Wageningen University and Research Centre

Department of Management Studies

Final Research Report

Business Models In The Dairy Value Chain:

A Comparison Over Geographies

Submitted in partial fulfilment of the requirement for the degree of “Master of Science” by:

Peter Jesse Sijbrandij

Registration Number: 891119820110

MSc Management, Economics and Consumer Studies

Specialization: Management Studies

Course code: MST-80433

Supervisors:

S. Pascucci (PhD)

dr. J. Bijman

March 2016

This report is produced by a student of Wageningen University as part of his/her MSc-programme. It is not an

official publication of Wageningen University or Wageningen UR and the content herein does not represent any

formal position or representation by Wageningen University or Wageningen UR.

*Costerweg 50-A0, 6701 BH Wageningen, The Netherlands.

Business Models In The Dairy Value Chain:

A Comparison Over Geographies

An MSc Thesis

Peter Jesse Sijbrandij*

Abstract

The world population is expected to grow rapidly over the coming decades, as is the

group of middle class consumers. This development is expected to lead to a growing

demand for dairy products. To meet this demand, and at the same time engage in

corporate social responsibility, many Western dairy firms are investing in dairy

production in developing countries. The sourcing strategies of firms in developing

countries, however, have not yet been extensively investigated. The objective of the

current paper is thus to discover similarities and differences between business

models in dairy value chains over geographies. Literature on business models is

plentiful but diverse. A comparison of business model literature has indicated that a

business model is made up of general elements researchers agree upon. Considering

the sourcing side of the supply chain, these elements are a firm’s key resources,

activities, and partnerships. Through a comparison of cases, it has been explored

what business models are used globally and how sourcing is organized in terms of

control, coordination and risk-reward sharing. Results indicate that there are not

simply a few distinctive business models firms can choose from. Instead, when

companies design their dairy development programs, they can configure it based on

the requirements of the specific context the program is situated in.

Key words: business models, dairy, development programs, developing countries,

agriculture

ii

Executive Summary Agricultural development is still highly important for communities in developing countries. The sector

is a major source of income, especially in rural areas of such countries. Development of agriculture

can thus play a major role in increasing incomes and thereby alleviating poverty. The objective of this

study is to identify possible business model approaches for multinational dairy firms when they

design and implement a dairy development program in developing countries. In order to fulfill this

objective, several activities have been performed. First, a literature review has been executed to

identify the most important elements of business models. Theories from different business model

researchers have been compared in order to discover commonalities between conceptual

approaches. The resulting overview of elements indicated that there are nine elements in a business

model researchers more or less agree upon. Three of these nine elements are concerned with the

sourcing side of a firm’s business model, namely key resources, activities, and partnerships.

Literature on supply chains indicated that these business model elements could differ on the basis of

three aspects, which set one business model approach apart from another. Business model elements

can differ on the basis of control, coordination and risk-reward sharing.

Subsequently, an investigation of eight distinctive cases of dairy development programs from seven

countries in Asia, Europe and Africa was performed. Data was gathered through the study of

documents, newspaper articles, books, and academic literature. Before analyzing the data, a list of

keywords was set up to allow for text analysis. As such, relevant information could more efficiently

be discovered. For every differentiating aspect of business models (control, coordination and risk-

reward sharing), the cases were clustered based on their approach to the specific aspect. This

process led to the identification of three different approaches for both control and risk-reward

sharing, and two possible approaches for coordination. Results thus indicated that firms could adopt

one of several approaches for each aspect when designing a dairy development program.

Contrary to what was initially anticipated, no explicit combinations of approaches are more often

encountered than others. Thus, the study does not produce a few distinct business models firms can

follow. Instead, the three aspects can be configured depending on the specific context the

development program is situated in. Companies can design their program freely and have the

opportunity to choose for a tailor-made solution based on its context.

Finally, a validation of the results was executed through interviewing an expert on dairy development

programs. The expert agreed with the set of approaches that can be taken, but indicated that certain

combinations of approaches in practice occur more often than others. The choice for a certain

approach is likely to be influenced by contextual factors. Successfulness of a particular dairy

development program is also dependent on the context it is situated in. Besides context, a firm’s

experience with other development programs, a firm’s experience with the region, and the

relationship the dairy processor has with farmers influences whether a program can be successful,

according to the expert. Both managerial and theoretical implications are subsequently discussed.

Dairy firms considering to implement a dairy development program in a country with an

underdeveloped dairy sector are advised to carefully consider what the main purpose of the program

is. Also, managers should consider to what extent they are willing to commit resources to the

program, which activities the firm should perform, and which stakeholders they are willing to partner

up with. Varying degrees of commitment to a program are possible, but this decision has major

consequences for the business model the firm will eventually employ.

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Contents 1. Introduction ..................................................................................................................................... 1

1.1 Agriculture in emerging economies today .................................................................................... 1

1.2 Future development of agriculture ............................................................................................... 2

1.3 Role of private actors .................................................................................................................... 4

1.4 The role of geographies ................................................................................................................. 5

1.5 Research objective ........................................................................................................................ 6

2. Literature Review ............................................................................................................................ 7

2.1 What is a business model? ............................................................................................................ 7

2.2 The role of business models .......................................................................................................... 8

2.3 Elements of business models ........................................................................................................ 8

2.3.1 The nine elements of business models ................................................................................ 11

2.4 Comparison of frameworks ......................................................................................................... 12

2.5 How elements can differ from one business model to another ................................................. 15

3. Conceptual framework .................................................................................................................. 17

4. Methodology ................................................................................................................................. 19

4.1 Research framework ................................................................................................................... 19

4.2 Data collection ............................................................................................................................. 20

4.3 Data analysis and validation ........................................................................................................ 21

5. Findings and analysis ..................................................................................................................... 23

5.1 Case description .......................................................................................................................... 23

5.1.1 Case I: Danone Romania ....................................................................................................... 24

5.1.2 Case II: Nestlé Pakistan ......................................................................................................... 24

5.1.3 Case III: FrieslandCampina Vietnam ..................................................................................... 24

5.1.4 Case IV: Dimitar Madzarov Bulgaria ..................................................................................... 24

5.1.5 Case V: Danone Egypt ........................................................................................................... 24

5.1.6 Case VI: Nestlé China ............................................................................................................ 25

5.1.7 Case VII: Promilch Romania .................................................................................................. 25

5.1.8 Case VIII: Fonterra Sri Lanka ................................................................................................. 25

5.2 Analysis of cases .......................................................................................................................... 26

5.2.1 Control .................................................................................................................................. 26

5.2.2 Coordination ......................................................................................................................... 27

5.2.3 Risk-reward sharing .............................................................................................................. 29

6. Results ........................................................................................................................................... 31

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6.1 Control ......................................................................................................................................... 32

6.2 Coordination ................................................................................................................................ 33

6.3 Risk-reward sharing ..................................................................................................................... 34

7. Discussion ...................................................................................................................................... 36

7.1 Validation .................................................................................................................................... 37

7.2 Limitations ................................................................................................................................... 38

8. Conclusion ..................................................................................................................................... 40

8.1 Theoretical implications and suggestions for future research .................................................... 40

8.2 Managerial implications .............................................................................................................. 41

9. References ..................................................................................................................................... 42

10. Appendices ................................................................................................................................ 51

10.1 Appendix A: Keyword list .......................................................................................................... 51

10.2 Appendix B: Case data ............................................................................................................... 52

1

1. Introduction The dairy market is an increasingly strategic industry in a rapidly changing global economy. The

consumption of milk is globally increasing, mainly due to rise in consumption in developing countries

(CDIC, 2015; Knips, 2005). This increase has two main drivers; population growth and increase in per

capita consumption (Hemme and Otte, 2010). The world population is expected to grow by 2.5 billion

to 9.8 billion people in 2050 (PRB, 2015), and as income in developing countries grows, the demand

for dairy products rises as well (Hemme and Otte, 2010). The production of milk is therefore

projected to increase by 23% over the next decade and 75% of that growth can be attributed to

developing countries (OECD/FAO, 2015). The focus of the dairy industry is thus on growth

opportunities in developing countries rather than on developed countries, where high consumption

amounts have been stagnating for years (CDIC, 2015; OECD/FAO, 2015). Pingali (2006) argues that

the Westernization of Asian diets is leading to a higher intake of protein-rich products. The changing

diet in such upcoming regions offers unprecedented opportunities for dairy firms. Much is to gain in

China in particular, a dairy market which, according to Euromonitor, will double in size by 2019

(Astley, 2014). But other emerging economies such as Russia and Brazil are overtaking Western

European markets quickly as well (Astley, 2014). In order to meet the growing demand for dairy

products, dairy production growth is needed in developing countries in particular (OECD/FAO, 2015).

Even in today’s globalized world, enhancing a more efficient and sustainable agricultural sector is

crucial for developing countries (Hazell, Poulton, Wiggins and Dorward, 2010). Recent evidence

suggests that agriculture is more effective in reducing poverty than non-agricultural sectors are

(Christiaensen, Demery and Kuhl, 2011; Diao, Hazell and Thurlow, 2010; Valdés and Foster, 2010).

Even the remarkable success of absolute poverty reduction in China was the result of developing the

primary sector (Montalvo and Ravallion, 2010).

Many governments hope to develop sectors such as mining, manufacturing or services as these

industries are profitable and help the economy transform to a more modern one (Hazell et al., 2010).

According to Lipton (1977: 349), developed countries wishing to provide aid to the less developed,

should encourage the local governments to channel a higher share of their resources towards rural

areas. Such approaches would make aid more effective and can be executed through, for example,

granting aid on the basis of rural investment (Lipton, 1977: 349). Few countries even have the

potential to develop mining, manufacturing or service sectors, according to Hazell et al. (2010). Most

countries lack minerals to trade or are not able to develop the manufacturing sector as they cannot

challenge cheap exporting giants China and India. Also, without the growth of the agricultural sector

or any other domestic sector, there is no support for growing the service sector as this industry

depends heavily on domestic demand (Hazell et al., 2010). Services can, however, link agriculture

with industry and help developing synergies between the two sectors through this link (Kay, 2009).

1.1 Agriculture in emerging economies today The current food system has evolved from simple distribution to a modern and complex system for

producing food and distributing products (Pingali, Khwaja and Meijer, 2005). Quality and safety

standards have improved dramatically with the increase of the level of technology in the industry.

This has made competing in the food industry a very difficult endeavor for smallholders with limited

resources (Pingali, 2006). Domestic markets in developing countries are especially undergoing rapid

2

modernization (Vorley, Lundy and MacGregor, 2009). This has been the result of investments in the

economy by both processors and retailers to increase efficiency in the supply chain.

In developing countries, dairy farming is generally a major source of income and provides

opportunities for development of rural areas (Uddin, Sultana, Ndambi, Alqaisi, Hemme and Peters,

2011). It is nearly impossible for families living on small patches of land in the tropics or subtropics to

survive by growing crops alone (Gall, 2013). Dairy farming is a viable alternative in those situations as

cash can be earned daily even if few inputs and equipment are used in the process (Gall, 2013). In

many developing countries in Asia and Africa, the gap between dairy consumption and dairy

production is widening every year as the necessity for more advanced knowledge and technology

cannot be met (Aganga, Thobega and Setimela, 2010; Ndambi, Hemme and Latacz-Lohmann, 2007;

Uddin et al., 2011).

A characteristic of underdeveloped dairy markets is the share of milk that is consumed through

informal channels (i.e. Kenya [Staal et al., 1997a], Zambia [Moll, Staal and Ibrahim, 2007] and

Ethiopia [Ahmed, Ehui and Assefa, 2004]). In Ethiopia, for example, dairy producers located in close

proximity to the country’s capital Addis Ababa sell a large share of their production (73%) whereas

farmers in rural areas retain the majority of the milk for home consumption (Ahmed et al., 2004).

When population density in rural areas increases, milk is increasingly traded through more formal

channels (Moll et al., 2007). Private and institutional traders then exploit the more developed milk

market.

1.2 Future development of agriculture Agriculture can thus be an important tool in alleviating poverty in developing countries.

Approximately 75% of poor people in rural areas would benefit significantly from higher incomes in

agriculture, making the agricultural sector a top priority for developing countries (Dethier and

Effenberger, 2012). According to Ravallion (2009), these countries should take the development of

China as an example. China’s fight against poverty was remarkable and provides a few key lessons to

policymakers in similar environments. One of the first steps in this process is the implementation of

market incentives for smallholders. This will encourage these farmers to increase their output and

will, in the longer term, lead to a significant reduction in rural poverty (Ravallion, 2009). Property

rights, infrastructure and food price stabilization are the most pressing issues to address in order to

achieve rural development according to Dethier and Effenberger (2012). However, these authors

argue that extension services also play a crucial role. Such services could help increase agricultural

productivity and as such create spillover effects in rural areas.

According to Markelova, Meinzen-Dick, Hellin and Dohrn (2009), acting collectively is one of the

manners in which farmers in developing countries can improve the situation in their industry. Early

investigations by Staal, Delgado and Nicholson (1997b) indicated that smallholders in Eastern Africa

often take collective action in reducing the transaction costs of bringing their products to the market.

This can be in the form of processing facilities set up by farmer groups and supported by the

government, or even full-fledged cooperatives. The advantages are especially clear when products

are marketed collectively, as this can assist in supply chain coordination and it can correct market

imperfections (Markelova et al., 2009). Such cooperative organizations can have a major impact on

the performance of smallholders. In China, for example, cooperatives are emerging in many different

3

agricultural sectors which take away the burden of marketing produce from smallholders (Huang,

2011).

Farmers active in less developed countries often have to deal with those imperfections such as high

transaction costs and missing capital markets (Markelova et al., 2009; Staal et al., 1997b). Through

the use of market-oriented institutional support the dairy sector in such countries should be

developed (Hazell et al., 2010; Uddin et al., 2011). The government is not the only actor playing a role

in dairy development, however. The private sector is increasingly seen as essential for solving the

world poverty problem through the incorporation of smallholders in their supply chain (Prieto-Carron

et al., 2006). Private actors play a major role in ensuring adequate transportation, cooling and

processing infrastructure (Van der Lee, Zijlstra, Wouters and Van Vugt, 2014). Moreover, private

actors can assist in offering inputs, such as feed or equipment, to smallholder farmers or can supply

them with advisory, financial or veterinary services (Van der Lee et al., 2014). They are the primary

source of investment in agriculture and a key supplier of services (Dethier and Effenberger, 2012).

Providing support to smallholders in developing countries can have major advantages for private

firms as well. According to Vorley et al. (2009), working with local farmers can create community

goodwill. As a result, local governments may be more willing to accept the presence of foreign firms

in their country instead of protecting domestic firms by restricting the influence of foreign firms.

Purchasing inputs from smallholders can also be part of a company’s corporate social responsibility

(CSR) strategy (Vorley et al., 2009). The firm can gain a competitive advantage by advertising its

positive influence on smallholders in less developed regions. This type of CSR is also called strategic

CSR and concerns achieving strategic business goals while simultaneously developing welfare of the

disadvantaged (Lantos, 2001). According to Jamali (2007), gains for private firms can be both tangible

and intangible. Firms can gain access to new business opportunities on the one hand, and can create

goodwill and loyalty in the eyes of potential future consumers on the other hand. Consumers in

developed countries are also more likely to consider the products from a firm with clear CSR efforts

for their next purchase (Sprinkle and Maines, 2010).

The increasing popularity of strategic CSR as a replacement of philanthropic initiatives is the result of

pressure firms endure from two opposite sides (Porter and Kramer, 2002). Critics and activists

demand increasingly high levels of CSR while shareholders demand higher short-term profits.

Executives should accept that strategic CSR is feasible and that they can satisfy different stakeholders

through their CSR activities (Burke and Logsdon, 1996). Investing in those activities can lead to new

business opportunities or innovations in products or processes which, in the long run, benefit the

entire corporation (Burke and Logsdon, 1996). Sprinkle and Maines (2010), for example, argue that a

firm’s CSR efforts may lead to efficiencies and cost saving in the entire value chain. To increase the

effectiveness of their CSR efforts though, companies should focus on causes in their own area of

expertise (Cochran, 2007). Economic returns for the firm and social returns for the community should

not be detached from each other. Instead, by combining economic and social returns, firms can

eventually secure higher profits for shareholders (Cochran, 2007).

When considering agriculture in developing countries in general, it can be argued that firms prefer

sourcing from larger farmers as opposed to being supplied by smallholders (Reardon, Barrett,

Berdegué and Swinnen, 2009). In some industries, however, such strategies are not possible due to

the structure of the industry. When small farmers dominate the industry, processors have no other

4

option than building a sourcing infrastructure for smallholders. When farmers lack important non-

land assets and the credit to acquire these assets, Reardon et al. (2009: 1725) discovered that

companies use “resource-provision contracts” in order to help develop smallholder businesses. The

effect of such support programs on supplier investment was investigated by Dries, Gorton, Urutyan

and White (2014) in the context of the Armenian dairy sector. The results indicated that different

kinds of support mechanisms, such as credit, input support or guaranteed prices, positively

influenced the degree of investment smallholders performed. However, support was considerably

more often provided to smallholders that had an exclusive relationship with the buyer and to those

that delivered to more internationally oriented buyers (Dries et al., 2014).

