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From Traditional Firm and Producer Company to a sustainable Community Enterprise System

Amar KJR Nayak

Abstract:

The paper argues that the inherent asymmetries in design, structure and purpose between

the traditional firm and the marginal producer would lead to exploitation of the marginal

producer under the current structure of production & trade relationship between the two.

While the existing agri-business models that link the marginal producers to the traditional

firms enhance immediate earnings for the marginal producers, the system will tend to

favour the traditional firm at the cost of the marginal producers. In the light of the above

phenomena, the paper argues that for a marginal producer based enterprise to be

sustainable, the enterprises needs to be community based, community paced, community

owned and professionally managed. The paper suggests that any enterprise system or

model to be sustainable for all in a community has to ensure the sustainability of the

weakest in the community.

Key Words Traditional Firm, Producer Company, Community Perspective, Clan Variables, Universal

Variables, Community Settings, Community Based-Paced-Owned-Professionally Managed

Enterprise, and Sustainism

Amar KJR Nayak is an Associate Professor in Strategic Management at the Xavier Institute of Management, Bhubaneswar, India. Many of these ideas discussed in this Working Paper have evolved over time through my engagement in teaching the course on Non Competitive Strategies at XIMB and my involvement in an Action Research project (MADP) of FAO. My interactions with various stakeholders of the project, especially with Mr. Subhash Mehta have greatly helped me in developing these ideas. The first part of the paper on the critique of traditional firms with its profit and growth objective has also been circulated among faculty members in XIMB and a few faculty members of IIM-B, IIM-C, BMMA, XLRI, Welingkar School, London School of Business, FAO-MADP Steering Committee members and BAIF-Bangalore. The paper was presented at the One Day Round Table Meet organized by Agriculture Finance Corporation Limited and the Planning Commission, Government of India on 31st of January 2009 at New Delhi. The author welcomes comments and can be reached through email: amar@ximb.ac.in

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From Traditional Firm and Producer Company to a sustainable Community Enterprise System

The paper has four sections. Section 1 discusses the concepts and fundamentals on which

the traditional firm exist and how the business models under inclusive capitalism adopted

by the traditional firm remain to be sub-optimal. Section 2 discusses the current trends of

linking marginal producers to the traditional firm, intervention through Producer

Company (PC) and the dilemmas therein. Section 3 advances the current modes of

intervention to the community owned and professionally managed enterprise. It

highlights the key variables on which such a community enterprise can be designed for

overall sustainability. Section 4 discusses the nature and structure of support to realize a

sustainable community enterprise system.

1. The Traditional Firm - A critique

A firm means a company or a business partnership. It originally denoted a signature and

later the name under which the business of a firm was transacted. By traditional firm, the

paper refers to the various forms of present business organizations like company,

partnership, multinational enterprise, multinational companies, etc. A firm can be best

understood from the purpose for which it operates and fundamental variables on which it

is designed. Further, understanding the overall economic-market system and the basic

assumptions of the system in which the firm operates would be vital.

A firm’s objective is essentially to increase the wealth of its shareholders. It is driven by

the objective of increasing profit from its operation. The nature of a firm is to grow and

expand over time. Indeed, growth in terms of size and market share helps the firm

towards its objective of profit maximization. These characteristics of a traditional firm

are best captured by the Penrose (1956). The whole body of literature on industrial

organization, resource based view and dynamic capabilities of the firm have been

developed based on these basic understanding of a firm.

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The other key dimension to understand and characterize the traditional firm is

competition. Some of the inherent assumptions within the framework of external

competition are (i) resources are limited and hence a firm needs to acquire as much

resources as it can, (ii) efficiency is best achieved by competing with others, and (iii)

holistic and sustainable models are not practical. In the above context, the dichotomy of

competition and non-competition has existed for long. However, with the onset of the

Industrial Revolution in the 17th Century and the emergence and growth of private firms,

the balance has moved towards competition. With the increasing belief in the virtues of

competition and self interest of a capitalistic systems, developed through the American

firms, organizations and institutions, it seemed that there was only one paradigm viz., the

paradigm of competition.

In the field of Management Science, competitive strategy is best captured by Porter

(1979, 2008). In the five forces model of competitive strategy of Porter, all the actors

with whom a firm engages with, viz., suppliers, buyers, existing producers, new entrants,

and substitute producers are perceived to be threats in business. How real is such a

presumption? On the contrary, Porter (2006) on strategic corporate social responsibility

suggests that a firm should cooperate with the suppliers and other actors along its value

chain to benefit the firm and the community with whom the firm operates. The

intellectual roots of the above view of competition are in Mason (1949) and Bain (1954)

that are based on the paradigm of ‘attenuating competitive forces’. The second stream of

competitive strategy emanates from a conflict perspective, the roots of which go back to

the 17th century military strategies and political strategies (Curry & Zarate, 1995). The

present day Game Theoretic analysis based on zero sum game is also based on conflict

perspective.

During the last five decades, competition has been viewed through the ‘resource based

perspective’. The competitiveness of a firm’s product or services was seen in the light of

back-up resources, processes, systems and capabilities. This view has been essentially

based on the Ricardian nature of rent seeking. To keep up with the fast changing and

competitive business environment in the recent years, firm strategy has evolved to view

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competition from the dynamic capability perspective. This view is based on the

Schumpeterian nature of rent seeking. While the ‘resource based perspective’ and the

‘dynamic capability perspective’ have provided insights into what gives a firm the

competitive advantage, their engagement remains within the domain of competition and

suffers from the problem of viewing competition as external competition alone.

