For Official Use
TAD/CA/APM/WP(2007)16
Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development
07-May-2007 ___________________________________________________________________________________________ English - Or. English TRADE AND AGRICULTURE DIRECTORATE
COMMITTEE FOR AGRICULTURE
TAD/CA/APM/WP(2007)16 For Official Use
Working Party on Agricultural Policies and Markets
CREATION AND CAPTURE OF VALUE IN SECTORS OF THE AGRI-FOOD INDUSTRY: STRATEGIES AND GOVERNANCE
9-11 May 2007
This document is presented for INFORMATION under item 18 ii) of the Draft Agenda at the 42nd Session of the Working Party on Agricultural Policies and Markets, to be held on 9-11 May, at OECD Headquarters, Paris 16.
Contact person: Celine Giner (Email:
[email protected]; Tel: +33 1 45 24 96 52) English - Or. English
JT03226678 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format
TAD/CA/APM/WP(2007)16 Note by the Secretariat
This report has been prepared by Emmanuel Raynaud (INRA SADAPT and Centre ATOM, University Paris 1) and Egizio Valceschini (INRA Darese). It consists of an empirical analysis of producers strategies across countries for value creation and capture in the agro-food chain. It examines the the framework of work and the tools used in the governance of relationships among different agents in the sector. It was used as a basis of information for the Secretariat’s scoping paper on future work under item 3.2 of the Programme of Work 2007-2008. It is presented for information only, even if comments are welcome.
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TABLE OF CONTENTS
Introduction ................................................................................................................................................. 4 I. Differentiation by quality and creation of value ...................................................................................... 5 II. Quality differentiation strategies and value chains: an analytical matrix............................................. 9 III. Strategic configurations in the agri-food sectors................................................................................. 19 Conclusions ............................................................................................................................................... 30 ANNEX: ....................................................................................................................................................... 33 EXAMPLES OF STRATEGIC CONFIGURATIONS ................................................................................ 33 BIBLIOGRAPHY......................................................................................................................................... 37
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TAD/CA/APM/WP(2007)16
CREATION AND CAPTURE OF VALUE IN SECTORS OF THE AGRI-FOOD INDUSTRY: STRATEGIES AND GOVERNANCE
Introduction 1. Over the past years, the situation of agricultural markets has changed in developed countries., Agricultural policies have moved from an initial objective of supporting agricultural incomes to achieving a variety of complementary objectives, in the field of environment, of food production or of the supply of services. The nature of the competition has changed. Agriculture and food production have entered a world of “mass customisation”.1 2. To remain economically viable – if they are not to be forced out of the industry – farmers are confronted with the challenge of finding new competitive strategies, due to falling terms of trade for agricultural products, reduction in agricultural subsidies and international opening of markets. Agricultural enterprises, like those in other sectors, have to adapt directly or indirectly to this mutation of the economic environment. Economic efficiency no longer comes only from the capacity to manufacture products more cheaply. Competitive advantage is sought through the capacity to respond better to a variety of variable and contradictory demands from consumers, industrial customers or retailers and as such through the differenciation of products. 3. Because of the evolution of the economic environment and of increasing competitiveness farmers are forced to take into account alternative options in terms of choice of production, marketing channels and contractual arrangements. These come on top of the traditional choices of varieties, production methods and volume. Producers seek to create monopolistic areas in a competitive world.2 Ultimately, the object is to obtain a differentiation rent by higher prices, while avoiding direct price competition, and thus by cost. 4. What are the options available to agricultural producers? An initial area for decision concerns choice of production and defining the scale of operations in relation to the experience and level of education of the farmer and capital, geographical location and various other characteristics of the business. A second area concerns choice of destination of products, marketing methods and contractual arrangements. Thus a choice arises, based on all these considerations, whether to produce homogeneous or differentiated goods. Production differentiation strategies are often recommended when production of homogeneous products is less profitable due to the absence of economies of scale. However, even products which were considered in the past as homogeneous are now often differentiated to make them compatible with their downstream use by industry or their final commercial destination. This strategic approach to agricultural production means that production costs and differentiation are the key to competition in the agricultural sector.
1.
The expression is used by Moati (2002).
2.
Industrialists and retailers in the agri-food sector in the 1980s generally established differentiation strategies by developing their brands. More recently, in the last decade of the 20th Century, these competitive strategies spread progressively to agricultural production, harvesting and initial processing. Even in mass production as widespread as that of cereals, differentiation nowadays is a strategic objective. It is characteristic of sectors which have reached “maturity”, which show low, zero or even negative growth rates.
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TAD/CA/APM/WP(2007)16 5. Choice of production, marketing strategies and contractual relations are often not made separately. The complexity of the decision increases with the extent of choice and consideration of the behaviour of other agents. The collective attitudes of buyers and other producers, such as cooperatives or their collective brands, must be appreciated. The opportunities offered to farmers or created by their individual or collective choices, give rise to a strategic configuration. The question is how to describe and characterise these various types of strategic configuration. 6. Differentiation strategies seek to increase the economic value of products. So what is the real or potential impact of the various strategic configurations on the creation of this value? Another question frequently discussed is identifying how this value is distributed. This document seeks to describe the strategic configurations resulting from differentiation strategies for agricultural production. It not only aims to show these strategies in all their diversity, but also to analyse the forms of governance necessary to deliver the product to the consumer. It is not, therefore, confined to a presentation of all the strategies and market systems, but also whether there is a match3 between these strategies and forms of governance. I. Differentiation by quality and creation of value 7. In differentiation strategies, quality is a primary decision value for economic agents. The purpose of differentiation is to present in the market a supply similar to that available in a sector, but not easily comparable to that of competitors. Acting on product characteristics, playing on consumer perceptions4 or else using geographical differences or peculiarities are the chief pillars of differentiation strategies. In each case, quality is an essential parameter: developing quality standards by defining product specifications or production methods, producing products in conformity with the standards, and control of conformity with the standards. 8. In general, quality signalling is a strategy of differentiation through information. It consists, as presented later, of assigning an economic value to information about quality based, firstly, on its relevance and, secondly, its credibility. 9. To begin with, the creation of value by quality signals is analysed. The focus is on the utility of a quality signal in a market and trace of its economic value. The precise source of that value is the key question. In this regard, the emphasis is often on “what consumers want”, their “expectations” or their “satisfaction” relating to the characteristics of the products or the information. Note, however, that the information on quality, however relevant in customers’ eyes, can lose all or part of its value if its reliability is not guaranteed in one way or another. The credibility of the label is just as much a source of value as the relevance of the information. The various guarantee mechanisms used to support the credibility of signalling strategies are analysed. 10. Secondly, different ways of creating value through quality signals which we call strategic configurations are identified. By that it is meant the combination on the one hand of a quality strategy and, on the other, organisation (or governance) of transactions in a vertical chain established by the parties involved, individually or collectively, with the aim of managing information underlying the signalling strategy. 11. While not claiming to suggest a complete classification, model configurations which seem to represent current trends are compared. They are differentiated by the organisation of control and the nature of the information behind the signals (quality strategy). They are also distinguished by the nature of 3.
It is also called “alignment” in organisation economics.
4.
A distinction is drawn between objective differentiation and subjective differentiation of which advertising is the chief tool.
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TAD/CA/APM/WP(2007)16 ownership rights of the signal, a decisive factor in the distribution of profit and participation in the governance mode adopted. 12. More specifically, the different ways of organising guarantee mechanisms are highlighted. This is for the following reasons. Firstly, because, it is the goal of credibility which guides the configuration of a value chain, i.e. the various forms of coordination put in place by economic or institutional players. Secondly, because this configuration determines the distribution of value among the various participants in the chain. I.1 Defining value in the chains 13. Economic analysis defines the value created in a chain (“vertical chain” or “supply chain”) as the difference between the benefit obtained by the consumers from the consumption of a unit of final product (B) and the cost of the inputs necessary to produce that final product (C), or (B-C) (see Besanko et al., 1996, Brandenburger and Stuart, 1996). These costs correspond to the value which must be sacrificed to convert the intermediate products into the final product. They include the opportunity costs5 which must be allowed by producers in the production/processing chain. The value is also equal to the sum of the consumer’s surplus and the producers’ profits. 14. Consider the example of a simplified vertical chain consisting of a single production stage6 as presented in Figure 1. The consumer’s surplus is the difference between the value he obtains from the consumption of a unit of final product, (B – P). The producer’s profit per unit of production sold is the difference between the selling price and all the costs necessary for the production of the final good in question, (P – C). The created value (B-C) is thus equal to: B – C = (B – P) + (P – C). Figure 1 illustrates this concept of economic value by unit of final product.
5.
The opportunity cost of an activity is the value of the best option which must be renounced to exercise the activity in question. Measuring opportunity cost in this way amounts to valuing what one gives up when one makes a choice.
6.
For example, consumers who buy fresh vegetables direct from a farm.
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Figure 1. Economic definition of value created in a chain
CONSUMER’S SURPLUS (B-C)
Value created
B PRODUCER’S PROFIT (P-C)
P C
COSTS (C)
15. This analysis provides the necessary tools to measure the value created by a vertical chain of progressive transformation of raw materials into final products. A fundamental question for our proposition concerns the distribution of value between the various actors in the vertical chain. It is one of the principal functions of markets to give rise to prices which distribute value to the various levels of the chain. However, the different stages of the chain are not necessarily coordinated exclusively by the system of market prices. Several other forms of coordination can be envisaged and are actually used. Take, for example, vertical integration7, contractual relations, strategic partnerships, enterprise networks. These different forms of organisations of transactions (also called structure of governance by the economy of organisations) will be examined further. The important point for the moment is to consider that these forms of organisation, among other things, have the function of sharing value between the various stakeholders in the vertical chain. I.2 Creation of value by quality signalling 16. Product differentiation and customer segmentation strategies seek to reflect as closely as possible the numerous, fickle and sometimes contradictory demands expressed by the markets. They rely on the heterogeneity of consumer preferences and inequalities of purchasing power to satisfy the new quality 7.
