industry strategic planning: keeping supply chains

Industry Strategic Planning: Keeping Supply ChainsCompetitive

Conrad P. Lyford, H. Christopher Peterson and James A. Sterns

Agricultural industries are increasingly challenged to develop strategies that enable them, as a group of firms andindustry organizations, to respond to an increasingly global marketplace. One approach used by several industries is theapplication of strategic planning and management tools, commonly used in a single business setting, to coordinateanalysis and action at an industry level. This is accomplished through a relation-based strategic group of firms frommultiple levels in the vertical supply chain. Here it is suggested that this type of strategic effort, called industry strategicplanning, provides unique benefits for industries engaged in such an effort, including limiting incentives for increasedconcentration and vertical integration. As such, industry strategic planning can be a useful method for revitalizing andsustaining agricultural industries.

The dynamic forces changing the structure oftoday's agri-food system appear to favor largemultinational conglomerates and/or highly concen-trated domestic firms that are integrated either hori-zontally, vertically, or both. Recent congressionalhearings and increasing producer concerns aboutmarket concentration and the growing power ofintegrators highlight deeply felt anxieties about thefuture of the system. Furthermore, the consolida-tion and concentration threatens the viability of ruralcommunities and support institutions, and the tra-ditional market alternatives of cooperatives, mar-keting orders, and commodity associations seemto have limited success countering the key trends.In fact, traditional cooperatives themselves are be-coming increasingly concentrated.

This paper shows that strategic planning prin-ciples and associated analyses that are widely usedin the academic field and actual business practiceof firm management can be adapted in order to con-duct industry strategic planning and coordination(ISPC) for agricultural commodity industries. Sev-

'In this setting, industry refers to firms and industry-support organizations involved in producing and marketingan agricultural commodityfrom a particular region. As such,the terms regional industry and industry are interchangeable.

Conrad P. Lyford is assistant professor, Department ofAgricultural and Applied Economics, Texas Tech University;H. Christopher Peterson is professor, Department ofAgricultural Economics, Michigan State University; and JamesA. Stems is assistant professor, Food and Resource EconomicsDepartment, University of Florida. The authors would like tothank Wade Brorsen and anonymous reviewers for theirinsightful comments. An earlier version of this paper waspresented at the 1999 WCC-72 meeting in Las Vegas, NV(June 27-29).

Review coordinated by the previous editor.

eral industries that have been involved in some formof ISPC include the Michigan apple, U.S. tartcherry, Ohio pork, Ohio dairy, and Texas vegetableindustries. Most recently, Hall and Lyford publishedresearch that illustrated ISPC efforts and an ISPCframework in the Texas vegetable industry.

ISPC is presented as an alternative to historicresponses to exogenous shocks to agricultural in-dustries. In a process repeated countless times overhistory, an industry is hit with a shock (e.g., dra-matic change in international trade policy) whichbegins to negatively affect the economic and fi-nancial performance of individual firms within theindustry. Industry leaders begin to ask one another,"What can be done?" As these leaders interact in-formally at extension meetings, trade shows, statefairs, and producer meetings, ideas for industryaction begin to crystalize and informal agreementsabout working together for common goals begin toemerge.2 Then flesh is put to the bone and some-thing is created. Historically, these entities for work-ing together have included cooperatives, commod-ity associations, and marketing orders. With theseentities, individual firms within an industry havebeen able to work on shared objectives and coordi-nate their strategic responses to the exogenousshock. This paper argues that these responses havenot fully realized the benefits of coordinating stra-tegic responses, and offers ISPC as a method forproactively improving this performance.

A number of important research questions orissues emerge when considering ISPC as an alter-native for sustaining the competitiveness of supply

2 This is essentially the concept of grassroots collectiveaction that was discussed by Harry Ayer (1997).

Journal of Food Distribution Research

chains. These include 1) how does ISPC compareto firm strategic planning and to traditional group-action alternatives such as cooperatives, market-ing orders, and commodity associations? 2) howmight market-structure characteristics affect theneed for ISPC? 3) what are the benefits from ISPC?and 4) could industry strategic planning lead tocollusion? After presenting two examples of indus-try strategic planning to provide empirical motiva-tion for the concept, this paper sequentially ad-dresses each of these questions in separate sections.

Industry Strategic Planning in the MichiganApple Industry

Recent history in the Michigan apple industry pro-vides an illustration of ISPC. The Michigan appleindustry has played an important and longstandingrole in Michigan, providing a substantial stream ofincome for rural communities. It includes appleprocessors, apple producers, fresh marketers, andindustry organizations serving those groups. In themid-1990s the apple industry faced a number ofimportant threats and opportunities typical of manyagricultural industries. For example, there wereincreasing supplies and competition from the stateof Washington and from large imports of apple juiceconcentrate. Other key threats included restrictionson the use of pesticides and other increases in en-vironmental legislation (Woods 1995).

Opportunities for industry efforts were recog-nized in several areas, including improving qualitymanagement for the fresh market, increasing ex-ports, and utilizing technical innovations through-out the industry. Overall, there was recognition thata certain level ofjoint effort was necessary to fullycapture opportunities for the industry.

