How value chains can share value and incentivise land use practices: a white paper

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How Value Chains Can Share Value and Incentivise Land Use Practices:

A White Paper

Caroline Saunders, Paul Dalziel, Mark Wilson, Tiffany McIntyre, Hilton Collier, William Kaye-Blake,

Alistair Mowat, Tava Olsen and John Reid

Client Report Prepared for

Our Land and Water National Science Challenge

30 September 2016

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Research to improve decisions and outcomes in business, resource and environmental issues.

The Agribusiness and Economics Research Unit (AERU) operates at Lincoln University, providing research expertise for a wide range of international, national and local organisations. AERU research focuses on business, resource and environmental issues.

The Agribusiness and Economics Research Unit (AERU) has four main areas of focus. These areas are:

wellbeing economics; trade and the environment; economic development; and non-market valuations.

Research clients include Government agencies, both within New Zealand and from other countries, other international agencies, New Zealand enterprises in the private sector, and community groups.

AERU MISSION

To exercise leadership in research for sustainable well-being.

AERU VISION

The AERU is a cheerful and vibrant workplace where senior and emerging researchers are working together to produce and deliver new knowledge that promotes sustainable well-being.

AERU STRATEGIC AIMS

 To be recognised by our peers and end-users as research leaders for sustainable well-being;

 To mentor emerging researchers and provide advanced education to postgraduate students;

 To maintain strong networks to guide AERU research efforts and to help disseminate its research findings; and

 To contribute to the University’s financial targets as agreed in the AERU business model.

DISCLAIMER

While every effort has been made to ensure that the information herein is accurate, the AERU does not accept any liability for error of fact or opinion which may be present, nor for the consequences of any decision based on this information.

Summaries of AERU Research Reports beginning with #235, are available at www.lincoln.ac.nz/aeru.

Printed copies of AERU Research Reports can be requested from the AERU Administrator.

This work is licenced under the Creative Commons Attribution 3.0 New Zealand licence.

Suggested citation for this report:

Saunders, C., P. Dalziel, M. Wilson, T. McIntyre, H. Collier, W. Kaye-Blake, A. Mowat, T. Olsen and J. Reid (2016). How Value Chains Can Share Value and Incentivise Land Use Practices: A White Paper. AERU Client Report, prepared for Our Land and Water National Science Challenge. Lincoln University: Agribusiness and Economics Research Unit.

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List of Figures

Figure 1: Four Types of Value Chains Illustrated with Three Businesses 10 Figure 2: Continuum of Governance Arrangements in Agribusiness Value Chains 22 Figure 3: Stylised Performance of Agribusiness Value Chains 45

List of Tables

Table 1: Members and Affiliations of the Research Team 2

Table 2: Research Reports from the Maximising Export Returns Programme 3

Table 3: Typology of Collaborative Behaviours 24

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Acknowledgements

The research team is grateful to the Our Land and Water National Science Challenge for funding that allowed this white paper to be prepared.

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Executive Summary

Introduction

1. This white paper was commissioned by the Our Land and Water National Science Challenge to test the hypothesis that the more collaborative a value chain is, the greater is the value that New Zealand producers, processors and manufacturers in the land and water sector can capture from profiling the desirable ‘credence attributes’ of its production systems (‘the New Zealand story’), targeted at consumer segments.

2. The analysis in this paper draws on the published results of the MBIE-funded research programme, Maximising Export Returns, and a structured literature review based on the keywords “market orientation of value chains” and “food”.

Value in Global Value Chains

3. Value chain thinking is grounded in the concept that the final customer is the final arbiter of value and so everything firms do along a value chain from producer to retailer should aim to add value to the consumer’s experience. A market oriented value chain can be conceptualised as the pursuit of a common vision, based on trust and collaboration, aligning strategies, structures and processes on what the consumer values, throughout the entire value chain system, with a focus on creating value.

4. Dagevos and Ophem (2013) offer a helpful four-way classification that recognises four sources of value: product value; process value; location value; and emotional value.

These definitions can be linked to land use decisions. Product and process value offer opportunities for physical and social science projects within the value chain. Location value provides opportunities for agribusiness, marketing and supply chain researchers, while emotive value offers a range of socio-psychological approaches for understanding consumer behaviour, sensory perceptions and brand value.

5. The Value Chain Management Centre of the George Morris Centre in Canada distinguish four types of value chains (see Figure 1 on page 10 of the white paper): fragmented;

cooperative; coordinated; and collaborative. This white paper argues that consumer value is best created and captured in a collaborative value chain. Collaborative value chains can produce greater rewards, but also generates increased risks. This is one of the reasons why quality science is required to create new knowledge for understanding how value chains can share value and incentivise land use practices.

6. Country-of-origin (COO) branding can provide a competitive advantage that is not easily copied and allows product differentiation. The New Zealand country brand has a strong reputation, but this is not reflected in as high a ranking for New Zealand’s reputation as a COO for food and beverages. This is important because COO has been found to be used by consumers as a cue for desired attributes such as quality and food safety. An example of a high profile COO initiative is the Origin Green Ireland programme.

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Market Oriented Value Chains

7. Since the 1960s, there has been a shift in commercial focus from increasing technical efficiency in commodity supply chains to increasing added value in differentiated value chains. Roep and Wiskerke (2012) suggest that globally the agri-food industry has been among the last to adopt this shift, and the New Zealand agri-food industry is often represented as producing commodities for export. The vision of the Te Hono Movement in New Zealand promotes a shift for agri-food exporters “from price taking to market making” to deliver greater value to consumers in overseas markets.

8. A market oriented value chain requires producers and processors to consider aspects of their products that consumers will value beyond physical properties. These include credence attributes that cannot be seen or experienced at the point of purchase, such as food safety, environmental stewardship, animal welfare, social responsibility, cultural authenticity and the like.

9. Market orientation requires communicating with consumers in order to understand their values. This information must then be disseminated along the value chain in order to support customer-focused decisions about production, value-adding processes and marketing. The way in which these decisions meet expectations must then be communicated to the end consumers.

