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7. Organisational Culture and Investment Decision Making

The study’s theoretical framework argues that capital investments are cultural phenomena, which both reinforce and change the fundamental structures of organisational behaviour.

In Government-oriented Co-operatives

From a theoretical perspective, a Government-oriented co-operative would be expected to display a more conservative and bureaucratically motivated rather than market-oriented investment behaviour, and indeed, the fairly well managed, government-oriented coffee society, Coffee B, invested mainly in processing facilities. The society had not made any major new investments recently and management sees no need to build new factories, which suggests that there is a lack of new investment targets in this society. Even the old investments had not been carefully planned.

In Supplier-Oriented Co-operatives

Supplier-oriented co-operatives, in contrast, would be expected to emphasise more supplier wealth objectives in their investment decision making. The fairly well-managed, supplier- and government-oriented dairy society, Dairy B had had a new mini dairy under construction for the past ten years, but major work had begun only recently. Once the plant is completed, the society hopes it can move towards a more successful era, if the plant can deliver the intended benefits and attract disaffected member producers to return. The main part of Dairy B’s investment cost is unfortunately financed by the common method of deductions from member payments, which has reduced net payments of producers. Consequently, member loyalty has decreased, which in turn, may endanger the whole mini dairy project. The ultimate question is whether enough members remain to deliver milk to the new dairy plant.

The situation is more mixed in the well-managed, supplier-oriented coffee society, Coffee A where bureaucratic wealth accumulation objectives are combined with attention to member supplier needs. There, the relocation of factories and electrification are ongoing projects and members perceive them as good investment targets. Members are satisfied, because the investments promise to benefit their daily activities. The co-operative bureaucracy involved in the capital investments was criticised, although the careful government evaluation of these investments was respected. Most of the investments were financed by member capital, although long-term loans were applied as well. On the other hand, opinions differ on the Nairobi building investments, which have since been restructured under a separate closed society and only some of the coffee society members are now involved in this investment. Some members regarded the buildings in Nairobi as good investments, but the majority thought that productive investments in factories were more important and would produce more direct benefits to them.

There was a suggestion to plant coffee trees in the idle lands of the society in order to increase member benefits. Some argued that the establishment of “a society-owned farm” would benefit members in many respects. It would bring more income, members could be educated to take care of coffee, and new ways of farming could be tested. This would create new income generating opportunities for the society.

Recent capital investments of the well managed, supplier (shareholder)-oriented dairy society, Dairy A and its union have concentrated on the construction of a new dairy at the union level. The cost of this dairy has been financed by a bank loan, which will be paid back once the dairy begins to generate income for the union. Milk storage facilities have been expanded recently to improve member loyalty, which is crucial for the success of this dairy plant investment. The present quality of milk products and the production chain from a raw material to an end product is not very good. Therefore, it may be difficult for this dairy to compete and increase its market share. According to the union management, its building investments generate good benefits currently. On the other hand, the AI investments have not been successful, because the Union has not been able to maintain the expected quality level of this member service.

The main investment target of the supplier/shareholder-oriented dairy cooperative in transition, Dairy C, was already in the 1980s to build a dairy. The investment was carefully planned and alternative investment targets were examined. This investment was largely due to member dissatisfaction in working through the KCC, but also in response to market liberalisation. Trust between the members and management is important in this investment. The plant was originally financed by a bank loan and members will become owners as they repay the loan. The society decided to organise the dairy plant as a limited liability company instead of the cooperative alternative, because it wanted to retain a full autonomy of decision making without interference by the Ministry. This society has an active development approach and various capital investment alternatives are continuously presented.7

7 This reason for transition is different from the typically presented motives (equity access, liquidity and corporate acquisition) for cooperative conversions to corporations (see Collins, 1991).
In Private Shareholder Estates

Neither of the two private shareholder-oriented coffee estates in the study had made any major investments recently due to financing problems. They were, however, replanting of coffee trees and had plans to improve the quality of the coffee in the future. On the other hand, the private dairy estate visited had made a major investment in a new dairy plant, where product quality as well as customer needs were being emphasised.

Comparison between Coffee and Dairy Investments

Some issues can be raised from a comparison of the coffee and dairy processing organisations. The dairy societies need to add value by further processing of milk products, and they are forced to make capital investments for this purpose. All the examined dairy organisations had completed or were in the process of making such investments. Quality and financing are deciding factors between success and failure. Quality is important for customers, who buy dairy products for their children. Producers should, therefore, meet the basic hygiene requirements to satisfy customer needs. As was expected, emphasis on product quality was highest in the private dairy company studied, followed by the dairy co-operative in transition, Dairy C. One can, therefore, conclude that a supplier-oriented culture does not offer an adequate approach in dairy production to cope with competition in liberalised markets and that a more customer-oriented approach aimed at satisfying consumer product quality concerns is also needed.

Dairy investments can be financed by voluntary member capital contributions, by direct member capital contributions deducted from milk payments or by bank loans, which are repaid by deductions from members’ milk payments. One disadvantage of direct member capital contributions collected via the payment deduction method is that it can lead to a significant reduction in the net payments to the producers, which has a negative affect on member loyalty. Therefore, dairy cooperatives often prefer to secure a bank loan to finance such new investments. The advantage of bank financing is that repayments may be postponed until the investment starts producing income, but the dairy investment could be immediately started. Bank financing will also put pressure on the management to generate adequate member benefits from the capital investment, because the loan must be repaid back to the bank.

Since coffee markets are just now entering into a liberalisation phase and Government continues to play an important role in the marketing process through the Coffee Marketing Board, coffee co-operative investment behaviour still displays a bureaucratic and conservative orientation. No major capital investments had been made in the coffee co-operatives studied. Due to a lack of alternative and potentially profitable investment targets, all the societies studied had made real estate investments. There is some evidence that such speculative investments in real estate, that had nothing to do with the core business of the co-operative, may have economically benefited some sub-groups within the co-operatives. However, they do not appear to have benefited the bulk of the members and were not in line with the true philosophy of farm producers’ co-operatives. These types of investments could have been better handled through a private limited company. There would be nothing wrong in founding another organisation for these investments, where the investors acted in their capacity as shareholders. This is possibly why coffee co-operative A chose this mechanism as a way to divest from such activities.

Improving the quality of coffee was an important investment objective for the private estates studied and they had planted new coffee trees to improve both quality and quantity. As a result, the average yield in a typical private coffee estate was double that of a co-operative smallholder. Somewhat in contrast, the examined coffee co-operatives stressed improving productivity as their best strategy for coping with market liberalisation. Improving the quality and quantity of members’ production was also regarded as an issue, but it was not seen as being the most important one. Thus, their main focus was on improving the processing and transport of coffee from the farm gate to the miller.

One common weakness, which seemed to limit the quality of co-operative investment decision making in both sectors, was the lack of reliable and timely data on co-operative business performance accessible to management and members alike. This was at least partly due to the low level of automation of management information processing within the sampled co-operatives, which all continued to rely on a manual system of accounting.

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