The inevitable evolution of growth

Introduction

Today’s food industry and the way it works is changing with a rapid speed. More and more companies are forming strategic alliances to drive operational efficiencies as well as drive down costs. The other reason to this kind of alliances are that it is a reaction to fierce competitive conditions and structural changes from the shift towards online market and continually going-on-discounts. 

The effects of strategic alliances

This pressure to remain competitive is leading many in the industry to form strategic alliances — sometimes with competitors — to keep pace with heightened customer expectations. Doing so, however, comes with its own set of challenges, making risk management and insurance critical components of these arrangements. (Marsh)

These alliances can be beneficial, allowing collaborating companies to:

  • Improve product development: Two minds are better than one. When two similar or complementary companies collaborate, they can bring different resources to bear, which can lead to real transformation. Rather than creating “separate but equal” standard products, they can unite to create truly innovative products that will move the needle for both companies.
  • Reduce costs: Innovation is not cheap, but it can cost less in a strategic alliance. The aligned parties can split the cost of procuring or implementing new technology and share facilities, which can reduce redundant capital expenditures for expensive technology and equipment at separate locations, and benefit from economies of scale along their supply chains. Ultimately, if a collaborative project fails, it usually costs less than if the parties were going it alone.
  • Enter new markets and grow more easily: Strategic alliances can speed up research, development, and production of new products and up the momentum on distribution of longstanding products debuting in new markets. Collaborating parties can piggyback off one another’s already established production or distribution platforms in specific locations. As such, companies are able to overcome production barriers and local cultural and operational obstacles that would otherwise hamper speed to market. (Marsh)

Unfortunately, strategic alliances often fail. Nearly half of the respondents to a 2014 study on strategic alliances by the CMO Council and Business Performance Innovation Network reported strategic alliance failure rates of 60% or more. (Marsh)

Figure 1. Mckeon 2014

A strategic alliance can bring its own risks. While the agreement is usually clear for both companies, there may be differences in how the firms conduct business. Differences can create conflict. Further, if the alliance requires the parties to share proprietary information, there must be trust between the two allies. In a long-term strategic alliance, one party may become dependent on the other. Disruption of the alliance can endanger the health of the company. (Kenton 2019)

In a summary, there are lots of benefits when forming strategic alliances, like improving product development, reducing costs and easier way to enter into new markets. And risks like failure in the management style and problems in the relationships between two companies. In addition, this kind of changes in the market will be tough for the suppliers, especially for the small suppliers. For example, Tesco and Carrefour, both have loads of own-brand-products. Once they form the strategic alliance, they want to reduce the costs and most likely keep producing more own products since it will be cheaper. Therefore, the small suppliers might suffer and lose the contracts to these food giants. 

Joseph Schumpeter’s theory of growth is one tool to understand and explain the strategic alliances. According to Schumpeter in a world characterised by a high degree of risk and uncertainty, only businessmen of exceptional ability and daring will be able to undertake innovations and launch enterprises and exploit opportunities for profit. (Ayesha) Schumpeter’s definition explain in one way, perfectly what is causing strategic alliances: the aim to get more profits and survive in today’s business world when creating new kind of forms of companies.

The causes of food inflation

Figure 2. FAO

During the last 5 years, the annual food price inflation in the world has decreased from 5% in 2014 to 4% in 2018 with divergent trends at regional level. (FAO)

Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. Cost-push inflation is determined by supply-side factors (cost-push inflation is different to demand-pull inflation which occurs due to aggregate demand growing faster than aggregate supply). Food inflation causes this kind of cost-push inflation. (Pettinger 2016)

Figure 3. Pettinger 2016

According to The Balance (Amadeo 2019), there are five causes of inflation in world food prices. They will drive up food prices in the long run. There are also short-term factors that affect supply and demand. Those include the weather, animal diseases, and catastrophes. The following four reasons drive prices higher over time: 

1. High oil prices raise shipping costs. Food gets transported great distances. You can expect high gas prices about six weeks after an increase in oil futures.

Oil prices also affect farming. Oil by products are a significant component of fertilizer. That contributes 20% of the cost of raising grain. Between 2001 and 2007, high oil prices added 40% to the cost of growing corn, wheat, and soybeans. 

2. Climate change creates more extreme weather. Its cause is greenhouse gas emissions that trap heat, causing air temperatures to increase. Hot air absorbs more moisture. It rains less, water from lakes and rivers evaporate, and the land dries up. When it does rain, the water runs off the land instead of getting absorbed into the water table. That creates floods.  

3. The U.S. government subsidizes corn production for biofuels. That takes corn out of the food supply, raising prices. America now uses 40% of its corn crop to make ethanol. That’s up from 6% in 2000. 

4. The World Trade Organisation limits the amount of subsidized corn and wheat that countries can add to global stockpiles. The United States, the European Union, and some developing countries heavily subsidize their agricultural industries. Farmers in those countries receive an unfair trade advantage. The WTO limits stockpiling to lower this edge. But it also reduces the amount of food available in a shortage. That increases food price volatility. 

5. People around the world are eating more meat as they become more affluent. It takes more grain to feed the animals needed for meat-based meals than is necessary for grain-based meals. Higher demand for meat means higher grain prices. Over time, this could offset lower United States demand for meat and dairy.

Food inflation is not unequivocal subject. There are several major factors and some smaller ones to make impact on it. It is happening all over the world and something has to be done to slow it down. Climate change talk is very hot subject at the moment. More and more things are being done in the companies to slow down the climate change. There is still lot to improve to stop it. Trends affect a lot to how people are consuming and in that way it affects on the prices of the food. 

List of references

Amadeo, K. 2019. Why Food Prices Are Rising, Recent Trends, and 2019 Forecast. URL: https://www.thebalance.com/why-are-food-prices-rising-causes-of-food-price-inflation-3306099. Accessed: 25.6.2019.

Ayesha, J. Schumpeter’s Theory of Economic Development|Economics. URL: http://www.economicsdiscussion.net/economic-development/schumpeters-theory-economic-development/schumpeters-theory-of-economic-development-economics/30174

Food and Agriculture Organization of the United Nations (FAO). Inflation in consumer price index for food. URL: http://www.fao.org/economic/ess/ess-economic/cpi/en/#.XdUjQi2Q1QJ

Kenton, W. 2019. Strategic alliance. URL: https://www.investopedia.com/terms/s/strategicalliance.asp. Accessed: 5.9.2019.

Marsh. Emerging Risks Spur Strategic Alliances in Manufacturing and Automotive Industries. URL: https://www.marsh.com/us/insights/research/manufacturing-and-automotive-alliances.html

Mckeon, M. 2014. 9 Challenges to Developing and Managing Strategic Partnerships. URL: https://www.powerlinx.com/blog/strategic-partnership-challenges/. Accessed: 15.9.2014.

Pettinger, T. 2016. Cost-push inflation. URL: https://www.economicshelp.org/blog/2006/economics/cost-push-inflation-2/. Accessed: 19.20.2016.

Pettinger, T. 2016. Food inflation. URL: https://www.economicshelp.org/blog/2578/economics/food-inflation/. Accessed: 10.1.2016.