Hybrid Organizations in a globalized world

Question 1

Hybrid Organisations in a Globalized World Producer Organisations and Vertical Coordination

Accepted Answer

Globalisation has intensified, in particular, integration of agricultural sectors of developoing countries into global trade patterns Removal of trade barriers and increased competition Increasing commodity prices (Rohstoffpreis) Increased flexibility for farmers to choose buyers for their products and suppliers of key inputs (market liberalization) But: small-scale, dispersed, and unorganised producers are unlikely to fully exploit market opportunities Unable to attain necessary economies of scale Lack of bargaining power in price negotiations Unable to meet the requirements of international customers (eg food quality and quantity) --> Need for producers to collectively organise (horizontal) coordination Future of small-scale farming! In addtion, modern (agrifood) supply chains are characterised by sequential, highly interdependent activities Interdepentence: quality of final product is determined by each individual activity along supply chain (=traceability) Ex: in order to protect investments in establishing a consumer brand for his/her products, a processor has to control any process that can negatively affect the value of the brand --> need for vertical coordination (vertical= different production, marketing, processing levels) Producer organisations as a from of collective organisation which could help producers to deal with pertaining market imperfections, such as lack of market information lack of access to credit and technical assistance insufficient insurance

Question 2

Market IMperfection and the Role of Institutions

Accepted Answer

Where supporting market institutions are lacking, rural markets in areas with low market infrastructure tend to be "thin" and imperfect In the absence of institutions that help to coordinate marketing activities or link producers to markets --> associated transportation and transaction costs are prohibitively high and hence underminde the process of exchange and# result in limited or localised markets with little rural-urban linkages Thus coordination faikure along the value chain may explain constrained agricultural development Overcoming the effect of sluch market imperfections therefore requries strengthening of institutions that promote coordination of market functions reduce transaction costs integrate markets Potential market-supporting institution: Producer organisations (PO) Their potential lies in enabling contractual links to input and output markets promoting economic coordination in liberalised markets leveraging market functions for smallholder farmers The success of producer organisations depends on their ability in Conveying market information coordinating marketing functions defining and enforcing property rights and contracts facilitating smallholder competitiveness in markets mobilising their member to engage in markets

Question 3

Producer Organisations (POs)

Accepted Answer

POs range from formal institutions (eg registered cooperatives) to informal producer groups and promote the interests of farmers Main goal of PO: economic benefit of members by provision of services that support economic activities (eg marketing services) Common (theoretical) distinction between functions of POs POs with primarily economic functions: Cooperatives: forward or back ward integration into value chain; purchase product from farmers (eg dairy processing cooperatives) Bargaining associations: centralisation & coordination of the selling of farm products (eg associations in the fresh produce industry) POs with primarily political functions give farmers a political voice & lobby for favourable state regulation

Question 4

Vertical coordination from transaction cost theory perspective (1)

Accepted Answer

Key elements of coordination gathering and processing information making decisions communicating these decisions The stronger interdependence among activities carried out by different persons/firms, the greater amount of information they mus process Thus, vertical coordination in a value chain requires Information exchange among the upstream and downstream participants of the chain some form of decision making that results in the alignment of the individual activities and investments Need for more vertical coordination because of increased competition levels require improved logistic efficiency, customer responsiveness, innovation and product differentiation higher consumer demands regarding food quality and safety; attributes that are determined by individual activities by interdependent actors --> requires cooperation (eg establishing joint goals) and coordination (eg aligning individual activities) innovations that require all chain participants to adjust their activities (eg labelling of GMOs or organic food) All three aspects require more information exchange among supply chain participants as well as forms of joint decision-making The cost of information exchange and decision making are so called coordination costs

Question 5

Vertical coordination from transaction cost theory perspective (2)