1.3 Role of private actors In order to let foreign direct investment (FDI) in emerging economies have its effect on rural areas as

well, appropriate extension and credit should be provided to farmers in these regions (Vorley et al.,

2009). Even though domestic firms may be wary of the arrival of international competitors, their

arrival can have a positive influence on the economy in countries where agriculture is still

developing. According to Dries and Swinnen (2004), development programs of foreign companies

help overcome market imperfections. Through spillover effects, smallholders can gain access to

finance and the quality of products smallholders supply increases dramatically. Domestic competitors

will start to copy the strategies employed by foreign firms once they witness its success. As a result,

the productivity and quality of the entire sector improves (Dries and Swinnen, 2004). Spillover effects

do not limit themselves to the dairy sector, however, as the investments made by retail and dairy

companies will have a positive impact on rural development as a whole (Dries, Germenji, Noev and

Swinnen, 2009).

Processing companies can play a large role in developing the country’s food sector. In fact, Gerber,

Mooney, Dijkman, Tarawali and De Haan (2010: 172) argue that the private sector plays a key role in

developing the livestock industry. Research on the Polish dairy sector by Dries and Swinnen (2010)

indicated that processing companies have had a large role in providing financial assistance to local

farmers. Through this support, farmers have been able to make highly necessary investments to

increase the quality and quantity of their produce. These smallholders would not have been able to

purchase cooling tanks and additional livestock without financial support and international

development agencies have not provided such support to agribusinesses (Dries and Swinnen, 2010).

Private sector firms can thus have a large influence on the development of developing country

smallholder farmers. Through the use of different business models, companies like Nestlé are trying

to support smallholders and to give them the needed assistance (Gerber et al., 2010: 160). Such

models depend on the needs of the industry in a specific country. In Morocco for example, the

company’s main objective was to eliminate the risk of antibiotic residues in milk. Therefore Nestlé

worked together with veterinary institutes and educated farmers on how to prevent milk losses due

to this issue (Gerber et al., 2010: 163). In Pakistan however, microbiological contamination was a

major risk and thus monitoring and farm assurance schemes were set up (Gerber et al., 2010: 162).

Multinational investment in developing country agriculture is not merely beneficial for farmers.

According to Slimane, Huchet-Bourdon and Zitouna (2016), foreign direct investment into the

agricultural sector led to an overall improvement of food security. Agricultural production will

directly be influenced by this investment, leading to an increased supply and lower prices of food. On

the contrast, investment in secondary and tertiary sector will lead to higher food insecurity. Spillover

5

effects of such investments will lead to more pollution and to the creation of jobs in urban areas. As a

result, the availability of food will decrease and its prices will rise (Slimane et al., 2016).

The impact of multinational investment in developing economies is beneficial for multiple parties.

Stokke (2009) investigated the influence of demand factors on the agricultural sector in less

developed countries. Multinational supermarket chains are increasingly entering developing

countries as part of the globalization process. If farmers are involved in this new supply chain, they

can benefit through productivity spillovers and increased demand. According to Stokke (2009),

supermarkets benefit from this development in agricultural skills through increased market share.

Furthermore, when farmers do not meet certain standards, supermarkets have an incentive to invest

in programs aimed at improving local productivity. Multinational processors generally impose higher

standards on their suppliers than local firms do (Dries and Swinnen, 2004). Through implementing

support programs for farmers, these multinationals attempt to increase the quality and quantity of

milk supplied to them. Not only do these support programs lead to higher incomes for farmers, the

supply base of processors is also increased. As a result, multinational dairy firms will have a more

reliable supply chain.

1.4 The role of geographies Dairy is produced in many underdeveloped regions globally due to the ability of easily converting

products to cash daily (Gall, 2013). No matter where this industry is located, contextual factors play

an important role in the industry function. A main concern in Africa is the pressure on land due to

water access issues, while European farmers are seeing rising prices of land due to manure spreading

regulations (Gerber et al., 2010: 173). China, on the other hand, has had a large feed deficit for

decades while the conversion of natural areas into agricultural use is a major concern in Latin

America. Due to such differences from one location to another, the needs of farmers can differ as

well. The biggest need for dairy farmers in certain parts of Africa could be to gain access to a steady

water supply while stable and affordable feed prices are a necessity for farmers in China. Therefore,

stakeholders in the dairy industry all over the world are attempting to make the sector respond

better to the evolving needs of society. At the same time, these stakeholders are trying to achieve

goals such as reducing poverty or increasing environmental protection (Gerber et al., 2010: 173). A

unified framework for implementing dairy development programs that are beneficial to dairy

farmers, processors and the society at large should be developed. Such a framework could give

guidance to dairy firms in implementing a program regardless of the proposed location of the

program.

6

1.5 Research objective Based on the information in the previous sections, it has become clear it should be investigated how

multinational dairy corporations can source efficiently and sustainably from developing countries

while simultaneously promoting the development of local smallholders. The objective of the research

project is to provide organizations with an overview of possible approaches to implement a dairy

development program. The context this problem is situated in is naturally very extensive and

complex. In order to demarcate the context of the current research project, several strategies to

achieve that goal will be compared. The comparison will be aimed on discovering similarities and

differences between business models in the dairy value chain across geographies. The main research

question can thus be formulated as:

Which business models for dairy development are utilized in different geographical contexts?

Through investigating this research question, it is attempted to define a set of different business

models firms active in the dairy industry can choose from. Thus, if a firm is planning on sourcing from

developing countries but struggling with the question as to how to approach performing business in

such contexts, the outcomes of this paper should offer relief. In order to be able to answer this

research question, however, it will first be necessary to define the term business model and its

elements. Subsequently, it will be attempted to develop a general framework indicating which

business model elements are most applicable to the current research and how these elements can

differ from one case to another.

7

2. Literature Review In the following section, literature on several important concepts will be discussed. This literature

should assist in discovering an answer to the research question stated in the previous section. First,

the business model concept will be explained. The role such a business model can play for firms will

subsequently be discussed. Third, the suggested elements a business model consists of according to

different researchers will be explored. These different frameworks will be compared after. Finally, it

will be discussed on which aspects one business model differs from another. In other words, how can

different business models be compared?

2.1 What is a business model? Even though business models are inherent to performing business exchanges, the concept has only

been introduced on a large scale over the last two decades (Teece, 2010). According to Chesbrough

and Rosenbloom (2002), the business model concept has its roots in literature on strategy. They

argue that Andrews (1987) was one of the first academics to differentiate between business strategy

and corporate strategy. Corporate strategy defines the course of the company into the almost

indefinite future, while the business strategy is concerned with more short-term product-market

choices (Andrews, 1987: xi, in Chesbrough and Rosenbloom, 2002). The growth of the Internet, the

growth of outsourcing and offshoring, and the emergence of a knowledge economy have changed

the way in which companies generate revenues and have made the analysis of business models very

relevant (Teece, 2010). Research on the use of the term business model has found that the specific

concept emerged in the early seventies but only gained momentum after the start of the digital era

in the mid-nineties (Ghaziani and Ventresca, 2005; Zott, Amit and Massa, 2011). A reason for this

emergence could be that traditional business models could not be properly adapted to the new

internet era at that time (Viscio and Pasternack, 1996). These new information technologies also

provided an opportunity of developing a new business model to many firms (Chesbrough, 2010).

A business model performs two core functions; value creation and value capture (Chesbrough, 2007).

A series of activities is performed by the firm which eventually yield a more valuable output than the

sum of the inputs. The business subsequently captures value from a portion of those activities as

reward for operating the model (Chesbrough, 2007). Although many people use the terms business

model and strategy interchangeably, there is a major difference between the two. A business models

describes the system of all of the components that, together, make up the organization. They are

stories that explain how the enterprise works and thus consider the business itself only. Strategy

takes another critical factor into account; competition (Magretta, 2002). Strategy thus incorporates

aspects of the business model and considers how these aspects fit into the industry (Seddon, Lewis,

Freeman and Shanks, 2004). In fact, it can be argued that the strategy of the firm primarily means

choosing a business model (Casadesus-Masanell and Ricart, 2010).

Many scholars have attempted to define the concept ‘business model’ and to determine which

aspects should be considered when studying this topic. Definitions range from “an explanation of

how a firm makes money” (Linder, 2000) to complex descriptions of interrelationships between

stakeholders of a firm and the benefits for these stakeholders resulting from the business model

(Bouwman, 2002). Zott et al. (2011) have therefore categorized often-used definitions of the concept

into three distinct categories. These categories are (1) e-business and IT in organizations, (2) strategic

issues such as value creation and (3) innovation and technology management. In light of the topic of

the current paper, the second category of business model definitions appears most applicable.

8

In terms of definitions at the strategic level, the direction of where a firm is moving with respect to

market positioning, interactions with stakeholders and opportunities for growth are considered

(Morris, Schindehutte and Allen, 2005). Amit and Zott (2001) first provided the definition that a

business model “depicts the content, structure, and governance of transactions designed so as to

create value through the exploitation of new business opportunities”. As transactions mean that

activities within and between firms are connected, the authors later adapted the definition to “a

system of interdependent activities that transcends the focal firms and spans its boundaries” (Zott

and Amit, 2010). This view on business models is in line with Mayo and Brown (1999), who argued

that these interdependent systems should create and sustain competitive business. Thus, a business

model involves a complex set of activities among multiple players which can lead to a competitive

advantage (Zott, Amit and Massa, 2011).

2.2 The role of business models Baden-Fuller and Morgan (2010) argue that business models can play multiple roles. First, business

model can help describing businesses and placing them in a particular category. As such, a taxonomy

can be created in which businesses are grouped. Organizations can be categorized through scale

models, in which elements of a particular business model are copied into another, or role models, in

which ‘ideal’ business models such as the McDonalds-, Dell- or Google-business model are admired

and copied. In light of this role, the business model seems to capture how the entire business is

focused. It can thus be argued that the elements which make a certain business model unique

transcend the architecture of the entire firm (Morris et al., 2005). Second, business models can be

used as subjects of scientific investigation. The elements of these models should then be studied

carefully to discover to which extent certain elements explain the successfulness of the particular

business model. Certain business model characteristics could be unique to a certain firm, but do not

necessarily explain why this firm is successful. Baden-Fuller and Morgan (2010) argue that the third

role a business model can play is as a recipe. This use is more practically focused than the scientific

uses of a business model mentioned previously. There are some general elements or principles which

can be applied to a business model. These elements, such as resources, technologies and markets,

comprise a basic recipe for success and firms can make minor variations on this recipe depending on

their needs and wants. One important capability, however, is what turns the separate elements into

a business model. Organization and integration is crucially important to potentially make a business

model successful. Managers can use variations on these recipes to experiment and, potentially, to

invent new business models.

2.3 Elements of business models As discussed previously, research on business models is plentiful but can hardly be considered as

unified. In fact, Porter (2001) argues that the definition of a business model is “murky at best”.

Simply having a business model to generate revenue does not even come close to creating economic

value and analyzing a business model independent of the industry it operates is impossible (Porter,

2001). Reasons for the murkiness of this concept are threefold; research on the business model

concept is relatively young, the disciplines this concept is applied to are limited, and the sectors

business models are investigated in (such as Internet-based businesses) are relatively new (Al-Debei

and Avison, 2010).

In an attempt to define generic business model elements, Shafer, Smith and Linder (2005) reviewed

business model literature and compared the elements found in different literature streams.

9

According to them, the business model is a representation of the underlying core logic of the firm

and its strategic choices for creating and capturing value within a value network. The four

components Shafer et al. (2005) defined were thus the strategic choices (i.e. customer, value

proposition, mission), value network (i.e. suppliers, customer relationship, channels), value creation

(resources and activities), and value capture (cost, financial aspects and profit).

According to Popp and Meyer (2010), a business model is made up out of three aspects; the type of

goods or services it provides, the business model archetype (patterns of doing business) and a

revenue model (patterns of capturing value). Onetti, Zucchella, Jones and McDougall-Covin (2010),

also believe that a business model is built up from three distinct, but different concepts. They argue

that in the attempt of developing taxonomies of business model, research has consistently failed in

accommodating location decisions and internationalization into the model. The proposition of Onetti

et al. (2010) therefore is that the focus of the business are the activities comprising the basis of the

company’s value proposition, the locus considers the locations where activities are spread, and the

modus is concerned with the internal organization of the company and its network. The combination

of these dimensions provides a framework for managers in designing a business model.

Al-Debei and Avison (2010) also performed an investigation of business model concepts. The authors

identified four fundamental aspects, namely the value proposition, value network, value finance and

value architecture. Al-Debei and Avison (2010) stress that firms can choose which of these primary

dimensions to focus on. Companies in the manufacturing business may place emphasis on value

networks, an element which is concerned with supply chain issues, as the supply chain is at the core

of their business. Telecommunication providers are likely to be more concerned with the value

architecture. This element involves the design of an organization and its technological architecture,

which is at the heart of a telecom provider’s value proposition (Al-Debei and Avison, 2010). The value

proposition in this framework is concerned with the products or services a firm offers and the

targeted market segments. Finally, value finance is related to costing, the pricing methods and the

revenue structure of the firm (Al-Debei and Avison, 2010).

In order to create a framework which can be applied to ventures in any industry, Morris et al. (2005)

have attempted to find commonalities in leading literature streams on business models. Six

components were argued to be consistently present in business model literature, all of which need to

be explored in order to guarantee comprehensiveness and completeness of a particular model (see

Figure 1). The framework subsequently identifies how the combination of these components within a

firm can create a competitive advantage and how these elements need to be operationalized in

order to implement the business model specifics (Calia, Guerrini and Moura, 2007).

Components Questions underlying the business model

Factors related to the offering How do we create value?

Market factors Who do we create value for?

Internal capability factors What is our source of competence?

Competitive strategy factors How do we competitively position ourselves?

Economic factors How do we make money?

Personal/investor factors What are our time, scope and size ambitions?

Figure 1: Business model components according to Morris et al. (2005)

10

George and Bock (2011) performed more empirical research on the elements of business models.

From surveying over 150 managers, these authors concluded that there are three underlying

dimensions of business models, namely the resource-, transactive- and value structure. The first of

these is concerned with a firm’s organization and the resources it uses to serve customers. The

transactive structure refers to how the organization performs transactions with partners and

stakeholders while the value structure is related to the mechanisms and rules that determine how a

firm creates and captures value. Taken together, these dimensions provide guidance to investors as

to how the firm will perform in the future (Trimi and Berbegal-Mirabent, 2012).

Shi and Manning (2009) argue that business models are built up out of four interrelated elements or

sub-models; the exchange-, the organizational-, the resource- and the financial model. In this

taxonomy, the exchange model is concerned with the value proposition of the firm. The value

proposition must be embodied in either a tangible or intangible product, it must be acceptable to an

economic actor other than the focal firm and it must be realized through a transaction between the

firm and the other actor.

In an attempt to find the generic dimensions or elements of business models, Lindgren and

Rasmussen (2013) combined different frameworks into the business model cube concept. Seven

dimensions were defined in the study; the value proposition, customers, the value chain,

competences, networks, relations and the value formula. Each of these dimensions is subdivided into

smaller components on the basis of which each business model differs from another. Lindgren and

Rasmussen (2013) further argues that firms do not run on a single business model but instead have

multiple business models to conduct different businesses.

Osterwalder and Pigneur (2010) operationalized the business model concept into nine elements that,

together, comprise the logic of how a firm makes money (see Figure 2). These building elements do

not need to be unique or innovative, but they are certainly interrelated and interdependent. A low-

price value proposition, for example, will lead the necessity of making the entire business model

focused on cost reduction. The nine elements cover the four major areas of business, namely

customers, the offering of the firm, infrastructure and financial viability.

Figure 2: The nine elements of a business model according to Osterwalder and Pigneur (2010)

11

2.3.1 The nine elements of business models

The nine elements of a business model as described by Osterwalder and Pigneur (2010) can be

combined into a business model canvas which globally displays the core of a business. In the

following section, the different elements will be briefly described.

According to the authors, an organization should make a clear decision on which customer segments

it aims to serve. In line with the landmark firm strategy theory of Porter (1985), Osterwalder and

Pigneur (2010) argue that firms can focus on the mass market, the niche market(s) or on specific

segments of the market. Organizations choosing to serve specific segments of the market often serve

multiple segments which have slightly different needs and therefore require a distinct offer. Business

models for customers in such a segment thus differ from business models for other segments.

