Understanding the hierarchy governance choice of some wineries in Brazil - case study of 3 Brazilian wineries

Watanabe, Kassia; Wever, Mark; Sousa, Rúbia Nara Rinaldi Leão de; Koenig, Claudia Cheron

doi:10.5700/rausp1221

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Revista de Administração (São Paulo)

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STRATEGY & BUSINESS ECONOMICS • Rev. Adm. (São Paulo) 51 (1) • Jan-Mar 2016 • https://doi.org/10.5700/rausp1221 copy

Understanding the hierarchy governance choice of some wineries in Brazil - case study of 3 Brazilian wineries

Análise da escolha das estruturas de governança em vinícolas brasileiras - estudos de casos em 3 vinícolas

Análisis de la elección de las estructuras de gobierno en vinícolas brasileñas - estudios de caso en 3 bodegas

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This study aims to contribute towards understanding the multiple factors, which influence firm's governance decisions. To identify some of these factors, three cases in the Brazilian wine industry were analyzed: Miolo located in Vale dos Vinhedos (South of Brazil) and in Vale do Rio São Francisco (Northeast of Brazil); Don Laurindo located in Vale dos Vinhedos; and ViniBrasil located in Vale do Rio São Francisco. For the most part, all three firms procure the grapes they use for their wine production in-house. Only Miolo purchases an insignificant amount of grapes outside of its production. By Brazilian standards, these regions have a long tradition of grape production and it is not difficult to purchase sufficient quantity of grapes to produce wine. However, the wineries are concerned also about the quality of the grapes they use and purchasing high-quality grapes might be critical issue. On the other hand, the quality of grapes is easily measured and the cost to buy in the market is cheaper than producing in-house. Furthermore, also the level of asset specificity present in the grape-grower-wine-producer transaction seems, by itself, insufficient to justify the use of hierarchical governance forms. Then, the aim of the article is to analyze the reasons why these wineries largely rely on hierarchy governance forms to procure their grape-inputs. What explains their use of hierarchy governance, given that both asset specificity and measurement problems appear to be relatively low?

Keywords:
Brazilian wineries; hierarchy governance; transaction costs economics; resource based view; property rights

Unit of analysis	Transaction/ contract	Resources	Individual property rights (Foss & Foss, 2005Foss, K., Foss, N. J. (2005). Resources and transaction costs: How property rights economics furthers the resource-based view. Strategic Management Journal, 553(12), 541-553. doi:10.1002/smj.465. https://doi.org/10.1002/smj.465... )
Focal dimension	Characteristic of transaction	Possession of resources	Ensure the property rights
Risk and uncertainty	TCE emphasizes the downside associated with risk or uncertainty in describing how uncertainty in the presence of specific investment may lead to misappropriation or hold-up problems (Williamson, 1985Williamson, O.E. (1985). The economic institutions of capitalism. Firms, markets, relational contracting. New York: Free Press .).	The expected results due to the uncertainty depend on the judgment of the agents and their learning.	Generates opportunism of parties: moral hazard, adverse selection and free rider problem requires structures to protect the property rights
Focal cost concern	Economizing on transaction costs by reducing maladaptation or hold-up problems, resulting from making specific investments to the extent that the marginal costs of reducing the problem are equal the opportunity costs of continued exposure to the problem.	Maximizing the return on the firm's assets based on acquiring unique assets, which either has upside potential, or which potential can better realized inside the acquiring firm.	Maximizing the marginal return on non-contractible investments. The property rights arise with the internalization of beneficial and harmful effects (externalities), when the gains of internalization become larger than the cost of internalization (Demsetz, 1967Demsetz, H. (1967). Toward a theory of property rights. The American Economic Review, 57, 2.)
Sources of market friction	Degree of asset specificity, uncertainty and performance ambiguity.	Difficult to replicate resources	Information asymmetry
Predicted response to market friction	- Increase in degree of asset specificity increases likelihood of vertical integration. - Increase in uncertainty reduces threshold for vertical integration when asset specificity is present. - Increase in performance measurement ambiguity increases likelihood of vertical integration.	- Vertically integrate to acquire unique resources - To the extent that unique resources are also idiosyncratic, TCE and RBV will predict that firms vertically integrate under the same conditions.	- Increase in asset specificity only increases likelihood of vertical integration if the marginal returns on non-contractible returns are affected – (See Whinston 2003Whinston, M.D. (2003). On the transaction cost determinants of vertical integration. Journal of Law, Economics, and Organization, 19(1), 1-23.).
Motivation for response	Integration increases administrative control (which reduces ability for parties to act opportunistic) and reduces incentives for (strong-forms) opportunism (as hard-powered incentives are replaced by low-powered incentives). (Williamson, 1991aWilliamson, O.E. (1991a). Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quaterly, 36, 269-296.)	Intangible knowledge can be better transferred inside the firm (integration).	Boundaries are related to the decision about physical asset ownership

	Miolo	Don Laurindo	ViniBrasil
TCE	- TCE helps to explain why the company integrated into wine production and purchased from small number of selected outgrowers: it reduced transaction costs resulting from demand uncertainty, temporal and locational asset specificity	- TCE helps to explain why the company vertically integrated into wine production: it reduced transaction costs resulting from demand uncertainty and temporal asset specificity.	- TCE helps to explain why the company is vertically integrated: it reduced transaction costs resulting from uncertainty and locational asset specificity
RBV	- RBV helps to explain why the company was able to vertically integrate: the company has longer experience producing grapes and wine with tacit knowledge acquired.	- RBV helps to explain why the company was able to vertically integrate: it already possessed the required competences to make fine wines. - RBV furthermore helps to explain why the company remained integrated: the tacit knowledge the company has about grape production is difficult to communicate to external growers.	- RBV helps to explain why the company was able to vertically integrate: it invested in innovation, breeding of grapes that are specific to a region with particular climate.
PR	- PR helps to explain why the company prefers to vertically integration: the control of residual rights of the grape and wine production. Moreover, because the difficult to trade the residual control, informal contracts with outgrowers prevail.	- PR offers another perspective on why the company remains integrated: the control rights of the grape-production process are difficult to specify in a contract since the production requirements frequently change.	- PR helps to explain why the company decided to vertically integrate: to ensure that all investment in innovation, grapes seeds adapted to the region.

Departamento de Administração da Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo Avenida Professor Luciano Gualberto, 908, sala F184, 05508-900 São Paulo / SP Brasil, Tel./Fax 55 11 3818-4002 - São Paulo - SP - Brazil
E-mail: rausp@usp.br

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[1] Kassia Watanabe, Professora da Universidade Federal do Recôncavo da Bahia (CEP 44380-000 – Cruz das Almas/BA, Brasil). E- mail:wtkassia@hotmail.com;wtkassia@ufrb.edu.br. Endereço: Universidade Federal do Recôncavo da Bahia, Avenida Rui Barbosa, 710, 44380-000 – Cruz das Almas – Bahia