Agricultural Producer Cooperatives as Strategic Alliances.

1
Agricultural Producer Cooperatives as Strategic
Alliances.

• Presentation to 15th Annual
• International Food and Agribusiness Management
  Conference
• Chicago June 2005

2
Overview

• Linkages between four bodies of theory to the
  design and governance of Agricultural
  Cooperatives
• Transaction cost analysis (TCA)
• Resource based theory (RBV)
• Social network theory
• Theories of trust and cooperation
• Three types of Cooperative are considered
• Traditional
• New Generation
• Learning Networks

3
Introduction

• Increasing interdependence of food production,
  processing and distribution
• Argued cooperatives make a unique contribution to
  these new forms of food chain organisation - But
  face organisational and investment challenges
• Believed that the theories identified may provide
  insights into the organisation of the food system
  in general and cooperative governance and
  financing issues

4
Objectives

• The broad objectives of this paper are to
• 1. Provide an overview of the application of
  four bodies of theory (transaction cost
  economics, the resource-based view of the firm,
  social network theory and theories of trust and
  cooperation) to strategic alliances.
• 2. Briefly describe the structure and
  organization of three types of cooperatives
  traditional, new generation and learning networks
• 3. Viewing cooperatives as a particular form of
  strategic alliance, develop propositions relating
  the theories discussed under objective 1 to the
  establishment, design, governance and management
  of the three types of cooperatives introduced in
  objective 2. This selection is somewhat
  arbitrary, based on the perceived relevance of
  the literature to agricultural cooperatives

5
Strategic Alliances

• Form of cooperative strategy whereby firms
  combine resources and capabilities to achieve
  mutually beneficial ends
• Joint ventures combine assets
• Equity alliances shareholders in new venture
• Non Equity alliances contractual agreements
• No single theory that provides comprehensive
  understanding of cooperative strategy
• Four theories are investigated to provide
  insights into cooperatives as strategic alliances

6
Transaction Cost Economics

• TCA traditionally applied to relationships
  between the firm and its suppliers or customers
• Argued that transactions between independent
  firms are costly and can be reduced through
  internalising activities
• Critical dimensions of transactions are
  frequency of occurrence, degree of uncertainty to
  which they are subject and asset specificity
• Balanced investment commitment between parties to
  the transaction, contracts, or vertical
  integration seek to limit opportunistic behaviour
• More complex a contract becomes the more likely
  it is that the activities embedded in the
  contract will be internalised

7
TCA and Strategic Alliances

• Alliances are formed to partially internalise an
  exchange to minimise transactions costs that are
  high relative to production and distribution
  costs
• Argued that TCA focuses on single party cost
  minimisation while alliances are inherently
  dyadic relationships
• TCA also focuses on appropriation issues that
  originate from contracting hazards and
  behavioural uncertainty
• Alliance structure tends to be more influenced by
  considerations relating to managing coordination
  costs across partners rather than concerns
  associated with appropriation

8
Resource Based View

• RBV important in the study of inter-organisational
  relations
• RBV argues that resources that valuable, rare,
  non-substitutable and in combination difficult to
  imitate are a source of sustained competitive
  advantage
• Resources and competencies include intellectual
  property (patents and brands), product
  development capabilities, ability to manage
  resource heterogeneity
• Way resources are combined and utilised can
  result in competitive advantage

9
RBV and Strategic Alliances

• Focuses on pooling and using valuable resources
• Form of alliance chosen will depend on the nature
  of the resources held and sought by each partner
• Key element is the symmetry of the resource
  exchange process firms must have resources to
  get resources
• Alliances have the potential for the development
  of new idiosyncratic resources which are unique
  to the alliance

10
Social Networks

• Social network theory proposes that economic
  activity is always embedded in a social context
• Importance of social network lies in access to
  information, emotional and tangible support,
  status, and a governance mechanism that
  facilitates trustworthy and predictable behaviour