Many observers and analysts of the functioning of the agricultural sector have shown the growing role played by contractualisation in the vertical coordination between the various actors (see, for example, USDA, 2002, 2004a). Thus, in the period 1969 to 2004, contractualisation rose from 12% of the value of agricultural production to over 36% (with higher values in certain specific branches such as meat production).
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TAD/CA/APM/WP(2007)16 demands linked to changes in lifestyles and eating habits. These demands traditionally concern four main areas: safety, health, satisfaction and service. To this must be added the emerging quality demands which concern the environment (protection of nature and the countryside, preservation of natural resources and biodiversity) or ethical values (“fair trade” or animal welfare for example) 17. In all these areas, the concern and indeed the demands of consumers regarding the products themselves, their origin, producers, production methods, etc., are growing exponentially. One explanation relates to the consumer’s frequent uncertainty about quality. In the agri-food industry, consumers are often not automatically in a position to know the quality of products, or the truth of the information about their characteristics. This problem is all the more critical considering that certain characteristics are mainly (i) “experience characteristics”8 (observable only after purchasing the product, at the time it is used,for example the tenderness of meat), or (ii) “credence characteristics” non identifiable even after purchase, for example, when the “safety element” of the quality or the nutritional composition of a product is an issue, or when one is concerned about ethical, cultural or environmental aspects of quality.9 In consequence, in food markets, individuals are particularly dependent on information controlled by the producers or retailers. 18. Economic analysis shows the potentially disastrous consequences of these information asymmetries on the efficient operation of markets (Akerlof, 1970). This pessimistic finding must, however, be refined as, even if some actors in the market often profit easily from these situations of asymmetric information, correction of these asymmetries may also be a source of value for both those who take the initiative in correcting them (for example, companies) and for consumers. 19. Information on product labelling is an example of a response to this asymmetry. More broadly, marking products with brands (commercial brands, labels, PDO, logos and various claims, etc.) is a predominant way of responding to the problem. Through a recognisable brand, the labelling seeks to inspire confidence by associating the quality of the product to the quality of the manufacturer or seller. Commercial brands of industrial manufacturers or major retailers’ brands (RB), or even official quality certificates are the chief pillars of this process. 20. The key concept is the quality signal. By this is meant a summary of information10 achieved by affixing to the product a logo, acronym, name or even some text promoting one or more characteristics of a product which are not directly visible at the time of purchase, or even in use, and which the supply may, at one stage or another, control. The information summary may concern certain attributes of the product and/or certain characteristics of the production process. We know that such signals are capable of generating value, which is measured, in particular, by the difference in consumers’ propensity to pay for a branded product and a reference product (cf. Loureiro et al, 2000). However, the question remains as to where this value comes from. 21. The economic value of the brand comes from its two essential economic functions: the relevance of the information and its summary, and the credibility of the information summary. In other words, differentiation strategies can generate value not only because they can produce different qualities
8.
This distinction between different characteristics of goods and their consequences for the operation of markets were introduced by Nelson (1970) and Darbi and Karni (1973).
9.
Thus, at the time of use, there is nothing to distinguish a product with particular conditions of production in terms of animal welfare, workers’ rights, protection of the environment or non-use of particular processes (biotechnology, irradiation, etc.) These characteristics relate to the “credence” aspect.
10 .
A summary or concentrated knowledge.
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TAD/CA/APM/WP(2007)16 (characteristics), suited to different categories of consumer (relevance criterion), but also because they can efficiently signal these qualities in a credible manner.11 22. A quality signal is relevant when it “makes sense” to the consumer, when the consumer recognises that it has a value (he is willing to pay both for the product characteristics and the information summary). This summary is intended precisely to add value to a distinctive signal used to differentiate a product from other products on the market. It may be vertical differentiation (higher quality) or horizontal differentiation (distinctive quality or specificity). 23. From the buyer’s point of view, the relevance of the quality signal is linked to three major functions served by it and which create a propensity to pay. The first is identification and tracing: the quality signal identifies the product as a specific combination of characteristics. It thus allows the buyer to find it more easily because the range of products is now organised. The second function is saving time and effort: the signal allows the consumer to memorise easily the result of previous choices, and the lessons of experience of consumption. It reduces the time and effort necessary to the process of choosing products. The third function is diversification of supply: the signal helps to extend the range of products available and reflects adjustment of supply to the specific needs of increasingly segmented markets and increasingly diverse tastes. 24. A quality signal is a commitment, a promise. To be credible, it must be based on a mechanism which guarantees that producers fulfil their commitments.12 Credibility consists of inspiring and maintaining the confidence of consumers or customers. It means ensuring that the information on the product is consistent with the stated definition and the commitments explicitly or implicitly made in the quality signal. The problems are then those relating to the translation of commercial specifications into manufacturing rules (technical specifications) and the reliability of production methods and validity of controls. The area of credibility is where consumer confidence plays a part. It is the problem of choice of mechanisms able to guarantee the reliability of the information. The question is how to guarantee that the quality mark (statement or promise on the label) is consistent with the actual quality of the product. It is how to ensure that the product conforms to the stated definition and commitments given. II. Quality differentiation strategies and value chains: an analytical matrix 25. The notion of value chain13 is a matrix for identifying quality differentiation strategies centred on the creation and distribution of value. First a precise definition of the various components of this matrix considering the component of creation of value based on criteria of relevance and credibility is proposed (2-1). Then the second element of these chains is presented by detailing the diversity of modes of 11.
This value can be calculated on the basis of three indicators. Firstly, the creation of a differentiation profit resulting from lower price competition: a quality signal is intended to increase the margin on certain products. It seeks to reduce the price elasticity of demand (increase P) and/or increase the consumer’s propensity to pay (increase B). However, experience shows that consumers only actually pay a “premium” for the quality signal when there is a clear difference between the quality shown and the minimum quality available. Secondly, formation of capital. A quality signal is an asset for the enterprise and its financial value is a crucial element. Its commercial value corresponds to the discounted income flows resulting from the product differentiation. The brand is part of the intangible assets of the enterprise. It is a financial asset whose value is largely determined by the introduction of the brand which in turn depends on strategic investment (product innovation, advertising, etc.) The value of the quality signal also depends on the capital of trust and the credibility built up over time. Protecting the quality signal is crucial, since, ultimately, it is about protecting the capital which it represents. Finally, the value of a quality signal can be identified from the generation of specific management costs: a branding strategy gives rise to additional costs to the enterprise (research, development, advertising and distribution costs, etc.).
12.
The term producer is used in its broadest sense: it can cover agricultural producers, industrialists, retailers.
13.
A similar application of the notion of value chain can be found in Cox (1999), Hobbs et al (2000).
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TAD/CA/APM/WP(2007)16 coordination which drive the effective functioning of quality differentiation strategies (2.2). A criterion of cohesion between these value chains considering the interactions between quality strategies and vertical coordination is also suggested (2.3). II.1. Relevance and credibility: The bases of quality signals Construction of the relevance of a quality signal 26. The capture of the consumer’s interest and the supplier’s capacity to attract depend on the relevance of the quality signal. As such, the problem is to select the relevant characteristics to highlight, bearing in mind the expectations and perceptions of the consumer. What information should be labelled? What form should the information take? Note in the first place that, a priori, it is the fief of the marketing department of enterprises to be able to identify consumer needs. Enterprises have a strong incentive to seek out new sales opportunities by identifying new consumer needs. Identifying them is far from being an exact science as suggested by the considerable number of new products which are rapidly withdrawn from the market (see, for example, Anderson and Gatignon, 2005). Note also that consumers’ expectations are going to change in the light of factors which enterprises only imperfectly understand (even if they can try to profit from new opportunities without necessarily having anticipated them). The example of the reactions of some companies to the BSE crisis in the beef market in France illustrates new opportunities for creating value. Following the fear of possible transmission of BSE to consumers, the demand for beef shrank considerably. The crisis allowed then a modification of the criteria for differentiation of supply. Thus the criterion of the origin of the animals (in this case of French origin) became an attribute valued by the consumer, who considered that domestic products were less affected by the BSE problem. The attribute of “origin of the animals” (and, to a lesser extent, information on breeding conditions) became relevant for consumers. The recent growth in sales of “fair trade” products likewise suggests that this characteristic carries more weight. The bases of credibility 27. The credibility of a quality signal may be studied by considering that a quality signal is comparable to a “contract” between the owner of the signal and the consumers, i.e. a set of promises on the future quality of goods irrespective of how this quality is defined (Figure A.1 in the annex). It may also be the promise that the products do not contain a certain ingredient, that the product is manufactured by means of a certain technology or that the product comes from a certain geographical place.14 28. Two peculiarities of this interpretation of the quality signal as a contract must be underlined. Firstly, the contract between producer and consumers is essentially an “implicit contract”, i.e. not codified in a written document. Observance of this “contract” cannot therefore be enforced by recourse to a court and derives from an economic calculation on the part of the producer.15 Secondly, the promises contained in this contract concern only decisions of the producer. There is no obligation on consumers whose only decision variable is the act of purchase (and repetition). Credibility means the capacity of the owner of the signal to guarantee the fulfilment of its commitments concerning the quality of the final goods. Two main types of mechanism, which can be combined, are distinguished.
14.
This interpretation of a quality signal as a contract was suggested by Klein and Leffler (1981). It is useful in allowing an analysis of the contractual mechanisms which can lead producers to produce the quality levels announced by the signals.
15.
This allows the commercial brand to be distinguished from the guarantees offered by a producer to accompany the sale of its good(s).
