Exploring clusters and their value as types of business networks in the agricultural sector

Matopoulos, A., Vlachopoulou, M. and Manthou, V.

Department of Applied Informatics, University of Macedonia 156 Egnatia st. 540 06 Thessaloniki, Greece tel. +30 2310 891820 / fax +30 2310 891804

e-mail: arismat@uom.gr, mavla@uom.gr, manthou@uom.gr

Abstract The undisputed link of the agricultural sector with regional economies, along with the increased competition, fosters agri-business companies to rethink their business philosophy and to transform from isolated firms to members of more extended business formations. The paper examines a particular type of business network, the cluster. It focuses on the concept of clusters and on cluster-based strategies in the context of agriculture. In particular, the paper explores the value of clusters by taking into consideration the particularities of the agricultural sector. Potential benefits and constraints of agri-business cluster development are also presented.

Keywords: agri-business clusters, driving factors, small-medium enterprises 1. Introduction In most of the business sectors all over the world new forms of cooperation among companies, have been developed in response to the increased international competition. The ability of enterprises to compete has been directly linked with their ability to collaborate with other enterprises. O’Keefe (1998) suggests that enterprises nowadays have to be first and foremost a good collaborator in order to become an efficient competitor. However, collaboration should not be restricted among companies. Often, collaborative action between firms and supporting local private and public institutions is needed in order to meet the challenges of increasing competition in both domestic and international markets.

In the agri-food sector, collaboration issues are increasingly becoming more important, as nowadays it is the system of growers-packers-exporters of a country that competes against the business system of another country, and not business entities independently (Nitchke and O’Keefe, 1997). Within this changing environment agri-business companies, which are mainly SME’s, find themselves often unable to adapt, to be flexible and to respond to the challenges, loosing their competing ability, due to

their size constraints. The formation of business networks is a powerful means for overcoming the size constraints of SME’s and succeeding in an ever more competitive market environment. Through networking, individual SME’s can address the problems related to their size and improve their competitive position.

In this paper the concept of cluster, as a particular type of business network is discussed. The aim of the paper is to enable policy makers and individual enterprises to have a clear view on the competitive power and the value of clusters. In particular, the paper initially explains the necessity of business networks in the agricultural sector and presents the factors that have affected business network creation. Next, the emergence of cluster-based strategies is presented along with the potential benefits and constraints of agri-business cluster development. Finally, an agri-business cluster is proposed along with the potential entities, their roles and ICT related applications that will enable the successful cluster operation. 2. Factors affecting the creation of business networks in the

agricultural sector A business network encapsulates organisations and enterprises collaborating and working together. It results from enterprises’ recognition that there are cases where working and operating alone is not sufficient to achieve the desired goals (Huxham, 1996). Business networks such as cooperatives, producer groups and other forms of collaborative organizations have traditionally been important in agriculture. In the following sections the factors affecting the development of business networks in the agricultural sector are presented. Factors are divided to internal ones, which are related to the characteristics of the industry and external ones which refer to business environment conditions.

2.1 Internal factors There are two main internal factors that have traditionally affected the development of collaborative organizations in agriculture. The first factor has to do with the specific attributes of agricultural products’ and the other one the structure of the sector. Agricultural products present a number of unique attributes, such as: seasonality of production (due the biological life cycle), perishability (difficulties in handling, uncertainty of production (due to weather conditions) and difficulties in pricing (due to the aforementioned factors). These specific products’ attributes, have forced many of companies operating in the sector to develop collaboration strategies in an effort towards minimizing time requirements in product processing and minimizing uncertainty in product supply. Additionally, in the vast majority of the

times, the total amount of supply needed, has to be delivered by many farmers instead of one or few.

The other internal factor has to do with sector characteristics and with the fact that most of the production and consumption occurs in different places, the countryside and the city respectively. As a result, a number of entities linked from ‘farm to fork’, such as: farmers, input suppliers, co-operatives, pack-houses, manufacturers, transporters, exporters, importers, wholesalers, retailers, and finally consumers had to be synchronized. An additional characteristic of the sector is related to the power asymmetry among entities. For example, farmers and co-operatives have been traditionally less powerful players than wholesalers and retailers and their only way to surpass the power disadvantage was by following collaboration strategies (cooperatives-joint ventures etc.) as a means for overcoming their size constraints and succeed in an ever more competitive market environment.

2.2 External factors One of the most important external factors is the globalization and deregulation of the markets, which generally resulted in increased competition. The existence of global companies and global markets changed completely the business environment and the companies’ business agenda. Success wan no longer measured against national standards, but rather against international benchmarks. In the agri-food sector, the globalization and deregulation of the markets has been followed by consolidation at all levels but particularly at the retailer level. As a result, global retailers have had increased needs and requirements from their suppliers not only in terms of quantity, but also in terms of logistics process.

