Master thesis
Smallholder behaviour and the perceived role of certification in the cocoa industry of Ghana, explained from a strategic business perspective
Faculty of Economics and Business MCs Small Business & Entrepreneurship
R.L.A. Eersteling S1814664
Supervisors:
Dr. C.H.M. Lutz Dr E.P.M Croonen
Executive summary
The focus of this master thesis project is on the behaviour of smallholders in the cocoa industry of Ghana. This research aims to add to the development discussion by taking a strategic business perspective on smallholders in the cocoa industry, while taking into account the differences amongst farmers. Academic insights from the Resource Based View (RBV) (Barney, 1991), Global Value Chain (GVC) approach (Gereffi et al., 2005) and Collective Action (CA) theory (Olson, 1965; Fischer & Qaim, 2013) are used to develop understanding regarding the negotiation position and strategic behaviour (or lack of) of smallholders in the cocoa industry in Ghana. We argue that the successful inclusion of smallholders in GVC’s requires the deployment of strategic resources and capabilities in the farming systems, and that these strategic resources and capabilities may be developed through collective action.
The fieldwork was conducted in the communities of the ABOCFA cooperative in Ghana. Data was collected by means of semi-structured interviews with ABOCFA farmers, board members of the cooperative, purchasing clerks, and industry experts. The first focus was on the resource base of the farmer. Membership of ABOCFA can be considered as one of the most important resources of the farmer as through ABOCFA farmers have access to the collective resources training, access to credit (indirectly), access to inputs and joint investments (i.e. the Organic and Fairtrade certificates that ABOCFA carries). Though members don not take full advantage of it, these resources provide them with the knowledge, means and support to run their business successfully and produce high quality cocoa that can compete on international markets. Moreover, ABOCFA membership gives access to the perks offered by their buyer Tony‘s Chocolonely. It is unique for a buyer to engage with and invest in their supplier base as much as Tony’s Chocolonely does. In the ABOCFA area no other organisation offers this many perks and this high of a premium as ABOCFA can with the support of Tony’s Chocolonely. Interestingly, though overall production is low, farmers scored medium to high on all capabilities and resources that are important for cocoa farming. Several reasons could explain the difference between the positive results of the capabilities analysis and the low output levels of the past years. Most importantly, knowing how to perform a capability and having (access) to resources to perform this capability, does not mean the farmer actually uses his or her resources and knowledge to perform the capability on the right time or as often as needed. This is related to issues with some resources that are essential to perform most capabilities: land, human capital (labour), financial resources and the collective resources training and access to credit. Moreover, due to short term vision, poor planning, lack of long term investment, social pressure to spent money on social events and the tendency to not save when more money comes in during the high season farmers are stuck in a viscous circle of taking and repaying loans.
Second, we focused on the potential advantages of certification at farm level. In this case being certified means being a member of the cooperative (ABOCFA) and vice versa. Farmers thus benefit from being certified (e.g. premium) and from being a member of a cooperative (i.e.
benefits of collective action). Most valued benefits were access to premium, access to knowledge (training) and access to inputs. In addition to this the expectation to increase yield and the prospect of support from ABOCFA and fellow members were important for farmers to become certified.
Despite the benefits that certification schemes offer, a substantial part of certified farmers in Ghana engage in side selling. Therefor the factors farmers take into account when choosing buyers for their cocoa were evaluated. On local level PCs are the face of the LBC (and ultimately the face of the value chain). Access to premium and a good relationship with the PC were mentioned most frequent as reasons to choose for a PC according to interviewed farmers. PCs and board members have a different perspective. Besides the premium, they unanimously stressed the importance of access to loans and prompt payment by the PC. Farmers who do not get paid immediately or cannot get a loan from a PC take their beans to another PC. This corresponds with views expressed during interviews with industry experts. With help of external parties ABOCFA has adapted to this by increasing the number of their PCs in the area and pre-financing the PCs so they can pay farmers as fast as possible. These measures has resulted in farmers bringing most, if not all, their cocoa to ABOCFA.
In addition to having different selling strategies, smallholders differ with regard to the intentions they have with the farm and the strategic value of resources they own or have access to. A typology based on the two dimensions strategic intent and strategic resources and capabilities was developed to distinguish different type of farmers. The combined scores on strategic intent and the strategic value of farmers’ capabilities translate into the strategic positions of the farmers. Unfortunately, from the data no clear relations can be seen between the strategic position of the farmer and their behaviour. Factors that were taken into account where the level of engagement with the cooperative, willingness to cooperate, selling strategy, negotiation position, adaptation of sustainable agricultural practices, and the farmer category (old traditional
farmer, female farmer, part time farmer, young farmer and business farmer). This lack of correlation may be explained by the nature of ABOCFA’s policies. ABOCFA does not discriminate regarding individual investments they require from farmers nor the benefits they provide to individual farmers. Regardless their strategic position, the individual benefits farmers enjoy from being a member exceed the contributions they make to the cooperative. High performers do not contribute significantly more to the cooperative, and thus do not feel the need to claim more power than low performers within the cooperation. In conclusion, not strategic position, but membership of ABOCFA influences behaviour of farmers.
As the role of ABOCFA is so important for the success of the farmer, next the strategic position of ABOCFA was evaluated. Some comments can be made. First, it is important to note that most factors that strengthen ABOCFA’s position are facilitated by support from third parties.
ABOCFAs strategic position will only be truly strong and durable when they can hold the position without external support. Second, interviewed farmers do not seem to have a vision regarding ABOCFA. Farmers’ pictured the role of ABOCFA as no more than a tool to fulfil direct material needs. No sense of ownership was displayed, neither ideas about the future of ABOCFA were expressed. Third, though at first sight membership commitment appears to be quite high as members sell most of their cocoa through ABOCFA, farmer commitment is in fact rather thin.
Membership commitment is mostly based on ABOCFA ability to finance their PCs timely so that PCs are able to pay farmers immediately and provide loans, the foresight of a premium, and its ability to provide knowledge and inputs. Because farmers are barely financially invested in the organisation, have no vision or sense of ownership regarding ABOCFA, and face no consequences when selling to other buyers, ABOCFAs position is vulnerable. Farmers who do not feel like they are the cooperative are likely to sell their bags to other buyers as soon as other buyers offer more benefits.