10. The need for effective two-way communication along a value chain is one reason why attention must be given to governance of a value chain. There is a wide range of models for governance in agri-food value chains. Peterson et al. (2001) suggest a continuum of five types from spot/cash market to vertical integration (see Figure 2 on page 21 of the white paper). Recent research on four New Zealand food value chains by van Velzen (2016) emphasises the importance of leadership for governance, recognising that

“shared governance can contribute to intelligence communication and responsiveness”.

11. Collaboration in a value chain involves a range of critical success factors, with many studies emphasising the importance of commitment and trust. A typology constructed by Wilson et al. (2011) defines four key collaborative constructs typically found in value chain research (see Table 3 on page 24 of the white paper): active disclosure; common objectives; joint risk taking; and relational commitment.

12. Although market orientation has positive effects on outcomes such as learning, innovation and company performance, an article by Grunert et al. (2008) warns that market orientation can lead to the ‘incremental innovation trap’, in which an exclusive focus on the end-consumer can lead a business to miss opportunities for innovation in technology development or genetics.

Value Chains and Land Use Choices

13. Agri-food value chains are increasingly market oriented, whether consumer values are expressed in country regulations or retailer requirements governing food and beverage products (market access threats), or whether they are expressed by identifiable sets of potential consumers being willing to pay a higher price for products with certain attributes (market segmentation opportunities). Market access threats and market

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segmentation opportunities have implications for land use choices in New Zealand, including decisions around what will be produced and how it will be produced.

14. Food safety and quality are clearly important to consumers. These consumer values sometimes require effective systems of traceability, which can be an entry point for country-of-origin to be a powerful marketing tool. These consumer values are also frequently reflected in policy, regulation and legislation initiatives implemented at different hierarchical levels. In addition, environmental concerns (such as greenhouse gas emissions and food miles) and sustainability labels (such as organic and fair trade) have become increasingly important to consumers. Dalziel et al. (2016), for example, reported from their survey of consumers in China, India, Indonesia, Japan and the United Kingdom that environmental factors in production contributed to judgements around food safety, particularly in the developing countries, and so should not be ignored by agri-food exporters.

15. A credence attribute that has been identified as offering value to final consumers is

“cultural authenticity”, which can add external value to food and fibre products through enhanced marketability, and can add internal value through improved production efficiencies. Cultural authenticity gives food meaning by telling an interesting story that connects it with a people and a place. Many foods are associated with specific areas and cultures and hence the authenticity of the product is expressed through the stories that describe these interlinked features. Although New Zealand may not have a strong internationally-recognized cuisine culture, its conservation culture does generate associations between food products and environmental cleanliness. New Zealand also has a strong authentic indigenous culture with relationships between people, the land, the water, and the flora and fauna contained therein, which mean the food and fibre hunted, harvested, gathered and produced by Māori are fundamental manifestations of who Māori are as a people. Provenance marketing is the best way of communicating cultural authenticity to consumers, it provides a “spatial dimension (its place of origin), a social dimension (its methods of production and distribution), and a cultural dimension (its perceived qualities and reputation)” (Morgan et al., 2008, p. 4).

16. Cultural authenticity can add production and process value internally as well. This is apparent from research on collectively-owned Māori businesses and enterprises, which demonstrates that they respond to demands from Beneficial Owners to operate in cultural authentic ways. The application of Māori cultural principles to value chains help deliver more efficient integration and greater operational streamlining, tying them together through the creation and maintenance of interlocking networks of reciprocal relationships that are focused on mutual benefit and shared risk. The entwined Māori and settler cultures can be used to add value through adept and sensitive provenance marketing of authenticity.

17. ZESPRI International Limited is a grower-owned marketing co-operative with 2,500 member growers exporting worldwide, with the majority of exports sold to the European and Asian markets. The white paper explores the success of ZESPRI through the framework of Dagevos and Ophem (2013) that focuses on product value, process value, location value and emotional value within a market orientation value chain.

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18. The ZESPRI example illustrates that market oriented value chains are already influencing land use choices and practices in New Zealand. Other examples are given to indicate the range of transformation that is taking place as the primary sector moves “from price takers to market makers” (in the language of the Te Hono Movement’s vision).

Conclusion

19. The conclusion returns to the central hypothesis being tested in this white paper is the following: The more collaborative a value chain is, the greater is the value that New Zealand producers, processors and manufacturers in the land and water sector can capture from profiling the desirable ‘credence attributes’ of its production systems (‘the New Zealand story’), targeted at consumer segments.

20. It summarises the main themes that have been discussed in the preceding chapters in the context of that hypothesis, concluding that there is strong evidence in the international literature for its validity. It then describes some specific science challenges that could be addressed with high quality research under five headings:

 Value to Consumers and Credence Attributes

 Market Oriented Value Chains and Communication

 Collaborative Value Chains and Governance

 Country-of-Origin

 Land Use Choices

21. The white paper concludes that a mission-led scientific research programme would deliver the strongest outcomes if it integrated some or all of the above elements. This would ensure that all contributions to value could be addressed.

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1. Introduction

1.1 Background to this White Paper

In August 2012, the New Zealand Cabinet agreed on an initiative to inject momentum into the goal of applying science for the benefit of New Zealand by establishing a number of National Science Challenges (National Science Challenges Panel, 2013, p. 1). In due course, eleven Challenges have been established, including Our Land and Water: Toitū te Whenua Toiora te Wai (referred throughout this white paper as OLW), launched on 26 January 2016 (see www.ourlandandwater.nz). The vision of this Challenge is: “New Zealand is world-renowned for integrated and successful land-based primary production systems, supported by healthy land and water and capable people”. Its mission is “to enhance primary sector production and productivity while maintaining and improving our land and water quality for future generations”.

The research strategy is organised around three themes (OLW Directorate, 2016, pp 5-6):

• Theme 1 (Greater Value from Global Markets): Value chain research that enables New Zealand communities, individuals and iwi to enhance and share economic value from products, services and market segments that are aligned with and validated against stakeholder environmental, social and cultural values;

• Theme 2 (Innovative and Resilient Land and Water Use): New technologies, concepts (e.g.

land use suitability) and enterprises that enable individual and collective land and water users and regulators best adapt to market signals and achieve primary production targets within community and regulatory limits; and

• Theme 3 (Collaborative Capacity): Individuals, communities, and iwi have the social processes, data, tools and capacity to agree and implement co-developed solutions that achieve sustainable outcomes within community and regulatory limits.

