What Do You Need to Make Strategic Choices?

What Do You Need to Make Strategic Choices?
Strategic Business Planning for Commercial Producers Identifying Strategies What Do You Need to Make Strategic Choices? There's a fundamental distinction between strategy and operational effectiveness. Strategy is about making choices, trade-offs; it's about deliberately choosing to be different. Operational effectiveness is about things that you really shouldn't have to make choices on; it's about what's good for everybody and about what every business should be doing. This presentation will outline some of the choices that need to be made and give you tools to do so. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers
Identifying Strategies Objectives Present key decisions and their basic options Provide tools for selecting a strategy in your business There are going to be different options available to you as you design and implement your strategy. Strategic choice has to consider options about resources, capabilities, and competencies as well as those for markets and products. It may well be, therefore, that the strategic assessment has identified strengths and weaknesses in existing resources and capabilities in comparison with competitors. This may lead to identifying the improvements needed either to shore up weakness or to build on existing strengths. It is also likely that potential market/product options will require supporting changes in resources and capabilities. © Purdue University, Center for Food and Agricultural Business, 2002

Key Strategic Decisions
Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions Business Enterprise Focus Strategic Direction Marketing and Channel Linkages Financial Organizational Structure Social Responsibility Managerial Style/Lifestyle The process of choice starts by identifying available options. The chosen strategy will have to answer the questions ‘what’, ‘how’, ‘why’, ‘who’, and ‘when’, so each option will provide provisional answers to each of these questions. The successful farm business requires key strategic decisions in seven areas. The types of decisions that must be made in each of these areas are summarized here. We will briefly discuss and illustrate these seven areas of strategic decision making. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions Business Enterprise Focus Product Product/process technology The most obvious type of option relates to which products or services to offer in which markets. It has been suggested that the most fundamental choices facing any business are the scope of the markets that it attempts to serve and how it attempts to compete in these chosen markets. The scope can either be broad—tackling the whole market—or narrow—tackling only a particular part of the market. The broad strategy often focuses on producing a product, often a commodity, at the least cost. The narrow focus usually produces a differentiated product. (more on next slide). We discuss a broad or narrow focus in more depth in the presentation “What Tools are Available to Generate Strategies.” A second decision is that of the production techniques and process technology. For instance, will hogs be produced in in-line farrow/finish technology or three-site production separating the breeding/gestation from the nursery from the finishing? Will reduced tillage techniques be used in crop production? What about precision farming and GPS technology? © Purdue University, Center for Food and Agricultural Business, 2002

Alternative Strategic Focus Strategies
Strategic Business Planning for Commercial Producers Identifying Strategies Alternative Strategic Focus Strategies Commodity Strategy Differentiated Strategy Production Emphasis End-User Focus Manufacturing Mentality Distribution/Marketing Mentality Low Cost Producer Value/Added Production Large Scale Operation Smaller Scale Operation Outsource Resources Own Resources Open/Impersonal Markets Negotiated Markets Downside Price Risk Relationship Risk Independent Decision-Making Interdependent Decision Making At the heart of the enterprise choice there are essentially two options. To produce something at a low cost, or to produce something which can command a higher price. Commodity versus differentiated. A cost focused commodity strategy is centered on providing a product at a lower cost than rivals. A differentiated strategy centers on the ability to supply something special or unique that makes the product distinctive. These are fundamentally different. The choice depends on the resources and capabilities the firm already has to a degree. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions Direction Growth Delay Retrenchment Examples of growth: Specialize - Concentrate on the production of feeder pigs rather than operating a farrow-to-finish swine enterprise. Intensify - Find a farmer that you can share some machinery with or agree on the purchase of particular input items. Expand - Doing things efficiently, so do more of the same. Diversify - Add new enterprises. This might be in totally different areas such as vegetables on a cash grain farm or specialized corn or soybean crops to a farm producing only bulk commodities. It could also include enterprises that add value to the existing production such as the on-farm processing of oil seeds. Replicate - Start another farm operation at a different site. Geographic diversification. Integrate - Make purchases of assets that move the business up or down the food chain. The development of seed, fertilizer, or chemical dealerships would be an example. The development of a new generation coop that processes items produced would be another. Network - Work with other farmers in the purchase of inputs or the sale of commodities. This provides a way that several small producers can appear to be a large producer. But when growth is not an option, then you may need to delay until other options are available. Retrenchment – downsizing the operation. