AGRI-FOOD CHAIN RELATIONSHIPS (PDF)

AGRI-FOOD CHAIN RELATIONSHIPS  This page intentionally left blank  AGRI-FOOD CHAIN RELATIONSHIPS Edited by Christian Fischer Agribusiness, Logistics and Supply Chain Management Institute of Food, Nutrition and Human Health Massey University Auckland, New Zealand Monika Hartmann Agricultural and Food Market Research Institute for Food and Resource Economics University of Bonn Bonn, Germany  CABI is a trading name of CAB International CABI Head Office Nosworthy Way Wallingford Oxfordshire OX10 8DE UK Tel: +44 (0)1491 832111 Fax: +44 (0)1491 833508 E-mail: [email protected] Website: www.cabi.org CABI North American Office 875 Massachusetts Avenue 7th Floor Cambridge, MA 02139 USA Tel: +1 617 395 4056 Fax: +1 617 354 6875 E-mail: [email protected] © CAB International 2010. All rights reserved. No part of this publication may be reproduced in any form or by any means, electronically, mechanically, by photocopying, recording or otherwise, without the prior permission of the copyright owners. A catalogue record for this book is available from the British Library, London, UK. Library of Congress Cataloging-in-Publication Data Agri-food chain relationships / edited by Christian Fischer, Monika Hartmann. p. cm. Includes bibliographical references and index. ISBN 978-1-84593-642-6 (alk. paper) 1. Food industry and trade. 2. Food supply. 3. Agricultural industries. I. Fischer, Christian, 1969- II. Hartmann, Monika. III. Title. HD9000.5.A3725 2010 338.1--dc22 2010013799 ISBN: 978 1 84593 642 6 Commissioning editor: Meredith Carroll Production editor: Tracy Head Printed and bound in the UK from copy supplied by the authors by CPI Antony Rowe  5 Contents Contributors ........................................................................................................................... 7 Preface and Acknowledgements ............................................................................................ 9 Introduction and Overview: Analysing Inter-organizational Relationships in Agri-food Chains Christian Fischer and Monika Hartmann ........................................................................... 11 Part I Agri-food Chain Relationships – Context and Theoretical Foundations 1 Building Sustainable Relationships in Agri-food Chains: Challenges from Farm to Retail Monika Hartmann, Klaus Frohberg and Christian Fischer .......................................... 25 2 Inter-organizational Relationships in Agri-food Systems: a Transaction Cost Economics Approach Fabio Chaddad and Maria E. Rodriguez-Alcalá ........................................................... 45 3 Behavioural Economics and the Theory of Social Structure: Relevance for Understanding Inter-organizational Relationships Monika Hartmann, Julia Hoffmann and Johannes Simons ............................................ 61 4 Collaborative Advantage, Relational Risks and Sustainable Relationships: a Literature Review and Definition Christian Fischer and Nikolai Reynolds ........................................................................ 74 Part II Empirical Evidence on Trust and Sustainable Relationships in Agri-food Chains 5 Trust and Relationships in Selected European Agri-food Chains Philip Leat, Maeve Henchion, Luis Miguel Albisu and Christian Fischer .................... 91 6 A Review of the Trust Situation in Agri-food Chain Relationships in the Asia-Pacific with a Focus on the Philippines and Australia Peter J. Batt ................................................................................................................. 105 7 Determinants of Sustainable Agri-food Chain Relationships in Europe Christian Fischer, Monika Hartmann, Nikolai Reynolds, Philip Leat, César Revoredo-Giha, Maeve Henchion, Azucena Gracia and Luis Miguel Albisu .... 119 8 Enhancing the Integration of Agri-food Chains: Challenges for UK Malting Barley César Revoredo-Giha and Philip Leat ......................................................................... 135 9 From Transactions to Relationships: the Case of the Irish Beef Chain Maeve Henchion and Bridin McIntyre ......................................................................... 150  6 10 Reviewing Relationship Sustainability in the Case of the German Wheat-to-Bread Chain Miroslava Bavorová and Heinrich Hockmann ............................................................ 164 11 Inter-organizational Relationships in the US Agri-food System: the Role of Agricultural Cooperatives Fabio Chaddad ............................................................................................................ 177 12 Guanxi and Contracts in Chinese Vegetable Supply Chains: an Empirical Investigation Hualiang Lu, Jacques Trienekens, Onno Omta and Shuyi Feng ................................. 