Dynamic Explanation of Industry Structure and Performance
Cotterill
During the last 20 years of the century food
expenditures is a share of disposable income have
continued their secular decline to less than 10% in the
U.S. Eating out has increased so that consumer
expenditures for away from home food now rival
purchases from grocery stores for home meals.
As we move into the 21st century globalization is
accelerating. American food manufacturers and
European supermarket retailers are taking the lead
(Ramsey, 2000). In its 1986 LBO Safeway sold its
substantial UK and Australian operations, keeping only
its strong dominant position in Western Canada. No
other U.S. food retailers, except very recently WalMart,
with its move into Germany and UK Supermarkets
(ASDA) has foreign operations of any size.
3. Expanding the Neoclassical Theory of Vertical
Organization and Performance
It is nothing new or startling nowadays for us not to
supply our own needs for soap. Nor does it seems strange
that many of us could not even describe the process of
making soap. We do not feel ashamed of not
understanding the intricacies involved in manufacturing
steel or assembling an automobile. On the contrary, we
take distinct pride in the fact that we do not need to know
how to make soap, steel, or automobiles. We are glad to
be able to depend on others to do such things for us and to
rest content in the knowledge that they are doing a much
better job than we could. Ours is not an era like that of
150 years ago, when self-sufficiency was the order of the
day. One of the distinct marks of the economic progress
of our age is rooted in the fact that inventive genius has
given us a civilization of specialists. (Adams and
Traywick, 1948, p. 3)
This quote from Walter Adams and Horace Gray
points to our path. As the parent of teenagers, now I
know why it is clearly not cool to be self sufficient or to
learn about dull topics. The next generation is simply
following the specialization dictum of economics. We
start with Adam Smith and Benjamin Franklin, proceed
to George Stigler and then expand Stigler's model. The
fundamental questions are what determines the
organization of a food marketing channel into firms and
markets, and how does a particular organization effect
the channel's performance.
Adam Smith keenly observed that specialization was
the key to economic progress and that it was limited by
the size of the market.
As it is the power of exchanging that gives occasion to the
division of labour, so the extent of this division must
always be limited by the extent of that power, or, in other
words, by the extent of the market. When the market is
very small, no person can have any encouragement to
dedicate himself entirely to one employment, for want of
the power to exchange all that surplus part of the produce
of his own labour, which is over and above his own
consumption, for such parts of the produce of other men's
labour as he has occasion for. ... In the lone houses and
very small villages which are scattered about in so desert
a country as the Highlands of Scotland, every farmer must
be butcher, baker and brewer for his own family. (Smith,
1776, Book 1, Ch. 3)
For food industries to form, i.e. the butcher, the
baker, and the brewer, they had to be spun off from the
farm and town homes. The market for such specialized
activity had to be enlarged via the growth of cities
(urbanization), the improvement of transportation, and
the reciprocal development of trade for agricultural and
other products so that exchange among all persons could
occur. This latter point is often unappreciated, but
critical for ultimate performance. Only those who work
in the exchange economy benefit and they do so relative
to their productivity and power position. This issue of
parity for agriculture in this industrial system has been
and remains a perennial concern.
Smith commented at length on the great importance
of cheap water versus expensive or nonexistent land
transportation in his day. (What goods could bear the
expense of land carriage between London and
Edinburgh, between London and Calculta?) Since his
time we have had several transportation and
communication advances that have expanded our ability
to specialize, e.g. railroads, automobiles, airplanes,
telephone, radio, television and the internet (Chandler,
1977). These and other new technologies have also
created entirely new industries and have transformed the
production technology of old industries in addition to
simply making the market larger so specialization could
occur within the old technology.
Commenting on Smith's specialization due to truck,
barter, and exchange, Benjamin Franklin, a citizen of a
non industrial, agrarian and frontier economy, quickly
appreciated what Alfred Marshall called external
economies and what we now routinely call
infrastructure.
Manufactures, where they are in perfection, are carried on
by a multiplicity of hands, .If by royal munificence, and
an expense that the profits of the trade alone would not
bear, a complete set of good and skillful hands are
collected and carried over [to the U.S.], they find so much
of the system imperfect, so many things wanting to carry
on the trade to advantage, so many difficulties to
overcome, and the knot of hands so easily broken by
death, dissatisfaction, and desertion, that they and their
employers are discouraged altogether, and the project
Food Marketing Policy Center Research Report No. 53