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions Marketing and Channel Linkages Marketing Your Firm Merchandising and Selling Products/Services Sourcing and Purchasing Resources Marketing It is difficult to off-set high purchase costs with increased efficiency, so acquiring inputs is an important area. As the food system becomes more coordinated, it may be advantageous to develop closer linkages with an input supplier. It may also be desirable to develop a purchasing or marketing alliance with other farmers. This might result in not only better prices but also better service. Merchandising products takes a pro-active approach to the sale of products. Rather than just delivering grain to the local elevator when it fits your schedule, you might seek out special market opportunities such as delivery at unusual times or delivering No. 1 yellow corn rather than No. 2. Seeking out such opportunities can provide a price premium. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions IV. Financial Business/Legal Choices Financing/Leasing Options Equity Sources Financial The financial structure refers to the way the business is legally organized and financed. The choice of the proper financial and organizational structure for the farm business may have as much to do with its ability to withstand risk as the choice of business enterprise focus and marketing and channel linkages. Many producers inherit their business structure from the past. Is this still the most appropriate form of business organization? While creating a new business organization can often be done with minimal tax consequences, this is not usually the case when dissolving a business. Farm business organizations can include a sole proprietorship, a partnership, a corporation, a limited-liability company, or combinations of these. Assets used in the business can be controlled through ownership or by leasing. There may also be opportunities to have outside investors provide equity capital, especially when thinking about land investments. There is more than one Indiana farmer that is farming land for a friend that wanted to have land as part of an investment portfolio. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions V. Organizational Structure Determining the Chain of Command Assigning Responsibility Giving Authority to Those with Responsibility The organizational structure refers to the working relationships within the organization. Structure distinguishes the what tasks people should do and how people should work together. The basis for successful strategy implementation rests on designing an effective organization. People working within an organization must be able to understand how their actions interrelate with the actions of others to support the strategy. A structure might imply tight rules, but the concept is more about developing a structure that fits the strategy. If your business can do that then can create and sustain a competitive advantage. If a general manager wants to know why it takes a long time for the business to make a decision or why business units are not cooperating then he or she needs to look at the organizational structure. Don Villwock, a popcorn farmer and president of the Indiana Farm Bureau, has a strategy that allows him to be off the farm 140 days a year. He does this by being a sort of hub to which all of the functions of the business report, but essentially run on their own. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions Social Responsibility Communicating Your Good stewardship Practices Being Involved in the Community Understanding the Needs and Concerns of Your Neighbors Social Responsibility The public is becoming increasingly more wary of the science upon which the food system is based. Producers need to be sensitive to these concerns and continually indicate what is being done to respond to these concerns. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Key Strategic Decisions VII. Managerial Style/Lifestyle Time/Labor Contribution Living Expenditures Risk/Stress Level and Attitudes Learning New Skills Organization Culture Leadership Managerial What do the people want from the business? What will be the balance between work time and personal time? Is it important that most of the production tasks be done by you or a family member? How much money must the business generate to support the family (s)? What are the attitudes about risk and how will these risks be managed? What is the plan for improving management skills or developing new skills? © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Strategic Direction Growth, Delay, or Retrenchment Let’s look more closely at the second decision, choosing the strategic direction. © Purdue University, Center for Food and Agricultural Business, 2002

Focus on Strategic Direction
Strategic Business Planning for Commercial Producers Identifying Strategies Focus on Strategic Direction Common Direction Questions Should we grow? Which business units should we grow? How do we grow the business unit? What activities, if any, should we give up to grow? We’ll begin to answer these four key questions with a set of analysis aids – i.e. matrices. But first we’ll look closer at what options we have to set the direction. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Direction Options
Strategic Business Planning for Commercial Producers Identifying Strategies Strategic Direction Options Strategic Direction Delay Pause Decision Trigger No Change Profit Growth Concentration Diversification Vertical Horizontal Related Unrelated Retrenchment Turn around Exit Captive Company Here is an overall picture of the three basic options (growth, delay (or stability) and retrenchment), and their resulting sup-options. We’ll look at each in turn. