Chain Failure Theory as a Framework for Evaluating Horizontal and Vertical Strategic Alliances among Food Value Chain Participants: A Red Meat Industry Perspective

Abstract

Useful insights about the operations of value chains can be gained by considering them as "latent clubs", that is, systems having the potential for improvement through collective action. Club theory therefore can be applied to examine ways to increase the economic surplus of a food value chain by participants taking collective action within a club good framework. The results of such action are called "chain goods". If these types of goods are not supplied along the value chain, value chain partners cannot maximise whole-of-chain profit. The result is "chain failure"; a concept analogous to the market failure of public goods in the wider economy. If an opportunity exists for partners in a value chain to collectively provide such goods, forming a club may be an efficient way do so. Horizontal and vertical strategic alliances are formed among firms, or groups of firms, in the value chain at the same level and/or across different levels. These alliances within a value chain are formed to correct some particular chain failure(s), such as supplying chain goods or internalising chain externalities. Strategic alliances may comprise all or only some chain members. Thus, they are clubs. The theoretical concepts of chain failure, chain goods and chain externalities can be used as a framework for evaluating whether to invest or not in a strategic alliance. The fact that there are existing alliances which appear to be organised in this way suggests that these concepts have practical as well as theoretical merit.