THE STRA TEGIC PO SITI ON OF
PRIMARY COFFEE P RODUCERS IN
ETHIOPIA
How can a Competitive Advantage Be Created Through Their
Association in Cooperatives?
1 Author: Esther Hartholt
S-number: 1559893
First Supervisor: Mr. M. Olthaar Second supervisor: Dr. C.M.H. Lutz Groningen, 19 December 2012 University of Groningen
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ABSTRAC T
Ethiopian primary coffee producers have significant contribution to the country’s economy, as coffee accounts for 20% of the total foreign exchange earnings and accounts for 1.3 million smallholders in the country. Therefore it is useful to analyse their strategic position and whether a competitive advantage can be further strengthened through their association in cooperatives, resulting in higher incomes. This is done by combining two streams of literature: the Global Value Chain and the Resource Based View. An internal assessment of the primary producers’ and cooperatives’ resources and capabilities is combined with a value chain analysis to assess the primary producers’ competitive advantage in the cooperative value chain. Results of this research show that sources of a competitive advantage are present. Strategic resources exist at both levels and valueless asymmetries can be turned into valuable resources. However, transparency and communication problems between primary producers and cooperatives have to be resolved, so that the primary producers can enjoy the benefits of a competitive advantage and their income increases.
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ACKNOW LEDGEMENTS
For this research to be developed, executed and finalized, many thanks and gratitude is felt towards the primary producers and the leaders of the cooperatives who participated voluntarily in the interviews. This thesis is evolved around them and without their participation, the research could simply not be completed. Many organizations made access to the cooperatives and primary producers possible, mostly located in difficult to reach areas. Contact details, transport and translating support were offered by especially TechnoServe and the coffee unions, for which great appreciation is showed. 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 and Tesfa.
Many thanks go to my two supervisors, Mr. M. Olthaar and Dr. C.M.H. Lutz, who were closely involved in our research. Their critical comments greatly contributed to my story.
Great appreciation goes towards my father Alex Hartholt, mother Gellie Hoekstra and sister, Nienke Hartholt. Thanks to their unconditional support I took the opportunity to write my thesis about this fascinating topic, which is a choice based on passion. Many thanks.
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TABLE OF CONTEN T S
Chapter 1. Introduction ... 6
1.1. Research Questions... 6
1.2. Relevance of this Study ... 8
1.3. Structure of this Study ... 9
Chapter 2. Literature ... 10
2.1. GVC ... 10
2.2. RBV ... 14
2.3. Conclusion and Conceptual Model ... 19
Chapter 3. Methodology ... 22 3.1. Research Design ... 22 3.2. Participants ... 22 3.2.1. The Interviewees ... 22 3.2.2. Selection of Participants ... 23 3.3. Data Collection ... 24 3.3.1. Researchers ... 24 3.3.2. The Interviews ... 24 3.3.3. Other sources ... 25
3.4. Operationalization of the Concepts ... 25
3.4.1. Global Value Chain ... 25
3.4.2. Resource Based View ... 29
Chapter 4. Findings... 35
4.1. Background Information ... 35
4.1.1. Global Picture ... 35
4.1.2. The Production Process ... 36
4.1.3. Value Chain ... 38
4.1.4. Price ... 40
4.1.5. The Rise of Cooperatives and Unions... 41
4.2. GVC ... 43
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4.2.2. Introducing the Primary Producers... 45
4.2.3. Mapping the Value Chain ... 47
4.2.4. Governance ... 62
4.3. RBV ... 80
4.3.1. KSFs ... 80
4.3.2. Business Strategy ... 83
4.3.3. Strategic Resources and Capabilities ... 87
4.3.4. Competitive Advantage ... 100
4.3.5. Conclusion on RBV ... 103
Chapter 5. Conclusion & Discussion ... 107
References ... 114
Appendix I. Participants of Study ... 117
Appendix II. Interview Questions ... 119
Appendix III. RI-Assessment Form ... 124
Appendix IV. Business Strategy ... 126
Appendix V. Basic Resources and Capabilities... 128
Appendix VI. RI-Assessments ... 134
6 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 Sahara Africa. Commodity products are mostly produced in developing countries which are being marketed in the Western economies, where high prices are charged for these products through marketing activities. 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 great price difference at primary producer level compared to the prices charged to end-consumers. 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 and to capture higher profits from selling their product. In case primary producers enjoy a competitive advantage, higher prices can be asked, resulting in better profits. When primary producers have strategic positions, it will contribute to the economies of the 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 agricultural 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 and accounts for 1.3 million smallholders in the country (ECGPEA, 2011), 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.
The following main research question has 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 cooperatives?”