The Michigan apple industry recognized thesethreats and opportunities along with the underly-ing need to better meet customer needs.3 The in-dustry responded in the early 1990s by forming TheMichigan Apple Industry Strategic Planning TaskForce that included representatives from all majorindustry segments, university researchers and ex-tension, and industry producer and commodity or-

3 A relation-based strategic alliance is built upon themutual interests and shared objectives of the members of thealliance, as opposed to an equity-based alliance in whichmembers share equity ownership of some common assets(Wysocki and Peterson 1998 ).

ganizations. This Task Force used strategic-plan-ning tools to develop strategies to improve Michi-gan apple industry performance. The strategic-plan-ning and management tools used included internaland external analysis, the setting of long-term ob-jectives, and the development and implementationof strategies.

These strategies worked toward improving ver-tical coordination in the industry, providing indus-try public goods, and enhancing communication andproviding information on areas of mutual interest,i.e., selected areas where a combination of firmsand industry organizations were expected to im-prove performance. For example, one area in whichthe industry focused considerable effort was theimprovement of quality management for the freshmarket. Firms and industry organizations workedtogether voluntarily. Strategies to address this areaincluded a maturity-information program, pre-har-vest workshops, and information on quality incen-tives. These efforts were supported by the applemarketers, the generic promotion organization, anduniversity extension. In addition, apple marketersand producers independently made changes to im-prove quality through investments and changes inmanagement practices.

The Texas Vegetable Industry

Historically, Texas has ranked third behind Floridaand California in terms of total U.S. vegetable andmelon production. However, according to the 1998Vegetable Summary, Texas dropped to a distantfourth. Data also show a steady decline in overallvegetable acreage in Texas over the past 50 years.Some, but not all, of the decline can be attributedto increased yields per acre resulting from improvedgenetics and cultural practices. However, the yieldincrease for most crops (such as tomatoes and spin-ach) over time has not been of the magnitude tooffset the overall decline in acreage.

In the past, the early markets enjoyed by Texasproducers and the resulting prices associated withthese markets enabled the industry to survive (andsometimes thrive). However, these early marketadvantages have been slowly eroded to the pointthat many Texas producers are now suffering fi-nancial stress. Symptoms of this stress can be dif-ficult to detect, but the most recent evidence of itsexistence comes in the form of the declining acre-

2 July 2002

Industry Strategic Planning: Keeping Supply Chains Competitive 3

age mentioned earlier, reduced profitability at alllevels of the vegetable value chain (grower andshipper alike), and even the elimination (bank-ruptcy) of some industry firms. In addition, grow-ers and shippers contend that price levels have beenat or below break-even at the variable cost level,with little revenue remaining for replacing andmaintaining fixed assets (Hall and Lyford 2001).

In the late 1990s industry leaders in the Texasvegetable industry recognized these challenges tothe industry and formed a strategic planning taskforce that included representatives from organiza-tions similar to those in the Michigan apple indus-try discussed earlier. This task force used strategicplanning tools to develop strategies to improve theperformance of the Texas vegetable industry. Keystrategies were developed and are in the process ofbeing implemented in a number of areas, includingdeveloping an industry-wide onion exchange andexpanding industry-wide promotion.

The Industry Strategic Planning andCoordination Concept

ISPC is a method that uses the techniques of firm-level strategic management to systematically setindustry-level goals and strategies designed to en-hance the competitiveness of an agri-food supplychain. As intended here, ISPC is a method spon-sored and implemented by a relation-based groupof the producers, assemblers, and processors of anindustry.4 The group is formed specifically to en-gage in common analysis and decision makingacross a broad agenda of issues that may includeany strategic concern or opportunity deemed rel-evant to industry performance.

Firms commonly use strategic planning andmanagement tools to prepare themselves for long-term competitive success (Pearce and Robinson1997; Thompson and Strickland 1995). A strategicmanagement effort typically includes developinga situational analysis, long- and short-term objec-tives, strategies for success, and implementationaction plans. Industry strategic planning is basedon the notion that an industry can adapt firm-leveltools to set the stage for future competitive success

in the entire agri-food supply chain.5 The equiva-lent of the firm-level decision maker is the groupof leaders representing processors, assemblers, pro-ducers, and others within the relevant industry (Fig-ure 1). It is this group which drives ISPC.

ISPC is appreciably different from firm-levelstrategic planning and management. A commodityindustry is made up of a complex set of firms atvarious vertical stages in the marketing chain. Thesefirms have differing core business strategies andvarious levels of vertical and horizontal linkages.Commodity industries also include industry sup-port organizations, e.g., promotional commissions,industry associations, or grower/producer groups.Furthermore, because of these numerous partici-pants, no clear-cut leader (comparable to a firm'sCEO or executive committee) exists with the re-sponsibility and authority to lead the developmentand implementation of performance-improvingstrategies for an industry. The main differencesbetween ISPC and firm-level strategic managementarise from this inherently fragmentary nature of acommodity industry.

The justification for engaging in industry stra-tegic planning has much in common, as argued inthe subsequent sections, with traditional group-ac-tion institutions in agriculture, e.g., cooperatives,marketing orders, and generic promotion commit-tees. Where they exist, industry strategic planningeven uses these traditional institutions. However,it is distinct from these institutions because the moretraditional organizations have more narrowly de-fined objectives that typically encompass a smallerpart of the entire value chain and do not focus on abroad industry agenda.