At the centre of these three themes, a work programme known as The Nexus operates to maintain integration within the Challenge and to ensure the Challenge mission is achieved.

The Nexus has three specific aims (idem, p. 6): (1) To improve focus and co-ordination of research activities and resources; (2) To enhance integration, co-development and trans- disciplinary capacity building; and (3) To result in greater delivery and impact.

In June 2016, The Nexus called for proposals to create working groups to address four research questions that had been identified as priority areas for the Challenge. In each case, a proposal was required to bring together the best team of researchers for the question who would then be commissioned to prepare either a review article or a policy white paper. The Agribusiness and Economics Research Unit (AERU) at Lincoln University submitted a proposal to prepare this white paper that addresses the following question (idem, p. 1):

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How can value chains better share value (economic, environmental, social and cultural) from consumer to producer and incentivise land use practices that relieve tensions between national and international drivers?

The research team brought together for this project is described in Table 1, along with their institutional affiliations. The first four people listed in the table held primary responsibility for drafting of the text, but all members of the team were involved in providing comments and feedback before the final version of the white paper was prepared.

Table 1: Members and Affiliations of the Research Team

Team Member Affiliation

Professor Caroline Saunders AERU, Lincoln University Professor Paul Dalziel AERU, Lincoln University

Dr Mark Wilson Faculty of Agribusiness and Commerce, Lincoln University Tiffany McIntyre PhD Researcher, Lincoln University

Hilton Collier Agfirst Consultants Wairoa Limited Dr William Kaye-Blake PwC New Zealand

Alistair Mowat Thought Strategy

Professor Tava Olsen Faculty of Business and Economics, University of Auckland Dr John Reid Industry Advisor and Researcher

The purpose of this white paper is to provide a solid foundation upon which more intensive research can be designed to advance the Challenge mission. The white paper will be placed on the Challenge website and its contents will help inform further development by the Challenge Science Leadership team of a key research question related to Theme 1: Greater Value from Global Markets. A Challenge-facilitated workshop will then be convened to construct a collaborative proposal to answer that research question (OLW Directorate, 2016, p. 2).

1.2 Research Methods

The proposal for this white paper was required to present a central hypothesis that would be tested in the research. That hypothesis is:

The more collaborative a value chain is, the greater is the value that New Zealand producers, processors and manufacturers in the land and water sector can capture from profiling the desirable ‘credence attributes’ of its production systems (‘the New Zealand story’), targeted at consumer segments.

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To test that hypothesis, the Lincoln University research team was able to draw on two main sources. The first was the results of a three-year research programme ending in September 2016, Maximising Export Returns, funded by the Ministry of Business, Innovation and Employment and led by the AERU at Lincoln University (see www.lincoln.ac.nz/aeru/mer). All of the results from that programme were made available for this white paper. This included the six research reports listed in Table 2 as well as other quantitative conclusions presented, for example, in Dalziel et al. (2016) and Tait et al. (2016a and 2016b).

Table 2: Research Reports from the Maximising Export Returns Programme

Authors and Date Title Miller, S., Driver, T., Velasquez,

N. and Saunders C. (July 2014)

Consumer behaviour and trends for credence attributes in key markets and a review of how these may be communicated.

Lees, N. and Saunders, C.

(January 2015)

Communicating New Zealand's credence attributes to international consumers.

Saunders, C., Guenther, M., Driver, T., Tait, P., Dalziel, P. and Rutherford, P. (May 2015)

Consumer attitudes to New Zealand food product attributes and technology use in key international markets.

Guenther, M., Saunders, C., Dalziel, P., Rutherford, P. and Driver, T. (November 2015)

Consumer attitudes towards attributes of food and beverages in export markets relevant to New Zealand.

Driver, T., Saunders, C., Guenther, M., Dalziel, P. and Rutherford, P. (December 2015)

The use of digital media and smart technology in shopping and information gathering for food and beverages in markets relevant to New Zealand.

Saunders, J. (September 2016) Trade implications for New Zealand agriculture with price premiums for credence attributes in food and beverages

The second source was the ABI/Inform database accessed through the central library of Lincoln University. The AERU conducted a literature search of this database using the following keywords: “market orientation of value chains” and “food”. To be included, the publication needed to have appeared in a peer reviewed scholarly journal after 2010 and been written in the English language. This produced 2,658 results. The publications were sorted by relevance and the first 300 abstracts were read to determine their applicability to the topic of this white paper. This exercise revealed that the British Food Journal is the most important journal for research on market oriented food chains. There were 22 articles downloaded for reading in full from this part of the research.

One article stood out for relevance: “Market orientation of value chains: A conceptual framework based on four case studies from the food industry” published in 2005 by Klaus Grunert and six co-authors. The Scopus abstract and citation database of peer-reviewed literature was used to identify 60 articles citing that publication. The abstracts of all these articles were read, resulting in a further 15 articles being downloaded for reading in full. Thus, 37 journal articles were highlighted for further study.

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As the research proceeded, some references in these journal articles were also accessed and this material was supplemented with other literature known to the research team. A notable example was a thesis prepared by Mariska van Velzen (2016) supervised at Wageningen University by Jacques Trienekens and Stefano Pascucci with assistance by Nic Lees and Caroline Saunders at Lincoln University. That thesis focused on the topic of Supply Chain Governance to Facilitate Market Orientation, with special reference to four case studies of global value chains for New Zealand food exports (ENZA apples; ZESPRI kiwifruit; Firstlight Foods Cervena venison; and ANZCO Kumanu lamb). Her research drew on important articles by her Wageningen supervisors, including Grunert et al. (2010), Wever et al. (2010) and Trienekens and Wognum (2013).

From the above sources, the Lincoln University research team identified important themes relevant to this white paper. These themes were developed into the material presented in the following chapters. A first draft was prepared and circulated to all the members of the writing team. Written feedback was provided, which was incorporated into the final version presented here.

1.3 Structure of the White Paper

The remainder of this white paper is structured as follows.

