ECONOMIC TRADE-OFFS AMONGST
PRODUCTION DIVERSIFICATION STRATEGIES IN BRAZILIAN SOUTH-EASTERN COFFEE
COOPERATIVES
Fellipe Silva Martins
Universidade Nove de Julho (UNINOVE), Brazil
E-mail: silvamartinsfellipe@gmail.com
Wagner Cezar Lucato
Universidade Nove de Julho (UNINOVE), Brazil
E-mail: wlucato@uninove.br
Submission: 14/08/2013
Revision: 28/08/2013
Accept: 11/09/2013
Brazilian agricultural cooperatives have seen
an unprecedented growth in production in the last decade which has led to several
different product diversification strategies. Almost all studies in Brazil
focus on the financial outcome of these strategies but few empirical studies
have addressed them properly. Even fewer papers have dealt with the causes and
possible strategies for the diversification of such cooperatives and their
impact on their strategic planning. Hence, this paper aims at comprehending the
different strategies in operations management for production diversification in
coffee-producing cooperatives in south-eastern Brazil. This was done through a
multi-case analysis comprising six coffee-producing cooperatives. The research
analysed both verbal (through interviews) and non-verbal (multi-criteria
decision analysis) responses to the causes of their diversification behaviours.
It was possible to find out that most of the cooperatives’ rationale for
diversifying is their pre-emptive response to financial crisis followed by
increasing the number of associates as a strategy to overcome this economic
struggle.
Keywords: agriculture, cooperative, production, diversification.
It is
of primary interest for researchers to understand which factors lead
cooperatives to succeed financially (FERREIRA; GONÇALVES, 2007; BIALOSKORKI
NETO, 2007a; BIALOSKORKI NETO, 2007b). This understanding is not only supported
by studies that indicate that cooperatives are more efficient ways of income
distribution (BONTEMS, FULTON, 2009; BARTON 2011) but also as a way of
providing economical sustainability in the long term (HERTIG, 2012). Although
relevant for most countries, it is even more important for the BRIC (Brazil,
Russia, India and China) economic reality in which cooperative results have
considerable impact (ILO, 2001) on the agricultural sectors and national trade
balance (HOSKISSON ET AL., 2000; HOLLENSEN, 2010).
Research
on performance of Brazilian agricultural cooperatives focuses on economic and
financial aspects (FERREIRA; BRAGA, 2007; BIALOSKORKI NETO; COSTA, 2009; DINIZ
PEREIRA et al., 2009), with a few
indications of factors that could have impact on them. Nevertheless, this paper
is upstream-oriented, studying factors already identified in the literature,
limiting them to the ones directly related to diversification of production and
operations management strategies in coffee-producing cooperatives which might
ultimately impact financial performance.
This
paper aims at answering which are the most relevant criteria for the
cooperatives to establish their diversification strategies. In order to do so,
a few steps have been outlined: identify/build constructs, identify possible
trade-offs between them, ranking the emerging strategies and finally, determine
which ones have more impact on the cooperative behaviour. Finally this paper
may find its application among cooperatives’ decision-making crew and
cooperative researchers.
In
order to contextualise readers on the state of coffee cooperatives in Brazil, a
concise review of the current literature is needed. Likewise, it is vital to
understand the role of diversification in cooperatives and its causes.
In
Brazil, regulated by law since 1971, cooperatives have developed and are active
in various branches. Data from the Organization of Brazilian Cooperatives (OCB,
2012), demonstrate that more than 6,500 cooperatives are currently in operation
in Brazil, with over 10 million associates and approximately 300 thousand
employees. Within the Brazilian cooperative scenario there is a highlight for
the productive sector, growing from 1.9% of Brazilian exports in 2005 to 2.4%
in 2011 and being indirectly responsible for maintaining a positive trade
balance of the country, impacting only 0.2% of imports in 2011. In short, the
OCB estimates that Brazilian cooperatives represent 6% of Brazilian GDP.
Among
the Brazilian cooperatives, the agricultural-husbandry ones account for 23% of
all cooperatives. Moreover, the agricultural cooperatives have only 10% of
registered associates in Brazil and 49% of direct jobs generated. The Southeast
region of Brazil leads the overall number of cooperatives in the country with
34%.
The
agricultural-husbandry cooperatives are also responsible for 97.3% of exports
of all Brazilian cooperatives (OCB, 2012), with 39.3% of these exports
originated from the sugarcane/alcohol production complex, 25.6% of the soybean
complex, 16.9% of meat production complex, 9.2% of coffee, tea and spices and
the remain divided among cereals, milk and dairy products, vegetable products,
cotton and fruits.