Transaction cost theory is another fundamental aspect that has been an integral part of

economics and management theories. Ghoshal & Moran (2005) argue that this theory has

badly influenced the managers of thousands of firms by suggesting that opportunism is a

key element to transaction cost. Indeed, firms in general have based their operations

largely on the foundation of transaction cost and the problem of competition therefore

surfaces more often today than ever before. Of the three key assumptions of transaction

cost theory, while the first two, viz., asset specificity and bounded rationality well

represent the real world, the third assumption that human beings are opportunistic is an

over simplification of human behaviour. Unfortunately, the opportunistic description of

human beings has been constructed to authenticate the opportunistic behaviour of the

managers in a firm.

With the global financial crisis, crash of stock markets and recessionary tendencies in the

most advanced countries in the recent past, the question of whether the paradigm of

competition is sustainable has been elusive. The present global financial crisis has lead

many to wonder about the old argument whether Capitalism or Socialism or Communism

is a viable alternative. Are we likely to find sustainable model(s) within the competitive

strategy framework or do we need to look beyond competition to get alternative

frameworks for all effective and sustainable means of economic engagement in the

future?

The rise and fall of Enron is a case of high expectation of growth and profits of the firm

under severe competition in a capitalistic setting. Enron’s ‘mark-to-marketing

accounting’ approach, where it inflated its return on investment to showcase its growth

and profitability was central to its collapse. The story of growth and fall of an Indian

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company, Satyam Computers is no different from the ambitious growth and profit

objectives of a traditional firm.

In the process of seeking the objectives of continuous growth and profits for its

shareholders, the firm adopts various processes and mechanisms in terms of say, tax

evasion, collusion among institutions, regulators and the firm, tactful conversion of

public property to private property. Firms also adopt deceptive accounting methods to

acquire capital from the general public through market capitalization. Firms also try to

take advantage of imperfect regulatory mechanisms. While firms may have financial

cross-holdings in multiple firms that are unquoted but they may report only on the listed

company. Further, the top management comprising of a few major shareholders virtually

control all decisions of the firm.

While the traditional large firms seek resources and incentives from the society/nation

through the industry-government institutional mechanisms, firms in the transforming

economies tend to take further advantage of the institutional deficiencies in the fast

changing economy. In the fast transforming countries like India, China and Brazil that

have quickly moved from a public ownership system to a free and private ownership

system; the private firms in these countries have also very large in a short span of about

ten years. Russia experienced this in the 1990s during its fast transformation process,

when its currency, Rouble had a free fall and depreciated by over 2000%, leading to easy

transfer of public property including the huge state-run enterprises to private firms.

The problem of high growth and profit maximization in the framework of external

competition cuts across all fields of our lives today. This phenomenon is also observed in

the world of sports and games. The India-Australia test series of 2007-8 is a case in point.

In the second test, the umpires on the field, umpires off the field, and the Australian team

made sure that the Indian team was given ten (10) unfair decisions (see video footage of

the matches at \\xsys\CRcorner\PGP-2\NCS\Cricket videos). This cricket match showed

that at the peak of competition, the nature of external competition can turn very ugly and

lead normal human beings to a state; devoid of morals, ethics and principles.

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Traditional trade theories have argued for global trade. The new engine of World Trade

Organization (WTO) that emerged from International Trade Organization (ITO) in 1944

has advanced the idea of free global trade and investment by arguing that it will benefit

everyone in the world. On the contrary, the New Trade Theory empirically proves that

due to increasing return on scale instead of decreasing return on scale as assumed in

perfect competition and free trade, international production and trade is limited to a few

regions of the world (Krugman, 1980). The current progress of global trade and

investment has greatly excluded a majority of the world from the benefits of international

trade contrary to what has been argued since the proposition of comparative advantage

theory (Ricardo, 1817).

In the recent past, the external competition in the field of management has taken a new

turn and it offers inclusive strategies under the tag of inclusive capitalism. The firms in

Japan had indeed adopted this strategy long back. Through their paternalistic strategy, the

Japanese firms adopted life long employment, seniority based salary system and company

union. Over the years, these business policies have given significant stability and

competitive strength to the Japanese firms. Toyota Motor Corporation’s paternalistic

strategy with reference to its employees, component suppliers, partners and its strategy of

financial cross-holding of various players in the industry is an exemplary case of

inclusive strategy. Tata Group, the Indian business conglomerate comes close to the

inclusive strategy of Toyota Motor. The concepts of co-production, co-creation and co-

opetition (Budney & England, 1983, and Prahalad, 2004) are other types of arrangement

to include the players in the supply chain to enhance the competitiveness of the leader in

the chain.

Corporate Social Responsibility (CSR) and the Strategic CSR (Porter, 2006) are also

some shades of ‘inclusive capitalism’ within the value chain of a company such that the

company gets the strategic advantage. Complementation Strategy of multinational

enterprises like BAT, Unilever, and Suzuki Motors (Nayak, 2008) is yet another

mechanism that firms have adopted to harness the capabilities of the local community

and industry. For instance, Hindustan Lever Limited (HLL), in 1975, after unsuccessful

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attempt to get milk supplies from the villages in Etah district even after providing cows to

the villagers, it had to inject more capital in the form of micro-finance to the villagers.

Once HLL complemented the credit and nutritional needs of the families who the

company had offered the cows, milk started to find its way to its dairy and the business of

HLL took off.