The title of Theme 1 of the Our Land and Water National Science Challenge is Greater Value from Global Markets. Chapter 2 therefore begins with the central concept of ‘value’ and how value is created and transmitted through ‘value chains’. It also draws on a Canadian study to distinguish four types of value chains: fragmented value chains; co-operative value chains; coordinated value chains; and collaborative value chains.

A feature of the last of these four types – the collaborative value chain – is its market orientation. This was also the key insight in Mariska van Velzen’s (2016) research of New Zealand agri-food value chains. Chapter 3 therefore explores market orientation in some detail.

This includes sections on the connections between market orientation and credence attributes, communication with consumers, governance and performance.

Chapter 4 returns to the mission of the Our Land and Water National Science Challenge, “to enhance primary sector production and productivity while maintaining and improving our land and water quality for future generations”. The chapter therefore discusses how value chains can influence land use choices. It begins with the primary credence attribute of food safety and then goes on to discuss how other credence attributes valued in international markets might influence domestic production decisions.

Chapter 5 addresses the hypothesis presented at the beginning of Section 1.2. It summarises the main themes in the white paper to test that hypothesis and finishes with a discussion of possible topics for further research.

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2. Value in Global Value Chains

The Te Hono Movement is a business-led, government enabled initiative that began in 2012 founded by the CEO of the New Zealand Merino Company, John Brakenridge. It is built on the commitment of more than 170 agribusiness leaders who have participated in one of several New Zealand Primary Sector Bootcamps hosted at Stanford University in the United States.

These leaders represent more than eighty per cent of the largest and most innovative companies in New Zealand’s primary sector. The vision of the Te Hono Movement is the following (www.tehono.co.nz/our-story).

From price taking to market shaping. Transforming the primary sector to realise the opportunity for Aotearoa, New Zealand to be recognised for our natural environment and products, as world leaders in innovation – a place to prototype and amplify, and the quality of our relations with the rest of the world.

The founder amplifies that vision with the following explanation (Brakenridge, 2016, p. 27):

New Zealand must challenge the status quo, blow apart the traditional price-taker mentality and move to a market-shaping model, one where we forgo a volume mentality for a value mind-set. Forget the idea of feeding the world. We’re too small to be a big producer. We don’t have an environment that can sustain that strategy and also live up to the clean, green brand on which so much of our economy relies.

If we’re to double the value of our primary-sector exports by 2025 we need to transform not what we’re selling, but the way we’re selling it. We’re leaving value on the table. Sometimes it takes a good crisis to catalyse action.

This transformation from a volume mentality to a value mind-set is consistent with the focus in Theme 1 of the Our Land and Water National Science Challenge on “Greater Value from Global Markets”. It is also supported by previous research in the AERU at Lincoln University, funded by AGMARDT, ANZCO Foods, Beef and Lamb New Zealand, Fonterra and ZESPRI.

Published under the title of The Land and the Brand, this concluded that “the agri-food sector will continue to play a dominant role in the New Zealand economy over the next decade if it succeeds in maximising value creation through integrating domestic industry developments, science and technology innovation and trusted commercial brand creation in the new international trading environment” (Saunders et al., 2016a, p. 89, emphasis added).

Against that background, this chapter focuses on value in global agri-food supply chains.

Section 2.1 defines value as the willingness-to-pay for a product by the final consumers at the end of a value chain. Section 2.2 then analyses different sources of value that can contribute to the final consumer’s willingness-to-pay. Section 2.3 draws on a 2012 report prepared for the Canadian Agri-food Policy Institute to analyse four types of value chains labelled as fragmented, co-operative, co-ordinated and collaborative. Section 2.4 describes country-of- origin value chains, supported by a country profile such as ‘The New Zealand Story’.

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2.1 Defining ‘Value’ and a ‘Value Chain’

The concept of value within a supply chain is viewed from two main perspectives: willingness- to-pay and customer value. In both perspectives, the final customer is the arbiter of value and so value is always defined with reference to the end customer (Macharia et al., 2013; Sausman et al., 2015).

An illustration of the first perspective is Porter’s (1985, p. 3) definition of value as what “buyers are willing to pay”. He argued that increased value is born out of offering equivalent benefits for a lower comparative price, or alternatively, a differentiated product with benefits justifying a higher price point. While this definition is widely used, it is from a firm’s strategic perspective and fails to take into account other factors of customer purchasing decision, instead reducing a decision purely to price (Bowman and Ambrosini, 2000).

A more encompassing perspective is customer value; the premise being that value is subjectively perceived by the customer. The value of the transaction is captured in the trade- off between what the customer gives up and the benefits that the customer receives (Christopher, 1982; Zeithaml, 1988). These values are more than economic costs; a customer may have a range of social, cultural or environmental values influencing purchasing decisions (see, for example, Holbrook, 1999).

There is a strong trend to focus more and more on the consumer’s role in supply chains. This trend is the genesis of the value chain concept and reflects more a way of analysing a supply chain than offering a completely new definition in itself. Hence, a value chain analysis will examine a supply chain for those value-adding and value-destroying activities that align with customer value and preferences. As a result, a demand-pull strategy is often emphasised as opposed to a supply-push strategy (Sausman et al., 2015). This is not to say that value chains do not have elements of supply-push (forecasting demand) as agricultural systems have notoriously long lead times and variability due to biological and natural hazards. Indeed, all supply and value chains possess elements of push and pull and can hence be described as hybrid systems.

Because the final customer is the arbiter of value, everything done by firms along a value chain should add value to the consumer’s experience (Sausman et al., 2015). Hence, the aim of agri- food value chains should be to transform raw resources such as meat or fruit into value-added products within the boundary of the value chain’s institutional environment (Trienekens, 2011). Thus, value is created not only by producers and processors, but also by “knowledge- intensive business services” (Muller and Doloreux, 2009) or “knowledge-intensive service activities” (OECD, 2006), such as sophisticated market analysis of consumer values.