Secondly, the firm needs to design a solution for the customers in the chosen segment. This value

proposition is the reason why customers should choose one company over the other. Customers are

not merely looking for products, but for solutions to their perceived needs (Teece, 2010). According

to Kaplan and Norton (2004: 10), the clarity of this proposition is the most important dimension of

strategy. They suggest that the customer value proposition has multiple dimensions including

product/service attributes (i.e. price, quality and functionality), relationship (i.e. service) and image.

Firms can thus offer the chosen segment i.e. a product of similar value for a lower price, products of

higher quality, or more accessible products. According to Kaplan and Norton (2004: 322), four types

of strategies to serve this market can be chosen; low cost, product leadership, customer solutions or

system lock-in. Each strategy requires the business model to be adapted to work in the service of this

particular strategy.

The third element is related to the channels a company utilizes to communicate with its customer

segments and to deliver its value proposition. Firms can decide to offer their products through direct

channels by i.e. web sales or own salespeople, through indirect channels such as partners or

wholesalers, or through a combination of channels (Osterwalder and Pigneur, 2010). Channels also

help in raising awareness about the products or services a company is offering and in providing

support after a customer has acquired the firm’s product or service.

Customer relationships consider the type of relationship a firm establishes with its customer

segments. This includes customer acquisition, customer retention and upselling (Osterwalder and

Pigneur, 2010). Acquiring new customer can be an expensive management process (Kaplan and

Norton, 2004: 115). By offering an entry-level product or a heavily discounted product, firms are able

to acquire, and hopefully impress, new customers. As customers are increasingly migrating from one

channel to another, customer retention is crucial (Ansari, Mela and Neslin, 2008; Valentini,

Montaguti and Neslin, 2011). It is far less expensive to retain existing customers than to replace

abandoning customers by new ones (Kaplan and Norton, 2004: 116). However, more mature

customers have been argued to be less marketing-responsive than newly acquired customers

(Valentini et al., 2011). Firms should therefore ensure they consistently deliver their value

proposition and maintain customer loyalty through appropriate customer service (Kaplan and

Norton, 2004: 116).

The revenue streams element is related to the cash a firm generates from the customer segments.

There are several ways a company can generate these streams, ranging from ‘simple’ asset sales to

licensing agreements (Osterwalder and Pigneur, 2010). A choice can also be made in the pricing

12

mechanism employed, which can be either completely fixed or dynamic, where prices change based

on market conditions. The latter type of pricing has been increasingly adopted in multiple industries

as new information and communication technologies have enabled companies to easily and instantly

change prices (Elmaghraby and Keskinocak, 2003).

The most important assets to make a business model work are considered in the sixth element, the

key resources. These assets, which can be physical, intellectual, human or financial, are crucial in

offering a value proposition and in reaching markets (Osterwalder and Pigneur, 2010). They have to

integrated in a unique way in order to satisfy the demands of customer segments (Johnson,

Christensen and Kagermann, 2008). Some researchers make a different distinction in which only

three types of resources are distinguished; tangible, intangible and financial resource (Surroca, Tribó

and Waddock, 2010; Villalonga, 2004), or tangible, intangible and human resources (Shi and

Manning, 2010). Intangible resources in such a case refer not only to intellectual assets such as copy

rights or brand names, but also to core competencies, which is the collective knowledge within a firm

on how to coordinate production skills and technologies (Prahalad and Hamel, 1990). These assets

are argued to be the only sustainable source of competitive advantage a firm has as this is the only

type of resource that cannot easily be replenished (Itami and Roehl, 1991: 1, 13; Villalonga, 2004).

To operate successfully, a firm must perform certain key activities. These activities describe the core

business of the firm and have a major impact on which resources it needs and on the value

proposition it can offer customers.

Companies can have key partnerships for multiple reasons. A motive for engaging into a partnership

could be to gain economies of scale, to reduce risk or to acquire certain resources or activities. In

recent years, firms have increasingly engaged in partnerships to improve the supply chain and to

reduce waste (Fiala, 2005). A supply chain has been defined as the alignment of firms that bring

goods or services to the market (Lambert, Stock and Ellram, 1998). Information technologies have

given firms the opportunity to acquire more data on demand and supply. As a result, engaging into

strategic partnerships with suppliers and buyers could reduce uncertainty and increase profitability in

the entire supply chain (Fiala, 2005). According to Porter and Kramer (2002), firms depend

increasingly on local partnerships. This demonstrates itself through collaboration with local suppliers

and institutions instead of focusing on vertical integration, more close collaboration with customers

and a bigger focus on local universities and research institutes to conduct R&D.

The final element of a business model is concerned with the cost structure of a firm. It considers the

most important costs incurred in the business model. These cost structures can be broadly

differentiated in cost-driven and value-driven business models (Osterwalder and Pigneur, 2010). For

some business models, namely, cost structures are more important than for others. Firms striving for

a low cost strategy in their value proposition will be more focused on an efficient cost structure than

firms pursuing product leadership.

2.4 Comparison of frameworks In the previous section of this report, different approaches to business model elements have been

discussed and existing frameworks have been explained. A comparison of these frameworks is

necessary in order to discover commonalities between conceptual approaches. In Table 2 and Figure

3 the business model elements of the frameworks previously described are depicted. Though these

13

conceptual approaches may utilize different names for certain elements and may categorize certain

aspects in businesses differently, it can clearly be seen that the theories have common grounds.

The business model elements by Osterwalder and Pigneur (2010), coined the Business Model Canvas,

together give a comprehensive overview of how the firm plans to create and capture value.

However, in order to narrow down the scope of the current investigation, a choice has to be made as

to which business model elements are to be investigated. According to Günzel and Holm (2013), the

elements can be classified into the front-end and the back-end of the business model. In the front-

end, consisting of the first five elements, a trial-and-error approach in innovation is more appropriate

while in the back-end, consisting of the final three elements, a linear (bottom-up) approach is often

taken. This is consistent with Osterwalder and Pigneur’s (2010) proposition that the first five

elements in the model are about value while the latter four are concerned with the efficiency of the

business model. In an earlier article on business models, Osterwalder and Pigneur (2002)

differentiated the nine elements into four distinct pillars which clearly indicate the main focus of

those elements (see Table 1).

Given the objectives of this research, namely to discover similarities and differences on the sourcing

side of the dairy value chain, the focus will be on the infrastructure management pillar involving

resources, activities and partnerships.

Table 1: Business model pillars and their elements according to Osterwalder and Pigneur (2002)

Pillar Business model elements

The product Value proposition

The customer Customer segments

Channels

Customer relationships

Infrastructure management Key resources

Key activities

Key partnerships

Financial aspects Revenue streams

Cost structure

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Osterwalder and Pigneur (2010) Popp and Meyer (2010) Onetti et al. (2010) George and Bock (2011) Al-Debei and Avison (2010) Shafer et al. (2005)

Customer Segments Value proposition Strategic choices Value Proposition Type of goods or services Focus Value structure Value proposition Strategic choices Channels BM archetype Locus Transactive structure Value network Value network Customer Relationships BM archetype Locus Transactive structure Value network Value network Revenue Streams Revenue model Modus Value structure Value finance Value capture Key Resources BM archetype Modus Resource structure Value architecture Value creation Key Activities BM archetype Modus Resource structure Value architecture Value creation Key Partnerships BM archetype Modus Resource structure Value network Value network Cost Structure Modus Value finance Value capture

Table 2: Fit of recent theories on business model elements in the Business Model Canvas

Figure 3: Comparison of business model elements

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2.5 How elements can differ from one business model to another In order to allow for a comparative study of business models in particular cases, it should be

investigated on which dimensions elements can differ. In the following section, we will investigate

the differences in elements between one business model and another. As this paper would become

too extensive if such an analysis were to be done for all nine business model elements, only elements

of the infrastructure management pillar will be investigated. The aim of this section is thus to give an

overview of which aspects of doing business impact the creation of a firm’s business model.

The framework provided by Vermeulen and Cotula (2010) allows for a comparative study of business

models. Whereas the previously discussed models concentrate on analyzing current business models

or creating new ones through the provision of distinct overarching business model elements, the

framework by Vermeulen and Cotula (2010) helps explaining differences between different models.

According to them, business models differ on the degree of ownership, voice, risk and reward.

Ownership in this respect refers to the degree of ownership of the business and of its facilities. Voice

is related to the ability of influencing business decisions within the supply chain. Business models can

also differ in the way risk, including production risk but also e.g. political and reputational risks, and

rewards are distributed among actors. Such risks are argued to arise largely due to the absence of

good relations with partners (Gallear and Ghobadian, 2004).

In supply chain literature, the terms used by Vermeulen and Cotula (2010) frequently emerge.

Gunasekaran, Patel and McGaughey (2004) argue, for example, that firms are increasingly breaking

down inter- and intra-firm barriers in order to form alliances. Such alliances will enhance control over

supply chains through enhanced decision making authority. Thus, through more ownership of supply

chain activities or stronger partnerships, a more integrated and efficient supply chain will be created

(Gunasekaran et al., 2004).

Contemporary supply chain management literature is taking into account more than merely

economic performance. Environmental and social issues are increasingly being considered when

studying the sustainability of the supply chain, leading to a triple bottom line approach including

people, planet and profit (Seuring and Müller, 2008). According to some critics though (Banerjee,

2008; Norman and MacDonald, 2004), this approach usually only considers economic factors topped

up with vague commitments to social and environmental concerns. A reason for this is that doing

well and doing good at the same time is difficult to accomplish for firms (Stoeckl and Luedicke, 2015).

There is also an increasing need for companies in a supply chain to cooperate with each other in

order to create a seamless supply chain (Seuring and Müller, 2008). Supply chain integration can be

seen as the degree to which a firm strategically manages organizational processes together with

supply chain partners (Flynn, Huo and Zhao, 2010). Partners can choose to share information or

resources, align incentives, communicate collaboratively or jointly create knowledge (Cao and Zhang,

2011). To manage the entire supply chain from end-to-end, however, has been argued to be nearly

impossible in practice (Fawcett and Magnan, 2002). Management of channel relationships can simply

be concerned with increasing the quality of information and the speed of information exchange or, in

a more advanced level of supply chain management, can focus on a common philosophy of

stakeholders in order to guide decision making. Placing a central focus on relationship management

is argued to positively influence the cooperation between partners in a supply chain (Gibbs and

Humphries, 2009: 100). Research on the effect of supplier integration on company performance has

16

not led to unified conclusions. Some researchers have found a negative relationships between

supplier integration and operational performance (Koufteros, Vonderembse and Jayaram, 2005;

Swink, Narasimhan and Wang, 2007) while others argued that increased supplier integration leads to

higher performance (Cao and Zhang, 2011; Devaraj, Krajewski and Wei, 2007). Flynn et al. (2010)

made a distinction between direct effects of supplier integration on operational performance and

effects through interactions with customer integration. Their results indicated that supplier

integration only seems to be positively related to performance when customer integration is

considered. It is thus important to integrate with both up- and downstream partners in order to

improve performance (Flynn et al., 2010).

Such supply chain integration leads to higher degrees of coordination between different parties in

the supply chain. There is high alignment between partners and communication is very efficient. Lee

(2002) argues that the need for more coordination in a supply chain depends on the characteristics

of the product. If the demand uncertainty is high, which is generally the case for functional products,

the most appropriate supply chain strategy would be either an efficient or a risk-hedging supply

chain (Lee, 2002). An efficient supply chain strategy is appropriate with low supply uncertainty,

where the supply chain is a stable process. In developing country agriculture however, supply

uncertainty can be considered as rather high, thus as an evolving process. A risk-hedging strategy,

where the risk of disruption due to unstable supply is reduced through using more than one source

for the firm’s inputs, would be more appropriate. Thus, in terms of coordination, firms must align

with partners in order to decrease the risk of supply disruptions or they must perform these activities

in-house.

In food supply chains, an efficient supply chain may be even more important than in industries where

products are less perishable. Research by Chen, Zhang and Delaurentis (2014) on dairy supply chains

in China indicated that decentralized supply chain structures could lead to a distortion in product

quality. Chen et al. (2014) also argue that food products from emerging markets are not necessarily

of poor quality, but that poor vertical coordination in the supply chain can instead lead to poorer

quality products. Quality control in a well-coordinated supply chain is thus essential to guard the

quality of the final product. Hueth, Ligon, Wolf and Wu (1999) even argue that quality control is a

good motivation for firms to take an interest in what is happening on the farm level. Another

important aspect of coordination between supply chain partners is the sharing of information.

Providing information to farmers and vendors can increase farm productivity and marketing

efficiency (Zhong, Yang and Chen, 2015).

Processing firms have multiple options to ensure quality in the supply chain is up to standard. One of

these options is to expose farmers to price risks (Hueth et al, 1999). In other words, share the risk of

product loss, and thus revenue loss, with farmers. Compensation for farmers in such a case is tied to

the price processors can sell the farmer’s produce for downstream. Such incentive-based payments

can be used to motivate farmers to increase the quality of their produce.

17

3. Conceptual framework Based on the literature described in the previous sections, it is possible to create a simplified

conceptual framework depicting the boundaries of the research to be performed in the current

investigation. This framework tackles the main research questions and concepts related to these

questions. Boundaries to the research will have to be created due to time and resource constraints,

as it will not be possible to investigate every element of business models. The focus of the current

study will be on the infrastructure management pillar of business models, which consists of key

resources, key activities and key partnerships (Osterwalder and Pigneur, 2002). All three elements

are located at the back-end of the focal firm, where sourcing activities (Günzel and Holm, 2013).

In the previous section it has also been discussed how business model elements differ and what the

characteristics of supply chain agreements are that make certain coordination arrangements

different from others. Differences can exist in the degree of control focal firm has of its partner or

vice versa. Thus, does one partner have some degree of ownership of the other? And who has

influence over business decisions within both firms? Does the focal firm influence its partner’s

business decisions or vice versa? Supply chain agreements also appear to differ in the degree of

coordination among partners, which is concerned with information or knowledge sharing. Partners

can both learn from each other and adjust their production to satisfy needs of the entire supply chain

if relevant information is shared (Oreszczyn, Lane and Carr, 2010). Finally, the manner in which both

risk and reward are distributed among partners differs between supply chains. Risk and reward are

likely to be interlinked, as a larger degree of risk in a “fair” relationship should yield higher rewards

(Lambert, Emmelhainz and Gardner, 1999; Xu and Beamon, 2006).

As can be seen in Table 3, researchers have largely found the same attributes to be important when

investigating how supply chains can differ. The discussion above, which has been a combination

between business model- and supply chain literature, has therefore led to the conceptual framework

in Figure 4 on page 18. In terms of the supply side of the focal firm, business models can have consist

of different key resources, activities and partnerships. The way in which control, information sharing

and risk/reward sharing are arranged can provide a clear understanding on business model

differences.

Vermeulen and Cotula (2010) Xu and Beamon (2006) Lambert et al. (1999)

Control Ownership Level of control Joint operating controls

Voice Decision style

Risk/reward sharing Risk Risk/reward sharing Risk/reward sharing

Reward

Coordination Resource sharing structure Joint planning

Communications Table 3: Comparison of attributes on which business model elements can differ

18

Figure 4: Conceptual framework

The framework presented in Figure 4 consists out of the three business model elements from the

infrastructure management pillar, as defined by Osterwalder and Pigneur (2002). These elements are

the key resources, activities and partnerships. In the remainder of this investigation, it will be

attempted to discover how these elements differ on the basis of control, coordination and risk-

reward sharing. Each of the three differentiating aspects has an influence on the business model

elements. In other words, when investigating the aspect of control, which is related to ownership

and decision-making in the supply chain, different approaches may be identified. Some firms may

decide for a business model in which they have a high degree of control in the supply chain where

others may choose for a different style. Such a managerial decision will have influence on the three

business model elements on the sourcing side of a firm. Sharing control with other stakeholders in

the supply chain, with NGOs for example, will mean that partnerships are involved, different

activities are performed by different actors and fewer resources have to be committed as compared

to a situation in which the focal firm needs to perform all these activities alone. Thus, we will

investigate how differing levels of those three aspects (control, coordination and risk-reward sharing)

influence the resources, activities and partnerships within the business model of a dairy processing

firm.

