The Strategic Position of Primary Coffee Producers in Ethiopia
How can a Competitive Advantage be created through their Association in Unions?
V.A.T.S. WOLLRING
1 Author: Valeska Wollring
Student Number: S2040247
First Supervisor: Mr. M. Olthaar Second Supervisor: Dr. C.H.M. Lutz
Groningen, 18/03/2013 Univeristy of Groningen
Master Thesis MSc BA - Small Business & Entrepreneurship
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Abstract
Ethiopian primary coffee producers contribute significantly to the country’s economy, as coffee accounts for 20% of the total foreign exchange earnings and supports 1.3 million smallholders in the country. Therefore, it is considered necessary to analyze their strategic position and whether a competitive advantage can be created and further strengthened through their association in cooperatives and unions, resulting in higher incomes. This is done by combining the Global Value Chain and the Resource Based View. The analysis of the cooperative value chain is combined with the internal analysis of the resources and capabilities of the cooperatives and the unions. This helps evaluate the primary producers’ possible competitive advantage within the cooperative value chain. The research findings demonstrate that there are sources of competitive advantage. Strategic resources exist at cooperative and union level and valuable resources could be developed out of asymmetries, creating a measurable competitive advantage.
Nevertheless, the value chain findings show that first, transparency and communication problems within the cooperative value chain need to be solved. Only then, will it be possible for the primary producers to enjoy the benefits of a competitive advantage through their association in unions in the form of an increased income.
Key words: Global value chain, resource based view, coffee, primary producers, cooperatives,
unions
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Dedication
This thesis is dedicated to my grandfather, Heinz Seifert, who has been helping Ethiopian coffee
farmers in agricultural matters 30 years ago working for a NGO. It is also dedicated to my father,
Dr. Jürgen Wollring, who was a passionate agriculturalist and loved Africa. They would have
loved my choice of doing research in Ethiopia. Both have passed away. Often, I felt as if I would
follow their footsteps and this has motivated me to choose for this topic.
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Acknowledgment
This thesis would not have been possible to develop, execute, and finalize without the primary producers, the leaders of the cooperatives and the leaders of the unions who participated voluntarily in the interviews. I am truly indebted and thankful for their participation. Moreover, I want to express my appreciation towards Technoserve and the unions, who have facilitated the access to the cooperatives and primary producers. They have provided us with the contact details, transport and translators for the interviews. Many thanks also go to all the other interviewees who participated in this research and to those who contributed to our pleasant stay in incredible Ethiopia, especially to Wosen Mesfin and Tesfa Mekonnen.
I am obliged to my two supervisors, Mr. M. Olthaar and Dr. C.M.H. Lutz, who supported and guided me throughout the whole processes of the research. Several times, their feedback got me back on track and made me look more critical at the whole situation. This helped to make my story complete.
Furthermore, I owe sincere and earnest thankfulness to my family, my mother Franziska Wollring, and two sisters, Marianne and Sarah Wollring. Thanks to their support, I took the opportunity to write my thesis about this fascinating topic and I also kept on going to finish writing the thesis. Great appreciation goes to my aunt, Dr. Karoline Kretzdorn, who gave the finishing and professional touch regarding the English wording.
Finally, I feel special gratitude towards Esther Hartholt, with whom I could enjoy this
unforgettable experience in Ethiopia. Without her, I would not have started this amazing
journey.
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Table of Contents
Abstract 2
Dedication 3
Acknowledgment 4
List of Tables 7
List of Figures 9
List of Abbreviations 9
Chapter 1: Introduction 10
1.1. Research Questions 10
1.2. Scientific Relevance of the Study 12
1.3. Practical Relevance of the Study 13
1.4. Structure of the Study 13
Chapter 2: Literature 14
2.1. Global Value Chain (GVC) 14
2.2. Resource Based View (RBV) 18
2.3. Conclusion & Conceptual Model 23
Chapter 3: Methodology 26
3.1. Research Design 26
3.2. Sampling Design 26
3.2.1. Research participants 27
3.2.2. Location of research conducted 29
3.3. Data Collection 30
3.4. Operationalization of Concepts 31
3.4.1. Global value chain (GVC) 31
3.4.2. Resource based view (RBV) 35
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Chapter 4: Findings 42
4.1. Background Information 42
4.1.1. Global picture 42
4.1.2. The production process 43
4.1.3. Value chain 45
4.1.4. Price 47
4.1.5. The rise of cooperatives and unions 48
4.2. Global Value Chain (GVC) 49
4.2.1. Introducing unions 50
4.2.2. Introducing cooperatives 51
4.2.3. In- and output relations in the value chain 54
4.2.4. Governance 72
4.2.5. Conclusion of value chain 87
4.3. Resource Based View (RBV) 89
4.3.1. Key success factors (KSFs) 89
4.3.2. Business strategy 94
4.3.3. Strategic resources and capabilities 101
4.3.4. Competitive Advantage 118
4.3.5. Conclusion RBV 122