A few recommendations can be made regarding the farmers and the cooperative. With better planning, saving during the high season and more investment in GAP farmers should be able to increase production. The positive scores on the analysis of farmers’ resources and capabilities showed that their resource base is rather promising. Maximizing the resources they have would help significantly to increase production.
Furthermore, farmers’ problematic attitude towards the cooperative needs to change. Though farmers are largely dependent on the services and benefits ABOCFA offers, they first of all do not take full advantage of benefits offered and second, they do not seem to be aware of how important ABOCFA’s role is for them and the potential ABOCFA holds for their future.
As the capabilities access to inputs, storing and saving appeared to have high strategic value, ABOCFA can help farmers forward by focusing on helping farmers master these capabilities. ABOCFA plays a big role in the capability ‘access to inputs’ as the cooperation supplies most important inputs. When applied the right way at the right time inputs are highly instrumental for increasing production. Improvements from ABOCFA with regard to the sometimes problematic supply of inputs will make a difference in pest control.
Furthermore, ABOCFA could stimulate farmers more actively to save. The easier it is for a farmer to save, the more likely he or she is to do it. At this moment no saving or credit programs are in place and the general managers sees saving as farmers’ own responsibility. As farmers have no savings they take loans to fulfill their immediate cash needs. They are not likely to receive loans from banks for reasonable interest rates, hence they take loans from whichever PC is willing to give a loan. Outstanding loans by PCs of other LBCs is a major reason for side selling. ABOCFA should reconsider developing a savings program, as it will benefit the cooperative as well; farmers would take less loans from other PCs, and have a buffer to perform Good Agricultural Practices year round.
As discussed before, as long as ABOCFA’s premium stays significantly higher than the premium offered by other LBCs, and ABOCFAs PCs are able to provide loans and pay farmers for their beans on the spot, farmers are likely to keep deliver (most of) their beans to ABOCFA. Risk is that as soon as these conditions are not met, and farmer commitment is not guaranteed in other ways, the situation will regress to what it was only a few years ago; farmers enjoy the benefits offered by ABOCFA (such as training), but sell their cocoa to LBCs other than the one ABOCFA contracted. This scenario is not unlikely. Other LBCs can come up with premium schemes more attractive than ABOCFA. At the moment farmers face no consequences when they do not deliver all their beans to ABOCFA. Moreover, as long as they deliver some of their beans, all benefits such as training and support are still accessible. ABOCFA should thus pay continuous focus on securing farmers commitment in as many ways as possible. One important way to do this is to increase focus on creating a sense of ownership among members. As of now, farmers are not leading in decision making processes and the management of ABOCFA. Most expertise lies with the general manager and external parties. The general manager and the external parties do give the impression that they sincerely care to educate and include members regarding managerial matters. It is up to farmers to take the next step and change their attitude towards ABOCFA. They need to feel like they are ABOCFA and that
when ABOCFA does well, they do well (and vice versa). Their attitude towards ABOCFA is crucial for the cooperatives survival during lesser times.
Farmers need see ABOCFA for the valuable resource that it is instead of some sort of Santa Claus. They thus need to invest in ABOCFA, whether it is in the form of financial contributions, time or by showing commitment even when other buyers offer better short term benefits.
Acknowledgements
It has taken me quite some months to finish this thesis, and there are many people I would like to thank. In particular I am thankful for all the farmers who welcomed me in their communities and participated in the in-depth interviews. I would like to thank Titi Doku and especially John Larweh for translating numerous interviews. Stephen Ashia, for introducing me into the ABOCFA cooperative and taking time to answer questions regarding the management of ABOCFA. I am very grateful for the Maunmunyu family for taking me in their home and making me feel welcome during my stay in Aponoapono, and especially for taking excellent care of me when I caught a kidney infection. My gratitude goes out to Henk Jan Beltman, and Tony’s Chocoloney’s staff for letting me tag along during their short visit to Ghana, and supporting this research in many ways. Furthermore I would like to thank Alle Metzlar, who co-wrote the first chapters of this report. The support I received from the University of Groningen was very valuable; Clemens Lutz, thank you for being my supervisor, your inspiring views on the cocoa industry, and the time and energy you put in guiding me through this project. Gjalt Eersteling, thank you for reading this report and giving valuable feedback. I am grateful for my family for being supportive and always showing great interest throughout my whole studies, especially during this last phase of writing this thesis. Jeroen Peters, I am very happy to have you as my neighbor and I am thankful for the support you showed while I was housebound due to health problems. And last but definitely not the least, Willem-Albert Toose from the Agro Eco-Louis Bolk Institute for basically making this whole research possible as you connected me to ABOCFA and several industry experts, showed my research partner Alle and I several cocoa communities, provided places to stay, opened your office in Accra for us to work in, offered all kinds of support when needed, and much more.