The distinction between ISPC and more tradi-tional forms of group action in agriculture requiressome further elaboration. Cooperatives, marketingorders, commodity-promotion committees, andcommodity associations focused on research anddevelopment have a long and successful history inagriculture that has been described and discussedin many works (e.g., Peterson and Anderson 1996;French 1982; Jesse 1987; Kaiser and Liu 1998;Wills and Cox 1988). However, these grou- actionstrategies all share several characteristics that limit

4 The term customer in this context is meant to referbroadly to both trade customers (e.g., retailers, processors) andfinal customers (e.g., consumers).

5 The adaptation of firm strategic management tools tothe industry context is more fully documented in Ricks andWoods (1996) and in Lyford et al. (1998).

Lyford, Peterson, and Sterns


their applicability to the food system currentlyemerging. First, they are commonly focused on theproducer level in the marketing chain. They assistproducers in coming together (i.e., forming hori-zontal alliances) in order to improve their strategicposition in the vertical chain (e.g., forming a coop-erative to process commodities into a value-addedform or promoting generic demand expansion withfinal consumers). Because these institutions arefocused on producer benefits, they may miss op-

portunities to improve supply-chain managementthat must, by definition, include others in the verti-cal chain. Second, none of these institutions aloneappears to offer an especially effective alternativeto smaller industry firms who wish to withstandthe forces of consolidation or strong private inte-grators. For example, few cooperatives have sur-vived in the highly integrated poultry industry. In-stead, strong private integrators-e.g., Tyson-have taken the lead. Third, many of these traditional

Figure 1. Typical Groups that Particiapte in an Industry Strategic Planning "Alliance."

4 July 2002


institutions have a limited scope. Promotion com-mittees focus on limited elements of a full prod-uct-marketing strategy since they typically do notactually market products. Commodity associationstend to focus on production-oriented research orpolitical issues facing an industry rather than a fullrange of strategic issues. Their agendas thus tendto be focused on narrow programs that are fixedacross time and may or may not represent the mostpressing strategic needs of an industry.

Industry strategic planning has the potential toovercome each of these limitations of existing in-stitutions because it brings together many of themain actors/entities of the supply chain.6 It at-tempts to coordinate the actions of fragmented firmswithout forcing consolidation or complete integra-tion, and an ISPC effort typically focuses only onselected areas of mutual interest. Firms typicallyare able to choose what efforts they want to par-ticipate in; i.e., an ISPC effort is largely voluntary.This stands in contrast to strategies that have sub-stantial mandatory components, such as develop-ing a new federal marketing order that sets qualitystandards. Finally, it places the whole range of po-tential strategic issues on the ISPC agenda and cre-ates a forum for that agenda to be focused and re-focused as the competitive environment evolvesthrough time.

Market Structure Characteristics Consistentwith ISPC

To understand the market conditions that makeISPC a relevant alternative it is necessary to re-view the common characteristics of agriculturalindustries. These features include a fragmentedmarketing chain, commodity production, largenumbers of producers and marketers, uncertaintyabout quantity and quality, inelastic demand, andasset specificity and fixity. While individual indus-tries have these characteristics to varying degrees,these are typical features that are consistent acrossmany agricultural industries and have been broadlydocumented in the agricultural economics litera-ture (Marion 1986). The performance of agricul-

6 As can be seen in Figure 1, groups typically involveddo not include retailers. Retailers are often served by manyindustries and as such are not tied to or closely linked with aparticular industry.

tural industries is affected in many important andnegative ways by these structural conditions as sum-marized in Table 1. These same conditions haveformed the historic basis for justifying the otherforms of group action mentioned above. However,it should be noted that even for industries that donot have these features, some form of collabora-tive industry efforts is often useful. For example,the computer industry commonly discusses indus-try technology standards. The key issue is that whenthe structural conditions described in Table 1 arepresent, the needs are particularly pressing.

When there are economic benefits from en-hanced coordination, it can be predicted that orga-nizational innovations will occur to capture thebenefits (Williamson 1985, 124-25). Clearly, oneorganizational innovation creating the high levelof concern noted at the beginning of this article isconsolidation, as agricultural industries becomemore closely integrated with fewer firms. Othergroup-action alternatives can also address certainof these performance problems, e.g., marketing or-ders for over- or under- supply conditions, process-ing cooperatives to manage quality concerns, com-modity-promotion programs to improve generic de-mand.

The essential issue here, that is being workedout in various industries, is the extent of hierarchiccontrol necessary to capture the economic benefits.Hierarchic control structures, established throughcontracting or integration, have substantial costsand risks. These typically include increased assetallocation, relationship risk, and supply/volumecontrol issues. Overall, a market often providestransparency and competitive-neither of which areguaranteed through contracting or integration-prices for inputs. As such, hierarchic governancesystems may be impractical or overly costly.