Chapter 1. Introduction
7 The focus of the research is on the cooperative value chain of coffee in Ethiopia, where the primary producers, cooperatives and unions form the main actors. The research is divided into two research papers with different focuses. This research paper focuses on the organization of primary producers in cooperatives, whereas the other research paper focuses on the organization of primary producers in unions, through cooperatives, so that the whole value chain is analyzed. The rationale for focusing on the cooperative value chain is because the researchers expect that the answers to the main research question lies in the organization of 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 lacks to explain explicitly why one is able to obtain 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 strategic 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 a complete 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 in the cooperative value chain.
The following sub questions will be answered:
I. How are the primary producers organized in cooperatives?
After mapping the value chain, governance is used to describe the organization of farmers in cooperatives. Governance explains the coordination, power and responsibilities in the value chain. Governance could affect the position of primary producers negatively when downstream value chain participants have the power to determine the process and product specifications, leading to a weaker position of the primary producers.
II. Which Key Success Factors apply in the Ethiopian coffee market and in particular at primary producers and cooperative level?
8 the KSFs so that they can adapt their production processes to it to meet these and to stay competitive.
III. How can the present business strategy of the primary producers and cooperatives 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. What strategic resources and capabilities do the primary producers gain through their association in cooperatives?
Strategic resources are characterized with high strategic value and consistency with the organization’s strategic intent, generating a competitive advantage.
V. How can the primary producers’ competitive advantage be strengthened through their cooperative membership?
An organization which possesses strategic resources can invest in strategic options to reinforce the sustainable competitive advantage. However, so-called valueless asymmetries can be turned into valuable resources, and therefore rise as potential sources of a competitive advantage. Both strategic resources and asymmetries are taken into account to strengthen the primary producers’ competitive advantage.
In this research two streams of literature, the GVC and RBV, are combined to study the cooperative value chain and to determine the strategic position of primary producers through their association in cooperatives. 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 account. This research focuses on the competitiveness of commodity producers, rather than on the whole chain. Including the internal organization is a necessity 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
9 develop GVC. The RBV is based on the model of Rangone (1999), where changes have been made to make the model clearer and better applicable.
Coffee production is influencing around 7 million lives in Ethiopia, as 1.3 million smallholders are producing coffee, who are heads of families at the same time. Therefore, it is important to determine whether the primary producers can improve their position and increase their income to live a descent life. 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 livelihoods 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 governmental Growth and Transformation Plan (GTP) and is geared toward fostering broad-based development in a sustainable manner (ATA, 2012). The findings of this study contribute to this objective by creating the understanding of how the farmers’ competitive position can be improved, so that their incomes can be increased.
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, where answers are given to the research questions. Chapter five finalizes with the conclusion and discussion, answering the main research question and addressing remaining issues.
10 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 the conceptual model developed for this study.
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, marketing the product or service to finally delivering it to the customers.
The GVC describes the activities which are necessary to design, produce and market a product (figure 1).
Figure 1: A 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 contributed to the logic of systemic competiveness. The logic of this is that firms should concentrate on the possessed resources, which are relatively unique, provide a valuable service to customers and which are
Chapter 2. Literature
11 hard to be copied by others. The remaining competences could be outsourced to other firms in the value chain. This extends the complexity of production, and consequently the systemic (or inter-) competitiveness (Kaplinsky & Morris, 2001). Secondly, efficiency in production is a necessary condition 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. Also, the strategic decisions of lead 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 (CSFs), which are distinctive characteristics of specific markets (Kaplinksy & Morris, 2001). Examples can be price and quality. The CSFs 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 succeed. Finally, Kaplinsky & Morris (2001) explain that value chain analysis is important as it helps to explain the distribution of benefits, particularly income, of the participants. Through value chain analysis an understanding of dynamic factors can be created to understand how to participate in global markets to provide sustainable income growth.
Three key constructs are developed by Kaplinsky (2004) which help the analysis of 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).
12 and flow within the chain” (Gibbon et al., 2008:320). Producer-driven chains are 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 lead firms. Here, governance is assumed to be driven by manufacturers. Buyer-driven chains are more present in labor-intensive sectors, product development, where 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 important factors in value chain governance. The five governance types developed by Gereffi et al. (2005) are shown in the following figure.
Figure 2: Types of Governance
Source: Humphrey (2004) and Gereffi et al. (2005)
13 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 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 contradiction to the relational global value chains, where the power balance is symmetrical. According to Gereffi et al. (2005), this is because both firms do contribute key competences. In the relational value chain, 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 in hierarchical and captive global value chains. Furthermore, Gereffi et al. (2005:88) explain 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.”
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 firms: the lead firm and its supplier(s). Also, GVC emphasizes that governance relation is shaped by the industry’s or process’ characteristics. 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.
14 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 explaining is the effectiveness and efficiency of each participant, or intra-competitiveness. Gereffi et al. (2005) explain how relations between chain actors can be described based on power and coordination, which is partly determined by the capabilities of actual and potential suppliers to fulfill transaction requirements. But they fail to give a detailed insight on what these capabilities are and how they are created. The RBV does provide this insight and can therefore explain why power asymmetries exist within the GVC.