List of tables and figures
Table 3.1 List of active licence buying companies 2012/2013 Table 3.2 Composition FOB-price of cocoa in Ghana Table 3.3 Quality grades
Table 4.1 Overview cases Table 4.2 Purchasing Clerks Table 4.3 Board members
Table 4.4 Overview of interviews with industry experts Table 5.1.2 Strategic Intent Farmers
Table 5.2.1 Capabilities per farmer
Table 5.3.1 Actively buying LBCs in the ABOCFA area
Table 5.3.2 Requirements and benefits of the different chains accessible at local level Table 5.3.3 Reasons to become a member of ABOCFA
Table 5.3.4 Reasons for selling to a particular PC Table 5.5.1 Appropriability test
Table 5.5.2 Inimitability test Table 5.5.3 Superior differentiation test Table 5.5.4 Non-substitutability test
Table 5.5.5a Score per capability on the strategic value tests Table 5.5.5b Strategic value per capability
Table 5.5.6 Operationalisation of storing, saving and access to inputs Table 5.5.7 Strategic value per farmer
Table 5.6.1 Farmer and type
Table 5.6.2 Farmer type related to farmer category
Table 5.6.3 Scores on factors that influence ABOCFA’s strategic position
Fig. 1 Conceptual Framework Fig. 2 Value chain Fig. 3 Overview of cash flow
Fig. 4 Map of the Aponoapono Biakoye Organic Cocoa Farmer Association Fig. 5 Building stones of a capability
Fig. 6 Typology
Fig. 7 Overview advantages buying parties Fig. 8 Farmer types
Fig. 9 Organisational Chart ABOCFA
Box 1 Patrilineal versus matrilineal system Box 2 Traditional Organic Farmer Association (TOFA)
Appendix
Table A1.1 Operationalisation Strategic intent
Table A1.2 Resources and knowledge necessary to master the specific quantity enhancing capabilities Table A1.3 Resources and knowledge necessary to master the specific quality enhancing
Table A1.4 Example basic Organic norms Table A1.5 Example Fairtrade norms
Table A1.6 Resources and knowledge necessary to master the marketing enhancing capabilities Table A1.7 Operationalisation general resources
Table A1.8 Operationalisation specific resources Table A1.9 Operationalisation specific knowledge
Table A3.1 Results Entrepreneurial learning Table A3.2 Results Willingness to Invest Table A3.3 Results Growth Orientation Table A3.4 Strategic capabilities per farmer Table A3.5 Selling strategy farmer Table A3.6.1 Farmers’ resources: Basics Table A3.6.2 Labour
Table A3.7 Reasons farmer to become ABOCFA member and Organic and Fairtrade Certified
24 26 27 35 35 35 36 44 51 54 56 57 58 60 63 65 66 68 68 70 71 75 75 84
18 20 28 34 37 40 59 75 134
20 29
95 97 98 99 99 100 101 102 104
119 120 122 124 128 130 131 132
List of abbreviates
AE-LBI Agro Eco Louis Bolk Institute
CA Collective Action
CAA Cocoa Abrabopa
CHED Cocoa Health and Extension Division
CMC Cocoa Marketing Company
Cocobod Cocoa Marketing Board
CRIG Cocoa Research Institute Ghana
FOB Free on Board
GAP Good Agricultural Practices
GHC Ghanaian Cedi
GVC Global Value Chain
ICS Internal Control System
KCL Kumankoma Co. LTD KCL
KK Kuapa Kokoo Farmer Union
LBC Licensed Buying Company
PC Purchasing Clerk
PPE Personal Protective Equipment
PPRC Producer Price Review Company
QCC Quality Control Company
RA Rainforest Alliance
RBV Resource Based View
SED Sustainable Empowerment and Development
SPU Seed Production Unit
SSU Seed Supply Unit
TOFA Traditional Organic Farmer Association
UTZ UTZ certified
VRIN Valuable, Rare, Inimitable and Non-substitutable
Table of contents
Executive summary ...1
Acknowledgements ...4
Introduction ...8
1 Research outline ...10
2 Theory ...12
2.1 Global Value Chain ...12
2.2 Resource Based View ...13
2.2.1 Resources and capabilities ...13
2.2.2 Strategic intent ...14
2.3 Collective action ...14
2.3.1 Value appropriation through collective action ...15
2.3.2. Cooperatives ...15
2.4 Conclusion ...17
2.5 Conceptual Framework ...17
3. Context ...19
3.1 Cocoa sector...19
3.2 Chain description ...20
3.2.1 Producers, price, production ...20
3.2.2 Purchasing Clerks and the selling process ...23
3.2.3 Licensed Buying Companies ...24
3.2.4 Ghana Cocoa Board ...25
3.2.5 Product and Cash flow ...27
3.3 Cooperatives ...28
3.3.1 Aponoapono Biakoye Organic Cocoa Farmer Association ...29
3.4 Certification ...32
3.4.1 Rainforest Alliance ...32
3.4.2 Fairtrade ...32
3.4.3 UTZ certified ...32
3.4.4 Organic ...33
3.5 Challenges ...33
4 Methodology ...34
4.1 Case selection and overview cases ...34
4.2 Methods of research ...35
4.2.1 Secondary data ...35
4.2.2 Semi-structured interviews with experts ...36
4.2.3 Semi-structured interviews with farmers and data analysis ...36
4.3 Operationalisation of concepts ...37
4.4 Validity and reliability...40
5 Analysis and Results ...41
5.1 Strategic Intent ...41
5.2 Resources and capabilities ...47
5.3 Characteristics Different Value Chains ...53
Conclusion External Analysis ...59
5.4 Strategic value ...60
5.4.1 Appropriability test ...61
5.4.2 Inimitability test ...63
5.4.3 Superior differentiation test ...65
5.4.4 Non-substitutability test...66
5.4.5 Strategic value per capability ...68
5.4.6 Strategic value per farmer ...70
5.5 Strategic Position: Farmer Typology...72
5.6 Strategic position: ABOCFA ...76
5.6.1 Strategic intent ABOCFA ...76
5.6.2 Group composition...77
5.6.3 Membership commitment ...78
5.6.4 Group size ...79
5.6.5 Governance and selection mechanisms ...79
5.6.6 ABOCFA’s strategic position given the accessible value chains ...81
5.6.7 ABOCFA’s strategic position given the challenges in the cocoa sector in Ghana ...82
5.6.6 Strategic position of ABOCFA; Strengths and Weaknesses ...83
Conclusion Strategic Value and Strategic Position ...84
6 Conclusion...86
6.2 Limitations ...90
Introduction
Ghana is the world’s second largest producer of cocoa. However, most smallholders in the cocoa industry live below the poverty line. Cocoa farming is known for its poor working conditions and negative impact on the environment. Besides issues of child labour and farmers’ poor working circumstances, the poverty among the cocoa farmers is the striking reality of the first stages of producing a chocolate bar (Cocoa barometer, 2015). Over 90% of global cocoa production is cultivated by an estimated 5,5 million smallholders in developing countries, and another 14 million rural workers directly depends on cocoa for their livelihoods (Hütz & Fountain, 2012). Cocoa production thus impacts many lives, economic development, and the environment in producing areas.
The cocoa chain is considered a global value chain: most beans are produced in West-African countries, while manufacturing, retailing and consumption mainly takes place in Europe and the United States. Also in growing economies like China and India chocolate becomes increasingly popular (ICCO, 2014). Due to growing consumer awareness and international attention for the problems in the industry, change took place during the last decades. NGO’s, manufacturers and other stakeholders became more active in sector-wide approaches focussing on both social and environmental dimensions of sustainability. The most visible result of the sustainability trend is certification of products. The aim of certification of cocoa is to secure supply, to address consumers’ demands and to improve social and environmental conditions on farms (Cocoa barometer, 2015).