Because of its potential for a broader strategicagenda and more comprehensive membership fromacross the marketing chain, ISPC can provide an-other institutional option for overcoming the nega-tive performance effects listed in Table 1. The fol-lowing section will more specifically comment onthe range of strategies open to ISPC for doing this.It is hypothesized that ISPC will be most relevantto an industry situation in which most, if not all, ofthe structural conditions cited in Table 1 occur si-multaneously in a sector, thereby necessitating abroad strategic agenda, and solutions to marketing


Journal of Food Distribution Research6 July 2002

0<4-10

(ASo

v .)

C'§s

CSS

CI's

CA rA

1) ^

* 0

Lei

31

^*Q §

O :>

§ O

^ _

^ O0_ C3

C Tl»CX

$ "

*(»/~

( *I(/

.2*ToI

Cd

CA

To

C)

M

C._

v.4..To,.O

,I

Cll

I

to

z

0_

i

5

-

Ct

V:

0 V:

¢ Da ^

^

6.

1o

-4->.4..

"1

0

rll

{g00

o,...1

C

05

*4-

or..>

(Q

(UCTa

C*

CD

0rn

o, .

(Do e

V -b

C)

*gO m-

Cg §

si Q

_3 X

*2 E

I :S

_ ^< *

Too

i|

*S

^ Too 0

§ -s

io j

*i)

00

CI

S a

§ '5v:

*_ "

S e; ._

To 8con *-

Inswoc

pa

I

ci

.'2A*i

*ft

.P.Sw

.PQ

c)P14

(D

*tp.

*4

I=

^3

to(20

£ i

;I

"0

(A

(s0

,IC9^EG

iC?

Gt00

§To

0

Q

-

Ino

RorA

4;

42

<u

4-o

u

c)

S3

C1

*.*

A

5^

* -'S

*4

*4

I

To

.s

CM

Qg

oA

2

In

c)

©

0

c-

*I-

-

(U

'S

ic)

>3

.

Io-

c)

Q

-W* rA

0To"*O4-3*P-o

.0

U


problems demand participation from multiple lev-els in the marketing chain, thereby necessitating abroad industry membership. These two conditionswould appear to make ISPC a stronger alternativethan other, more traditional forms of group actiongiven their limitations as argued above. However,these conditions may result in vertical integrationwithin the ownership of one firm or within a strongcontract system. Hence, a third condition for theeffectiveness of ISPC might thus be the infeasibil-ity of vertical integration-e.g., a sector too frag-mented and capital intensive for a single owner tointegrate-or the desire of the fragmented entitiesin a sector to retain some level of independence. Inthe first case (infeasibility), ISPC would appear tobe a dominate organizational alternative. In the sec-ond case (desire of entities), ISPC would have toprove itself superior to a vertical-integration alter-native in operation. This could occur if hierarchi-cal coordination, through contracts or integration,is simply impractical or unnecessary to fully cap-ture available economic benefits. The likelihood ofsuch superiority would be an empirical issue be-yond the scope of this introductory paper.

Benefits of Industry Strategic Planning

A key issue in the feasibility of ISPC to provide analternative to vertical integration (consolidation) or

traditional group action is whether or not such aneffort provides economic benefits. The followingsubsections provide a menu of ISPC benefits andreview their use in two industry cases. An overallsummary for the two industries, indicating areas ofbenefits provided, is found in Table 2.

Achieve Strategic Change in Fragmented orDispersed Industries

Agricultural industries often have not respondedquickly or at all to important needed changes - evenafter such changes have been well identified. Forexample, the problems associated with fat in hogs(an important quality concern) was recognized atleast twenty years ago (Hayenga et al. 1985). Con-sumers wanted a lean product, but incentives to pro-ducers continued to be based largely on live weight.This provided powerful incentives for alternativemarketing channels and integration to develop.Recent effects are evident from increased levels ofcontracting and captive supply in the pork indus-try. Similar problems in other industries includelongstanding quality issues related to cleanlinessand grading in U.S. wheat (Webb, Haley, andLeetmaa 1995; Hill 1987) as well as fat and yieldgrade for beef (Schroeder et al. 1998). These ex-amples suggest that even when an important op-portunity or need clearly exists, many industries

Table 2. Effects of Industry Strategic Planning and Coordination in the Michigan Apple and TexasVegetable Industries.

--~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Michigan Apple

Industry

Achieve Strategic Change

* Develop an Overall Awareness of Industry Issues

* Identify Strategies to Improve Performance

* Implement Strategies

Improve Supply-Chain Management

* Transmit Customer Demand

* Develop Critical Mass

Develop Industry Public Goods

* Prioritize Research Objectives

* Improve Industry Voice

Yes

Yes

Yes

Yes

Proposed

Yes

Yes

Texas VegetableIndustry

Yes

Yes

Yes

Proposed

No

Yes

Yes

Lvfor~d, Peterson, and Sterns


do not seem to respond in any strategic, coordi-nated manner with obvious implications for therelevant industries.7

ISPC is a means for achieving change withinan industry. Strategic management for firms is in-tended to bring about change that will enable long-term competitive success. Translated into industryterms, this change would be achieved by:

1. Developing an overall shared industryawareness of industry needs and opportu-nities;

2. Identifying industry strategies that can beexpected to lead to long-term industry suc-cess;

3. Implementing the strategies.In both the Michigan apple and Texas vegetableindustries these steps were accomplished. Thismeans that the industries are seeking to developand implement pro-active strategies toward enhanc-ing their competitive success and long-term viabil-ity-i.e., achieving strategic change.