Social Entrepreneurship has evolved as another model of business. This model generates

profit for the firm employing the abundant factor endowments of production in a poor

community. The argument of Prahalad (2006) on ‘Fortune at the bottom of the pyramid’

has been critiqued much (Ramachandran, 2008, Karnani, 2007, Srinivasan, 2005) on the

above reasons. The different strategies under inclusive capitalism move from the view

that the stakeholders are not to be perceived as threats but actors who could help towards

creating value for the firm. While creating value for the shareholders of the firm, the poor

participants of the community would also gain economically in the process.

Inclusive Capitalism has been quite appealing. Even the Governments of several

countries have tried to abandon the welfare state mechanism in favor of market

mechanism as a means to inclusive growth. In the welfare state mechanism, the

government took an active part for the growth of the firm and intervened for the well

being of the society as a whole. In the market mechanism, the society including the poor

and marginal producers is expected to achieve well being through their engagement with

the firm in the free market system. With growth and profits objectives of the firm being

supreme for a firm and the inherent asymmetries between the firm and the individuals in

a society, how equitably will the firm and the marginal producer trade their

produce/services in a free market system?

Today’s business models appear to have several problems of sustainability as they seem

to be based on weak theoretical foundation and unrealistic assumptions. As Sethi (1986)

would argue; a society is simplistically converted to a market. It presumes that because

the market is inefficient, firms come into existence. In this process, it assigns a

pessimistic role to the society. It is devoid of vital elements like political philosophy and

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normative content. Through its elaborate organizational structure, business organizations

create distance as the organizational and institutional structures are inherently based on

arrogance, coercion and conflict. The assumption of automaticity in the structure and the

distance between people due to many hierarchies appear to dehumanize the people in the

traditional business models. Further, the unnatural rate of growth often leads the firm to

adopt environmentally abusive practices that makes the firm unsustainable in the long

run.

While values, ethics, and morals are inherent part of a human being, the present business

models ignore these aspects. Fundamentally, individuals devoid of spirituality are

unlikely to run the enterprise in a sustainable manner as they themselves are not

complete. Indeed spirituality could help the owner cum co-producer/co-worker in an

enterprise to cross the barrier of the general notion of competition. An integrated

community based owner-producer-co-worker, small sized, with appropriate technology

and humane values could possibly offer an alternate model that is sustainable for any

economic engagement.

The current firm structure and function is essentially designed for seeking profit for the

select shareholders of the firm and to grow endlessly to meet this profit objective of the

firm (Penrose, 1995). With profit motive being the driving force behind the existence of a

firm, how strong is the argument that a firm will cater to its employees, retail investors,

suppliers, and the society at large? If the firm did care for these stakeholders as much as it

did for profit, issues of firing employees, shutting down of factories, creative destruction

of valuable product/service, drumming very hard on corporate social responsibility while

spending less than 1% of the profit on it, devising mechanisms to avoid paying taxes, and

etc would not occur as we have been noticing more of these in the recent years.

In the final analysis of the traditional firms, it appears to me that whether it is competitive

strategy or inclusive strategy, there are some common asymmetric variables that drive

business under the capitalistic frameworks. The foundation of a traditional firm with its

growth and profit objectives wrests on a few key variables viz., Economies of Scale,

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Capital Intensity, Technology Intensity, Control of Ownership, Control of Management

and Firm Efficiency. I see these variables as ‘clan variables’ as an enterprise model based

on these variables will benefit more to the owners of the firm than others engaged in the

process. These structural design and purpose of traditional firm creates the doubt whether

an enterprise based on these fundamentals will be sustainable in the long run or give way

in due course of time as it has been with a few cases in the most capitalistic system of the

United States of America.

How can the present business models deliver or work with the 4 billion people at the base

of the pyramid? The concerns for developing appropriate business models to fit the

context of the base of the pyramid have been raised by many including Ricart, et al

(2004). If new set of variables contrary to the traditional variables were to be the basis for

new models of doing business, how would the design and structure of traditional firm /

organization change? It would demand changes on several other aspects.

2. Traditional Firm & Producer Company Perspectives

2.1 Intervention from a traditional Firm Perspective Enamored by profit and growth of the traditional firms, the NGOs and the Governments

have been trying to emulate the methods of a traditional firm to improve the livelihood of

the majority in rural India who are largely engaged in agriculture and allied activities.

While the needs of the poor and marginal farmers in terms of building production

capacity, marketing capacity, and financing capacity have been well understood, the

approach has been in the light of the traditional firm. Rural India is considered as rural

sector like other sectors, viz., steel sector, pharmaceutical sector, etc. The so called rural

sector is characterized by low income consumers as compared to middle and high income

consumers in the towns and cities. Rural India is also seen as under developed markets

which could be developed for future expansion of products and services of the traditional

firm.

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In the above light there have been different types of intervention by the Governments.

Capacity building of the marginal farmers and the poor has been attempted on various

fronts, viz., programme awareness, production capacity, and value addition. Similarly,

several Government and non government agencies have intervened on marketing and

financing issues. Several innovations in the form of cooperatives, self help groups (SHG),

common interest group (CIG), and micro financing institutions (MFI). Some form of

producer companies like the Aharam of CCD, Madurai and Fab India have also evolved

in the process of engaging the poor and the marginal producers. The shareholding

structure in both Aharam and PC’s of Fab India are not as per the norms of the Producer

Companies, section IXA, Companies Act 1956. Majority of the shares are held by a few

and they exercise more voting rights than other members in the Producer Company.

While both CCD-Madurai and Fab India claim to have formed PCs, they do not represent

the characteristics of a Producer Company.