Chapter 5: Conclusion and Discussion 127
Bibliography 132
Appendices 135
Appendix I: List of Interviewees 135
Appendix II: Interview Questions 136
Appendix III: Assessment Form 142
Appendix IV: Organizational Chart 144
Appendix V: Answers to Interviews 145
Appendix VI: VRI-Assessments 147
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List of Tables
Table 1: Operationalization of Mapping the Value Chain 32
Table 2: Operationalization of Governance 34
Table 3: Operationalization of the Key Success Factors 35
Table 4: Operationalization of Basic Resources 36
Table 5: Operationalization of Basic Capabilities 37
Table 6: Operationalization of Strategic Criteria 39
Table 7: Operationalization of Strategic Intent 39
Table 8: Operationalization of Miller’s Asymmetries Resulting in a Competitive Advantage 41
Table 9: Introducing the Unions 50
Table 10: Introducing the Cooperatives 51
Table 11: Amount of Sales of the Unions 55
Table 12: Amount of Sales of the Cooperatives 56
Table13: Amount of Profit of the Unions 58
Table 14: Amount of Profits of the Cooperatives 59
Table 15: Coffee Flow of the Unions 60
Table 16: Sales Destination of the Unions 61
Table 17: Coffee Flow of the Cooperatives 62
Table 18: Sales Destination of the Cooperatives 63
Table 19: Services Offered by the Unions 65
Table 20: Educational Level of the Cooperatives 69
Table 21: Dividends Paid by the Unions 81
Table 22: Purchase Dividend Paid by Unions 82
Table 23: Dividends OCFCU Cooperatives 82
Table 24: Dividends SCFCU Cooperatives 83
Table 25: Dividends YCFCU Cooperatives 83
Table 26: Key Success Factors of Cooperatives and Unions 90
Table 27: Business Strategy of Cooperatives 95
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Table 28: Business Strategy of OCFCU 98
Table 29: Business Strategy of SCFCU, YCFCU, and LEFCU 99
Table 30: Basic Resources and Capabilities of Cooperatives 101
Table 31: Basic Resources and Capabilities of Unions 104
Table 32: Fit Between KSFs and Basic Resources and Capabilities of Cooperatives 107 Table 33: Fit Between KSFs and Basic Resources and Capabilities of Unions 108 Table 34: Strategic Value Assessment of Cooperatives’ Key Resources by Researcher 110 Table 35: Strategic Value Assessment of Cooperatives’ Key Resources by External 110 Table 36: Final Strategic Value of Cooperatives’ Key Resources 110 Table 37: Strategic Value Assessment of Unions’ Key Resources by Researcher 111 Table 38: Strategic Value Assessment of Unions’ Key Resources by External Assessors 112
Table 39: Final Strategic Value of Unions’ Key Resources 112
Table 40: Strategic Consistency of Cooperatives’ Key Resources 114
Table 41: Strategic Consistency of Unions’ Key Resources 114
Table 42: Strategic Resources of Cooperatives 116
Table 43: Strategic Resources of Unions 117
Table 44: Miller’s Three Steps to Create a Competitive Advantage 118
Table I: Interviewees Industry Experts 135
Table II: Interviewees Unions 135
Table III: Interviewed Cooperatives 135
Table IV: Findings Basic Resources Unions 145
Table V: Findings Basic Capabilities Unions 145
Table VI: Findings Financial Resources Cooperatives 146
Table VII: SCFCU VRI-assessment 147
Table VIII: Interviewee II VRI-assessment 147
Table IX: Interviewee I VRI-assessment 148
Table X: Interviewee XV VRI-assessment 149
Table XI: Averages of all Assessors 149
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List of Figures / Graphs
Figure 1: Simple Value Chain 14
Figure 2: Types of Governance 16
Figure 3: Conceptual Model 25
Figure 4: Map of Coffee Regions 30
Figure 5: Production Process of Sundried and Washed Coffee 44
Figure 6: Coffee Supply Chains in Ethiopia 45
Figure 7: History of Establishment of Cooperatives and Unions 49
Figure I: OCFCU’s Organizational Chart 144
Graph 1: ICO Composite Indicator Prices of Coffee 47
Graph 2: ICO Group Indicator Prices 48
List of Abbreviations
ECGPEA Ethiopian Coffee Growers Producers Exporters Association
GVC Global Value Chain
ICO International Coffee Organization
KSFs Key Success Factors
LEFCU Limu Enara Farmers Cooperative Union OCFCU Oromia Coffee Farmers Cooperative Union
RBV Resource Based View
SCFCU Sidamo Coffee Farmers Cooperative Union
YCFCU Yirgacheffe Coffee Farmers Cooperative Union
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Chapter 1: Introduction
Globalization has made many things possible and has made life easier for many people.
Unfortunately, besides winners, there are many who do not benefit from globalization. Many of those who cannot enjoy the benefits of globalization are primary producers, suppliers, and / or farmers in sub-Saharan Africa. Commodity products are mostly produced in developing countries and then marketed in Western economies, where marketing activities lead to high prices for these products. The question is who benefits from these higher prices? Are these the primary producers, exporters, importers, wholesalers or shop owners? One can often note a big difference between the prices paid to the primary producers compared to the prices the end- consumer has to pay. Is this difference justified because each participant in the value chain needs to make profit or are downstream participants asking higher prices at the expense of upstream participants such as the primary producers? This research examines whether the primary producers are able to improve their strategic position in order to achieve higher prices when selling their product. In case primary producers can achieve a competitive advantage, higher prices can be asked, resulting in better profits.