Improve Supply Chain Management

One of the key features of performance for a pro-duction-marketing system is its effectiveness invertical coordination (Mighell and Jones). Severalimportant industry structural features have beenidentified earlier that could limit the vertical-coor-dination effectiveness of agricultural industries (i.e.,fragmented marketing chains, commodity produc-tion, perishability, and uncertainty about produc-tion levels). In general, ISPC could be a source ofalternative coordination through improving infor-mation transfer (e.g., end-user demands for qualitytraits) and strategic alignment of the actions andchoices of individual firms across the supply chain(e.g., new product development).

ISPC would not, of course, preclude individualefforts by industry firms to capture opportunitiesfor themselves. In some cases, ISPC could help anindustry's firms recognize opportunities that theycould take advantage of. This could encourage firmsto develop private arrangements between them-selves to help meet customer needs in critical areas

such as developing a critical mass of suppliers of aquality feature or variety. Alternatively, ISPC couldsimply raise awareness of key issues and help ana-lyze those issues within a broader supply-chaincontext. This means that an ISPC effort need notpreclude private forms of coordination, but can sim-ply seek to facilitate or encourage effective action.

Transmit Customer Quality Demand

An important issue that needs effective responsesby agricultural industries is the changing nature ofcustomer demands, including quality requirementsand specific demand features. However, the frag-mented structure of agricultural production andmarketing often leads to difficulties in effectivelyidentifying and responding to consumer demandin the marketing system. This has been noted inseveral agricultural industries, including the grainindustry (Hill 1990) and the cattle industry(Shroeder et al. 1998).8

Individual firms have access to a limited set ofinformation based on their own market experiencesand public market information that may be supple-mented by specific market-research efforts. Theseparation in the vertical agricultural system be-tween producers and consumers has frequently ledto slow changes and ineffective responsiveness tochanging consumer needs. This has provided a pow-erful incentive for vertical integration by owner-ship.

ISPC could help facilitate increasing effective-ness in the marketing system by identifying con-sumer needs and developing effective industry re-sponses to meet these changing demands. For ex-ample, industry strategic planning could, as withthe Michigan apple industry strategic planning, fa-cilitate studies to identify specific aspects of chang-ing demand, preferences and consumer require-ments.9 In that ISPC a series of focus groups andsurveys were used to determine specific consumerquality preferences, and this information was pro-

8 For example, trade is frequently based largely on gradesand standards that can become increasingly less relevant ascustomer needs change and diversify.

7 Some agricultural economists have noted that theinstitution for collective or group action often is missing eventhough there are possible gains from such action (Shaffer 1980;Schmid 1987).

9 Specifically, Michigan apple industry strategic planningfocused its efforts to better understand and respond toconsumers' quality needs, such as apples with a high level ofcrispness and good taste.

8 July 2002


vided to the industry. In addition, several effortswere developed and initiated within this industrytowards improving quality management and bettermeeting consumer needs.

An industry strategic planning effort hence hasthe potential to facilitate improved information flowand adjustments to consumer demand. What dif-ferentiates this process within the context of ISPCis that the information is developed by and madesimultaneously available to entities at multiple lev-els within the supply chain. Ideally, all relevantdecision makers (i.e., those within the chain whoare needed to respond to the consumer signals) arepresent in ISPC.

Develop a Critical Mass of a New Product

Certain beneficial changes in industry performancemay require a critical mass of product volume orchange adopters to achieve success.' 0Critical-masstheory and the potential benefits of a critical masswere modeled extensively by Schelling (1978) anddiscussed by Dixit and Nalebuff (1991). Schellingindicates that many systems have a "tipping" orcritical-mass point based in system dynamics. If acritical mass is achieved, the system can achievedramatically improved outcomes. Achieving criti-cal mass often involves production and processingchanges at multiple levels in the supply chain. Ef-forts by one or several individual firms, especiallyin fragmented agricultural industries with manysmall firms at multiple supply-chain levels, willlikely be insufficient in themselves to achieve thebeneficial outcome of critical mass.

ISPC could both aid in identifying the neededchanges or types of products appropriate for themarket and facilitate the development of criticalmass for effective changes. For example, a substan-tial quantity of a certain new apple or wheat vari-ety may need to be supplied to customers in orderfor the industry to be viewed as a consistent andreliable supplier of the new product, and thus togain initial and continued access to retailer shelfspace or a food manufacturer's ingredient lists. The

'0 Certain changes can be established if a critical masswithin an industry creates the change. For example, if asufficient number of firms use a particular quality descriptionof their product, this quality description may become thestandard for the industry. The change is establishing the newquality standard.

challenges of producing hard white wheat on a largeenough scale to be used by millers is a specific ex-ample. A minimum critical mass of volume of aproduct or variety may also be necessary for con-sumers to learn about the new product. At the sametime, processors need critical mass to innovate andimplement changes at their level to facilitate thenew market or product. ISPC within an industryfor new variety development and introduction couldwork to address this issue. Vertical integrationmight achieve the same end, but with the downsideof further market consolidation. Other group-ac-tion alternatives do not have as ready access to thekey decision makers at multiple levels in the sup-ply chain.