The unit of analysis in the above framework remains to be the entrepreneurial entity, the

firm. Often, the traditional firm tries to find opportunities in a rural setting and builds a

business around it. Further, the attempts in the traditional firm perspective have been to

link the various intermediaries to the firm or a corporation. For example, link the farmers

of cotton to a multinational company through a system of ‘contract farming’ or link small

vegetable farmers to Reliance Fresh through supply contract. Empirical evidences of such

market linkages, while they yield handsome profits to the marginal farmers in the short

run, they destabilize rather destroys most marginal farmers in the long run leading to

farmer suicides. The various SHGs and CIG are increasing by being linked to private

micro-financing institutions (MFI).

While the intensions of several policy makers and social leaders are noble, are the

unwanted consequences because of the inherent conflict in the interest of the traditional

firms and the marginal producer? Any kind of inclusive capitalistic model with the core

nature of firm (viz., shareholder profit and firm growth) intact is unlikely to ensure the

sustainability of the marginal producers. Hence, to presume that marginal producers will

profit in the long run and that they be sustainable through the interventions from a

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traditional firm perspective appears to be fundamentally weak and fallacious. Please see

Fig. 1.0 for the structure of intervention from a traditional firm perspective.

The structure of intervention from a traditional firm perspective is not tenable because of

the inherent asymmetries and contradictions in the fundamentals on which a traditional

firm and an individual marginal producer are based on. Traditional firm is based on large

economies of scale, minimum scope and product specialization, large capital, high end

technology, ownership of large assets, and management control. On the contrary, an

individual or a few marginal producers taken together operates on small scale of

operation, season based multiple crops/produce, smaller capital, lower and traditional

technology, and ownership of fewer assets. Further, the purpose of traditional firm is to

seek profit and growth; whereas the objective of a marginal producer is to have a means

of sustainable livelihood.

The traditional firm characteristic of large scale economies of a single produce would

logically support mono cropping. The capitalistic intensity typically alienates the

marginal producers from the management and ownership of the operations. Technology

intensity of the operation makes the marginal producer a misfit to the production system.

In other words, the economic system built on the foundation of the traditional firm has

little place for marginal producers and the poor. The skills, knowledge, experience and

wisdom of the marginal producers and the poor do not find value in the traditional firm

structure. Crop failure, debt burden, migration, unemployment in the traditional firm

driven operations, separation from family and finally loss of dignity of the marginal

producer have been common in the above structure & process.

2.2 Producer Company, current practices & the dilemmas

The administrative difficulties faced by the cooperatives like NDDB which was under the

state cooperative act led the movement towards creation of Producer Company. Putting

the producer cooperatives as Producer Company under the Companies Act give the

producer cooperatives flexibility to operate and have access to bank credit like a

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company. By virtue of these efforts of NDDB and the high powered committee chaired

by Prof. Y K Alagh and many others, the Producer Company came into existence in 2002

with an amendment of the Companies Act, 1956.

The features of Producer Companies are detailed in section IXA of the Companies Act,

1956. A Producer Company (PC) is a company of the primary producers of any kind, like

that of agricultural produce, forest produce, rural artisans, and any other local produce,

where the members are actual producers. While each member can have only one share

and one vote, he/she can contribute any amount of produce to the PC. Contrary to the

traditional firm, the shares of the PC members cannot be transferred without the special

approval of the board of the PC. As against the traditional company, a PC should have a

minimum of 10 members but can have any number of members. It can also have a share

capital of less than 100,000 INR. The legislation also allows the members to avail of

credit facilities from the PC. With regard to management of the PC, the Act requires that

the PC has to be run by professional managers with a Chief Executive Officer to be

responsible for the overall operations.

The 17 Producer Companies of DPIP-MP seem to have several elements as per the

legislation. These PCs largely appear to serve the purpose of aggregation of agricultural

produce. The PCs through the arrangement of contract marketing sell their produce to

processors or any other large national and international buyers. The attempt of the PCs

has been on the traditional technology transfer mechanism, which may not fully leverage

on the available local technology of the respective communities.

In its attempt to aggregate the produce from the marginal producers, the above PC model

focuses on the common interest groups or self help groups as the basic units for

aggregation. Village, block and district serve as geographic spaces from where these

producers groups come from. Marketing has been understood and applied from the

traditional firm perspective. Whether the above approach and the logic of traditional

marketing will help the cause of sustainability of the marginal producers has not been

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looked into. Empirical evidences existing PCs suggest that current PC models intend to

gradually adopt the traditional firm perspective.

If the PC were to adopt the traditional firm perspective with regard to efficiency,

technology, scale, and capital, and the question of whether the PC will make the marginal

producers sustainable in the long run arise. Since the traditional firm approach, by design,

tends to serve the interest of traditional firm, the above approach is likely to lead to

another sub-optimal model. Indeed, many of the about 150 PCs that exist today in India

including the PCs of District Poverty Initiative Programme-Madhya Pradesh (DPIP-MP),

are unaware of where they are taking the primary producers to; whether to some large

network of a private company for short term benefits or leading the rural producers to a

sustainable system in his/her own right. Please see Fig. 2.0 for the present structure of

intervention from a community perspective.

There have been a lot of discussions in the Medicinal, Aromatic and Dye Plant (MADP)

project of the Food and Agricultural Organization (FAO), New Delhi and in BAIF

Development Research Foundation on the various parameters of community

organizations and business platforms. While there is an understanding that community

level organization or enterprise could improve the livelihood of the poor and marginal

producers, there has been only limited understanding on how these could be designed and

implemented.

