Agribusiness and Agribusiness Management

It is a fascinating journey for a seed of wheat or corn to end up as bread or cornflakes in a dining table. It changes several hands undergoes several mutations during which time it was turned into crop, then processed at the primary level later at secondary and tertiary level to be turned into value added products. By the time it reaches the table the metamorphosis is complete.

The wheat in your slice of bread might have originated from Punjab or Haryana, the corn in the cornflakes from the fields of Karnataka or Tamilnadu, the butter or cheese from the villages of Gujarat, the tea from the estates in Assam, the juice from the oranges of Nagpur. The coffee or chocolate you drink might have come from Brazil or Ghana and Ivory Coast, the edible oil from Malaysia or Indonesia, the toor dal from Myanmar, mattar (green peas) from Australia. The food on the table whether it is a ready to eat type or cooked at home is the result of the efforts and coordination of a complex network of people and organizations. You might have visualized by now the several people or organizations involved in the whole process. The input suppliers, farmers, traders, millers, value added processors, bakers and at every stage the transporters, warehouse owners, wholesalers, retailers etc are involved in the chain from the farm to the fork.

Davies and Goldberg of Harvard Business School defined agribusiness way back in 1957 as “the sum total of all operations involved in the manufacture and distribution of farm supplies; production activities on the farm; and the storage, processing and distribution of farm commodities and the items made from them”. 

The complex network of organizations involved in food production and marketing consists of thousands of organizations of varied size and formats. Small and marginal farmers, primary processors or millers at the block or taluka town, village and cottage industries manufacturing papad, pickles, ketch up, giant corporations both domestic and transnational sourcing raw materials from different parts of the world using sophisticated technology, big corporations supplying seed, fertilizer, pesticide, farm machineries, retailers from modern organized format to small kirana (mom and pop)stores etc. All these organizations at one level are collaborating and another level competing with one another to deliver the product of value to the consumer. The value could be in terms of lower price or better and unique product.

Agribusiness and Rural Enterprises

The term “agribusiness” is often misconstrued especially by policy makers especially in developing countries such as India and equated with small agro processors located in rural areas using locally available resources. Further, the use of low cost technology and labour intensive process of manufacturing mostly by unskilled and semiskilled labourers completes that “understanding”. The policy pronouncements follow this understanding to boost agro processing with the hope to increase rural income and employment. One can very well imagine the competition between say a small ketchup manufacturer operating out of a shed in one of the small industrial estates and Heinz and Hindustan Unilever’s Kissan or a flour miller operating in a neighbourhood with that of Pillsbury (General Mills) or Aashirvaad (ITC).

These small units mostly produced/processed and marketed locally. The products are undifferentiated they are essentially commodities. These rural based processing units add only time dimension to the crop or commodity. That is agricultural commodities are produced in certain seasons but demand is throughout the year. As the products are mostly perishable they need to be processed thus making it available for consumption throughout the year. When space dimension is added, that is, to cater to the demand for urban and overseas market these units are inadequate or inefficient for the purpose.

In order to cater to urban and overseas market the scale of agro processing units need to be expanded or some sort of institutional innovation is needed to achieve economies of scale to build brands and market their products nationally or internationally.  AMUL and Lijjat Pappad are examples of institutional innovations which helped to scale up operations to serve the markets far from production centres. The aggregation of decentralized production of small producers and centralized processing and marketing enabled them to build brands.

Today, the consumer tastes and preferences are changing rapidly and are becoming increasingly complex. Commodity processing motivated at first by the need to preserve food has evolved into system to fulfill consumers’ desires for quality, variety, convenience etc. The quality attributes of a product demanded by the consumers is increasing in complexity. From storability and prolongation of shelf life to nutritional standards to flavour to convenience and to health providing nature the quality attributes demanded in the market place are constantly evolving. This has necessitated the processing firm to source raw materials far and wide.

Apart from the intrinsic qualities such as flavour, texture, appearance, shelf life and nutritional value, extrinsic factors that is the production system adopted such as pesticide used, genetically modified organism, processing methods, packing etc contribute to the quality demands of the consumer.  As the ingredients originate from different parts of the country or the world to make a product to cater to a particular set of consumers ensuring food safety becomes paramount importance. Technological advances have provided the food industry with methods required to meet the complex needs of the consumer.

As the scale and nature of agro processing changed it has opened up the possibility of using modern management tools and techniques. Tuning up the supply chain for procurement, efficiency in processing, segmenting the market and cater to them all increases the scope to use management tools.

Agribusiness, as mentioned earlier, is not just agro processing It involves several actors from input suppliers, farmers, processors, wholesalers, retailers, logistic providers etc. Thus agribusiness sector is a 'chain' of industries directly and indirectly involved in the production, transformation and provision of food, fibre, chemicals and pharmaceutical sub-strata.

As agribusiness encompasses all activities that are relevant to the eventual production, transformation / value addition, differentiation, distribution and retailing of food, fibre and associated products the question is what to manage in the various sub sectors? Are the managerial skills needed to run the various activities of agribusiness firms different from the conventional management techniques?

Is the job of a finance manager in a large fertilizer firm different from the one in an engineering firm? Is the job of a marketing executive in a processed food industry say in HLL (Kissan Jam, Squash, Annapoorna Atta etc) different than the one at a toy manufacturer or white goods manufacturer such as TV, refrigerator, washing machines etc? Is the role of the HRD manager in a pesticide unit different than his counterpart in a computer manufacturing firm? The answers to the above questions tend to be negative. 