191 13 Inter-organizational Relationships as Determinants for Competitiveness in the Agri-food Sector: the Spanish Wheat-to-Bread Chain Azucena Gracia, Tiziana de Magistris and Luis Miguel Albisu ................................... 206 14 How Buyer–Supplier Relationships can Create Value: the Case of the Australian Wine Industry Lynlee Hobley and Peter J. Batt .................................................................................. 220 Part III Implications and Outlook 15 Best Practice in Relationship Management: Recommendations for Farmers, Processors and Retailers Hualiang Lu, Peter J. Batt and Christian Fischer ....................................................... 237 16 Improving Agri-food Chain Relationships in Europe: the Role of Public Policy Luis Miguel Albisu, Maeve Henchion, Philip Leat and David Blandford .................... 250 17 Lessons Learned: Recommendations for Future Research on Agri-food Chain Relationships Fabio Chaddad, Christian Fischer and Monika Hartmann ......................................... 267 Index .................................................................................................................................. 281  7 Contributors Luis Miguel Albisu is head of the Agri-food and Natural Resources Economics Unit, Agri- food Research and Technology Center of Aragón (CITA) in Zaragoza, Spain. [email protected] Peter J. Batt is an associate professor of food and agribusiness marketing at the School of Agriculture and Environment (Muresk Institute), Curtin University of Technology, Perth, Australia. [email protected] Miroslava Bavorová is a senior researcher at the Institute for Farm Management at the Martin Luther University in Halle (Saale), Germany. [email protected] halle.de David Blandford is a professor of agricultural and environmental economics at the Pennsylvania State University, USA. [email protected] Fabio Chaddad is an assistant professor at the University of Missouri, Columbia, USA. [email protected] Shuyi Feng is an associate professor at the College of Public Administration, Nanjing Agricultural University, China. [email protected] Christian Fischer, at the time of writing, was an associate professor of supply and value chain management at the Institute of Food, Nutrition and Human Health at Massey University, Auckland, New Zealand. He is now an associate professor of agricultural economics and management at the Free University of Bozen-Bolzano in Italy. [email protected] Klaus Frohberg is an emeritus professor at the University of Bonn, Germany. [email protected] Azucena Gracia is a senior researcher at the Agri-food and Natural Resources Economics Unit, Agri-food Research and Technology Center of Aragón (CITA) in Zaragoza, Spain. [email protected] Monika Hartmann is a professor at the Institute for Food and Resource Economics, University of Bonn, Germany. [email protected] Maeve Henchion is head of the food market research programme at the Ashtown Food Research Centre (AFRC), Teagasc in Dublin, Ireland. [email protected]  8 Lynlee Hobley is a graduate student and part-time lecturer in the School of Agriculture and Environment (Muresk Institute), Curtin University of Technology. [email protected] Heinrich Hockmann is a professor at the Leibniz Institute for Agricultural Development in Eastern and Central Europe (IAMO) in Halle (Saale), Germany. [email protected] Julia Hoffmann is a doctoral student at the Institute for Food and Resource Economics, University of Bonn, Germany. [email protected] Philip Leat is a senior economist and former team leader of food marketing research in the Land Economy and Environment Research Group of the Scottish Agricultural College (SAC) in Aberdeen, UK. [email protected] Hualiang Lu is a senior lecturer at the School of Business Administration, Nanjing University of Finance and Economics, China. [email protected] Tiziana de Magistris is a researcher at the Agri-food and Natural Resources Economics Unit, Agri-food Research and Technology Center of Aragón (CITA) in Zaragoza, Spain. [email protected] Bridin McIntyre is a senior researcher at the Ashtown Food Research Centre (AFRC), Teagasc in Dublin, Ireland. [email protected] S.W.F. (Onno) Omta is a professor of food chain management at Wageningen University, the Netherlands. [email protected] César Revoredo-Giha is a senior economist and team leader of food marketing research in the Land Economy and Environment Research Group of the Scottish Agricultural College (SAC) in Edinburgh, UK. [email protected] Nikolai Reynolds is a senior research manager at Synovate in Frankfurt, Germany. [email protected] Maria E. Rodriguez-Alcalá is an instructor of agricultural and applied economics at the University of Missouri, Columbia, USA. [email