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Strategic Direction Options Growth Concentration Diversification Vertical Horizontal Related Unrelated Integrate Network Cooperatives Value-Added Investments Intensify Expand Replicate Network Diversify into Related Agricultural Production Enterprises Capture Synergies Non-Ag Industries Ignore synergy For cash flows Or Risk reduction Growth strategies are popular because most managers equate growth with success. Growth by concentration is to focus resources in one business unit (or industry) and emphasizes a single product. Think of McDonalds (fast food) or Caterpillar (construction equipment). Two strategies are available with in concentrated growth. Vertical integration is when the firm begins to enter the businesses that supply or distribute its products. Horizontal integration is an expanded presence in a current industry. The other growth option, diversification, occurs when different products are added to the business. These can be either related – some common thread with other products currently produced. Or unrelated – into completely unrelated products. Some examples include the following: Specialize - Concentrate on the production of feeder pigs rather than operating a farrow-to-finish swine enterprise. Intensify - Find a farmer that you can share some machinery with or agree on the purchase of particular input items. Expand - Doing things efficiently, so do more of the same. Diversify - Add new enterprises. This might be in totally different areas such as vegetables on a cash grain farm or specialized corn or soybean crops to a farm producing only bulk commodities. It could also include enterprises that add value to the existing production such as the on-farm processing of oil seeds. Integrate - Make purchases of assets that move the business up or down the food chain. The development of seed, fertilizer, or chemical dealerships would be an example. The development of a new generation coop that processes items produced would be another. Network - Work with other farmers in the purchase of inputs or the sale of commodities. This provides a way that several small producers can appear to be a large producer. Replicate - Start another farm operation at a different site. Geographic diversification. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Strategic Direction Options Delay Pause Decision Trigger No Change Profit Delaying strategies are also known as stability strategies since no significant change occurs. Often the industry is moderately attractive. Little change is expected. There is little incentive to invest in capital purchases. The same mission and similar objectives are followed but with higher achievement goals every year. The goal is to improve performance. A pause strategy reduces the level of objectives since it often occurs after a fast growth from which a chance to consolidate is needed. A no-change strategy continues on the same course, just adjusted for inflation. A profit strategy sacrifices future growth for present profits. Maintenance and research are cut. The point here is that choosing not to do anything is still a choice. This strategy can be very dangerous if pursued for any long period of time because of the onset of complacency. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Strategic Direction Options Contraction Consolidation Outsourcing Sole Supplier Preferred Provider Contract Grower Sellout Divest Bankruptcy Liquidation Retrenchment Turn around Exit Captive Company Retrenchment strategies are often unpopular since they imply failure – that something has gone wrong. There is a great deal of pressure to improve performance with retrenchment strategies. A turnaround strategy emphasizes improved operational efficiency. This often happens in an attractive industry and the company’s problems are pervasive, but not critical. The first phase is contraction (initial effort to cut costs and size) which progresses to consolidation (development of a stabilizing plan) and then into rebuilding at which point the business could be expanded again, or sold. A captive company strategy is similar to divestment, but instead of selling, the activities are a close relationship is formed with one buyer. For instance, at least 75% of the output is contracted to one buyer. Marketing costs are cut and long run plans can be made. This is a strategy followed by many hog producers that produce on production contracts for vertically integrated meat packers. An exit, or liquidation, strategy is a last resort. It should be considered for a unit with a weak competitive position in an unattractive industry. Top management often does not realize a crisis is developing since it attributes difficulty to temporary environmental problems. They adopt a “weathering the storm” attitude, attempt to conceal the problems, and even hope for a miracle. However, there are strategic choices to be made to exit the industry which include selling the farm in pieces or as a whole or filing bankruptcy. In certain situations any of these options might be most appropriate. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Which Units to Grow? Business Unit Growth Matrix Based on EFAS and IFAS 4 Quadrants Cash Cows – Low EFAS, High IFAS Normally Delay Strategy Stars – High EFAS, High IFAS Normally Growth Strategy Question Marks – High EFAS, Low IFAS Growth or Delay Strategy Dogs – Low EFAS, Low IFAS Retrenchment Strategy The business unit growth matrix is an aid in integrating and evaluating environmental performance. To use it we map a company’s strategic business units or products on a matrix according to how well the company does the task versus its relative importance to the market. Using the IFAS (Internal Factor Analysis Summary) to measure the internal position gives us a rating of that general position. A high number on the IFAS (above 3) means the business is performing strongly. For the external rating we look to the results of the EFAS table. Again a rating above 3 means the organization is positioned well to take advantage of opportunities or counter threats in the surrounding environment. EFAS and IFAS tables are discussed in more depth in the Internal and External Environment modules. Mapping the EFAS and IFAS rating into a quadrant gives us four combinations. These combinations can then suggest to us what some characteristics of our products might be, and thus what strategies to undertake with them. © Purdue University, Center for Food and Agricultural Business, 2002

Business Unit Growth Matrix