Other important factors are related to government policies such as specific agricultural policies, as well as, more general national policies for development. Particularly in Europe, agricultural policies in the past have been designed in such a way to foster and support collaborative organizations. Nowadays, despite the fact the European agricultural sector is downsizing, most of the countries have recognized the increased social importance of the sector. The social importance draws from the fact that for many regions in rural areas, agricultural activity is the main form of economic activity, both revitalizing regional economies and keeping people at the countryside. As a result, in many cases agricultural policies do not stand as isolated policies but they are rather perceived as more of development policies.

Nowadays, there is a dramatic increase of consumers’ awareness on agri-food safety issues. This trend, in combination to European laws and regulations for products’ safety has put enormous pressure on agri-food companies, forcing them to improve coordination of processes and activities in an effort to improve the control and the monitoring of production processes. As a result, agri-food companies developed

collaboration strategies particular between entities at a different level (e.g. farmer-manufacturer-retailer, farmer-cooperative-retailer) in order achieve undistorted information exchanges and track and trace efficiency.

2.3 Linking driving factors to specific business network types Not all the driving factors described before have affected business networks’ creation in the same way or in the same extent. In figure 1 below, combinations of the driving factors associated with specific business network types are presented.

Figure 1. A representation of the driving factors affecting business network creation

Apart from the inherent trend of the sector towards collaborative organizations in general, driven by product and sector characteristics, other factors have affected business networks creation differently. For example, markets’ globalization and deregulation in combination with product and sector characteristics have fostered the creation of horizontal networks with leading firms surrounded by a vast network of suppliers, spread over different countries (Menard and Klein, 2004). In addition, the increased consumer awareness on food safety issues in combination to the two previous factors have fostered the creation of vertical networks in an effort to improve the control and the monitoring over production processes. Finally, the recognition of the social importance of the agricultural sector, in addition to the economic one and the expanding nature of competition to global, has forced governments to support cross-sectoral networks (clusters) in an effort to remain competitive.

3. Cluster as a type of business network In the face of the foregoing changes and challenges a number of different collaboration strategies and business formations were developed. One of the most promising strategies was the formation of a particular type of network, the cluster. 3.1 An overview of clusters While the presence of this particular network type can be traced back in history (Piore and Sabel, 1984; Putnam, 1993), it is only the last decades where clustering has been recognised as an effective business strategy (Neven and Droge, 2000). A precise definition or at least a set of principles for delimitation of clusters appear to be somehow missing in much of the cluster literature, as also emphasized by Maskell (2001), due to multidimensionality and vague character of clusters which pose problems of theoretical and empirical definition, as well as, methodological investigation. Feser (1998) notes there is no cluster theory per se, rather a broad range of theories and ideas that constitute the logic of clusters. According to Porter (1998), clusters can be defined as: “geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (for example universities, standards agencies, and trade associations) in a particular field, linked by commonalities and complementarities”. Clusters are based on complex relationships among the involved partners. These relationships can be built on common or complementary products /services, production and distribution processes, core technologies, resource requirements, logistics, education, training and outsourcing services support. Porter (1998) argues that there are four reasons responsible for the clusters’ genesis. Clusters can occur because of historical circumstances, because of geographical circumstances (industries already located in a certain place), because of innovations and accidentally.

3.2 Conceptualizing clusters According to Brusco (1990), a business network is comprised of three different kinds of firms. “Final-firms” (F.F.) that produce for the final market, “stage-firms” (S.F.) that are involved in only one stage of production, and “others” (O.F.) that work in a different sector which is not directly linked to the “Final-firms” sector. By expanding Brusco’s categorization to other organizational type, such as institutions (I.) that often influence the business activity of a business network, and by taking into consideration Thompson’s (1967) seminal categorization of organizational interdependencies, an overall conceptual framework for clusters is presented. Under this framework, business networks consist of three different types based on the mix of organizations and the type of interdependencies that participate.

Figure 2. An overall representation of business networks

A cluster consists of both firms and institutions and is characterized by the existence of pooled, sequential and reciprocal type of interdependencies. The value base of this particular network type arises from their regional character. Proximity results in easy access to specialized suppliers, services and human resources, reduced transaction costs, information spillovers, increase capacity of innovation by diffusing organizational and technological knowledge (Asheim and Ιsaksen, 2000; Competitiveness Group, 2002). Horizontal networks, unlike clusters do not include other organizations, but firms only and they are created in one sector. Relationships between F.F. and S.F. are characterized by pooled interdependencies, while relationships among different F.F. (e.g. strategic alliances, joint ventures) are characterized by reciprocal interdependencies, which means that firms are mutually dependent on the choices and the actions made by each other (Lazzarini et al., 2001). The main value base in horizontal networks is knowledge diversity and network externalities. Vertical networks, similarly to horizontal ones consist of firms solely. Firms in vertical networks may be from different sectors and characterized from sequential interdependencies meaning direct relationships ordered in serial manner. Optimization of production and operations is the main source of value. Unlike

horizontal networks and clusters, vertical networks (or supply chains) include a dominate firm which sets the rules and the standards. In figure 3, all three types of business networks are classified based on: membership requirements, interdependency types, major outcomes of each type, its value base and the geographical scope.

