AGRICULTURAL COOPERATIVES: ORGANIZING FOR MARKET ...

AGRICULTURAL COOPERATIVES: ORGANIZING FOR MARKET-ORIENTATION

IAMA World Congress VIII, “Building Relationships to Feed the World: Firms, Chains, Blocs” Uruguay, Punta Del Este, 29 June - 2 July 1998

Kyriakos Kyriakopoulos1 Research Fellow Nijenrode University The Netherlands Institute for Co-operative Entrepreneurship Straatweg 25, 3621 BG Breukelen The Netherlands tel: +31 346 291557 e-mail: [email protected]

2 June, 1998

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The author appreciates the helpful comments of Prof. M.T.G. Meulenberg and Prof. G. van Dijk.

Abstract: The main assumption of cooperatives’ functioning is that their markets approximate commodity markets and thus it follows that production orientation is pursued. The paper questions this assumption by suggesting that the current economic shift is associated with growing emphasis on evolving and differentiated consumer preferences. As a result, companies are compelled to espouse customer-oriented beliefs, develop strategies for continuous learning about and responding to markets. I argue that market-oriented strategy poses challenges regarding the ownership, decision making, and business conduct of cooperatives. I conclude this paper by discussing these organizational arrangements necessary to facilitate market-oriented strategies. INTRODUCTION Cooperative’s formation appears to have relied on a key assumption that joint vertical integration of farmers on the basis of single raw material and geographical scope can countervail the power of buyers and sellers and capture economies of scale in close-tofarm-activities. In addition, to co-ordinate this joint vertical integration system, cooperatives have traditionally utilized a set of unique co-ordination mechanisms, frequently referred as cooperative principles. It is suggested that these traditional cooperatives’ arrangements with respect to ownership, financing, control, and supply chain management point at production orientation (Nilsson 1998a; Søgaard 1994) and output maximization (Helmberger & Hoos 1962). In accordance with this production philosophy, the last thirty years have evidenced an explosion in consolidation among co-operatives to capitalize on cost advantages in the raw material handling, first-level processing, and distribution. This horizontal integration strategy alone, though necessary in many instances, is insufficient to provide competitive edge because the main drive is to exploit economies of scale assuming a commodity type of business (Nilsson 1998a). The reorganization of food and agribusiness is not, however linear, involving only the scale of business operations, but it is associated with transformation of the marketplace as well. Global proliferation of technology and managerial know-how, reorganization of international economic boundaries, deregulation of the markets, and heterogeneity in consumer behavior mark a major economic shift from production to market-driven competition (Grunert et al. 1996; Boehlje, Akridge & Downey 1995). Fundamental to this shift is the need to develop an organizational culture that puts the customer first or defines the business purpose as creating a satisfied customer (Deshpande, Farley & Webster 1993). To accomplish this, organizations need to be well-informed about and anticipate the market they serve- its structure, relationships and motivation (Day 1991). In addition they should be able to proactively develop suitable market strategies (Narver & Slater 1990). To make sense of and respond to their market, agribusiness firms in general and cooperatives in particular need to develop competency in market learning and responsiveness, that is, to become marketoriented (Grunert et al. 1996). I argue that market orientation poses two main questions regarding the strategy as well as the structure of cooperatives. The former deals with the ability of cooperatives to rapidly process market information across the cooperative chain.