A value chain describes all the activities, functions, roles and organisations involved in the production, delivery and consumption of products from raw materials to final consumption and back again through reverse flows (Hastings et al., 2016). Colloquially, this system is often described as ‘farm gate to plate’, or ‘beef to burger’, simple descriptors for what are dynamic and complex systems (Hearnshaw and Wilson, 2013). This definition is almost identical to the definition of supply chain management (Hyland et al., 2014). Following Fearne et al. (2012), a market oriented value chain along these lines can be conceptualised as:

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 the pursuit of a common vision,

 based on trust and collaboration,

 aligning strategies, structures and processes…

 … on what the consumer values,

 throughout the entire value chain system,

 with a focus on creating value.

The concept of value chains was popularised by Porter (1985) to describe a firm’s internal value-adding activities. He argued that the secondary activities of the firm (i.e. firm infrastructure, human resource management, technology and procurement) exist to support its primary activities, which are directly related to the production, marketing and delivery of goods or services. Porter’s chain presents a very narrow definition as the original conception refers only to a firm’s internal value-adding processes.

Consequently, the concept has since been extended to take a wider systems view which Kaplinsky (2000, p. 121) defines as:

… the full range of activities which are required to bring a product or service from conception, through the intermediary phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and the final disposal after use.

A systems view promotes the idea that firms do not act as functional silos, but rather as a linked chain. Indeed, the way competition is viewed has shifted from the concept of individual firms competing against each other to chains competing against chains (Fearne et al., 2012;

Spekman et al., 1998). Hence, the entire chain becomes a “vehicle for adding value and eliminating waste” (Sausman et al., 2015, p. 199). This paradigm shift facilitates coordination and collaboration among actors in the chain to deliver products that meet the needs of the consumer in an efficient and effective manner (Brinkmann et al., 2011; Spekman et al., 1998).

Collaborative behaviour in value chains is based on a series of strategic relationships between firms that foster information sharing. Information gathering and analysis can be expensive, so that the enterprise paying for this intelligence is less likely to share that information if their business model is based on arbitrage between different markets or suppliers. Indeed, this can be an incentive for resisting a collaborative value chain.

More coordinated chains, led by a major chain member (such as a retailer, packer, shipper, wholesaler or broker), may choose to share a proportion of that intelligence to drive loyalty.

To be sustained, this sharing may require the transactional costs of producing the intelligence to be spread among participants, or to be matched by reciprocal sharing of other data or information resources. This tends to require high degrees of trust and commitment, as well as a collaborative governance process that ensures each chain member is contributing to the costs and being rewarded with a share of the benefits.

When incentives and goals are aligned throughout a value chain, not only is productivity increased, but the threat of opportunism may be reduced (Gulati et al., 2012; Sausman et al., 2015). That is, firms no longer only act in their own self-interest, narrowly defined, but for the

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good of the chain as a whole. Additionally, the increase of globalisation has seen reduced trade barriers, advances in communication technology and declining transport costs, all of which facilitate coordination within value chains (Trienekens, 2011).

2.2 What Gets Valued?

If the key issue is to how better share value across economic, environmental, social and cultural dimensions for New Zealand value chains, then a central question is: What gets valued by the final consumer? Various approaches to the question have attempted to define value by focusing on the product itself (Shewfelt, 1999), freshness, texture and taste (Luyten, 2003), nutrition and health benefits (Ruben et al., 2007), food safety (Kennedy et al., 2008) and preferences for convenience, conspicuous consumption and prestige (Collins, 2009). As this list indicates, what is valued by consumers has a much wider definition than simply a product’s physical attributes (although these remain important). Dagevos and Ophem (2013) offer a helpful four-way classification of value (which they term Food Consumption Value – FCV) that incorporates a view of consumer sentiment aligned with the consumer centric view of value chains outlined in the previous section. These four views are:

• Product value

• Process value

• Location value

• Emotional value

The first value is the traditional product value. Product value is generally well understood and comprises the product attributes themselves and the price/quality relationship for foods and commodities. This includes sensory properties of freshness, taste, texture, flavour as well as price. For commodities this could also include utility value of the product for use by processors within a wider value chain. Most primary producers understand how important it is to supply products that meet the highest level of these attributes, but may not know specifically what these attributes are due to not being connected to heterogeneous consumers of their products (Grunert et al., 2005).

The second value, process value, focuses on the processes and practices used within the value chain to produce the product or food. This view of value includes not only the technology, knowledge and physical assets of the farm or production system itself, but also includes consumer ethical concerns on how these products are produced (Lusk and Briggeman, 2009).

Consumer sentiment concerning the health risks, ecosystem degradation and animal welfare must not be ignored (Weather et al., 2003), and it is here that land use practices can have the biggest impact on perceptions of the value chain. This suite of consumer concerns also includes the ecological footprint of food production vis-a-vis world population growth as well as debates about “free-range livestock product, environmental pollution, genetic modification, chemicals, food miles and fair trade issues” (Dagevos and Ophem, 2013, p. 1477).

The third value area is location value, defined as the setting and atmosphere of where a product is purchased or consumed. This includes the scene, physical landscape, environment

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and ambiance of place of consumption, which could include the home, restaurants, fast food and off licence premises, the so called ‘infrastructure of consumption’. It also includes the characteristics of the experience itself such as entertainment, knowledge and service levels of staff and more generally reflects what the marketing literature terms the quality of the

‘service-scape’ (Rosenbaum, 2005). This value is important as much of the competition in value chains manifests directly at the retail end (location value).

An interesting extension is the possibility that consumers value how a good is transported from its place of processing to its place of consumption. This underlay the ‘food miles debate’, for example, that posed a threat to New Zealand food exports to Europe (Saunders and Barber, 2007 and 2008). It might be regarded as part of process value, or as part of location value, but in either case would incorporate logistics in the supply chain that can add or destroy value such as double handling, the cool chain, wastage, shrinkage, damage, spoilage, energy, innovative packaging, labelling and recycling during the route to market. This is an operational view of value, but importantly allows value chains to incrementally add value through operations management, process management and continuous improvement regimes such as Lean and SixSigma (Goldsby et al., 2006).

The final of the four values is emotional value, or what may also be called ‘emotive value’. The original definition was originally limited to the consumer’s emotive response to the immediate service-scape and experience of consumption (King and Meiselman, 2010). Importantly for our discussion, however, emotive value can extend beyond the emotive response of consumption (pleasure, satisfaction, utility, etc.), to the emotive response to the ‘story’

associated with the product. This encapsulates the esoteric features of the brand and product image such the symbolic and moral meaning of the products and their associated value chains.

