System dynamics and innovation in food networks

System dynamics and innovation in food networks

Article Type: Guest editorial From: British Food Journal, Volume 111, Issue 8

About the Guest Editors Melanie Fritz is Associate Professor in the Department of Food and Resource Economics at the University of Bonn. Her research interests include the role of trust in business relationships, e-commerce, cost-benefit analysis in food safety and quality, sustainability management, and modelling of food system dynamics and logistics.

Gerhard Schiefer is Director of the International Center for Food Chain and Network Research and Professor for business economics, organization and information management at the University of Bonn. His research interests include food chain management, quality management and traceability, information and decision support systems, e-commerce, food chain logistics and simulation. Gerhard Schiefer is the corresponding author and can be contacted at: schiefer@uni-bonn.de

The food sector is faced with major challenges that arise from changes in the sector’s economic and non-economic environments, from changes in lifestyles, from possible climatic changes, from global increases and changes in food consumption (Pingali, 2007), from a diminishing production base due to the loss of agricultural land, and, not the least, from changing attitudes of society towards the consequences of the food system’s activities for environmental, social and economic issues, captured in the term of “sustainability” (Aiking and de Boer, 2004).

To cope with these challenges as an industry and to secure the global availability of food that is affordable, safe, and of the quality and variety expected by consumers, the agri-food sector will need to better coordinate its activities and exploit its innovation potential but also assure that emerging development dynamics remain robust enough to easily adapt to the wide range of possible future scenarios the sector might have to face (Ingram and Brklacich, 2006).

These general statements generate challenges for the global food sector, which extends from input supply industries and agriculture to food processing, food distribution, and retail. In the flow of products throughout the value chain (Porter, 1998) – the sequence of different stages of sourcing, production, processing, and distribution involved in the provision of food to consumers – the interrelationships between the actors constitute a classical “System dynamics” environment (Forrester, 1997), which is characterized by processes that incorporate feedback loops as well as sequences of causes and effects with possible time delays in between. The range of interrelationships covers food supply chains where they might remain stable due to contracts or customs or food supply networks where interrelationships evolve dynamically through changing trade relationships from within a network of different enterprises that are active at each one of the stages of the value chain. The network scenario, which is (still) dominant in most of the sector, poses a specific challenge for research to initiate and support the necessary innovation and development dynamics to assure, e.g. product characteristics like food safety, food quality or food origin at the consumers’ end. The coordination challenge is aggravated by the fact that agriculture and the processing sector are dominated by small- and medium-sized enterprises (SMEs).

Through its agricultural base, the agri-food sector is deeply rooted in the social and cultural environment of society. In a global context, this adds to an organizational diversity that cannot be eliminated by reallocation and concentration of production sites. However, this organizational disadvantage may add to the diversity of food products, which is seen by consumers, especially in Europe, as a competitive strength that could be exploited by industry.

These arguments point to some of the specific complexities of the food sector and the need for the engagement and cooperation of different disciplines in support of the necessary innovation and development initiatives. The system focus has gained momentum in European research discussions, not the least, through the establishment of multidisciplinary so-called “European technology platforms”, which are linked to European research programs and support the identification of food system research needs.

This special issue of the British Food Journal offers a selection of articles from the “2nd International European Forum on System Dynamics and Innovation in Food Networks”, which was organized in Igls/Innsbruck, Austria, February 18-22, 2008. The forum initiative evolved from the need for a multidisciplinary system view involving economics, agribusiness management, finance, policy, marketing, system’s modelling, consumer research, and others. It was supported by the European Association of Agricultural Economists (EAAE) and an international group of universities from Europe, North America, and Australia. Limitations on the number of participants and a concentration on senior scientists allowed an intensive discussion of issues.

The selection of articles offers a broad range view of the system spanning from network configuration, communication and performance to the drivers and potential barriers to innovation in food networks and the effects of different modes of marketing and advertising on the actors of the food system to the analysis of impacts of a quality and safety crisis on different food network actors.

The first five papers cover different aspects of food networks and span from the analysis of structures in networks producing traditional food, the analysis of factors fostering sustainable relations in food networks to the impact of collaboration between firms on their performance and prediction markets as a means to collect information for decision making in supply network management. In the first paper “Microeconomics of collaboration and network configuration”, Weaver focuses on collaborative relationships between companies and analyses why such strategies have been incompletely pursued in the food sector as opposed to other industries building on microeconomic theory. The paper presents a framework for identification of the optimal pattern of relationships across firms to compose networks that could enhance the competitive advantage and the economic performance of the food sector. A microeconomic theory of firm level choice of transactions is presented and extended to consider market level equilibrium in where persistent relationships are defined to compose an integrated economic network. The results point to the controversial evidence that while performance of the food system has been the target of extensive public policy, that policy has typically viewed food enterprises as autonomous units operating through competitive markets.

In their paper “Chain governance structures: the European traditional food sector”, Gellynck and Molnar identify chain-level, product-, and country-specific characteristics of chain governance structures in traditional food sectors in Belgium, Italy and Hungary in cheese, beer, white pepper and meat production networks. Building on a taxonomy providing insights to determining variables of the application of governance structures, the findings show that the complexity of the governance in the traditional food networks analyzed varies largely. Besides chain-level, product-, and country-specific differences, the retailers’ size is determining factor for the applied governance structure.