For example, the strategy to develop a "pre-mium grade" for Michigan fresh apples is highlydependent on developing a critical mass of grow-ers and shippers in Michigan who can supply applesthat meet the standards of this grade (where such agrade could be defined by a set of quality charac-teristics important to key customer bases). How-ever, Michigan traditionally has not been viewedas a consistent supplier of "premium" apples.Knowing this, retailers may be reluctant to source"premium grade" apples from Michigan, fearingthat the Michigan industry would not have adequatesupplies on an annual basis. New incentives forgrowers and shippers to make the capital invest-ments necessary to produce and market "premium"apples could be created with the new grade, andthe critical mass created could assure retailers thatthe industry is now in the position to provide a con-sistent supply. However, this strategy has not beenselected for implementation.

Develop Industry Public and Club Goods

Within agricultural industries there are many dif-ferent forms of industry public and club goods (i.e.,goods with high exclusion costs, goods with mar-ginal costs of adding new users near or equal tozero, goods with joint impact). Firms producing aparticular product in a region face similar produc-tion and marketing issues because the region typi-cally has a specific set of production capabilitiesbased upon common weather conditions and pestsas well as localized external conditions such astaxes, property rights, and availability of trainedpersonnel. For example, the production research



developed at many Land-Grant Universities hasoften worked toward improving the production ca-pabilities-varieties, strains, etc.-available tofirms that produce and market from a particularregion. Thus a state's Land-Grant University typi-cally has an important role in providing the publicgoods of that state's agricultural industries. An in-dustry strategic planning effort can act in a con-certed effort to promote the development of anindustry's public or club goods. For example, theTexas vegetable industry has sought to develop anindustry-wide onion exchange. Similarly, theMichigan apple industry supported an effort to ob-tain U.S. government funding for research onfireblight, a disease with serious consequences tothe production of apples in Michigan. This fund-ing effort was eventually successful and may re-sult in improved Michigan apple production if thefireblight problem is more effectively controlled.

Industiy Voice

An important type of public or club good that canbe provided to the industry by ISPC is that the pro-cess may become a focal point for industry com-munication and group action. The outcome of ISPCoften represents to some extent the collective willof the industry on certain issues. The improved unityand ability to communicate can occur within theindustry itself as well as with organizations out-side the industry. For example, the Michigan applestrategic planning effort was able to communicateas an industry with the U.S. Department of Agri-culture to develop a favorable protocol to meet thephytosanitary regulations for a major importingcountry. Similarly, the Texas vegetable industrydeveloped Project Plant-"Produce Leadershipand Assessment of Needs for Texas"-part ofwhich focused on communicating industry needsto the Texas legislature. This unity and communi-cation is typically difficult in many industries de-spite the presence of many group-action organiza-tions. Indeed, the many different industry organi-zations, such as producer-led organizations andmarketer-led organizations, may rarely meet anddiscuss critical issues with each other. This oftenprecludes effective action on many issues. Hence,effectiveness from other group-action alternatives(e.g. generic promotion or large cooperatives) couldbe enhanced by ISPC.

Prioritized Research

Related to improved industry voice, ISPC can alsodevelop an improved understanding of priority ar-eas for research that have the potential to improve"local" industry's production capabilities (i.e., tar-get the process by which public goods are provided).ISPC could also aid in mobilizing resources to ad-dress a particular area that needs more research at-tention (i.e., target the development of a particularpublic good). Both the Texas vegetable and Michi-gan apple industries developed lists of prioritizedareas needed to improve performance in their in-dustries. Facilitative research such as at Land-GrantUniversities also could then emphasize these pri-ority areas.1 Furthermore, ISPC identification ofareas of needed research can stimulate private-sec-tor research and effort. Porter notes that joint re-search projects in emerging technical areas have astimulating effect on the success of an industry(1990, 636).

Performance, Collusion, and Industry StrategicPlanning

A key issue for economists in evaluating any eco-nomic activity is the effect of the activity on theentire system from producers to consumers. In thepreceding section, important economic motivationsand rationale were developed for ISPC that indi-cate potential industry benefit through improvedperformance. Consumers may also benefit fromISPC as an industry becomes more effective inmeeting their needs. However, an important con-sideration is whether or not an industry strategicplanning effort can reasonably be expected to havea positive impact on consumers. This analysis isespecially important because, historically, "coor-dination" efforts by firms are often viewed suspi-ciously by economists. One consideration in thisanalysis is whether or not ISPC would provide morebenefits to consumers compared to an alternativeof more vertical integration and consolidation.

Agriculture in general has had a number of"group" coordination efforts with potential risks toconsumers. For example, producers with a federal

" In the Michigan apple industry such a list was developedto communicate industry research needs to researchers and hasbeen used to justify research in the targeted areas.

10 July 2002


marketing order that allows quality restrictions havesome incentive to restrict quantity through overlyrestrictive minimum quality standards (Bockstael1987). Similarly, a cooperative in a region can seekto control prices in a region. However, despite theseconcerns the general benefits of group-action al-ternatives have been seen to be positive.

