Network designs as agribusiness architecture: The Bioceres SA case

Napolitano, G.; Ordóñez, H.; Senesi, S.

Research article

Network designs as agribusiness architecture: The Bioceres SA case

Network designs as agribusiness architecture:The Bioceres SA case

Napolitano, G. ⓘ
Food and Agribusiness Program,
Facultad de Agronomía UBA.

Ordóñez, H. ⓘ
Food and Agribusiness Program,
Facultad de Agronomía UBA.

Senesi, S. ⓘ
Food and Agribusiness Program,
Facultad de Agronomía UBA.

Resumen

Argentina is an important producer of bread wheat (Triticum aestivum); notwithstanding, the volume generated must grow based on an increase in productivity and an expansion of the productive frontier by adding new regions, so as to increase exports and improve business for the producing companies. Both aspects are related to the corresponding development of genetics; therefore, investment in research and development of new varieties is key.As a consequence of poor implementation and problems with the juridical interpretation of Law 20.247 of Seeds and Phytogenetic Creation, added to the fact that INASE (the National Seed Institute) does not adequately perform its role as controller of the system, the business of wheat seed in Argentina becomes diluted. This is due basically to the proliferation of seed without State control (bolsa blanca), hidden under the guise of “seed for one’s own use” that does not pay royalties for the developer. Bioceres SA deals with this business culture at variance with the law and technological development by means of a network type of internal design coupled to an external network architecture with clients and suppliers. The company manages a network of contracts that supports a genetics and seed business under the umbrella of the BioInta denomination, obtaining the developments needed by the sector, the companies and the country.

Abstract

Argentina is an important producer of bread wheat (Triticum aestivum); notwithstanding, the volume generated must grow based on an increase in productivity and an expansion of the productive frontier by adding new regions, so as to increase exports and improve business for the producing companies. Both aspects are related to the corresponding development of genetics; therefore, investment in research and development of new varieties is key.As a consequence of poor implementation and problems with the juridical interpretation of Law 20.247 of Seeds and Phytogenetic Creation, added to the fact that INASE (the National Seed Institute) does not adequately perform its role as controller of the system, the business of wheat seed in Argentina becomes diluted. This is due basically to the proliferation of seed without State control (bolsa blanca), hidden under the guise of “seed for one’s own use” that does not pay royalties for the developer. Bioceres SA deals with this business culture at variance with the law and technological development by means of a network type of internal design coupled to an external network architecture with clients and suppliers. The company manages a network of contracts that supports a genetics and seed business under the umbrella of the BioInta denomination, obtaining the developments needed by the sector, the companies and the country.

Palabras Clave:

AGRICULTURA COMERCIAL, ADMINISTRACION DE EMPRESAS, ADMINISTRACION DE EMPRESAS ⓘ

Keyword:

organizational architecture, , ⓘ

1.- INTRODUCTION – THE BUSINESS OF WHEAT IN ARGENTINA

The evolution of the wheat-sown area in Argentina in the last 15 years has not shown significant variations; it has stayed at about 6 million hectares, reaching 6.23 millions in the 2004/05 campaign. This represents a percentage of 21.05% with respect to the total grain area and corresponds almost entirely to bread wheat (Triticum aestivum). During this period, the grain and oleaginous cultivated area increased 42.5 %, while the area occupied by cereals remained stable; this indicates that the increase is due exclusively to the growth of oleaginous crops, within which soy represents 50.9% of the total grain area of the country. In the 2005/06 campaign, 5 million hectares of bread wheat pan were sown, representing a retraction of practically 20% in area.

The business of autogamous plant seeds in Argentina has not been unaffected by the changes of the country’s economy and of the treatment of property rights in the general business culture. The bread wheat seed business in Argentina has developed within this cultural framework of non payment of royalties for the developers and subsequent disinvestment in the development of the genetics of the crop. Argentina needs to develop new varieties that will allow an increase of production based both on an increase of performance per unit and on an extension of the productive frontier. These macro or first order diseconomies have led to diseconomies of second and third order, impeding a greater and better development of the business in the country.