Multiple researches have been conducted as a result of these developments. Most studies on the topic of sustainable cocoa production have been done in two fields of research; social studies, focusing on the situation of the farmers from a development perspective, and economic studies based on outcomes and effects of development policies. However, in this body of research farmers are not being recognized as a force that could initiate changes leading to the solution. Moreover, for sustainability projects in the cocoa sector the smallholder perspective is systematically being underrepresented (Cocoa barometer, 2015). This is illustrative for the African rural development policies, as Lutz (2012, p.
473) concluded: “so far studies paid attention to the institutional environment at macro and meso level only”. Furthermore, above mentioned perspectives do not cover strategic aspects or pay attention to processes to achieve those outcomes. Strategic aspects are mostly ignored in African rural development policies (Lutz, 2012). This gap might explain why the effects of these policies on smallholders’ income have been rather weak.
The report of Laven (2010) aims to include a smallholders’ perspective in the debate about upgrading smallholders in the cocoa industry. A link with the strategic management theory is made, though no strategic theories are used. She highlights the need for an analysis of the
heterogeneity among farmers since “such insights explain different outcomes for producers that help policy-makers and NGOs develop more effective intervention that can reach the most vulnerable groups”. Despite acknowledging the importance of differences among farmers, Laven (2010) as well mainly takes a more macro perspective and focuses on solutions beyond the farmer.
This research addresses the need for an approach with a business perspective at farmer level. It is argued that every farmer who owns or has access to land and produces cocoa is a business-owner. Business-owners make their own choices, follow their own strategies and differ from others in their own way. This research therefore explores the possibilities for smallholders to grow and develop their business by being unique.
In Europe differing your business from others is a requirement to have a successful business, why would this be different for smallholders in developing countries? Thus, the main aim of this research is to add to the development discussion by taking a strategic business perspective on smallholders in the cocoa industry, while taking into account the differences amongst farmers. To generate new insights regarding the improvement of the position of smallholders in the value chain strategic business concepts are used to analyse the behaviour of cocoa farmers.
In this research the initial steps of this approach will be carried out by addressing differences between smallholders in terms of their intent (what do I want to achieve?) and their resources and knowledge base (what means do I have to achieve this?). Combining these factors will lead to a typology which provides possibilities to explain the behaviour of the farmer, recommendations for farmers in terms of most valuable investment options, as well as assists policy-makers in terms of identifying suitable and less suitable farmers to aim for while building or extending projects.
The Global Value Chain (GVC) approach provides the starting point of this research. The GVC assists to identify different stakeholders and forces in the cocoa value chain, which results in an understanding of the position of smallholders in the cocoa value chain (Gereffi et al., 2005).
Different actors with different aims and power relations include farmers, producer organisations, traders, manufacturers and processors, certifiers, and public bodies. The GVC approach is widely used to identify opportunities for smallholders from developing countries in export
value chains. However, this body of literature does not sufficiently address the resources that are necessary to create and sustain a competitive advantage, neither does it provide insights into the forces that determine value appropriation among actors in the chain (Olthaar, 2015; Lutz, 2012). The value appropriated refers to that part of the total value created within the value chain that is appropriated by the smallholder, and depends on the relative power of the actors involved in the value chain (Gereffi et al., 2005). However, within the GVC literature it remains unclear on which features this power is based.
To solve this problem, the resource based view (RBV) will be discussed as it addresses, besides value creation, also the importance of value appropriation, and the subject of competitive advantage. According to the RBV (Barney, 1991), successful participation in a chain requires the ownership of strategic resources (stocks of available factors such as ownership or user rights of land, seedlings, equipment, human capital, certification) and capabilities (e.g. skills and experience to deploy resources effectively). Control over these strategic resources and capabilities can help smallholders to improve their negotiation position in the chain and make better deals with suppliers and especially buyers (Lutz, 2012).
A stronger strategic position enables the farmer to appropriate a larger share of the total value created in the chain. Furthermore, the RBV addresses the differentiation among smallholders in terms of which resources and capabilities are available to them, and whether they are willing to invest in additional resources and capabilities.
Many of the smallholders in developing countries are severely resource constrained, and therefore unable to develop a strong strategic position individually (Lutz, 2012). This causes the need for joint production (Thorp, Steward, Heyer, 2005; Markelova, Meinzen-Dick, Hellin, Dhorn, 2009;
Foss and Lindenberg, 2011; Criaviotti, 2012). To this end, aspects of collective action (CA) theories relevant to the global cocoa value chain will be explored. Through collective action farmers are able to solve some of the resource constraints they face, increase scale advantages and reduce transaction costs (Markelova, Meinzen-Dick, Hellin, Dhorn, 2009). A collective of small farmers could leverage its bundle of resources in order to compete, just as joint investment may allow smallholders to create strategic resources that provide them a stronger position in the value chain (Olthaar, 2015). As discussed earlier, individual farmers have different levels of strategic intent towards their business that describes what they want to achieve with their business. Furthermore, farmers have a strategic intent towards the cooperative that describes what farmers expect from the cooperative and which roll they want the cooperative to fulfil. The cooperative itself has a strategic intent as well, ranging from unwritten underlying principles to clearly formulated goals in the statutes. Furthermore, the success of a cooperative is dependent on several factors, such as membership commitment, group composition, group size, selection and governance mechanisms, and strategic positioning of the cooperative.
The three theoretical concepts (GVC, RBV and CA) are further explained in chapter 2, after the outline of this research is presented. In chapter 3 the context of the cocoa production in Ghana is described. After that, the methodology (chapter 4) is discussed, which is followed by the analysis of the results in chapter 5. Finally, this report ends with the conclusion and recommendations in chapter 6.
1 Research outline
In this study the resource base and behaviour of famers in the cocoa market is analysed. Cocoa farmers face different buyers interested in their product: traditional small traders, cooperatives and certified traders, amongst others. Those buyers all offer different selling conditions (price, credit, inputs, etc.). Furthermore, farmers differ in terms of the role cocoa plays in their life (e.g. subsistence farmers vs. entrepreneurial cocoa farmers). We want to understand how farmers make their choices, and in particular the attractiveness of the contracts offered by producer organisations and Licenced Buying Companies (LCB’s). This may help us to understand how they engage in certification and producer organisations, and why some of these farmers are not a member, or engage in side-selling. The research will be carried out at the level of the farmer. Important outcomes of this study are recommendations for certifiers and producer organisations to make their contracts more attractive to targeted farmers in the future, to identify most valuable investment options for farmers, and to increase loyalty of the members towards the scheme. Practitioner organisations may use the results to facilitate improvement of farmers’ working and income conditions through sustainable farming practices. The main question of this research is;
How can smallholder behaviour in the cocoa industry of Ghana be explained from a strategic business perspective?