Coffee
is usually grown in mainly in third world countries, which concentrate most
producers (MILAN, 2008, WINTGENS, 2009) and Brazil has a strong tradition in
its production and exportation. Ferrari (2006) retraces a historic panel of
Brazilian grain production in her thesis, as she affirms that coffee is the
main responsible for the modernisation of Brazilian transportation during the
19th century.
However,
Brazil has been losing its place in this market, as during the 60s the high
prices attracted international concurrency, which led to the loss of importance
of Brazilian market share. Ferrari (2006) cites the heavy frosts in 1918 and
the Great Depression, in 1929, as factors that aggravated the economic
situation for coffee producers, and claims the intervention policies adopted by
the Brazilian government in the 60s and 70s to boost internal production and
consumption by the internal market based on freezing prices and controlling
food imports (including coffee) as one of the quality lowering factors which collaborated
to the Brazilian’s losing of market share. Farina and Zylberstajn (1998) also
appoint lack of quality, high production costs, coffee producers’ high debts,
climatic problems and price oscillations as a few of the main reasons for
Brazil to lose space in the international coffee market.
Although
historically linked to coffee, Sao Paulo was not the only state engaged in its
production. In the Parana state the agricultural production shifted from mate
to wood and later coffee and has become one of the main coffee producers, whose
production is nowadays only beaten by the soy complex in volume and return
(FAJARDO, 2006). Other states have also significant coffee production, with
four of them concentrating most of the Brazilian production.
Despite
purchasing other crops and products, coffee has been the main product of these
cooperatives. Nevertheless, aversion to risk, market stagnation for the last 20
years and climatic disasters obliged cooperatives to start considering
diversification strategies in order to survive. Ferreira and Braga (2004)
demonstrate that cooperatives which did not focus on coffee also started
purchasing it to diversify their production, even though it was a minor
production in some states. Saes, Santos and Pinto (1995) blame the aversion to
risk – especially under conditions of fixed costs and great market value
fluctuation – as one of the main reasons for coffee cooperatives in Minas
Gerais to be gradually switching production towards other cultures, as has
already happened more intensively in Sao Paulo and Parana. In Minas Gerais,
heavy frosts in 1979 and 1982 reduced significantly coffee production and
forced cooperatives to diversify their production in order to maintxain their
industries and processing plants as is the case of Cooxupé - the biggest coffee
cooperative in Brazil.
Milan
(2008) demonstrates that commodity coffee market might be stagnated but there
are efficient alternatives to commodities’ price oscillation as specialty
coffee.
The
foundation of this paper is that diversification strategies affect the
financial performance of agricultural-husbandry cooperatives as it is a form of
benefitting from their current production structure, organisational structure
and economies of scale to add value to their production. Oijen and Hendrikse
(2002) attest the unavailability of literature that associate cooperatives and
product diversification yet they argue other sources of literature exist for
diversification in other fields.
Several
authors (PLESHKO, HEIENS, 2012, HUSSAIN et al., 2013) concur in that
diversification is one of four core alternatives companies must choose –
besides increased market penetration, market development and product
development – and that its acceptation implies in continually weighing and
comparing the advantages of all them. He also provides a simple but useful
framework to describe diversification by classifying its possibilities in three
main groups: vertical diversification (verticalisation), horizontal diversification
(within the main or primary scope) and lateral diversification (outside the
main or primary scope).
Prymon
(2011) reviews the same original concepts by demonstrating that only
diversification strategies are truly consolidated and have real implementation
possibility as the other strategies depend on external conditions to the
company’s reality to be fully applied. Sexton (1986) studied vertical
integration of cooperatives and stated that the main gains of the cooperatives
may be found between the scale economies and bargaining power. Donoso et al.
(2003) stretch this concept by affirming that cooperatives strive to control
all the production process until the end consumer in order to obtain these.
As
for agricultural production, Mehta (2009) endeavours to explain the basic
concepts of diversification as an equal-shared use of the land for a multitude
of crops and concentration – or minimum diversification as he called it – the
whole use of the land to produce one sole kind of crop. Likewise, he explains
that even though it is easy to isolate concentration from diversification, one
must proceed to ascertain the degree of diversification in an already
diversified environment, i.e., the ratio of the products and their weights.