Improved strategic positions of primary producers would contribute to the economies of developing countries because in many of these countries the production of commodity goods is essential for the economy. An example of such a country is Ethiopia, where 80% of employment is accounted for by the agriculture sector (African Economic Outlook, 2012). An important contributor to the Ethiopian agricultural sector is the production of coffee. Ethiopia’s major export product is coffee which makes 20% of the total foreign exchange earnings. As coffee production is an important industry in Ethiopia which accounts for 1.3 million smallholders in the country (ECGPEA, 2012), it is worthwhile to investigate the competitive position of these farmers and how they can benefit from the globalization and the international coffee trade by improving their strategic position.
To address this problem, several research questions have been formulated.
1.1. Research Questions
The following main research question was to be answered:
“What is the current strategic position of the Ethiopian primary coffee producers and how can their
strategic position be improved through their association in unions?”
11 The focus of the research is on the cooperative value chain of coffee in Ethiopia, where primary producers, cooperatives and unions form the main actors.
Research is divided into two research papers with different focuses so that the whole value chain is analyzed. The first paper focuses on the organization of cooperatives, where primary producers are grouped, in unions. The second research paper
1focuses on the organization of primary producers in cooperatives. The reason to focus on the cooperative value chain is because the researchers expect that the answers to the main research question will be found in the organization of the primary producers in cooperatives and unions, because at farmer-level the required investments to be able to compete cannot be made, largely due to lack of capital and knowledge.
To answer the main research question, two streams of literature, the Global value chain (GVC) and resource based view (RBV), are combined. The GVC is reckoned as a useful approach to understand the different parties within a value chain, their function and their relationships to each other. But the GVC fails to explain explicitly why one actor is able to get higher returns than others. Getting higher returns has to do with having a better strategic position than the other actor in the chain. To improve an organization’s competitive position, it is necessary to understand how a competitive advantage can be created. The RBV addresses this issue by assessing the organization’s resources and capabilities.
Combining the GVC and RBV results in the understanding of the primary producers’ strategic position and their association in cooperatives and unions and how this can be improved based on the resources and capabilities within the cooperative value chain.
The following sub questions will be answered:
I. How are the cooperatives, and through them the primary producers, organized in the unions?
After mapping the value chain, governance is used to describe the organization of cooperatives in unions. Governance explains the coordination, power and responsibilities in the value chain. Governance could affect the position of primary producers negatively. Downstream value chain participants could have the power to determine the process and product specifications, leading to a weaker position of the primary producers and cooperatives.
1 Hartholt, E. (2012). The Strategic Position of Primary Coffee Producers in Ethiopia: Can a Competitive Advantage Be Created Through Their Association in Cooperatives?. Rijksuniversiteit Groningen
12 II. Which key success factors apply in the Ethiopian coffee market and in particular at
cooperative and union level?
When an organization wants to improve its competitive position, it is first necessary for it to understand the requirements set by the industry and buyers. These are referred to as key success factors (KSFs). The chain actors must be aware of the KSFs so that they can adapt their production processes to meet these and to stay competitive.
III. How can the present business strategy of the cooperatives and the unions be described?
Besides meeting the KSFs, the organization’s key resources should be in line with the organization’s strategy to create a competitive advantage. Key resources result from linking the basic resources of the organization with the KSFs.
IV. Which strategic resources and capabilities do the cooperatives gain through their association in unions?
Strategic resources are characterized by high strategic value and consistency with the organization’s strategic intent, which is to generate a competitive advantage. However, so-called asymmetries can be turned into valuable resources with help of bundling resources, creating potential sources of a competitive advantage. Both strategic resources and asymmetries are taken into account to improve the cooperatives’
competitive advantage.
V. How can the cooperatives’ competitive advantage be strengthened through their union membership?
An organization which possesses strategic resources can invest in strategic options to reinforce the competitive advantage. Here, it is invested if the cooperatives can also benefit from the unions’ strategic resources.
1.2. Scientific Relevance of the Study
Two streams of literature, the GVC and RBV, are combined in this research study. The aim is to
understand the cooperative value chain and to determine the strategic position of cooperatives,
and through them the primary producers, associated in unions. The GVC literature has been
applied in the coffee industry, focusing on the contribution of the participants and mutual
relations in the value chain. However, so far the focus has been on the competitiveness of the
whole value chain, not taking the individual, internal organization of the chain participants into
13 account. This research focuses on the competitiveness of commodity producers, rather than on the whole chain. Including the internal organization is essential in order to determine the strategic position of the primary producers in the cooperative value chain. Combining the value chain analysis with the assessment of the resources and capabilities through the RBV results in a thorough understanding of the contribution of the actors and the relations within the chain, so that the strategic position of the coffee farmers can be determined and possibly improved. This allows the researchers to further develop the GVC. The RBV is based on the model of Rangone (1999), where changes have been made to make the model clearer and better applicable.