Academic insights from the Resource Based View (RBV) (Barney, 1991), Global Value Chain (GVC) approach (Gereffi et al., 2005) and Collective Action (CA) theory (Olson, 1965; Fischer & Qaim, 2013) are used to develop understanding regarding the negotiation position and strategic behaviour (or lack of) of smallholders in the cocoa industry in Ghana. Therefor their strategic resources (e.g. land, amount of trees, labour), capabilities (e.g. experience, skills) and strategic intent (e.g. goals) will be analysed. GVC literature provides industry-specific details to understand the position of the actors in the value chain and how value is created (Gereffi et al., 2005). Strategic management literature takes a step further by distinguishing between value creation and value appropriation. The value appropriated is the part of the total value created that is captured by the smallholder. Not all value created in a chain is distributed evenly among actors, generally resulting in smallholders benefiting least (World Bank, 2007; TCC, 2015). Since every start-up in Europe is critically assessed (in order to get external finance) regarding its ability to appropriate value, the same approach would be expected in the debate on smallholders in the cocoa industry. Thus, we argue that a strategic business approach focused on firm level will aid to understand in what ways participation in the cocoa value chain may or may not be attractive for smallholders.
According to the RBV (Barney, 1991), successful participation of smallholders in a chain requires the ownership of strategic resources and capabilities to improve their negotiation position. This will help smallholders to make better deals with suppliers and especially buyers. A stronger strategic position should enable the farmer to appropriate a larger share of the total value created in the chain. The aim of this research is first of all to improve understanding on how farmers use their resources (e.g. time spent on labour, use of land and inputs), and why they use them the way they do. This leads to the first sub question;
How do farmers allocate their resources, and why?
The perceived advantages (e.g. immediate payment in cash, extra inputs) on farm level of different value chains (certification schemes) influences farmers’ choice of buyer. In this study we focus on several potential advantages of certification at farm level such as:
- A price premium for the farmer - Improved access to knowledge - Better access to credit for the farmer - Improved access to inputs for the farmer - Stable access to markets
This leads to the following sub question;
What are benefits of certification on farmer level as perceived by the farmer?
While certification schemes aim to offer advantages to farmers, a majority of the farmer population supplies the traditional chain. Furthermore, a substantial part of the certified farmers engages in side selling to the traditional chain (WUR, KIT & CIRAD, 2014). Possible explanations for certified producers selling to other chains are; farmers lack incentive to sell the product as certified (due to absence of price difference), farmer has social ties with the buyer, or the farmer sells the produce to the first buyer who can fulfil in the farmer’s immediate cash-need. Reducing side-selling should reduce the payback period for certification organisations and cooperatives (KPMG, 2011). The following sub question regarding the practice of side-selling was formulated;
What selling strategies can be distinguished among farmers?
Furthermore, the role of cocoa varies for individual smallholders. Smallholders differ with regard to their intentions and the resources and capabilities they own (or control). Given that farms differ, we expect that incentives to adopt sustainable agricultural practices will differ as well.
To help us distinguish different types of smallholders a typology is developed that addresses two dimensions; strategic intent and available strategic resources and capabilities. The former guides strategic decision making regarding the allocation of resources (e.g. willingness to invest) in order to maintain or reach a certain status in the future. Furthermore, farmers have a strategic intent towards the cooperative they are part of, in this case the strategic intent shapes how the farmer engages in these producer organisations. The smallholder's resources are regarded as stocks of available factors under control of the farmer and capabilities as a smallholder’s capacity to deploy resources effectively.
Based on these insights the following sub question was developed;
What types of farmers can be distinguished based on their strategic intent, strategic resources and capabilities?
A typology is useful for several reasons: a typology will gain insights in which farmers are more likely to remain a stable supplier of cocoa in the future (and therefore be more interesting for certification), which types of farmers are more likely to be certified, and which farmers are more likely to engage in side-selling. Finally, by identifying several types of smallholders, and the differences in success between those groups, this research will have the potential to identify investment opportunities to strengthen the position of smallholders in the cocoa-industry, and to adapt certification schemes to the needs of the different types of farmers.
Many of the smallholders in developing countries are unable to develop a strong strategic position individually as they are severely resource constrained (Worldbank, 2007). Through collective action farmers can solve resource constraints, increase scale advantages and reduce transaction costs (Markelova, Meinzen-Dick, Hellin, Dhorn, 2009), thus leading to a clear need for joint production (Thorp, Steward, Heyer, 2005;
Markelova, Meinzen-Dick, Hellin, Dhorn, 2009; Foss and Lindenberg, 2011; Criaviotti, 2012). A collective of small farmers should leverage its bundle of resources in order to compete, just as joint investment might allow smallholders to create strategic resources that provide them a stronger position in the global value chain (Olthaar, 2015). These insights led to the following sub question;
What suggestions could be made regarding valuable investment options for different types of smallholders and their producer organisations?
Suggestions are made how to adapt certification schemes to the needs of farmers. A better understanding and fit between the farmer population and certification schemes may help to increase loyalty under farmers, shorten the payback period on certification investment for both farmer and producer organisation, and identify areas with room for improvement.
2 Theory
In this section the three main theoretical pillars on which this paper builds are described; Global Value Chain (GVC) approach, the Resource Based View (RBV) and Collective Action Theory (CA). This chapter is structured as followed. Section 2.1 discusses literature on GVC and how these insights fail to explain why smallholders do not manage to appropriate value nor address the resources that are necessary to create and sustain a competitive advantage. Then in section 2.2 insights from strategic management and in particular the RBV are discussed to highlight the importance of strategic resources and capabilities for developing a strong strategic position and a sustained competitive advantage.
Furthermore, this section elaborates on the difference between value creation and value appropriation, and the importance of strategic intent.
Section 2.3 discusses literature on CA, with a focus on how smallholders may be able to compete through collaboration and solve some of their resource constraints through bundling of their resources. This chapter ends with the construction of a conceptual framework in which above mentioned theory are linked to the case of smallholders in the cocoa industry of Ghana.