Mehta (2009) also follows the current approach of using the Herfindahls’
diversification index (OUSTAPADISSIS; NTAFIS; MOUTRAN, 1993; ARIYARATNE et al.,
2000; RAHMAN, 2008) or one of its various adaptations (SECER, 2008; SINGH;
PARK; LITTEN-BROWN, 2011) as one of the measures for diversification of
production in farms and agricultural and husbandry cooperatives.
Culas
and Mahendrarajah (2005) have studied reasons why agricultural production is
more prone to diversify its production considering that while all fields of
activities are exposed to financial risk and uncertainty, climate and natural
factors have a substantial effect on the production outcome. They also add
other factors related to marketing, price uncertainties, opportunistic
behaviour and local policies. In this sense they follow Pope and Prescott
(1980), who acknowledged that larger farms tend to be more diversified whereas
smaller farms have an inclination not only to be less diversified but also
managed by less experienced owners. They also argue the impact of the choice of
diversification is of paramount importance to the farmer’s welfare and income
return. In addition, comparing to common farms, they noticed a correlation
between product concentration and the cooperatives. Finally, O’Connor and
Thompson (2006) discuss the relation between maintaining a position based on
commodity production or product differentiation and state that the former group
usually reap more financial advantages.
Thus,
it can be inferred the lack of general research linking cooperatives and
diversification. Also, it appears that studies that deal with further
developments as diversification causes and strategies as well as trade-offs
between them are non-existent.
In
this paper we aim at comparing trade-offs amongst different strategies in
production diversification for coffee-producing cooperatives in south-eastern
Brazil, which concentrate most of Brazilian coffee production.
As
the objective of this paper is to investigate which criteria are employed by
the cooperatives whilst developing diversification strategies, it has been
empirically tried to classify the possible causes/strategies and built
propositions that might explain the reasons for their adoption. A number of
authors have employed classification as a means to develop constructs and
theories (BAILEY, 1994, FETTKE; LOOS, 2003) and it is consistently used in
organisational and operations’ management studies.
Since
this research was started with the development of theories before testing and
validating them, it cannot be classified it as a case study, yet being
acknowledged as grounded theory (MANUJ, POHLEN, 2012). Following their
approach, the development of the research was split in four parts: 1)
definition of the conceptual classifications (constructs); 2) discussion –
obtaining data from interviews and PAPRIKA methodology; 3) analysis and
contrast with the conceptual classifications (constructs); 4) comparison with
the literature and final limitations.
To do
so, six cooperatives whose production were concentrated on coffee but also
purchase and process other crops and products were selected and their
descriptions are depicted within the results and discussion session. Although
the number of cooperatives chosen might not be enough to generalise, other
researchers have successfully given evidence of strong theoretical and
practical implication with a similar pool sample (WU; CHOI, 2005).
As
for the first part, it was aimed at discussing which diversification
causes/strategies were chosen by the cooperatives and the rationale underneath
them through a semi-structured interview, which is usually the most appropriate
alternative for qualitative research (BRYMAN, 1995; COLLINS; HUSSEY, 2003).
Throughout the interviews, so as to ensure homogeneity in the answers, a body of
basic questions was developed. Along with the basic information about the
cooperatives, the questions were focused on their processes, diversification
causes and future plans. The interviewees were chosen as being part of the
managing staff of the cooperative. As for the interview sessions, they usually
took 30 minutes each with additional 30 minutes for the Paprika questionnaire.
All the interviews were conducted during the same schedule (October 2012).
To
support and counterbalance the interviews, it was decided to re-test their
answers based on the Potentially All Pairwise Rankings of all Possible
Alternatives method (HANSEN; OMBLER, 2009) – also known as Paprika, which
provides a safer way of measuring options and choices in strategies as although
the inputs and outcomes are commonly perceived as verbal descriptors,
internally they are treated as mathematical values for ranking and sorting. The
reason for this re-testing is that by only asking questions during the
interviews, we managed to perceive most of their intentions for the present
course actions and future ones – i.e., what plans they have in mind to tackle
the consequences of the pre-built scenarios (constructs) – yet using a
Multi-criteria decision analysis (MCDA) method as Paprika enables the
researcher to understand concepts of trade-offs between these causes/strategies
and overcome the sheer verbal analysis barrier.
