An inquiry into evolving supply chain governance structures in South African agribusiness

Abstract

Supply chain management is emerging as an important source of competitive advantage for agribusinesses globally and in South Africa. The objective of this study was to describe and analyse the emerging governance structures in agribusiness supply chains. Governance structures are the formal and informal institutions that prohibit, permit, or require certain actions and provide the incentives for exchange. Agribusiness managers can choose from a continuum of governance structures which include spot or cash markets, specifications contract, relation-based alliance, equity-based alliance and vertical integration. These structures are distinguished by the composition of market and managed control of the transaction processes. In this study the constructivist and positivist inquiry paradigms were adopted to address the complexity and interrelation of factors involved in the choice of governance structure. The study was conducted in two stages. The first stage entailed a survey of agribusiness managers to elicit their opinions and perceptions on the strategic direction, preferred present and future coordination mechanisms, strategic focus, the future shape of the agro-food industry and the major factors driving these trends in the South African agribusiness complex. These were compared with global trends. This section was conducted in the positivist paradigm to extend the validation and generalisation of the second stage which was conducted in the constructivist paradigm. The second stage entailed the analysis of three case studies to identify the drivers for supply chain formation and the expression of these drivers, strategic considerations and transaction characteristics in appropriate governance structures. The choice of governance structure is influenced by the drivers of change, product characteristics, processes of the supply chain, transaction characteristics and costs. The most significant drivers of change were company competency, consumer behaviour and technology. The perishable nature of most agricultural products, in particular, requires special control and traceability systems to ensure chain transparency in order to certify and assure consumer safety and product quality. These drivers, product characteristics and systems determine the characteristics of the required transaction to facilitate the creation of customer value. Key concepts that emerged in the description of transaction costs are bounded rationality, opportunism, asset specificity and information asymmetry. The optimal governance structure maximises desired transaction requirements while minimising the costs of exchange. The analysis of the case studies showed that these factors cannot be considered in isolation. In each of the cases a different factors was instrumental in the determination of the optimal governance structure. The study identifies a six step decision process for agribusiness managers and researchers to relate drivers of competitiveness to appropriate governance structures. The emergence of supply chains is driven by evolving consumer demands and societal values on the one hand and the need for agribusiness and inter-agribusiness competency to transform these needs and values into consumer value on the other hand. South African agribusiness are employing technology and closer vertical coordination to improve production processes, quality assurance, traceability and process transparency. In line with global trends South African agribusiness will have to establish ever more sophisticated systems to satisfy consumer needs and societal values as these evolve to include less tangible needs and values such as environmental and ethical concerns.