11
Social Networks and Strategic Alliances

• Underlying logic of alliance formation is
  strategic needs and social opportunities
• Social networks facilitate alliance formation by
  enlarging the circle of potential trustworthy
  partners
• New opportunities for alliances often identified
  through existing relationships
• Positive prior experiences with alliances create
  a favourable environment for the establishment
  and maintenance of continuing relationships
• Socially embedded relationships engender
  confidence and trust and a natural deterrent for
  bad behaviour that will damage reputation

12
Trust and Cooperation

• Number of definitions of trust however confident
  expectations and a willingness to be vulnerable
  are critical components of all definitions
• Three perspectives of on trust
• Calculative other will do as they say
• Shared cognition based on length depth of
  relationship
• Personal Identity holding common values
• Risk is considered essential for essential for
  the development of trust
• Some form of interdependence is required where
  the interest of one party cannot be achieved
  without reliance on another

• Cooperation involves proactive behaviour to
  achieve mutually beneficial outcomes
• Cooperation both engenders trust and requires
  trust to initiate it

13
Trust and Cooperation in Strategic Alliances

• Development of mutual trust lowers transaction
  costs by reducing the negative impact of bounded
  rationality, relationship specific investment and
  opportunism
• Repeated exchange based on trust improves the
  performance of inter-organisational exchanges
• Although argued that trust and control
  (contract/legal structures) are both needed for
  confidence on partner cooperation, trust can
  reduce reliance on contracts and assist in
  dispute resolution

14
Traditional Cooperatives

• Key elements of traditional cooperatives include,
  
• limited return on capital
• benefits to members according to patronage
• unrestricted membership (not always retained)
• democratic control (not always retained)
• Common form of horizontal alliance in the
  agricultural sector
• Often formed due to excess supply and depressed
  prices and market failure
• Often involve some form of vertical integration
  but usually at first stage of the supply chain

15
Traditional Cooperatives

• Shortcomings well recognised include
• Treatment of capital resources as common property
• Issues relating to governance and control
• Free rider problem
• Horizon problem
• Portfolio problem
• Control problem
• Influence cost problems
• These shortcomings have resulted in variations to
  traditional cooperatives including the New
  Generation Cooperatives

16
New Generation Cooperatives

• Term originated in mid 1990s and is widely used
  in the US and Canada
• Core characteristics of NGCS
• capital is not treated as common property
• Closed membership
• Tradable delivery rights
• Contractual obligations to deliver
• More focus on value added niche products

17
Learning Networks

• Associations of individuals of organisations who
  share experiences and learn from each other for
  mutual benefit
• Distinguished from traditional and new generation
  by loose structures and limited financial
  commitment
• Leadership Trust and commitment and shared vision
  important components necessary for the effective
  transfer of information an knowledge
• Outside assistance also identified as important
  in success
• High transaction cost in formation stage

18
Cooperatives as Strategic Alliances

• Alliance theory usually focuses on dyadic
  relationships
• Limited literature on multiple member alliances
  reflects the business reality that two firm
  alliances predominate in the universe of
  alliances
• Multi firm alliances have emerged in a number of
  industries particularly knowledge based and
  research and development alliances
• Key issue is the size of multi member alliances
  what determines the size of multi member alliances

19
Alliance Theory and Insights
20
Alliance Theory and Insights
21
Alliance Theory and Insights
22
Case Study Tatura Milk

• Background Key Points
• Dairy Cooperative established in 1907
• Maintained independence despite market
  deregulation, increasing concentration of
  processors through mergers and acquisitions
• Increasing competitive pressure, particularly
  through supermarket branded milk
• Sustainable competitive advantage based on
  strategic alliances both domestically and
  internationally
• Financially strong with equity of 50 of total
  assets
• Innovative culture with growth strategy designed
  around value added product particularly in the
  functional and bio foods area
• Strong export sales, 65 of total sales with
  Japan being the largest customer.

