Vijayakrishna Spice and Seed Farms (Vkspice) was established in 1990 and over the past 20 years the company gained a lot of potential buyers such as Avt McCormick, Synthite, Plantlipids, etc., because of its high production value. It produces a wide variety of spices, but it is mainly known for production of IMP Chilli (organic chilli) and turmeric which are mainly adapted because of favourable weather conditions. Vkspice is headquartered in Guntur, Andhra Pradesh, India and has sales, procurement and other supply chain operations in various parts of the state.
This report critically analyses Vijayakrishna Spice and Seed Farms, the strategies adapted by the company and the issues faced by them. It also analyses the impact of information and knowledge on the spice exporters in India, with a particular focus on the company Vkspice (spice industry) on its strategic environment. Some concepts in this report are drawn by the tacit knowledge gained during my 3 years experience of working as Sr. Procurement manager, with this company.
2. Industry Context
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The Indian spice industry is booming with a substantial increase in exports over the past few years. India accounts for nearly 45 % and 30 % in terms of volume and value in the world spice trade. The blooming global spice market also poses good opportunities for the Indian spice industry to provide quality spices at competitive price (Spice trade 2010).
Recently, the domestic and international spice industry is witnessing a remarkable growth attributable to the variations in the lifestyle patterns of the consumers worldwide. Application of spices in various industries like pharmaceutical, medicine, beverages and food processing made consumers to incline more towards them, which in turn increased global demand of spices and culinary herbs.
Developing countries like India, China and Indonesia are the prime producers and traders of a variety of high quality spices (mostly organic) in the world. Most of the domestic and international trade takes place in the dried form.
Culinary herbs are the other natural products consumers are most attracted to these days. The market of these products is constantly growing with the major supplies from India to USA and EU. A sound knowledge of the methods and processes involved in the production of herbs and spices is always required for a labour-intensive industry like this.
In agriculture the application of Information and Communication Technology (ICT) is all the time more important. Identifying the improvement areas and utilization of information and communication technologies in agriculture has gained importance and priority in our knowledge driven society. The above mentioned parameters act as the support for the agricultural development in line with environmental sustainability criteria.
The central problem in all human activities within organisational and inter-organisational context is access to relevant, accurate and availability of the complete knowledge. Adoption of effective problem strategies by all agricultural institutions might resolve the increasing problems at community, national, regional and international levels.
Vkspice operates with in rural agricultural sector of India. This sector is mostly run by the tacit knowledge passed over by generations. Hence the demand for producing organic spices makes this sector competitive. As mentioned in Ifda (2004) Swaminathan has noted that conventional farming is more chemical and capital intensive whereas organic farming is primarily knowledge intensive. It is necessary for Vkspice to keep the farmers updated with the latest agricultural practices to meet the demand and gain competitive advantage. Information and knowledge sharing across the supply chain and use of IT technologies are the key factors that provide distinctive advantage in this sector.
3.1. Information and the Five Forces
Vkspice and the industry it operates in can be understood better by performing Porter's five forces analysis. Fig 3.1 illustrates the
Figure 3.1: Information and the sector
Spices are the key ingredients in most of the cuisines which strictly need the use of specific spices. Although there are no natural substitutes to spices there are few substitutes like the use of Artificial or Synthetic Flavours which give almost the same taste of the spices. However, due to the health awareness most of the people are inclined towards the use of authentic natural, organic spices over synthetic spices. More broadly, other forms of products can be considered as substitutes. Some might argue that the growth in use of readymade food products pose a threat to the market, but this seems unlikely given the target market.
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The industry faces intense competition since the concentration of suppliers is high and reputation, goodwill of the company plays a major role in the buyer's decision making process. Its competition is often at regional level. There are also many small local companies often operating in a specific location and as the demand for authentic organic spices increased the demand for maintaining the quality of the product raised. Hence the companies needs to be up-to-date with the information related to quality procedures (Spices board of India 2010) and good knowledge about the organic farming, (REF !) where the companies require sharing information and knowledge to their suppliers (farmers) by providing sufficient training with the help of experts. Having information and good knowledge about different techniques, technologies play a crucial role in this industry sector.
Vkspice was one of the first companies in local markets to start the production of pesticide residue free spices. It recognised the demand in early stages and took necessary steps to succeed among its competitors. This company started the use of backward integration and made the efficient use of IPM (Integrated Pest Management) techniques in producing organic spices and it also conducted training sessions in giving information about new changes in industry and to impart knowledge about new farming techniques and pest management to supplier and farmers with the help of agricultural scientists and support from the buyers. Vkspice also make better use of the information technology to maintain variety of data such as financial and customer data by installing accounting packages like AIMS which was customised and developed specially for its own purpose and upgraded to Tally in the recent years. This gave Vkspice a strategic advantage over its competitors. However there is no dedicated testing lab facility for analysing the produce or material that was procured from the external open markets while transferring the knowledge and information of advanced techniques in farming practices to its suppliers.