Besides the academic relevance, this study also has a practical value.
1.3. Practical Relevance of the Study
Coffee production is influencing around 7 million lives in Ethiopia, as 1.3 million smallholders, most of them the bread-earners of families, produce coffee. Therefore, it is important to determine whether the primary producers have a chance to improve their position, increase their income and improve the quality of live. Enhancing the reaps of coffee in the country could be an economic answer to poverty reduction. Also, the government of Ethiopia has an interest in improving the livelihood of the primary producers. Ethiopia’s vision is to achieve middle income status by 2025 through increased smallholder farmers’ productivity and income by leveraging the activities of agricultural cooperatives. This is part of the Growth and Transformation Plan and is geared toward fostering broad-based development in a sustainable manner (ATA, 2012).
The findings of this study contribute to this objective by helping to understand how the farmers’
competitive position can be improved, so that their incomes can be increased.
1.4. Structure of the Study
The next chapter elaborates on the theories of GVC and RBV, resulting in a conclusion and the
conceptual framework. Chapter three explains the qualitative methods of conducting this
research. Chapter four presents the findings of this research and answers the research
questions. Chapter five finalizes with the conclusion and discussion, answering the main
research question, addressing remaining issues, and presenting the limitations of this research.
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Chapter 2: Literature
The first section introduces the GVC, identifies unexplained issues of the GVC and describes shortly how the RBV can address these issues. Then, the RBV is introduced and explained in detail. This is followed by a conclusion and a description of the conceptual model developed for this study.
2.1. Global Value Chain (GVC)
A value chain describes the full range of activities which are required to bring a product or service from conception, through the different phases of production, to marketing and then finally to deliverance to the customer.
The GVC describes the activities which are necessary to design, produce and market a product.
Figure 1: Simple Value Chain
Source: Kaplinsky (2000)
Kaplinsky and Morris (2001) say that there are three reasons why value chain analysis is
important in this era of rapid globalization. Firstly, with the growing division of labor and the
global dispersion of the production of components, systemic competitiveness has become
increasingly important. Systemic thinking is a result of increasing intra-plant and inter-firm
production, which is caused by just-in-time principles, the use of electronics-based automation
technologies and the need to get products more quickly on the market. This forces actors in the
chain to work closely together in order to make the whole system more competitive in having
lower inventories, greater responsiveness and higher quality. Kaplinsky and Morris (2001)
explain that the development of focusing on core competences contributes to the logic of
systemic competiveness. The logic of this is that firms should concentrate on the uniqueness of
their resources and additionally they should provide customers with a service which is valuable
and difficult to copy by others. The remaining competences could be outsourced to specialists,
other firms in the value chain. This extends the complexity of production, and consequently the
15 systemic (or inter-) competitiveness (Kaplinsky & Morris, 2001). Secondly, efficiency in production is another one of the necessary conditions for successfully penetrating global markets. Kaplinsky and Morris (2001) explain that trade policies in final markets and strategic decisions of lead firms played a dominant role in determining global requirements. Moreover, the strategic decisions of leading firms govern the participation in the global value chain. The value chain analysis includes those factors which determine the participation of particular groups of producers in final markets. An important factor is the critical success factors, which are distinctive characteristics of specific markets (Kaplinksy & Morris, 2001). Examples are price and quality. The critical success factors can be grouped in ‘order qualifying’, which producers have to achieve minimally to be able to participate in the market, and ‘order winning’, where producers can become more successful than others. Finally, Kaplinsky and Morris (2001) say that value chain analysis is important as it helps to explain the distribution of benefits, particularly income, of the participants. Thus value chain analysis helps to understand the dynamic factors which are relevant to provide sustainable income growth while participating in global markets.
Three key constructs are developed by Kaplinsky (2004) which help analyze how and which producers enter and participate in the global markets: barriers to entry and rent, system efficiency and governance. These three elements are closely linked. Firstly, the author explains that rent comes from differential productivity of factors (including entrepreneurship) and barriers to entry, which causes scarcity. Kaplinsky (2004:82) uses Schumpeter to explain that scarcity can be constructed, arising from “purposive actions rather than as a consequence of the bounty of nature”, where entrepreneurs play a unique role in carrying out new combinations based on innovation. Secondly, system efficiency impacts the competitiveness when efficiency of the individual links in the value chain is improved. Thirdly, governance includes coordination and control within the value chain and takes place within various activities along the chain. As the international economy experienced a transition from arm’s length relations to a complex system of subcomponents, the need for coordination and integration increased, which emphasizes the importance of governance (Kaplinksy, 2004).