Given New Zealand’s investment in its national branding strategy and promoting its key competitive features such as 100% pure and grass-fed production systems, linking good land use decisions with branding and building ‘the story’ of our products that appeals to consumers will be critical in the future (Saunders et al., 2016a).

Building on Dagevos and Ophem’s (2013) original contribution, and summarising the above discussion, this white paper focuses on the following four extended definitions of what gets valued in agri-food value chains.

• Product value – This adopts the traditional view of product attributes and characteristics important to the consumer.

• Process value – This focuses on the processes and practices used within the value chain to produce the product.

• Location value – This includes the point of purchase or consumption value but may include value placed on how products get to the point of sale including the operational activities of the supply chain.

• Emotive value – This includes the consumer’s emotive response to consumption as well as the brand/product story and any associated post-consumption moral/ethical reinforcement or dissonance.

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These definitions can be linked to land use decisions. Specifically, product and process value offer opportunities for physical and social science projects within the value chain. Location value provides opportunities for agribusiness, marketing and supply chain researchers, while emotive value offers a range of socio-psychological approaches for understanding consumer behaviour, sensory perceptions and brand value. We next examine types of value chains to illustrate the structural concepts and interactions, based on the stylised diagram in Figure 1.

Figure 1: Four Types of Value Chains Illustrated with Three Businesses

FRAGMENTED

CO-OPERATIVE

CO-ORDINATED

COLLABORATIVE

Source: Adapted from Value Chain Management Centre (2012, p. 9).

Business A

Business B

Business C

Business A

Business B

Business C

Business A

Business B

Business C

Business A

Business B

Business C

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2.3 Types of Value Chains

The Value Chain Management Centre of the George Morris Centre prepared a report in 2012 for the Canadian Agri-Food Policy Institute entitled Characterizing the Determinants of Successful Value Chains. This analysed and illustrated with case studies the features of four types of value chains: fragmented value chains, co-operative value chains, co-ordinated value chains and collaborative value chains. For each value chain type, the report characterises its strategic factors, governance arrangements, financial features, communication practices and operations (Value Chain Management Centre, 2012, Appendix 1).

The report makes the point that specific value chains are unlikely to fall neatly into one of the four types it presents, but argues that the four typologies “provide a useful method of assessing and comparing the relative nature, benefits and challenges associated with each approach” and “represent the structure and nature of value chains operating in the Canadian and international agri-food industry” (idem, p. 8). The types are illustrated using an example of a value chain with three businesses or enterprises, which is reproduced in Figure 1 on the previous page. The report summarises the four value chain types as follows (idem, p. 9):

Fragmented: Companies primarily compete on a traditional trade footing. The majority of business is conducted as a series of short-term, one-off transactions.

Price, volume, and quality are commonly paramount to business dealings. The primary onus of strategic decisions is on self-preservation and sharing the bare minimum of transactional information, for fear a company’s insights are used against it. Typically, the result is a fragmented chain comprised of businesses that share adversarial and distrusting relationships. These types of businesses often look to past experiences for solutions to current challenges, and have little opportunity to utilize the resources of other members of the value chain. As a result, they are limited in their ability to effectively and efficiently adapt to changing market demands.

Cooperative: Companies possess a mutual understanding of how and why they can benefit from cooperating with one another over the medium term at an operational level, rather than undertaking specific short-term or one-off business deals. The attitudes and culture of the businesses involved will determine whether a chain’s structure can develop into a more strategically aligned approach, where the partners can utilize one another’s capabilities for commercial advantage. Whether such an approach is feasible may also be determined by the environment in which the chain operates and in which it competes against other chains and businesses.

Coordinated: Companies with complementary attitudes, cultures, and leadership styles choose to coordinate their business arrangements over a short to medium timeframe. A more strategically aligned structure than the one exemplified above causes at least part of the chain to think and act from a strategic – and not only operational or tactical – perspective. A strategic perspective arises from operating in an external environment that allows this type of approach to occur. Over time, the participants come to steadily acknowledge the benefits of conducting medium-term business deals with chosen suppliers and buyers, leading to increased levels of commitment and the development of more sophisticated value chain management capabilities.

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Collaborative: Companies engage in longer-term strategic arrangements that involve collaboratively sharing resources and/or investing in the capabilities required to achieve mutually beneficial outcomes. Successfully adopting this type of model requires the involved businesses to possess compatible cultures, vision, and leadership. It also requires an external environment that is conducive to supporting and enabling such an approach. While the model can undoubtedly produce greater rewards than the three alternative models, it also generates increased risks, particularly for businesses that are still developing (as opposed to refining) their value chain management skills.

This white paper adopts the hypothesis that market oriented value chains are best supported by the fourth type in the above list, based on collaboration. There are many ways in which increased collaboration can add value to a chain; it can lead, for example, to more flexible contracting agreements that better align the incentives in the chain. There has been significant research into methods for aligning supply chain incentives (Nahmias and Olsen, 2015, Chapter 6). To illustrate, many book publishers offer buy-back agreements to bookstores that allow bookstores to return unsold copies for a full refund. In this way, the stocking risk to retailers is reduced and they are encouraged to stock more. However, buy-back contracts can be problematic in environments where suppliers do not want to take goods back, which is usually the case for primary products. An alternative method for aligning incentives and reducing a retailer’s stocking risk is a revenue sharing contract, where the supplier receives some of the revenue in return for accepting a lower upfront wholesale price. This may be attractive in situations where the market opportunity for the product is not yet proven.

There are also examples where collaboration along a value chain is required to meet consumer expectations on issues such as animal welfare and environmental stewardship. This can be illustrated by the case study of the campaign by People for the Ethical Treatment of Animals (PETA) in August 2015 using footage of animal cruelty within the Ovis 21 farm network supplying merino wool for Patagonia. Within days of the launch of that campaign, Patagonia had stopped its purchases from the Ovis 21 network, going on to say: “Patagonia will not buy wool again until we can assure our customers of a verifiable process that ensures the humane treatment of animals” (www.patagonia.com/blog/2015/08/patagonia-to-cease-purchasing- wool-from-ovis-21/).

