Presentations and Talks

Challenges in Managing the Business

 Steve Sonka¹

The charge for us panel members is to highlight the research, education and policy implications of structural change in the food system.  My particular assignment, of course, is to focus on those professional activities that strive 1) to better understand managerial decision-making in the sector and 2) to create mechanisms to improve the capability of individual managers. 

As this conference has demonstrated, structural change has many dimensions.  However from a managerial perspective, a key unifying feature is that decision-makers will need to consider effects on the several levels that comprise the food chain as well as effects on their individual firms.  Several forces have been identified in this conference as drivers of structural change.  The availability and use of advanced information technologies can be viewed as both a driver and facilitator of change.  These technologies offer unprecedented capabilities for agricultural decision makers to capture, analyze, communicate, and exploit information created by the actual operations of firms.  It is critically important, therefore, to emphasize these capabilities relative to future managerial challenges. 

Managerial Implications

Structural change that enhances knowledge creation in agriculture can have several managerial implications.  Three will be identified here.  The first is that it is necessary to consider the suite of strategic issues facing the sector today (biotechnology, precision agriculture, electronic communications, agricultural structural change, globalization, etc.) as an interwoven whole rather than as separate phenomena.  The potential impact of each of these developments will be substantially affected by the evolution of the others.

The second implication is that it is critically important for managers to understand the effect of the perverse economics of information technology as they consider sector adoption patterns.  Network externalities and the cost structures inherent in information systems lead to settings where one or two systems become industry standards and dominate the market (Shapiro and Varian, 1999).  In such settings, a series of valid short run decisions to not adopt the system can turn out to be strategically disastrous.  Conversely, relying for too long on a system that is not going to become the standard can be equally as dangerous.

The third managerial implication is that agricultural managers will need to learn how to appreciate, employ, and extract value from the use of intangible assets.  Competency in creating and managing intangible assets such as information and relationships within knowledge creating systems will need to be developed.  Historically managers throughout the economy emphasized acquisition and control of physical and financial assets as a primary means to success.  Particularly in the agricultural sector, acquiring control of land, buildings and equipment, and labor was the effective strategy.  Learning to appropriately value and employ intangible assets will challenge managers throughout the sector.

Opportunities for Agricultural Economists

Opportunities for agricultural economists are related to the new challenges inherent in the managerial implications just discussed.  Exploiting these opportunities will require that we extend beyond the neoclassical theory of the firm as a fundamental concept and econometric analysis of secondary data as the dominant empirical paradigm.  This section will highlight three concepts around which we can extend our conceptual foundations.  These three are only a few among several promising conceptual frameworks that we should consider.  The section will conclude with a brief comment on empirical analysis.

Information as a driver of industry redefinition:  Although the effects of information technology adoption have been well publicized, the underlying mechanisms by which information and information technology fuel industry transformation are less well understood.  Sampler (1997) provides an important analysis of these underlying mechanisms.  Based upon Sampler’s analysis, two key transaction characteristics (separability and aggregation potential) have been identified (Sonka, et.al., 2000).  One characteristic, separability, refers to the extent to which specific information attributes can be captured with each transaction.  The second, aggregation potential, refers to the extent to which those information attributes can be leveraged to gain economic value beyond the purpose of the original transaction.

The availability of low cost information systems has materially altered the nature and number of attributes that are routinely captured in many of today’s economic exchanges.  Technology allows us to separate many more information attributes with each transaction.  The second transaction characteristic is aggregation potential.  Knowing the purchase habits of one consumer is interesting but there is relatively little economic value that can be gained from the information associated with one transaction.  However, substantial additional benefits are available if that data can be accumulated, analyzed, and used to enhance future performance.  This process of knowledge creation typically involves the explicit capture of information that previously existed only tacitly² (Nonaka and Takeuchi, 1995). 

An important implication of the Sampler framework is that the more profound effects of information technology adoption typically occur at the industry or sector level.  This occurs as transaction attributes that previously were tacit become explicit and as aggregation of those attributes generates new knowledge that can be used for competitive advantage.  Although in its early stages, agricultural systems seem to be at the early stages of information technology adoption of the type that facilitates industry redefinition (Sonka and Coaldrake, 1996).  Precision agriculture offers the potential to separate and capture many attributes of information that were only tacitly known in the past (National Research Council, 1997).  This development correlates extremely well to the separability characteristic noted earlier.  Adoption of the Internet is proceeding rapidly among agricultural producers.  E-commerce innovations focused on production agriculture similarly are in their early stages.