Governance is considered as an essential aspect of the value chain, to be able to understand the
relations within the value chain, the positions of the participants and where needed how to
improve certain activities in the chain. Firstly, Gibbon et al. (2008) refer to Gereffi to explain
governance as producer- or buyer-driven structures where governance is defined as “the
authority and power relationships that determine how financial, material, and human resources
are allocated and flow within the chain” (Gibbon et al., 2008:320). Producer-driven chains are
16 mostly found in capital intensive industries where producers tend to have most control over capital-intensive operations within hierarchical organized networks coordinated and managed by leading firms. Here, governance is assumed to be driven by manufacturers. Buyer-driven chains are more present in labor-intensive sectors, where product development, marketing and branding is more important. Here, governance is assumed to be driven by retailers and/or marketers. Gibbon et al. (2008) explain that the producer- or buyer-driven perspective is too simplistic, and that a so called bi-polar structure can arise when different lead firms, being manufacturers and marketers, control the chain. Gibbon et al. (2008) refer to Sturgeon to explain how governance can be described as networks of lead firms and their suppliers. In this definition actors operate on a more equal level compared to the driven-definition. Inspired by the modular concept of value chains, Gereffi, Humphrey, & Sturgeon (2005) developed five governance types in global industries. The governance types depend on three factors. The first factor is the complexity of information and knowledge transfer required to sustain a particular transaction, particularly with respect to product and process specifications. Another factor is the extent to which this knowledge and information can be codified. Finally, the capabilities of actual and potential suppliers in relation to the requirements of the transaction are an important factor in value chain governance. The five governance types developed by Gereffi et al. (2005) are shown.
Figure 2: Types of Governance
Source: Humphrey (2004) and Gereffi et al. (2005)
Figure 2 shows the five global value chain types arrayed along the dual spectrum of explicit
coordination and power asymmetry. Gereffi et al. (2005) elaborate on the fact that the
governance types can describe how power operates in global value chains. In hierarchical value
chains, top management at headquarters has direct administrative control over subordinates in
a subsidiary or vertically integrated firm. This direct control suggests a high degree of explicit
17 coordination and a high power asymmetry with the lead firms. Also in captive global value chains, power is exerted directly on the suppliers by the dominant lead firm. The suppliers face significant switching costs and therefore, are captive. These networks are often characterized by a high degree of monitoring and control by the lead firm. The hierarchical and captive types have an asymmetrical power balance between the firms. In the relational global value chains, the balance of power is symmetrical. According to Gereffi et al. (2005), this is because both firms do contribute key competences. In the relational GVC, there is a rather high coordination, but this is achieved through a close dialogue between more or less equal partners, opposed to the unidirectional flow of information and control between unequal partners as in hierarchical and captive global value chains. Thus it can be said that “in modular global value chains, as in markets, switching customers and suppliers is relatively easy. Power asymmetries remain relatively low because both suppliers and buyers work with multiple partners.” (Gereffi et al., 2005:88).
Gibbon et al. (2008) argue that governance within GVC does not refer to a particular lead firm driving the chain based on its strategies, but rather refers to a form of coordination between the lead firm and its supplier(s). Also, GVC emphasizes that governance relation is shaped by the characteristics of industry or processes. Therefore, the fivefold typology of Gereffi et al. (2005) enhances the explanatory scope of governance by moving towards an inter-firm transaction instead of an arm’s length perspective determined by one lead firm.
Gereffi, Humphrey, Kaplinsky, & Sturgeon (2001) argue that the clearest examples of value chain governance are in sectors such as garments, processed fruit and horticulture, where the power of the buyers is clearly evident. Humphrey (2004) explains that buyers have become more concerned with the specifications of both products and processes further back along the value chain. These requirements concern quality, safety, traceability, authenticity, guaranteed supply, product differentiation and innovation. It is important to know exactly what the customers at the end of the value chain are demanding for. Humphrey (2004:14) states that “the increasing importance of vertical coordination agricultural supply systems does have some implications for agricultural development strategies”. Diversification strategies need to be aware of the key actors within the global value chain and the different agents along the chain who make key decisions.
In conclusion, the GVC lays focus on inter-chain competitiveness, referred to as systemic
competitiveness, where the effectiveness and efficiency of the whole value chain matters. What
the GVC is not elaborating on is the effectiveness and efficiency of each participant, which can be
18 referred to as intra-chain competitiveness. Gereffi et al. (2005) show how relations between chain actors can be described based on power and coordination, but they do not explain the roots of power. The power is partly determined by the capabilities of actual and potential suppliers to fulfill transaction requirements. The RBV provides this insight and can therefore explain why power asymmetries exist within the GVC.
The next section elaborates on the RBV theory.
2.2. Resource Based View (RBV)
The RBV is developed as a complement to Porter’s five forces model to determine an attractive market (Kraaijenbrink, Spender, & Groen, 2010). The main difference is that the RBV places the main determinants internally instead of externally to the organization. The RBV is an important contribution to strategic management as it helps to understand the sources of a sustained competitive advantage (Barney, 1991). The RBV builds on the assumptions that firm resources are heterogeneous and not perfectly mobile.
As a founder of RBV, Barney (1991:101) defines resources as “all assets, capabilities, organizational processes, firm attributes, information, knowledge etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness”. Various researchers defined such resources, which come down to physical capital resources, human capital resources and organizational capital resources.