The
goal of an MCDA method is to consider multiple criteria in the same
decision-making situation, and thus, being able to sort preferences and
trade-offs. As for Paprika itself, this method equates verbal decisions to
values – for instance, higher financial performance and medium associates’
production absorption versus medium financial performance and higher
associates’ production absorption - and translates the choices into
mathematical groups and choices (a1 > b2 vs. a2 < b1) and finally sorts
out all the criteria into groups and ranking of choices. The outcomes can be
analysed through their mathematical relationships, but can also be interpreted
as non-mathematical values to make decision-making easier to untrained
practitioners. Although more commonly known methods (AHP, ANP, etc) are used in
situations alike, it was preferred selecting Paprika for its ease of use and
mathematical sorting, ranking and trade-off analysis possibilities. Hence,
comparison between the interviews’ analyses and ranking outputs/trade-offs from
Paprika is useful to confirm the causes/strategies chosen in diversification
and their results perceived by cooperative boards.
Prior
to interviewing cooperative members, it is necessary to develop constructs as
basic assumptions. These assumptions are also the basis for the interviews and
the decision-making matrix. It must be said that although a strategy is usually
understood as a form implemented by an organisation to handle a cause, for the
sake of this paper causes have been closely identified with strategies and
clustered together.
The
constructs’ original references are Ferreira (2002), Ferreira and Braga (2004)
– diversification, operation time and expansion of associates; Nilsson (2010) -
Risk Aversion; Gimenes, Sousa and Gimenes (2007) - Climatic Conditions;
Increase of Area – Gonçalves and Vegro (1994); and finally Lafleur and Merrien
(2012) - Economic Crisis.
The
first construct considered by this paper deals with the Brazilian cooperatives’
length of operating time as a factor of success and failure in their
development and survival. It is paramount to the comprehension of Brazilian
cooperatives as the length of their existence is structurally tied to the
Brazilian economical history from the 30s to this time.
One
of the reports of The Brazilian South Region Development Bank (BRDE, 2003)
achieves a comprehensive depiction of Brazilian cooperative history and states
that from the 30s and especially after the 40s this movement was heavily
influenced by the presence of the first development agencies, under the new
economical intervention policies enacted by the federal government (as a
response to the Great Depression) and the promulgation of the first set of laws
regulating the sector in Brazil.
During
the 50s and 60s governmental actions shifted from stimulating the growth of
cooperatives in Brazil to the prioritisation of industrialisation within the
existing cooperatives, which had two main goals – increasing agricultural
production and discharging workers so that they could be absorbed in urban
activities. Lima (1974) notes that until
1957 there was a low rate of cooperatives engaged in coffee production.
In
1965 the National Rural Credit System was created and the “golden age” of
cooperatives in Brazil started with the easy access to credit and abundance of
government loans. This period would endure until the 80s and culminated in the
crisis of cooperativism nationally as Brazil plunged in economical bankruptcy,
which, according to Nicácio (1997), led to self-management of the sector as it
saw itself abandoned by the Brazilian government and suffered from the steep
shrinkage from R$ 21.6 billion in 1986 to R$ 5.6 billion in 1995 in government
loans. In addition, abrupt changes in the monetary, exchange-rate and budgetary
policies aggravated the cooperatives’ financial performance.
In
the 90s, cooperatives have regained balance, and despite many having shut down
operations, the ones that remained nowadays benefit from and capitalise with
the more stable economic environment. Consequently, the time a cooperative has
had to develop and mature may be closely tied to the way it performs.
Many
different opinions exist about the risk aversion especially concerning
cooperatives. Kimball (1988) established the reason for cooperation as a
non-formalised understanding in a group sharing a few members’ risk, thus dividing
the negative outcome. Nielsen (2000)
also remarks that the farmer also faces a risk when balancing the pros and cons
of being a member and not having full control of the sales and their margins
and being a non-member and having to face all the risks of non-insertion in the
market on their own.
As
for agricultural and husbandry cooperatives this is even more important as
there are more incontrollable factors involved in the production activities.
Also, as not all cooperatives assume a verticalisation process, their
dependency on commodities and the uncertainty about the possibly wavering
prices might add a good amount of risk. Thus, the need of gathering in groups
is part of the basis for the creation of a cooperative.
Nevertheless,
some cooperatives have an even more conservative profile, as Bialoskorski Neto
(2000) recalls, and end up sharing operations with non-members as a form of
diminishing risk, particularly when these third-party associates are
professional ones. This author also adverts that there is also a tendency of
cooperatives that largely show aversion to risk usually being the ones to mask
their situations and conceal their reality. Nielsen (2000) also notes that
cooperative members generally tend to be conservative towards risk when it comes
to “diversification and global investment” (p. 56). Thus, risk is present at
all phases of agricultural and husbandry cooperative operations, be it
production, insertion in the market, pricing, processing, selling and so on.