2.1 Global Value Chain
The Global Value Chain approach provides the starting point of this research. According to Kaplinsky (2000, p. 121) a GVC is described as “the full range of activities which are required to bring a product or service from conception through the intermediate phases of production (involving combinations of physical transformation and the input of various producer services), delivery to final consumers and final disposal after use”. Within a GVC there might be a big geographic distance between the local producer of the good and the global consumer (Bair, 2005).
The GVC approach has grown to a considerable body of literature during the 1990s and onwards (Gereffi & Korzeniewicz, 1994; Gereffi, 1999a;
1999b; 2001; 2003; Gereffi et al., 2005; Humphrey and Schmitz, 2001; 2002; Gibbon, 2001). The GVC approach was initially referred to as Global Commodity Chain analysis (Hopkins & Wallerstein, 1986; 1994), as this analysis was concerned with agricultural practices only. The commodity approach was then further developed by Gereffi (2005) into a unified theoretical framework that includes industrial commodity chains, in order to make it possible to identify and change existing power relations within chains (by means of upgrading strategies) (Laven, 2010). Global commodity chains differ from non-commodity chains in the sense that due to producer anonymity large volumes are produced by multiple producers that cannot easily be traced back (Gereffi et al., 2005). Using the term ‘value chain’ reflects the notion that value is added at each point in the chain, however, the terms value chain and commodity chain are used interchangeably in literature (Laven, 2010).
A particular advantage of the GVC approach is that upstream and downstream events are taken into account (Van Dijk and Trienekens, 2011).
The cocoa value chain can be considered a GVC, where upstream actors responsible for low value-adding activities are generally located in developing countries (farmers, purchasing clerks), whereas downstream companies responsible for high-value adding activities are typically located in developed countries (processors, manufacturers, retailers).
In global agricultural value chains governance modes are numerous. Supply chains are becoming increasingly globally dispersed and buyer driven instead of producer driven (Gereffi et al. 2005). Lead firms, which are typically high-value adding firms located on the downstream side of the chain, have a lot of power and use this power to coordinate and control (govern) a chain by determining what has to be produced, how, when, and by whom (cf. Gereffi et al 2001; Gibbon et al. 2008; Humphrey 2004a; Humphrey 2004b; Humphrey and Memedovic 2006; Sturgeon 2007). Additionally, standards reflecting the preferences of consumer groups, governmental bodies, and NGO’s influence the governance mode of the GVCs. The governance structures in the value chains determine what the intermediaries can offer the individual farmers. Chain
governance defines what the quality standards are, what the involved stakeholders have to do, and how the responsibilities are distributed. This means that the governance structure may affect, among others, prices and margins, minimum quality standards, the distribution of inputs and credit and access to extension services for the different actors in the chain.
Since GVC research examines the different ways in which global production and distribution systems are integrated, it helps shining a light on the possible winners and losers in this globalization process, and how and why the gains from globalization are spread. Particularly important is how the number of gainers can be increased (Gereffi et al., 2005). Gereffi et al. (2001) argue that global trading systems have both positive and negative effects for people in developing countries. Inclusion in export chains is seen as an instrument to alleviate poverty (Laven, 2010). On the
other hand, downsides to globalization include falling prices for producers and cases where upgrading of products or processes does not necessarily lead to increased profits and sustainable incomes for smallholders (Gereffi et al. 2001).
GVC literature provides industry-specific details to understand the position of the actors in the value chain and how value is created (Gereffi et al., 2005). However, not all value created in a chain is distributed evenly among actors, generally resulting in smallholders benefiting least (World Bank, 2007; TCC, 2015). Governance structures determine the distribution of created value, and according to GVC literature, value appropriation is dependent on the relative power of firms involved (Gereffi et al., 2005). Different actors with different aims and power relations include farmers, producer organisations, traders, public bodies, manufacturers and processors, and certifying bodies. Actors such as lead firms have the power to coordinate and control a chain, whereas smallholders seem to have least power. The GVC literature does not provide further insight how this relative power comes to being. Based on strategic management insights, that allude power to the resource base of the firm, it is argued that lead firms have more power, and thus a stronger strategic positions, since they own or have access to strategic resources.
Smallholders in the chain lack the resources to create a strong positions for themselves. If value appropriation is dependent on the relative power of the actor, one should focus on how the power position then could be improved. Being part of a value chain only makes sense if the farmer is able to appropriate a reasonable part of the value created in the chain. The GVC literature emphasizes the role of governance in the chain, upgrading, productivity improvements and meeting demands of Western customers and lead firms to increase benefits and improve the position of smallholders in the chain (Gereffi, Humphrey & Sturgeon, 2003; Humphrey and Schmitz, 2002). In contrast, in this report the argument is made that the position of farmers only can be improved if, first and foremost, they have the opportunity to develop strategic resources to strengthen their position in the chain. Thus, to assess the situation at micro (farm) level, a strategic analysis of the position of smallholders in the GVCs is needed.
2.2 Resource Based View
Actors higher up in the chain, and the institutional environment that surrounds farmers, largely determine the scope for change and the direction of ‘progress’ available to farmers according to GVC theorists (Laven, 2010). The strategic perspective takes a more inside-out view instead of an outside-in view of the firm, stressing that opportunities for this ‘progress’ reside within the firms’ resource base as well. A firm’s success depends therefore on the chance they get to develop their strategic resources. Only these strategic resources may protect firms against the strong competitive forces in the value chain and enable a firm to appropriate value created within the chain (Barney, 1991).
Strategic management literature distinguishes between value creation and value appropriation, where GVC literature mostly focuses on value creation only. The value appropriated is the part of the total value created that is captured by the smallholder. Every start-up in Europe is critically assessed (in order to get external finance) regarding its ability to appropriate value, thus this study suggests the same approach in the debate on smallholders in the cocoa industry. Participation in a value chain is successful when enough value can be appropriated by the actor.
According to the RBV (Barney, 1991), successful participation in a chain requires the ownership of strategic resources and capabilities. This will help smallholders to improve their negotiation position and make better deals with suppliers and especially buyers. A stronger strategic position should enable the farmer to appropriate a larger share of the total value created in the chain. It is argued that successful inclusion of
smallholders in GVCs requires the deployment of strategic resources and capabilities in the farming systems (Lutz, 2012). Consequently, the
‘inclusion’ of smallholders in GVCs only makes sense if they have the opportunity to create strategic resources (Lutz, 2012). Thus, to assess the situation at micro (farm) level, a strategic analysis of the position of smallholders in the GVCs is needed.