Spice Industry requires large inputs of labour, raw materials and services. The cost of these inputs can have a significant effect on profitability. Whether the strength of suppliers is weak, moderate or strong depends on how much bargaining power they can exert. As a result they have some flex in determining product pricing, delivery, and distribution. In this sector some suppliers are smaller and do not have much power over the pricing and distribution of their products. However, in this sector most of the suppliers are farmers and local market agents. They get the information from Newspapers and other forms of print media and also from the Audio and Video media. The companies have very high bargaining power over suppliers as the concentration of suppliers is high in local markets. They have less threat to the market. (Talk about Supply chain- sharing info)
Spices are used throughout the world and buyers need to have an immense knowledge about the market. There are wide ranges of spices classified into different varieties depending on their characteristics, most of the buyers get information to make their purchase decisions through Market committee websites and also collect additional information from the local markets with the help of their representatives. There is additional information available on the websites of Spices board (Spices board of India 2010) about different varieties and availability of spices based on specific locations. Since they have less control over the forces and because of the raised demand for the organic spices they have very less bargaining power over the suppliers and since demand is high the cost of switching very low.
3.1.5 Barriers to entry
Spice industry is a highly competitive industry. Even though initial capital investment is less, the risk for new entrants is very high. Sound experience and customer database is a major barrier to entry and lack of knowledge about the product, market information is the key barriers to entry. (REF ! abt trust) The company's reputation and trust also plays important role building long term relationship with the buyers and also because of the high concentration of suppliers exporting the same goods usually competition in high and local politics also have a significant effect on markets. Technology plays a major role as pesticide free spices are of growing demand these days and use of a product testing lab is highly essential in this sector, as it aids in increasing the value of the product. Furthermore, labour unavailability is one more barrier that makes the risk high for new entrants to enter this market.
3.2. Strategies Adopted:
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According to (Mintzberg et al 1988) Strategy formation in entrepreneurial firms is a visionary process, Vkspice being an entrepreneurial organisation have particular business strategies, human resource strategy and have no definite focus on Information system strategy. From the analysis done in (section3.1) it can be concluded that Vkspice needs to formulate strategies for all of its operations in order to gain a competitive advantage in the operating sector.
3.2.1. Business Strategy
Spice industry is currently facing many challenges due to global lifestyle changes (section 3.1), but at the same time there is an increasing growth opportunity for the industry with the increase in demand for natural products. `The sales growth of organic spices are 35 % annually, more than double the 16 percent growth rate of spices farmed through chemically intensive methods' (Forestrade, 2004). The recent changes in lifestyle of consumers are forcing the companies to produce good quality products and this is leading to an extensive competitive rivalry between the firms operating in same sector. Hence, Vkspice implemented some business strategies in order to improve the performance of the organisation in producing and procuring authentic spices.
Vkspice took a strategic approach of 'contract farming' in producing IPM or pesticide free spices. Farmers have been introduced to new farming strategies that intend to drive pests away effectively, improve crop quality and raise productivity. The company having a good farmer base formulated a process where the farmer groups from different regions work in collaboration with the company in growing demanded varieties. Vkspice, has trained the farmers with the latest skills and techniques about integrated pest management, or IPM and started giving 25 % premium price over the market rate. This allowed the farmers to supply the best quality products on time by giving priority to Vkspice, whilst gaining goodwill, maintaining professional relationship with the existing customers and expanding the customer base. Evidence in Croplifeasia (2007) has shown that farmers are successful in implementing IPM practices.
3.2.2. Information Intensity in the Spice Industry
The differences in the role and intensity of information among various industries are illustrated by Information Intensity Matrix (Porter and Millar, 1985). The matrix relates the intensity of information content of the value chain with information content of the product. Figure 3.2.2 shows the porter's Information Intensity Matrix.
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Source: Porter, Michael E and Victor E. Millar, "How information gives you competitive advantage." Harvard Business Review, July-August, 1985, pg. 149 - 160.
Figure 3.2.2: Information Intensity Matrix
The use of information communication technology (ICT) is highly important in this industry (section 2). Vkspice gets the information from the buyers about the product, varieties required and also buyer's passes on the information of logistics and storage of the goods in warehouses. Information sharing in this industry is a continuous process on both ends of the supply chain. Also, the company needs to update the lower level managers and farmers with latest information and knowledge that is received from the buyers. Hence the intensity of information content in the value chain is high in this industry. As the products in this industry are spices, it has low information content. However, due to rapid development in the field of technology the cost of hardware drops. So, Vkspice can distribute the technology among the lower ends of the company.
From the information intensity matrix it can be analysed that, Spice industry has a high use of the information in the value chain, but relatively low content in product dimension. I.T has an important role to play in this industry.
3.2.3. Organisation and Information
Daft and Wieck (1984, see Mutch, p.59, 2008) suggest that 'we can locate organizational ways of knowing, which they term interpretive systems, against two sets of assumptions'. First assumption is about environment being analysable or unanalysable and the second assumption is about organizational intrusiveness being passive or active (Figure 3.2.3).
Organizations and Information
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Figure 3.2.3: Organizations as interpretations systems
The entrepreneurial school states that strategy formation is a mental process of the chief executive who is the architect of the strategy (Mintzberg et al, 1998). Vkspice is an entrepreneurial organisation and the strategy formation was made by the chief executive or the owner of company. As most of the buyers are multinational companies like Avt-McCormick (section 1), they will pass on the information of formulated strategy about the product requirements to Vkspice. Since, Vkspice being an entrepreneurial organisation, there is no formal strategy made. Here, owner of the company makes the decisions by analysing the data received and pass the informal data down to the hierarchy. Low level managers are not allowed to take decisions and they need to contact the chief executive of the company at each part of the operations in order to finalise. Hence, Vkspice falls into the undirected viewing.