The current structure of Producer Company allows for ownership and management

control by the primary producers through the provision of professionals managing the

PC. It has also taken the community perspective rather the firm perspective on the above

two accounts. However, on the issues of scale, technology, efficiency, source and size of

capital, it is not clear whether the PC would adopt the traditional firm perspective or

some other perspective. What would be the problems, if the PC were to adopt the

traditional firm perspective? This calls for further review of the fundamentals on which a

sustainable community enterprise could be built.

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3.0 Basis of a Sustainable Community Enterprise We may be able to advance our understanding if we understand the three key terms in

this section, viz., enterprise (firm), community and sustainability. In section 1, we had

some explanation on the fundamentals on which a traditional enterprise is built. While the

basics of an enterprise like scale, technology, capital, ownership, management will not

change, the nature and degree of each might need to change. The existing enterprise

model of Producer Company does incorporate some interest of the primary producer, or

the community. However, greater clarifications on the issue of the community and its

context and the issues of sustainability are necessary to make any valuable progress on

the subject.

3.1 Concepts of Community & Sustainability

Understanding the community in the light of a sustainable community enterprise is

important. In the context of rural India, the basic unit of community is the family. A

number of families staying together with some common bonding among them would

constitute a village. While a village meets the social, cultural and emotional needs of the

families, it does not fully meet the economic needs of every family. A number of villages

with geographical contiguity and sharing some common natural resources form the

community in our analysis. Ecology of this community consists of the land, forest and its

resources, water resources, and the whole natural habitat on which the people in the

community depend for their livelihood. Depending on the resource base of the ecology

and the surplus generated from the ecology of the community, the geographical size of

the community can be estimated for a sustainable community enterprise.

Identifying the community would help specify who the producers are, total number of

producers/members, number of villages involved, characteristics of the ecology,

economic engagements of people thereof, and the potential surplus of produce from the

community. It will further help in determining the economies of scope and scale for the

community enterprise. In the first iterative step of determining size of the community,

Gram Panchayat, the basic unit of the Indian political system could be used. Depending

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on the size of a Gram Panchayat (GP), the geographic spread, natural resource base,

potential surplus produce, the size of community can be revised in the subsequent

iterative steps of intervention.

Sustainability refers to the ability of the individual family to lead a healthy and happy life

over time and continuously. The focus is on the individual family and not on the

organization or enterprise / firm. We presume that if the individual family, the basic unit

of the community enterprise is sustainable; the community enterprise systems will be

sustainable. Our initial measure of sustainability will therefore be the amount of revenue

earned by individual family from their engagement with the community enterprise. The

community of people should also feel that they own this enterprise. The feeling of

ownership would possibly depend on the level of participation of the members in the day

to day operations of the enterprise. Location of the enterprise and the pace of change in

the enterprise will determine whether the members can see the activities and participate

from time to time. So besides the issues of economic viability, sustainability of the

community enterprise will depend on the location, decision making, participation and the

pace of change in the community enterprise.

3.2 Understanding the Institutional Settings in Rural India

Understanding the context and adapting to the given context is probably the key for any

effective implementation of an idea. While there is enough understanding of the context

of rural India and the settings of the poor, the knowledge is either not utilized or the

implementing authority often concludes on the settings without sufficiently recognizing

its dynamic process of change. The large institutional mechanisms often impose

themselves upon the existing institutional mechanisms, creating conflict in the village set-

up or creating several loop holes for further exploitation of the poor.

The historical and traditional institutional structures are deep rooted, complex and

dynamic in nature. The complexities arise from the interrelationships among the several

institutions viz., social institutions, economic institutions, political institutions, and

cultural institutions (Bingen, 2000). The new institutions, viz., micro-financing

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institutions, contract farming, etc created by external players add to the confusion and

complexity in the rural setting.

Social institutions evolve over time based on the people’s concept of social relationships,

community, social groups, individual roles and responsibilities, perception of the function

of the social group, and the overall social life of people in a village. Similarly, the

economic institutions in the community levels could be based on the local perception of

materials, their system of valuation of the materials and the production relationship

among various people in the village. The cultural institutions would be similarly based on

the local beliefs, faiths, trust, and the philosophy. Further, the political institutions are a

result of the power relationships and the very concept of power as conceived by the

people.

While the policy and development project implementer are aware of the deep roots of

historical and traditional institutions in a village settings and the various socio-economic

problems, they are often bound by the target fixed by their respective departments of the

Government. In this process, the objective of the department, the targets of expenditure

and preparation of the report take precedence over the person (poor & weak) for whom

the whole machinery supposedly works. With the lack of strong involvement and

motivation of the government, the intermediaries make hay in the process of

implementation. In due course, the government officials also join the intermediaries to

get their pie from the development intervention aimed for the rural poor and marginal

farmers. The government institutional arrangement inadvertently leads to achieving

annual financial targets and misses its own planned development objectives (Nayak,

2008).

The existing government institutional mechanisms do not fully recognize the strength and

capacity of a village and its institutions. The knowledge and wisdom with the people,

their techniques and technology either in farming, production, storage or construction

have not been properly leveraged by the existing government institutional mechanisms.

The Government and its different agencies have often adopted a top-down approach that

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ignores the capacity of the primary producers and stakeholders. Indeed, the development

interventions should be such that it promotes and strengthens the historically developed

good institutional processes.

Within the existing community settings and its institutional settings, the proposed

community enterprise in theory calls for a review of the modes and the level of emphasis

on social communication, community mobilization, community organization, farming

principles, appropriate agro-technology, and management principles to be able to realize

a sustainable community enterprise.

