The boundaries of the firm: why do sugar producers outsource sugarcane production?

Industrial firms world wide have shed non-core business and outsourced these activities. An increasing number of sugar producers in Southern Africa have also outsourced their sugarcane production activities for both strategic and equity reasons. The purpose of the study is to use a transaction cost analysis (TCA) approach to assist the firm, as an outsourcer, make and structure an outsourcing decision. A Case Study methodology, which includes data from two major Southern African sugar producers, is employed to test the research questions. The results indicate that sugarcane production should not be outsourced on a partial specification contract basis but rather co-ordinated by a more relational structure like a strategic alliance. The results also suggest that the suitability of a strategy-based structure can sometimes be contradicted by a transaction cost analysis approach. Finally, the results indicate a conflicting South African agribusiness scenario, namely, the need to expand small-farm supply versus the economic goal of profit maximisation.