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4. Methodology As previously mentioned, the aim of the current research is to discover similarities and differences

between business models in the dairy value chain by making a comparison of business models across

geographies. In the previous sections, the business model concept and its elements have been

defined, and a framework defining both applicable business model elements and the ways in which

these elements can differ has been developed. In order to get a comprehensive overview of the

different strategies multinational corporations can choose to source efficiently from developing

countries and simultaneously engage in corporate social responsibility, a method for finding these

different strategies should be chosen. Through desk-based

4.1 Research framework The research object, the phenomenon of study, will be the approaches to dairy development in dairy

value chains. This object will be studied based on the research perspective, also known as the

theoretical or conceptual model (Verschuren and Doorewaard, 2010). In the current research

project, this perspective will be the elements of business models as defined in the theoretical

framework in the previous chapter (see Figure 4, page 18). These are thus the key resources,

activities, and partnership factors. These factors are investigated on the basis of the attributes that

came forward from supply chain theory, such as control, coordination, and the risk-reward

relationship. Through the study and application of dairy development programs in real-life cases, an

overview of business models should be presented (see Figure 5).

Figure 5: Research framework

Due to limited availability of quantitative data, and the complexity of the research questions

proposed, a qualitative research approach is implemented in the current investigation. Concepts

such as control, coordination and risk/reward sharing cannot simply be placed on a continuum and

are therefore difficult to investigate using quantitative research. In other words, as the complexity of

these concepts allows for better interpretation through qualitative research.

The approach to the research will be inductive, which means that inferences are developed from the

objects analyzed in the current study (Saunders, Lewis and Thornhill, 2012: 146). The aim is thus to

build theory from the concepts that were discussed in the literature review section of this paper. It

will be investigated how these concepts apply to the current research question and to the cases

selected for this investigation. Researchers agree to a certain extent on the existence of unifying

concepts making up business models. However, the application of such theory development

programs in agricultural sectors of developing countries has not been performed. As such, an

inductive approach to the research question is justified in order to integrate information from

20

practical cases with the existing business model literature. The results of this study are thus aimed at

extending the existing theory, business model theory in this particular case. Such an extension of

theory is necessary for justification of a theory-building approach (Eisenhardt and Graebner, 2007).

Cases should be used as the basis for developing theory inductively as the relevance of the method is

that it forms one of the best bridges from rich, qualitative evidence to mainstream deductive

research (Eisenhardt and Graebner, 2007). Due to cases being embedded within their own

environmental context, theory built from cases is likely to be accurate, interesting and testable

(Eisenhardt and Graebner, 2007). Each case in such a research stands on its own and serves to

confirm or deny the hypotheses or propositions which have emerged from earlier experiments (Yin,

2009: 54). Cases shall therefore be selected in order to predict similar results (literal replication) or to

predict contrasting results (theoretical replication). In the latter instance, the researcher should be

able to anticipate these results in order to validate the propositions (Yin, 2009: 54).

Subsequently, a research strategy should be chosen. According to Yin (2009: 8), three conditions give

an indication of the type of research most applicable in social science; (1) the type of research

question, (2) the degree of control the investigator has over behavioral events, and (3) the degree of

focus on contemporary as opposed to historical events (see Table 4). The current research is

concerned with the questions of how business models differ and with the rationale behind these

differences. Case study research can thus bring aid in the current research as there is no need for

control over behavioral events and the focus is on recent events. According to Dul and Hak (2008: 4),

cases “in their real life context are selected, and scores obtained from these cases are analyzed in a

qualitative manner”. Research based on case studies is often regarded as the most interesting type

of research as they take advantage of rich empirical data (Bartunek, Rynes and Ireland, 2006;

Eisenhardt and Graebner, 2007).

Method Form of Research Question

Requires control of behavioral events?

Focuses on contemporary events?

Experiment How, why? Yes Yes

Survey Who, what, where, how many, how much?

No Yes

Archival analysis Who, what, where, how many, how much?

No Yes/no

History How, why? No No

Case study How, why? No Yes

Table 4: The three conditions explaining the choice of research method (adapted from Yin, 2009: 8)

4.2 Data collection The selection of cases for this investigation is done on the basis of relevancy to the topic. In inductive

case study research, the purpose is merely to develop theory (Eisenhardt and Graebner, 2007). This

study was not set out to test existing theory, and therefore theoretical sampling can be considered

appropriate (Eisenhardt and Graebner, 2007). This refers to a researcher’s decision to choose a

certain sample based on analytic grounds as developed over the course of the study (Sandelowski,

Holditch-Davis and Harris, 1992). It is the “purposeful selection of a sample according to the

developing categories and emerging theory” (Coyne, 1997: 629). An important characteristic of

21

theoretical sampling is that it is cumulative; each case builds upon the data collected in previous

cases (Corbin and Strauss, 2008: 146). Theoretical sampling can therefore also more appropriately be

referred to as ‘analysis-driven purposeful sampling’, as it was named by Glaser (1992: 102). This type

of sampling is more appropriate in the current research as it was not possible to make decisions on a

sample before the start of the study due to a lack of knowledge on what sample criteria should be

set. The cases are thus selected in theoretical sampling for their suitability in clarifying relationships

and logic among constructs (Eisenhardt and Graebner, 2007). Cases were found through searching in

both academic and non-academic literature, such as news articles. It was then attempted to gather

information from multiple sources in order to triangulate the emerging theory until no new

information was discovered. This process is also called saturation, a moment when no new data are

emerging (Corbin and Strauss, 2008: 143). In this case, the sampling approach has largely been

performed on the basis of convenience. Even though the primary objective of this research is to

discover dairy development approaches for multinational dairy firms, two local cases were also

selected. The main reason for this is the relevancy of the cases. When gathering data, these cases

emerged and displayed an interesting addition to the research. The fact that they were not

multinational was of lesser relevancy.

According to Corbin and Strauss (2008: 151), a researcher should make a choice about the nature of

data to be used in theoretical sampling. The kind of information desired to be collected by the

researcher should be the main criterion for this choice. This choice is, however, bound to the

resources available for the investigation. Data in the current research is gathered through the study

of documents, newspaper articles, books and academic literature. A list of keywords was set up

before analyzing the data through a text analysis in order to discover relevant information (see

Appendix A, page 51). The keywords in this list were identified in the academic literature on business

model elements and the literature on how these elements could differ. Subsequently, relevant

keywords were added throughout the course of data collection when relevant topics were

investigated. Previously studied data was then revisited in order to ensure all information containing

new key words was also included in the analysis. The keywords were used as coding in order to bring

together related information.

When theory building is the aim of a study and case studies are the objects of analysis, multiple cases

create more robust theory as opposed to single case-studies (Eisenhardt and Graebner, 2007).

Skepticism about the uniqueness of a certain case and the lack of generalizability of theory emerging

from that case to the entire population can more easily be defended if the same investigation is

applied to multiple cases (Yin, 2009: 61). Therefore, it was decided to investigate multiple cases. The

similarities and differences between the business models of these cases were explored. This should

provide a comprehensive overview of possible approaches.

4.3 Data analysis and validation With the data coded, a comparative analysis could be performed. According to Corbin and Strauss

(2008: 195), such an analysis involves that conceptually similar incidents are put under the same

code. As such, it was possible to get a comprehensive overview of the approach of the firm in the

specific case on the relevant differentiating aspect. The two most important factors of control,

coordination and risk-reward sharing were placed in a grid. Cases were then scored on these factors

as either low, moderate, or high. In chapter 5.2 starting on page 26 this scoring and subsequent

clustering of cases is explained.

22

The results from this clustering produced different approaches firms could take in designing their

business model for dairy development in countries with an underdeveloped dairy industry. The

impact of that approach on all three business model elements was assessed in order to show the

concrete consequences for one’s business model when choosing a certain approach.

As a final step, the results were validated by consulting an expert on dairy development. An interview

was performed with Dr. Liesbeth Dries, Associate Professor at Wageningen University in the

Netherlands. She is an expert in vertical relationships between stakeholders in the dairy industry,

especially when it comes to countries with an underdeveloped dairy sector. Dr. Dries has performed

research in many Central and Eastern European countries on support programs in agriculture. During

the interview, the relevancy of her research to the current investigation was discussed. Dr. Dries also

examined whether the conclusions of the current investigation were in line with her ideas about

dairy development programs.

23

5. Findings and analysis Three broad approaches exist in selecting a sample; convenience, judgement, and theoretical

sampling (Marshall, 1996). The first technique involves selecting the most accessible subjects to

investigate. A judgement or purposeful sampling approach is concerned with selecting the most

productive sample to answer the research question. The theoretical sample is selected based on

interpretative theories from the emerging data. Although convenience sampling has the inherent

disadvantage of decreased credibility, it is the most suitable technique for this research project

(Marshall, 1996). Due to the novelty of the subject, it is not possible to select a purposeful or

theoretical sample as it is not known which sample would be most productive.

In order to discover which business models firms use in their dairy development program, they were

evaluated on the basis of the conceptual framework. This entails that each of the three aspects

(resources, activities and partnerships) are investigated closely for all eight cases and the ways in

which cases differ in terms of these aspects are depicted graphically. This process should allow us to

find similarities in business models and thereby help identify distinctive routes firms can take when

implementing dairy development programs.

5.1 Case description In the following section, a brief description of the selected cases will be provided. Eight cases were

selected and as much information as required was extracted in order to get a comprehensive

overview of all cases. Not all of the dairy development programs in this sample were implemented by

multinational dairy corporations. Two cases are dairy development programs set up by local dairy

processors. The main reason these cases were selected even though no multinational dairy firm was

that displayed an interesting addition to the research. Where possible, multiple sources were used to

verify whether information regarding a case was correct. Half of the cases were located in Asia,

namely in China, Pakistan, Sri Lanka and Vietnam. One case from Africa was selected (Egypt) while

the other three cases were located in Romania (2) and Bulgaria (Figure 6).

Figure 6: Map of selected cases

24

5.1.1 Case I: Danone Romania

French dairy giant Danone entered Romania in 1998 and has developed an infrastructure in order for

Romanian farmers to deliver milk to the company (Van Berkum, 2006: 175). The firm owns just one

processing facility, which is located in the Hungarian capital Bucharest. In this facility desserts are

mainly produced and milk from small farmers all over the country comes together. Milk is collected

at collection points and at larger farms.

5.1.2 Case II: Nestlé Pakistan

Nestlé, a major international company active mainly in the food and beverage industry, entered

Pakistan in 1988 (Rosemann, 2005). Nestlé, which has its roots in Switzerland, merged with Pakistani

Milkpak and was renamed as Nestlé Milkpak in Pakistan. From Pakistan, dairy products have been

exported by the company from 1993, especially to the United Arab Emirates, Sri Lanka, Bangladesh,

Afghanistan and other Central Asian States (Rosemann, 2005). Nestlé sources from more than

135,000 dairy farmers through collection points in 2000 Pakistani villages (Nestlé, 2015). Milk from

these farmers is processed in the company’s two factories, which are located in Sheikhupura and

Kabirwala (Nestlé Pakistan, 2014).

5.1.3 Case III: FrieslandCampina Vietnam

FrieslandCampina entered Vietnam in 1995 through a joint venture with the Protrade Corporation

(FrieslandCampina Vietnam, 2015a). The Dutch dairy company gradually increased its sourcing in the

country to more than 4000 suppliers at present. Besides sourcing from every region in the country,

the firm is also developing model dairy farming regions in different areas of the country. In these

regions, 50 farms are established where farmers will each raise around 80 dairy cows intensively on a

patch of 6 or 7 hectares of land (FrieslandCampina Vietnam, 2015b). The model farms are intended

as examples for Vietnamese farmers on how to improve the quantity and quality of supplied milk.

The program is assessed by Harvard University professors Michael Porter and Mark Krammer

(FrieslandCampina Vietnam, 2015b).

5.1.4 Case IV: Dimitar Madzarov Bulgaria

Dimitar Madzarov is a Bulgarian dairy firm founded in 1991 (Bachev, 2007: 7). The company produces

its dairy products only from locally produced fresh milk from the Plovdiv region. Milk, from cows,

sheep, goats and buffalos, is processed into many different products such as curds, butter and both

hard and soft cheeses (Bachev, 2007: 12). Over 1000 farmers supplied their milk to the dairy in 2007.

The majority of this group held a herd counting five cows or less. Collection centers were set up in 80

different locations in order to collect milk from these farmers more efficiently (Bachev, 2007: 7).

5.1.5 Case V: Danone Egypt

Danone entered Egypt in 2005 as it saw major growth opportunities in the Northern African country,

where the demand for dairy products is still underdeveloped (Oxford Business Group, 2012). The

company started setting up milk collection centers in 2010 where farmers can get their milk weighed,

analyzed and stored before it being transported to Danone’s processing facility (Down to Earth,

2013). Together with NGO CARE International the firm is attempting to improve the quality and

quantity of milk produced by Egyptian farmers. The majority of dairy farms are small family

businesses holding herds with two to ten cattle. According to experts, efficiency gains are the only

way forward due to Egypt’s limited water supply and high cost of feed (Oxford Business Group,

2012).

25

5.1.6 Case VI: Nestlé China

Nestlé first entered the Chinese market in the 1980s, when China was slowly opened up to the world

(Quesnel, 2014). In 2014, the Swiss food giant established a Dairy Farming Institute in Heilongjiang, a

Northeastern province of China. The company aims to modernize Chinese dairy farming practices in

a sustainable manner (Nestlé, 2014). Around 700 participants are expected to receive training on

responsible practices annually at the institute. The training model utilized by the company in China is

based on a model used by Swiss agricultural institutes (Quesnel, 2014).

5.1.7 Case VII: Promilch Romania

Promilch was founded by three local people in Northeastern Romania (Van Berkum, 2006: 175).

Farmers’ association IPSA started investing in the company from 1999, gradually expanding their

share in the firm. IPSA received funding from a Dutch support program to make capital investments

in Promilch. Milk is mainly sourced through IPSA collection centers and processed into fresh dairy

products (Van Berkum, 2006: 175).

5.1.8 Case VIII: Fonterra Sri Lanka

Fonterra, New Zealand’s largest dairy corporation, started doing business in Sri Lanka over 35 years

ago (Fonterra, 2015). The company currently sources from approximately 4000 Sri Lankan farmers,

who have received support from Fonterra’s dairy development program since 1997 (Daily Mirror,

2015). Part of this program is the establishment of monitor farms, farms which are given intensive

support by the company for three years and serve as an example on how to improve dairying in the

country (Fonterra, 2015). Fonterra markets mainly milk powder products through its number one

brand in the country, Anchor. Most of the milk marketed in the country has been imported from New

Zealand, as Sri Lanka is only 20% self-sufficient (Stringleman, 2015). This is partly due to the small

scale of farming in the country, where the average farm only supplies just over six liters of milk per

day (Fonterra, 2015).

26

5.2 Analysis of cases In the following section, the previously mentioned cases are analyzed on the basis of the information

that has been gathered about their business model. This information can be found in Appendix B.

5.2.1 Control

In terms of control, a distinction was made between the investment of resources a firm has

contributed to the program and the degree of partnerships involved in it. ‘Control’, in the context of

this investigation, refers to concepts such as ownership, voice, and decision style. Thus, if the

investment of a firm into the dairy development program is lower, control over the specifics of the

program will also be lower. When partnerships with other actors are being made, these actors are

also likely to have a say in the program and the firm’s degree of control will thus be lower.

These aspects should indicate how involved a company is with the program and to what extend it has

to share control over decisions with other stakeholders. Most cases indicated high company

investments into the project (see Figure 7). Firms generally seem to contribute significant resources

to the initiated programs, both in terms of financing and in terms of less tangible resources such as

time and knowledge. Case I, Danone Romania, has been shown to have contributed less resources to

its program. We can see that the company has provided an infrastructure through which

smallholders can deliver their milk to the processing facilities. The milk from larger farms is picked up

on-site while smaller farmers have to deliver their milk to collection points. The dairy picks up milk

supplied by multiple farmers from these collection points, which are owned by private

entrepreneurs. Danone has also outsourced the transportation of raw milk to its factory in Bucharest.

The company is thus only concerned with processing its milk and with extension services, which will

be discussed later in this chapter. The firm thus exhibits a low degree of control; its investment in the

program is fairly low and there are no partnerships involved.

Two more apparent clusters were formed on the right side of Figure 7. The first cluster, containing

Dimitar Madzarov (case IV), Promilch Romania (case VII) and Fonterra Sri Lanka, is characterized by a

high degree of company investment and a low degree of partnerships involved. The companies of

these cases are thus concerned heavily with the infrastructure of sourcing milk in their respective

regions, but do not share control of sourcing activities with partners. In other words, only the

company itself is concerned with its program and little, if any, support from other parties is involved.

Cases that score moderately on the level of partnerships involved are Nestlé in Pakistan (case II) and

Danone Egypt (case V). Nestlé in Pakistan works together with local NGOs to train paraveterinary

workers and to train artificial insemination, and Danone Egypt works with individual Egyptian

farmers, local agricultural cooperatives and a local NGO. The cases of FrieslandCampina Vietnam

(case III) and Nestlé in China (case VI) illustrate that companies can also involve a wide variety of

partners in their program from different disciplines and backgrounds.