23
Tatura Milk

• Tatura Milk Industries Competitive Advantage
  Through Alliances
• Traditional Cooperative reshaped
• Strategic Alliances
• Tatua
• Ingredia
• Anadis
• Value Added products

• Unique alliances
• Strong trust foundations
• Social networks
• Resource complementarity
• Leadership

24
Tatura Milk

• Tatua
• Resource complementarity RD philosophy
  supports TMI philosophy of value added product
• Mutual Understanding and respect that has
  facilitated openness, information sharing and
  knowledge transfer
• Ingredia
• Similar sized French farmer based cooperative
• Milk flow of Ingredia threatened provided
  impetus for alliance
• Similarities in background, size, strategy,
  philosophy and RD focus

25
Tatura Milk

• Anadis
• Alliance consistent with RBV alliance creates
  set of resources necessary to develop sustained
  competitive advantage through resource sharing
  colostrum harvesting and manufacturing of unique
  products
• Protected alliance through becoming the major
  shareholder in Anadis
• Key Feature Anadis Tatura Innovation Engine
  Room (ATIER) co-develop new products

26
Anadis Products
27
Tatura Milk

• Success of initial alliances ? led to development
  of further alliances
• Contracts and trust contribute to predictable
  behaviour
• Appropriate partners identified through social
  networks
• Familiarity with alliances has enhanced trust
  enabling TMI to rely less on formal structures

• Personal social relations occur at a number of
  levels assisting transactions to take place at
  levels necessary

28
Case Study Riverine Plains

• Background Key Points
• Officially commenced December 1999
• Total membership of 200 members located in
  Southern NSW and North East Victoria
• Growing recognition of need for farming systems
  group to develop research and knowledge sharing
  in the region
• There were existing farming groups however they
  were fragmented and lacked resources to develop
  meaningful research support and projects.
• External involvement from Departments of
  Agriculture in both states and University of
  Melbourne
• Strong research focus
• Successful existing model existed Birchip
  Cropping Group located in North Western Victoria
• Socially and environmentally conscious
• Membership fee 115.00 for three years

29
Riverine Plains
Farmers promoting excellence in farming systems
by providing quality information, leading
research and sharing ideas for the economic,
environmental and social benefit of the Riverine
Plains.

• Features of the Network
• Distinctive features associated with learning
  networks limited financial commitment,
  relatively informal structures strong personal
  relations, shared vision, trust and focused
  leadership.
• The focus of the group is articulated as follows
• Establishment of a proactive farmer group to
  coordinate and initiate research
• Consolidation of fragmented groups across the
  region
• Development of a group which was able to attract
  leading farmers who valued their membership of
  the group
• Attract funding to support meaningful research.
• Support the economic and social development of
  rural communities

30
Riverine Plains
One of Riverine Plains main achievements has
been the quality of information it has been able
to present, both through a range of seminars and
an annual publication

• Success attributed to strong drive commitment and
  enthusiasm of leaders
• Outside assistance from government and education
  representatives
• Existing social networks catalyst to formation of
  group
• Commitment, open and frequents communication and
  external support principal reasons for continued
  success
• Social networks and emotional support
• Trust in executive committee essential to success

31
Overview and Conclusions

• Insights from the literature and the case studies
  
• TCA major contributor to understanding design and
  governance issues in traditional cooperatives and
  in explaining how NGCs overcome TCA based
  problems
• TCA less relevant to design and governance of
  NGCS and Learning networks
• RBV highly relevant to analysis of alliances
  between cooperatives (both traditional and NGC)
  as illustrated by TMI case
• Riverine Plains indicates that learning networks
  can be beneficial to members without an active
  and reciprocal exchange of resources
• Reciprocal exchange of ideas still occurs at
  informal level through networking

32
Overview and Conclusions

• Social networks are a key element in the
  formation and maintenance of TMI alliances
• Building and maintaining alliances is seen as an
  embedded competence (in the RBV sense) in TMI
• Social networks important in the establishment
  phase of all three types of cooperative
• Trust and cooperation important for the ongoing
  operation of the alliances established by TMI
• Need and opportunity for trust between members
  reduced by legal and institutional arrangements
  in all three types of cooperative
• Significance of informal networking should not be
  underrated

33
Overview and Conclusions

• Cooperative law of large numbers based on the
  idea that for TCA type reasons generating trust,
  cooperation and reciprocity has a cost and this
  cost increases as the size of the group
  increases.
• Leadership also appears to be very significant at
  both the operational and Board level this will
  included as part of follow up qualitative and
  quantitative studies to be undertaken in the near
  future.