The next section elaborates on the RBV theory.
The RBV is developed as a complement to Porter’s Five Forces Model, to determine an attractive market (Kraaijenbink, Spender & Groen, 2010). The main difference is that the RBV places the main determinants internally instead of externally. The RBV is an important contribution to strategic management as it helps to understand the sources of a sustained competitive advantage, based on a firm’s resources and capabilities (Barney, 1991). The RBV builds on the assumptions that firm resources are heterogeneous and not perfectly mobile.
As one of the founders, 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. 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 fulfil 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 by exploiting opportunities and neutralizing threats. They fulfil rarity when they are rare among current and potential competitors. Inimitability is measured by historical conditions, causal ambiguity (not knowing what is 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 created when “it is implementing a value creating strategy not simultaneously implemented by any current or potential
15 competitors” and a sustainable competitive advantage is created when firms are not able to duplicate the benefits of this strategy. Although Barney contributed to the RBV literature, four problems can be addressed in his theory.
The Tautology Problem
Priem & Butler (2001) criticize the RBV perspective of Barney by questioning if it is actually a theory which can be empirically tested. Their conclusion is that Barney’s explanation of the VRIN-criteria and competitive advantage is tautological, meaning that Barney’s definitions are analytical statements true by definition and are therefore not amenable to empirical tests. Priem & 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”. This way, definitional dependencies are reduced and value is the fundamental component determining the extent of competitive advantage as it will lead to higher returns.
The Exogeneous Black Box
Priem & Butler (2001) further 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 can change, so value as well. Because value determines the extent of competitive advantage when using Schoemaker’s definition, including the external environment is necessary. Amit & Schoemaker (1993) agree that the external environment must be included when applying the RBV and argue that the challenge firm’s 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 so that a sustainable competitive advantage can be created, which lacks in Barney’s explanation.
The Inclusive Definition of Resources
16 defines resources and capabilities separately. Rangone (1999) firstly 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) distinghuishes three types of basic capabilities: Innovation 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.
17 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 determining the strategic value of critical resources, is another important contribution of Rangone to the RBV literature. Barney and other researchers flaw in this perspective, as the firm’s strategy is not included in their theories. But the strategy is essential to take into account, because for a firm to be able to deploy resources in such a way to gain sustainable competitive advantage, one must know the direction to work to. This is determined by a firm’s strategy.
The How-Mission
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 refer to being able to 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).
18 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, 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 the ambiguity of those. 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 them within the organization. Then, exploiting them and later sustaining their development. Lastly, the asymmetry-derived capabilities have to be matched to the opportunities which are found 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”. Then, organizations can convert these asymmetries into resources and capabilities and let them grow and leverage across the appropriate market opportunities.
19 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 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 and 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.
The conceptual model is created based on the GVC and RBV. This research focuses on the organization of primary producers in cooperatives within the cooperative market route. 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). To get a better understanding of the strategic position of the primary producers in the cooperative value chain, the RBV helps to understand and analyze their position. This paragraph explains how the concepts of the RBV have been defined.
Barney is famous for his key concepts in the RBV literature, but showed four main flaws: The tautology problem, the exogenous black box, including capabilities in the definition of resources and the ‘how-mission’. By adopting the broader accepted definition of competitive advantage used by Schoemaker, 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 solves the how-mission. Due to these improvements, Rangone’s model is used for this research, however to come to the final conceptual model, adjustments have been made.
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 key success factors (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
20 considered. This is done to emphasize the importance of the external environment and to avoid an immediate translation to the internal organization. As KSFs are extremely important to assess the organization’s effectiveness. Rangone (1993:208) explains that “identifying KSFs and assessing and monitoring 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 meet the KSFs are key capabilities. And only the resources which are necessary for the fulfillment 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 strategic criteria. Barney introduced the VRIN-criteria as explained, however Miller (2003) explains that the “valueless” resources can still develop and generate a competitive advantage when these resources are rare, inimitable and non-substitutable. Also, all key resources are valuable in this analysis, as they contribute to the creation of the KSFs. Therefore in this research the V of the VRIN criteria is dropped.
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 avoid a tunnel vision and to prevent neglecting important resources.
21 can leverage across appropriate market opportunities, increase income and therefore generate a competitive advantage.
This theoretical framework leads to the final conceptual model (figure 3). The upper part of the conceptual model represents the GVC concepts, showing the main chain actors of the cooperative market route. The highlighted boxes, primary producers and cooperatives, show the focus of this study. In the lower part of the model, the concepts of the RBV, as discussed above, are presented.
22 This chapter explains what type of research is conducted, which participants were selected and how the data collection and the analysis of it are preceded to answer the research questions.