Figure 3. A classification of business networks

3.3 Barriers to cluster development Although cluster formation presents a number of opportunities and benefits for companies, as well as, for the region where the cluster exists, the development of such a formation is not an easy process. Cluster development is in fact a multidimensional and also diachronic process. Multidimensional in the sense that there are a number of reasons energizing the development of a cluster, and diachronic in the sense that the formation of cluster requires a long term approach and under-investments, in the past in a region, may limit future cluster formation. Most of the barriers to cluster development can be traced to weak infrastructure (Asian Development Bank, 2001; Rosenfeld, 2002). By weak infrastructure it is meant deficits in physical infrastructure which deteriorate potential capital investments in the future. The limited or total lack of access to capital is also a very important barrier. It influences the adoption and the implementation of new technologies, which are absolutely necessary for building cluster-based economies, and its absence is a serious handicap in growing clusters. Another important barrier is related to human capital and in particular the lack of skilled workforce. Finally, one of the most important barriers to cluster development has to do with the lack of the appropriate business mentality, since the formation of a cluster requires knowledge, data and information exchanges which presuppose a certain level of mutual trust.

4. The development of agri-business clusters The development of clusters in various industries and in many different places all over the word is a reality and it has been successful in many cases. The concept of clusters allows for different forms of best practice to fit different contexts. It can be used to signal an enormous range of both supply-side and demand-side processes, as well as, different institutional links. The agricultural sector in rural areas can be seen as one specific idea of a cluster model. 4.1 An agri-business cluster: Potential entities, roles and ICT related applications The development of an agribusiness-cluster can be used to eliminate the size disadvantage of companies in rural areas and can help companies to respond to the increased challenges of competition, globalization, as well as sector related changes. An agri-business cluster may be a local or regional network made up of farmers, input suppliers, co-operatives, processors, transporters, universities, export associations, public research institutes, universities, technology transfer offices, research parks/ technopoles and associated funding initiatives. Rosenfeld (1997), had underlined the need, for the actors forming the cluster, of having active channels for business transactions, dialogue and information exchange. The introduction and the implementation of ICT applications could act as a catalyst in the formation of cluster, since business transactions and information exchanges can be facilitated and improved. The geographical element of clusters remains important, but not a constrained factor in a number of activities such as information, data and knowledge exchange among cluster members (Gillespie et al., 2001). In figure 4, roles of each entity participating in the agri-business cluster, along with available ICT applications are presented.

Figure 4: Entities’ roles and ICT applications for agri-business cluster development

4.2 Barriers to agri-business cluster development Several factors limit the development of competitive clusters in less favoured regions (Rosenfeld, 2002). Most can be traced to physical and technical infrastructure deficits, lack of access to capital and skilled work force, absence of organizational structures and lack of information flow channels. The limited use of the new technology is one of the most important problems that entities face in rural areas. The technology infrastructure is the mortar for building cluster-based actions, and its absence is a serious handicap in growing clusters. In addition, to the previous problem cluster entities may confront the problem of how to strike a balance between internal needs for different organizational and technological systems and external needs for connectivity and share-ability of messages, data, applications and processes (Vlachopoulou and Manthou, 2002). An important barrier that deteriorates the development of agri-business clusters is the lack of the appropriate co-operative business philosophy among entities. For many years, agri-business companies in rural areas were used to practice their business activity autonomously and independently. Given the changing nature of competition, most of the companies find themselves unable to trust other companies and, experience difficulties in co-operating with them.

5. Conclusions The formation of business networks in the agricultural sector has been traditionally one of the most usual practices of sector’s entities in an effort to respond to the characteristics of the sector, as well as, industry and policy changes. Particularly the last years where the interdependence of rural economies with agriculture has been clearly recognized in many countries, a particular type of business network, the cluster is thought to support agri-business companies. The implementation of cluster-based strategies is expected to enforce, particularly SME’s in rural and remote areas, by eliminating the size disadvantage. Based on the regional character of clusters and on proximity, agri-business companies in collaboration with public institutions can secure access to suppliers, assure sales volumes and take significant advantage of research and development possibilities provided by institutions. However, companies often find themselves unable to actively take part in such business formations, either as a result of companies’ inefficiencies, or as a result of the lack of the appropriate ‘cluster’ business philosophy. In both cases, there is a need for an institutional framework for education, training, technical support, promoted by local, regional or national authorities, under an explicit agri-business development focus.