A reasonable approach to evaluating the po-tential for collusion in an industry would be to usean industrial-organization approach, such as thatfollowed by Connor as well as by Scherer and Ross.In this type of approach, there are structural fea-tures that are generally considered to make pos-sible cartel (i.e., quantity- or price-fixing) behav-ior. The following analysis is based on the typicalindustry structure described earlier in this article.

Large Numbers of Firms with a High Degree ofRivalry

One of the key difficulties that any industrywould have in actually establishing some sort ofcartel is the large number of firms and the amountof rivalry in an industry. Typically, firms in mostagricultural industries are highly competitive withone another. Although ISPC provides a structurefor these individual firms to work together, the re-lation-based effort only focuses on selected areasand individual firms continue to compete with oneanother. Competitive rivalry generally remains, andin fact the experiences in the Michigan apple andTexas vegetable industries support this thesis.

Limiting Effects of Competition from OtherIndustries

Competition from other industries that supply asimilar set of products would usually provide stronglimitations on the impact of any cartel activitiesinitiated by an industry. Most commodity indus-tries have both domestic and international compe-tition. Competitor industries supplying the same orvery similar products would likely increase theirown sales and hence substantially mitigate price orprofit effects of a move to increase prices throughrestricting quantity. The decrease in quantity by theindustry that tried to accomplish such behaviorwould allow the competitor industries to increasemarket volume.

Limiting Effects of Competition from OtherProducts

Other agricultural products (or synthetics) almostalways can to some extent be substituted for theproducts supplied by a commodity industry. Thissubstitution effect provides a limitation on anyindustry's potential supply-limiting effort. For ex-ample, strawberries compete with blueberries, rasp-berries, and other fruit products, while wheat com-petes with corn, rice, and other grains. Efforts byan industry to increase prices through monopolis-tic practices would be mitigated by substitute prod-ucts.

Instability of Collusive Efforts

A fourth important factor is that even if an industrycould make some temporary monopoly gains forthemselves, these would likely be unstable. Indi-vidual firms in an industry would have an incen-tive to refuse to cooperate with the "monopoly"behavior by supplying more to the market (Greenand Porter 1984). Also, some theory suggests thatmonopoly price setting is unstable in the face ofeither rapidly increasing demand (Rotemberg andSaloner 1986) or a slump in demand (Tirole 1990,252). In those situations firms tend to not cooper-ate in a discipline of quantity restriction.

Implications

The common structural characteristics of agricul-tural industries make the possibility of collusionfairly low according to what would be expectedfrom industrial-organization theory. Essentially, acommodity industry is unlikely to be able to effec-tively collude to restrict quantity. Industries withvery few firms with a high degree of vertical inte-gration are much more prone to collusion, as high-lighted by the recent ADM price-fixing conspiracy(Connor 1997).

Overview and Concluding Statements

In summary, ISPC and its focus on the entire sup-ply chain can provide important economic benefitsfor agricultural industries. These economic benefitsarise from common features or structures of agri-culture industries, including fragmented marketing

Lvford, Peterson, and Sterns


chains, commodity production, asset fixity, andweather impacts. Where these structural conditionsexist, ISPC is more likely to have substantial ben-efit. Economic benefits can be achieved throughundertaking industry efforts that include increasedinformation on changing customer preferences,acknowledgment of and responsiveness to thesechanging customer needs, and provision of indus-try club or public goods. To the extent that suchgoods can be more effectively supported or pro-vided through ISPC than through integration, ISPCwill likely be successful over time. By achievingthese benefits, industry strategic planning can helpsmall agricultural firms compete and thus limit thetrend in many industries toward domination by afew firms that are either horizontally or verticallyintegrated, or both.

Experiences with ISPC have been limited to arelatively small number of industries for a limitedperiod of time. This article is intended to providean indication of the potential of ISPC. Future re-search can usefully be pursued to establish ISPC asan effective roadmap for providing economic ben-efits for the economic viability and success of ag-ricultural industries.

These economic benefits point to the potentialfor industry strategic planning to be used as an ef-fective tool both by policy makers and within theland-grant system. It is a tool that differs from othergroup-action approaches in agriculture since it canextend across the vertical production-marketing-processing system in an industry and by its use ofstrategic planning tools. Yet the approach wouldenhance and not compete with the effectiveness ofexisting group efforts towards industry competi-tive success. Industry strategic planning is not, how-ever, a "miracle cure" for the issues and challengesfacing agriculture. Rather, it is one potentially im-portant tool that should be considered in the mar-ketplace of ideas to enhance performance withinagriculture while assisting the ability of smallerentities to remain viable.

References

Ayer, H. 1997. "Grass Roots Collective Action:Agricultural Opportunities." Journal of Agri-cultural and Resource Economics 22(July): 1-11.

Bockstael, N. 1987. "Economic Efficiency Issues

of Grading and Minimum Quality Standards."In Economic Efficiency in Agricultural andFood Marketing, R. Kilmer and W. Armbuster,eds. Iowa State University Press, Ames, IA.

Connor, J. 1997. "The Global Lysine Price-FixingConspiracy of 1992-1995." Review ofAgricul-tural Economics 19: 412-427.