Rouse & Daellenbach (1999) developed a method to analyze a sustainable competitive advantage based on a resource-based view. This method is needed to determine the competitive advantage from organizational factors predicted by the RBV. So far, the emphasis in the strategic management literature has primarily been on environmental factors as industry and market, to determine a competitive advantage. However, following the RBV, sustainable competitive advantage grows out firm-specific resources and capabilities. This means that research must be done in organizations rather than on organizations. Following the method of Rouse & Daellenbach (1999), this study is based on qualitative research, where semi-structured interviews are held with the actors within the cooperative value chain. Semi-structured interviews allow the researcher to navigate through questions and probe when necessary, so that a greater understanding within the organization can be developed. Also, because the research is conducted in an industry characterized by political sensitivity, it is important that trust relations are built, so that the respondents feel comfortable enough to provide accurate and new information. Semi-structured interviews allow this space. Blumberg (2008) explains that the benefit of semi-structured interviews is that communication is stimulated, as open questions are asked and probing is allowed. Also discussion can take place, which can be rewarding for the respondents.
This study is characterized with explorative study to better comprehend the nature of the problem, being the strategic position of primary coffee producers. Extensive interviews are conducted to understand the relations and position within the cooperative value chain.
3.2.1. The Interviewees
Appendix I shows an overview of the total interviewees in this research. As participants of the cooperative value chain, 24 farmer-memberss, 8 cooperatives and 1 union were interviewed.
Chapter 3. Methodology
3.1. Research Design
23 References to the members are done by “Member Number”. Being directly related to the value chain, managers and directors of 6 NGOs, 2 governmental organizations and 4 private companies were interviewed. Due to political sensitivity, these interviewees stay anonymous and are referred to as “Interviewee Roman Numeral”.
3.2.2. Selection of Participants
Rouse & Daellenbach (1999) explain that when an analysis is conducted on how firms are trying to be different from competitors, analysis from inside the organization is needed, using a detailed, fieldwork-based comparison of carefully selected firms. For this study, the cooperative coffee value chain is selected to collect performance data from, which is the first step of Rouse & Daellenbach’s (1999) method. The second step is to cluster strategic groups within the industry selected, which are in this research the primary producers, cooperatives and unions.
The research is conducted in Ethiopia (figure 4). Ethiopia is selected as a country to conduct the research, because 80% of the employment in the country is accounted for by the agricultural sector, as explained in the introduction. The competitive position of the farmers is in this light important, because many inhabitants are depending on these primary producers.
Figure 4: Coffee Zones in Ethiopia
24 time is available, 8 cooperatives and 22 farmers of OCFCU (plus 2 non-member farmers) are interviewed for this study. The selection of the cooperatives is based on their performance, marked as weak, medium or strong, based on the amount and quality of coffee produced. This selection is done by the union itself, as they possess the knowledge concerning this matter. This selection is cross checked by two NGOs who closely cooperate with most of the unions, to create objectivity. The selection of the OCFCU-farmers is also based on their performance, being strong, medium or weak. This selection is done by the cooperatives, as they are closely linked to the farmers and possess this knowledge. A variance of strong, medium and weak cooperatives and farmers are selected, so that comparisons can be made for the analysis and an objective view is created.
The NGOs, governmental organizations and private companies are selected based on available information on the Internet and on the network which is built during the first weeks of the research in Addis Ababa by the researchers. All people contacted agreed to participate in this study, except for various employees of the national auction ECX who explained to be too busy or simply did not respond.
3.3.1. Researchers
The research is conducted by two researchers, two MSc BA students, specialized in Small Business & Entrepreneurship. One researcher focuses on the primary producers and their organization in cooperatives and one researcher focuses on the cooperatives and their organization in unions. The focus of this research is the strategic position of the primary producers to determine their competitive advantage through their association in cooperatives. Both research papers make use of the same data collection and references to each other’s work will be made. Reference to my colleague’s work will be made by ‘Wollring (2012)’.
3.3.2. The Interviews
The interviews were held in a period of three months (May, June and July 2012) of research in Addis Ababa and the Southern and Oromia coffee areas in Ethiopia (figure 4). The interviews with the cooperatives and primary producers were conducted with a translator, as the interviewees do not speak English, but only the local language being dominantly Amharic or Oromifa. The translator was a representative of the union, an employee of the governmental promotion office, a business advisor of the NGOs or business students of Jimma University.
25 During the interviews one researcher asked the questions and one researcher wrote down the answers, varying per interview. Every interview is typed out and a table overview is made to summarize and compare all answers. The interviews took minimally 1.5 to 2.5 hours. Due to this, the interviews with the primary producers were held in groups of 3-4 farmers, as the amount of interviewees and time limitation did not allow the researchers to do this individually.
Two rounds of interviews were held with the unions and two NGOs, of which one round was held before interviewing the cooperatives and farmers and the second round was held after interviewing the cooperatives and farmers. This allowed the researcher to cross check gathered data from the cooperatives and farmers where necessary and to conduct the RI-assessments, which will be explained later.
