Asymmetric information, principal-agent behaviour and governance mechanisms in the South African lamb supply chain

Abstract

The recent addition of Karoo Lamb to South Africa’s repertoire of products with a regional identity attracted extensive publicity. The news headlines that spoke of challenges to protect the geographical name, discrepancies among supply chain stakeholders and the outright opportunism and exploitation of the geographical name made Karoo Lamb a particularly interesting case study to examine. Regrettably, the niche product “Karoo Lamb” has not yet come to its own. In an effort to support the development of this initiative, the thesis sets out to address the central question; “How do we increase farmer participation in differentiated product supply chains, whilst discouraging opportunistic behaviour so that the performance of these chains can be optimised?” The overarching question, mentioned above, is addressed in four independent but related research papers by using the differentiated Karoo Lamb supply chain as a case study. The specific questions considered in these papers are:  What are the claims most vulnerable to opportunistic behaviour?  What drives a farmer’s tendency to behave opportunistically, and how can these drivers be used to prevent opportunistic behaviour?  What factors encourage a farmer to participate in a differentiated supply chain?  What enforcement mechanisms are best suited to prevent the opportunistic behaviour of farmers?  What governance mechanisms are currently employed to govern the supply chain?  Are the governance and enforcement mechanisms properly aligned to guarantee the authenticity of the differentiated product? The thesis employed the principals of agency theory, transaction cost economics, and contract theory to address the practical problems faced by the Karoo Meat of Origin certification scheme. The thesis combined quantitative and qualitative research methods to analyse the data collected from four primary stakeholders involved in the Karoo Lamb supply chain. From the total population of 209 certified Karoo Lamb farmers, 73 farmers were interviewed on their farms in the Karoo region. In addition to the farmers, five abattoirs, two processors and/or packers and five retail outlets were interviewed. Results supported the expectation that a farmer’s decision to invest in the collective reputational capital of a product is shaped by his/her relationship with the abattoir, and the ease with which business is conducted. The easier it is for the farmer to do business with the abattoir the more likely the farmer is to invest in the Karoo Lamb initiative. Other, more personal attributes, such as the farmer’s risk profile, education and his/her network also proved to influence his/her willingness to invest in the collective reputation. The efforts to increase the membership base of Karoo Lamb contributes to the success story of Karoo Lamb. The success of the initiative, however, remains threatened by opportunism. The investigation revealed the “from the Karoo” and “free range” claims as the most vulnerable to opportunistic behaviour specifically during times of droughts. The study further revealed a lack of information exchange between the farmers and abattoirs, specifically regarding droughts, feeding practices and disease treatments, as the leading driver for opportunistic behaviour. An increase in information sharing, within the farmer network, and with the abattoir, is therefore recommended. This is the main strategy to reduce or eradicate the opportunistic behaviour of farmers. In addition to broadening farmer investments in the reputational capital of Karoo Lamb and to preventing the opportunistic behaviour of farmers, the success of the Karoo Lamb initiative also requires an alignment between the enforcement and governance mechanisms. The investigation supported the notion that the State-appointed third party is relatively unsuccessful when it specifically comes to the monitoring of the Karoo farmers for compliance with production standards. Due to the failure of the third party, the thesis made an attempt to explore alternative monitoring and enforcement mechanisms. The results indicate that the majority of the Karoo Lamb stakeholders preferred monitoring and enforcement mechanisms that include more frequent monitoring and stricter prosecution strategies to deal with non-compliant stakeholders. Owing to many years of commodity style operations throughout the supply chain, the correct vehicle for ensuring the proper implementation of the enforcement mechanisms remains a challenge. The assessment of the Karoo Lamb supply chain reveals non-contractual arrangements with qualified partners as being the most frequently utilised governance mechanism. However, this mechanism is not sufficient when the third party fails to monitor and enforce the production standards accurately. Therefore, with a view to ensuring the credibility of Karoo Lamb, a move to toward more hierarchical arrangements, are expected, which would provide a stronger focus on private or mutual enforcement mechanisms. This means that the stakeholders in the supply chain would be jointly responsible for the credibility of the product and therefore jointly responsible for the enforcement of quality and origin standards.