Natural
disasters are part of the outcomes of all agricultural and husbandry
cooperatives but coffee plantations are especially prone to die due to frost
damage and during the 70s a series of heavy frosts ruined most of the coffee
production – particularly the one in 1975 which almost decimated the coffee
plants (SOUZA; BIALOSKORSKI NETO, 2004).
The
harvest in 1975 (before the frost) in Paraná State amounted to 10.2 million
bags – approximately 48% of the Brazilian production, which made Paraná the
biggest exporter inside Brazil then – and the next year the harvested coffee
summed up 3.8 thousand bags of coffee, equivalent to 0.1% of all Brazilian
production. That had two main consequences: the shift from the production of
coffee to other crops – mainly soya and wheat – and the migration of the
farmers to others states northward.
Other
states also suffered and are still vulnerable to the consequences of the frost
and other natural disasters. Nowadays it is one of the main concerns of both
the Brazilian cooperatives and government funding agencies to protect and
develop ways of enhancing the agricultural production to these climatic
disorders but it is an always present risk and fear. Hence some cooperatives
may choose to trade less income from coffee for obtaining long term financial
sustainability.
In
Brazil, the number of agricultural cooperatives has largely seen no changes
varying approximately 15% between 1994 and 2010 whereas the number of
associates was increased by 308% in the same period. Many reasons could explain
this phenomenon, but the restructuration of Brazilian agribusiness both in
cooperatives as in fully market-driven companies, the local currency exchange
rates (similarly to other third-world countries) and the professionalisation of
agribusiness are probably the main explanations.
Moreover,
as in other countries, Brazilian cooperatives have also woken to external
market investment and started playing with mergers, acquisitions and other
vertical and horizontal absorption strategies (MERLO, 1998), which also led to
the expansion in the number of associates to each cooperative. Thus, having an
increase in the number of associates is an important advantage to any
cooperatives but especially in Brazil, where local laws do not compel
associates to sell or even maintain a pre-determined level of financial
interaction with the cooperative, hence putting associates in a comfortable
position to analyse the pros and cons of selling their produce to the cooperative
or directly to the market (free-rider problems), leading to opportunistic
behaviours which might undermine the cooperatives’ strategic planning,
including their diversification strategies.
No
studies could be found in the Brazilian agricultural and husbandry cooperative
sector about the direct impact of the increase of operation area of the
cooperatives in their production and financial outcomes.
Differently
from only increasing associates numbers – who may be concentrated in the area
around the cooperative – opting for increase in the operation area encompasses
new costs and new strategies as it may be useful to have not only a network of
warehouses to absorb local production but also pre- or full local-based
processing facilities. It may also involve the choice in keep focusing on the
previous product(s) or opening their cooperative to newer products.
As
mentioned before, Brazilian cooperatives have benefitted from large sums of
money lent by the government and also suffered from their withdrawal in times
of need. Brazilian economy agonised during the 80s and in the end of that
decade a new model of agricultural production has arisen, concentrating the
purchasing power in the hands of few broker companies, leading to different
economic scenarios and even oligopsonistic ones (GONÇALVES; VEGRO, 1994), where
full-fledged speculation and total lack of liability between the brokers and
sellers predominates.
On
the strength of it, big farmers may keep playing in the market, but for small
and medium farmers that possibility sounds sombre. Thus, they feel compelled to
join or form cooperatives to avoid a completely helpless situation, and if this
is the main reason for the existence of the cooperative, it may induce the cooperatives
to base their strategies in the most conservative scenarios.
The
selected cooperatives were first contacted by telephone and agreed to be
interviewed on the condition that their names, places or any other information
that might lead to their identification would be undisclosed, as is the common
practice in Brazil. The interviews were long enough to grasp the importance
that the role of diversification plays on these cooperatives’ daily lives, yet
an in loco visit could add a broader perspective as it could or not match the
information provided.
For
the six cooperatives, the same order was followed: semi-structured interview
and Paprika questions. As for the Paprika methodology, it is usually sent a
questionnaire with option pairs so that the interviewee can choose the one he
prefers or that explains better the situation in case. We chose to do this
differently as the number of options was short, and could be done as an
extension to the telephone interview.
The
first cooperative (A) is a traditional cooperative and their main interest is
in expanding the number of associates so that they may have a better financial
basis to trade coffee and other products. The interview revolved around their
plans to expand operations which explained their need of more associates who
would provide not only more income to expand but also more production.
When
clearly asked about their choice of diversification strategy it was stated that
it took place whenever and wherever it was needed and that even if there were
some guidelines discussed during internal meetings and associates’ gatherings
they were not strictly enforced.