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TAD/CA/APM/WP(2007)16 The reputation mechanism 29. This is based on the construction of a brand image thanks to the repetition of the same purchases. This repetition leads to associating the quality of the product to the name of the manufacturer and/or seller. Economic analysis shows that, for the owner of the brand to have an incentive to satisfy the expectations of the consumer (which the owner has itself aroused) it is necessary for there to be a “price premium”, i.e. a difference between the market price of the “standard” quality and the selling price of the product concerned. The discounted value of this price premium represents the economic value of reputation. 30. It is the threat of the customer breaking off the relationship and the related loss of reputation which makes the implicit contract self-enforcing (Klein and Leffler, 1981). It is in the producer’s interest not to disappoint consumers' expectations. The greater the brand’s reputation, the greater the damage in the event of its loss16: loss of market share, as well as loss of profitability of investments (e.g. advertising expenditure or creation of a distribution network). The system of independent certification 31. This consists of supporting the credibility of a quality signal by the intervention of a formal institution, external to the commercial transactions. In the case of certification brands, the credibility of the mark relies on formal control of conformity with the benchmark: ex ante control (accreditation of producers) and ex post control (product testing) which is based on the intervention of a formal institution, public, private or mixed, but external to the parties involved in the transaction. 32. In that case, the quality signal seeks its guarantee in an independent third party body whose functions are; (1) to specify the characteristics used in the standard, (2) to check conformity with those characteristics, and (3) issue the certificate of conformity. 33. Such an “institution” may derive the legitimacy of its guarantee from the State (e.g. official quality marks of the European Union) or the reputation acquired by an independent private body (the Underwriters Laboratory in the USA). In all cases, it engages its own liability, including criminal17, based on its technical expertise, the reliability of its tests and, where applicable, its powers to sanction users of the mark. 34. each.
Table 1 summarises the two dimensions of relevance and credibility by providing the content of
16.
Of course, the sanction by the market will be even greater if legal liability arises: the law reinforces the effect of reputation.
17.
Of course, the reputation mechanism can also be applied to the independent bodies themselves. Moreover, that is one of the differences between France and certain European partners concerning certification bodies. France considers that the State must be involved to give its guarantee, while others maintain that it is sufficient to allow full play to certification market forces, with competition between bodies and the reputation mechanism eliminating inefficient certifiers.
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Table 1. Component parts of quality differentiation strategies Component parts
Content
Examples
Attributes of the quality signal
-Nature of information communicated
-Symbolic attributes of the brand, -Attributes related to origin (geographical), - Attributes related to conditions of production (bio, environment….)
Type of guarantee system
-Means assuring credibility of promises, i.e.: -Organisation of control: who controls? How?
- Reputation - Direct or indirect certification - Combination of the preceding two means -Direct or indirect control
II.2. Identifying governance modes 35. The identification of the sources of value of a quality differentiation strategy is a first stage. It is insufficient, however, in the sense that it ignores a second important element of value chains, namely, the distribution of value. The way in which the distribution of value operates concerns: •
the decision-making process for the quality signal (i.e. by whom and by what means are decisions taken),
•
translation of the chosen product qualifications into technical specifications,
•
governance modes of relations in the chain.
36. These different elements (See below Table 3) influence the distribution of value by acting both on the expected profits and the costs (production and transaction). Ownership of the quality signal defines the actors who are in a position to decide on the differentiation strategy and how its evolves. This ownership may be private (e.g. commercial franchise chains) or public as in the case of official quality marks. 37. The technical specifications can have a major impact on the costs of production of the various parties concerned. Finally, coordination of vertical relations will also influence the creation and distribution of value through the negotiation of prices between the various parties, the incentives they provide to make specific investments, not to behave as a free-loader in relation to the construction of the final quality, etc. 38. This is all the more true given that, in the majority of the agri-food sectors, final quality is a “collective construction”, heavily dependent on the actors at various stages in the chain. For example, if a distributor seeks to segment the supply of fresh beef based on a criterion of tenderness of the meat, the breeding and slaughtering conditions may be crucial. The profitability of specific investments in the promotion of products may thus be reduced by the opportunist behaviour of such suppliers or retailers. 39. At the same time, uncertainty about the quality of intermediate products must also be reduced in order for the quality signal to play fully its role as indicator of homogeneous and regular quality. Control of this quality is then strategic in order, in commercial terms, to guard against a deterioration of one’s own
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TAD/CA/APM/WP(2007)16 reputation and, in legal terms, against criminal liability18. In other words, the commercial success of a differentiation strategy, i.e. the value created, also lies in the form of governance of transactions in the chains. Thus quality control and measurement and incentive mechanisms suited to different stages in the chain must be put into practice. Control of the quality signal and the associated standard 40. Observation of the agri-food sectors shows the diversity of quality signals. Traditionally, especially in Europe, two main families of quality signals can be distinguished: on the one hand, commercials brands owned by processing companies, farmers’ cooperatives or retailers; on the other, official quality certificates, owned by the State, which makes them available (subject to certain conditions) to the actors in the sectors.19 41. In the first case, a brand is the property of a private organisation (collective or otherwise). This organisation thus has control of the definition of the quality (attributes indicated to the consumer) but also owns the private technical specifications or standard which supports the quality. In particular, ownership of these assets gives it the possibility of modifying the technical definition of the quality and the related standard.20 This control also extends to instruments to guarantee regularity of the quality. 42. The commitment represented by the mark often obliges the enterprise to exercise extreme quality control. Frequently purchased products are a challenge for the enterprise in this respect. For example, L’Oréal’s reputation forces this firm to seek zero defects, i.e. to push to the limit its precautions before launching a new product or any modification of the formula of its beauty products. 43. The reputation mechanism does not automatically ensure that the production system in the firm manufactures all products in conformity with the standard. The problem is even more difficult when all or part of the production of a product sold or any modification of the formula of a product sold under its brand is delegated to “partners”. Other systems for managing product conformity are then put in place to strengthen the guarantee by reputation. 44. For ten years or so, manufacturers or retailers with brand strategies have been adopting new quality management systems. In the context of management of branded products, the goal now is to achieve “zero defect”. It is in this perspective that Quality Assurance certification procedures are used. At the same time, any delegation of production of all or part of the quality is also accompanied by a definition of technical constraints, limiting the discretion of the parties involved and producing a “production standard” in the form of a benchmark. 45. In the second case, under national and European regulations on marks identifying quality and origin, these various marks are owned by the public authority which assigns their use to collective organisations.21 In particular, the State delegates the definition of the marketing strategy and the 18
These various elements are developed by Barzel (1982), Williamson (1991) among others.
19.
Other quality signals can, of course, be envisaged. Reference to the geographical origin of the product (country of origin labelling) is also used, for example, in the United States and New Zealand (Hobbs, 2003, Clemens and Babcock, 2004).
20.
This does not mean the absence of negotiations with other actors in the chain involved in production. However, as suggested by recent economic analysis, the important point is the fact that the owner possesses residual rights of control i.e. the right to decide unilaterally in all situations not covered by the initial negotiations or contracts (in particular the right to sell their asset in the market) See Besanko et al (1996), Milgrom and Roberts (1992) for an academic presentation.
21.
PDO (Protected Denomination of Origin) and PGI (Protected Geographical Indications) at Community level, directly inspired by the French system of labelling and guarantee of origin. For further information on this system of
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TAD/CA/APM/WP(2007)16 specifications to collective organisations (provided that they conform to a minimum standard at national level). These collective organisations are made up of representatives of the various successive stages of the vertical chain (except distribution). The various actors must thus agree collectively on the definition of a collective quality strategy and the implementation of the associated specifications. 46. Even if the reference to the origin “local produce”, “local crafts”, “tradition” as a tool for differentiating agricultural products and its associated protective regulation are essentially developed in the European agri-food sectors, this system of reference to origin is also found in other regions of the world (on a smaller scale, it is true). One might mention the brand “Vidalia Onions” in the United States, a quality mark owned by the State of Georgia (Hayes et al, 2004), the quality marks « Idaho potato » and « Grown in Idaho » which are certification marks, and New Zealand’s lamb producers (Clemens and Babcock, 2004).22 In all the above cases, the use of marks is shared between legally independent enterprises. One can then legitimately talk about collective marks. 47. Compared with the distribution of value, the previous two situations give contrasting positions. In the case of private marks controlled downstream (retailers or processors), agricultural producers are either mere suppliers of raw materials if the differentiation of products is done primarily downstream, or subcontractors if the quality strategy emphasises characteristics which these producers control or influence. Their bargaining power will therefore fluctuate according to their relative importance in relation to the final quality as signalled to consumers. Moreover, they have little control over the definition of the technical specifications. Conversely, in systems under official quality marks, agricultural producers are stakeholders in the elaboration of the quality strategy and the technical specifications. By regulation, the geographical origin of intermediate products and the final product is a major component of the information conveyed to consumers. The assets at the origin of the creation of value are higher up the vertical chain.23 The same applies to collective systems which make explicit reference to the origin of the products without, however, in the European system of official certification of product origin, fully identifying the origin of products. Description of vertical coordination 48. The last key element in value chains is the description of the vertical coordination governing the various relations between the actors. A description of these modes of coordination is necessary because, as we indicated above, there are as many different quality differentiation strategies as there are possible different competing pairs (strategies/modes of organisation). Economic analysis of organisations has recently explored and studied the diversity of governance modes which make up a market economy. Where hitherto one only considered a single governance mode to coordinate transactions between private operators and the market, recent work distinguishes three “families” (Williamson, 1985, 1996): the market, the firm and a set of contractual relations covered by the term “hybrid forms”.24 Hybrid governance structures are analysed as intermediate between the two polar forms, the market and the integrated firm. Franchise agreements, a long-term contract, enterprise networks or a joint-venture agreement are just some examples. Hybrid governance maintains the legal autonomy of the parties (one is then in the market register). However, the role of coordination by the price system is highly reduced (but not eliminated) in favour of coordination based chiefly on a system of rules (essentially a contract or series of contracts). The certification by public authorities, consult Bureau and Valceschini (2003), Hayes et al (2004), Marette et al (2007), OECD (2000). 22.
