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

RETAILING WHOLESALINGMARKETING

MANUFACTURING

FARMING PROCESSING

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 NOTCOST EFFECTIVE

TO RUN FOR CORPORATIONS

BANKING

POSSIBLE REAL ORPERCEIVED 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

• 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

• 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