MGMT 627 Advanced Agribusiness Management Examiner Sandra Martin Facilitators Sandra Martin (Forbes 804) Sandra.Martin@lincoln.ac.nz Michael Lyne (Orchard 105) Michael.Lyne@lincoln.ac.nz Associate Professor, Dr, Mike, Sandra Who are you?
On completion of MGMT 627, students will: • Have an understanding of different business structures in agribusiness • Be able to critically analyse the performance of an agribusiness supply chain
Assessment:Three assignments, weighted 50, 20 & 30% respectively. Due dates are scheduled for 8 September, 29 September and 27 October Text Book:Two volumes of readings titled ‘MGMT 627’. Volume 1 is available at the bookshop for about $20 Teaching Method:Lecturer and student-led group discussion of tutorial questions drawn from the weekly readings. Use PowerPoint and/or the OHP. Student presentations should not exceed 20 minutes Moodle: Tutorials and answers will be posted on the MGMT 627 website on the intranet along with assignments and other information about the course
Timetable: 14:00-17:00 Wednesdays in S3. Any clashes? Policies: CPPP, Extensions,plagiarism,referencing technique Student Learning Centre: Help with referencing & writing style Tea Break:Flexitime, bring tea cup Open door policy Class Rep?
Economic Coordination In a world of perfect information where capital is perfectly fungible, products are homogeneous and all goods and services are private goods, perfectly competitive spot markets coordinate quantities demanded and supplied through the price mechanism There is no other coordination of market agents in these perfectly competitive spot markets. The ‘invisible hand of the market’ matches supply with demand as market agents respond independently to price signals in pure competition with one another But, in reality, information is not perfect (asymmetric information), capital is not perfectly fungible (asset specificity), products are not homogeneous (variable quality and timing), and many services used by producers have the properties of public goods (e.g. extension services) As Coase (1937) pointed out in his seminal paper ‘The nature of the firm’, when the cost of transacting in spot markets is high, coordination of market agents may be a less costly way of matching supply with demand
We can define coordination as the effort or measures designed to encourage agents within a market system to achieve a common goal by collaborating with one another Such coordination may be undertaken by private agents acting collectively but is often facilitated, or at least regulated, by the State ‘Vertical coordination’refers to coordination among agents at different points in a marketing chain, e.g. a farmer is contracted by a cooperative to deliver a specific quantity and quality of product at a specific point in time ‘Horizontal coordination’refers to coordination among agents at a given stage of a marketing chain, e.g. several farmers pool their produce and sell it collectively
Drivers of vertical coordination Vertical coordination will be discussed in detail by Dr Martin in the next part of this course. Our focus will be on horizontal coordination. Nevertheless, we need to understand what drives vertical coordination According to the Transaction Cost Economics (TCE) approach, the main driver of vertical coordination is asset specificity. Assets (both physical and human) become more specific as their opportunity cost diminishes For example, if a wholesaler builds a refrigerated storeroom to supply a nearby supermarket with a perishable product, this storeroom will have little value to the wholesaler if the supermarket decided not to purchase the product and the only other buyer was much further away The owner of a specific asset is therefore vulnerable to a hold-up problem. For example, the supermarket might behave opportunistically and refuse to buy the perishable product unless the wholesaler reduces its price
An agent confronted with opportunism and imperfect information will be reluctant to invest in specific assets, and consumer demands may not be met - unless the agent can alleviate the hold-up problem by entering into an enforceable contract with the buyer Contractual arrangements are one method of achieving coordination between agents in a supply chain. Contracts establish responsibilities for each party and their rewards for meeting these obligations. They may be formal (written) agreements or informal (verbal) agreements If it is difficult to specify the terms of a contract (owing to complex product quality or timing requirements), and if there is uncertainty about its enforceability, coordination may require vertical integration Vertical integration is an extreme form of vertical coordination where a single firm (hierarchy) performs several activities in the supply chain. In our example, the wholesaler may establish its own retail outlet to safeguard a substantial investment in refrigerated storerooms
Hierarchy (Vertical integration) Asset specificity Uncertainty Complexity Contracting (Vertical coordination) Spot market
Drivers of horizontal coordination Individual farmers may find themselves excluded from preferred markets because the unit costs of transacting vertically are too high when attempting to sell a relatively small volume of output. In this case, they may have to use markets that do not value quality or credence attributes (like organic and ethical characteristics) Alternatively, farmers could sell (purchase) their products (inputs) collectively in order to reduce the costs of transacting vertically and so gain access to preferred markets In other words, farmers can broaden their marketing choices and link vertically with agents in preferred supply chains by coordinating with other producers, i.e. by coordinating horizontally
What are the key drivers of horizontal coordination? • Size economies: farmers can reduce unit processing, marketing and transaction costs (e.g. compliance and information costs) by pooling their produce • Finance: farmers can share the costs of lumpy assets required to add value to their product • Bargaining power: farmers can negotiate better contractual terms and enforce them more easily if they pool their produce • A large enough number of farmers to achieve size economies, raise finance and wield bargaining power • A product purchased by affluent consumers, especially those prepared to pay a premium for credence attributes associated with human ethics and organic production methods
Forms of horizontal coordination can range from: • informal agreements between farmers to coordinate purchases and sales; • to groups constituted to facilitatecollective action like farmers’ associations; • and ultimately to groups in which decision making is centralised like cooperatives and companies Cooperatives and companies represent horizontal integration, an extreme form of horizontal coordination in which farmers exchange their decision-making power for benefit and voting rights and elect directors who manage (or hire an expert to manage) their transactions
Hierarchy (Vertical integration) Contracting (Vertical coordination) Spot market Horizontal coordination Horizontal integration Size economies, lumpy assets, finance, bargaining power