3.3.3. Other sources
Besides collecting data through the interviews, secondary literature is used to gain useful information. These are reports from international organizations such as IFPRI and ICO, theses of the Ethiopian Jimma University, strategy plans from the government, annual reports from the unions, data from the Ethiopian Commodity Exchange and papers from NGOs.
The concepts of the GVC and the RBV have been operationalized based on Emans (2004). The concepts of the conceptual model are translated to raw variables and the indicators to items, resulting in the interview questions. In each table, the brackets after each item indicate the questions asked to the participants, showed in Appendix II. Firstly, the operationalization of the GVC is described which is mostly based on the handbook for value chain analysis written by Kaplinsky and Morris (2001). Some minor issues have been changed to adapt the frame to the local situation of this research. Secondly, the operationalization of the concepts of the RBV is presented, which is mainly based on Rangone’s (1999) framework.
3.4.1. Global Value Chain
Kaplinsky and Morris (2001:49) explain that “there is no mechanistic way of applying value chain methodology” because not only the value chains differ, but also the national and local context in which they are situated. Every chain has its own characteristics and can only be analyzed by understanding the broader issues which are influencing the value chain. For this
26 research, first the value chain is mapped followed by describing governance issues within the cooperative value chain. This is done based on secondary sources and the interviews.
In- and Output Relations in the Value Chain
Based on identified variables by Kaplinsky & Morris (2001), the value chain is mapped so that the input-output relationships between the primary producers and cooperatives is described and valued with numbers (table 1). The first two variables, the amount of sales and profit, describe how much has been sold, how high the costs were and how much profit has been made by the farmers and cooperatives. Secondly, physical flow of the commodity explains how much kilograms of coffee has been bought and sold by the primary producers and cooperatives respectively. Thirdly, destination of sales shows the segments to which the coffee is sold. Fourthly, the flow of services shows what type of services has been received and given. Fifthly, the educational level explains the amount of diplomas at farmer and cooperative level, owned by permanent or temporary employees.
Table 1: Operationalization of Mapping the Value Chain Conceptual
Variable Raw Variable
Indicating
Variable Items
Mapping Amount of
Sales Amount of total sales What have been your total sales last year? (PP7/PP10/C58/C59) Amount of coffee
sold How many kgs of coffee have you sold last year? (PP7/C58) Amount of
Profit Amount of costs What have been your costs last year? (PP12/C60) How much dividends did you receive? (PP41/CC38)
How much dividend did you pay out the members in total? (CC50)
Physical flow of
commodity Amount of coffee purchased How many kgs of coffee have you bought last year? (C55) Amount of coffee
sold How many kgs of coffee have you sold last year? (PP7/PP9/C58) Destination of
sales Amount of buyers To whom did you sell the coffee? (PP8/C25) Percentage of
sales to each buyer How much coffee did you sell to each buyer? (PP8/C26) Amount of coffee
for domestic use How many kgs of coffee have been sold for local use? (PP8/C58) Flow of
27 (respectively)? (PP39/C47)
Amount of
trainings What services do you offer or receive (respectively)? (PP39/C47) Amount of loans What is the amount of loans you give or
receive (respectively)? (PP40/C48) Kind of inputs What kind of inputs do you provide or
receive (respectively)?(PP14) Educational
Level Amount of permanent and seasonal employees
How many permanent and seasonal employees do you have? (PP17/C9)
Amount of skilled and unskilled employees
How many of your employees have a degree? (PP17/C9)
Items based on PP: Interview Questions Primary Producers, C: Interview Questions Cooperatives
Governance
Based on Kaplinsky and Morris (2001) three variables are determined to analyze the governance within the chain (table 2). These variables are the functions of governance, legitimacy, and richness and reach. Kaplinsky and Morris (2001:29) explain that: “Governance ensures that interactions between firms along a value chain exhibit some reflection of organization rather than being simply random.” This means that certain guidelines are needed concerning product-, process- and quality-requirements to have an efficient and effective value chain. It is therefore needed to determine what these requirements are and by whom these are determined. This is analyzed based on three forms of governance functions, identified by Kaplinksy and Morris (2001): the legislative, judicial and executive governance. Legislative governance is about the rule making for participation, these rules define the basic conditions for participation. The conditions are mostly concerning with the price, quality and delivery reliability. Judicial governance is the rule monitoring part which involves the coordinating the conformance to set rules. And finally, executive governance is about assisting producers to achieve those rules. It does not only include parties within the chain, but also includes parties external to the chain. Based on secondary sources the functions of governance are identified for this research.
28 this particular value chain, especially for the primary producers. Due to the direct financial gains, the dividend payment is a benefit for farmers as member of cooperatives. When dividend is paid consequently and the determination of the amount of dividend is clear, trust in the cooperatives is increased. Secondary resources and the interview results are used to analyze these variables.