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To be effective, learning should be accompanied by strong actual behavioral change that makes knowledge input in the value chain of an organization. However comprehensive market oriented strategy is, the structure of organizations affects the successful implementation of this strategy. Market-oriented coordination of the food chain questions traditional cooperative structure’ efficiency and effectiveness. My purpose in this paper is to extend our understanding of co-operatives’ market orientation. In order to accomplish this goal, I first explicate the elements of market orientation borrowing from marketing and organizational literature. Secondly, I will discuss some constraints that key organizational arrangements of cooperatives impose on the implementation of market-oriented strategy drawing from agency theory. Then, I suggest changes in structure than can facilitate the orientation of co-ops to the market. THE NATURE AND PROCESSES OF MARKET ORIENTATION Market-oriented organizational culture If organizational culture refers to the shared values and beliefs that define the way a firm conducts its business, market-oriented culture refers to the pattern of shared values and beliefs that puts the customer’s interest first (Deshpande, Farley & Webster 1993). Market-oriented organizations are committed to a business strategy that attracts and satisfies customers. It views the organization “from the point of view of its final result, that is, from the customer’s point of view” (Drucker 1974, as cited by Kotler 1994, p. 1). Fundamental to this culture is the assumption that sustainable competitive advantage stems from managing the business value chain so as to maximize customer delivered value (Kotler 1994). To accomplish this goal, an organization should be able to understand the material and non-material value drivers of consumption. What makes market orientation so valuable to food companies? The market structure and dynamics change as a result of concentration, internationalization, and emergence of collaborative schemata in every stage of food and agribusiness. The retailing sector provides the most clear-cut evidence of this trend as a handful of multiples emerge and prevail in the European food chain (Hughes 1994). These retail chains, thanks to sophisticated consumer data collection mechanisms, are able to deliver value tailored to their consumer preferences by coordinating product development processes, logistics, distribution, and in-store promotion campaigns. In addition, the globalization of the markets creates new sources of competition not least limited to domestic competitors. Firms need not only to stay abreast of the local competitors but to anticipate the moves and competences of foreign competitors. In addition, the heterogeneity in food demand due to changing demographics creates new market segments. Coupled with advances in biotechnology, demand segmentation offers more possibilities for coordination of food value chain to achieve product differentiation. The exponential growth of market data from applications of information technology e.g. UPC data, EDI strengthens the linkages in the food chain with a view to satisfying consumer demand. At the same time, these advances call for developing various kind relationships among organizations from farm inputs, farming, processing and retailing to assure food quality as perceived by consumers. 2

Organizations espousing market-oriented norms and beliefs can be on the cutting edge for they are sensitive to opportunities arising from market shifts and able to articulate suitable strategies with a view to delivering superior perceived value. Learning about the markets Although strong market norms and values provide the drive for focusing on customers and competitors, an organization needs a learning orientation as well (Day 1994; Narver & Slater 1995). Learning at organizational level occurs when new knowledge is developed that has the potential to influence behavior (Sinkula 1994). Thus, an understanding of how organizations become market-oriented calls for investigating of how organizations learn about the markets. A learning organization is an organization capable of acquiring, transferring, interpreting and storing knowledge in its effort to adapt to the changing marketplace. Thus, market learning involves the following stages: information acquisition, information dissemination, interpretation, and organizational memory (Huber 1991; Sinkula 1994). 1.

Market information acquisition: Although many organizations collect market data, marketoriented companies are more systematic and educated. Information can be acquired from different sources including customers, competitors, employees, and other sources of memory within the organization. To avoid the “tyranny of the served market” (Hamel & Prahaland 1994), attention is directed not only to current customers, supply chain partners, and competitors but potential ones as well. In addition, technological advances in related industries are analyzed for the potential impact on the firms’ perceived value delivery. Market oriented organizations, hence, are better educated in tracking shifts and trends in their markets, visioning and leading changes by motivating everyone in the organization to participate actively in the learning process (Day 1991).

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Information dissemination: Information dissemination involves the exchange and communication of information among different parts of the organization. Organizational learning thrives when information in one function, plant, or work unit is diffused in the organization. For instance, when salespersons become aware of complaints or suggestions from customers other functions i.e. production, purchase as well are informed and involved in this process of delivery customer value. It is suggested that less centralized, formalized organizational structure promote frequent communication, many informal encounters and exchange of information and ideas (Kohli & Jaworski 1990). Organizations that posses lean structures with much of informal communications and few layers of hierarchy are able to acquire, disseminate and act upon information collectively (Slater & Narver 1995).

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Shared interpretation of information: Shared interpretation (Moorman 1995) is a process of giving meaning to information. Information mostly appears to be vague, uncertain, and ambiguous and thus it has to be analyzed and given a context (Slater & Narver 1995). Mental models or theories-in-action provide the boundary for learning. They help managers and employees simplify and comprehend information. Mental model poses two main challenges for effective learning. First, they should be complete otherwise they distort information (Day 1991). For instance, mental models that stress production orientation will direct an organization towards the technical aspects of the product at the expense of customer needs and value. Secondly, mental models are effective when they are widely shared by the organizational members. Disparate mental models lead to incoherent strategies, lack of commitment, and ultimately reactive behavior. On the contrary, shared mental models promote timely and proactive behavior. For example shared mental models in new product development projects imply agreement on how markets are segmented, which segment fits the organization, what supply chain partners can be approached for collaboration, and how to cope with competitors.