27

Company investment

Low Moderate High

Par

tner

ship

s in

volv

ed

Low

I

IV VII

VIII

Moderate

II V

High

III VI

Figure 7: Clustering of control aspect

5.2.2 Coordination

‘Coordination’ refers to communication and alignment between stakeholders and thus the sharing of

information, knowledge and resources. As there is a large gap between the knowledge of dairy firms

and smallholder farmers, the sharing of information on how to improve the quantity and quality of

dairy delivered is crucial for both parties. In this case, such sharing takes place in the form of

extension services. Firms can decide to support the development of smallholders by providing them

such extension services.

When investigating the coordination aspect of business models, a distinction was made between the

depth of extension services offered by dairy firms and the level of involvement of these dairy firms in

coordination mechanisms. The first is concerned with the extent to which the dairy firm provides

services to the farmers supplying to the company. These services can take many forms, ranging from

advisory services in terms of farm hygiene to free veterinary services and the provision of

innovations. In this distinction, depth refers to how involved a dairy firm is in the provision of support

services to farmers. Merely providing advice to farmers, an activity all investigated processors

perform (see Table 5), is considered as a low level of depth of extension services. The latter aspect,

the involvement in coordination mechanisms, entails the involvement of the dairy processor with

activities such as quality control and transportation.

Two main separate clusters could be identified, as depicted in Figure 8. Most cases were shown to be

involved heavily in coordination mechanisms such as infrastructure, transportation and quality

control. Two of the investigated cases however, Danone Romania (I) and Nestlé China (VI), were not

involved with coordination mechanisms to a large extent. The former outsources most coordination

activities to external actors. Collection points for raw milk are owned and exploited by private

entrepreneurs whilst transportation is handled by independent conveyors. The dairy thus merely

provides an infrastructure to farmers and outsources the activities in this infrastructure to third

parties. The latter, Nestlé in China, built a training center near Harbin in the North-Eastern corner of

the country. In the center, students and farmers alike are trained in modern farming methods

covering a wide range of topics. The company thus does not connect the sourcing side of milk with

the training of farmers. Nestlé does source from farmers in the area, and applies the same principles

in China as it does in Pakistan (case II), but keeps its training center activities separate from the

sourcing activities.

28

The two main clusters identified (Figure 8) include cases that show high involvement in coordination

mechanisms. The companies are thus heavily involved in providing an efficient infrastructure for

sourcing milk. The difference between the two clusters, however, is the depth of extension services

offered to smallholders. While all investigated companies in these clusters provide advice to farmers,

case II, III and IV provide more extensive services. Nestlé in Pakistan for example (case II), provides

free veterinary services and high yield fodder seed to farmers supplying the firm. Another example is

Dimitar Madzarov in Bulgaria (case IV), which supplies farmers with rent-free milk tanks as a means

to improve milk quality on farms.

Table 5: Extension services offered by dairy companies (*i.e. to assist in acquiring financing from external parties)

Depth of extension services

Low Moderate High

Invo

lvem

ent

in c

oo

rdin

atio

n

mec

han

ism

s*

Low

VI

I

Moderate

High

V VII VIII

II III IV

Figure 8: Clustering of coordination aspect (*i.e. transportation and quality control activities)

Dep

th o

f ex

ten

sio

n

serv

ices

H

igh

<

--

Lo

w I II III IV V VI VII VIII

Advisory services

- Hygiene X X X X X X X

- Farm management X X X X X X X X

- Business plan* X X X

- Other (i.e. sustainability or safety) X X X

Provision of inputs X X

Veterinary services X X

Provision of innovations X

29

5.2.3 Risk-reward sharing

The final aspect on which business models can differ is risk-reward sharing. The two indicators of this

aspect were chosen to be the use of incentive-based payment systems and the use of payment as an

investment mechanism. The former of these indicators, the incentive-based payment system, is

concerned with the extent to which bonuses, premiums or other methods to reward farmers based

on their performance were employed by the dairy firm. The latter, the use of payment as investment

mechanism, refers to assisting farmers in expanding their farming activities through the use of

alternative modes of payment. This can take the form of i.e. milk money prepayment or using milk

money as a collateral for financing inputs or investment activities.

Two extremes were formed in the case analysis with regard to the risk-reward sharing aspect of

business models (see Figure 9). The first extreme is a cluster including Danone Egypt (case V), Nestlé

China (case VI) and Fonterra Sri Lanka (Case VIII). As discussed in the section on results of the

coordination aspect above, the investigated case of Nestlé in China was concerned with the set-up of

a dairy training center. The center is focusing on the training of farmers and students, and is not

connected to the sourcing side of the company. This case is thus not concerned with payment to

farmers whatsoever. Fonterra in Sri Lanka is bound to the floor price of milk as established by the Sri

Lankan government. Besides the set price the New Zealand dairy firm is bound to, Fonterra does not

reward its suppliers with premiums based on either quantity or quality and does not offer the

possibility to receive financing on the basis of milk supply. The case of Danone Egypt is similar to the

business practices of Fonterra in Sri Lanka as Danone negotiates prices with farmers every three

months and purchases their milk at competitive market rates. No financing on the basis of milk

supply is offered by the company.

The second extreme is a cluster consisting of FrieslandCampina Vietnam (case III) and Promilch

Romania (case VII). FrieslandCampina pays its Vietnamese suppliers a premium based on the quality

of the supplied milk. An additional bonus scheme is also in place, featuring bonuses for more

hygienic milk (lower bacterial counts) and for higher quantities of milk delivered. Furthermore, loans

are provided to suppliers for investments in the farm, in livestock, and in farm biogas units. Interest

and loan repayments are deducted from milk payments, giving farmers the opportunity to repay

their loan through higher production. Promilch also bases its milk price on the quality supplied and

pays a premium price to farmers based on the volume provided to the dairy. Similar to

FrieslandCampina in Vietnam, the company provides farmers with a loan for investments in cattle

and the construction of stables or equipment. The milk provided is considered as collateral for the

loan, while a business plan and the opinion of milk collection center staff are crucial to guarantee the

reliability of the borrower.

The third identifiable cluster was formed in between the clusters previously described, and thus

scores moderately on both indicators. This cluster is made up out of Nestlé Pakistan (Case II) and

Dimitar Madzarov in Bulgaria (case IV). Nestlé provides its suppliers in Pakistan with an incentive if

they supply milk regularly. These suppliers are rewarded with cash bonuses through a lucky draw.

The company also provides microfinance loans and helps farmers make investments through the

prompt payment of milk money. Dimitar Madzarov pays market prices to its farmers and stimulates

the extension of farm activities through premiums for supplying higher quantities of milk. The

company also provides advance payment to farmers in winter to ensure much needed working

capital to their suppliers.

30

Use of incentive-based payment systems

Low Moderate High

Use

of

pay

men

t as

inve

stm

ent

mec

han

ism

*

Low

V VI VIII

Moderate

II IV

I

High

III VII

Figure 9: Clustering of the risk-reward sharing aspect (*i.e. taking milk as collateral for financing, prepayment of milk money)

31

6. Results From the literature on business models it has become evident that scholars largely agree on the

elements a business model is made up of. The business model canvas by Osterwalder and Pigneur

(2010) is a well-known archetype of business model research. The model identifies nine separate

business model elements which, together, make up a company’s business model. According to

Osterwalder and Pigneur (2010) the elements are interrelated and interdependent. Therefore, for

business models to be successful, the elements should be in line with each other. The sourcing side

of a firm consists of three elements, namely key resources, activities and partnerships. These

elements can differ on the basis of control, coordination and the risk-reward relationship, as has also

been discussed in the literature review of this paper (Lambert et al., 1999; Vermeulen and Cotula,

2010; Xu and Beamon, 2006).

In the following section, the different approaches firms can take regarding dairy development

programs are discussed on the basis of the three differentiating aspects of business model elements.

Thus, for every aspect, it will be discussed what choices a firm has on the basis of the strategies taken

by the investigated cases in the current research. These approaches have been based on the clusters

discussed in the previous section of this paper. Every cluster stands for an approach to the dairy

development program. A cluster thus represents an approach a single or multiple firms take in terms

of control, coordination or risk-reward sharing. As such, an overview of possible courses of action for

dairy firms in implementing their development program can be identified.

32

6.1 Control Regarding control over the program, firms can decide to take one of three approaches. Three

different clusters have been identified based on a cluster analysis of the cases used in this paper.

Firms have the choice to;

1. Provide merely an infrastructure for milk supply and outsource non-core activities

2. Build an infrastructure for milk supply and invest in milk sourcing activities

3. Build an infrastructure for dairy farming and jointly invest in dairy activities

The influence of these approaches on the three business model elements have been depicted in

Figure 10. The first approach a firm can take is to concentrate on core activities only. The dairy

processor will focus on processing milk and marketing it, which is traditionally the firm’s purpose. In

this scenario, the processor will provide an infrastructure through which smallholders can supply

their milk. The firm itself is not concerned with performing activities such as collection and

transportation, these activities are all outsourced to third parties. Ownership is separated, meaning

that the firm does not interfere with management of the smallholder farms. No partnerships are

undertaken, only contracts with entrepreneurs active in collection and transportation of milk are set

up to assure supply.

Figure 10: The three approaches on the basis of 'control'

The second approach a dairy firm can take is to build a complete infrastructure for milk supply and to

invest in milk sourcing activities connected to it. The dairy firm will then not only focus on processing

and marketing milk, but also on investing in the supply chain necessary for gathering and

transporting milk. Thus, a framework is set up including the initiation of collection points under

control of the firm and a system for transportation to the processing facility. No partners are

involved in the process however, as it is the dairy firm alone setting up the entire framework.

The third and final approach to building a dairy development program based on the findings

regarding the ‘control’ aspect of differentiation in business models is to build an entire infrastructure

for dairy farming. This approach involves utilizing the knowledge and resources of partners to

encourage more efficient dairy farming. The partners in this scenario can include a wide variety of

stakeholders such as NGOs focusing on empowering dairy farmers, but also other companies such as

feed or fertilizer suppliers. Through these partnerships, the dairy firm will bring together much

needed expertise for developing the entire sector in countries where the dairy supply chain is not yet

very efficient.

33

6.2 Coordination The ‘coordination’ aspect regarding business model differentiation is the second aspect investigated.

There are two main approaches firms can take, and these approaches differ mostly on the depth of

extension services offered;

1. Offer advisory services regarding the improvement of the quantity and quality of milk supply

2. Offer both advice and practical solutions to improve the quantity and quality of milk supply

The difference between approaches regarding the coordination aspect is more pronounced than the

three approaches defined in the ‘control’ section above. Most cases investigated in the current

research are namely highly involved in coordination mechanisms. As these cases are situated in

countries where the supply chain is functioning suboptimal, dairy firms appear to get involved

significantly in activities such as collection, quality control and transportation. An explanation for this

behavior could be that dairy firms want to ensure a fairly stable supply of milk. This can be enhanced

by ensuring the entire supply chain is functioning efficiently.

Figure 11: The two approaches on the basis of ‘coordination’

The two approaches differ mainly on the depth of extension services, which is the scope of extension

services offered (see Figure 11). This scope can range from advice on improving production to the

supply of inputs to farmers. All cases investigated offered advice on farm management, most firms

also on how to improve hygiene conditions, and some even on sustainability and safety. However, a

second approach is to take the support one step further and supplying smallholders with high quality

inputs such as feed, fertilizer or veterinary services. Firms could even provide farmers with

innovations such as milk tanks to significantly improve the quality of milk supplied by these farmers.

34

6.3 Risk-reward sharing According to the third aspect investigated, three approaches differentiate dairy development

programs from one another (see Figure 12);

1. Compensate farmers with market prices for milk

2. Provide premiums for supplying milk at higher quantity or quality next to competitive prices

and offer some form of loan

3. Offer premiums for higher quantities and quality and provide loans for investment in the

farm. Loans can be repaid through future milk supply or milk supply can be used as collateral

As has been shown in the results section of the current report, the approaches with regards to risk-

reward sharing differ mainly on two aspects. These are the manner of payment provided to suppliers

of the dairy firm (reward) and whether or not investments in smallholder farms is supported through

supplier payment (risk). The latter aspect is thus concerned with how the risk of investments in farms

is distributed. The first approach involves compensating farmers with market prices for milk. The

dairy firm in this case will pay farmers for the supplied milk and will not offer premiums or bonuses

for supplying higher quantities of milk or for providing a higher quality product.

The second approach entails the use of prevailing market prices for rewarding farmers, with the

addition of bonuses and premiums for supplying higher quantities of milk or for ensuring a steady

milk supply. As such, farmers are inclined to keep their production up and to supply to the dairy firm

regularly. The dairy firm enjoys the added benefit of being able to more accurately predict supply.

Another characteristic of this approach is the offering of some form of loan. This is usually

demonstrated in the form of microfinance or advanced payment in seasons where production is

generally lower.

The third approach involves the extensive use of premiums and bonuses. These bonuses are based

on the quality, volume, and hygiene of milk supply. Such schemes should persuade farmers to

improve the quality standards at their farm and to invest in production. This approach also involves

the use of payment as an investment mechanism, much more extensively than the second approach.

Loans are provided for investments in the farm, in livestock, or sometimes even for investments in

improving the sustainability of a farm. The milk provided can be used as collateral for the loan, and

interest and loan repayments can be deducted from future milk supply. Through this approach, the

Figure 12: The three approaches on the basis of ‘risk-reward sharing’

35

dairy firm significantly stimulates the ability for smallholders to invest in improving the capacity or

the conditions of their respective farms. The risk of default on microloans can also be shared with

partners such as NGOs or governmental institutions.

36

7. Discussion The current study set out to identify business models firms in the dairy industry can employ when

they are considering to implement a dairy development program. Such programs are aimed at

improving the quality and quantity of dairy supplied by smallholder farmers in countries with an

underdeveloped dairy industry. The objective was to formulate several alternative business models

and subsequently discussing the pros and cons of each business model. The results of this

investigation appear to be more complex.

Earlier in this paper, it was discussed how Baden-Fuller and Morgan (2010) argued that business

models can perform three functions. These functions can be (1) to describe businesses and to classify

them in a taxonomy, (2) to be a subject of a scientific investigation, or (3) to be a recipe other firms

can be inspired by. Business models can play any of these roles, but they can also play all three roles

simultaneously. Subsequently, it has become clear that there are some overarching principles

recurring in different investigations regarding business models. These principles have been identified

through the investigation of business model literature by different authors (Al-Debei and Avison,

2010; George and Bock, 2011; Hedman and Kalling, 2003; Lindgren, 2013; Morris et al., 2005; Onetti

et al., 2010; Osterwalder and Pigneur, 2010; Popp and Meyer, 2010). Though these authors use

varying terms for business model elements, it is certainly possible to identify recurring themes. As

the current paper is concerned with sourcing arrangements, the infrastructure management pillar

can be considered as relevant elements. This pillar, according to Osterwalder and Pigneur (2002), is

consisting of the business model elements resources, activities and partnerships.

From literature on supply chain theory it has come forth that these key activities, resources and

partnerships can be differentiated in terms of control, coordination and risk-reward relationships.

The first of these aspects, control, is concerned with ownership a firm has over the supply chain and

its decision-making authority in this chain. In other words, this revolves around how ownership and

voice are distributed along the supply chain. When a company invests more resources in a supply

chain, it is highly likely that it demands a higher degree of influence over decisions. Thus, higher

degrees of control can be observed when more resources are devoted to a program. Simultaneously,

the activities element of the firm is affected. More decision-making authority implies that firms will

need to be concerned with a larger number of activities. When firms decide to include more partners

in the program, these partners are likely to require a say in decisions and the degree of control of the

focal firm is lower. As can be observed, there is a strong interrelationship between these business

model elements. When a high degree of resources is committed to the program, the firm is likely to

be concerned with more activities in the supply chain and will have to share less decision making

power with partners.

Coordination in this research endeavor has been mostly concerned with the provision of extension

services and involvement in coordination mechanisms such as quality control and transportation.

Again, the three elements were highly interdependent as was already recognized by Osterwalder and

Pigneur (2010). It was observed that when more resources were committed to the program, the focal

firm was often involved in a higher degree of activities. Thus, a more involved firm will need to

commit a higher degree of resources to the program. It is, however, difficult to establish the

relationship coordination activities have with the degree of partnerships involved in the program. On

the one hand it can be argued that a program with lower degrees of involvement in coordination

activities and extension services will require more partnerships to fill this void. On the other hand the

37

firm can act merely as a processor and leave all other activities in the supply chain to the market,

therefore engaging in far less partnerships. The same logic can be reasoned for firms with higher

involvement in supply chain coordination activities. If firms cover many of these activities in their

support program, less external partners are needed to perform them. They could also partner up

with multiple parties though, to assist them in performing such non-core activities.

The distribution of risks and rewards is the third differentiating aspect of business model elements.