As that case study shows, stronger collaboration provides better information along a value chain; distributors, marketers, retailers and consumers know about the production practices being used (transmitting process value from its origin to final purchasers). Further, information flows the other way, so that producers know what is valued by final consumers so that they can tailor their land-use choices to meet those expectations. This makes producers less vulnerable to accusations of unacceptable or poor practices, as well as supporting quality assurance programmes for making improvements where necessary to sustain or create additional value.

As discussed earlier in this chapter, logistics of transporting products along a supply chain can also create value. This is another aspect where collaboration can be important. Fragmented supply chains in the red meat industry, for example, can create high transportation costs as

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lambs are trucked long distances. This suggests the possibility that increased collaboration could reduce some of those costs if more lambs were assigned to their closest processor.

Thus, there is no simple recipe for constructing a collaborative value chain, and indeed the summary quoted on the previous page accepts that the attempt to do so may generate additional risks. This is one of the reasons why quality science is required to create new knowledge for understanding how value chains can share value and incentivise land use practices (the title of this current white paper commissioned by the Our Land and Water National Science Challenge). The following chapter therefore surveys some of the issues involved in market oriented value chains, after the following section discusses one of the key questions for New Zealand; can a strong country-of-origin profile contribute to capturing higher returns in global value chains.

2.4 Country-of-Origin Value Chains

The High Value Nutrition National Science Challenge recently commissioned a review of the scientific literature on the role country-of-origin (COO) can play in consumer purchases of food products (Miller et al., 2016a). That report observed that country-of-origin labelling (COOL) is mandatory for at least some food products in the major countries importing from New Zealand (notably, the United States of America, China, the European Union and Australia).

Leaving aside these regulatory requirements, the literature recognises that COO can provide a competitive advantage that is not easily copied (Baker and Ballington, 2002; FutureBrand, 2014 and 2015) and allows product differentiation (Carter et al., 2006).

FutureBrand is a London-based consultancy that specialised in country branding and country- of-origin branding. It explains the difference between these two concepts, and the importance of COO, in the following terms (FutureBrand, 2014, p. 30):

A country brand in the classical sense is a marriage of national identity and reputation. It drives national pride, political influence, leisure and business visitation and inward investment, and its strength is determined by perceptions across five association dimensions from ‘good for business’ to ‘value system’ (in FutureBrand’s CBI model). …

Country of Origin, on the other hand, is a key driver of every day consumer choice and can directly impact GDP by generating revenues through sales of products and services (both at home and abroad). The true distinction between a ‘country brand’ and a Country of Origin brand is that you can enjoy the latter without needing to visit the place. In other words, you can buy a little bit of Germany and what it stands for when you purchase a BMW, but you do not need to be in Germany to do it.

The New Zealand country brand has a strong reputation. The FutureBrand (2015) report, for example, gave calculated a Country Brand Index (CBI) for 118 countries based on the following elements (idem, p. 9):

 Awareness: How well do people know the country and its offerings?

 Familiarity: What qualities come to mind when people think of the country?

 Associations: How highly do audiences esteem the country? Does it resonate?

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 Preference: Is the country considered for a visit? What about for investment, to acquire or consume its products?

 Consideration: To what extent do people follow through and visit the country or establish a commercial relationship?

 Decision/Visitation: Do visitors recommend the country to family, friends and colleagues?

New Zealand ranked eleventh in that list, below Australia, Denmark and Austria but above the United Kingdom, Finland and Singapore. New Zealand’s ranking as a country-of-origin, however, is lower: FutureBrand (2014, p. 16) placed New Zealand 17^th in its 2012/13 study.

New Zealand was not in the top ten as a country-of-origin for ‘food and beverage’ (idem, p.

17), despite such a high share of the country’s exports coming from that industry. The FutureBrand report (idem, p. 30) explains why this might be important.

This matters because brand-driven consumption is increasing exponentially worldwide with the explosion of new middle class consumers in the BRIC markets (Brazil, Russia, India, China) and other developing nations. There are now estimated to be more middle class consumers in China than the entire population of Europe, and they are exercising their new consumer power through discretionary, brand-driven consumption in every category. In this context, brands will reach more new consumers, in more places, more frequently than any other drivers of country reputation and associations over the next decade. Couple this with a need for greater transparency and a clearer ‘Made In’ story across design and manufacture, and it is arguable that Country of Origin brands will start to contribute significantly to national reputation and overall country brand strength.

That conclusion is echoed in the review of the scientific literature by Miller et al. (2016a).

Country-of-origin has been found in several studies to be used by consumers as a cue for desired attributes such as quality (Claret et al., 2012; Berry et al., 2015; Insch et al., 2015) and food safety (Cicia et al., 2011; Lim et al., 2014; Ortega et al., 2014; Lewis and Grebitus, 2016).

A strong country-of-origin brand can also be important in countering food safety scares involving a particular location or a commercial brand associated with a country. Examples of recent food safety scares include BSE infection of beef cattle (Aizaki et al., 2012) the melamine in infant formula scandal in China (Wu et al., 2014), the Fonterra whey protein concentrate contamination false alarm in 2013 (Stojkov et al., 2016), and the ‘horsemeat scandal’ in Europe that same year (Barnett et al. 2016).

An example of how a country-of-origin brand can be developed to create value in global value chains is Origin Green Ireland (www.origingreen.ie/). The Origin Green Promise is a “verified commitment to sustainability all along the supply chain” (www.origingreen.ie/about/origingreen-promise/):

The Origin Green promise is an unprecedented one. It is the only sustainability programme in the world that operates on a national scale, uniting government, the private sector and food producers through Bord Bia, the Irish Food Board.

Independently verified, it enables Ireland’s farmers and producers to set and achieve measurable sustainability targets – reducing environmental impact, serving local communities more effectively and protecting the extraordinarily rich natural resources that our country enjoys.

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At the heart of the Origin Green programme is the Origin Green charter, a guideline document to the workings of the Origin Green programme.

From coast to coast, from seabed to soil, our ever-growing numbers of Origin Green members are fully committed to developing more stringent ways of working which will see 100% of Ireland’s food and drink exports on the road to sustainability by 2016.