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Organizational memory: Finally, organizational memory results from organizational history, or experience of organizations with decision stimuli and responses (Walsh & Ungston 1991).

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Organizations have to develop memory mechanisms that summarize their experience. Rules, policies, standard operating procedures, structures and databases can serve as memory mechanisms (Day 1991; Moorman & Miner 1997). It is necessary that these mechanisms do not distort the experience and can be easily retrieved. . Information technology is instrumental in preserving and retrieving information and thus stimulating learning. Strong organizational memory implies that knowledge is not wasted due to high management and labor turnover. For instance, plans and reports from external experts or consultants are communicated throughout the organization and stored in operating procedures.

Market responsiveness Market knowledge generated through the aforementioned learning processes hold the potential for influencing the actual behavior of the learner. Actually this very impact on actual behavior constitutes a very important aspect of market orientation (Jaworski & Kohli 1993). Market responsiveness pertains to the interfunctional coordination of an organization’s resources to create and deliver superior customer value (Narver & Slater 1990). Market responsiveness includes both planning/design and implementation activities (Kohli & Jaworski 1990). Response planning and design activities include utilizing market research and data in product development, marketing plans of existing products, divisional marketing strategy, building relationships with supply chain members, or when entering a foreign market or a new industry etc. Response implementation describes the agility and efficiency of a firm’s reaction towards competitive moves, customer complaints, changes in technology, and regulation. The new product development projects manifest, market responsiveness: market intelligence is utilized to select and target markets, develop and test new product concepts, choose suitable distribution channels, and communicating the value of the product so as to achieve superior customer satisfaction. Figure 1 illustrates the elements of market orientation.

Organizational Culture: set of beliefs that put the customer first

Market Information Processing: Acquisition, Dissemination, Shared Interpretation, Organizational Memory

Market Responsiveness: Interfunctional Response Planning and Response Implementation

Figure 1: The elements of market orientation.

COOPERATIVES’ STRUCTURE AND MARKET ORIENTATION Thus far, we have assumed that market orientation can be pursued without limits. In fact, any strategy is contingent upon the organization’s structure. In this section I elucidate on the distinctive properties of cooperatives’ structure. I especially pay attention to those properties that inhibit market orientation. The structure of cooperatives

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Cooperatives present one of the alternative coordination mechanisms of the production, processing, and marketing of food products. Are there any differences in the way cooperatives conduct their business in comparison with IOFs? To answer this question, we need examining the structure of cooperatives. The scientific literature on cooperatives distinguish two main distinctive characteristics: type and structure of vertical integration scheme they follow. Co-operatives represent a type of vertical integration between farming operations and processing/marketing functions. This type of vertical integration differs from that of ordinary corporations. Farmers, first, are unable to integrate on their own: investments in downstream or upstream activities are amenable to scale effects and broad financial capacity is necessary. On economic grounds, thus, it is inefficient and forbidding for a single farmer. Instead, farmers band together in a cooperative to accomplish a joint vertical integration (Sexton & Iskow, 1988). Farmers jointly own the cooperative. However, farm-members’ operations remain under their private control. Thus, there is not a single entity that co-ordinates the vertical integration as it is widely the case in IOFs. A set of organizational arrangements set by the statute of cooperatives proxies internal co-ordination. These organizational arrangements, typically associated with cooperative principles, basically fall in one of the following categories: ownership, control, and benefit (Barton 1989). As far as the ownership concerns, it is restricted to those that qualify for membership. In principle, cooperatives encourage as many farmers to become patrons by resorting to open membership, ideological and political neutrality, minimum entrance fee, organizing as a society etc. (Nilsson 1998b). The control aspects of cooperative are built upon the premise that members should be directly involved in the decision making. To support that, voting and membership in the Board of Directors are restricted to patrons on the principle of democratic control. Benefits are also returned to members in proportion to their patronage via cash and patronage refunds. Members are receiving any interest on their shares but instead they are redeemed equity gains in various schemes. More unique is the allocation of a portion of net income to the collective capital upon which no claims are made. Table 1 summarizes the main organizational arrangements of cooperatives. Some problems for market orientation These unique organizational arrangements of agricultural cooperatives appear to present some challenges when market-oriented strategy is sought. In this section, I distinguish and discuss two set of problems related to the principal-agent relationship and the business conduct of cooperatives. Agency problems of cooperative organizational arrangements Many cooperative researchers suggest that the property rights and governance structure of cooperatives cause a set of problems that arise from separation of ownership and management (Nilsson 1998b, Vitaliano 1983; Harte 1997). According to agency theory (Fama & Jensen 1983), the relationship between the owner-principal and the manager-agent puts forward an issue of alignment of the goals of both parties. The structure of residual claims of cooperatives creates the following problems:

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The public nature of residual claims: Cooperative is owned collectively by its patrons. When property rights are collective or unassigned then the free rider behavior arises (Olson 1965). Property as a public good implies that members are not able to enforce their rights. Cooperatives usually adopt open membership which simply means that a new member does not have to contribute to the value of a cooperative assets. A withdrawing member has not any right on the collective capital to which he has contributed though his patronage. It follows that members are unwilling to share investments whose benefits are nor appropriable in proportion to their costs. This is identified as a common property problem (Vitaliano 1983).

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The horizon of residual claims: Another troublesome consequence of the collective property of cooperatives is that they are used to be tied-equity firms in which residual claims on the enterprise’s income stream are contractually tied not to the capital that members have invested but to their volumes of transactions with the firm. Thus benefits from investments can be captured only over the time of membership/use and not over the productive life of the assets giving rise to the horizon problem (Caves & Petersen 1986).

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The tradability of residual claims: The risk behavior of patrons varies and aggregate synthesis of risks is aggravated due to lack of secondary market for shares. Patrons can not acquire a portfolio of investments which reflects their risk preferences due to lack of tradability of ownership rights: thus the portfolio problem arises (Vitaliano, 1983). The result of such a restriction is risk aversion of members towards investments (Nilsson 1998b).

4. The decision attributes of property: Separation of residual risk-bearing from management in corporations has lead to refinement of the decision process: decision management (initiation and implementation) is exercised by the management and decision control (ratification and monitoring) by the residual claimants, that is, the shareholders (Fama & Jensen, 1983). Stock market provides the signals for evaluating management performance functioning as a control mechanism on behalf of shareholders. In contrast with IOFs, decision rights are poorly-developed in cooperatives making necessary members’ interference. The decision control can not be exercised since shares are not tradable. Thus, members’ involvement with cooperative decision control is necessary and it is demonstrated by restricting membership on the cooperative board to farmers-members only (Vitaliano 1983). Decision management tasks are also ill-performed. As we know appropriate reward system preconditions acquisition of skillful management. However, cooperatives are not allowed to use share ownership or share options to reward successful management (Harte 1997). Overall, both decision management and decision control functions in cooperative organizations are underperformed giving a rise to the so-called decision problem.

The problem is aggravated as the membership of cooperatives becomes more diversified in terms of farm size, product, nationality, and age. For instance, the horizon problem appears to be stronger when farms are being sold instead of transferred in the younger generation of the same family. The structure of residual claims restricts capital growth which is verified by empirical evidence (Fulton et al. 1995). As a result, members are less willing to invest in higher-margin activities further in the food chain for they present considerable market risks. Many investments necessary to ensure a market-oriented strategy fall in this category: branding, new product development, R&D investments. Instead, members put pressure on the management and the Board of Directors to increase patronage refunds and accelerate equity redemption plans at the expense of long-term investments (Cook 1995). Problems associated with the business conduct of cooperatives The relationship between the principal and the agent in the traditional cooperative model creates serious problems; equally important are the problems associated with the business conduct of cooperatives.