Accepted Answer

Five attributes of transactions that affect size of transactin costs Asset specifity Environmental uncertainty and complexity Frequency of transaction (=routines) Behavioural uncertainty (= trust, joint history of patterns) Connectedness to other transactions (= embeddedness) Some governance strucutres are more efficient than others, depending on attributes of transaction characteristics of parties involved (market power) state of institutional environment (competition legislation, regulation) Available governance strucutres range from pure market to pure hierarchy Pivotal attributes determining the degree of vertical coordination are asset specificity, uncertainty & connectedness to other transactions Two types of transaction costs: those resulting from transactional risks and those resulting from need to coordinate interdependent activities Typical transaction costs economics solution for reducing transaction costs: use of a more hierarchical governance strucutre Hence, formal institutions of governance (eg laws, contracts) can reduce transaction costs But: informal institutions are also able to lower transaction costs All economic behaviour is embedded in a larger social context --> The reputation effect plays an imiportant role in reducing transaction costs within communities Pivotal question: Can POs reduce transaction caused by need to safeguard specific assets difficulty of measuring performance need to coordinate interdependent activities and transactions?

Question 6

Attributes of transactions that affect size of transaction costs 1. Asset specificity

Accepted Answer

refers to sunk costs involved in making investments that are specific to transaction (milk production) is high when opportunity cost of investment is very low --> inflexibility of alternative uses opens up possibilities for opportunistic behaviour to extract quasi rents of investment leads to problem of safeguarding those specific investments --> related transaction costs direct costs of crafting safeguards indirect costs of failure to invest in productive assets is particularly a problem in the presence of local monopsonies (hold-up by the processor/trader)

Question 7

Attributes of transactions that affect size of transaction costs 4. Behavioural uncertainty

Accepted Answer

refers to difficulty and high costs of measuring performance of contract partners in situations of asymmetric information (eg costs as a result of uncertainty about quality) leads to direct transaction costs: screening and selection (ex ante) monitoring (ex post) leads to indirect transaction costs: failure to identify appropraite partners (ex ante) (adverse selection) productivity losses through shirking (ex post) (opportunistic behaviour) --> Performance measurement costs are particularly problem in markets for products with credence attributes (eg organic) and have become more important due change in consumer needs

Question 8

Attributes of transactions that affect size of transaction costs 5. Connectedness to other transactions

Accepted Answer

leads to typical coordination problems (eg lack of information about form of interdependence between individual activities (=traceability) creates need for information exchange as well as orchestrations of the adaptation of each transaction --> if adaptation is not coordinated, an opportunity cost of maladaptation arises is typically present in high quality food chains with international trading companies/supermarkets that apply strict quality requirements or are building a reputation of quality suppliers supply chains that seed to improve efficiency by closely aligning all logistics throughout the supply chain

Question 9

Impact of POs on transaction costs related to vertical coordination 1. Asset specificity

Accepted Answer

Increasing levels of asset specificity due to Increase in investments in order to comply with particular quality requirements (=food labels) Increasing dependency of farmers on a particular buyer (supermarket chains) Vertical integration of farmers into processing and marketing by way of cooperative is effective mean to reduce risk In case of limited selling opportunities (due to concentrated market) and perishable products, farmers face risk of opportunistic appropriation of quasi-rents by their buyers (milk production) --> cooperative can solve this problem by taking the buyers position In modern supply chains, processing/marketing firms often invest in establishing reputation or even building a consumer brand safeguarding this investment involves substantial transaction costs of monitoring producers these transaction costs will be lower when brand owner is a PO, because then there is no conflict of interests between producers and buyers POs are also suitable governance structure for marketing regional products: --> brands of regional products are likely to be in hands of cooperatives to handle the buyers dependency on local farmers --> PO as appropriate governance strucutre for combining horizontal coordination among producers with vertical coordination in supply chain

Question 10

Impact of POs on transaction costs related to vertical coordination 4. Behavioural uncertainty

Accepted Answer

POs can reduce performance measurement problem (and hence transaction costs) by eliminating any source of conflict of interests --> remaining information asymmetry does not pose a transactional risk (although it still poses an PO internal coordination problem) POs can solve problem of asymmetric information between producers and buyers in different ways Hidden information about product quality Introduction of quality grades and standards sorting and grading prodcuts into different quality classes --> reduces transaction costs (for buyers) of searching for the right products, thsu improving the efficiency of the sales process Hidden information about consumer demand Establishment of a market information system / hiring a sales agent to find buyers, negotiate prices, and collect market information Additionally, POs make use of social mechanisms to reduce transaction costs resulting from asymmetric information Social mechanisms like norms and customs can reduce transaction costs of keeping individual actions in line with group interest Ex. rural credit organisations (--> group lending approaches that rely on peer monitoring)