3.3 Intervention from Community Perspective

Arising out of the weakness of development intervention from a traditional firm

perspective, there is a need to change the lens of analysis on the type of interventions that

could make the marginal producers/farmers sustainable. Changing the gears from the firm

perspective, it may be wise to analyze the issues of sustainability from the community

perspective. This simple shift of the lens sets the tone for a ‘paradigm shift’ in the

development processes and institutions. Let us gradually look into the implications of this

change.

From the community perspective, the rural marginal producers are not to be seen as a

segment of the market that is to be exploited for the fortune of a firm but that the people

in the community need to seen more humanely. The unit of analysis for sustainability is

the family that constitutes parents and children. In our age old tradition, the families have

sustained themselves for ages through their creative engagement with the ecology around

them. For any system to be sustainable, the sustainability of the basic unit of our society,

viz., the family could be an appropriate measure than the sustainability of an enterprise

per say.

The individual, the basic unit within the capitalistic framework, appears to be an abstract

concept since the individual owes his/her survival and identity to a family. A family or

household (term from an economist’s perspective) appears to be a more realistic, holistic

18

concept and fits to be the unit of analysis for sustainability. The concept of village and

the concept of a community (consisting of a few villages) are relevant from the point of

view of optimal and efficient organization where in you can share and exchange goods,

services, joys and sorrows by cooperating, complementing, and supporting each other.

As already identified, the needs of the marginal producers are knowledge/awareness,

production capacity, marketing capacity, value addition capacity and capability of

planning and execution. However, from a community perspective, all the resources

required for these capacities can be owned by the producers themselves and managed by

professionals employed by the producers. The arrangement of these resources under the

ownership of the primary producers with the rules of operation developed by the

producer-members and managed by professionals is what could constitute an enterprise

from the community perspective.

3.4 Basis of sustainable community enterprise A sustainable model of economic engagement may be possible when the design variables

of an enterprise have universal application and not just applicable or profitable to a select

clan say the capitalists, the technologists, a few traders or some business conglomerates.

While designing business models, the interpretation of the variables will significantly

change to make the variables universally applicable. For instance, competition will need

to move from external competition to internal competition. Manager within the firm will

need to challenge oneself instead of resorting to competing with others. The firm will

have to cooperate with other players in the industry. The purpose of the firm will no

longer be profit per say but the well being of the people engaged and others affected by

the firm. Profit will be used only to measure the operational efficiency of the firm and not

to measure accumulation of personal wealth.

While the business-as-usual model seeks control of both ownership and management, a

universal model might have to allow for common ownership and common participation in

the decision making process. Instead of intensive use of capital and intensive use of

19

technology, a process that clearly alienates the majority (Sethi, 1986 & Schumacher,

1975), the sustainable model probably have to seek equal proportion of capital of the co-

workers of the enterprise and that each owner cum co-worker will have equal decision

making power in the enterprise. As against economies of scale of individual firms, small

is beautiful and sustainable has been well argued (Schumacher, 1975). Many small

enterprises could produce enough for all rather than one enterprise creating economies of

scale and emerge as a monopoly in the market.

Since the basis for sustainability of a community enterprise is the sustainability of the

family, the membership of this enterprise could be based on family. While the basic

fundamentals of a traditional firm, viz., scale, capital, technology, ownership,

management will be applicable to the community enterprise, the nature of these variables

will be such that they make the family-members to be sustainable. A significant shift in

terms of ideas, tools, techniques, systems, production system, agricultural practice, type

of research engagements, management methods & principles, marketing focus and

institutions would be required to meet the above objectives.

With regard to size of firm; while growth in size is the breath of a traditional firm, the

community enterprise based on agricultural and allied products should limit itself to an

optimal size and seek economies of scope of produce from the small producers / farmers.

Given their small land holdings and resource base, the marginal producers can only

produce small quantities of items. Further, the production relationship is linked to the

natural resources and the seasons of the year and hence they are best suited to produce a

variety of items during the year. For geographical contiguity, ease of communication

among the members, transport and logistics, the members could be drawn from the

villages within the ecology of a Gram Panchayat.

Technology is the given context could mean the process of farming, the type of farm

inputs or the type of farm machinery used. Technology intensity may be relevant in

industries where the issues of indivisibility and technological compatibility arise.

However, given the nature of production and consumption patterns in agriculture, farm

20

produce, and the marginal farmers, technology intensity may not be appropriate. While

intervention with appropriate technology would be effective in the complex, diverse and

risk prone (CDR) agricultural settings, the current nature of technological interventions

have been found be largely deficient (Chamber, 2005). Technology intensity would

invariably exclude the marginal producers from the production system. Instead of being

technology intensive as in traditional firms, appropriate technology with improvisation of

local technology wherever available could be used for achieving better efficiency.

Leveraging the technical capabilities of the people and creating a mechanism to

complement the local knowledge and capability would help. Adopting appropriate and

people friendly technologies could enhance the efficiency of the community. Research in

agriculture, farming, horticulture, food processing should accordingly focus on

appropriate and people friendly technologies rather than technologies that often increase

the efficiency of the traditional firms at the cost of marginal producers and the poor.

The source and size of capital employed in the proposed community enterprise should be

carefully chosen. Optimal levels of capital should be employed as capital intensity would

again exclude majority of the people in rural community because of the high asymmetry

of resource base in the community. Professional guidance to organize in the first few

years and seed capital from the Government to the community enterprise would

substantially remove the capital asymmetry among the marginal producers and help put

the community enterprise into action. Section 4 of this paper provides some more details

on this.