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For many years, cooperatives have been associated with equal treatment. Fundamental to this practice is the assumption that cooperative decisions are homogeneous and preferences of various groups are identical (Staatz 1983). For instance, equal pricing, an important variant of equal treatment, implies charging the same price per unit regardless of the patronage volumes. In this way, larger patrons are charged or receive the same price as smaller patrons although they inflict smaller costs or contribute more to the net income per unit. This type of cross-subsidies, in a systematic pattern, between various groups of members can endanger the cohesion of the cooperative (Sexton 1986). It follows then that farmers are less willing to commit their raw material to the cooperative plants or they even withdraw entirely from the cooperative.

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Another important complication of equal treatment concerns the differentiation of farm produce. Although quality improvements of farm produce are ascribed to cooperatives’ reliable grading systems, the challenge today is even bigger. New market niches e.g. regional food, ecological food, resulting from demand differentiation lead to greater differentiation at the farm level (Royer 1995). It follows that these entrepreneurial farm activities call for differential price treatment. The spirit and practice of equal treatment has impeded the recognition and exploitation of such market opportunities. For instance, ecological milk production has met the criticisms of conventional dairy farmer-members in Denmark (Søgaard 1994).

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In addition to equal pricing, cooperatives restrict their raw material procurement to their fixed membership base (Royer 1995). Decline to diversify the sources or the type of raw material impairs efficient business operations for purchasing inputs from least expensive sources is not possible (Caves & Petersen 1986). Next to that, serious logistics problems can arise due to seasonality and variability of farm production. Uneven flow of raw material impairs the reliable performance of distribution activities when they enter into business with industrial or retail customers. Not only the farm inputs but as well as the end-product are subject to member’s production limitations. Cooperatives are unlikely to undertake businesses that compete with member products. Thus, cooperatives deprive themselves of a competitive product mix that meets the product attributes preferred by consumers and industrial customers.

Inevitably, the ownership, control, and business conduct of cooperatives restrict vertical expansion into value-added activities, exploitation of market opportunities at both farm and processing level, and creation of superior customer value. As a matter of fact, the organizational arrangements of traditional cooperatives render them production-oriented businesses. Table 1 summarizes the main features of productionoriented cooperatives. ORGANIZING FOR MARKET ORIENTATION The former section illustrated some problems the traditional cooperative model poses for the implementation of market-oriented strategy. In this section, I discuss which organizational arrangements are necessary to facilitate market-oriented behavior. The co-operative as a market-oriented vertical chain While in IOFs, profit is the clear objective making easy to design the right incentives let alone to evaluate management performance, cooperative decision making has been plagued by confusion on the nature of their objective. The dominant logic of cooperative chain has unfortunately focused on the raw material that members supply. In few other instances, co-operatives, driven by management ambitions, run the cooperative as an independent profit center. The former leads members to be concerned with the price of the raw material. The latter usually leads management to pursue business expansion or optimization of

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cooperative enterprise’ net income through business operations that are remotely related to members’ activities. As a matter of fact, both objectives are suboptimal and irrelevant, for vertically integrated type of organizations as we already know from the 1940s. Maximizing the patron’ welfare is the only optimal solution: joint maximization of benefits of members both as investors and patrons (Sexton & Iskow 1988). Table 1: Production-oriented and market-oriented cooperatives. Structure of cooperative Control

Production-oriented Cooperatives

Market-oriented Cooperatives

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Only Members

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Democratic control Board of Directors restricted to members Decision making by members

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•

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Only Members Open membership, Ideological /Political Neutrality, Societies Limited entry fee to cooperative assets Collective capital

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Restricted to members

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• • •

Equal pricing Equity gains redemption Minimum interest on shares

• • •

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Restriction on non-member trade One single-homogeneous product procurement Delivery obligation & Acceptance obligation

• •

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Horizontal expansion via federated structure and mergers with other cooperatives

•

•

Cost leadership market strategy on

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• Ownership

• • •

Benefit

Market strategy

•

•

• • •

•

Members and limited number of nonmembers Democratic control Participation of external experts or external owners Separation of decision making tasks Members and limited number of nonmembers Closed membership Substantial entry fee in proportion of patronage Transferable shares Members and limited number of nonmembers Equitable pricing Equity gains reflected on shares Competitive interest on shares Increased non-member trade Diversified procurement driven by consumer market demand Specified quality and quantity requirements via contracts or delivery rights Vertical expansion via strategic alliances, R&D consortiums, and marketing and distribution joint ventures Product differentiation market strategy

