Modelling buyer-seller relationships in agribusiness in South East Asia

A model of buyer-seller relationships is developed to explain the nature of the long-term relationships between Filipino potato farmers and their seed suppliers. Relational satisfaction is derived from the seed supplier's offer quality (seed quality, delivery intent and competitive price), relationship specific investments (adaptations, communication, education and training and reciprocal buying) and a reduction in uncertainty in the seed supply market. However, rather than satisfaction leading to trust, satisfaction has a more direct impact on a potato farmer's desire to maintain a long-term relationship. Nevertheless, in the absence of a formal seed certification system and the nature of the long-term credit arrangements that often exist between farmers and seed suppliers, including reciprocal purchasing arrangements, trust remains a key relationship building variable. Fortuitously, seed suppliers have an opportunity to build trust with potato farmers through making relationship specific investments. Introduction. Farm purchasing behaviour can be considered as industrial buying behaviour because farmers purchase inputs to produce farm products. However, from an organisational context, farmer's buying behaviour may be quite different from buyer behaviour in industrial organisations. The majority of farms, especially in South East Asia, are small family enterprises without functional departmentalisation and formalised procurement procedures. Farm management, including purchasing, is primarily the responsibility of the farmer. Another important aspect of purchasing behaviour on family farms is the interdependence between expenditures on household consumption and production inputs (Kool 1994). Given a particular income level, increasing expenditure on farm production inputs can only be made by reducing household consumption and vice versa. Furthermore, given a particular type of farming and a particular production method, changes in the utilisation of farm inputs may occur quite frequently, due to the substitution of inputs arising from changes in input prices, output prices and the prices of consumption goods. Nevertheless, a farmer's decision to purchase can be considered a problem solving process in which functional, emotional, social and situational variables become important (Kool 1994). Rational motives include such economic factors as cost, quality and service, but emotional and social criteria may become decisive when various alternatives meet minimal functional requirements, or when farmer's are unable to perceive any tangible difference in the functional criteria between alternative offers. Furthermore, farmer's are generally faced with a large number of alternatives and a limited amount of time in which to make the decision to purchase. Farmers, therefore, often tend to simplify the purchasing task by purchasing inputs successively from the same supplier. Repeat buying may result from a number of reasons including habit, a lack of decision making, a perceived absence of choice, or, the lack of time to evaluate alternative suppliers. These criteria may be related to either the product or to the supplier. Finally, in a great many instances, the net value of the purchase can be evaluated only after purchase (Kool 1994). At harvest, the actual yields, revenues and profits are realised and this information, as well as the experience accumulated during the growing season and information gained from other farmers, tends to update the parameters farmer's use in making their next decision to purchase (Feder et al 1985). As an industry, agriculture is embedded in an environment which exerts considerable influence on farm purchasing behaviour (Kool 1994). The influence of the environment is often subtle and persuasive, as well as being both difficult to identify and measure. Webster and Wind (1972) identify six environmental influences including; social, cultural, economic, political/legal, technological and physical. In agriculture, the uncertainty of supply in the farm input market, the uncertainty of price in the farm output market and large seasonal variations in productivity will introduce additional dimensions to the models of organisational buying behaviour proposed by Hakansson (1982), Anderson and Narus (1990), Morgan and Hunt (1994) and Wilson (1995). Uncertainty is the key dimension affecting organisations, inter-organisational relationships and the costs of transacting (Achrol et al 1983; Heide 1994). Uncertainty prompts firms to establish and to manage relationships in order to achieve stability, predictability and dependability in their relationships with others (Oliver 1990). Performance is thought to improve when more relational market structures are introduced in response to high levels of uncertainty (Noordewier et al 1990). When suppliers are more inclined to respond favourably to buyers requests for change, buyers are able to adjust more readily to changes