Reynolds, Fischer and Hartmann identify factors which influence the sustainability of the German pig meat and cereal chains in their paper “Determinants of sustainable business relationships in selected German agri-food chains”. They show that effective communication, the existence of personal bonds and equal power distribution between buyers and suppliers are key determinants of sustainable vertical business relationships. The relevance and significance of the determinants differ across the investigated food chain levels (farmer-processor versus processor-retailer), the use of formal versus non-formal relationship types and the maturity of a relationship. This implies that agribusiness and farm managers can enhance the sustainability of their business relationships by effective communication (i.e. the relevance and reliability of the transmitted information, and the communication timeliness and frequency), by fostering personal bonds with their suppliers and/or buyers, and by employing – and retaining – key staff who fit culturally and/or socially with those they transact with. In addition, managers also need to be aware of the fact that a business relationship can be negatively affected by abusing a more powerful market position.

Ziggers and Henseler contribute with their paper “Inter-firm network capability: how it affects buyer-supplier performance” to a more complete understanding of firms’ collaborative capabilities in developing and leveraging inter-organizational relationships. They offer a view that a firm’s critical resources and capabilities span firm boundaries and are embedded in inter-firm resources and routines. Building on a capability view, it is argued that firms can engender sustainable competitive advantage by enabling firms to build and leverage inter-organizational relationships to generate relational rents by: fostering close working relationships with a limited number of suppliers; building effective network structures, and developing a long term orientation. The results achieved using PLS path modelling for a sample of 176 Dutch firms demonstrate that inter-firm network capability significantly and substantially affects supplier performance as well as buyer performance, thereby providing evidence of the predictive validity of the inter-firm network capability construct.

The paper “Prediction markets: a powerful tool for supply network management?” by Hedtrich et al. provides an innovative approach to improve information collection and decision making in supply network management in food networks by evaluating the possible advantages of applying prediction markets to supply network management. The paper focuses on requirements and possible results of the use of prediction markets based on literature on supply network management and prediction markets and finds that prediction markets are a new instrument to collect diverse information among the supply chain members and to publish that information to other members.

The next two papers focus on drivers and barriers for innovation in food networks. Capitanio, Coppola and Pascucci analyse the main dynamics of the Italian food system, focusing on relationships between the inclination to innovate and a set of firm characteristics in their paper “Indications for drivers of innovation in food sector”. They perform a component analysis to identify factors that can explain features that differentiate Italian food firms and quantify the role of such factors on innovation behaviour by means of a logit model. The results show that in the Italian food sector, innovation adoption follows different patterns when product or process innovation is considered. In particular, the probability of introducing product innovation is influenced by the quality of human capital, the geographical context and, to a less extent, the age of the firm. As a consequence, product innovation mainly depends on organizational features and intangible factors such as firm experience and cumulative knowledge. With regard to the stimulation of innovation in the Italian food sector it can be said that diversified intervention strategies are necessary.

The paper “Innovation drivers and barriers in food processing” by Fortuin and Omta explores how far the food processing industry can rely on the principles of innovation management developed in high-tech industries to improve its innovation performance based on an analysis of its drivers and barriers for innovation. Based on industrial organization theory and the resource-based view of the firm, different aspects of innovation management in nine multinational food-processing companies with their headquarters in the Netherlands were investigated. The findings show that the food processing industry can rely on the general principles of innovation management, even though there is clear room for improvement. Especially the potential of “open innovation” with suppliers and buyers to leverage innovation resources and capabilities is underutilized. Interestingly, the uneven power distribution in the chain, especially the high pressure of buyers, acts as a strong driver for innovation.

The further coming two papers take the impact of different modes of marketing and advertising into account. Spreen and Jaregui in their paper “World orange juice market: benefits of generic advertising” examining the generic advertising program of the Florida processed orange industry to assess the presence and level of free-riding by Brazilian orange growers on the Florida-funded program. The results show that the distribution of benefits associated with promotion program between Florida and Brazilian growers depends on the magnitude of the demand shift accomplished by the generic promotion program.

In their paper “Market power and trade promotions in US supermarkets”, Gómez and Rao analyse the impact of trade promotions, which are manufacturer incentives directed to retailers rather than to consumers on performance and coordination in the food supply chain, which in turn affect retail food prices. To assist food manufacturers and retailers in the identification of institutional, brand and size variables that may help them leverage trade promotion negotiations, the paper presents results of an empirical study to measure the influence of market power on the outcomes of trade promotions negotiated between food manufacturers and supermarkets. Based on data from 36 supermarkets in the USA, the results suggest that that brand, size, and institutional power of food manufacturers and retailers affect trade promotion budgets and their allocation among discount- and performance-based types; food manufacturers have relatively more control over their trade promotion budgets whereas retailers may have more influence on the allocation decisions.

The last paper “Eliciting processing industry damage from feed crises” by Meuwissen, Van Andel, Van Asseldonk and Huirne takes dynamics caused by a feed crises into account and assesses direct and indirect damages of dairy processors and pig and poultry slaughterhouses in The Netherlands. Starting from a number of feed crisis scenarios, results indicate that in the most likely scenario it is expected that a feed crisis affects 15 processors, i.e. 20 per cent of processing business in The Netherlands. Processors’ direct damage is largely (>90 per cent) determined by the mixing of produce during various phases of processing. Indirect damage is on average perceived not to exceed direct damage.

The range of issues discussed in the articles demonstrate the food sector’s need for innovative approaches to deal with present problem scenarios and for development initiatives that support its dynamic adjustment to the challenges it has to face in future scenarios.

Melanie Fritz, Gerhard Schiefer