Competing in the global agrifood system: A buyside perspective

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Competing in the global agri-food system A
buy-side perspective

• Peter Goldsmith
• NSRL Endowed fellow in Agricultural Strategy
• University of Illinois
• Agricultural and Food Cooperatives in Rural
  Development
• Implications of Business Dynamics for the Public
  Policy
• June 16-17, 2004
• Waugh Auditorium, 3rd Floor, ERS
• 1800 M Street, NW, Washington, D.C. 20036

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Opportunity and Investment in the post-modern
economy

• Global Sourcing
• Global Competitors/Opportunities
• Scale Economies Frag. of Demand
• mass customization
• End-user driven
• solution orientation
• Service and Knowledge Bundling
• Multinational Players
• regions over nations

3
My Thesis

• Cooperatives have been noticeably absent from
  adaptation to structural change in the US.-
• Why ?
• Traditional and New Gens have struggled
• Group action though thrives, just not
  self-organized
• Because.
• Co-op theory of the 80s and 90s only half the
  story
• Prescriptive about governance and core
  competencies
• Other Half
• Co-ops need new strategic architecture
• Become buyers agents not sellers agents
• Post-modern prescription
• Need both pieces
• Changed organizational design
• New Strategic Architecture

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Co-op TheoryModern Theory (1940-1980)

• Co-op comparable and competitive with proprietary
  firms
• Emilianov (1942) Phillips (1953) Helmberger
  and Hoos (1962), Ladd (1974), Zusman (1982)
• Rational and Stable
• Homogeneity and Stationarity
• Conditionality
• Co-op as a firm
• An inward focus of theory

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Neo-Modernists (1980-2000)

• Broke with modern theory
• Identified organizational design flaws
• Heterogeneity
• Dynamics
• Rational patrons
• Staatz (1983) Game Theory
• Subadditivity and Harm
• Sexton (1986) Game Theory
• Pricing and Voting
• Cook (1994) Neo-Institutional
• Property rights
• Goldsmith (1995) Transaction Theory
• Existence/Senescence and Governance Choice

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Neo-Modern Co-ops

• Consistent with the Prescription of the
  Neo-Modernists
• New Generation Co-ops and LLCs
• Growth in New Gens/LLCs
• 252 (Merritt et al, 2003)
• K Sourcing (liquidity)
• Commitment (obligation)
• Quality (closure and differential pricing)
• Governance (hierarchical)
• Resources (core competencies)
• Co-op as a firm
• But.. still an inward focus
• Addressing internal weaknesses

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Why hasnt value been driven up the chain? ----A
Lense Problem The Buy Side vs. Sell Side

• Farmer looking down the chain selling a
  commodity
• Meat animal or Grain product
• Retailer/Wholesaler/Manufacturer looking up into
  the supply chain
• Buying an array of inputs
• Meat (grain), packaging, labor, credit, equipment
  etc.
• Each input has numerous attributes- a bundle
• Lot size, timing, processing quality, end-use
  quality, commodity characteristics, logistical
  quality

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Differing Perspectives Case of Mexican White
Corn Buyers --looking down the chain vs. looking
up the chain
Sell-Side Proposition Sees a rifle shot -One
Product -Production Characteristics -USDA
Grade -Offer Grid
Buy-Side Proposition Sees a shot gun -Many
Products -Many Characteristics -Industrial
Needs

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The Buy-side Half-Pipe

• Does the buyer really want a relationship?
• Very little evidence in the food system
• Substitutability the norm
• Simplicity in Procurement- not complexity
• Wary of over-investment in relationships
• Low ROI
• e.g. indemnification

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Why does the buyer want to buy from a group?

• Where do cooperatives and other forms of group
  action fit in with
• Industrial marketing and supply chain management?
• End-user orientation
• guiding the supplier Kohli and Jaworski, 1990,
  JOM.
• The evolution to a service/knowledge sector?
• Global environment with many suppliers?

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Not Quite Right

• Neo-Modern theory maybe only half right
• New Gens and LLCs may be getting the org. design
  right but
• New design didnt seem to solve the problems of
• Value creation and capture
• Competing for K
• Co-op firm still had a inward (producer)
  orientation
• Co-op as a means to producer ends

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Thoughts and Prescription

• Need to analyze the coop in an outward context
• What does grouping of individual suppliers do for
  buyers?
• How does a group achieve relevance?
• Need to directly address the major feature of raw
  ag/semi processed procurement supply risk
• Prescription
• Analyze the cooperative as a risk manager (Buyer)
• Analyze the cooperative in the context of the
  wholesaling function- Buyers agent
• Analyze the cooperative in the context of
  relationship management (N. Rackam and D.
  Peppers)
• Focus the cooperative on features, services, and
  products, not just cost

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Contact information
Dr. Peter Goldsmith NSRL Endowed fellow in
Agricultural Strategy The Department of
Agricultural and Consumer Economics The
University of Illinois 433 Mumford Hall 1301 West
Gregory Drive Urbana, Illinois 61801 217-333-5131
Fax-333-5538 pgoldsmi_at_uiuc.edu http//www.ace.uiuc
.edu/faculty/goldsmith/