Even if this last example does not have the legal status of an official certification of quality, it nevertheless has similar characteristics.
23.
Even if it is a misuse of language (from a legal point of view), some authors consider these official marks as “farmerowned brands” (see Hayes et al., 2004).
24.
See, for example, Williamson (1996), Ménard (2004).
14
TAD/CA/APM/WP(2007)16 agri-food field especially has shown a wide diversity of these hybrid forms. In an earlier work (Raynaud et al, 2005), a more precise classification of these governance modes based on case studies at European level was suggested. This classification is shown in Table 2 while Box 1 explains the various modes in more detail. Table 2. Governance structures and degree of vertical coordination Williamson classification Detailed classification
Market Spot market
Hybrid Implicit (or relational) contract
Implicit contract + qualification of the partners
Hierarchy contract
Financial participation
Vertical integration
Degree of vertical coordination Source : Raynaud et al. (2005)
Box 1: Definition of different governance structures
25.
25
•
Spot market (or spot contract) : “a contract for the immediate exchange of goods or services at current prices”. This mode of coordination is based essentially on the price system. It is a totally impersonal mechanism in the sense that the identity of the parties has no influence over the terms of trade.
•
Implicit contract (or relational contract) : “shared understandings that are not legally enforceable but that the parties consider to be binding on one another’s conduct”. Unlike the previous case, the identity of the parties is important to the extent that one is dealing essentially with repeated interactions between the same parties or different parties belonging to a same “community”. It is reputation which guarantees the contractual agreement.
•
Implicit contract with qualification of the partners: same situation as the preceding with one limitation. One of the parties (or both) can only do business with a party which complies with certain criteria. For example, a distributor requires suppliers to have an ISO type system.
•
Contract : “formally, contracts are legally enforceable promises”. A written agreement which stipulates in varying degrees of detail the obligations of the contracting parties. In the event of a dispute, the parties may resort to the courts, to enforce the contractual agreement. Examples are contracts of employment, franchise contracts, contract of marriage…..
•
Financial participation (equity participation): the contractual agreement between enterprises (bilateral or multilateral) is based on financial participation in the capital of the enterprises. Examples of this mode of coordination include joint-venture agreements, cooperatives, creation of a common subsidiary.
•
Vertical integration : “bringing two or more successive stages in production and distribution under common ownership and management”. For example, a motor manufacturer buys its supplier of suspensions (integrates its vertically) or decides to produce in-house rather than outsource.
Based on Milgrom and Roberts (1992).
15
TAD/CA/APM/WP(2007)16 II.3. The cohesion of strategic configurations as a source of additional value: aligning governance
strategy
and
49. Once the various quality differentiation strategies have been identified, the question which then arises is that of the forms of organisation needed to support these strategies. Is the market with its strong properties of adjustment and incentives still the most efficient governance mode? There are good reasons for thinking that certain strategy/governance mode pairs are more efficient than others in terms of creation of value. The link between strategies and governance is based on the existence of problems of coordination attached to the quality differentiation strategies (also called “contractual hazards”). It was noted above that, firstly, the owner of a commercial brand engages both its reputation and its legal liability when it sells its products, and, secondly, the final quality often depends on the behaviour of the actors at the various stages throughout the production chain. The owner of the mark thus has an interest in selecting carefully the mode of coordination with these various actors so as to limit potential coordination problems (which economists try to evaluate through the notion of transaction costs) which can reduce the value of the reputation. In particular, modes of coordination of the most “critical” transactions in terms of quality as signalled to consumers should then evolve towards greater contractual integration which, potentially, can go as far as total vertical integration as these modes of coordination allow the introduction of more appropriate means of control and incentives than provided by market governance.26 If a distributor delegates production of a food product whose final quality is highly dependent on the behaviour of the agricultural producers, this relationship can be expected to be driven by a governance mode closer to vertical integration. Conversely, if the value created by the mark depends essentially on the behaviour of the owner (through original marketing, for example) and little on the behaviour of the intermediate product suppliers, it seems pointless and inefficient to put in place a mode of coordination allowing strong control. For example, the value of the Nike brand comes essentially from marketing know-how and little from the intrinsic quality of the various intermediate products making up the final product. It is not surprising, therefore, that the mode of coordination governing relations between Nike and its suppliers is similar to market governance. 50. This reasoning allows putting forward the proposition that modes of coordination in vertical chains with private brands will be closer to vertical integration than those using official quality marks. In chains with official certification, part of the coordination problems related to quality management and assurance are managed by an independent body responsible for certification (the certifying body). The official certification is responsible for quality control throughout the chain and in a sense takes the place of private coordination mechanisms by allowing strong control of actors in the chain.27 51. Thus, a given quality differentiation strategy will have a preferential form of organisation, i.e. organisation of relations between operators in the chain which can limit problems of coordination. Defining, for an actor or group of actors, a certain quality strategy to a large extent means choosing, or in any case giving preference to, forms of organisation which are most likely to impose themselves. The value chain will be all the more coherent if there is a match between governance of transactions in the chain and the type of quality strategy adopted. This match is evaluated according to the means used to limit transaction costs in the relations between actors in the chain, in practice the choice of modes of coordination.28
26.
See Gonzalez-Diaz et al (2003), Furquim de Azevedo et al (2002), Codron et al (2005), Raynaud et al (2005a,b) for results along these lines.
27.
See Raynaud et al. (2005) for results along these lines.
28.
This principle is close to that proposed by economics of transaction costs (Williamson, 1991, 1996) whereby competing economic agents will choose to organise their transactions so as to minimise transaction costs. See Muris et al (1992), and Spiller and Zelner (1997) for illustrations.
16
TAD/CA/APM/WP(2007)16 52. The important point of the analysis is to consider both quality strategies and governance modes as decision variables for the agents involved. The value created by the quality strategy depends on the governance mode and vice versa. A good match between these two strategic decisions, a good alignment, is a source of value as it allows the system to function more harmoniously. Certain quality strategies may then not be selected not because they do not create value but because the transaction costs necessary to manage them are too high. II.4. Modelling the diversity of strategic configurations 53. Bearing in mind the diversity of empirical situations observed, it is essential to model some “typical configuration” based on a single analytical matrix. The aim of this approach is, ultimately, to evaluate the strengths and weaknesses from the actors’ point of view (in the broadest sense, enterprises, groups of enterprises, institutions or local authorities, associations, etc…). The value of a common analytical matrix is that it can isolate the key comparative elements. These elements must be linked to the modes of creation and distribution of value: nature of the differentiation (attributes communicated, qualification mode(s)…) guarantee mechanisms to ensure credibility (reputation, certification…) owners of the brand (individual and/or collective actors, institutions, State) modes of governance of vertical relations. 54. Figure 2 summarises the various elements. Various quality strategies can be identified considering the mode of value creation, firstly based on information communicated to consumers or to the final customer implicitly or explicitly, and secondly, the means of guaranteeing the credibility of the brand. The value of this approach is that it allows a comparison of the very great diversity of quality differentiation strategies. Figure 2: Modelling a strategic configuration
Governance mode of the differentiation strategy
Quality differentiation strategy
Relevance
Rights of ownership of the quality signal
Attributes signalled and information communicated to the consumerr
Differentiation standard Source and conception
Credibility
Coordination of vertical relations
Guarantee mechanisms to assure promises
Creation and distribution of value in the chain
17
TAD/CA/APM/WP(2007)16 Table 3. Parameters of a strategic configuration Quality differentiation strategy
Decision-making and Ownership title
Actor driving the strategy, i.e. owner of the quality signal:
Ownership of the quality signal, i.e. system of allocation of rights:
Collective chain organisation - Marketing organisation - Producer board - Consortium - Foundation - National agency - Regional regulatory council - Certification organism
Official signal - "Label Rouge" - Organic - PDO - PGI Certification brand - Certification brand - Collective brand - Collective label (marketing, origin) - Ecological label - Regional brand
Private organisation - Private firm - Retailer - Producer Cooperative - Cooperative - Association of producers - Union of cooperatives Relevance, i.e. attributes signalled to the consumer :
Attributes signalled and Differentiation standard
Inter-firm cooperation: several enterprises agree to design a common standard "de jure" standard : benchmark (technical specifications) elaborated by consensus
Production methods - Method of production or breeding - Know-how - Feeding - Animal welfare - Method of transformation
Codification of a common benchmark by a committee of professional experts (third-party regulation: e.g. AFNOR or ISO29 standards) Issued by an exogenous regulator of a mandatory common codification for all participants in the market (regulations on products, sales conditions, labelling)
Coordination vertical relations : - Spot market (or spot contract) - Implicit contract (or relational contract) -Implicit contract with qualification of partners - Formal contract (written) - Financial participation (equity participation) - Vertical integration - Chain contract
Coordination
29.
Type of differentiation standard:
Non cooperative: spontaneous result of competition
- Incentive/reputation - Self-control - External audit - Certification
and
Private brand - Collective brand - Private brand - Private retailer brand
"de facto" standard : collective benchmark (technical specifications) applied under private rules
Product characteristics - Organoleptic characteristics - Fatty substance content - Freshness - Tenderness - Practical character - Safety, consumer health - Constant quality
Origin - Geographic origin - Natural product, without pesticide - Environment protection - Traceability Credibility i.e. guarantee mechanisms:
Control
Governance strategy
International Standards Organization.