Las main restrictions can be found in the Law of Seeds and Phytogenetic Creations and, most especially, in its implementation in the sector. The law admits the existence of “own use” which is not effectively controlled by the institution that applies it (INASE). This originates the almost indiscriminate sale of illegal “bolsa blanca” or generic seed. While in the mid-90s (95/96 campaign) 50% of the demand of soy and wheat was covered with controlled seed, at present that percentage is between 15 and 20%. According to the officials of INASE, it is "difficult to quantify" how much is seed “for one’s own use” and how much is illegal trade, although the figures they deal with indicate that the ratio is 40% “for one’s own use” and 60% illegal seed. It is worth mentioning that soy and wheat represent 57% of the total value of the potential seed market, which indicates the impact of these two species on the market (see Table 1).

Table 1: Argentina. Importance of soy and wheat in the seed market
Species	Potential Demand (Tn)	Value (00 U$S)	Certified Seed (20% of the potential demand)	Value (00 U$S)
Soy	1,050,000	420,000	210,000	84,000
Wheat	600,000	144,000	120,000	28,000
Total		985,000
Source: INASE

As a result of poor enforcement of the laws, the companies that provide new genetics and seeds register in the country a low number of new varieties produced by the genetic improvement of wheat. Evolution towards a business design oriented towards respecting these rights promotes technological and scientific innovation, investment of the businesses of the sector and the development of business related to genetics like, for instance, the export of bread quality differentiated wheat.

1.1. Discrete structural analysis of the “wheat seed” sector in Argentina.

1.1.1. Institutional Environment

Starting with the Law of Convertibility of the Peso the primary objective of price stability was achieved in the country. Secondly, this stability was initially accompanied by high rates of economic growth. The State’s intervention in the grain business was interrupted, imports of fertilizers and agrochemical products were authorized without taxes, transportation of agricultural products was deregulated and port operation costs were notably reduced. The benefits derived from the application of the new policies did not reach all the members of the farming sector equally; it generally favored the concentration of production in larger units, better prepared to obtain financing under more favorable conditions and to incorporate technology.

The legal framework that regulates the seed business in Argentina revolves around the Law of Seeds and Phytogenetic Creations. This law constitutes the only and exclusive form of ownership protection for vegetable varieties in Argentina, and establishes the regulatory frame for seed commercialization. The Law of Seeds establishes penalty to “whoever identifies or sells, with correct identification or otherwise, seed from cultivars whose multiplication and commercialization have not been authorized by the owner of such cultivars.” This is the phenomenon known as “bolsa blanca”, in which producers illegally sell seed they supposedly produce for their own use. However, the Law states that “whoever reserves or sows seed for his own use, or uses or sells the product of cultivating such a phytogenetic creation as raw material or food does not violate ownership rights on a cultivar.” Producers resort to this article to exercise their right to make “their own use” of the wheat harvested for later sowing, therefore hurting the businesses that invest in genetic improvement of cultivars, since the producer does not buy “identified” and/or “State controlled” seed again, the only way for the developers to collect royalties on ownership rights.

In the face of these restrictions posed by the institutional setting, and in order to try to control the seed reserved “for one’s own use”, Argentine developers started collecting what is known as extended royalty”. This consists in charging the producers each time they reserve part of their harvest to sow again during the next campaign, arguing that Article 27 of the Law of Seeds, which allows reserving seed for one’s own use, does not specify whether this reserve should be free or paid for. However, not all varieties have “extended royalty”; many continue to offer varieties without it, varieties that are usually older, giving the producer the option of choosing what varieties to buy, while the producer is hurt as he buys varieties with lower potential yield.