Member relationships Members are the most valuable asset of co-operatives. Market orientation in the cooperative chain can not flourish unless members are given incentives to integrate in the food chain. In the past, members have been criticized as production-oriented. Financial-ownership arrangements are mainly to blame and worth receiving special attention. From equal to equitable treatment

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Diversity in the preferences, risks, and costs among membership is considerable nowadays. Integration into higher risk activities and consolidation among cooperatives are expected to increase this diversity. Cooperatives will need new agreements to keep their membership loyal otherwise some groups of patrons defect. Such an outcome can not be of value to farmers because organizational costs increase, and hence, relinquishing their operations to private firms will be inevitable. Equitable treatment appears to ameliorate the problem for it recognizes the different preferences and contribution of various groups of patrons providing them incentives to remain within the cooperative (Staatz 1983). For instance, stable and efficient solution would be to organize cooperatives along homogeneous segments on the basis of location, product category or investments profiles to satisfy special preferences and needs, yet under a single management (Sexton 1986; Staatz 1983). Strengthening the individual property rights Capital provision of members should become proportional to their patronage. In addition, establishing a secondary market for equity capital can increase the share transferability and liquidity. Proportional shares that can be traded among members or potential members can ameliorate certain agency problems (Cook 1995). For instance, tradable shares provide members with signals for evaluating the market performance of cooperative and choosing their suitable investment portfolio. Members will have more incentives to invest in risky activities like new product development, or brand marketing, and logistics. Many cooperatives willing to keep the members involved with investing in the cooperative have established a secondary market for membership shares allowing for trade of shares among members. Every share carries a delivery right of a number of units of raw material. Members can trade their shares at conditions that reflect the value of market performance of the cooperative enterprise (Van Dijk et al. 1997). Restructuring property rights in the aforementioned ways allows economizing in transaction costs in risky investments along the food chain. Many transactions related to technology are vulnerable to opportunistic behavior that is dampened because the cooperative is owned by its patrons. As a result, the cooperative is less likely that it will behave in exploitative manner towards its owners (Royer, 1995). Therefore asset specific investments both on primary and processing stage are feasible. To support that claim, strategic management literature claims that systemic innovation innovationinterdependent set of complementary innovations- should be organized internally for they are subject to considerable transaction costs (Chesbrough & Teece 1996). Otherwise critical investments will fail to realize giving a rise to a market failure situation. Take, for example, the case of production of functional food in the dairy sector. Coordinated use of biotechnology is necessary to achieve product attributes according to industrial users requirements. Market-oriented business conduct Co-ordination of the raw material supply The growing importance of vertical coordination in the food sector has the effect of more business-like trade between cooperatives and members. An important aspect of this trend is the strict application of business-at-cost principle. In addition, members are subject to stricter delivery conditions (Van Dijk, Kyriakopoulos, Nilsson 1997). 9

This is necessary to assure that the exact quantities and specified qualities are delivered to the processing plants. For instance, the Dutch dairy co-ops demand their members to buy special delivery rights. For the same reason, contracts with detailed specifications are gaining ground. Procurement diversification In response to growing importance of meeting processing and end-user needs, it is necessary to increase their non-member trade i.e. buying from and selling to nonmember-farmers. A more radical variant of this different procurement policy concerns business with non-members that are remotely related to the member’s raw material. Such a business strategy can be beneficial as long as it offers economies of scale and scope, reducing seasonal variations and enriching the product mix. For instance, seasonality and quota production of industrial potatoes inhibited Avebe, the Dutch starch cooperative, from ensuring a steady supply to its clients. To solve the problem the cooperative decided to diversify the raw material procurement. First, it expanded its membership to 2000 German potato growers. Secondly, Avebe sources tapioca, corn, and wheat starch on a global scale to meet the specific requirements of its global customers. By means of diversification and global sourcing of raw material, the company has ensured a steady supply of cheap raw material and in time delivery of the derivative products to industrial buyers. Market-oriented decision structure PLC subsidiaries for marketing and international operations Increasingly, capital intensive and risky activities i.e. further down the processing chain, new product development, research and development, international operations need radical reorganization. Agility, flexibility and market responsiveness appear to be achieved easier in autonomous PLC subsidiaries, separate from the holding cooperative. Institutional investors are more then attracted to become equity holders. In general, PLC subsidiaries give the advantage of better financial control, risk reduction, access to ludicrous market activities, responsive decision making, and more sound business strategy. The two biggest Danish coops MD Foods and Danisn Crown have been pioneers in teaming up with institutional investors in order to set up MD Foods International and Tulip International. In contrast, cooperatives organized in the federated system suffer from certain drawbacks when they entrepreneurial decisions are taken. Competition among local cooperatives-members of the federated cooperative is counterproductive impairing coordination of processing or marketing functions (Schrader 1989). Beneficial, though, in certain circumstances, this solution might be, inclination to confine collaboration among cooperatives on ideological grounds can be detrimental to the interests of patrons. For instance, collaboration of cooperatives on strategic research is beneficial as risk reduction and cost sharing are achieved. For instance, Danish meat cooperatives undertake jointly strategic R&D research. In contrast, when penetration into foreign market is at stake a strategic alliance between an IOF and a cooperative may be preferable. These problems have rendered federated structures inappropriate to co-ordinate several stages of the agri-food chain due to growing administrative cost, lack of agility, 10