A strategic business approach focused at firm level will aid to understand why participation in the cocoa value chain may or not be attractive for smallholders.
2.2.1 Resources and capabilities
Penrose (1959) was the first to propose that the source of competitive advantage resides inside the firms’ resource base. Only after Barney (1991) conceptualized attributes of strategic resources (resources that have the potential to result in sustained competitive advantage), the RBV has become a prominent theory within the field of strategic management. Resources include all assets, information, knowledge, etc. that enable the firm to conceive and implement strategies that improve its efficiency and effectiveness. According to Barney (1991), the only way to gain a
sustained competitive advantage relative to other firms, and therefore a favourable strategic position, is to control Valuable, Rare, Inimitable and Non-substitutable (VRIN) resources. As argued by Barney (1991), firm-specific immobile resources which are simultaneously Valuable and Rare, have the potential to lead to a competitive advantage. If, additionally, these resources are Inimitable and Non-substitutable, they could lead to a sustained competitive advantage. Firm specific resources are heterogeneous and difficult for competitors to replicate, and therefore, important differences in cost or benefit advantages arise from these firm-specific resources.
For smallholders in global value chains this means that their position can only be attractive if they own strategic resources and capabilities (Lutz, 2012). Successful inclusion of smallholders in GVCs thus requires the deployment of strategic resources and capabilities in the farming systems.
This is confirmed with more general theory of Sirmon et al. (2008), who states that it is crucial for small firms that want to appropriate more value in a chain to make an attractive value proposition by leveraging their resource advantages.
2.2.2 Strategic intent
The role of cocoa varies for individual smallholders. Smallholders differ with regard to their intentions and allocate the resources available to them accordingly. According to Prahalad and Hamel (1989) strategic intent implies a sizable ‘stretch’ between current capabilities and resources, and aspirations. The traditional view of strategic planning focuses on the fit between existing resources and current opportunities, where strategic intent creates a misfit between resources and ambitions. The firm then closes this gap by systematically allocating resources towards the goal. Prahalad & Hamel (1989) give five steps that need to be accounted for to facilitate the goal. These steps, when adapted slightly, can also be applied to the case of smallholders in the cocoa industry; Firstly, a sense of urgency needs to be created that puts a focus on issues that need improvement. Certification can be seen as “an intervention to shake up farmers”1, since it provides smallholders with a sense of urgency and stimulates them to set and reach goals (to qualify for the certificate). Secondly, a competitor focus needs to be developed so that every
‘employee’ (smallholder) is able to benchmark his or her efforts against best practices in the industry. In practice farmers can look up to chief farmers (who often have larger plots and higher production levels) in their area. Thirdly, employees need to be provided with the right skills through training. Farmers obtain know-how on producing good quality cocoa mainly from their families, but also through radio broadcasts and newspapers (Laven, 2010). LBCs, NGOs, and Cocobod furthermore provide extension services which provide farmers training on Good Agricultural Practices (GAP) or business skills. The better smallholders are able to obtain know-how, the more efficient they can allocate their resources. Fourth, the firm should be given time to digest one challenge before launching another. And fifth, clear milestones and review mechanisms need to be established to track progress. This imposes a bottleneck as record keeping imposes a big challenge on the generally poorly educated farmer population.
Strategic intent towards the collective describes how farmers engage, if at all, in their producer organisation. A producer organisation can offer many benefits to a farmer. Farmers can choose to actively invest in the organisation or, as often contributions (in time) are voluntarily, choose to invest the bare minimum. This all depends on whether they have a sense of ownership towards the organisation and view it as a vehicle that can help them improve their own position and that of their community. Members can be heterogeneous with respect to what they are able to contribute, and even regarding their individual interest in the collective. However, members should be homogenous with respect to group goals (Olson, 1965; Gary, 2014).
2.3 Collective action
Collective action is described as “voluntary action by a group to pursue shared objectives” (Marshall, 1998, as cited in Markelova, Meinzen-Dick, Hellin, Dhorn, 2009, p. 623). Aggregation of farmers in for example cooperatives has many advantages. An organised group of smallholders has better access to credit. Furthermore they can save money by bulk-buying quality inputs such as fertiliser. As a cooperative they could afford expensive machinery that makes them more efficient or less dependent on labour. As a group, farmers can more reliably supply a wholesaler who needs large amounts, or meet sophisticated demands of supply chains (Robinson, 2013). This is in line with Thorp, Steward & Heyer (2005), who argue that collective action can be seen as an instrument to strengthen the market position of smallholders as it improves access to all kinds of club goods (even local public goods) and global value chains for rural households. Furthermore, cooperatives could reduce exploitation
1 Personal communication with B. Elzakker, expert from AE-LBI
and inequalities (Gray, 2014). According to Dr. Adu-Acheampong (personal communication, 2015), the only way for smallholders to improve their position and to avoid being taken advantage of is to organise themselves so they have a voice.
Lack of access to needed goods and services should provide an incentive to organise for greater economic independence (Gray, 2014). However, many farmers in developing countries, and particularly in Africa, are not (yet) organised in producer organisations or cooperatives (WUR, KIT, CIRAD, 2014). In Ghana farmers’ level of organisation is low as farmers are not formally organised, but are rather organically structured around buying centres and their purchasing clerks (PCs) (WUR, KIT, CIRAD, 2014). The lack of investment in farmer organisation makes it also increasingly difficult to meet (changes in) demand, for which being organised has become more and more a prerequisite (Laven, 2010).
Certification schemes can help farmers organise themselves in producer organisations and then provide training and certification at the level of the producer organisations. The aim of certification then is not only to make cocoa farming sustainable, but also to make involved farmers benefit from the extra created value as they are now organised as a group. Furthermore, membership of a certified cooperative can lead to benefits such as a price premium for the farmer, improved access to knowledge, access to credit, inputs and markets.