Dixit, A. and B. Nalebuff. 1991. Thinking Strate-gically. W.W. Norton & Company, New York.

French, D. 1982. "Fruit and Vegetable MarketingOrders: A Critique of the Issues and State ofAnalysis." American Journal of AgriculturalEconomics 64: 916-923.

Green, E. and R. Porter. 1984. "Non-cooperativeCollusion under Imperfect Price Information."Econometrica 52: 87-100.

Hall, C. and C. Lyford. 2001. "Industry StrategicPlanning and Coordination: The Case of theTexas Vegetable Industry." Journal of FoodDistribution Research 32 (July): 53-66.

Hayenga, M., V. Rhodes, J. Brandt and R. Deiter.1985. The U.S. Pork Sector: Changing Orga-nization and Structure. Iowa State UniversityPress, Iowa.

Hill, L. 1987. "Grain Grades: They Lack an Eco-nomic Rationale." Choices (Fourth Quarter):24-27.

Hill, L. 1990. Grain Grades and Standards: His-torical Issues Shaping the Future. Universityof Illinois Press, Urbana and Chicago.

Jesse, E. 1987. "Economic Efficiency and Market-ing Orders." In Economic Efficiency in Agri-cultural and Food Marketing R. Kilmer andW. Armbuster, eds. Iowa State UniversityPress, Ames, IA.

Kaiser, H and D. Liu. 1998. "The Effectiveness ofGeneric Versus Brand: The Case of U.S. DairyPromotion." Review of Agricultural Econom-ics 20 (Spring/Summer): 69-79.

Lyford, C. 1998. An Analytical Frameworkfor In-dustry Strategic Planning and Coordination.Unpublished Ph.D. Dissertation, MichiganState University.

Lyford, C., D. Ricks, C. Peterson, and J. Stems1998. "A Framework for Effective IndustryStrategic Planning and Coordination." Paperpresented at the annual WCC-72 meeting, LasVegas, Nevada, June 11.

Marion, B. 1986. The Organization and Perfor-mance of the U.S. Food System. Lexington

12 July 2002


Books, Lexington, MA.Mighell, R. and L. Jones. 1963. Vertical Coordi-

nation in Agriculture, AER19. Washington,D.C.: USDA, Economic Research Service.

Pearce, J. and R. Robinson. 1997. Strategic Man-agement: Formulation, Implementation andControl. 6th Edition. McGraw-Hill Companies,Chicago.

Peterson, H. and B. Anderson. 1996. "Cooperativestrategy: theory and practice." Agribusiness :An International Journal 12: 4 (July/Aug): 371-383.

Porter, M. 1980. Competitive Strategy. The FreePress, New York.

Porter, M. 1990. The Competitive Advantage ofNations. Free Press, New York.

Ricks, D. and T. Woods. 1996. "Strategic Planningfor Improved Competitiveness by RegionalCommodity Industries." Journal of Food Dis-tribution Research (February): 59-71.

Rotemberg, J. and G. Saloner. 1986. "A Supergame-Theoretic Model of Business Cycles and PriceWars during Booms." American EconomicReview 76: 390-407.

Schelling, T. 1978. Micromotives andMacrobehavior.W.W. Norton & Company,New York.

Scherer, F.M. and D. Ross. 1990. Industrial Mar-ket Structure and Economic Performance. 3rdEdition. Houghton Mifflin, Boston.

Schmid, A. 1987. Property, Power, and PublicChoice. Praeger Publishers, New York.

Schroeder, T., C. Ward, J. Mintert and D. Peel.1998. "Value-Based Pricing of Fed Cattle:

Challenges and Research Agenda." Review ofAgricultural Economics 20 (Spring/Summer):125-134.

Shaffer, J. 1980. "Food System Organization andPerformance: Toward a Conceptual Frame-work." American Journal ofAgricultural Eco-nomics 62: 310-318.

Thompson, A. and A. J. Strickland. 1995. Craftingand Implementing Strategy, Irwin Inc., Chi-cago.

Tirole, J. 1990 The Theory of Industrial Organiza-tion, The MIT Press, Cambridge, MA.

Webb, A., S. Haley and S. Leetmaa. 1995.ancingUS Wheat Export Performance: The Implica-tions of Wheat Cleaning." Agribusiness 11(4):317-332.

Williamson, 0. 1985. The Economic Institutionsof Capitalism. The Free Press, New York.

Wills, R. and T. Cox. 1988. "Generic AgriculturalCommodity and Promotion: Economics andImpacts." A. E. Ext. New York State Collegeof Agriculture and Life Sciences, Cornell Uni-versity, Department of Agricultural Econom-ics 88-3 (March): 13-16.

Woods, T. 1995. Subsector Strategic CoordinationToward Improved Performance: A Frameworkand Apple Subsector Case Study. UnpublishedPh.D. dissertation, Michigan State University.

Wysocki, A. and H. Peterson. 1998. "QuantifyingChoice Along the Vertical Coordination Con-tinuum." Food and Resource Economics De-partment Staff Paper, No. SP98-18, Universityof Florida.

Lvfor~d, Peter~son, and Sterns

industry strategic planning: keeping supply chains

Documents