in the environment. Similarly, when buyers provide information to suppliers, the supplier, in turn, is better able to respond to the buyers requests. However, for there to be a relationship, there must be an expectation of repeat business. When both parties know they are in an extended arrangement, they are more willing to accept short-term disadvantages because things will even out in the long run. However, there is always the risk that either party may seek to take advantage of the situation by acting opportunistically. If there is to be a meaningful long-term relationship, respective buyers and suppliers must learn to trust the opposite party to fulfill their obligations (Hakansson and Wootz 1979; Hallen et al 1991; Han et al 1993; Morgan and Hunt 1994; Achrol 1997). Developing a conceptual framework of buyer-seller relationships. After wheat, maize and rice, the potato ranks as the fourth most important food crop in the world. However, unlike the other major food crops which are reproduced from seed, potatoes are highly heterozygous and varietal integrity can only be maintained by utilising vegetative propagation (Horton 1987). Consequently, and almost without exception, the majority of the world's potato farmers use tubers to establish their crops (Beukema and van der Zaag 1990). Because potatoes are vegetatively propagated, with each successive crop, the productivity of the seed generally decreases, due to the accumulation of disease. During the growing season, plants may become infected with either a systemic disease or a virus. Generally, those plants which become infected produce infected tubers, which, when replanted, produce infected plants which provide a potential source of infection for other plants. Seed tuber quality, therefore, not only directly influences the crop, but it may also have an impact on the productivity of any future crops derived from that seed (Beukema and van der Zaag 1990). Four variables influence seed tuber quality; seed size, seed purity, seed sanitation and the physiological age of the seed (van der Zaag 1990; Rasco 1994). However, a farmer's decision to purchase seed may also be expressed in rational economic terms as either value-for-money (Kool et al 1997), or as value-in-use (Hutt and Speh 1995). Seed which is substantially free of pathogens costs more to produce and therefore it will cost more to purchase (Beukema 1990). Improved seed, however, is generally more productive (Monares 1981). It is widely recognised that, in most of South East Asia, seed is the major cost of potato production (van der Zaag 1990; Rasco 1994). However, farmer's cash flow constraints, their lack of capital and inadequate storage facilities further limit a farmer's ability to purchase improved seed (Crissman and Hibon 1996). Consequently, most potato farmers are forced to borrow to finance the crop and with very little collateral, most are forced to borrow at high rates of interest from various informal sources (cooperatives, traders, input suppliers, relatives and neighbours)(Tagarino et al 1998). Input suppliers extend credit with the express intention of securing the farmer's crop at harvest and therefore availing themselves of the benefits of marketing the crop. Credit is extended on the basis of long standing, personal relationships in which trust between the parties overcomes the need for formal contracts. All buyers emphasise the importance of reliability of delivery (Lehmann and O'Shaughnessy 1974; Hakansson et al 1977; Ellram 1990). Most buyers prefer to purchase from local sources (Hakansson and Wootz 1975). Local suppliers are generally less expensive and offer more dependable service than those located at a distance. Delivery may be more prompt because the distance is shorter and there is less likelihood of transport delays. More importantly, local suppliers gain greater knowledge of their customers needs and may be more flexible in meeting their requirements (Leenders and Fearon 1993). When exchange between the buyer and seller takes place in such a manner that the supplier's offer quality exceeds the buyer's expectations, satisfaction increases (Anderson and Narus 1990). Therefore, it is expected that the higher the seed supplier’s offer quality, the greater the relationship satisfaction (Figure 1). High levels of satisfaction will have positive consequences for the relationship, encouraging greater loyalty and a longer-term working relationship (Anderson and Narus 1990). Satisfaction results in increased moral, greater cooperation between the channel members, fewer terminations and reduced litigation (Ganeson 1994). A firm's satisfaction with past outcomes indicates equity in the exchange. Equitable outcomes provide confidence that neither party has been taken advantage of in the relationship and that both parties are concerned about the others welfare. Firms that are able to lower the level of conflict in their relationship experience greater satisfaction (Anderson and Narus 1990). Where individuals intera