Question 11

Impact of POs on transaction costs related to vertical coordination 5. Connectedness to other transactions

Accepted Answer

As noted earlier, coordination costs result from a lack of information and from dispersed decision-making Traditional function of POs: horizontal coordination among the producers (to get prodcuts of uniform quality) Nowadays: challenge of combining horizontal with vertical coordination If processors need information on products and production methods to align their own processing and marketing activities: --> Economisation of coordination costs through collecting and exchanging of these information by a cooperative In addition, PO as member-based institution, is suitable organisatino to provide technical assistance (which farmers need in order to meet the high quality standards of modern supply chains) Coordination strategies for traditional and modern POs: The will enhance the effort in collecting, processing and distributing information perform a brokerage function between customers and producers try to establish direct trading relations with major retailers to shorten the information chain between producers and consumers increase activities in providing technical assistance to their members --> in case of interdependent transactions, POs can reduce transaction costs by performing a coordination function

Question 12

Contract Farming, Transaction Costs, and POs

Accepted Answer

Contract farming (CF) as particular mechanism of vertical coordination in agro-food supply chains Increase in CF due rise of supermarkets in food retailing: procurement practices require more vertical coordination among production, wholesale and retail Reduction of role of state in providing marketing services, credit and inputs: CF can provide access to inputs and services (extension) Support of CF by development practioners: CF as one of the main instruments to link small-scale farmers to domestic and even foreign markets and therby to reduce poverty Facing high levels of interdependence, spot markets entail high transaction costs due to uncertainty and/or specific investments --> CF as efficient transaction costs minimising alternative for organising production and sales of quality food products Influence of POs on establishment and efficacy of CF arrangements Creation of countervailing power to reduce (often) uneven bargaining power between farmers and agribusiness firm Reduction of transaction costs for agribusiness firm in dealing with multiple agents (--> no need to negotiate with each farmer individually) Support in resolving disputes between farmers and agribusiness firm Provision of access to inputs, technical assistance, and credit that is required to enable farmers to produce the expected quantity and quality Contribution to the development of fair contract terms

Question 13

Critical Issues regarding POs

Accepted Answer

Issue 1: POs and their role as infromation broker Tightly vertically coordinated supply chains might induce POs to collect and distribute only specific information on specific customers --> POs will loose some of their wider economic and social significance Issue 2: POs and contract farming POs can facilitate CF (eg by providing inputs and technical assistance to their members, where buyers lack of incentive) For producers and their contractors, POs can reduce transaction costs related to asymmetric information and conflicting interests But: in order to perform these activities, POs need to strengthen their expertise in contracting, negotiation, and the technical area Issue 3: The size of the PO Vertical coordination often takes place via small groups of producers and their customers, due to easier organisation of information exchange and monitoring activities facilitation of innovation adaption lower member heterogeneity But: trade-off between these advantages of small size and the bargaining power of the organisation Issue 4: Multipurpose versus single purpose organisations The need for more vertical coordination will lead to a separation of functions among POs into specialised interest organisations and economic institutions The expertise needed in customer specific markets differs from the expertise in lobbying politicians Possible conflict of interest between economic POs serving a particular producer group and the political function representing all farmers in a particular region/industry Intensification of vertical coordination will entail a shift from community-oriented organisations to producer oriented institutions But: advantages of a community-based organisation Availability of social capital (--> keeps transaction costs low) Strong sense of ownership (--> keeps commitment high) --> Implications of shift to producer-oriented organisations on the efficacy of these social mechanisms? Issue 5: Professionalsation of the management The need for more vertical coordination will lead to more professional management in the PO The necessary marketing expertise is not likely to be available among the members, but has to be acquired or externally hired Professional management can better deal with the stricter quality requirements in the transaction between members and the PO But: control board members also have to receive substantial training in order to perfom the control function Issue 6: Enabling or restricting institutional environment Success of POs in supporting access of farmers to modern supply chains also depends on the institutional environment In order to acknowledge the importance of POs in helping smallholder farmers to improve their market access, many countries have to revise their laws on cooperatives

Economics of Cooperation (Subject) / Hybrid Organizations in a globalized world (Lesson)