For this aspect, focus was laid on the use of incentive based payment systems as a form of reward

and the use of payment as an investment mechanism as way in which to share risks. This has led to

three distinct types of approaches possible for firms when implementing a dairy development

program. First, in the most simplest form, a firm could choose for an approach in which farmers are

merely compensated with market prices for the milk they have delivered. Second, processors are

seen to provide premiums for supplying milk at higher quantity and/or quality. If the farmer provides

milk at a high quality, he or she will receive a bonus on top of regular market prices for milk.

Simultaneously, the firm often offers some form of loan to smallholder farmers. The third possible

approach is that, on top of the provision of premiums for higher quantity and quality supply, the firm

uses payment of milk as an investment mechanism. Loans to farmers can then be repaid through the

future delivery of milk.

7.1 Validation These results have been acquired through data on business models of eight different dairy

development programs in seven countries across Asia, Europe, and Africa. They have indicated that

many different business models can be employed. Firms will be able to choose an approach from

each of the three aspects control, coordination and risk-reward sharing. For this research, an

interview was performed with Dr. Liesbeth Dries, an expert in the dairy sector and in development

programs for this sector. The aim of this interview was to validate the gathered results and to discuss

whether these results are in line with her experience regarding dairy development programs.

Firstly, the necessity of development programs in the dairy sector was discussed. Dr. Dries indicated

that development programs can be used in all kinds of agricultural sectors, but that investments are

definitely necessary to increase the quantity and quality of products in the dairy industry. Resources

are namely often missing in developing countries as the sector here is characterized by small-scale

farmers. Financial resources can be provided by large international aid programs but it is usually

more effective to have a major ‘pulling’ force involved in development. Then, there is a win-win

situation for both suppliers and buyers. There have been instances where aid programs set up an

infrastructure of collection stations without taking action on the demand side of the chain. As long as

the program lasted, farmers used these stations but as soon as the organization pulled out and let

the market do its job, collection stations were abandoned. The link between demand and supply is

thus very important.

Dr. Dries also indicated that the aspects on which business model elements can differ are certainly

connected to each other. In other words, certain combinations of approaches are more likely to

occur than others. When investment is higher, for example, firms will have more control in the

development program and will have a higher number of activities to coordinate. A more important

issue though, would be to discover the factors that lead to the choice for a certain approach over

another. These factors could be the firm’s needs and demands, but also the context in which the

38

dairy development is situated. Contextual factors are likely to influence the most suitable approach

for implementing such a program. When farmers lack access to credit, for example, the provision of

microcredit by the processor can have a major effect on the development of farmers according to Dr.

Dries.

Dr. Dries performed research on the dairy sector in multiple Central and Eastern European countries.

One of the main conclusions of Dries et al. (2014) was that support programs in agriculture are less

likely to be implemented in sectors with high degrees of competition. In such cases, farmers are able

to switch buyers more easily as there are multiple buyers available in the same region. The

investments made by processors in improving working conditions on farms will then be lost. In the

interview, Dr. Dries indicated that this is a problem for many agricultural sectors. The dairy sector,

however, is particularly suitable for the implementation of development programs due to the asset

specificity of investments. Most investments are made in cows or in technology specific for dairy,

whilst the supply of inputs such as fertilizer for e.g. cash crops can also be used for different

purposes. It is thus more likely that the investments made through a dairy development program are

utilized for the intended purpose. When the degree of competition is lower, development programs

are even more likely to be implemented. Processors then have more confidence that farmers will

return on their promises of delivering dairy. A strategy for processing firms to decrease the risk of

farmers not honoring their commitment is to engage with cooperatives, according to Dr. Dries. The

cooperative will then serve as an intermediary party and will have a direct relationship with farmers.

Social pressure can prevent farmers from not fulfilling their promises as such an action will have

negative consequences for their colleague-farmers.

7.2 Limitations The current research project has been subject to several limitations that need to be addressed. First,

the data used for this investigation was extracted from documents, newspaper articles, books, and

academic literature. For each case data was selected from different sources until saturation took

place. However, no interviews with relevant stakeholders were performed. Due to time- and

resource constraints, it has not been possible to perform such interviews, certainly not with

stakeholders from all eight cases. Interviews could have been very valuable for determining what

motivation firms have when designing their dairy development program though. On the other hand,

the main objective of this research has been to map possible approaches for firms in designing and

implementing their development program. With the information available, these approaches could

still be identified without interviewing stakeholders. When a closer look at the motivation behind a

particular approach is demanded, interviews would have been especially crucial in gathering the right

results.

Second, the sample in this investigation consisted out of eight dairy development cases. These cases

were selected based on the availability of relevant information. It is difficult to establish whether all

possible approaches have been discussed in this paper. There may be other business models in dairy

development, or even in other (agricultural) sectors, dairy processors can implement of which there

is little information publicly available.

A third limitation of this research is that contract arrangements have not been investigated. The

nature of the information used did not include details about contractual arrangements between

farmer and processor. Dr. Dries indicated that contracts could present valuable insights in the role

39

stakeholders play in a relationship, based on all three differentiating factors investigated in this

paper. The degree of control each party has over certain decisions in the supply chain can be

specified, coordination arrangements and responsibility over coordination activities are mentioned,

and the distribution of risks and rewards between parties are often defined in contractual

arrangements. In fact, the form of contract between parties (i.e. formal vs. informal) could give an

indication of how the relationship works already.

Finally, it has not been in the scope of this research to investigate whether contextual variables

influence the choice for a certain business model in designing a dairy development program. Too

many variables would have to be compared in order to allow for an all-encompassing theory of

business model selection criteria. Not only would information from all stakeholders be needed to

gain an insight in the thought process of these stakeholders, information on the business

environment would also have to be collected and compared for all cases.

40

8. Conclusion For development to take place in emerging economies, the agricultural sector needs to be supported

in order to build a decent foundation for the country’s economy. The dairy sector can play an

important role in this regard. Globally, the demand for dairy products is rising rapidly. This growth is

especially taking place in developing countries, where rising incomes bring new opportunities to

domestic consumers. In many of these countries, however, the gap between consumption and

production of dairy products is widening. To close this gap, more advanced knowledge and

technology is needed in the rural domain (Aganga et al., 2010; Ndambi et al., 2007; Uddin et al.,

2011).

One of the ways in which such resources can be provided to smallholder farmers is through

corporate development programs initiated by private actors. Development programs help improve

the quantity and quality of dairy supplied by smallholder farmers, which is advantageous for both the

farmer and the downstream processor. This study set out to identify which distinct business models

firms can employ in their development programs. Through an analysis of business models employed

in practice, both at the time of writing and in earlier endeavors of dairy companies, it became

apparent that there is not a single prevalent business model in use. In fact, processors all use their

own distinctive business model. The different elements business models consist of can be configured

along the wishes of the firm and the demand of farmers.

The set up was of the current study was to formulate the ‘recipes’ firms in the dairy industry could

follow when designing a dairy development program in the sense of the functions described earlier

by Baden-Fuller and Morgan (2010). The results of this study should thus provide a frame to relevant

managers on which they can add or remove certain features. The overall frame though, should be

one of several dairy development business models. For each aspect in this study, clusters of cases

were identified and approaches to dairy development programs corresponding to such a cluster were

standardized and clarified. This has led to the establishment of three specific approaches for both

‘control’ and ‘risk-reward relationship’, and two approaches for the aspect ‘coordination’. Dairy firms

can design their development program in countries with an underdeveloped dairy sector by choosing

an approach for each aspect. There are, however, no explicit combinations of approaches a dairy firm

can take. The results of this study show that any combination is possible.

When designing their dairy development program, firms can thus choose any of the ‘ingredients’ of

the three differentiating aspects to complete the business model of their development program. The

three aspects, control, coordination and risk-reward relationship, can be configured depending on

the wants and needs in the specific context. As a result, a very diverse set of business models can be

identified. On the one hand, this result can be considered unfortunate as the study does therefore

not provide us with a few, distinct business models firms can employ. On the other hand though, this

paper indicates that companies can design their dairy development program fairly freely and that the

firm thus has many choices. As a result, tailor-made solutions can be provided depending on the

specifics of both the firm and the environment the dairy development program is rolled out in. The

probability of programs to be successful is therefore higher.

8.1 Theoretical implications and suggestions for future research This research project has contributed to theory on business models in developing country agriculture

by combining business model theory with knowledge on supply chains and subsequently applying

41

this knowledge to various practical cases. Business model elements have been shown to differ on the

basis of several aspects, namely control, coordination, and risk-reward sharing. Firms can take a

certain approach regarding the specific aspect, depending on what the needs and wants of

stakeholders in the program are. The choice for a certain approach will determine what resources

are committed, what activities the firm will perform and what partnerships are initiated. However,

the choice of approaches for the aspects are not necessarily related. The business model functions as

a ‘recipe’, meaning that any combination of approaches can complete a business model.

Several suggestions can be made for follow-up research on the subject of business models in dairy

development programs. First, if there indeed are contextual variables influencing the approach firms

take towards designing and implementing a dairy development program, which seems to be a

reasonable assumption, it would be interesting to discover which variables are most important to

stakeholders. Such research could provide indications to firms under which circumstances a certain

business model would be suitable.

A second suggestion would be to investigate the successfulness of dairy development programs. The

current investigation has only been concerned with the structure of programs and with the roles

different stakeholders play in such a program. It would also be interesting to see whether a certain

approach has more beneficial effects for the farmer, for the processor, or for both. One could then

also investigate the possible effects a dairy development program has on the community at large in

the long run.

Finally, an investigation about how dairy firms can best benefit from a dairy development program

would present a valuable contribution to the discussion about support programs. In this paper it has

previously been discussed that smallholder support can be part of a company’s CSR program. In fact,

Vorley et al. (2009) suggest that merely purchasing inputs from smallholders can be part of the CSR

strategy and provide the firm with a competitive advantage. Sourcing from local smallholders in

developing countries could thus provide the dairy firm with an advantage in developed countries. It

should be investigated in what ways a firm can communicate its development efforts in other

countries most effectively.

8.2 Managerial implications Managers of dairy firms have to consider several issues before designing and implementing a

development program in a country with an underdeveloped dairy sector. Management should

primarily contemplate the main purpose of the program. The purpose of the dairy development

program can have a major impact on its business model. Business models will significantly differ

between a firm which is only looking to source locally and to assist farmers in delivering consistent

quality, and a firm which is willing to assist in investment financing on farm level, for example.

Therefore, it is essential to establish the degree of commitment a firm is willing to apply to the

program before determining the specifics of the approach. Firms will thus have to consider what

resources they are willing and able to commit, which activities they should perform and which

stakeholders they are willing to partner up with. An important example of one of these issues is the

consideration whether the firm will work with individual farmers or with cooperatives. Farmer

cooperatives can assist in the development program and decrease the risk of farmers not fulfilling

promises.

42

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10. Appendices

10.1 Appendix A: Keyword list

Key terms control Key terms coordination Key terms risk-reward sharing

Ownership Investment Voice Influence Decision-making Decision style Owning Building Construction Majority Shareholder Operations Organization Partnership Working with Joint Funding

Logistics Transportation Collection Delivery Procurement Contract Quality control Services Training Education Knowledge Assistance Support Feed program Inputs

Risk Reward Prices Bonus Premium Payment Money Financing Loans Credit Investment Collateral Guarantee Compliance

52

10.2 Appendix B: Case data

Case I: Danone Romania

The dairy development program of Danone Romania was investigated by Van Berkum (2006: 167-

189). In Romania, the company developed an extensive finance scheme for its suppliers but also

included a triangular input scheme. Together with banks, Danone provides loans to smallholders in

Romania. An important difference in this model as compared to other loan guarantee programs is

that Danone takes collateral from farms for medium-term investments in order to reduce the

constraints for borrowing.

Source

A. Van Berkum, S. 2006. Restructuring and Vertical coordination in the dairy sector in Romania.

In: The Dynamics of Vertical Co-ordination in Agri-food Chains in Eastern Europe and Central

Asia / J.F.M., Swinnen, Washington : World Bank, (Working paper 42): 167-189.

B. Pieniadz, A., Hanf, J.H., Voicilas, D.M. and Götz, L. 2009. Challenges for chain based finance in

the Romanian dairy chain. Paper prepared for presentation at the 113th EAAE Seminar “A

resilient European food industry and food chain in a challenging world”, Chania, Crete,

Greece, date as in: September 3 - 6, 2009.

C. FAO and EBRD. 2007. A systematic analysis of the agribusiness sector in transition

economies: The Romanian dairy sector. Available from

http://www.eastagri.org/files/ROM_dairy_VC_final.pdf

D. Bruszt, L. And McDermott, G.A. 2014. Leveling the Playing Field: Transnational Regulatory

Integration and Development. Oxford, UK: Oxford University Press.

Control

“From the collection points and large farms, the milk is transported to regional collection centers for

further transport to Bucharest, where the only processing unit in Romania is located. This factory is a

greenfield investment and modern equipped.” (A: page 175)

“The collection points and centers that supply Danone are all owned by private entrepreneurs.” (A:

page 176)

“The dairy does not have its own collecting points.” (B: page 8)

Coordination

“Danone acquires milk from all over the country, from small farmers whose milk is collected in

(around 60) collection points at local level and from larger farms. From the collection points and large

farms, the milk is transported to regional collection centers for further transport to Bucharest, where

the only processing unit in Romania is located.” (A: page 175)

“Danone now procures milk from farmers delivering at least 250 liters of milk a day, which indicates

that the threshold (the smallest dairy farm) possess about 15 cows (assuming a yield of 6 thousand

liters a year per cow).” (B: page 7)

53

“Additionally, according to a representative of Danone, the dairy only contracts with commercial

farms (=legal units) and not individual farms (=natural persons), since “commercial farms better meet

Danone’s requirements regarding the quality, quantity and have better business culture” such as

contract enforcement, technical know-how, general understanding of market economy, and farm

economics. Consequently, Danone's procurement structure has changed significantly over the last

decade.” (B: page 8)

“Friesland and Danone have outsourced the transportation of milk (and their products) to

independent conveyors.” (A: page 176)

“The share of direct deliveries from farmers increased to 85% in 2009. The transportation risks and

costs by this procurement channel are usually covered by the processor. The dairy does not have its

own collecting points. However, it cooperates with a few independent CPs, Ltds. or farmers’

associations. The transportation of this milk (including costs and risk assurance) is outsourced to

independent conveyors. The share of the milk deliveries from those CPs on the total milk procurement

is 5%.” (B: page 8)

“Milk quality controls take place at the (larger) farm and at the collection points.” (A: page 177)

“… reports that there are several stages of quality control: the milk collector controls at the farm on

density and acidity of the milk, while the farmers’ association (through the laboratory staff in the

field) in addition controls on fat, protein, dry matter, and added water at the collection center.

Furthermore, the factory controls the entire intake itself through its own lab. On top of that, at least

monthly the laboratory of the Veterinary Direction and periodically the laboratory of the Consumers’

Protection Office are controlling the milk. Danone and Raraul indicate that they use a similar quality

control system and are governed by external inspection.” (A: page 178)

“Danone offers advice services to its farmers. First, a farmer can get advice on drafting his business

plan and assessing his opportunities for expanding his farm. Second, Danone offers technical advice

on feeding, hygiene, improving the fertility rate of the cows, and other technical farm management

issues.” (A: page 179)

“Danone, on the other hand, has made prefinanced inputs the cornerstone of its farmers’

development program. The company supports farmers who are aiming at improving their business

through small-scale investments in, for instance, spare parts of field machinery and milk installations,

and through purchases of feed compounds (concentrates), milk powder (as cattle feed), and

detergents (of milking equipment). A farmer may apply for prefinanced inputs only after he has

delivered good-quality milk to Danone for at least six months. By countervaluing the investments in

required inputs, Danone buys the farmer’s estimated milk production in advance: normally the

prefinancing does not exceed the value of one year of production, yet the advance may extend to two

or a maximum of three years of production. Because Danone gives security to the input suppliers,

they are willing to deliver the inputs to the farmers.” (A: page 179-180)

“There is an annual training programme for farms; feeding balance software is provided to larger

farms; the company 19 manages an internal market (a kind of small-scale e-bay) in which farmers

that wish to buy or sell equipment find each other; Danone has negotiated prices with important

54

input providers and farmers can access these inputs while paying back the cost through milk

deliveries.” (C: page 19)

“However, leading Romanian dairy plants including Danone offer their assistance mainly to larger

farms owning at least 20 cows.” (D: page 73)

“For instance, as early as 2000, Danone Romania (…) began to negotiate special conditions for their

contracted milk producers with suppliers of veterinary drugs, detergents, or machinery.” (D: page 73)

“Another type of assistance refers to specific inputs such as feed compounds, detergents, medicines

or other veterinary service, and machinery. In this case, Danone applies triangular contracts. The

special agreements involve three entities: Danone, the farmers, and the companies delivering goods

and services to the milk sector. Based on this contract, farmers can purchase the respective goods or

services directly from the indicated input provider. Danone pays for the respective goods and service

at the time of purchase. The farmer repays the financial obligations to Danone by milk deliveries,

usually within one year.” (B: page 9)

“The programs include technical assistance (vocational training) to directly support farmers by

introducing and applying modern techniques and technology. Additionally, Danone provides an

extension service, which includes cows’ feeding plans, herd management, and more. In some cases,

Danone’s extension service takes an indirect form, for instance, giving farmers feedback on a business

plan.” (B: page 9)

Risk-reward sharing

“Danone offers a relatively low base price (10 percent below the market price), but offers bonuses

when a farmer delivers milk of above-average quality, according to protein content and germ count,

and also for constant delivery. In this way farmers can reach a mark-up of 35 percent above the

average market price.” (A: page 177)

“An important factor in stimulating milk quality upgrading has been the milk price incentive schemes

developed by private dairy companies.” (C: page 19)

“In addition to prefinanced inputs, Danone is willing to provide farmers with medium-term credits for

investments in, for instance, milking installations and animal purchases. A farmer can qualify for

investment credits if he is a stable supplier to the company and if his farm has a certain minimum

size. In principle, Danone offers investment credit assistance only to the medium and larger farms,

targeting at farms that can deliver around 400 kg/day (in due time).” (A: page 180)

“In 2005, Danone launched the program “Reaching West” aimed at providing their contracted milk-

producing farms with favorable credit terms for investments needed to meet European standards.”