18
TAD/CA/APM/WP(2007)16 A strategic configuration is determined by parameters in three major fields presented in Table 3. The first field concerns driving the quality strategy. It refers to the nature of the owner or legal beneficiary of the quality signal. The owner of the signal possesses the right to use it, and from that stems its decisionmaking power. It is the owner who has the capacity to initiate and, if applicable, to modify the signalled attributes, the differentiation standard, the guarantee mechanisms and the organisational forms. The owner of the signal thus determines, as it were, the intent of the differentiation strategy. By these operational choices, such as recourse to contractualisation or vertical integration, the signal owner directs and organises the vertical relations. Moreover, it is ownership of the signal, by the legal power it confers, which largely determines the control and distribution of the value and economic profit associated with operation of the signal. 55. The second field of parameters concerns designing and implementing the differentiation. This field is a major challenge for the driver of the differentiation strategy, for two main reasons. The first is that defining the attributes signalled to consumers and the type of standard which translates the signalled information into technical specifications lie at the heart of the differentiation strategy. It is on these that the capacity for differentiation is based, they that “create the difference” within the supply sphere. The second reason is that the nature of the differentiation to a large extent determines the method of control and coordination with the various stakeholders in the quality. In general, the more the quality of the attributes and the reliability of the information communicated to consumers depend on the behaviour of the economic actors in relation to the strategy driver, the greater the need for control and coordination. 56. The third field of parameters of a differentiation strategy concerns the choice of guarantee mechanisms and modes of organisation of relations between the various actors involved in the strategy. The guarantee mechanism chosen to ensure the credibility of the signal also strongly influences the most efficient form of organisation. Indeed, recourse to external mechanisms (certification by the State or by a third party) limits the need for direct control accordingly. It is the institutional environment which, in a sense, takes over the control function. Conversely, guarantee mechanisms based on reputation will require maximum direct control on the part of all the actors who apply it: control of suppliers’ actions, control of technical specifications, etc…. A reputation/certification combination will be placed in an intermediate area in terms of control needs. III. Strategic configurations in the agri-food sectors 57. Based on the analytical matrix, five strategic configurations which take account of the diversity of international situations are described. These configurations are not intended to be statistically representative. Rather they serve as an illustration. The panorama proposed here primarily allows us to grasp a few typical configurations (archetypes), identify the main differentiation strategies and characterise the main categories of vertical relations. It is thus possible to define the situation of the economic actors, especially those in agricultural production in the strict sense, in various contexts of strategic differentiation of products, and to show their position in the capture of the differentiation profit. 58. Of the five configurations identified, two are well known. On the other hand, the other three have emerged more recently relying on organisational innovation. Thus the five configurations are presented in two stages. First, the two so-called classical configurations are described, i.e. corresponding to cases which, for a long time, have proved their economic efficiency, durability and geographical reproducibility: PDO, first generation manufacturers’ brands and retailers’ brands (DB). Then the socalled innovative configurations are presented, encompassing in this term all forms of innovation, by an unprecedented association of strategic differentiation and downstream driven (second generation DB) or simple differentiation and upstream driven (agricultural producers’ brands). Innovation may also come from the nature of the management (i.e. the owner of the quality signal), as for example driven by a consumers’ and environmental protection association or a local authority. 19
TAD/CA/APM/WP(2007)16 59. These examples will serve to illustrate a way of interpreting quality differentiation strategies and to draw their organisational consequences. A cross-cutting summary of the relationship between these major configurations and the nature of the vertical relations will be proposed. This presentation will be an opportunity to highlight the key questions which are faced by the agricultural actors upstream (farmers and their organisations) in each of the configurations studied. III.1. The “classical” strategic configurations 60. The classical configurations fall into two categories. What they have in common is that they are each based on mechanisms for the allocation of well-known property rights and driven by actors in the agri-food sectors which have been the subject of considerable study. Their economic efficiency is proven, as well as their capacity to be applied in different countries and for very different products. The difference between the two categories lies in the type of differentiation favoured by each. •
One is based on the characteristics of the supply: known as “strategic segmentation”, it seeks to highlight the qualitative characteristics which are highly distinctive of a type of product or a production method. It consists of organising a sector from upstream to downstream. Sectors traced from their origin, such as the Protected Designation of Origin (PDO), belong to this model. It is a mode of differentiation based on the characteristics of origin of the products and with a specific institutional mechanism.
•
The other starts from consumer preferences: often called “marketing segmentation”, it is based on analysis of demand. It seeks to divide consumers into groups characterised by the same needs, the same habits, the same purchasing behaviour. It consists of adapting products to the different types (segments) identified as privileged targets. Commercial brands, in particular industrial manufacturers or retailers, generally rely on this type of strategy. The strategic configuration driven from upstream and centred on signalling the origin of the
products 61. In this type of configuration, the reference standard is the origin of the products, as shown by the example of Comté cheese in Box 2. On the one hand, the entire relevance of the reference to the origin lies in a reaction to industrial standardisation. Through origin, it is the variety of products, the image of the local brand, diverse artisanal know-how which are sought. On the other, these configurations rely on a regulated mechanism (professional association) which broadly defines the rules for sharing profits and the nature of the downstream links. This mechanism plays an essential role in guaranteeing quality, by certifying that the products produced are in conformity with European regulations. 62. The chief special feature of this type of configuration is the crucial importance of the institutional environment. Indeed, in PDO, management of the signal is delegated by the public authorities to independent agricultural bodies responsible for drawing up specifications and certification and control procedures. The quality signal thus obtains its warranty and credibility from recourse to an independent body. Ultimately, such an institution draws its legitimacy from the State’s guarantee or its own reputation. 63. The right to use the signal is delegated by the public authority to a producers’ collective (the CIGC in the case of Comté and the Consortium for Parma Ham; Strategic configurations of Comté and Parma Ham are presented in Table A.1). The collective exploitation of the signal may give rise to opportunist behaviour. Each actor in the GI branch is a partially independent actor whose interests are not always fully in line with those of the collective organisation. Consequently, it is a strategy which requires strong organisational and control capacity on the part of producers. Its efficiency is highly dependent on the capacity of the collective organisation managing the brand to enforce an internal discipline in order not 20
TAD/CA/APM/WP(2007)16 to reach a state of price competition, the chief consequence of which would be to seek a reduction in production costs by dragging down quality. Ultimately, this discipline relies on the establishment of appropriate forms of coordination which sometimes conflict with the principles of the right of competition. Box 2: Geographical Indication (GI) Comté 30
The GI Comté was created in 1958. In terms of turnover, it is the leading French cheese GI. Its management is delegated by the State to a collective organisation, the “comité interprofessionnel des gruyères de Comté” (CIGC), which comprises representatives of milk producers, producers’ cooperatives (the “fruitières” which transform the milk into fresh cheese) and the refiners (who age the fresh cheese in cellars). The GI Comté is an official quality mark. The reference to origin primarily highlights the typical nature of the product related to the specific characteristics of the production/transformation activity. The GI also signals the flavour and nutritional characteristics of the cheese. Some GI Comté also promote a “biological agriculture” characteristic or the expression “Comté extra” for the best cheeses. In addition, the label may also show the commercial brand of the processor or distributor (for example the Président or Entremont brands, or else the brands of the retailers Carrefour and Monoprix). The GI Comté is thus a generic signal which allows various differentiation strategies to be put into practice. Comté is a cow’s milk cheese consisting of a cooked pressed paste produced in the region of Franche-Comté. The definition of the quality is subject to a standard which must be approved by the National Institute of Appellations of Origin (INAO). It chiefly covers the definition of the GI area and a series of restrictive provisions (for example, limited number of breeds of cow, lack of silage for animal fodder, maximum distance between the place of production of the milk and the place of transformation, minimum duration of refining, etc.). Traceability of origin is the keystone to the credibility of the GI. All along the production/transformation chain, it is organised on the bases of external control by staff of the public administration and the inter-professional committee, internal control by each producer. Sanctions and exclusion procedures are envisaged. The vertical coordination between the principal stages of production (breeding, transformation, refining) varies depending on the subtlety of the differentiation strategies within the appellation. The principal modes of coordination identified between these various stages are as follows (see our classification on p. 19): relations between farmers and the first transformation are essentially driven by financial investments (essentially agricultural cooperatives) or by relational contracts. Contractualisation in the form of relational contracts or written contracts dominates relations between the first stage of production and refiners. Finally, relations with retailers are essentially governed by relational contracts or the spot market.
64. The major difficulty of these configurations concerns their capacity to face the competition from traditional brands (average for credibility, problems of homogeneous quality). The proliferation of GI for the same type of product or the proliferation of different standards within the same GI also threaten to confuse the image of the signal for consumers.31 Two developments of this strategic configuration could be envisaged. 65. The first would involve bringing the central links of the chain (production and first transformation or operation, depending on the type of product) closer together in a resolve to achieve strong differentiation (creation of common brands) and reduction of diversity within the same GI. This change would clarify and compress the information carried by the quality signal. The difficulty, however,
30.
At European level, Comté has had a PDO since 1996.
31.
The growing competition with national wine production from foreign production with a clear brand is exemplary in this regard. Moreover, it seems very difficult for the “new” wine consumers (in France and abroad) to understand and use the reference to origin as an indicator of quality when reference to the grape is simpler.
