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
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
My Thesis
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Cooperatives have been noticeably absent from adaptation to
structural change in the US.
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Why ?
Traditional and New Gens have struggled
Group action though thrives, just not self-organized
Because….
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Co-op theory of the 80’s and 90’s only half the story
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Other Half
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Prescriptive about governance and core competencies
Co-ops need new strategic architecture
Become buyers’ agents not sellers’ agents
Post-modern prescription
 Need both pieces:
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Changed organizational design +
New Strategic Architecture
Goldsmith, University of Illinois
Co-op Theory
Modern 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
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
Neo-Modern “Co-ops”
 Consistent with the Prescription of the NeoModernists
 New Generation Co-ops and LLCs
 Growth in New Gens/LLCs
 252
(Merritt et al, 2003)
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K Sourcing (liquidity)
Commitment (obligation)
Quality (closure and differential pricing)
Governance (hierarchical)
Resources (core competencies)
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Addressing internal weaknesses
 Co-op as a firm
 But…….. still an “inward” focus
Goldsmith, University of Illinois
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
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
Seller
Buy-Side Proposition: Sees a shot gun
-Many Products
-Many Characteristics
-Industrial Needs
Goldsmith, University of Illinois
Buyer
The Buy-side “Half-Pipe”
 Does the buyer really
want a “relationship”?
 Very little evidence in
the food system
 Substitutability the norm
Buy-Side Incentives for Supply
Chain Control
Buy-Side Value
Hard Contract
Soft Contract
 Wary of over-investment Simple Contract
Spot
in relationships
 Low ROI
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Increasing Information
e.g. indemnification
Goldsmith, University of Illinois
Market Uplift
Increasing Control
Risk Mitigation High
Increasing Control
 Simplicity in
Procurement- not
complexity
Low
Hard Contract
Soft Contract
Simple Contract
Spot
Increasing Information
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
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
Thoughts and Prescription
 Need to analyze the coop in an outward context
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What does grouping of individual suppliers do for buyers?
How does a group achieve relevance?
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Need to directly address the major feature of raw ag/semi
processed procurement: supply risk
 Prescription
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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
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