(D: page 73)

“However, one respondent indicated that large farmers are generally preferred, as far as access to

the financial assistance is concerned.” (B: page 9)

“Danone normally takes the farm housing and/or land as guarantee for non-deliverance of milk or

breach of contract.” (A: page 180)

55

“For example, both dairies (i.e., Danone, Albalact) provide short-term ‘symbolic’ financial assistance

for operating resources such as feed compounds and energy costs to overcome temporal illiquidity,

faced by some farmers, usually during the winter.” (B: page 9)

“The dairy buys the farmer’s estimated milk production in advance, providing the farmer with

respective bar money or cash remittance (Danone). In return, the farmer draws an order check

(voucher), which the dairy can cash by the farmer’s bank if he or she does not deliver the ‘contracted’

milk.” (B: page 9)

“The farmer pays back the commitments with milk deliveries.” (B: page 9)

56

Case II: Nestlé Pakistan

Sources

A. Gerber, P., Mooney, H.A., Dijkman, J., Tarawali, S. and De Haan, C. 2010. Livestock in a

changing landscape – Experiences and regional perspectives. Washington, DC: Island Press.

B. Nestlé 2015. http://www.nestle.com/brands/dairy/dairycsv

C. Burki, A.A. and Khan, M.A. 2007. Milk Districts and Efficiency of Smallholder Dairy Producers

in Pakistan. Lahore University of Management Sciences, Pakistan.

D. Haksöz, C., Seshadri, S. and Iyer, A.V. 2012. Managing Supply Chains on the Silk Road:

Strategy, Performance and Risk. Boca Raton, FL: CRC Press.

E. Zia, U., Mahmood, T. and Ali, M.R. 2011. Dairy development in Pakistan. Rome, Italy: FAO.

F. Riaz, M. 2010. The role of the private sector in agricultural extension in Pakistan. Rural

Development News, 1: 15-22.

G. Nestlé Pakistan. 2014. Management Report 2014. Accessed from

http://www.nestle.pk/investors/financialreports.

Control

“Nestlé’s milk district model generally functions with the setting-up of rural milk collection centers,

which provide access to chillers in remote rural areas.” (C: 2)

“Milk collection sub centers were housed in shops rented by the company in or near villages.” (D:

page 195)

“Nestlé accounted for more than 80% of the total chillers present in the milk collection universe in

Pakistan, with most of the competition using ice to chill milk. Nestlé had been investing more than

Pakistan Rupee (PKR) 100 million per annum on chillers since 1992.” (D: page 195)

“We collect milk from 190,000 dairy farmers with 3,500 milk collection and 3,300 chilling centers.” (G:

page 30)

“Nestlé invests more than USD 180 million a year in milk sourcing in Pakistan, and USD 3 million in

milk-related operations, agricultural and technical support, and training for farmers.” (B)

“Feeding points collected milk in large drums and delivered to the nearest sub center to be chilled.

However, feeding point agents were not under direct control of Nestlé.” (D: page 195)

“A partnership with the United Nations Development Programme is also training 4 000 female

livestock workers.” (B)

“Nestle cooperates with local NGOs to train para-vets and artificial insemination.” (F: page 20)

Coordination

“Each supplier delivers milk to a collection point twice per day, directly after milking cows or

buffaloes.” (A: page 162)

“Milk was collected through a vast network of village milk centers (VMCs), sub centers and centers.”

(D: page 193)

57

“Feeding points collected milk from those locations whose milk volume did not justify investment in a

sub center setup.” (D: page 195)

“From the delivery points, Nestlé transports the milk in churns to centers equipped with milk cooling

tanks and electricity generators (...)” (A: page 162)

“The milk supplied by each farmer must undergo a basic and rapid quality check before being

accepted.” (A: page 162)

“When milk was brought to the sub center, the first task the collection agent performed was

measuring the volume of the milk. Then he performed a series of quality tests.” (D: page 195)

“The Nestlé Milk District Model involves (...) milk collection centers featuring payment systems,

quality and safety controls, electronic weighing equipment and cooling tanks.” (B)

“(...) Nestlé has implemented the following tools to ensure that contamination risks are under control:

Quality control schemes (...)

Farm quality assurance schemes

Supplier assessment and selection

Supplier education and development” (A: page 162)

“The Nestlé Milk District Model involves (...) free technical and animal husbandry support to improve

milk quality [and] free veterinary services.” (B)

“As a service to farmers, Nestlé established and extension service, staffed by qualified veterinary

doctors, to assist them in vaccination and treatment of livestock, improved breeding, good animal

husbandry practices, provision of high yield fodder seed, etc.” (D: page 193)

“These companies also provide their suppliers with management, production and hygiene advice.” (E:

page 14)

“Nestlé invests (...) USD 3 million in milk-related operations, agricultural and technical support, and

training for farmers.” (B)

“Nestlé restructured its agricultural services in 2005 so that it now consist of over thirty full-time

agronomists, 56 veterinary doctors and agricultural engineers to help the farmers (mainly in Punjab

province) with their milk production by offering different trainings from fodder production, hygiene

and milking practices to constructing cowsheds.” (F: page 20)

“Nestlé cooperates with local NGOs to train para-vets and artificial insemination.” (F: page 20-21)

“Since farmer’s wives are crucial in every milkproducing farm, the company has created seven teams

of three women each, all trained vets, sociologists and specialists in animal husbandry. Their task is to

meet farmers’ wives and empower them through training in milk production, animal husbandry, and

hygiene, and to give them an understanding of Nestlé’s milk collection system.” (F: page 21)

Risk-reward sharing

“The Nestlé Milk District Model involves (...) milk collection centers featuring payment systems,

quality and safety controls, electronic weighing equipment and cooling tanks.” (B)

58

“For the farmers, Nestlé started a Loyalty Incentive scheme.(...) It announced that all farmers who

had been supplying milk regularly for the past 15 days (...) were eligible for the scheme if they

continued to supply regularly for the next 2 months. (...) Farmers were given prizes in cash as well as

kind through a lucky draw.” (D: 197-198)

“The Nestlé Milk District Model involves (...) USD 25 million of microfinance loans each year [and]

prompt payment to farmers for each milk delivery.” (B)

“The company also bears the cost of interest (9%) on loans buying high quality cattle, if the farmer

agrees to sell the milk to company.” (F: page 21)

59

Case III: FrieslandCampina Vietnam

Sources

A. Royal FrieslandCampina N.V. 2014. CSR Report 2014. Available from:

https://www.frieslandcampina.com/app/uploads/sites/2/2015/07/FrieslandCampina-CSR-

Report-2014.pdf

B. FrieslandCampina Vietnam. 2015. Dairy development program. Available from:

http://production.frieslandcampina.com.vn/english/sustainability/chuong-trinh-phat-trien-

nghanh-sua.aspx

C. Bruce, B. 2013. FrieslandCampina and Rabobank boost dairy farming in Indonesia and

Vietnam. Posted on 21-10-2013 on: http://www.foodbev.com/news/frieslandcampina-and-

rabobank-boost-dair/

D. Thuy, D. 2013. Promoting shared community value. Posted on 25-11-2013 on:

http://www.vir.com.vn/promoting-shared-community-value.html

E. Haartsen, L., Van der Lee, J. and Wouters, B. 2010. Competitive Dairy Value Chains in

Southeast Asia. Dairy Expert Roundtable Meeting December 8 & 9, 2010, Muak Lek, Thailand.

Control

“The company has invested so far more than USD 13 million and has 70 permanent employees for the

DDP.” (E: page 12)

“The company has organized forty collection points, scattered over the provinces Binh Duong, Tay

Ninh, Long An and Ho Chi Minh City. In addition there are 2 Milk Chilling Centers and a network of

cooling facilities at 4 collection points and 3 farms established.” (E: page 12)

“The most important mission is to improve the infrastructure of the milk collection network.” (E: page

12)

“The project is a Public-Private Partnership between FrieslandCampina, Wageningen UR, cattle feed

company De Heus, TheFriesian Agro Consultancy, Fresh Studio, the Ha Nam provincial government

and the Dutch government.” (A: page 26)

“FrieslandCampina is working with Agriterra to strengthen the position of dairy farmers and

cooperatives in developing countries.” (A: page 28)

“The Ha Nam Provincial People’s Committee contributed the funds for infrastructure building (roads,

electricity, bridges, culverts, and leveling) and granted land usage right for 66ha. Moreover, the

Netherlands Ministry of Foreign Affair also funded 5 million Euros for the costs of consultation,

planning and technical equipments for dairy farming and harvesting.” (B)

“Through the Rabobank Foundation and Rabo Development, we give farmers in developing countries

access to financing. A partnership with FrieslandCampina is of immense added value for dairy

farming in both Indonesia and Vietnam.” (C)

“The dairy development activities of FrieslandCampina in Vietnam are assessed by professors Michael

Porter, Mark Krammer of Harvard University, as well as the Business Council for Sustainable

Development of Vietnam (...)” (B)

60

Coordination

“Dairy Development Program activities include:

Establishing a holistic milk collection system

Providing technical services and high quality trainings & consultations programs

Establishing quality control and assurance from farm to factory (...)” (B)

“The company staff at each station took charge of checking the quality of milk produced by dairy

farmers before weighing it.” (D)

“Setting up a quality control and assurance systems from farm to factory. The infrastructure and

logistics of the milk collection system are supported and enhanced by ISO management and HACCP

systems. The company has recently initiated a project called "Quality risk management system" for

raw milk collection from farms to factory (based on HACCP from farm level).” (E: page 12)

“Local farmers are also given training to increase their milk yield and improve its quality.” (C)

“The project will also help with training, the setting up of the production process for cattle feed and

financial services for the participating farmers.” (A: page 26)

“Employees with considerable knowledgeable of dairy production are deployed, via a so-called

consultancy pool, to advise and support dairy farmers and dairy cooperatives in Asia and Africa. This

support is aimed primarily at improving the quality of the milk and the productivity per cow.” (A:

page 27)

“In the DDP countries investment in technical support and the development of model cattle sheds

continued in 2014 with the aim of helping local farmers improve milk production. In Vietnam model

cattle sheds were built where farmers can watch demonstrations on aspects that can improve the

quality of the milk. In addition, the 60 most productive farms in Vietnam received technical support

aimed specifically at improving milk production and quality and reducing costs.” (A: page 27)

“High skilled, and well trained, extension staff provides farmers with free of charge services, such as

artificial insemination and veterinary service, as well as providing medicines at cost price.” (E: page

12)

“This is being accomplished by deploying knowledge from the Dutch agricultural sector via various

programs and exchanges. During the Farmer2Farmer programme, for example, Dutch member dairy

farmers visit farmers in the DDP countries to exchange knowledge and experience.” (A: page 28)

“Local farmers are also given training to increase their milk yield and improve its quality.” (C)

“A training program for farmers raises awareness and creates mutual interest in a better quality and

safety of fresh milk.” (E: page 12)

“Apart from dairy husbandry aspects, the training focuses on farm economics.” (E: page 12)

Risk-reward sharing

“An incentive based payment system implemented in Vietnam as part of the automated payment

system.” (A: page 26)

61

“The process helped pay farmers based on their product quality, from there encouraging farmers to

take care and apply Good Dairy Farming Practice and HACCP standards on food quality control to

improve milk quality, Huan noted.” (D)

“Farmers are rewarded for performing better, based on the FAO’s Good Dairy Farming Practices, and

investing in improving of their farm.” (A: page 29)

“FrieslandCampina pays an additional supplement on top of the average local milk price for better

quality milk. This stimulates dairy farmers to produce better quality milk.” (A: page 29)

“A transparent and incentive milk payment system encourages dairy farmers to produce high quality

fresh milk. Farmers can obtain a premium on the price if high quality milk is delivered. Furthermore,

the company has recently applied a bonus scheme, on top of milk pricing, to individual farms for

better hygiene quality milk (low bacterial counts) and higher milk volume delivered.” (E: page 12)

“FrieslandCampina and Rabobank support local dairy farmers by leveraging knowledge and expertise,

and providing financing on relatively favorable terms.” (C)

“The loans are used to purchase cows, improve conditions in barns and fund biogas units.

FrieslandCampina buys the milk that is produced. The interest and loan repayments are deducted

from the price paid for the milk, enabling the farmers to repay the loans in gradual stages.” (C)

62

Case IV: Dimitar Madzarov Bulgaria

Sources

A. Bachev, H. and Manolov, I. 2007. Inclusion of small scale dairy farms in the supply chain in

Bulgaria: a case study from the Plovdiv region. Regoverning Markets Innovative Practice

series, London: IIED.

Control

“The company has built 80 terminals in different locations close to the dairy farms.” (A: page 8)

“All these methods of private governance restrict poor performance and opportunistic behavior,

improve quality, and enhance effective commercialization of farm output.” (A: page 26)

Coordination

“Each terminal is equipped with 2-3 tanks for milk, staff and devices for analyzing the major

indicators of the delivered milk, i.e. butter and water content, traces of antibiotics and other physical

and chemical characteristics.” (A: page 8)

“A modern system of laboratory and on the spot quality and safety checks up has been introduced

(…)” (A: page 9)

“An efficient system for verification and registration (documentation) of quality and quantity of

delivered milk from each supplier has been put in place.” (A: page 10)

“A considerable number of investigated farms report that ʺDimitar Madzarovʺ Ltd executes strict

control on milk quality, milk safety, and hygiene of production.” (A: page 26)

“In addition, 150 tanks have been installed within individual or groups of dairy farms. They are rented

for nothing to farmers and are entirely maintained by the company while raw milk is collected by the

dairy trucks daily or every other day.” (A: page 8)

“The provision of group tanks increases the efficiency of milk collection, minimizing costs for

communication, verification, tests, and transportation.” (A: page 10)

“The dairy provides assistance to milk suppliers in the construction of new facilities and preparation

of projects for public support.” (A: page 11)

“The dairy uses its own experts and explores the economy of scale saving costs on provision of

“standard” services to numerous farms.” (A: page 11)

“Most needy farmers get predominately two types of service from ʺDimitar Madzarovʺ Ltd, around

30 per cent mention receiving consultation and information and six per cent crediting.” (A: page 26

Risk-reward sharing

“According to farers investigated in the study, the main reasons for selling milk to Dimitar Madzarov

Ltd are the existence of contract, collecting milk close to farm, better quality control, good reputation,

high trust, timely payment, higher prices and lower risk.” (A: page 23)

63

“In addition, 150 tanks have been installed within individual or groups of dairy farms. They are rented

for nothing to farmers and are entirely maintained by the company while raw milk is collected by the

dairy trucks daily or every other day.” (A: page 8)

“Significant on farm (site) specific investment has been made by the company consisting of milk

collection, cooling, and controlling facilities and staff. Many of these are highly specific to

individual/groups of farms where material assets are provided (rented) for free to suppliers as the

dairy carries out further maintenance and repair of facilities.” (A: page 10)

“In the winter period when the supply of milk is lower, advance payment is also given. That mode of

interlinking “interest free credit” against “marketing of raw milk” guarantees farms much needed

cash flow and working capital, secure continuation of livestock production, and stabilizes milk

delivery.” (A: page 11)

“Regular payment for supplied milk (every 15 days) brings about a stable income for farming

households and incentives to maintain good relations and the contract with the dairy.” (A: page 11)

“For the majority of farmers, payment is made every 15 days, and the importance of this frequency

has increased compared to previous arrangements.” (A: page 25)

“As far as prices are concerned, most farms report that market prices are employed.” (A: page 24)

“Differential prices are used to stimulate extension of livestock operations and milk supply. Small

suppliers (holders of 1-2 cows) are paid at the current market price (0.20 euro/liter), bigger suppliers

(more than 100 liter) get a premium of 12.5 per cent (0.225 euro/liter), and the biggest farms (more

than 300 liter) receive a 17.5 per cent premium (0.235 euro/liter).” (A: page 11)

64

Case V: Danone Egypt

Sources

A. Down to Earth. 2013. How Danone makes milk producers part of its development strategy in

emerging countries. Posted on 22-07-2013 on:

http://downtoearth.danone.com/2013/07/22/how-danone-makes-milk-producers-part-of-

its-development-strategy-in-emerging-countries/

B. Gayle, H. 2013. MCC (Milk Collecting Communities) Egypt – Phase 2. Posted on 01-02-2013

on: http://ecosysteme.danone.com/project/danfarm-egypt/

C. Down to Earth. 2013. Egypt: a lab for new ways to work in emerging markets. Posted on 08-

01-2013 on: http://downtoearth.danone.com/2013/01/08/egypt-a-lab-for-new-ways-to-

work-in-emerging-markets/

D. Payaud, M.A. 2014. Marketing Strategies at the Bottom of the Pyramid: Examples From

Nestlé, Danone, and Procter & Gamble. Global Business and Organizational Excellence, 1: 51-

63.

