A Comparative Analysis of Two Hog Firms from Iowa
By Brent Hueth, Maro Ibarburu, and James Kliebenstein, Iowa State University - The study looks at business organization and coordination of specialty-market hog production using a comparative analysis of two Iowa pork niche-marketing firms. They describe and analyze each firms management of five key organizational challenges: planning and logistics, quality assurance, process verifcation and management of "credence attributes", business structure, and profit sharing.Abstract
Although each firm is engaged in essentially the same activity, there are substantial differences across the two firms in the way production and marketing are coordinated. These differences are partly explained by the relative size and age of each firm, thus highlighting the importance of organizational evolution in agricultural markets, but are also partly the result of a formal organizational separation between marketing and production activities in one of the firms.
Introduction
Markets for specialty, or niche, agricultural products have grown considerably in
recent years. Organic produce is perhaps the most prominent example, but markets for
so-called "natural foods," and for foods with a regional appellation, have also expanded a
great deal (Dimitri and Greene, 2002; Grannis and Thilmany, 2002).
In contrast to other
dimensions of the ongoing evolution of agricultural markets, the growth of specialty
production is not the result of technical advances and improved agricultural productivity
but rather is the result of product differentiation based largely on the use of retro
technologies. There has been considerable research on the welfare effects and
organizational changes resulting from technical change and the increasing
industrialization of agriculture.
Much less has been said about the consequences of
agricultural "deindustrialization". We take a step in this direction by comparing the
activities of two Iowa pork niche-marketing firms. We focus in particular on the
organizational and coordination challenges associated with specialty-market production.
The purpose of our analysis is mostly descriptive; however, we also provide normative
analysis, indicating where there seem to be opportunities for improved coordination.
We frame our comparison around five generic coordination topics. These include
planning and logistics, quality assurance, process veri.cation, business organization, and
profit sharing. Hog production systems are inherently uncertain (particularly so in
"natural" production systems), so arrangements must be made to accommodate
unforeseen events and to flexibly and effciently manage the flow of animals from farm to
consumer.
Developing a reputation for quality requires consistent production of the set of
attributes desired by end consumers, and consistency requires some kind of process for
quality assurance. Additionally, specialty markets typically involve provision of one or
more "credence" attributes, in which case process verification is important. Finally,
business organization and pro.t sharing are somewhat related but also separate in that
many forms of profit sharing can be implemented within a given organizational structure.
Although not the only possible taxonomy of coordination issues facing specialty
producers, this set of topics represents a convenient grouping of issues for comparison
across the firms we study.
Related Literature
Our work contributes to a larger literature that addresses various topics within the
overarching theme of "specialty markets" in agriculture. One line of research documents
the incidence and growth of specialty markets. Dimitri and Greene (2002) document
growth in organic foods markets during the 1990's. During this period, retail sales grew
20% or more per year, and certified organic cropland and pasture more than doubled,
reaching a total of 2.3 million acres by 2001. Although there are no corresponding
aggregate statistics for other forms of specialty production, it is easy to point to
examples.1 Kennedy et al. (1997) also note that the term "value-added" has become
widely used in agricultural markets and typically refers to some form of branding and
product differentiation by farmers.
Although traditional commodity markets will almost
surely maintain their overall dominance of agricultural activity, these and other examples
seem to point toward a future with an increasing diversity of agricultural food items.
Among work that focuses on specific cases of niche marketing, Hayes et al. (2004)
document the development of three well-known "farmer owned brands" (a term which
they use in reference to both "designation of origin" and "guarantee of production
process" branding) and discuss the economics behind these successful branding strategies.
The authors note that supply control is a key feature of successful branding strategies and
that, without supply control, successful niche markets quickly become commodity
markets. Such has arguably been the case for U.S. organic producers. Buhr (2004) uses
three case studies to show how a relatively small pork marketing firm can find a unique
niche within a larger, mostly commodity market. Strategies range from specializing in
cuts for a particular ethnic minority and season to diversifying across different kinds of
sales outlets (wholesale, restaurant, retail direct to consumers).
Other authors have evaluated consumer preferences toward particular niche attributes.
For example, Grannis and Thilmany (2002) study the potential market for natural pork in
the intermountain west area of the United States. Using contingent value techniques and a
mail survey of over 2000 primary grocery shoppers, they find a strong influence of
household income and previous consumption of other natural products on mean
willingness to pay for natural pork.
They find that with respect to production attributes,
feed additives and external effects on the environment are also important explanatory
variables. Their results are somewhat ambiguous regarding consumers' valuations of
product-of-origin labeling.
Finally, as in this paper, some authors have studied the organization and coordination
of niche marketing. For example, Gonz´alez-Diaz et al. (2003) study quality assurance
procedures that support branding in Spanish markets for fresh meat and note that
geographical indicators and private branding (by individual firms) can be complementary
in signaling multiple quality attributes. Brester (1999) presents a case study of a
successful niche marketing venture in milling and baking. The case involves full
integration by a single large Montana wheat farmer into the provision of milled wheat
products for specialty bakers.
In this paper we focus on organization within specialty pork markets. Relative to the
literature discussed above, we emphasize the communication, informational, and overall
coordination requirements for marketing niche pork. In what follows, we describe the
coordination issues facing a typical specialty market producer and then summarize how
each of our example firms address these issues. As we will see, there are some similarities
but also significant differences in the way coordination is achieved. Additionally, relative
to what one might expect, there is much less formality in the contractual mechanisms used
by the various parties.
Further Information
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Source: Center for Agricultural and Rural Development, Iowa State University - November 2005