In his definition, Barney (1991) shows that resources need to have some characteristics in order to become strategic. He discusses the four empirical indicators – value, rareness, inimitability, and non-substitutability (VRIN) - of the potential of firm resources to generate a sustained competitive advantage. Resources and capabilities which fulfill these four VRIN characteristics have the potential to generate a sustainable competitive advantage. Resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness. They fulfill rarity when they are rare among current and potential competitors.
Inimitability is measured by historical conditions, causal ambiguity (not knowing what it exactly
is, or where it is created), or social complexity (social interactions make it hard to copy). Non-
substitutability means that other resources cannot be strategic substitutes. Barney (1991:102)
explains that a competitive advantage is obtained by a firm when “it is implementing a value
creating strategy not simultaneously being implemented by any other current or potential
competitors” and a sustainable competitive advantage is created “when these other firms are
unable to duplicate the benefits of the strategy”. Although Barney contributed to the RBV
literature, three main problems can be addressed in his theory:
19 The tautology problem and value criteria
Priem and Butler (2001) criticize Barney’s perspective on RBV by questioning if it is a theory which can be empirically tested. They come to the conclusion that Barney’s definitions of competitive advantage and VRIN-criteria are tautological since they are analytical, true by definition, and therefore, are not amenable to empirical tests. Barney’s definitions indicate that additional conceptual work is needed if the RBV is to meet the law-like generalization standard.
Priem and Butler (2001:29) explain that the RBV can be made synthetic by using different, more widely accepted definitions of competitive advantage and refer to Schoemaker’s definition: “a firm that is systematically creating above average returns.” Like this, definitional dependencies are reduced and value is the fundamental component determining the extent of competitive advantage as it will lead to higher returns.
Furthermore, Priem and Butler (2001) criticize that because the external environment in Barney’s RBV perspective is assumed to be homogeneous and immobile, the criteria for value remain in a so called exogenous black box and therefore prescribing competitive advantage is hindered. However, value is determined exogenously by demands in the market environment. In reality these demands as well as the value can change. Because, according to Schoemaker’s definition, value determines the extent of competitive advantage, inclusion of the external environment is necessary. Amit and Schoemaker (1993) agree that the external environment must be included when applying the RBV and argue that the challenge managers are facing is to identify a set of strategic assets as grounds for establishing the sustainable competitive advantage and generating organizational rents. To be able to identify these strategic assets, a multidimensional approach is needed, which is defined as: “one that includes internal and external elements, static and dynamic aspects, and rational as well as behavioural considerations” (Amit & Schoemaker, 1993:42). This means that the external environment should be taken into account, in order to deploy resources and capabilities in such a way as to create a sustainable competitive advantage. This perspective is missing in Barney’s explanation.
The inclusive definition of resources
Another criticism on Barney (1991) is his definition of resources which includes capabilities rather than distinctly differentiating between those two. Rangone is clearer in this perspective and defines resources and capabilities separately. Rangone (1999) extends Barney’s list of resources by dividing resources into homogenous classes such as financial resources, physical resources, human resources, technological resources, reputation, and organizational resources.
Furthermore, Rangone (1999) distinguishes three types of basic capabilities: Innovation
20 capability, production capability, and market management capability. Based on this, Rangone (1999) developed a tool to conduct strategic analysis to determine the firm’s strategic position.
An SME’s sustainable competitive advantage is according to Rangone (1999) based on the three basic capabilities. Explicitly or implicitly, consciously or unconsciously, the SME puts a strategic focus on one or more of these capabilities. The basic capabilities are founded on the firm’s endowment of critical resources, which are defined as “those that are the basis of the company’s sustainable competitive advantage” (1999:234). These resources are determined to be critical when they meet the following tests: competitive superiority, imitability, duration, appropriability, and the substitutability. Rangone’s (1999) five tests are similar to the VRIN attributes of Barney (1991), but extends these with appropriability. The competitive superiority test evaluates if and to what extent the key resources contribute to differentiating the company from its competitors. Imitability analyzes the difficulties actual and potential competitors may have in imitating the key resource. This takes the resource’s physical uniqueness, path dependency, causal ambiguity, and economic deterrence into account. The duration test measures if the resource’s benefits will also be generated in the long term which says something about the sustainability of the key resource. The appropriability test verifies if the company owning the resource is able to exploit the generated advantages generated in the market. The final test, the substitutability test, assesses how difficult it is for competitors to replace the resource with an alternative that gives the same advantages. Rangone (1999) links the critical resources and the basic capabilities through key performances, which depend on the industry’s key success factors (KSFs). The key performances can be divided into three categories:
Manufacturing performances, new product performances and marketing performances. This is where the external environment comes in. The external environment must be analyzed to be able to determine the KSFs. Rangone (1999) does not specify what KSFs could be and does not define these. De Vasconcellos and Hambrick (1989:367) offer a definition and state that KSFs are
“those tasks or attributes which are particularly mandated by the task environment”. These requirements arise in response to buyers’ behavior, economic situations, regulations and so on.