Given the undisputed importance of clusters and the importance of the agricultural sector for the Greek economy the exploration of clusters in the Greek agricultural sector along with an analysis of their specific characteristics should be included in future research.

6. References Asheim, B.T. and A. Isaksen (2000). Localised Knowledge, Interactive Learning and

Innovation: Between Regional Networks and Global Corporations. In E. Vatne and M. Taylor (Eds.). The Networked Firm in a Global World. Small Firms in New Environments. Ashgate, Aldershot (163-198)

Asian Development Bank, (2001). SME Development TA: Policy Discussion Papers 2001 / 2002 Best Practice in Developing Industry Clusters and Business Networks, Policy Discussion Paper No. 8

Competitiveness Group (2002). Cluster-based policies, [www document], http://www.competitiveness.com/nps/corporate_com/clusters/whatisacluster.pdf accessed 03/05/2003

DTI (2001). Business Clusters in the UK - A First Assessment, Department of Trade & Industry, London.

European Commission (2002). Regional clusters in Europe, Observatory of European SMEs 2002/No 3, Enterprise Publications, European Commission 2002.

Feser, E. (1998) Old and New Theories of Industry Clusters, in Steiner, M. (ed) Clusters and Regional Specialisation, Pion Limited, London.

Gillespie, A., R. Richardson and J. Cornford, (2001). Regional Development and the New Economy, EIB Papers, 6, 1, European Economic Growth: The Impact of New Technologies, European Investment Bank, Luxembourg

Krugman, P. (1991). Geography and Trade. Cambridge, Massachusetts, MIT Press. Krugman, P. (1995). Development, Geography, and Economic Theory. Cambrigde,

Mass., MIT Press. Lazzarini, S.G., Chaddad, F. R., and M. L. Cook, 2001. Integrating supply chains and

network analyses. Journal on Chain and Network Science, Vol. 1, No. 1, pp. 7-22. Martin, R. and P. Sunley (2001). Deconstructing clusters: Chaotic concept or policy

panacea? In Regional Studies Association, Regionalising the knowledge economy. Conference Proceedings of the Regional Studies Association Annual Conference, November 2001

Maskell, P. (2001). Towards a Knowledge-Based Theory of the Geographic Cluster, Industrial and Coprporate Change, 10 (4): 921-943

Menard, C. and P.G. Klein, 2004. Organizational Issues in the Agrifood sector: Toward a comparative approach, American Journal of Agricultural Economics, 86 (3): 750-755.

Neven, D. and C.L.M. Droge, (2000). A Diamond for the Poor? Assessing Porter’s Diamond Model for the Analysis of Agro-Food Clusters in the Developing Countries. Available at: http://www.ifama.org/conferences/2001Conference/Papers/Area%20VI/Neven_David.pdf

Nitchke, T. and M. O’Keefe, (1997). Managing the linkage with primary producers: experiences in the Australian grain industry, Supply Chain Management: An International Journal, Vol. 2, No. 1, pp. 4-6.

OECD (2001). Local Networks of Enterprises in the World Economy. World Congress on Local Clusters, Issues paper, Paris, 23-24 January 2001

Piore, M., and C. F. Sabel (1984). The second industrial divide: possibilities for prosperity, New York, Basic Books.

Porter, M. (1990). The competitive advantage of nations, New York, Macmillan. Porter, M. (1997). Knowledge-Based Clusters and National Competitive Advantage,

presentation to Technopolis 97, September 12, Ottawa Porter, M. (1998). On Competition. Boston: A Harvard Business Review Book

(pp.197-288). Putnam, R.D. (1993). Making democracy work: civil traditions in modern Italy,

Princeton, New Jersey, Princeton University Press. Roelandt, T., et al (2000). New Policies for the New Economy, Cluster-based

Innovation Policy: International Experiences, 4th Annual EUNIP Conference, Tilburg, The Netherlands, 7-9 December 2000

Rosenfeld, S.A. (1997). Bringing Business Clusters into the Mainstream of Economic Development. European Planning Studies, 5: 3-23

Rosenfeld, S.A. (2001). Networks and Clusters: The Yin and Yang of Rural Development in Exploring Policy Options for a New Rural America, Kansas City, Missouri: Federal Reserve Bank of Kansas City, 2001, Available at: http://www.kc.frb.org/RuralCenter/RuralMain.htm, accessed 03/05/2003

Rosenfeld, S.A. (2002). Creating Smart Systems: A guide to cluster strategies in less favoured regions, European Union-Regional Innovation Strategies, April 2002.

Thompson, J.D. (1967). Organizations in action: Social science bases of administrative theory, New York, McGraw-Hill.

Vlachopoulou, M. and V., Manthou, (2002). Partnership Alliances in Virtual Markets, International Journal of Physical Distribution and Logistics Management, Vol.33, No. 3, pp. 254-267.