The
next cooperative (B) displayed a different behaviour by stating that one of
their priorities is to expanding operations but not by putting all their eggs
in one basket. This seemingly conservative profile is supported by their
history of approximately 40 years in operation, even if coffee was not always
their main product.
During
the interview, their line of thought suggested that their good financial
situation of late is due to the fact that previous boards of directors have had
the courage to break up with their past production focused on coffee to a more
modern way of seeing their cooperative by opening space to other products and
activities. When asked whether this option would weaken their coffee
production, it was replied that it would not do any good to have higher income
with coffee if it could all change in a second, be it as a result of a bad
harvest or financial market turmoil.
This
last question raised the issue of the lack of apparent knowledge of their
strategy. The answer lies in the results of the Paprika questionnaire, in which
it was clearly showed through question after question that their main concern
was the financial situation. Whenever they had to choose between climatic
changes or aversion to risk and economic crisis, the later was always appointed
as the rationale for their decision.
The
third cooperative (C) exhibited a fairly diversified portfolio of products
absorbed by the cooperative but coffee still is their main product. They show
an example of apparent lack of direction in their diversification strategies
since different strategies were adopted in the last two decades without passing
a full evaluation by their associates or not being followed for time enough to
see their efforts paid off. In addition, their board of directors has been kept
unaltered for the last 15 years.
Cooperative
C maintains a position close to the cooperative A, in which they expect an
expansion of their operations (especially processing and distributing coffee),
but this expansion is done according to the local needs and it does not follow
any guidelines, rather than being decided when needed.
They
also opt for the search of new associates as a diversification strategy as they
need a larger production to vindicate their processing plants, in view of a
previous wave of diversification that led to more products absorbed by the
cooperative but with less concentration.
The
fourth cooperative (D) was the only one to choose a different factor for their
diversification strategy: climatic conditions. According to the interviewee the
cooperative has suffered a lot from several pests in the 90s that afflicted the
whole production including coffee. However after answering the Paprika
questionnaire, it has showed a certain amount of doubt between this factor and
the economic crisis that these pests initiated. Due to the similar or
consequential aspect of the factors they may be interpreted as climatic
conditions being followed by a subsequent economic crisis as a reason for their
diversification.
The
fifth cooperative (E) was the smallest and youngest of the cooperatives
interviewed. According to the interviewee, the reason for their foundation was
the economic crisis, and the fragile position the farmers found themselves
into. As such, they formed a cooperative, but it is centred in the production
of coffee. They display a low level of diversification but it was stated that the
plans of the cooperative include diversify to other crops and husbandry-milk
activities in order to complement their production.
The
sixth and last cooperative’s positioning (F) is to increase their associates’
basis. According to the interviewee, they are planning to open several local
warehouses to increase absorption of local production and invest in processing
facilities. Their diversification strategy is to migrate from coffee to other
crops (corn and soya) in the commodity market and keep investing in the
processing of coffee towards final consumers.
During
the interviews it was stated that one of the reasons for their diversification
was also the economic crisis in the 80s and 90s and that this crisis would not
have affected them as much as it did if they had increased the number of
associates during these decades.
This
work aimed at better comprehending agricultural cooperative’s point of view
concerning production diversification. To delve into this matter a group of six
coffee-producing cooperatives was chosen, which provided a homogeneous
environment but – due to the low number of cases – was not enough to be a
source of generalisation to the whole cooperative universe in Brazil.
Nonetheless,
it provides useful insights on the way Brazilian cooperatives choose their
strategies as it demonstrates that their choices are not based on a thoughtful
strategic plan, but rather on a daily basis. This might find its origin in the
fact that none of the interviewed cooperatives would fit in the top category of
financial performance, according to the classification of the Brazilian
National Economic and Social Development Bank (BNDES, 2011).
However
this comprehension might be ambiguous or unclear and the insights provided by
the analysis given by Paprika are of great support to understand their relative
importance. Since Paprika is one of the Multi-criteria Decision Analysis
methodologies, their core might be analysed by the Choice Experimentation
field, which, according to Azevedo, Corrigan and Crooker (2008), have become
one the most used valuation methods because of their ability to understand
multifaceted issues, based in the utility theory. One of the features of such
theory is the possibility of ranking the attributes and their utility values:
Thus
it becomes clear each attribute’s influence in the general understanding of the
strategies. However, to delve into the core of the cooperatives’ system of
values, one must continue to employ one of the main applications of the utility
theory which is the concept of Marginal Rate of Substitution.