The final component of value chain governance is the extent to which the rules of incorporation affect chain relationships stimulated or hindered by organizations or institutions, measured by richness and reach. The term richness is about the depth, the extent to which these rules affect core activities of the firm. And the term reach refers to how widely power is exercised, questioning if there are more rule setting lead organizations. This is again based on secondary sources and the interview results.
Table 2: Operationalization of Governance Conceptual
Variable Raw Variable
Indicating
Variable Items
Governance Function of Legislative Governance
Type of rules Codified (S)
Concerning Products and / or Processes? (S)
Degree of
Rule-Setting Rules and Regulations(S) Informal Rules (S)
Done By (S) Function of
Judicial Governance
Degree of Auditing
Process Rules and Regulations (S) Done By (S) Function of
Executive Governance
Degree of
Supporting System For Which Products / Processes (S)
Done By (S) Sanctions Degree of Negative
Sanctions Type (S) Done By (S)
Effectiveness (S) Degree of Positive
Sanctions Type (S) Done By (S)
Effectiveness (S)
Legitimacy Degree of Trust Since when are you a member? (PP4/C6) What services do you offer/receive (respectively)? ((PP39/C47) How high were the loans you have
provided/ received last year and what was the interest rate? (PP40/C48)
How is the price for the coffee determined? (PP42/C51/C56)
29 you get paid for your sales?
(PP13/PP42/C51)
How many members do you have and do you buy from all of them (C3/C57)? How much of the members’ production did you buy (C57) / Have you sold everything to the cooperative (PP8)?
How would you describe the relation between you two? (PP44/C53) Are the primary producers in any way limited or by you (C52) / Are you in any way limited by the cooperative? (PP43) How much dividends did you receive from the cooperative and when? (PP41)
How are the dividends determined? (PP41) Reach &
Richness Degree of Richness How do these rules affect core activities of the firm or its behavior? (S) Degree of Reach Are there more than one rule setting lead
firm? (S)
Items based on PP: Interview Questions Primary Producers, C: Interview Questions Coo peratives, S: Interviews and Secondary Data
3.4.2. Resource Based View
Using Barney (1991), Rangone (1999) and Miller (2003), the RBV is operationalized to analyze the concepts KSFs, basic resources and capabilities, key resources and capabilities, strategic criteria, strategic intent, strategic resources and capabilities and competitive advantage.
KSFs
30
Table 3: Operationalization of the KSFs
Conceptual Variable Raw Variable Indicating Variable Items
Key Success Factors Prerequisites for
Success Required Resources, Skills and Competences What are the prerequisites and requirements of the industry to be successful in the competitive environment? (PP29/C24/I20/I28)
Buyers Market segments What are the possible market segments for your
organization? (PP30/C25/ I9/I18)
Buyers Requirements What are their requirements for buying the coffee?
(PP32/C27/I11/I12/I20/I39)
Items based on PP: Interview Questions Primary Producers, C: Interview Questions Cooperatives, I: Interview Questions Industry Experts
Basic Resources and Capabilities
The basic resources and capabilities are operationalized based on Rangone’s (1999) understanding, as explained in chapter 2. The basic resources are distinghuised in 6 classes (table 4) and the basic capabilities are divided into the innovative, - production, - and market management capabilities (table 5). The answers of the interviews were analyzed after the first round of interviews and compared to resources named so that the link to the basic capabilities could be made.
Table 4: Operationalization of the Basic Resources
Conceptual Variable Raw Variable Indicating Variable Items
Basic Resources Financial
Resources Availability of Financial Resources What are the most important financial resources the firm possesses? (PP15/C7)
Physical
Resources Availability of Physical Resources What are the most important physical resources the firm possesses? (PP16/C8) Human
31 Technological
Resources Availability of Technological Resources What are the most important technological resources the firm possesses? (PP18/C10) Reputation Availability of
Reputation To what extent is the reputation an important resource of the firm? (PP19/C11)
Organizational
Resources Availability of Organizational Resources
What are the most important organizational resources the firm possesses? (PP21/C12)
Items based on PP: Interview Questions Primary Producers, C: Interview Questions Cooperatives
Table 5: Operationalization of Basic Capabilities
Conceptual Variable Raw Variable Indicating Variable Items
Basic Capabilities Innovative
Capabilities Ability to develop new products What kind of new product development efforts does the firm conduct?