The weak part of the “extended royalty” system is control, since the producer voluntarily declares how much he has reserved “for his own use” and pays for it. Since it is not covered by the law, INASE does not exert any type of control over it. However, ARPOVhas inspectors who, based on records of buyers of varieties with extended royalties, visit the fields to verify if they are reserving “for their own use”. Consequently, low enforcement of the law and differing interpretations of it cause the habit of reserving seed “for one’s own use” and the “bolsa blanca” phenomenon.

1.1.2. Organizational Environment

Autogamous species preserve their genetic features from one generation to another. The companies that produce varieties of autogamous species in Argentina, and specifically of bread wheat, are medium scale and work with national capital, with the exception of one multinational company. In the country there are basically two systems of production of autogamous plant seed: the “cooperators system” and the “direct sale system”. However, there are companies that operate under a combination of both:

Cooperators System: the seed producer has a series of cooperators to whom he sells the Pre Basic seed so that they will produce the seeds that will be sold to the producers, and the developer sells them the labels and collects a royalty for each seed pack sold by the cooperator. The plant sales outlet9, in turn, exercises control over the cultivation and harvest of this seed; however, each cooperator is free to determine at what price he will sell his seed, and this may be detrimental for the rest of the cooperators. This systems causes great heterogeneity in the quality of the controlled seed and, therefore, the producer does not see the advantage of this type of seed over “bolsa blanca” or seed that they can reserve for their own use. This reflects in a decrease in the sales of controlled seed by these outlets. On the other hand, there are diverse prices in the market for the same product.
Direct Sale System: it consists in selling seed directly from the plant sales outlet, royalty already included, through a network of distributors. In this system the plant sales outlet produces its own seed (by company and/or coordination) and sells it at an only price and with standardized quality controls, homogenizing the product offered to the producer.

At organizational level, ARPOV is a civil association that groups most of the companies that have research and development of varieties and hybrids of different species. Among them are the main wheat seed producing firms of Argentina. Their main objective is to fight “bolsa blanca” and limit reserving seed “for one’s own use” in different ways: Changes to the institutional frame, application and control of “extended royalties”, and so on.

1.1.3. Technological Environment

Production and yield: Production in the latest campaign (04/05) was 16 million tons. In the past 15 years this value increased by 45.5 %; this figure has increased based on better yields per unit, since, as mentioned above, the area sown has remained relatively constant. (see Chart Nº 1).

Direct sowing: It is estimated that 45% to 48% of the national farming area is sown by this method. The massive adoption of this technology in the cultivation of wheat is related to the predominance of soy in crop rotations, which impacted in the mass use of this process technology, and to the beneficial impact that sowing through stubble has on soil and water conservation on the profile.

There is a need to generate varieties with better adaptation features and, fundamentally, with greater productivity; on the other hand, it is necessary to incorporate new areas to the nation’s wheat production. These circumstances point to obtaining larger volumes for export and improving the business for producers. To do so, it is necessary to increase investment in improvement plans and to develop specific technological packages. At present, the institutional restrictions mentioned in 1.1.1 go against these business decisions, and the models reviewed in 1.1.2 do not make any positive contributions, either.

Chart Nº 1

Source: SAGPyA.

1.2 The bread wheat seed market in Argentina

According to information provided by SAGPyA and ARPOV, the seed market invoices $ 704 million (approximately U$S 235 million), of which wheat contributes $ 132 million (approximately U$S 44 million), that is, 18.7%. According to data from INASE, of the total wheat area sown in the country, only 24.7% is sown with controlled seed. The potential value of the market is (as can be seen in Table 1) U$S 14 million.

2.- OBJECTIVES

Analyze the intra and inter organizational network design as a compatible architecture for the development of agribusiness of genetics and seeds of autogamous species in Argentina.

Discuss the case of Bioceres SA as an implementer and manager of the network architecture in the BioInta project of bread wheat seed.

3.- MATERIALS AND METHODS.

In this study we have used the methodology of the case study, in the understanding that the phenomena of interest in the study cannot be separated from their context. It is to be expected that, according to what specialists have stated, the phenomenological knowledge that emerges from this work may be transferred to circumstances perceived as similar to those that frame the case by decision makers in agribusinesses related to seeds or autogamous plant genetics or to other situations comparable to those described here.