2.3.1 Value appropriation through collective action
According to the RBV the availability of strategic resources explains why some actors in a chain are able to appropriate a larger part of the total value created, i.e. realize high returns while others end up with losses. It is thus important for the smallholder to develop these kind of resources. However, creating strategic resources and capabilities concerns a major challenge for the farmers under study, hampering the development of a competitive advantage and thus the appropriation of value. While proponents of the RBV emphasize that this competitive advantage results from resources housed within the firm, the relational view broadens this perspective by emphasizing that a firm’s critical resources may extend beyond firm boundaries (Dyer & Singh, 1998). They indicate that the combining of resources may be a source of
“relational rents and inter-organisational competitive advantage” (Dyer & Singh, 1998, p. 661). Meaning that by acting together actors can generate supernormal profits that cannot be generated by either actor in isolation. It is not surprising that recently more and more focus have been put on the need for and benefits of joint production, especially in the case of resource constraint individual smallholders at the bottom of value chains (Thorp, Steward, Heyer, 2005; Markelova, Meinzen-Dick, Hellin, Dhorn, 2009; Foss and Lindenberg, 2011; Criaviotti, 2012). When actors are willing to make relationship specific investments, productivity gains are possible (Williamson, 1985). In conclusion, successful cooperation allows smallholders to create both individual and joint strategic resources that provide them a stronger position in the value chain, which in turn increases their ability to appropriate more value.
2.3.2. Cooperatives
Literature on cooperatives shows the importance of strategic positioning and the role of strategic intent, membership commitment, group composition, group size, and governance and selection mechanisms.
Strategic positioning
Strategic positioning plays a role in the performance of cooperatives. Just like an individual farmer the cooperative itself has a strategic intent as well, ranging from unwritten underlying principles to clearly formulated goals in the statutes. According to several studies successful
development of the cooperative requires that these goals are clearly specified (Sykuta and Cook, 2001; Barham and Chitemi, 2009). In order to develop a strong strategic position and the ability to compete in the private sector without external funding, a cooperative requires clearly specified targets, investments and a strong committed member base (Sykuta and Cook, 2001).
Group composition
Groups may be composed of heterogeneous members with respect to what they are able to contribute, and even regarding their individual interest. However, the group should be homogenous with respect to group goals (Olson, 1965; Gary, 2014). Olson (1965) describes the surprising tendency for the "exploitation" of the great by the small in producer groups. Still, while facing the risk of being taken advantage of, members will cooperate voluntarily if individual gains of getting access to a club good are higher than the individual costs.
In the study of Gray (2014) cooperatives were more successful when their members had incomes that were stable and allowed members to
remain independent of the cooperative. Additionally, organisations composed of members who were impoverished had problems to maintain stable equity, raising capital and remaining independent of creditors.
Membership commitment
In order to develop strategic resources commitment from members is required. Commitment to sell through the cooperative, to invest time and financial resources in the cooperative, and willingness to take actively part in the management of the cooperative (Gray, 2014). Gray (2014) states that group solidarity is as important to a cooperative as the pooling of resources and channelling of collective action, as cooperative success was more likely if members valued solidarity and concern for their community.
Group size
In many cases, small groups are more efficient and viable than large ones as governance costs increase with group size, while benefits created need to be shared among more members (Olson, 1965). The larger the group, the more difficult it is to achieve collective action (Ostrom, 1999;
2000). Even though more resources are accumulated as group size increases, it becomes more difficult to realize and govern voluntary contribution. This is referred to as “the paradox of group size”, (Wincent et al. 2010, pp. 45).
Selection mechanisms and governance mechanisms
Cooperatives have unique governance structures due to its bi-dimensionality; they are both a social community and an enterprise (Borgen, 2001). A major challenge in agricultural cooperatives is to coordinate farmers’ activities with customer demands, and alter the traditional inclusive member orientation to a more business orientation on order to qualify for downstream norms (Bijman, 2009). Cooperatives who prioritize inclusion face risk of free riding (Olson, 1965). Selection mechanisms based on criteria such as size or production potential reduces inefficiencies and reduces the chance of free-rider behaviour and opportunism. Additionally, some form of compulsory membership is in most circumstances indispensable to union survival (Olson, 1965).
Buyers depend on the cooperative for products produced according certain quality standards, and the cooperative depends on farmers supplying these products produced according to these quality standards. To ensure this, and to prevent opportunistic behaviour, governance mechanisms need to be put in place. Governance structure within cooperatives should facilitate coordination and facilitate control. Groups can either be governed in a formal or informal (relational) way or in a mixture of both. According to Organisation Theory (McCann and Galbraith, 1981) higher levels of formalization (from informal personal agreements to more formal arrangements) comes with higher level of control and more detailed and strict rules, routines, monitoring systems, and the centralization of decision making. Informal mechanisms are based on trust and its underlying normative behaviours operates as a self-enforcing safeguard (Poppo and Zenger, 2002). However, lack of trust is an issue in the Ghanaian cocoa sector (Oppong, personal communication; Laven, 2010) and one of the main reasons farmers refrain from cooperating (Laven, 2010). Formal governance mechanisms involve formal contracts. However, complete contracts do not exist (Besanko, 2013), neither do smallholders have the resources to realize formal governance forms, and thus often need to rely on informal governance mechanisms (Ostrom et al. 1992).
Cooperatives that were facilitated and supported by local and national organisations have a greater likelihood of success (Gray, 2014). This institutional support is lacking in the Ghanaian context (Laven, 2010). Furthermore, the importance of member owned and geographical embeddedness of the organisation cannot be overstated (Gray, 2014; Adu-Acheampong, personal communication); when cooperatives are set up by individuals from outside the community, the risk is high that when these leaders leave, the cooperative will collapse. Furthermore, it has happened that educated and experienced people from the urban areas have used cooperatives as an opportunity to misuse the lack of experience of the local people as a way to make money (Adu-Acheampong, personal communication). In the study of Gray (2014) cooperatives had a greater likelihood of success if strong organisational structures were developed. These structures can be ‘borrowed’ from affiliated organisational sponsors, which in the case of Ghana is common; as NGOs put down initial structures and train members so that that they could gradually take over the management and coordination of the cooperative (Glin, Oosterveer, Mol, 2014). However, cooperatives in Ghana often fail as soon as the third party assisting in the foundation steps out, or when funds dry out (Adu-Acheampong, personal communication).
Though, even when cooperatives failed, in most cases cooperatives members were better off, even when the cooperative ended. This seemingly