Resources as the fundamental source of competitive advantage:  The essential managerial dictum of strategy is that competitive advantage accrues to those firms whose distinctive organizational competences have a superior fit with the business and societal environments within which they operate (Andrews, 1971; Thompson and Strickland, 1990).  Drawing heavily upon industrial organization economics and the structure-conduct-performance paradigm, this perspective has been used effectively to explain why certain firms have superior performance in particular marketplaces (Porter, 1980 and 1994).  In recent years, an approach with more dynamic capabilities has emerged.  This approach focuses on the key role of resources available to the firm in determining and maintaining successful positions in the marketplace.  This resource-based view of strategy has received extensive examination as a means to move from static to dynamic analyses (Barney, 1991; Mahoney and Pandian, 1992).  Westgren (Westgren and Martin, 1997) has led in the application of the resource-based view to the dynamics of change in agriculture.  Whereas Porter's approach was predicated on industrial organization economics, the resource-based view can be linked to classic concepts of firm growth in economics (Penrose, 1959; Coase, 1937). 

Critical to understanding the resource-based view is the recognition that the concept of resources employed is more comprehensive than the perspective of resources in neoclassical economics.  Physical and human capital were the primary resources that drove traditional economic strategies.  In the resource-based view, the firm's resources include intangible assets such as organizational capital, brand names, and intellectual property rights.  Organizational capital is comprised of less tangible resources such as decision-making processes, coordinating systems, and established patterns of work (Tomer, 1987).  Production and marketing systems empowered and continually refreshed by new knowledge gained from the firm's operations can be powerful sources of organizational capital.

The role of information in value chains:  Value chain analysis can be an important tool with which to examine structural change.  Boehlje (2000) describes six critical dimensions of value chains.  These are 1) processes and activities that create the products or services demanded by the consumer, 2) product flow features of the chain (transportation, logistics, scheduling, inventory management, etc.), 3) financial (cash) flow across participants and processes, 4) information flow across the chain, 4) incentive systems to reward performance and share risk, and 6) governance/ coordination systems (ie, joint ventures, open access markets, strategic alliances, etc).

In the development of marketing channels to deliver agricultural output with differentiated traits, all six dimensions need to be considered.  Our familiar decision making tools, however, are much more effective for evaluating issues regarding the first three dimensions than they are for the last three.  Frameworks that more effectively investigate the last three dimensions are needed.

Casson (1997) offers a particularly intriguing framework of the economy as an information system.  This framework conceives of information as having two roles in the economy.  One is to coordinate activities.  The second is to improve the quality of decision making.  By approaching information from the decision theory perspective, Casson specifies that the quality of decision-making is a function of information.  And the role of decision makers as specialized intermediators in the context of information flow is emphasized.  Such  intermediation requires resources  (has costs) even as it reduces the need for resources by enhancing coordination.   This frames information capture, analysis, and exchange as economic variables.  Therefore, Casson (1997, p. 1) identifies that, “as information costs change, so too does the institutional structure of the economy”.   Technological change associated with information, therefore, can affect the optimum amount of intermediation either by enhancing the benefits of intermediation (improving the quality of decisions) or by reducing the costs of intermediation. 

 Challenges for Agricultural Economists

The three frameworks should be very helpful in exploring the evolution and impacts of structural change in the food sector.  Agricultural economics, as it is typically practiced, has relatively little to contribute to decision makers struggling to anticipate and respond to these types of change.  Application of neoclassical theory of the firm might help quantify the reduction in direct transactions costs associated with e-commerce. However, it has limited potential in assisting decision makers understand the strategic implications of that technology. 

The most challenging, and most exciting, feature associated with structural change and decision making is that most of the change will occur in the future.  A decade or two from now we will know how governance, risk/reward distributions, and functional interlinkages have changed and undoubtedly, we will be able to state with confidence how managers and firms should have responded.   But to be useful today, agricultural economists need to develop and apply future-oriented concepts, methods, and tools.  Econometric analysis of secondary data, although historically very useful to the profession, has relatively limited applicability to questions focused on the implications and potential responses to structural change.