and limited market focus. Evidence from the actuality suggests a decline of the federate structure and the apex organizations both in EU countries (Van Dijk, Nilsson, Kyriakopoulos 1997). Decision making tasks allocation Proliferation of managerial know-how, complex alliances, and changing market environment poses tremendous challenges for co-operative decision making. This means that decision tasks have to be allocated between Board of Directors and Management Board and that both bodies are better equipped to fulfill their tasks. Management capabilities need advancing since decision management functions are more complex, risky, and specialized. Cooperatives should be able to attract competitive and motivated management. An appropriate reward system preconditions acquisition of skillful management. In addition measuring management performance to market criteria can make cooperative’s decision management more effective (Royer 1995). At the same time, the Board of Directors should be able to draw a sound long-term business strategy, judge the performance of management, and most important ensure a holistic view on the farming and marketing activities in the cooperative food chain. Many cooperatives, seeking to deal with the complexity of decision control, have allowed for external persons, usually experts, to participate in Boards of Directors as a means of assistance to farmers’ delegates. In the Netherlands, the restructuring process in the fruit and vegetable sector has led not only to a mega merger of independent auctions into a single marketing organization, but also to re-engineering of the decision making process as well. What is new is the introduction of two layers of management: one for the cooperative organization, VTN and one for the marketing organization, the Greenery (van Dijk 1997). The latter consists of professionals who assume full responsibility for running the company. They are evaluated by the Board of Directors of the marketing organization whose members are growers and external advisors. The cooperative has it own separate management consisting of growers and it is evaluated by a separate Board of Directors with a staff of growers and external experts. CONCLUSIONS In the ongoing debate about the re-engineering of cooperatives, something has been missing: this reorganization can not be linear, involving only the scale of business operations, but it has to be associated with changes of kind as well. Change in food and agribusiness has accelerated making possible the coordination of farming and processing to satisfy customer needs. Vertical expansion into value-added activities is enmeshed with market risks and uncertainty. Vertical expansion requires an organizational culture oriented towards the market that puts the customer first. Market uncertainty and volatility call for sensing and anticipating the customer preferences, the dynamics of competition, and the role of technology and regulation. Learning strategies about the market include tapping many sources coming from direct experience, self-appraisal, experimentation, benchmarking, and collaboration with key customers and supply chain partners. Learning becomes 11

effective when it is accompanied by actual behavioral change. Market responsiveness is demonstrated in market segmentation and targeting, product and service development, and distribution and communication activities of an organization. As with most strategy transformation, market orientation questions the current structure of cooperative organizations. Ownership, governance structure, and business conduct are the core of this structure. Though the traditional structure has ensured a strong market position vis a vis market forces, its value is bounded and conditional. Heterogeneity both in consumption and production requires new cooperative structure that motivates and coordinates diverse groups of members, management, directors, employees, suppliers towards market-oriented business operations. Bringing about this change in strategy and structure will contribute not only to the efficiency and effectiveness but as well as institutional legitimacy of cooperative organization.

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