21
TAD/CA/APM/WP(2007)16 comes from the possibility of getting independent actors to agree on the redefinition of a collective project while at the same time, conditions of production (and individual strategies) may be highly heterogeneous.32 66. The second change would be to develop distributor brands associated with the upstream, progressively abandoning any reference to the regulatory framework of PDO. In that case, agricultural producers might fear that the entry of major retailers into GI systems would lead to a gradual disappearance of the public label as the source of differentiation, resulting in a less favourable distribution of value as far as they are concerned. The marketing configuration driven from downstream 67. In this type of configuration, quality signals are driven by the new largely internationalised economic leaders, i.e. major industrial groups and mass food retailers.33 These enterprises develop ranges of products identified by commercial brands. It is a case of differentiating products by constant innovation and classical marketing signals. In this context, food relies increasingly on factors if production of industrial origin with a high scientific and technical content. 68. The differentiation strategies mean providing a mass customer base with increasingly individualised products but at low cost. To reduce production costs, their objective is to standardise everything that reasonably can be. Delayed differentiation is the preferred method able to achieve two objectives which for a long time were considered contradictory. It consists of pushing as far downstream as possible the differentiation of products supplied to consumers.34 This method of differentiation is not always possible, and the weight of the characteristics of the raw material may still be considerable. We then talk of simple differentiation. In the context of simple differentiation, the weight of the supplier remains high, in particular because the attributes communicated to consumers by the owner of the brand impose the use of restrictive technical specifications. In the agri-food sector, this method of differentiation modifies relations with suppliers considerably. In the case of Creta Farm presented in annex in Table A.2, it is the organoleptic quality of the finished product which is the basis of the differentiation strategy. The degree of control by the processors requires recourse to vertical integration (Creta Farm) or strong coordination contracts (the Cassegrain “Joint Committee” – presented in Box 3 - , associating industrialists and producers’ associations and representatives of the transformer, and managing the various elements not specified in the contracts). 69. To underpin this strategy, ISO type Quality Assurance certification procedures have become commonplace among retailers and processors. Indeed, when a distributor or a transformer delegates to another manufacturer the production of a product sold under its own brand, it is dependent on the quality of that manufacturer’s work. The expansion of quality management methods seeks chiefly to increase the traceability of the process in order to improve information systems, alert and control procedures. All activities, in particular agricultural production, are now subject to this type of procedure. Farmers become suppliers or raw materials, subject to strict specifications concerning production methods. Selected and controlled by accreditation procedures, they become “subcontractors”. 32.
In this regard, the example of Comté is not representative of all cheese GI in France. Other GI, for example, have great difficulty in modifying their specifications in the sense of more restrictive conditions of production.
33.
We will not, in this paragraph, deal with the example of first generation RB, which have marketing configurations very close to the brands of the classical manufacturers, where the differentiation is based on a marketing segmentation which is relatively independent of suppliers.
34.
This is a fundamental aspect of this strategic configuration: the choice of a deferred specification and qualification of products allows reduction of stock, lead-times, planning horizons, vagaries of demand, and thus satisfies the demands of flexibility of suppliers’ production systems, which increases productivity of the overall quality management mechanism.
22
TAD/CA/APM/WP(2007)16 70. Forms of organisation among operators are changing towards greater contractual integration which can, potentially, go as far as total vertical integration, as in the case of Creta Farm. However, for historical and political reasons, in certain countries such as France, for example, the form of organisation which tends to dominate is rather of the “management by contract” type relayed through producers’ organisations. In this model, agricultural producers delegate their bargaining powers to their organisations and take part in collective bargaining with the transformer or distributor, in particular on conditions of market access (volumes grown, selling price of the raw material). Box 3: The Cassegrain brand Cassegrain is a brand of a manufacturer of canned vegetables created in the 1960s and bought in 1989 by the Bonduelle Group, the European leader in the sector. In an extremely low-grade and shrinking market (for canned products), this brand enjoys a high power of differentiation, It targets an “up-market” segment, based on impeccable conservation in visual terms (no blemishes, regular size, etc.) and organoleptic criteria (tenderness and taste). Both these characteristics are essentially related to the quality of the agricultural raw material (“vegetables from the field”). This quality is determined by cultivating methods (sowing, pre-harvest treatments) and harvesting. The standard defined by Cassegrain is centred on agricultural activities. It defines production methods, farmers’ practices and harvesting methods (date, etc.). The company drives the strategic configuration by programming the production phase and the supply phase. Cassegrain’s credibility stems from the company’s capacity to control the production parameters which, in the main, depend on the behaviour of the agricultural producers. The difficulty is further increased by the large number of suppliers (several dozen, even hundreds) necessary to supply the factory in bulk. Coordination with farmers is thus a key control factor. The production standard is implemented in the framework of individual written contracts between the brand owner and its agricultural suppliers. Control is carried out by technicians in the agronomic department of the transformation unit, during the growing phase, then after the harvest when the factory is supplied. At this level, the personal relationship between the farmers and the factory agronomist plays an often very important role, in particular in deciding the date of the harvest, as the interests of the two parties may be fundamentally divergent. Given the large number of agricultural producers, the contract is negotiated collectively, at production area level, between the farmers’ representative association and the industrial production unit. Its main task is to fix the contract price, thus it approves the sharing of the profit on differentiation.
23
TAD/CA/APM/WP(2007)16
71. This situation could, however, change. Indeed, in the agri-food products market, the success of a differentiation strategy is measured by the difference in price between the standard products, which called reference supply, and the differentiated products. Competition tends to erode this profit on differentiation constantly, by reducing the gap between the two types of product. For some years, the major distribution chains (and also some processors, but less significantly) have opted for greater market segmentation, multiplying their supply by dividing it into a number of specific products. First generation RB thus tend to be replaced progressively by so-called second generation RB, where the differentiation is based in most cases on the introduction of precise specifications and/or strengthened controls along the transaction chain, possibly accompanied by supplier selection. These examples of second generation RB will be discussed in the following point on innovative strategic configurations. 72. Despite everything, the outlook for the development of these downstream differentiation strategies is still fairly good. Several aspects of the competitive environment operate in their favour. In the medium term, international pressures and the strategic directions of the major distribution and agri-food groups are moving towards increased liberalisation of markets. Furthermore, the productivity gains inherent in this type of strategic configuration are high, especially due to the possible further development of Quality Assurance procedures to strengthen the reputation mechanisms of the brand. In addition, globalisation of markets is accompanied by globalisation of brands. The efficiency of reputation mechanisms is thus enhanced, benefiting from economies of scale in a wider market. 73. Another factor favourable to the development of these strategic configurations could be the development of agriculture in the countries of the East or in other third countries, where low raw material costs can still increase the competitiveness of brands with deferred differentiation sold at more competitive prices in the final market. III.2. Innovative strategic configurations 74. In innovative strategic configurations, the nature of the innovation may be of varying kinds. It is seen both as a break with classical differentiation strategies and/or as a break with dominant forms of organisation. This broad definition of the notion of innovation is inevitably matched by a diversity of cases. Therefore, without seeking to be exhaustive, three types of configuration are distinguished, principally depending on the leader (promoter and driver) of the differentiation strategy: •
the configuration put in place by producers, most often combining a marketing and strategic differentiation strategy. It concerns collective brands of agricultural producers.
•
the configuration developed by retailers, based on strategic differentiation. This differentiation strategy makes it necessary to create new supply chains (e.g. “quality chains” opening the way to various forms of cooperation and partnership.
•
The configuration characterised by the emergence of a new type of promoter. The status of these new promoters and managers of the differentiation strategy varies: local authorities, associations of social actors not involved in trade (consumers, environmental associations). The innovative strategic configuration driven from upstream: collective brands of agricultural producers
75. In this type of configuration, collective organisations of producers establish quality signals based both on marketing segmentation and strategic segmentation. Their objective is to rely on complete control 24
TAD/CA/APM/WP(2007)16 of quality to highlight to the final consumer, in the form of a commercial brand, specific attributes based on reputation or a combination of reputation/certification. 76. One frequently observes, in this type of configuration, that the brand owner’s objective is to combine marketing differentiation (e.g. positioning based on environmental concerns) with strategic differentiation (use of production specifications, reference to a region of origin). The mode of qualification supporting this differentiation is thus directly controlled by the producers or their organisations. Table A.3 presented in annex gives two examples of this type of value chain for the fresh tomatoes market, Savéol in France and Qualitom in the Netherlands. Box 4 presents in more details the organisation of Savéol. The differentiation of these brands is essentially a matter of the strategic assets owned by these producers, whether directly or through cooperative structures or their branches. The threshold effects in terms of control, investment in advertising, research and development require pooling of resources by individual producers. These brands are thus very frequently accompanied by a high degree of mutual decisionmaking.
25
TAD/CA/APM/WP(2007)16 Box 4: The Savéol collective brand The association of three agricultural cooperatives of growers under glass, Savéol, created its tomato brand in 1981. These cooperatives are shareholders in a joint subsidiary, which owns the Savéol brand, which is now the leader in the French market for fresh tomatoes. This joint subsidiary is responsible for marketing, the marketing strategy (promotion, advertising, positioning of the brand) and negotiation with retailers. The brand seeks to signal two characteristics: one concerns the production method (integrated biological protection), the other concerns the tomato itself (constant and homogeneous visual quality). The signalling to consumers is based on a marketing innovation: the sale of tomatoes on the vine. The brand is aimed at an “upmarket” segment of consumers, sensitive to the taste of the product, appreciative of its looks and its fragrance (olfactory characteristic of the vine), interested in an ambivalent characteristic between health and respect for the environment, restricted use of pesticides. The differentiation standard consistent with these relevance criteria is the combination of a product innovation, an agronomic innovation and a marketing innovation. Three types of actor have a strong influence on the signalled attributes: the enterprise which provides the means for the integrated biological protection and seeds, agricultural producers and the cooperatives themselves. To a lesser degree, retailers also have a role in the stability of these characteristics (through the physical handling of the products). Internal control of compliance with the specifications by agricultural producers is based in the joint subsidiary. For their part, the cooperatives have an essential role in the technical monitoring of producers, harvesting and processing of products. In addition, two of the cooperatives are shareholders in a firm supplying specific inputs for biological and integrated production (vertical integration). In addition, the seeds used by these growers are provided by the collective structure. The strategic configuration is managed by the subsidiary, a collective organisation structured essentially on the financial links between the participants. Relations with agricultural producers are organised by each of the cooperative on the basis of a membership contract and financial participation by the growers. The cooperatives have decisionmaking powers with regard to planning of crops and allocation of production quotas to growers, incentives and controls (selection and exclusion of producers, centralised allocation of different segments of production (cherry tomatoes, more traditional tomatoes) among the various growers.
