P ROCESSING C OMPANIES IN M ODERN S UPPLY C HAINS

According to the strategic management discipline, the emphasis on competitiveness and competitiveness measures must be placed on specific industries and industry segments rather than on countries because firms that compete in international markets instead of countries (Porter, 1990).

Therefore in order to raise the dairy sector’s competitiveness, the solution proposed in this thesis passes through the modernization of the dairy supply chain, especially via the enhancement of processing companies’

competitiveness.

Several definitions of competitiveness have been put forward in the literature based on the different sources and indicators of competitiveness depending on the research objectives of each study (ex.: Cook and Bredahl, 1991; Feurer and Chaharbaghi, 1994; Kennedy et al., 1997), but little consensus exist.

Porter provides a well-accepted and largely adopted definition of competitiveness: ‘the ability to profitably create and deliver value through cost leadership or product differentiation (customer value)’ (Porter, 1980). It was further extended including indicators of competitiveness: ‘the sustained ability to profitably gain and maintain market share (Porter, 1985).

Since this thesis has a supply chain perspective, both cost leadership and the customer benefit approach are applicable. Downstream the product differentiation is essential for dairy companies achieve a competitive advantage, but since a large number of close substitutes exist in the markets where dairy companies operate, prices and costs must not be ignored.

Companies’ costs might also highly vary because of management shortcomings and inefficiencies on the processing plants. In Southern Brazil dairy supply chain, for example, they face a high competition for resources (milk purchase) and for sales of dairy products. Therefore the definition of competitiveness provided by Cook and Bredahl, (1991, p. 1472) seems more appropriated and it is adopted in this thesis. It is itself a further extension of Sharples and Milham, (1990), and also from Porter’s. It is defined as the “ability to deliver goods and services at the time, place, and form sought by buyers at prices as good or better than other suppliers while earning at least the opportunity costs on resources employed” in an specific market.

Having this clear, this thesis proposes to understand the external and internal mechanisms refraining or boosting the capacity of processing companies to be competitive in a globalized agri-food chain, studying the case of the dairy supply chain in Southern Brazil.

The external mechanisms refer to those characteristics that may provide a more or less friendly environment to the companies, such as socioeconomic circumstances, market characteristics, customer structure, global cultural context, or any system of market interventions that could be implemented generating price distortions, i.e. the agribusiness environment, according to the contingency approach (Donaldson, 2001). On the other side, the internal factors could be the formal structure of the organization, the resources

available, the age and size of the company, management practices, degree of vertical or horizontal integration within the supply chain and network relationships. Also factors that firms can directly control, such as technical and allocative efficiency and technology adoption where firms should consider to make adjustments on its performance improving the productivity (Grant, 1991; Latruffe, 2010; Nivievskyi, 2009).

Also according to the Dairy Reporter, to become more competitive in global agri-food chains, it is necessary to focus on “sustainability, efficiency and product innovations as industry-specific challenges facing dairy processors, where dairy professionals should learn to reduce waste, cut costs and gain chain efficiency”. And achieving this objective is important since processing companies are the guarantee of market access for farmers, and likely the only stakeholder in condition to countervail the bargaining power of retailers and ensure a fair distribution of the value created to farmers (Tybout, 2000). They may also be the main diffusor of technologies to farmers, and provider of inputs and access to higher value markets (Dries et al., 2009) or credit (Farina, 2002). Thus they are of importance as a modernizer agent for the supply chains and the reason of our choice as object of study. By the other side, the literature shows a mixed evidence of the modernization of the processing industry on both inclusion and exclusion of farmers in developing countries (Reardon et al., 2009) depending on their context, level of development, and opportunistic/altruistic behavior of the companies’ leaders.

However, despite the challenges they pose, when well governed, modern supply chains have the potential for important rural development (Gereffi et al., 2005).

Evidences from the study conducted by Dries et al., (2009) about the restructuring of the dairy supply chains in central and eastern European countries presents examples of such potential. It also reveals a clear path of restructuring steps put in place with the objective of modernization and globalization. They initiate by economical/institutional measures, where in the first moment governments promote higher degree of liberalization, creating an environment where direct competition is crucial for survival. Retailers and processing companies are the first to adapt or exit. Public and private standards are established. In the sequence, processing companies adopt measures of vertical integration in order to solve problems related to the

supply of raw materials. They establish contractual programs with farmers to provide them with technical assistance, inputs access, credits programs for investment, guarantees on bank loans, extension services, management advisory services, among others. These measures serve to upgrade milk quality and to secure their supplier base against losses to other dairies that do offer these valuable services. Furthermore these arrangements need well-established and ‘business friendly’ institutions that facilitate transactions (Brunetti et al., 1999), as is the case for enforcing contracts for example. We see a similar pattern between these restructuring steps in dairy supply chain of eastern European countries and the Brazilian case in the past years, although in Brazil the process is a more delayed.

However, previous experiences in the restructuring into modern globalized supply chains of other Brazilian agricultural sectors, such as pork and poultry in Southern Brazil for instance, revealed an intense exclusion of farmers in a first moment and a subsequent inclusion of the remaining farmers on higher value markets (Escher, 2011a; Ferrari et al., 2005). Most of those excluded farmers migrated to the dairy production and decided then to integrate and formed traditional cooperatives for milk collection and processing to overcome the power of buyers, controlling the processing chain link and the prices at this step (Chaddad, 2007a). And today, after a late initiative started only in the 1990’s, these companies are also facing a process of modernization with all its “pros” and “cons”.

The purpose of this thesis is to diminish the effect of those “cons”, by proposing possible solutions on how to become a modern supply chain and include the higher number of producers at the same time. In this way diverting from previous experiences and proposing a new form of supply chain modernization. Thus, contributing to the best possible socioeconomic impact on the country.