protected] Johannes Simons is a senior researcher at the Institute for Food and Resource Economics, University of Bonn, Germany. [email protected] Jacques Trienekens is an associate professor of food chain management at Wageningen University, the Netherlands. [email protected]  9 Preface and Acknowledgements This book is the result of several years of research activity in an academic topic of growing importance: how to better link farmers, processors and retailers with each other in order to ensure and improve the supply of food products which meet consumer needs and wants. The editors, and some of the book contributors, got more strongly involved in the topic in 2005 when they started the research project on ‘Key factors influencing economic relationships and communication in European food chains’ (FOODCOMM, SSPE-CT- 2005-006458) which was funded by the European Commission as part of the Sixth Framework Programme. The collaborating laboratories were: Institute for Food and Research Economics, University of Bonn, Germany (coordinator); Land Economy and Environment Research Group, Scottish Agricultural College (SAC), Edinburgh and Aberdeen, UK; Institute for Agricultural Development in Central and Eastern Europe (IAMO), Germany; The Ashtown Food Research Centre (AFRC), Teagasc, Dublin, Ireland; Ruralia Institute, University of Helsinki, Finland; Institute of Agricultural and Food Economics (IAFE), Poland; and Unit of Agri-food Economics and Natural Resources, Agri-food Research and Technology Center of Aragón (CITA), Spain. The main results of the research project have been published in several articles in scientific journals (all of which are referred to in this volume). However, when the research project finished it became evident that the results needed to be compared in a wider context than it was possible within the project. Simultaneously to the FOODCOMM work, complementary research has taken place nearly all over the world. This book attempts to integrate the experiences gained by a number of researchers in different countries but around the same topic. We would like to express our sincere gratitude to Meredith Carroll of CAB International for publishing the book; to all contributors, and in particular to Maeve Henchion, Philip Leat and Luis Miguel Albisu, for reviewing many of the book contributions; and to Jan Schiefer, Julia Hoffmann and Stefan Hirsch of the University of Bonn and Bill Wang of Massey University for editorial assistance. Christian Fischer Monika Hartmann March 2010  This page intentionally left blank  ©CAB International 2010. Agri-food Chain Relationships 11 (eds C. Fischer and M. Hartmann) Introduction and Overview Analysing Inter-organizational Relationships in Agri-food Chains Christian Fischer1 and Monika Hartmann2 1 Massey University, Auckland, New Zealand 2 University of Bonn, Germany ‘Il faut créer des liens entre les hommes’ Antoine de Saint-Exupéry Introduction ‘One must create bonds between men’, and – as we argue in this book – also between organizations, if a steady supply of food products is to be ensured and improved in an ever more demanding world. Against the background of global market liberalization, increasing consumer awareness and concerns, and the spreading of life-changing technologies, new ways to produce, distribute and consume food are evolving. As a result, the organization of production and distribution systems (including agriculture) has to adapt and one of the most fundamental drivers behind this process is the general recognition that, depending on the situation, collaboration can be more effective than competition as a general organizational mode to achieve economic efficiency. Collaboration requires organizations to build and maintain effective relationships, hence the need for a clear understanding of what ‘inter-organizational relationships’ are, in particular within an agri-food chain context, when they are necessary, and how they can be improved. One of the main findings from the studies in this book is that while profit motives are at the core of agri-food chain relationships, gaining full satisfaction from them also requires the nurturing of personal bonds, in particular with farmers, if a relationship is to be sustained and the mutual benefits of collaboration are to be fully unlocked. While the topic has already received considerable attention in the general economics, business, management and marketing literatures, it has not been extensively covered within the agricultural and food economics profession. This holds despite earlier work of Giovanni Galizzi and Luciano Venturini and their 1999 book Vertical Relationships and  12 Christian Fischer and Monika Hartmann Coordination in the Food System, which summarized the