Several exciting empirical tools are available which can allow our analyses to become more strategically relevant to decision makers (Boehlje, 2000).  One example is system dynamics.  Cloutier (1999) provides a particularly thorough application of that approach in an examination of market coordination alternatives between farmers and the packer in the pork sector.  It is important to stress, however, that these conceptually rich approaches have data requirements that cannot be filled through primary reliance on secondary data sources.  They require data on processes and functions within and between firms whereas secondary data tend to be bounded by historic firm boundaries and are framed by financial accounting concepts (Boehlje, 2000).  Although the concepts described here offer valuable insights in themselves, their full value cannot be exploited without doing the difficult work necessary to create empirical understanding of their implications.  Unfortunately, agricultural economists have tended to lose their historic connection with decision makers, procedures used in actual operations, and the capability to acquire and exploit primary data on processes and functions.  This indeed may be the factor that limits the profession’s ability to meaningfully respond to decision issues associated with structural change.

Concluding Comments

Agricultural economists ought to play critically important roles 1) in understanding and predicting the evolution of information-driven industry redefinition in the sector, 2) conceptual development of new algorithms and methods of analysis, and 3) education of managers to most effectively compete using these new tools.   To do so, we will have to reach beyond our comfortable domains both conceptually and empirically.  In so doing, we have the opportunity to enrich and invigorate research and scholarship in the profession. More importantly, we have the chance to assist both public and private decision-makers as they are making critically important decisions associated with the changing structure of the food industry.

References

Andrews, K.R. 1971. The Concept of Corporate Strategy.  Homewood, Il.; Irwin.

Barney, J. 1991. Firm resources and sustained competitive advantage.  Journal of Management.  17:99-120.

Boehlje, M. 2000.  Structural changes in the agricultural industries:  How do we measure, analyze, and understand them?  American Journal of Agricultural Economics.  Forthcoming.

Casson, M.  1997.  Information and Organization.  Clarendon Press. Oxford, UK.

Cloutier, L.M. 1999.  Economic and Strategic Implications of Coordination Mechanisms in Supply Chains: A Nonlinear and Dynamic Synthesis.  PhD dissertation, University of Illinois at Urbana-Champaign.

Coase, R.H. 1937.  The Nature of the Firm.  Economica.  4:386-405.

Mahoney, J. and J.R. Pandian  1992.  The Resource-Based View Within the Conversation of Strategic Management.  Strategic Management Journal.  13:363-380.

Nonaka, I. and H. Takeuchi. 1995. The Knowledge Creating Company. New York: Oxford University Press.

National Research Council, 1997.  Precision Agriculture in the 21^st Century, National Academy Press, Washington, DC.

Penrose, E.T. 1959.  The Theory of Growth of the Firm.  Basil Blackwell.  London.

Porter, M.E. 1994.  Fundamental issues in strategy: a research agenda.  Toward a Dynamic Theory of Strategy.  R.P. Rumelt, D.E. Schendel, and D.J. Teese (eds).  423-462.

Porter, M.E. 1980.  Competitive Strategy: Techniques for Analyzing Industries and Competitors.  New York: The Free Press.

Sampler, J.L. 1997.  “Redefining Industry Structure for the Information Age”.  Strategic Management Journal.  19:343-356.

Shapiro, C. and H. R. Varian. 1999.  Information Rules. Boston, Mass: Harvard Business School Press.

Sonka, S.T. and K.F. Coaldrake. 1996. "Cyberfarm: What Does It Look Like? What Does It Mean?" American Journal of Agricultural Economics. 78: 1263-1268.

Sonka, S.T., R..C. Schroeder, S.L. Hofing, and D. A. Lins.  Forthcoming, 2000. Production Agriculture As a Knowledge Creating System. International Food and Agribusiness Management Review.

Thompson, A.A. and A.J. Strickland. 1990.  Strategic Management Concepts and Cases.  Homewood, IL: Irwin.

Tomer, J.F. 1987. Organizational Capital.  Praeger; New York.

Westgren, R.E. and L.J. Martin.  1997. The Heterogeneity of Firms: Where Public Policy and Firm Strategy Collide.  In Government and the Food Industry.  L.T. Wallace and W.R. Schroeder (eds).  Kluwer Academic Publishers: Londo n.