Efficiency for a firm is estimated based on the output and inputs to the firm. In such an

analysis, while the firm may be efficient, the community of producers need not remain

efficient while trying to make the traditional firm efficient. Efficiency in the above

community enterprise model is the efficiency of the family-member of the enterprise and

not the enterprise itself as in the traditional firm approach. Further, the efficiency of

community takes precedence over the enterprise itself.

21

While in the traditional firm perspective, produce of the primary producers are aimed to

be traded where ever the firm can maximize profit or produce wherever it can efficiently

add value, the community enterprise to be sustainable will need to focus more on the

local value addition and local marketing. The objective of the local value addition and

local exchange of produce is to reduce the cost of the produce by reducing the number of

intermediaries in the process of value addition, total cost of transportation, packing and

unpacking cost, taxes, and cost of certification by an external agency, etc. Reducing the

cost of the produce and making them locally available would also increase the internal

consumption of these produce in the local community; thereby increasing the nutrition

levels in the community. After fulfilling the nutritional needs of the local community, the

surplus produce/products could be sold at the local, district, national or international

markets. Keeping the market space closer to the site of production could stabilize the

local demand and supply situation and reduce the risk of fluctuations of the global

markets for the smaller producers.

With regard to ownership and management control, the current legislation on Producer

Company already clarifies and is different from the traditional firm or company

approach. Given the community perspective of the community enterprise, the enterprise

should not only be community owned and controlled but also be based in the community

and not far away from the members. Being aware of these institutional issues and other

problems in a village setting, the proposed enterprise should also be appropriately paced

such that the people in the community can appreciate and accept the processes to form

and develop the enterprise. While community enterprise will be owned by the primary

producers, it will be managed by a team of professional employees for value addition,

logistics, accounts and marketing. In other words, this enterprise should be community

based-paced-owned and professionally managed enterprise (CBPOPME). Please see Fig.

3.0 for the structure of intervention and the basis on which a sustainable community

enterprise should wrest upon.

22

4.0 Structure and Nature of Intervention

Having taken the GP as the ecology for the resource base of CBPOPME, systematic

mapping of resources of the community and mapping of resources of the families

(members) would be first requirement. Based on these mappings, listing of the

produce/items to work with and identification of markets should follow. Subsequently,

the appointment of professionals, the accounting methods to be used, the management

systems to be adopted, and the source and size of finance needs to be taken care. Finally

the type of value addition following the post harvest activities can be worked out.

The source of finance and the size of finance are critical for the sustainability of

CBPOPME in the first three-four years till it is stabilized. The limitation in the resource

bases of the poor, asymmetry in village power structure and information would often

exclude the poor and the marginal producers from the process of intervention. Seeking

capital from private players would lead to business as usual as it might have conflicting

interests between the producer and the provider of the capital. With the existing burden of

the marginal producers, he/she will not dare to enter such a contract and if even if he/she

takes the risk, he/she is likely to fall into the trap of the traditional firm paradigm.

Therefore, given the nature of asymmetry and limitations in the resource bases of the

rural marginal producers and the dangers of seeking capital from private players, a

minimum seed capital for basic infrastructure, professional guidance and professional

managers to operate the CBPOPME during the first three years should be offered by the

Government in place of its budgetary provision through the Department of Agriculture

and Allied industries. Some financial provision from the Department of Rural

Development and the Department of Panchayati Raj can also be allocated towards the

CBPOPME in each panchayat. The guiding principle for sourcing of finance, whether

from government or private body is to ensure that the seed capital is not tied up to any

condition other than the sustainability of the primary producers.

23

Let us look at the current financing structure of the Government to a GP. The total

expenditure of the Government of India through the three departments viz., Department

of Agriculture and Allied industries, the Department of Rural Development, the

Panchayati Raj Department amounts to be a 100,000 crores INR. Please see Table 1.0 for

amount spent by the three departments during the recent years. In addition to the support

from various schemes of agriculture, horticultural and allied activities of the Government

of India, the individual State Governments spend substantial amounts for the rural poor

and marginal producers/farmers. For illustrative purpose on expenditure of State

Governments, the PR department of Orissa in 2005-06 had a provision for Rs.1313.6

crores through various schemes like SGSY, SGRY, NREGA, IAY and NFFWP. The PR

Department of Government of India during 2007-08 had various schemes viz., Rashtriya

Gram Swaraj Yojana (training & capacity building & infrastructure development), Rural

Business Hubs, Action Research & Research Studies, Backward Regions Grant Fund,

etc. Please see Fig. 4.0 for existing sources of funding through the PR departments of the

state and the central government. A portion of these funds could be directed towards

building the community enterprises on the above lines.

For the purpose of our initial understanding it may be worthwhile to estimate the amount

of capital required to operationalise a community based enterprise. I draw some figures

from the case of District Poverty Initiative Project, Madhya Pradesh (DPIP-MP), that has

implemented 17 Producer Companies covering 2900 villages over a period of seven years

at a total project cost of 464.92 crores INR. DPIP-MP has interestingly included the state

Rural Development and PR department budgets to contribute about 10% to the project.

However, the majority of the funding is from external source, viz. the World Bank. Given

the nature of the agency involved, the high cost of consultants and the cost of elaborate

administrative mechanisms for control and reporting, the cost of putting up a producer

company seems to be many time higher than what could have been.

However, what is important to note is the amount of working capital and administrative

expenses allotted per PC. DPIP-MP has a provision of 25,00,000 INR towards working

capital and about 7,00,000 INR towards administrative expenses per Producer Company.