E. CARE Social Enterprises. 2013. Initial Learning and Guidance: Embarking On Social Enterprise

Initiatives. Available from:

http://www.care.org/sites/default/files/documents/Social_Enterprise_Learning_Document_

2013.pdf

F. Care Enterprises. 2013. Investment & Partnership Opportunities. Available from:

http://www.care.org/sites/default/files/documents/CARE-Enterprises_Portfolio-2013.pdf

Control

It creates cooperatives with the aim of developing and securing small producers’ milk production (A)

(...) setting up new collection centers and renovating existing ones to meet new quality standards. (B)

(...) open milk collection centres (MCC) and provide the producers who go there with a range of

services (weighing, milk analysis, storage, etc.) to help them improve their production.(C)

Two MCCs have already been opened, and by May 2012 they were collecting 4.5 tons of milk every

day.

With the support of the Danone Ecosystem Fund, Danone Egypt and its local partner CARE

International co-created the “MCC Egypt” project, setting up new collection centers and renovating

existing ones to meet new quality standards. (B)

To address these problems, Danone and Care International decided to collaborate and worked with

local agricultural cooperatives to learn how to improve the situation of local producers.(D: page 58)

These projects involving many local partners enable Danone to change both its supply chain and its

distribution system in rural areas of the country. (D: page 58)

At the heart of the initiative is a partnership between CARE Egypt, Danone and existing cooperatives

to establish Milk Collection Centres (MCCs). (E: page 5)

65

Additionally, the partnership established between Egyptian farmers, cooperatives and the private

sector will build the trust necessary to transform an unstable dairy industry into a thriving one. (F:

page 16)

Coordination

“The cornerstone of the project is the Milk Collection Center (MCC), where farmers living close by

deliver the milk themselves twice a day. For those who live further away, collectors gather the milk

and deliver it to the MCC.” (D: page 58)

To implement the project, a team was trained to provide quality monitoring and to manage the

centers’ logistics as well as the associated services (such as feed, veterinary services, etc).(B)

(...) open milk collection centres (MCC) and provide the producers who go there with a range of

services (weighing, milk analysis, storage, etc.) to help them improve their production.(C)

The MCC checks the milk quality and gives access to such services as feed, milk quality, and health

management programs. (D: page 58)

The MCCs provide technical support to farmers (...) (E: page 5)

Specifically, the objectives of this project are to improve small farmers’ incomes through increasing

milk production and quality, provide them with feed services, train them in hygienic practices to

improve animal health, (...) (D: page 58)

Small farmers also have the opportunity to be trained in hygiene, milking, veterinary services,

governance and organization. (B)

Risk-reward sharing

Specifically, the objectives of this project are to (...) ensure fairer profit distribution among the milk

value chain (...) (D: page 58)

The MCCs provide technical support to farmers, purchase milk at competitive market rates and then

sell to Danone at prices negotiated every 3 months under a long term supply agreement. (E: page 5)

66

Case VI: Nestlé China

Sources

A. Nestlé. 2012. Nestlé leads dairy development in China with new training institute. Posted on

11-01-2012 on: http://www.nestle.com/media/newsandfeatures/shaungcheng-milk

B. Nestlé. 2014. Nestlé inaugurates major Dairy Farming Institute in China. Posted on 15-10-

2014 on: http://www.nestle.com/media/newsandfeatures/nestle-inaugurates-dairy-farming-

institute-china

C. Nestlé. 2014. Nestlé in Society: Creating Shared Value and meeting our commitments 2014,

Full Report. Available from: http://www.nestle.com/asset-

library/Documents/Library/Documents/Corporate_Social_Responsibility/nestle-csv-full-

report-2014-en.pdf

D. Grow. 2015. More Milk for China. Posted on 02-03-2015 on:

http://grow.cals.wisc.edu/tag/nestle

E. Quesnel, R. 2014. Nestlé bets on Chinese dairy farmers. Posted on 21-12-2014 on:

http://www.swissinfo.ch/eng/beating-the-competition_nestl%C3%A9-bets-on-chinese-dairy-

farmers/41174420

Control

Nestlé is helping China accelerate the development of its milk industry with the construction of a new

dairy farming institute in Shuangcheng in Heilongjiang province. (A)

Local partners will be encouraged to help create an investment fund of 2.5 billion RMB for the

project. (A)

Nestlé is investing around CHF 30 million in the Dairy Farming Institute. (B)

Nestlé has agreed to work with the Shuangcheng government to increase levels of training and

technical assistance already provided to local farmers. (A)

“(...) and partnering with stakeholders, including governments and universities.” (B)

Through partnerships with leading domestic and international universities, local government, farmers

and dairy professionals, this state-of the art training facility (...) (C: page 111)

The Dairy Farming Institute’s business partners are Alltech, Alta Genetics, Avery, Boehringer

Ingelheim, East Rock, Elanco, Foester Technik, GEA, Goke•Storty, IFCN, Land O’Lakes, SCR, Zoetis, as

well as our academic partners at the University of Wisconsin Madison and Northeast Agricultural

University in Heilongjiang Province. Other partners are likely to join in the future.

In partnership with the authorities, Nestlé has distributed 1,000 free milking machines to farmers to

ensure no farmers in the region have to continue milking by hand. (A)

The first phase of training is being jointly delivered by experts from the University of Wisconsin. (C:

page 111)

Land O’Lakes, which is, of course, a cooperative, is the feed partner at the Dairy Farming Institute. (D)

67

Coordination

The institute, with its series of training farms, aims to be the country’s leading dairy training center,

offering teaching courses from national and international experts. (A)

They will gain practical experience in expanding their farm businesses, improving productivity and

sourcing high quality milk sustainably. (A)

They cover a wide range of dairy management disciplines, including animal health and welfare,

milking hygiene, animal nutrition, environmental protection, and socio-economic management. (B)

Focusing on milk cow feed formulation, the participating managers will gain a better understanding

of their role and responsibilities with regard to farm animal welfare, dairy cow nutrition and farm

management. (C: page 111)

As well as providing practical lessons and tools for everyday use, the training will build capacity,

support the transfer of knowledge to other employees, and ensure good practices – including those

related to farm animal health and welfare – are applied across the sector. (C: page 111)

Risk-reward relationship

In its efforts to develop the rural area over the years, the company has also provided credit

guarantees to those farmers with the potential to grow their businesses. (A)

Located in Shuangcheng in the rural state of Xinfu, the new training facility is housed in a large,

futuristic, cylindrical building where some two dozen students from various provinces have since

October each paid 2,000 Yuan (CHF318) for a three-day course in modern farming methods. (E)

68

Case VII: Promilch Romania

Sources

A. Van Berkum, S. 2006. Restructuring and Vertical coordination in the dairy sector in Romania.

In: The Dynamics of Vertical Co-ordination in Agri-food Chains in Eastern Europe and Central

Asia / J.F.M., Swinnen, Washington : World Bank, (Working paper 42): 167-189.

B. Bruszt, L. and Langbein, J. 2012. Strategies of Regulative Integration via Development: The

regulative integration of the Polish and Romanian dairy industries. Working paper prepared

for the joint IDB – EUI – USC CIBER Conference, “Fostering Regional Regulative Integration -

Learning Across Regions,” held at the Inter-American Development Bank, Washington DC,

February 23-24, 2012.

Control

Promilch has a written contract with the farmers’ association ISPA, its major shareholder and by far

its most important milk supplier, and not with individual members of ISPA. (A: page 174)

In 1999, the farmers’ association ISPA joined with investments in equipment. These investments were

possible through the Dutch PSO support program. (A: page 175)

The association uses a Dutch fund—received from Rabobank on very attractive terms—and provides

small loans to farmers who want to invest in animals, (re-)construction of stables, and/or equipment.

(A: page 180)

Gradually ISPA Eco SRL, a limited liability company fully owned by the ISPA members, expanded its

share to 65 percent of the total shareholding. (A: page 175)

The ISPA farmers association, majority shareholder of PROMILCH, employs staff providing extension

services to its 2,000 members. (A: page 178)

Coordination

The factory in its present form opened in 2001 and it processes mainly milk delivered from the ISPA

collection centers (85 percent). (A: page 175)

Finally, larger local dairy companies, such as Promilch and Albalact (formerly Raraul), take care of the

collection and transport themselves, which makes it easier for small farmers to deliver milk to these

dairy processors. (B: page 14)

Also Promilch/ISPA reports that there are several stages of quality control: the milk collector controls

at the farm on density and acidity of the milk, while the farmers’ association (through the laboratory

staff in the field) in addition controls on fat, protein, dry matter, and added water at the collection

center. Furthermore, the factory controls the entire intake itself through its own lab. (A: page 177-

178)

On top of that, at least monthly the laboratory of the Veterinary Direction and periodically the

laboratory of the Consumers’ Protection Office are controlling the milk. (A: page 178)

69

Raraul and Promilch, for instance, take care of the collection and transport by themselves. (A: page

176)

Also Raraul and Promilch/ISPA invested in cooling facilities and milk control equipment in milk

collection centers. (A: page 176)

IPSA has taken initiatives to provide its members with basic farm-level support on matters of key

importance (feeding, milk quality, and hygiene) and a secure market outlet. (B: page 15)

The ISPA farmers association, majority shareholder of PROMILCH, employs staff providing extension

services to its 2,000 members. (A: page 178)

Services provided are various: from supporting farmers in making feeding plans for their herd to a full

business plan. In its early days, much extension work focused on convincing farmers to improve

hygiene in their milking practices. The association distributes leaflets with practical information and

hints on cultivating feed, storing milk at the farms, cleaning practices, and so forth. (A: page 178)

ISPA staff visit farmers individually and organize meetings, trainings, on-farm demonstrations, and

trials through which knowledge exchange is enhanced. (A: page 178)

Risk-reward relationship

Promilch’s payment to ISPA farmers is determined according to quality and is based on individual

samples tested through modern equipment available at the association-owned milk collection

centers. (A: page 177)

For the bigger farmers, a premium price based on increased volume delivered is negotiated within

the contract with Promilch. (A: page 177)

ISPA reports that prices are established monthly, taking into account the market developments.

Promilch/ISPA has a one-year contract for the farmers with more than 10 cows but (re-)negotiates

prices (at least) every six months. (A: page 177)

ISPA also plays a role in helping farmers with credit, but as its members are predominantly small-

scale farmers, borrowers are largely farmers with only a few milk cows. (A: page 180)

The association (...) provides small loans to farmers who want to invest in animals, (re-)construction

of stables, and/or equipment. (A: page 180)

Farmers qualify for a loan through an interview in which they have to indicate their business plan. An

average loan is around 400 euros, with a maximum of 2,000 euros. ISPA loans are to be repaid after a

6- to 18-month grace period for animals, and a four-year grace period for construction investments.

(A: page 180)

Farmers do not have to provide any collateral; the milk delivered is considered the “collateral.” (A:

page 180)

ISPA deals with the default risk by having a solidary liability of both the loan beneficiary and the milk

collection center staff who guarantee the reliability of the borrower. (A: page 180-181)

70

Case VIII: Fonterra Sri Lanka

Sources

A. Fonterra. 2015. Sri Lanka. Available from:

https://www.fonterra.com/global/en/sustainability+platform/sustainable+dairying/sri+lanka

/sri+lanka

B. Stringleman, H. 2013. Sri Lanka agreement a boost for Fonterra. Available from:

http://farmersweekly.co.nz/article/sri-lanka-agreement-a-boost-for-fonterra?p=119

C. Stringleman, H. 2015. Sri Lankan dairy growth resumes. Available from:

https://farmersweekly.co.nz/article/sri-lankan-dairy-growth-resumes?p=1

D. Economy Next. 2015. High prices keeping liquid milk out of reach of Sri Lanka masses. Posted

on 13-07-2013 on:

http://www.economynext.com/High_milk_prices_in_Sri_Lanka_keeping_liquid_milk_out_of

_reach_of_masses-3-2337-9.html

E. Daily Mirror. 2015. Fonterra Brands Sri Lanka collects record milk volumes from Sri Lankan

dairy farmers. Posted on 10-11-2015 on: http://www.dailymirror.lk/94675/fonterra-brands-

sri-lanka-collects-record-milk-volumes-from-sri-lankan-dairy-farmers

F. Anchor Milk. 2015. Empowering our Farmers. Available from:

http://www.anchormilk.com/community-support/empowering-our-farmers/

Control

Fonterra Brands Lanka collects milk from small dairy producers for processing at its local site. (A)

Work is also planned to develop model farms to provide practical training and advice, and which act

as local demonstrations of best dairy farming practice to local farmers, and for the up-skilling of

future extension leaders in dairy. (A)

A significant thrust in FBL’s Farmer Training and Development program is to set up “monitor farms”.

Monitor Farms are typical of local dairy farms and once selected are being given intensive support

through the programs for up to three years. (A)

This is aimed at more local milk collection, investment in model farms to train more dairy farmers,

more milk collection centers and encouragement of farm growth through Fonterra’s Farmer

Education and Development program. (B)

We’re investing in Demonstration Farms and Training Centers in several parts of the country to

provide training on best practices to improve dairy skills. We’re also setting up state-of-the-art

chilling center facilities for dairy collection which act as knowledge sharing hubs for farmers to learn

from Fonterra’s experts. (F)

The small dairy farmer development project spans three areas: farmer and service provider training

and development, model farms and milk collection hubs, and working with the Sri Lankan authorities

and contributing to cooperative development opportunities to advance the industry. (A)

Fonterra and the governments have agreed to significantly increase investment in dairy development

in Sri Lanka over the next decade. (B)

71

Coordination

Fonterra Brands Lanka collects milk from small dairy producers for processing at its local site. (A)

Fonterra Sri Lanka collected a peak of 40,000 liters a day from 4400 small dairy farms scattered

throughout the hilly country. (C)

(...) Fonterra wants to assist them to achieve their aims through introducing farmer training and

development (extension) programs. (A)

Farmer training and development favors the “hands on” approach through field days, discussion

groups, practical demonstrations and mentoring. (A)

Participants learn a range of skills, including how to detect and treat the early stages of mastitis,

implement best-practice farm health and safety practices, and understand more about onfarm milk

quality improvement techniques. (B)

By investing in local farmer education and development, as well as training local employees at our

own milk-collection centers, we have already significantly enhanced the quality of the milk collected

over the last decade. (B)

Support focuses on the areas that will have the greatest impact on farm productivity, livestock

performance and business sustainability. (A)

Fonterra’s supply relationship officers have worked with me since late last year to help increase my

farm’s productivity. They visit my farm regularly to help resolve any issues such as animal health and

feeding them properly. (E)

The small dairy farmer development project spans three areas: farmer and service provider training

and development, model farms and milk collection hubs, and working with the Sri Lankan authorities

and contributing to cooperative development opportunities to advance the industry. (A)

Risk-reward relationship

Sri Lanka was a price-controlled market, where the government fixed the retail price of milk powder

sachets, within which the importers, packers and retailers had to make ends meet. (C)

Sri Lanka’s government has guaranteed a floor price for milk to encourage production and in June

decided to implement a budget proposal to increase the purchasing price of a liter of liquid milk to 70

rupees from 60 rupees. (D)