77. These types of configuration face two major difficulties. The first is the financing of investment, advertising, control, certain production assets in a context of strong competition with traditional brands with strong resources. The other difficulty concerns market access, which is through the major retailers. Apart from the difficulty of referencing, the bargaining relationship between the upstream actors and the major retailers is unfavourable to the former, which mortgages the capacity to capture the profit on differentiation. It is also a weak link for the owner of the brand in terms of quality control. The behaviour of the distributor can seriously degrade the final quality of the products (appearance, for example) while the brand owner has little way of influencing this behaviour. Conversely, two aspects can work to the advantage of these value chains: i)
The pursuit of direct access to the consumer through direct sales or electronic commerce. These modes of distribution, for certain families of products, could flourish. A good illustration is producers’ organisations seeking to develop their own distribution networks (e.g. for farm products).
ii)
The key situation in the direct control of the strategic assets of the differentiation. Apart from the possibilities of innovation (i.e. new specifications), technical control of means of production/transformation and the position in the chain strengthen the credibility of promises to consumers or direct customers (wholesalers, for example). It should also be noted that the centralisation of brand decision-making, controls, qualification modes are powerful strategic advantages.
26
TAD/CA/APM/WP(2007)16 78. One of the major challenges for these actors is to rely on new means of certification (by standards, in particular) to avoid relying on reputation, which is out of reach financially, while emphasising strategic differentiation, a genuine competitive advantage of the upstream. Innovative strategic configurations driven from downstream 79. As a complement to the so-called first-generation RB discussed above, retailers have for some years been developing new supply chains, often called “quality chains”. Their chief characteristic is that they are managed by a major distribution company. The signalling and information on quality makes specific reference to the distributor’s mark, which engages its reputation (e.g. the Carrefour quality chain in Box 5). The name of the distributor may also be associated with a producer’s brand, as is frequently the case in the United Kingdom (e.g. Tesco’s Nature’s Choices associated with Castle Brand, a producer’s brand for fresh vegetables presented in annex in Table A.4. - marketing specialists then talk about cobranding). This question of the labelling of the final product is essential, as it allows identifying which out of the distributor or the producer is actually engaging its reputation. 80. In this strategic configuration, a cooperative relationship of varying intensity replaces a purely commercial relationship (the spot market). The competition is then no longer between suppliers for standardised products and seeking the lowest prices. Competition is rather between different competing configurations established by retailers to capture a profit on differentiation in the final consumer market. 81. Retailers and producers are thus bound by the reference to a set of characteristics. The question which then arises is how and by whom the value created is shared. This complex question depends on several factors:
35.
•
The contractual terms of trade are decisive: methods of fixing and levels of prices, purchase conditions, negotiation of volumes, etc.
•
The degree of mutual dependence of the supplier and the distributor. Strong mutual dependence (e.g., without alternative distribution channels for the producer and dependence on a particular product type for the distributor) increases vertical cooperation and encourages sharing of the value created. Conversely, unilateral dependence increase the risks of hold up35, thus the capture of the profit by one of the partners.
Economists talk about “hold up” when, in the hypothesis of opportunism of economic agents, one of the contracting parties captures a large part of the profit (see Williamson, 1985, and Milgrom and Roberts, 1992, for simple explanations of this type of contractual risk).
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Box 5: The “Quality Way” of the distributor Carrefour In 1992, Carrefour, one of the leading distribution chains in the world, created under its name its own brand of beef under the logo “FQC” (“Filière Qualité Carrefour - Carrefour Quality Way”). After 1996, the beef market crisis engendered by the BSE health crisis gave a considerable impetus to this retailers’ brand. The information communicated to consumers under the signal “FQC” chiefly concern two characteristics of the products: the origin of the animals (breeds, animals born and raised in France) and tenderness of the meat. On the one hand, the origin of the products seeks to signal a health warranty, assured thanks to the traceability of 36 the meat from breeding to the supermarket . On the other, the tenderness of the meat is a gustatory characteristic much valued by consumers, and thus a particularly relevant differentiation criterion. The problem is that it is very difficult for the consumer to identify it or the butcher to check it before consumption. For Carrefour, signalling this characteristic comes down to highlighting its capacity of control of the entire production chain. A crucial element of the mechanism of the quality standard developed by Carrefour and transmitted, through a set of specifications, to all the actors in the production chain. Carrefour heavily commits its brand image in the commercial promotion of its Quality Way. The reputation mechanism has a central role in the distributor’s credibility. As regards control, it relies on an audit mechanism and, above all, on certification by an officially accredited body. Control is exercised through the organisation of the entire production chain, led by Carrefour, in cooperation with breeders associations and slaughtering firms. It is these actors who control the two key stages for efficient control of the two attributes signalled to consumers: firstly, the breeding method and selection of animals, and secondly, slaughtering and storage conditions of the meat. Breeders’ associations have a crucial role in the negotiation of prices, constitution of batches of animals (number of head, frequency, etc.) and the organisation of control. The specifications developed by Carrefour are implemented through contracts with farmers and slaughterhouses. The contracts envisage “quality premiums” and exclusion clauses. This is an organisational innovation with the introduction of tripartite contracts involving Carrefour, a breeders’ association and a slaughterhouse. This tripartite contract gives the distributor a right of oversight of the relations between breeders and slaughterhouses. It is the driver of the strategic configuration.
36.
Carrefour does not make explicit reference to health security in its communication because it does not have the legal right to do so. However, the origin of the animals as a mechanism for reducing health risks is highlighted. Sans and de Fontguyon (1999) note therefore “For consumers, geographical origin thus becomes a key criterion and guarantee automatically included in strategies of demarcation by quality” (p. 179).
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TAD/CA/APM/WP(2007)16 The innovative configuration driven by an emerging collective actor 82. This type of configuration, also qualified as innovative, has a strong peculiarity. Unlike the preceding configurations, the brand owner is not an economic actor in the strict sense. As it is not a stakeholder in the trade, its role is very close to that of a third party. It enhances the credibility of the information communicated to the consumer. In other cases, its role is similar to that of a “metacoordinator” structuring, controlling and guaranteeing a quality signal by its particular institutional position. In some cases, a financing role (of control or of promotion of the brand for example) is also possible. 83. The case of Milieukeur in the Netherlands (pork meat) and that of “Carne de Asturias” in Spain (beef) are very illustrative. Configuration strategies are presented in annex in Table A.5; The case of “Carne de Asturias” is presented in details in Box 6. Milieukeur is a quality mark managed jointly by consumers’ and environmental associations, representatives of public authorities, economic agents in the pork industry. The brand is owned by an autonomous foundation responsible for drawing up the specifications. Control of compliance with the specifications is delegated to a specialist firm. 84. The case of “Carne de Asturias” is similar to a regional mark, but the mark, owned by the region of Asturias, is delegated to an inter-professional committee. This committee supervises application of the specifications and monitoring of the conditions of production. It also has the role of establishing the marketing strategy (promotion, sales, etc.). Box 6: Carne de Asturias (Spain)
In 1994 the regional government of the principality of Asturias, Spain decided to launch the mark ‘Asturias Meat-quality controlled: The ‘Asturias Meat’ mark is approximately equivalent to a regional mark, and is managed by a professional association even though it belongs to the principality of Asturias. The label informs consumers of two main product characteristics: its place of origin and the breed of the animal (local breeds). Information on the origin of the animal implicitly gives consumers information on the breed of the animal, its feed and its organo-leptic attributes in terms of taste and tenderness. This label is considered to be an ‘ombrella mark; that is it covers a variety of meats, even though its principal products are beef and veal. The quality of meat is monitored though out the supply chain, from the farm to the retailer, by a private firm whose main shareholder is the region of Asturias. The controls undertaken by the firm pertain essentially to food safety and sanitary aspects of production as well as their conformity with product specifications developed to ensure high organo-leptic qualities. This private firm is also the main shareholder of the wholesaler through which most of these meat products are sold. A third actor in this ‘chain of control and of governance’ of the quality mark is an association to which the government has conferred the management and control in the use of the mark. It also markets the products under the mark. The board of directors of the association is composed of representatives of the regional government, actors in the production chain and firms which certify the quality of the product.