research that had been undertaken in the 1990s and before. Although over the last decade a number of articles have appeared on the topic, no comprehensive work has been published since then which covers theoretical and empirical investigations regarding agri-food chain relationships, adopting a global focus. This volume attempts to fill the gap. The book is structured in three parts. Starting with an overview regarding main developments in the agri-food sector with relevance for chain relationships (Chapter 1), Part I is mainly concerned with providing the theoretical foundations for analysing agri- food chain relations (Chapters 2, 3 and 4). Building on this conceptual basis, the second part presents in-depth empirical evidence for different countries, food chains and chain stages regarding the issues of trust and sustainable relationships in agri-food chains (Chapters 5 to 14). The red meat industry (beef and pork) is the focus of Chapters 5, 7 and 9. Cereals (bread and malting barley) are analysed in Chapters 5, 7, 8, 10 and 13. Horticultural products (fresh produce and wine) are investigated in Chapters 6, 12 and 14. Regionally, the studies cover Europe, North America (the USA), China, Australia and the Philippines. While most studies were conducted in developed markets, Chapters 6 and 12 look at the particularities of transition or developing economies. As to individual agri-food chain stakeholders, a number of chapters (Chapters 5 to 12, 14 and 15) offer and discuss separate findings for farmers, food processors or retailers. Based on the theoretical and empirical findings in the first two parts of the book, recommendations for agribusiness managers (Chapter 15) and policy-makers (Chapter 16) are described in the third part. The final Chapter 17 discusses avenues for future research. Three major topics are covered in this book. The first is about the use of suitable production and distribution system architectures. It addresses the question of whether members of agri-food chains should ‘buy’, ‘make’ or ‘collaborate’. In other words, should agri-food products be produced by specialist organizations (farms and firms) and sold through spot market transactions; or should they be produced by large, multi-activity corporations that own farming, processing and retailing assets (or combinations hereof)? A potential third way covers hybrid arrangements, where legally independent and specialized organizations form collaborative partnerships and build sustainable relationships, thus working together in order to meet ever more sophisticated consumer requests. Within economics, this problem is analytically reduced to the appropriate choice of ‘governance structures’. One of the main criteria used to facilitate decision-making about the best organizational architecture to use is the minimization of transaction costs. In this volume, three chapters are devoted to this topic. In Chapter 2, the reasoning behind transaction cost economics is reviewed and then expanded to not only include vertical (producer-to- consumer) but also horizontal (within the same industry) as well as cross-industry governance structures. Chapter 11 applies this approach to the US agricultural cooperative system. In Chapter 9, chain stakeholders’ governance structure choices for selling beef in Ireland are empirically analysed. Using a number of social factors rather than exclusively relying on transaction cost minimization considerations, the authors explain the shift from primarily spot markets to repeated market transactions. Finally, Chapter 3 reviews the socio- and psycho-economic roots of human behaviour in the context of inter- organizational relationships. While the analysis in this chapter is somewhat different from the previous ones mentioned, conceptually this study belongs within this topic as it deals with the influence of social embeddedness of business relationships on governance structure choice.  Analysing Inter-organizational Relationships in Agri-food Chains 13 The main focus of this book is the assessment of the ‘sustainability’ of inter- organizational relationships in agri-food chains. Relationship sustainability is defined as to include static ‘quality’ aspects of business relationships, as well as dynamic considerations which are summarized in a ‘stability’ component. The overall motivation behind the studies covering this topic is to identify the level of relationship sustainability and thus to reveal how good business relationships between agri-food chain stakeholders currently are. Another is to analyse determinants that influence relationship sustainability. Based on these findings, the studies suggest measures of how to improve business relationships in the agri- food sector. Eight chapters deal with relationship