(PP22/C16)
Success of new products How would you describe these efforts in comparison to the competition? (PP23/C17) Ability to develop new
processes What kinds of process innovation efforts are conducted? (PP24/C18) Success of new processes How well do these efforts
succeed? (PP25/C19) Ability to achieve superior technological and/or management capability Which superior technological and/or management capabilities does the firm possess? (PP27/C20)
Production
Capabilities Ability to produce, deliver and ensure competitive priorities
In what way is the firm able to produce and deliver products to customer, while ensuring competitive priorities like quality? (C21) Market
Management Capabilities
Ability to market and sell
products What capabilities ensure that the firm can market and sell its products efficiently and effectively? (PP26/C22)
Items based on PP: Interview Questions Primary Producers, C: Interview Questions Cooperatives
Key Resources and Capabilities
32 and industry experts indicated the industry’s and buyers’ requirements. After the first round of interviews, the link between the basic resources and KSFs was made by the researchers, resulting in the key resources and capabilities. In the second round of the interviews the deputy manager of OCFCU, Interviewee I, VII and XIV were asked to cross check the identified key resources, but essential resources were not missed.
Strategic Criteria
To determine the strategic value of the identified key resources and capabilities, the RI criteria are used. In chapter 2 an explanation is given why the value criterion can be dropped, based on Miller’s theory where valueless asymmetries still can generate a competitive advantage. Taking the focus of this research in account, the non-substitutability criterion can be dropped as well, as coffee is an unique product and cannot be strategically replaced. In conclusion, this research assesses the identified key resources with the RI-criteria to determine their strategic value. Based on Barney (1991), Rangone (1999) and Miller (2003), the RI criteria are operationalized (table 6). In the assessment form (Appendix III) tables show the key resources of the primary producers and cooperatives combined with the RI criteria, resulting in four assessments per key resource: one for ‘rareness’ and three for ‘inimitability’. These assessment forms have been filled in by the researchers and the external assessors: the deputy manager of OCFCU, Interviewee I, II and XV, using values of Low (1), Medium (2) and High (3). The strategic values of each key resource are calculated per individual assessment. Rarity and inimitability are equal criteria and each count for 50% to calculate the strategic value. The three sub-criteria of inimitability are therefore averaged. The strategic value of key resources is considered low when having a value between 1 and 1.66, medium when having a value between 1.67 and 2.33 and high when having a value between 2.34 and 3. This determination is based on having equal ranges for each value. The strategic values from the external assessors are averaged and compared with the strategic values of the researchers. Remarkable differences between the researchers’ and the external assessments are explained, resulting in the final list of the strategic values per key resource. The choice of the final strategic values is motivated based on the assessments and interviews.
Table 6: Operationalization of Strategic Criteria
Conceptual Variable Raw Variable Indicating Variable Items
Strategic Criteria Rareness Degree of rarity Is the resource rare among current or potential competitors? (AF)
33 Causal Ambiguity Is it clear how the resource has
been created? (AF)
Social Complexity Do social interactions make the resource hard to copy? (AF)
Items based on AF: Assessment Form
Strategic Intent
Rangone (1999:235) explains that an organization “explicitly or implicitly, consioucly or unconsioucly, puts its strategic focus on one or more of the above basic capabilities”. The strategic intent can be mono-dimensional, when strategic focus is on one capability, or strategic focus can be laid on more capabilities. Therefore, strategic intent is about the firm’s strategic objectives and related actions to achieve this for the coming years. This way the strategic focus can be determined. The strategic intent is determined at farmer and cooperative level, based on the first round of interviews.
Table 7: Operationalization of the Strategic Intent
Conceptual Variable Raw Variable Indicating Variable Items
Strategic Intent Strategy Vision of future strategy What is your current strategy/ strategy for the coming five years? (PP34/C29)
Actions Degree of specific actions What actions will you take in order to achieve these goals? (PP36/C31)
Items based on PP: Interview Questions Primary Producers, C: Interview Questions Cooperatives
Strategic Resources and Capabilities
34
Competitive Advantage
Priem & Butler (2001) use Schoemaker’s definition of competitive advantage: “a firm that is systematically creating above average returns”. Above average returns are created when an organization possesses strategic resources. To sustain or create a competitive advantage, the identified strategic resources have to be invested in or deployed according to the opportunities in the market. As explained, also valueless asymmetries can be turned into valuable resources, causing a competitive advantage. Miller (2003) is used to determine this according to his three steps. First, the asymmetries have to be discovered. Miller (2003:964) states that “although this is an empirical issue, there are a number of reasons to believe that the answer is affirmative”. The reason is that organizations are complex representing bundles of properties, people ad relations that they are unique in many ways. There are many sources of asymmetries: long-term contracts, distinctive forms of knowledge, processes, cultures, reputation, established contacts, team capabilities. Secondly, these asymmetries need to be embedded in the organizational design that exploits them to extract value and that sustains their development. Many catalysts exist to extract value from asymmetries: unique teams can be matched up with projects, alliances can be built, and capabilities can be exploited. Miller (2003:965) explains that “the organizational context can be used to make these links”. At last, market opportunities have to be found to leverage these asymmetries. Miller (2003) explains that these processes, especially the process of exploiting asymmetries, are evolutionary based on trial and error. Therefore, results based on this research can be interpreted as a first step of this continuing process. In this research, the use of cooperatives and unions can be seen as an instrument for farmer-members to possess and / or create unique resources and capabilities, so that primary producers benefit from a competitive advantage.