Agribusiness Firms and Governance

Till a century or so ago farming was basically a subsistence activity and was self contained. Farmers basically produced their own inputs such as seed, manure etc farm tools were supplied by local artisans and the production was largely consumed on the farm or in the village. The small surplus that might remain was collected by itinerant traders.

Technology especially after World War II had revolutionized agriculture in many ways. Inputs such as seed and fertilizer which the farmer himself was producing had become specialized activities. The modern inputs and improved farming practices increased production manifold. The huge surplus began to be shipped to distant markets. This has spawned a range of activities away from farms such as processing, storage, transportation and marketing giving rise to functional specialization and segmented organizational handling. For each of these activities there are supporting activities such as finance, research and development and others such as government policies. For example, processing needs finance for both investment and operations (working capital), manpower is needed to run the plant and machinery, and research and development can contribute to efficiency or innovations. If the government policies are favourable the enterprise may flourish. So, each activity is impacted by various forces from outside.  Further, the actions of one activity in the chain affect other activities. If the consumers’ preferences are not incorporated in processing it not only affects the processor but also the wholesaler and retailer of the products.  However, these activities had no center for control and the firms separately perform the various functions and make their decisions. Price is the coordinating mechanism across the structure and that influences the behaviour of various components. In order to be efficient the decision makers must be fully aware of what is happening and what is likely to happen in the subsector of the system if not, the decisions they take might adversely affect other players. However, price and market mechanism alone is not sufficient to coordinate the various activities when a firm is dealing with non commodity product that is, offering a differentiated product to the consumers. So, there is a need for other governance structure apart from price and market mechanisms in order for the various players in the agribusiness sector to perform effectively.

Firm Strategy and Governance Structure

The various components of the agribusiness sector can be demarcated into production and processing sub sector. Firms involved in activities which impact the commodity prior to processing are in the production sub sector e.g seeds, input supplies etc. Firms involved after commodity processing are in the processing sub sector.

The quality attributes demanded by the consumers as was seen earlier is expanding. Apart from storability consumers are looking for nutrition, food safety, convenience etc. As for quality it is not only about texture, flavor, appearance etc but also about pesticide residues, genetic modification etc. This had given rise to two types of firms – firms that focus on the commodity and the firms that focus on the consumer. The competitiveness of the firm is defined as the ability of the firm to profitably create and deliver differentiation. This implies that competitiveness is directly related to the factors that influence a firm’s cost and structure. Commodity firms are likely to utilize the strategy of cost leadership to compete and survive in the field.

The firms which are differentiating their product and competing in the market focus on the consumer. They constantly look for opportunities in the consumer behaviour and try to seize it by acting accordingly. For example, consumer expectation on convenience and food safety cannot be delivered unless all stages of the food system work together to deliver them. In such circumstances, the boundaries between the input suppliers, commodity producers, merchandisers are broken and there is interrelationship in the channel. Prices and markets once the primary coordinating mechanism for open market is replaced by various forms of managed coordination such as contracting, strategic alliances, vertical integration wherein there is single ownership of multiple market stages. The reliability of various actions and the cost determines what sort of governance structure is needed for a product.

Invisible coordination allows individual economic actors to follow their self interest and pursue exchange relationships that are short term, opportunistic, limited as to information sharing, flexible, preserving independence of the actors. Managed coordination, however, is built on mutual trust, benefit sharing, open to information flow, stable and inter dependent. The intensity of control determines the kind of arrangement.

If the different actors in the chain of a product carry out their activity efficiently and the firm is getting the needed materials at the time it wanted the firm can rely on the spot market to get the materials to cater to its consumers. In case, there is uncertainty may be with regard to price or timely delivery or quality specification dependency on the spot market would be detrimental to the firm. The firm then has to look for alternative arrangements to get the supply may be through contracts or strategic alliances with the suppliers or taking over the activity itself that is involving in the activity.  A firm involved in value added processing needs different ingredients apart from the main raw materials such as flavours, preservatives, nutrients for fortification etc besides packing materials. Depending on the reliability of the suppliers to the firm’s specification the governance structure need to be determined. In case the supplier of packing material is completely unreliable the firm may start or acquire the packaging unit. If the raw materials available in the spot market are not upto their quality standards the company may enter into contract with farmers. It may take stake in a firm supplying critical flavor in order to reduce uncertainty. Thus, depending on the situation for different inputs that goes to make a product the firm has to follow its procurement strategy. The market conditions largely determine the power of the players which in turn dictates the governance structure. For example if the market is perfectly competitive spot market is ideal but in case for some supplies the market is monopolistic or oligopolistic in nature the suppliers tend to extract “rent” by constantly haggling during each transaction thus disrupting whole planning of the firm. In such cases the firm may be forced to look for other governance mechanisms.

Many large corporations have multiple governance structure in order to achieve cost leadership or differentiation. For example,  Cargill Inc, one of the largest grain traders in the world also have presence in flour milling, animal feed manufacturing, seed and chemical companies

Organization’s   Dependence	High	Partner Relatively Powerful Compared to the Organization	High Degree of Interdependence Smooth Relationship
	Low	Low Level of dependence on each other (ideal for market based transactions)	Organization Powerful compared to the partners
		Low                                   High Partners’ Dependence

Fig 1 Interdependence in the Supply chain under various Situations

 Source: Chopra (2007

The challenge for agribusiness managers is when to buy, where to buy, how to buy and from whom to buy. Depending upon the organizations dependence on its partners the decision may change to when to make, how to make. The knowledge about the agricultural markets and its functionaries, market conditions etc are important for managing agribusiness