According
to Pindyck and Rubinfeld (2012), the Marginal Rate of substitution is the rate
of exchange between two items that would satisfy the trade, usually taking the
form of a curve which could be interpreted by its two axis (x, y), in which any
momentum would mean that the rate of x for y in that point would satisfy the
exchange. This curve is thus defined as the indifference curve, which means
that by extracting any given points from this curve, the situation will bear
the same results to the decision maker, as the changing amounts of x and y
would compensate for the lack of each other. However, for this study, the
software only returns a specific point (instead of a curve), as the pool of entities
tested is small and they were treated one body for the sake of the research.
Nevertheless,
the Marginal Rate of Substitution is a powerful tool to understand in which
terms the cooperatives are willing to let go or to adhere to one or more
strategies and how far they would be willing to do so, as can be interpreted by
the quantitative analysis of the different Marginal Rates of substitution. The
advantage of not having a curve is that it is possible to calculate the average
Marginal Rate of Substitution for each construct in comparison with the others,
which provides some extra information on their relationship.
Table 1 –
Attributes (integers) and utility values (normalised %)
Operation time |
Integer |
Normalised % |
|
|
Short operation time |
0 |
0.0% |
|
Medium operation time |
3 |
1.6% |
|
Long operation time |
6 |
3.2% |
Risk aversion |
|
|
|
|
Little aversion |
0 |
0.0% |
|
Medium aversion |
10 |
5.3% |
|
High degree of aversion |
31 |
16.6% |
Natural disasters Unfavourable
climatic conditions |
|
|
|
|
Low effect |
0 |
0.0% |
|
Medium effect |
7 |
3.7% |
|
High degree of effect |
9 |
4.8% |
Expansion of associates |
|
|
|
|
Little impact |
0 |
0.0% |
|
Medium impact |
20 |
10.7% |
|
High impact |
40 |
21.4% |
Increase of area |
|
|
|
|
Little impact |
0 |
0.0% |
|
Medium impact |
11 |
5.9% |
|
High impact |
19 |
10.2% |
Economic crisis |
|
|
|
|
Little influence |
0 |
0.0% |
|
Medium influence |
41 |
21.9% |
|
High influence |
82 |
43.9% |
The
following table shows the Marginal Rates of Substitution of the constructs
versus the others, according to the body of cooperatives:
What
can be first deduced from this table is that obviously Economic Crisis is by
far the most important reason for cooperatives to diversify and also that
Climatic conditions and Operating time have a very low influence in the
cooperatives’ choice of strategies. Applying the concept of Marginal Rate of
substitution, we can then understand that the body of cooperatives value
Economic Crisis as 13.7 times more influential on their production
diversification strategies as Operating Time - the widest relative importance
found on the table. However it is more useful to analyse the data obtained
through the average Marginal Rate of substitution. In this scenario, the
distances between the constructs are less pronounced, yet Economic Crisis still
more than doubles the MRS of Increase of Associates. This is consistent with
the interviews, as Economic crisis is cited by 5 out of 6 cooperatives.
Table 2 -
Relative importance of the items - Marginal Rate of Substitution of the
constructs on the column by the ones in the row.
|
Economic crisis |
Increase of associates |
Risk aversion |
Increase of area |
Climatic conditions |
Operating time |
Average MRS |
Economic crisis |
|
2.1 |
2.6 |
4.3 |
9.1 |
13.7 |
6.36 |
Increase of associates |
0.5 |
|
1.3 |
2.1 |
4.4 |
6.7 |
3.00 |
Risk aversion |
0.4 |
0.8 |
|
1.6 |
3.4 |
5.2 |
2.28 |
Increase of area |
0.2 |
0.5 |
0.6 |
|
2.1 |
3.2 |
1.32 |
Climatic conditions |
0.1 |
0.2 |
0.3 |
0.5 |
|
1.5 |
0.52 |
Operation time |
0.1 |
0.2 |
0.2 |
0.3 |
0.7 |
|
0.30 |
On
the other hand, the role played by Increase of Area seems to be the one of a
medium-sized influence factor and Increase of Associates and Risk aversion have
a substantial influence on the strategies but not as much as Economic Crisis.
Increase of associates is quoted as the most influential by 3 out of 6. What must be taken into account is that both
constructs are intertwined and could be interpreted in conjoint.
As for
these two constructs, while Economic Crisis is the most significant (as it is
present in almost all answers, and is also top-ranked in MRS), the strategic
planning of cooperatives still values - at least verbally - Increase of
associates as a greater influence in their choice of production diversification
strategies.