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85. This configuration offers a not negligible development potential, at least for certain market segments. The rise in the power of concerns of an ethical, environmental and local employment order places some categories of new decision-makers in a position of strength in relation to consumers. The relevance of these signals and their promotion is thus at an advantage compared with other types of signal carrying values considered too commercial or lacking in credibility. It is above all in the role of “extra-sectoral” actors (consumer, environmental protection associations, local authorities, etc…) that these configurations may find opportunities for development. 86. One of the advantages of these “extra-sectoral” actors relates to their institutional position similar to that of a third party. The example of Milieukeur, driven by consumers and environmental protection associations, is significant in this regard. Another advantage stems from their financing capacity, with new sources of financing and the existence of economies of scale in, for example, costs of control. The mark “Carne de Asturias” is a good illustration of these advantages of scale, while maintaining the flexibility inherent in a traditional brand. 87. The difficulty of developing them is primarily due to the capacity to mobilise actors of various kinds around a common project. These collective actions remain in most cases difficult to implement and manage, and the risks of conflicting interests are high. Maintaining the profit on differentiation over time is probably the major difficulty in this type of configuration. The opportunism of agents, already mentioned in the case of producers’ brands, will be all the stronger where controls are difficult or too expensive to put in place due to the dispersion of producers, their heterogeneity and their limited involvement in brand-related decisions. Conclusions 88. The various strategic configurations that have been identified are summarised in Table 4. They suggest that the role of farmers in the elaboration and control of the quality and coordination strategy varies. Two contrasting situations can be distinguished: firstly, farmers can be “drivers” (individually or collectively) or “suppliers”. 89. In the first case, they are at the heart of the decision process on the definition and development of the quality strategy and modes of governance. In certain configurations, these are individual strategies. A farmer is thus the driver of his own strategy. For example, many farmers begin to develop strategies of sales direct from the farm or supply to consumer collectives (strategies which are developing on the fringes of the major agglomerations).37 This possibility has not been studied in this report because of the still very localised character of this configuration. In this system, the farmer is master of his decisions, he is the “sole driver”. He can therefore modify his strategy in the light of the opportunities for profits that he envisages. Conversely, he does not enjoy the advantages related to a more collective strategy (economies of scale on production costs, reputation effects,…). In these distribution short circuits, the principal mode of regulation of relations is the farmer’s reputation, the fruit of repeated contacts with his customers. 90. Various configurations illustrated above also showed the central role of farmers in configurations where farmers’ collectives are at the heart of the quality differentiation strategy. This is the case of the preceding configurations driven from upstream and centred on signalling origin (e.g. GI Comté) or farmers’ collective brands (e.g. Savéol). Compared with the preceding situation, farmers are at the heart of the decision-making process, but collectively. The sharing or distribution of the decision-making is more concentrated in the case of farmers’ brands (where, in a sense, they are collectively the “drivers”) than in 37.
Direct sales and other local shops is similar to the « community supported agriculture » which is growing up in the United States (http://www.nal.usda.gov/afsic/pubs/csa/csadef.shtml). See Farnsworth et al (1996).
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TAD/CA/APM/WP(2007)16 the case of official quality brands insofar as, in the latter case, farmers must meet and negotiate with their downstream customers (they are collectively “co-drivers”). Collective action is obviously a source of economic advantage. It allows the downstream enterprise to compete by pooling individual investments, for example by allowing a critical volume of production to achieve economies of scale on the production and promotion of products. It also favours farmers’ collective bargaining power in relation to other actors in the chain. However, collective action also harbours numerous sources of problems of coordination between the parties involved. The various agricultural actors do not necessarily have the same objectives and interests which complicates negotiations and may slow the responsiveness of these systems to changes in the market. The success of these systems then depends very much on the collective organisation established, the principal function of which is to manage efficiently the heterogeneity of the parties involved. 91. In the second case, the definition of the quality strategy is beyond the farmers’ reach (even if that does not deprive them of all their bargaining powers). This strategy is controlled by the actors downstream of the farmer, whether transforming enterprises (e.g. Cassegrain), retailers (e.g. Carrefour) or “innovating” organisations as shown by the example of Milieukeur in the Netherlands. On the other hand, farmers are still at the centre of the mechanisms to the extent that they supply the raw material. They are then the “suppliers” of the driver of the quality differentiation strategy. It may be thought, a priori, that in these situations, farmers’ have a weaker bargaining power which reduces the share of value which they can recover. This conjecture is only partially true. On the one hand, linking up with a major distributor can also allow reaching a critical mass allowing reduced production costs. On the other hand, farmers’ bargaining power will depend heavily on the attributes at the heart of the relevance of the quality strategy. As shown by the Carrefour example, the quality of meat sold under the distributor’s mark depends heavily on what happens upstream. In addition, the criterion of reference to the origin of the animals prevents (for the time being) any relocation of supply. Farmers, even if they do not control the definition of quality, are nonetheless critical in assuring the success of Carrefour’s commercial strategy.
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TAD/CA/APM/WP(2007)16 Table 4. The situation of farmers (and their organisations) in the different types of value chain Strategic configuration Differentiation centred on origin and driven from upstream
Examples - Parma Ham - Comté
Marketing differentiation driven by actors of the agri-food industry
- Cassegrain - Creta Farm -1st generation retailers’ brands
Innovative strategic configuration driven from upstream
- Savéol - Qualitom
Innovative strategic configuration driven from downstream
- « Quality Way » Carrefour - Nature’s Choices (Tesco)
Innovative strategic configuration driven by an emerging collective actor
- Milieukeur - Carne de Asturias
Opportunities -Building credibility (economies of scale of control costs) - Direct control of sources of differentiation -Existence of a stable institutional environment -Access to final market -Easier cost control
- Credibility construction (management of the quality and of the differentiation strategy) - Capture of part of the rent by the targeting of a direct access to consumers - Access to final market -A priori capture of part of profit possible, depending on internal operating rules
-Depending on the method of management, possibility of capturing all or part of the economic profit of differentiation -Control of critical quality points
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Threats - Access to final market -Competition with commercial brands -Maintaining credibility in the face of problems of variability of quality -Position of subcontractor -Heavy dependence on a downstream actor -Little or no control of the economic profit on differentiation - Market access, risks linked to retailers’ behaviours - Control of costs of production and of investment for control and advertisement -Dependence on the customer -Control of production costs linked to constraints. -Risk of distributor opportunism in relation to capture of the profit -Competition with commercial brands -Control of costs, especially production - Access to final market via major retailers (referencing)
TAD/CA/APM/WP(2007)16
ANNEX:
EXAMPLES OF STRATEGIC CONFIGURATIONS
Figure A.1. Quality Strategies and organisation forms : Framework of analysis
Sectorial characteristics
Quality signal
Transaction cost contractual risks
Institutional environment
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Governance structures Intermediary transactions
TAD/CA/APM/WP(2007)16 Table A.1. Classical strategic configuration driven from upstream Examples
Decision-making and ownership rights
Comté (France) Cheese -Created in 1958 -Inter-professional committee (CIGC)
Parma Ham (Italy Cold meats -Created in 1963 ; PDO since 1993 -‘Parma Ham Consortium’ (association of ham producers)
-Origin of product : type -Taste and nutritional qualities
-Origin product -Organoleptic quality -Product without additives (except salt)
-Geographical limits -Breeding methods - Manufacturing method - Method of refining cheese - Traceability of origin - External control by public bodies: INAO, government (DGCCRF, etc.), Inter-professional committee - “internal” control of each producer - Exclusion procedures
- Geographical limits - Feeding of pigs -Minimum weight of pigs -Artisanal finishing of hams - Traceability of origin - Control by independent body : Istituto Parma Qualità - ISO 9002 standard in some cases -Self-control for production protocol; slaughterhouse control of raw material
Attributes signalled and differentiation standard
Control and coordination
Table A.2. Marketing configuration driven from downstream Examples Decision-making and ownership rights
Attributes signalled and differentiation standard
Control and coordination
Cassegrain (France) Preserved vegetables -Created 1962, purchased in 1989 -Direct ownership of the brand by the manufacturer
Creta Farm (Greece) Pork meat and cold meats - Created in 1995 - Direct ownership of the brand
-Organoleptic quality -Symbolic image of the brand -Specifications: technical itineraries and cultivation methods
- Organoleptic quality -Characteristics of the raw material -Geographical origin of pigs -Specifications: method of transformation
- Traceability of the process -Part ISO standard certification - Programming of supply: field/factory monitoring and coordination - Contractualisation
- Traceability of the process - Supply of pigs - ISO Certification - Direct control of strategic assets by vertical integration of the principal links in the chain.
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TAD/CA/APM/WP(2007)16 Table A.3. Innovative strategic configuration driven from upstream Examples Decision-making and ownership rights
Attributes signalled and differentiation standard
Control and coordination
Savéol (France) Fresh tomatoes on the vine -Created in 1981 -Direct ownership of the brand by the subsidiary of the cooperative
Qualitom (Netherlands) Fresh tomatoes -Created in 1995 - Direct ownership of the brand by the cooperative
-Visual (homogeneity, constancy) and organoleptic quality -Symbolic image of the brand
- Products of constant visual quality - Organoleptic quality
-Specifications for seeds and production methods -Manufacture of inputs -Brand reputation -Enterprise certification for distributor relations -Direct control of strategic assets
- Specifications for seeds and production methods -Selection of producers - Brand reputation -ISO certification of processes
Table A.4. Innovative strategic configuration driven from downstream Examples
Decision-making and ownership rights
Attributes signalled and differentiation standard
Carrefour Quality Way (France) Beef -Created in 1992 -Distributor Carrefour
Castle Brand +Nature’s ChoiceTesco (United Kingdom) Fresh vegetables -Created in 1985 -Nature’s Choice (Tesco), with mention of Castle Brand
-Product origin -Food safety
-Superior quality and consistency -Geographical origin
-Specifications for production and transformation
- BRC mark (British Retailers’ Consortium)
-Reputation -Certification
-Reputation of both brands -Certification - individual and collective - BRC Quality Assurance certification
-Selection of suppliers
- Selection of suppliers
Control and coordination
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TAD/CA/APM/WP(2007)16
Table A.5. Innovative strategic configuration Examples Decision-making and ownership rights
Attributes signalled and differentiation standard
Control and coordination
Milieukeur (Netherlands) Pork meat -Created in 1998 -independent foundation including consumers’, environmental associations, public authorities and actors in the chain
Carne de Asturias (Spain) Beef -Created in 1994 -Region of Asturias and by delegation the Meat Committee of Asturias.
-Protection of the environment -Animal welfare
-Origin -Organoleptic quality -Traditional production methods
-Detailed specifications (feed, breeding conditions) -Total traceability of products -Advice and services to various stages of the chain -Internal control by delegation by the foundation -Third party certification approved by the foundation
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-Genetic characteristics -Geographical area -Conditions of production and slaughter (age, feed…) -Internal control -Third party certification
TAD/CA/APM/WP(2007)16
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