Based on their empirical research, De Vasconcellos and Hambrick (1989) show that
performance is improved when the firm’s strengths are aligned with the KSFs. After having
defined the strategic value of the critical resources, Rangone’s (1999) next step is to determine
the strategic consistency of those resources, referring to this as the ability to contribute to the
achievement of the company’s strategic intent. Rangone (1999) shows that based on the
strategic value and strategic consistency, the firm’s critical resources can be mapped in a matrix
which generates strategic options. Strategic resources are those resources which have strategic
value and are consistent with the strategic intent. Including a firm’s strategic intent when
21 determining the strategic value of critical resources, is another important contribution of Rangone to the RBV literature. The flaw in Barney’s and other researchers ’perspective is that the firm’s strategy is not included in their theories. It is essential to take the strategy of a firm into account in order to determine which strategic resources are needed to be deployed to gain a sustainable competitive advantage. To do so, the firm needs to determine the future direction to work towards. This is determined by a firm’s strategy.
The how questions
While Rangone offers a tool to conduct strategic analysis to determine subsequently which resources have strategic value, the question how resources and capabilities could be used to create a sustainable competitive advantage remains. Priem and Butler (2001:33) challenge the RBV research and bring forward various how questions: “How can the resource be obtained?
How and in which contexts does it contribute to competitive advantage? How does it interact/compare with other resources?” Teece, Pisano, & Shuen (1997) tried to include the external view to the RBV by introducing dynamic capabilities, which claim to be able achieve a new form of competitive advantage. The word ‘dynamic’ is referred to “the capacity to renew competences so as to achieve congruence with the changing business environment” and the term ‘capabilities’ “emphasizes the key role of strategic management in developing the internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment” (Teece et al., 1997:515).
Miller (2003) also offers a solution to this “how-mission” by focusing on asymmetries and dynamic capabilities by questioning how a firm could obtain or create resources, if they did not already have them. Miller (2003) refers to this as the ‘sustainability-attainability dilemma’ of the RBV theory, which explains that attainable resources cannot result in sustainable resources, because competitors have access to these just as well. So the question remains how to develop a sustainable competitive advantage that is not acquired yet and at the same time not attainable?
Miller (2003) provides an answer to this by dropping the ‘value-requirement’ of Barney’s VRIN- criteria, explaining that firms can use valueless asymmetries, develop them into valuable ones, and go on to create a unique competitive position. Miller’s (2003) theory is an extension to the standard RBV assumption while he provides a more practical view of competitive heterogeneity.
Based on the research, Miller (2003) has found out that to overcome the dilemma of attaining
sustainable resources, firms should not so much build on valuable resources and capabilities but
on asymmetries. Asymmetries can be concrete, but many are subtle and complex and are defined
as “skills, processes, talents, assets or outputs an organization possesses or produces that its
competitors do not and cannot copy at a cost that affords economic rents. They are rare,
22 inimitable, and non-substitutable (Miller, 2003:964)”. Miller (2003:964) defines resources as
“asymmetries that produce superior economic returns”. Miller (2003) underlines that what gave these asymmetries the potential for a sustainable competitive advantage was the inimitability, rarity, and also their ambiguity. What made the asymmetries attainable is that they were already possessed by the firms. But these asymmetries were not connected to engines of value creation and were suitable to be liabilities or assets. In many cases he studied, the starting value of the asymmetries was negative, reflected by for example disastrous divisions or unproductive teams.
Thus, inimitability, not the value of it, was the declarer of attainable advantage.
Miller (2003) presents three steps firms did well when converting asymmetries into valuable resources or core capabilities. Firstly, discovering the asymmetries and critically determine their potential. Secondly, turning asymmetries into capabilities by embedding these into the organization, exploiting them, and later sustaining their development. Thirdly, the asymmetry- derived capabilities have to be matched to the opportunities available in the market. To conclude, Miller (2003:973) says that firms can overcome the sustainability- attainability dilemma by “discovering asymmetries, which are more common than full-fledged resources and capabilities and easier to defend than imitable assets”. Afterwards, organizations can convert these asymmetries into resources and capabilities and let them grow and leverage across the appropriate market opportunities.
Another ‘how question’ that the RBV should answer concerns the exploitation and management of strategic resources and capabilities in order to generate a competitive advantage. Sirmon, Hitt
& Ireland (2007) address criticism of the RBV by the link of creating value in dynamic environments through managing firm resources in the right way. The three resource management processes introduced by them are: Structuring the resource portfolio, bundling resources to build capabilities and leveraging capabilities to exploit market opportunities. Doing so, a competitive advantage is created and wealth for the owner is increasing. Sirmon et al.
(2007) explain that managers must adjust the structuring sub processes according to the uncertainty in the environment and munificence; this affects the organization’s ability to create value through bundling and leveraging processes. In this process, the manager plays a critical role. The ‘how-process’ to use resources to create value consists of acquiring resources, accumulating resources and divesting resources. Capabilities are created by bundling resources.