24

Even before the project began, the local Government has been working with the

communities on training, capacity building, social communication and social

mobilization, etc.

Taking cues from the above experiment of DPIP-MP and some of my experiences in the

action research project of MADP-FAO, I suppose financial provision for the first three

years on (a) Working Capital, (b) Basic infrastructure including a office, working shed,

and storage space and a mini vehicle, etc (c) Professional Managers & Administration

and (d) Expertise on Agriculture & allied activities and Management will be sufficient to

set up a sustainable community enterprise. Depending on the socio-economic-political

and cultural context of a community (GP), some communities may require a little more

time but the amount per community enterprise will not vary significantly.

Once the CBPOPME is stabilized, the annual turnover of the enterprise would be high

enough for it to fund its complete operation on its own and no external support from the

Government will be needed. By virtue of it being in the Companies Act, 1956, the

community enterprise can take (off course optimum amount) loans from the banks if need

be for future requirement. Table 2.0 projects the monthly income of the producer-

member and the annual turnover of the community enterprise at the farm gate price of

produce (without value addition) in different situations. In addition to getting about Rs.

2000 per month for the value of his/her produce, the producer-member would have

additional quarterly income from the profits made by the community enterprise, ensuring

a sustainable means of livelihood for the marginal producers. From providing sustainable

earning to the family-member, of the above community enterprise in the long run can

provide Identity, Capacity, Brand, Empowerment, Equity and Dignity to labor of the

marginal producers. All these can lead to a ‘Life of Dignity’ for the rural poor and the

marginal farmers and in the process ensure the food requirements of the country.

25

Figure 1.0: Structure of Intervention from a Traditional Firm Perspective

Intervention Examples Knowledge/Awareness Govt/NGO/Radio Programme Agricultural Inputs Production Capacity Agri Technology (Dept. of Agriculture) Value Addition Processing/Cold Storage (Dept. of Horticulture)

TRIFED/Market info

Marketing (Swaminathan Foundation)/ E-choupal /Fab India

Finance RRBs-NABARD

Micro Finance Agencies;

FIR

M

(Driv

en b

y Pr

ofit

& G

row

th)

SHG CIG

PC, (Fab India, Aharam-

CCD)

MFI Contract Farming

Firm/Market Based Approach

F. Efficiency Economies Capital Technology Mgmt. Ownership of Scale Intensive Intensity Control Control

Rural Sector

Fortune at Bottom of

the Pyramid

Development Sector

26

Figure 2.0: Present Structure of Intervention from a Community Perspective

Community/Capacity Based Approach

CIG / SHG

Village

Block

District

Knowledge/Awareness

Production

Marketing

Value Addition

Planning & Execution

M

anag

ed b

y Pr

ofes

siona

l Man

ager

s

‘P

rodu

cer

Com

pany

’ (D

PIP-

MP)

Con

tract

M

arke

ting

Efficiency? Economies Capital Technology Mgmt. Ownership of Scale? Intensity? Intensity? Control Control

27

Foundations of CBPOPME

Figure 3.0: Structure of Intervention from a Sustainable & Stable Community Perspective

Knowledge/Awareness

Production

Marketing

Value Addition

Planning & Execution

M

anag

ed b

y Pr

ofes

sion

als e

mpl

oyed

by

the

mem

bers

of c

omm

unity

ent

erpr

ise

C

BPO

PME

(PC

)

Optimal Scale

Economies of Scope

Community Efficiency

Appropriate Technology

Minimal Private Financing

Producer Owned & managed through professionals

S

elf/L

ocal

/Urb

an M

arke

ts

Community/Capacity Based Approach

Individual

Family

Village

Community (GP)

Ecology

28

Figure 4.0: Existing Schemes for a Gram Panchayat (G.P.) Source: Annual Report, 2005 -06 Panchayati Raj Department, Govt. of Orissa and Annual Report, 2007–08, Ministry of Panchayati Raj, Government of India.

Gram Panchayat

NREGA

Infrastructure Development

SGRY

Action Research & Research Studies

NFFWP

Backward Region Grant Fund

Training & Capacity Building

SGSY

Rural Business Hub

IAY

29

Table1.0: Expenditure of a few different departments of the Government of India

Amount in Rupees crores

Source: Report of the CAG on Union Government Accounts 2006-07 & Annual Report, 2007-08, Ministry of Panchayati Raj, Government of India.

Table 2.0: Different Scenarios of Monthly Income for Producer-Members and Farm Gate Turnover at the Farm Gate for the PC

Number of Producer members

Amount of monthly contribution in terms of produce (in Rupees)*

Monthly Turnover (in Rupees)

Annual Turnover (in Rupees)

500 1000 5,00,000 60,00,000

1000 1000 10,00,000 120,00,000

2000 1000 20,00,000 240,00,000

2500 1000 25,00,000 ** 300,00,000

2500 (50% of avg. GP

population)

2000

50,00,000

600,00,000

*In addition to getting the value of his/her produce, the Producer-Member would have additional quarterly income from the profits made by the PC. **The Government should make a provision of Rs. 25 lakhs towards the Working Capital of the Producer Company.

Year

Agriculture & Allied

Rural Development

Panchayati Raj

1987-88 2955 317 1995-96 10867 5645 1999-00 18865 5139 2000-01 22255 4305 2001-02 28294 6189 2002-03 31101 11737 2003-04 32911 12174 2004-05 36366 9478 8.45 2005-06 37622 15660 48.70 2006-07 48376 32642 1999.48 2007-08 45014 37682 3688.16

30

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