After
analysing all the cooperatives’ interviews and Paprika questionnaires, it can
be understood that the main reason for cooperatives to diversify their
activities is the drive for expansion of associates. That may be linked to the
literature concept of value migration strategy (SLYWOTZKY, 1996; WALTERS, 2012)
in which the coordination of the chain is primordial. It also appoints to the
double nature of such cooperatives which split their activities in the
buying-selling commodities and their processing and selling to the final
consumer. In order to achieve those, in a context where cooperatives depend on
the purchases from their associates to keep their processing facilities working
– and especially in a fluctuating market which means risk to them – it is
necessary to reinforce their associate basis as a first step in preparation for
bigger plans.
Second,
almost all cooperatives also listed economic crisis as the main or minor reason
for their diversification. This may be one of the reasons for none of them to
fit in the BNDES’s top financial performance category. It is also indicative of
their lack of strategic planning and their waiving specialised external
consultancies.
Only
one cooperative (A) has not cited economic crisis in the reasons for their
diversification. Their motives for diversification are centred in the increase
of associates which is closely tied to the increase of area. It seems that even
in their lack of strategic planning, they have at least a direction to pursue
which is the expansion of their production through the increase of associates.
Thus
we can break down their main and secondary factors for diversification as such:
Table 1 – Main
factors for diversification.
Cooperatives’
Diversification Factors |
||||||
|
A |
B |
C |
D |
E |
F |
1st
|
Increase of
Associates |
Economic
Crisis |
Increase of
Associates |
Climatic
Conditions |
Economic
Crisis |
Increase of
Associates |
2nd
|
Increase of
Area |
Aversion to
risk |
Economic
Crisis |
Economic
Crisis |
Aversion to
risk |
Economic
Crisis |
This
leads to the comprehension of the connection between the two main reasons for
cooperatives to diversify their productions: economic crisis as a source and
increase of associates as the solution most cooperatives have chosen to end
their economic turmoil history. It also demonstrates that – at least for the
cooperatives interviewed – climatic conditions, increase of area and aversion
to risk are secondary and subjected to the main factors.
Studies
on cooperatives tend to focus only on the economic outcome. Few researchers
have addressed the problems related to diversification within those
cooperatives, and even fewer deal with causes and strategies for such
diversification options.
This
paper’s goal was to provide basic comprehension on these causes/strategies in
Brazilian coffee cooperatives. As it could be understood from the data gathered
in the research, most of these cooperatives in Brazil face economic struggles.
As for the strategies chosen by them to overcome such hardships, the most
important was found to be the increase in their operations, especially when
increase of associates is taken into account. It is also demonstrated that
although literature in Brazil indicates other problems as having significant
impact on their financial outcomes, Climatic conditions and Operation time have
in fact little impact on their strategic planning.
As
for practitioners, it is also enlightening to perceive that most cooperatives
concentrate their efforts in the increase of means of production, which are the
consequences of increasing their associates, as a goal to improve their
financial situations.
Although
providing important evidence for the pursuing of studies in the area, this
paper should not be held able to generalise its conclusions to the whole
universe of coffee producing cooperatives in Brazil. This is due to the fact
that coffee production in Brazil is concentrated in three states (Sao Paulo,
Minas Gerais and Espirito Santo) but new growing areas emerge everyday (Bahia,
Brazilian Midwest), presenting a broader geographical area, which prevented in
loco interviews.
A
second important limitation is that the number of cooperatives is low compared
to the hundreds of cooperatives available. Also, the constructs are all linked
in their conception and should not be understood separately. Other studies aimed at better comprehending
these constructs and expanding them may arise.
This
study also concentrated in medium-sized cooperatives, which still struggle with
the economic difficulties inherited from the 80s and 90s and this scenario may
be different for top tier cooperatives, which have most probably overcome this
situation.
Another
limitation is that the Paprika methodology works only on personal choices which
may or may not reflect reality for the whole cooperative background. The
methodology itself is planned to avoid such research problems, but in loco
interviews could have been used to complement its results. Also, the statistics
used do not count for inter-correlation, and for future studies, more complex
methodologies could be used – as structural equation modelling – so that the
internal relationships between the constructs may be better comprehended.
As
for the constructs themselves, in case of further studies, it is also advised
to empirically attempt to separate constructs from strategies, which is
something not found in the literature. Other studies may also be developed to
confirm these constructs and results and expand their comprehension by using a
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