4.- RESULTS AND DISCUSSION

In 2003 a group of successful agribusiness businessmen of Argentina founded a company named Bioceres SA whose mission was to promote and manage innovative and sustainable business in biotechnology. Within this framework it developed an agreement with the National Institute of Farming Technology (INTA in Spanish) to finance the development of bread wheat varieties. This agreement aimed at developing the varieties in the market to be used in the different wheat growing areas of the country, additionally generating sustainable “technological packages” that would allow a greater productivity of these cultivars. This project aims at an increase of the wheat sown area and per unit productivity. It is expected that both effects will in turn increase the profitability of the business for producers and the production and export of this cereal.

Fulfillment of these objectives is supported by a network structure of multipliers and seed nurseries that produce and commercialize the cultivars under the BioInta denomination. This network is managed by Bioceres, who has designed a network internal structure as appropriate architecture for their business management. This internal network was built on the basis of implementation of ISO Standard 9001/2000, which allowed the design of the entire structure, strategy and business culture of the company as it was built and evolved.

This dynamic design of the internal structure so as to promote innovation and the construction of social capital is sustained by the vision of the number one executive of the company and his interaction with the rest of the organization. It requires broad vision and high capacity of action at all hierarchical levels . Likewise, in order to take advantage of its potential to the fullest, it needs to be integrated to other external structures to form a network with clients and suppliers, strategic alliances, contracts and agreements so as to attain maximum flexibility of the business model and adequately manage information, communication and knowledge.

With this type of organizational architecture, understanding it as internal structural design and interrelations with its setting, Bioceres SA faces the bread wheat seed business by: (a) promoting research and development in cultivation genetics, (b) insuring that such research and development be done with local scientific and technical teams and with private financing from the value chain itself, (c) supporting the collection of royalties by the obtainers in the network of seed nurseries that commercialize the product in the areas of production, and (d) building social capital and a trustworthy business that diminishes its transaction costs as the frequency of interaction increases between the State (INTA) and private businesses (Bioceres and seed nurseries) and among private businesses (Bioceres, seed nurseries and multipliers).

It is important to understand that, in the final analysis, transaction costs and diseconomies of 2nd and 3rd order depend on people and their interactions and relationships. Because of this, the construction of social capital within the organization and among organizations in the external network constitutes a key to improve competitiveness in the genetics and seed business and make it more innovative and better adapted to the turbulence that may have developed in the country. This architecture supports the business but its development has encountered certain limitations and restrictions. Since it depends on the actions of people, opportunism, limited rationality and asymmetrical information have made attempts at times against the success of the proposal.

These aspects have been attenuated through certain interesting mechanisms worthy of mention, among which Bioceres’ leadership role in the network is the key issue, but so is the leadership of number one in the company. Likewise, the democratization of information and the development and management of knowledge within the network have played an important role at the time of deactivating processes of asymmetrical information. At the same time, part of these processes of generation and transfer of information promote the loyalty of clients as they generate an “extended product” such as seed is production and technology adapted to each ecological region in which Bioceres has a seed nursery.

5.- CONCLUSIONS

Inter company network designs are supported by the construction of social capital based on the interaction of the members of these organizations. These architectures need strong leadership to orient their vision of the whole, define the mission and set the goals. Bioceres SA has assumed this role to reach the objectives set successfully and completely. The complexity of the institutional setting and the culture mentioned before in the business of autogamous plant genetics complicate joint actions, promote individualism and orient actors toward opportunistic decisions. In that complex and turbulent scenario, Bioceres manages the contracts and joint actions of the network.

In order to do this, Bioceres’ internal design had to lean towards collaboration, an efficient flow of information, and the promotion of innovation and leadership. This allowed the generation of a type of structure of matrix design that makes it easier for the members of the company to work as a network. The internal network sustains the external network, and both are promoted by leadership, innovation and the promotion of social capital.