sustainability in one way or the other. Chapter 4 discusses underlying theories and formally defines the sustainable inter- organizational relationship (SIR) construct. Chapters 5 and 6 deal with trust, one of the most important components in SIRs. While using similar conceptual approaches, Chapter 5 covers European and Chapter 6 Asia-Pacific agri-food chains. Chapter 7 represents an empirical investigation into the main determinants of SIRs for six European countries, two commodities and both farmer–processor and processor–retailer relationships. Chapter 8 analyses the determinants affecting the sustainability of business relationships for the UK barley-to-beer and whisky supply chain. Chapter 10 uses a more qualitative approach to discuss the role of trust for sustainable business relationships in the German wheat-to-bread chain. Chapter 12 focuses on ‘satisfaction’, another particular component of sustainable relationships and empirically estimates the importance of major driving forces behind relationship satisfaction for fresh vegetable supply chains in China. Chapter 13 investigates determinants of relationship quality in Spanish wheat-to-bread chains but also analyses how good-quality relationships contribute to chain competitiveness. The third main topic of this book covers the impact of sustainable relationships on chain performance. Although the book does not offer a systematic analysis of this matter, two chapters explore it in more detail. As already mentioned, Chapter 13 is concerned with chain competitiveness as a measure of performance while Chapter 14 uses the concept of ‘relationship value’ as a performance proxy, covering the Australian wine industry. Chapter summaries In the following we provide a synopsis of the contents of each chapter. The summaries were drafted by the respective chapter author(s) and reviewed by the editors. Chapter 1 – Building sustainable relationships in agri-food chains: challenges from farm to retail This chapter discusses the broader business context in which today’s agri-food chains operate. It also describes the long-term trends which have shaped agri-food sectors and markets and which have contributed to the rise of vertical business systems such as supply or value chains. In particular, the changing economic, technological, social and policy environments are reviewed. These include globalization (i.e., the widespread trade and labour market liberalizations), increasing consumer quality demands and the linked rise in public and private standards, the ubiquity of information and communication technologies, and the increasing skills base and entrepreneurial capacities in today’s knowledge-based societies which foster the development of highly networked economies.  14 Christian Fischer and Monika Hartmann Given the new reality, vertical business systems have emerged as highly competitive organizational formats which allow collaborating companies to exploit economies of size (scale and scope) while maintaining strategic flexibility, agility and managerial independence. However, one requirement for establishing competitive vertical business systems is the development of sustainable inter-organizational relationships. Building and managing such relationships is in particular a challenge for farmers who traditionally have operated on the basis of spot market exchanges. Yet the decline of specialized food retailing and the rise of global supermarkets also pose problems. Supermarkets that deal with large numbers of (food and non-food) suppliers on a regular basis increasingly use procurement practices which build on private standards, formalized contracts and electronic auctions, therefore sidestepping individual supplier relationships. While the transition from the transaction-based to a relationship-based agri-food economy will take time and be partial, the future seems to favour the extensively embedded, consumer-oriented agri-enterprise rather than the traditional owner-centred, price-driven farm business. Chapter 2 – Inter-organizational relationships in agri-food systems: a transaction cost economics approach This chapter analyses inter-organizational relationships in agri-food systems from a transaction cost economics perspective. Given the diversity of organizational and legal forms observed in inter-organizational relationships, the chapter focuses on understanding the nature and governance characteristics of such relationships. The chapter first presents a typology of inter-organizational relationships treating them as intermediate forms along the market–hierarchy continuum of transaction costs economics. Subsequently, the chapter builds on recent theoretical advances and defines inter-organizational arrangements as ‘true hybrids’ combining