The website lists 520 companies that have signed up for the Origin Green Programme, and Bord Bia (the Irish Food Board, at www.bordbia.ie/Pages/Default.aspx, accessed 19 September 2016) states that around 70 per cent of Ireland’s food and beverage exports “are on an independently verified journey of sustainability”. Origin Green includes initiatives at the farm level, in the dairy sector and in retail and food service. The result is that the programme is able to (in the words of the Origin Green Sustainability Charter, accessed 19 September 2016 at www.origingreen.ie/wp-content/uploads/2014/06/Origin-Green-Sustainability-Charter- June-2014.pdf):

1. Demonstrate the sustainability credentials of individual Irish food and drink manufacturers.

2. Enhance the reputation of Ireland as a source of sustainably produced food and drink products.

The second of those impacts strengthens Ireland’s country-of-origin brand, in line with modern approaches to creating and protecting value in global value chains. The Irish food and drink sector recorded the sixth consecutive year of export growth in 2015, with the value of these exports now 51 per cent higher than in 2009 (Bord Bia, 2016, p. 2).

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3. Market Oriented Value Chains

The previous chapter has highlighted that the final customer is the arbiter of value and so value is always defined with reference to the end customer. This is typically taken for granted for an individual firm selling to consumers (expressed, for example, in the adage that “the customer is always right”), but there is greater uncertainty about its role in business-to- business transactions along a supply chain. If the willingness-to-pay of final customers is the ultimate arbiter, why do firms along the supply chain not merge into a single enterprise to capture that value (a strategy known as vertical integration; see, for example, Williamson, 1971)? In many cases, this is indeed an efficient response, but in other cases there may be good reasons for maintaining specialised firms that negotiate external transactions with each other along a supply chain (Lafontaine and Slade, 2007). In these latter cases, is it possible to operate the supply chain as a ‘value chain’ in which participating firms organise themselves and their mutual transactions to discover and distribute knowledge about what is valued by the final customers? Value chains that take this approach are described as ‘market oriented’, which is the subject of this chapter.

3.1 Market Oriented Value Chains versus Commodity Supply Chains

Since the 1960s, as globalisation and market competition have continued to increase, industries have recognised a shift in consumer trends towards value-added and differentiated products. Consequently, focus has shifted from improving efficiency in production and distribution systems to providing greater value as defined by the end consumer. This shift expects value chains to adopt a market orientation, which can be defined within a systems framework as (Grunert et al., 2005, p. 430):

… chain members’ generation of intelligence pertaining to current and future end- user needs, dissemination of this intelligence across chain members, and chain wide responsiveness to it.

Roep and Wiskerke (2012) suggest that globally the agri-food industry has been among the last to adopt this shift, and the New Zealand agri-food industry is often represented as producing commodities for export. The resulting supply chains tend to focus on increasing the quantity produced and then pushing product to market as efficiently as possible to satisfy demand schedules, while simultaneously achieving consistent quality and economies of scale through high volume production (Grunert et al., 2005; Macharia et al., 2013).

Although there have been shifts towards market oriented value chains, agri-food chains continue to be criticised as disaggregated supply chains of commodities, in which each firm along the chain acts as a silo and competes out of self-interest in an attempt to maximise its own profits (Hobbs and Young, 2000). These chains have been criticised for being supply- driven and for overlooking the values of consumers, which leads to wrongly specified products, extra costs and lost opportunities (Grunert et al., 2005). Emerging chains can also be

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particularly vulnerable to a lack of information linking their product quality with consumer behaviour, though, they can improve the performance of the whole chain by understanding the quality-related factors that drive consumer satisfaction and repeat buying (Mowat and Collins, 2000).

In disaggregated supply chains there may be a small number of influential actors that hold considerable power with regards to information and material flow. These gatekeepers may be intermediate processors, manufacturers, importers and distributors, or retailers (Lees and Saunders, 2015). These gatekeepers are able to make decisions as to what products are passed through the ‘gate’ to reach the end consumer, as well as decoding and disseminating consumer demands back upstream to producers, which gives them significant market power for capturing the value provided to ‘their customers’.

This gatekeeping activity has the power for good, in terms of greater coordination across the value chain, or ill in terms of behaving opportunistically and extracting economic rents from others. Moreover, as firms act as silos with the aim to exploiting power imbalances for self- interested gain, the transaction costs across the entire chain are increased. Hold up problems are introduced when firms fail to invest in tailoring offerings to a consumer segments for fear of opportunistic behaviour from other chain members (Grunert et al., 2005). The result are unbalanced dyadic relationships that often favour the powerful party and impede value creating activities (Hingley, 2005) in that, while maximising local returns, they degrade the returns to the entire value chain. These value destroying behaviours add costs that ultimately pass to consumers.

Accurate market signals are often times poorly communicated to upstream producers of the chain. The upstream suppliers are provided information according to the desired attributes of the gatekeeper, and hence, effective land use incentives are not fully exploited. As chains have become more global, they have also become more complex and technically driven in order to meet consumer needs. Due to this information asymmetry, retailers are often the most powerful players in the food chains as they directly interact with the consumer and gather vast amounts of data on segment preferences (Vlachos, 2014).

It is argued that, because the retailer is the main gatekeeper and acts in its self-interest, it will pass on information according to its needs, often in the form of experiential attributes such as taste, size and colour, as well as desired credence attributes such as food safety (Lees and Saunders, 2015). This limited information set is passed along the chain to processors and producers. Because the processors and producers do not have a sophisticated knowledge of final consumers, this can stifle innovation and the development of differentiated products that could create added-value for identified market segments.

The New Zealand mutton chain for example, could arguably be called a disaggregated chain.

While there have been attempts (and some success) to reengineer the chain through mechanisms such as innovation and product differentiation (Deloitte, 2011), the actual process of value chain upgrading appears to be an enormously difficult task. To date, there has been relatively little research conducted in this area (Trienekens, 2011). This chain is characterised by powerful retailers acting as gatekeepers, transactional arms-length exchanges and lack of innovation due to information asymmetry. Although New Zealand

How value chains can share value and incentivise land use practices: a white paper