Table 8: Operationalization of Competitive Advantage
Conceptual Variable Raw Variable Indicating Variable Items
Competitive Advantage Discovery Degree of Discovery Which potential valuable asymmetries do the primary producers and cooperatives possess respectively? (R) Development Degree of Development Which catalysts can be used
to extract value from asymmetries based on the organizational context? (R) Market
Leveraging Degree of Market Leveraging Which market opportunities exist to leverage asymmetries? (R)
35 First, background information of the coffee industry in Ethiopia is given, including information about the history of this sector, the price, sales options through the value chain and the development of the unions and cooperatives. Followed by the results regarding the research questions, where summaries are provided after each section, including room for analysis and interpretation. Answers to the research questions are given in this chapter as well.
Background information creates an understanding about the context of the coffee industry and its environment. First, a global picture is provided about the worldwide production and the role of Ethiopian coffee. Then the production process is explained, followed by an elaboration on the value chain. Price developments are described, concluded with the rise of cooperatives and unions.
4.1.1. Global Picture
Coffee is produced in more than 50 developing countries, providing income for approximately 25 million small-scale farmers and employing about 100 million people. The three main coffee producers are Brazil, Colombia and Vietnam, where Brazil is currently supplying about a third of the total production. The top five consumers are the USA, Brazil, Germany, Japan and France. About 65% of the world supply of coffee is Arabica and 35% is Robusta (Petit, 2007). Ethiopia’s share of the world coffee export in 2009, 2010, and 2011 was respectively 2.5%, 2.9%, and 2.3%. In 2010, Ethiopia was number one and in 2011 the second largest exporting country of Africa. Of all the coffee exporting countries in the world, Ethiopia has made it on place 11 in 2011 (ICO, 2012).
Ethiopia is the birthplace of Arabica coffee, with a wide diversity of genetic varieties, not producing any Robustas. The annual coffee production is 7.5 million bags (of 60 kg) in 2010 and 6.5 million bags in 2011 (ICO, 2012). About half of the total production is consumed domestically (ECGPEA, 2012). Exports for 2010 were 3.3 million bags and for 2011 2.7 million bags of coffee, which equals 160,500 tons (ICO, 2012). Of the total volume exported, around one third is washed coffee. This segment is growing at 4% for the last two years, whereas the amount of unwashed coffee exported is slightly decreasing. Coffee is the backbone of the
Chapter 4. Findings
36 Ethiopian economy, contributing 20 percent of total foreign exchange earnings in 2010 (ECGPEA, 2012).
According to ECGPEA (2012), the production system classifications for coffee are divided into four categories in Ethiopia: Forest coffee (10%), semi-forest coffee (30%), garden-coffee (50%) and semi-modern plantation (10%). Output is considered low compared to other countries, with estimates lower than 200 kg per hectare for forest coffee and around 450 – 750 kg per hectare for semi-modern coffee plantations. Most farmers do not use chemicals (Petit, 2007). Ethiopia is divided into districts, called woreda, being classified as a major, medium or minor coffee grower based on the amount of coffee trees. The coffee production is mostly concentrated in the Oromia Regional State (60%), the Southern Nations, Nationalities and People’s Region (35%) and others (5%) (ECGPEA, 2012).
A current development is the international consuming market demanding specialty coffee. Dempsey (2006:1) explains that “from a commercial standpoint, specialty coffees are those with a particular characteristic or set of characteristics that bring higher sales prices”. Several areas in Ethiopia provide coffee with a unique taste, such as Harar, Yirgacheffe or Sidamo (Dempsey, 2006). According to ECPGEA (2012), the specialty market which accounts for 19% of exports market, tends to grow at higher rates than the commodity markets. World specialty and differentiated markets grow at more than 20% a year. Ethiopia is the only producing country with more than 6,000 accessions of potential high quality Arabica coffee of which 10% is wild forest coffee. Unfortunately, in 2010 only 81,000 tons (27%) of total production reach the specialty grade and not necessarily the specialty prices. Around 31% of all Ethiopian coffee exports may reach specialty grade, but are sold at $US 2 to 4 less per kg of coffee compared to equivalents grades from Kenya or Colombia (ECPGEA, 2012).
In conclusion one can state that Ethiopian coffee is of high quality and has many opportunities in the coffee market which are not exploited yet.
4.1.2. The Production Process
38
Figure 5: Production Process of Sundried and Washed Coffee
4.1.3. Value Chain
Coffee is produced in developing countries, largely exported to be consumed in the developed countries. Cervone (2011) explains that there are two types of supply chains in the coffee industry in Ethiopia: The conventional route and the cooperative marketing route.
Figure 6: The Two Coffee Supply Chains in Ethiopia
Source: Adapted from Cervone (2011), Petit (2007) and Kodoma (2007)