governance instruments of ‘pure’ markets with instruments of ‘pure’ hierarchies. That is, governance of inter- organizational relationships is conceptualized as a multidimensional construct composed of several coordination and control mechanisms. These governance mechanisms are designed and implemented by alliance partners to manage the basic tension between collaboration (or cooperative interdependence) and competition (or transactional interdependence) that is characteristic of every form of inter- organizational relationship. Chapter 3 – Behavioural economics and the theory of social structure: relevance for understanding inter-organizational relationships Neoclassical economists view economic agents as rational, atomized and purely self- interested individuals, maximizing utility in the presence of full information. Neither social relations on the one hand, nor limited resources to obtain and process all information on the other, are taken into account in this approach. However, a large body of evidence exists which indicates that people deviate from exclusively self-interested, efficiency-oriented behaviour. The chapter describes the contribution that the theory of social structure and behavioural economics provides for a deeper understanding of business relationships.  Analysing Inter-organizational Relationships in Agri-food Chains 15 Social structure theory, in the context of business relations, regards economic behaviour as embedded in and mediated by a complex and extensive web of social relations. It takes a comprehensive look at the different goals that actors in business relationships try to achieve and the rules they observe. Business relations are regarded as intertwined with social relations. Behavioural economics is concerned with empirically testing neoclassical assumptions and explaining identified systematic deviations from those assumptions. Together, social structure theory and behavioural economics provide powerful insights regarding inter- organizational relationships, with the concepts of trust, reciprocity and reputation playing a crucial role. The chapter shows that social embeddedness of inter-organizational relations allows transactions to take place, even in cases where considerable vulnerabilities such as moral hazards exist that cannot (totally) be controlled by explicit contracts. Social ties between firms based on trust, reliability and reciprocity are able to create intangible, largely inimitable, resources which enhance firms’ competitiveness. Fairness-driven reciprocity behaviour is a social norm with considerable implications for inter-organizational relationships, as is shown in behavioural economics. It can explain why actors get involved in or abstain from a business relationship, as well as why they are willing to punish or reward their partner even if this implies personal losses. Numerous studies show that in markets with incomplete contracts, the interaction of fairness and reputation effects not only changes the outcome of a transaction, bringing it closer to the optimal efficiency level, but also influences the structure of relationships towards more long-term bilateral transactions. Chapter 4 – Collaborative advantage, relational risks and sustainable relationships: a literature review and definition Based on a review of the recent applied economics, marketing, business and management literature on inter-organizational relationships, a definition of sustainable inter- organizational relationships (SIRs) is derived. Starting from the notion of ‘collaborative advantage’ (i.e., the competitive advantage arising from collaboration) it is argued that sustainability of inter-organizational relationships in vertical, buyer–seller partnerships can help to make business transactions more efficient, despite existing relational risks. In particular, it can contribute to: (i) reduce environmental uncertainty (e.g., by securing a more stable or higher inflow of orders); (ii) obtain better access to crucial resources (e.g., raw materials, capital, specialized skills or knowledge); and/or (iii) result in higher business productivity (e.g., by enhancing loyalty among suppliers). SIRs can be defined as high-quality and stable business relationships which are responsive to changing environments and which collaborators continue as long as the benefits derived from a relationship outweigh the costs of maintaining it. Chapter 5 – Trust and relationships in selected European agri-food chains Trust is an integral part of agri-food supply chain operation, both for ensuring food safety and quality, and facilitating the exchange relationships between businesses. Through its implicit sharing of norms and values by transacting parties, it is central to good chain relationships.