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

1. 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

2. 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 Goldsmith, University of Illinois

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 80’s and 90’s 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 Goldsmith, University of Illinois

4. 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 Goldsmith, University of Illinois

5. 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 Goldsmith, University of Illinois

6. 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 Goldsmith, University of Illinois

7. Why hasn’t 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 Goldsmith, University of Illinois

8. Seller Buyer 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 Goldsmith, University of Illinois

9. 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 Goldsmith, University of Illinois

10. 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? Goldsmith, University of Illinois

11. Not Quite Right • Neo-Modern theory maybe only half right • New Gens and LLC’s may be getting the org. design right but… • New design didn’t 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 Goldsmith, University of Illinois

12. 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- Buyer’s 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 Goldsmith, University of Illinois

13. 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@uiuc.edu http://www.ace.uiuc.edu/faculty/goldsmith/ Goldsmith, University of Illinois