MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 1 Vertical Coordination and Cooperatives Types of coordination Considerations in coordination Farmer cooperatives

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 2 Two Types of Integration/ Coordination Horizontal –Ownership or control of parallel or similar firms (e.g., multiple retail chains, multiple farms) –May raise questions of market fixing or excessive market share Vertical –Ownership or control of various stages of the value chain –May raise issues of conflict of interest Vertical Coordination Opportunities –Ownership of upstream or downstream value chain members –Contractual relationships Market specification (explicitly defined deal) Resource providing Management/income guaranteeing contracts

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 3 Vertical Coordination: A Very Messy Chart! FARM SUPPLIES RETAILINGWHOLESALING MARKETING MANUFACTURING FARMINGPROCESSING FINANCING TRANSPORTATION

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 4 Vertical Integration Several value chain members are owned by the same company PROCESSOR FARMER WHOLESALERS/ RETAILERS MANUFACTURER USUALLY NOT COST EFFECTIVE TO RUN FOR CORPORATIONS BANKING POSSIBLE REAL OR PERCEIVED CONFLICT OF INTEREST TRANSPORTATION INVESTMENT OPPORTUNITY BUT DIFFICULT TO RUN

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 5 Possible Conflicts of Interest Denying of resources to potential competitors— e.g., –Bank owning food industry resources will be less likely to lend to competitors –Retail store will not stock competing products (e.g., Pepsi owned but sold off KFC and Taco Bell chains) Lower priority given to potential competitors or non-competing customers under conditions of scarcity or limited capacity

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 6 Specialization –Economies of scale –Development of expertise and efficiency –Possible bargaining advantage due to fewer competitors Examples –Farmers –Processors –Manufacturers –Retailers

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 7 Diversification –Spread of risk –Control of needed resources –Balance of product life cycle and cash flow issues –Synergy (?) Examples –Store brands –Manufacturers invest in Transportation Processors

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 8 Decentralization Technology now allows for transactions where –Parties do not have to meet in person (e.g., as opposed to auctions) –Product can be shipped from producer directly to a large buyer—e.g., Commodities from the farmer to the processor without a stop at the auction house Products from the manufacturer to large retail customers Possible in part because there are fewer but larger buyers—e.g., –Large vs. small manufacturers –Larger supermarket chains as opposed to independent stores

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 9 Impact of Decentralization Less information available on overall market prices Reduced costs but loss of employment for intermediaries

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 10 Farmer Cooperatives Farmers joining in ownership of needed resources—e.g., processing capacity Often run for ideological rather than economic reasons Are effectively real businesses that must be run –Either by volunteers with limited experience in the field –By outside managers that must be hired, evaluated, and paid

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 11 Types of Cooperatives Marketing –Selling activities –Branding of regional products Purchasing –Economies of scale –Taking delivery of bulk that would be difficult to ship to individual farmers Services –Credit, insurance, health benefits, irrigation, utilities Processing

MKTG 442 COORDINATION AND COOPERATIVES Lars Perner, Instructor 12 Problems With Cooperatives Governance—one-person- one-vote or influence proportional to usage and investment? Financing of large investments Handling withdrawal of members Public resentment of tax advantages