Three different bundling processes are stabilizing, enriching and pioneering (Sirmon et al.,
2007). Moreover, they argue that organizational learning is very important for the effectiveness
and efficiency of the management of these resources. Based on this, Sirmon and Hitt (2009)
elaborate on resource management via asset orchestration which is vital for superior
23 performance, gaining a competitive advantage. The asset orchestration involves two dimensions, the resource investment and deployment decisions. It is necessary to invest at a certain level in the right resources to improve these and possibly create a better position. The second dimension is the resource deployment decision which involves “the selection of the specific market segment(s) in which to engage the firm’s resources” (Sirmon & Hitt, 2009:1380). Sirmon and Hitt (2009) reveal that the highest performance outcomes were achieved when resource investment and deployment decisions fit. Here as well, the manager’s role is crucial.
2.3. Conclusion & Conceptual Model
The conceptual model is created based on the GVC the RBV. This research focuses on the organization of cooperatives, and through these the primary producers, in unions within the cooperative value chain. Issues of concern are their relationship to each other and the governance structure. Governance is taken into account, as due to globalization a transition from arm’s length relations to a complex system of subcomponents has taken place, so that the need for coordination and integration has increased (Kaplinsky, 2004). The RBV helps to understand and analyze the strategic positions of the unions and cooperatives. This following paragraph explains how the concepts of the RBV have been defined.
Barney is famous for his key concepts in the RBV literature, but, as has been showed, these have various flaws: The tautology problem and value criteria, the inclusive definition of resources, and the how questions. By adopting the broader accepted definition of competitive advantage used by Schoemaker: “a firm that is systematically creating above average returns”, the tautology problem is solved. Furthermore, Rangone’s (1999) framework solves the exogenous black box by including the external environment through the KSFs, so that a competitive advantage can be determined. Rangone (1999) also uses a clearer definition of resources by dividing them into six classes. And Miller’s (2003) three steps and Sirmon and Hitt’s bundling of resources solve the how questions. The final conceptual model used for this study is based on Rangone’s model with some adjustments and adaptations.
Rangone (1999) considers the company’s key performances to make the link between basic
capabilities and critical resources operational. These key performances depend on the industry’s
KSFs. For this research, to make the link between basic capabilities and the key resources and
key capabilities, the KSFs determined by the industry and buyers are considered. This is done to
emphasize the importance of the external environment and to avoid an immediate translation to
the internal organization. KSFs are extremely important to assess the organization’s
effectiveness. Rangone (1993:208) explains that “identifying KSFs and assessing and monitoring
24 how well a company has operated compared to its major competitors are crucial elements in fulfilling strategic goals and, thus, enhancing organizational effectiveness”.
Rangone (1999) refers to key performances and critical resources as two distinct concepts, where key performances are linked to the external KSFs and are based on the critical resources.
In this research however, key capabilities and key resources are used as one concept, where key capabilities refer to Rangone’s (1999) key performances and key resources refer to Rangone’s (1999) critical resources. Both, the key capabilities and key resources, are linked to the KSFs and therefore used as one concept in this research. Only the basic capabilities, which do produce a contribution to the KSFs determined by the industry, are key capabilities. And only the resources, which are necessary for the enforcement of the key capabilities, are the key resources.
After having identified the key resources and key capabilities, their strategic value needs to be determined by fulfilling certain criteria. For this analysis, Barney’s (1991) VRI-criteria are used to do so. The value criterion is fundamental to determine the extent of a competitive advantage, using Schoemaker’s definition. Moreover, Miller (2003) neglects the value criteria, but here it is used to discuss if the asymmetries are valuable or not. Rarity and Inimitability are according to Miller (2003) the most important criteria to determine if a resource can generate a competitive advantage. Therefore, the VRI-criteria of Barney are used and not Rangone’s five criteria. The Non-substitutability criterion is not used for this research because there is no substitute to coffee.
As Rangone (1999) emphasizes the importance of the resources’ strategic consistency to be able to create a competitive advantage, it is necessary to know the strategic intent of a firm. However, in Rangone’s (1999) model, it is not clear when the concept of strategic intent is used. For this research, it is chosen to use the concept of strategic intent when the key resources and capabilities have been already analyzed. This is done in order to prevent neglecting important resources at the beginning of the analysis.
While having identified Rangone’s strategic resources, an extra step is included. Valueless resources can be turned into valuable ones with the help of Miller’s (2003) three steps of discovery, development, and leveraging. Miller (2003) focuses on asymmetries where inimitability instead of value is the most crucial criterion for creating a competitive advantage.
Miller (2003) argues that at present, firms might not have these strategic resources, but they are
able to create those by considering asymmetries which can be turned into valuable resources
and capabilities. Here, Sirmon and Hitt’s (2007) bundling of resources is taken into account here
25 as the bundling of resources can improve or create capabilities. These resources can leverage across appropriate market opportunities, increase income and therefore generate a competitive advantage. Also, Rangone’s strategic resources and capabilities need to be exploited in such a way that they generate a competitive advantage.
This theoretical framework leads to the conceptual model (figure 3). The upper part of the conceptual model represents the GVC concepts, showing the main chain actors of the cooperative value chain. The highlighted boxes, cooperatives and unions, show the focus of this study. In the lower part of the model, the concepts of the RBV, as discussed above, are presented.
Figure 3: Conceptual Model