Strategic Business Planning for Commercial Producers Identifying Strategies Business Unit Growth Matrix IFAS High Low EFAS Star ? Cash Cow Dog Resources are allocated to business units according to where they are situated on the grid as follows: Cash Cow - a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units. With a cash cow we would want to delay actions that would change its position. Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures. Usually a growth strategy would be associated with a star. Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown. Dog - a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share. New products are often question marks. If one of these products is to generate enough cash to become important to the business or industry, and thus a star, money must be taken from a more mature cash cow product and spent on the question mark. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies How Do We Grow? Growth Options Matrix Based on Customers and Products 4 Quadrants Market Penetration More of Same Product to Same Customers Horizontal Growth Market Development Same Product to New Customers Horizontal and/or Vertical Growth Product Development New Product to Same Customers Vertical or Horizontal Growth Total Diversification New Product to New Customers Related or Unrelated Diversification Penetration: Why? To dominate market How? To increase usage or get new customers; reduce price; expand distribution or increase promotional activities When? When market is growing Market Development: Why? To venture into new markets How? Sell existing products in new markets; modify product; use different distribution; use different advertising/sales strategy When ? Present market is saturated Product Development: Why ?To satisfy buyer’s need How ?New or improved product; innovate or augment product When ?Customer has a need or a problem Diversification: Why? Growth opportunities outside current business How? New products for new markets When? Distinctive competencies available © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Growth Options Matrix Old New Market Penetration Product Development Market Total Diversification Product/Service Customer Focus The next step is to assess how business development will occur. We do this by plotting the product to be sold versus the type of customer focus (Growth Options Matrix). Products are either ones currently produced by the firm (old) or ones that business has never produced before (new). Customers are either current customers (old) or ones the business has not reached before (new). Old products sold to old customers usually succeed with a market penetration approach. New products to old customers often respond to a product development strategy. Old products to new customers are market development. New products to new customers are a differentiation strategy. Market penetration: Increase market share among existing customers Market development: Attract new customers to existing products Product Development: Create new products for present markets Diversification: Introduce new products into new markets © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies What Do We Give Up? Outsourcing Matrix Based on Core Competencies and Competitive Advantage Source of Competitive Advantage? No = a Basic Activity Possibly = an Emerging Activity Absolutely = a Key Activity Competency? Weak Strong To examine the activities that are candidates for eliminating, or having someone else do, the “Outsourcing Matrix” can be used. The outsourcing matrix suggests, in a graphical form, how activities required by the business should be treated depending on value of the activity and ability of the firm to do the activity. The in-house vs. outsource trade-off is a decision that should be reviewed periodically. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Outsourcing Matrix Source of Competitive Advantage Capability and Cost (relative to others) Yes (Key Activities) Possibly (Emerging Activities) No (Basic Activities) Get Capability Collaborate Exit / Buy Keep in-house Partner Consider Selling Weak Strong The Outsourcing matrix presented here is an adaptation on material developed by Richard Insinga and Michael Werle, “Linking Outsourcing and Strategy.” 14(4): The Academy of Management Executive. The first decision a manager should make is whether there is potential for the activity to yield a competitive advantage for your company. Questions to help you answer this query are: How many firms do this activity in your area; how strong are these firms; how crucial or key is this activity to your business; Once you have decided if there is potential for the activity, then you need to rate your business’s internal capability to perform the activity relative to your competition, on a scale from weak to strong. We can plot these on two axes. On the vertical axis is degree the activity will be, or is, a source of competitive advantage. There are three degrees: first, the activity provides no competitive advantage and is called a Basic Activity; second, it might provide an advantage and so is called an Emerging Activity; and third, it is required to be competitive and so is called a Key Activity. Basic activities are not sources of competitive advantage (is a standard and common activity commonly available); emerging activities might provide an advantage (they may provide some value, and is not commonly known); a key activity is clearly an advantage for the business (rare skills/abilities that provide a distinct competitive advantage). On the horizontal axis is the ability of the firm to perform the activity well relative to competitors, either weak or strong. As an example, it could be argued that driving a tractor is a basic activity that provides no competitive advantage. Tractor drivers do not possess any particularly unique skills that are not readily available. A farm manager should consider hiring someone else to do it in his place, or contract someone to do it so that it does not have to occupy the time spent on higher value. Adapted From Richard Insinga and Michael Werle, “Linking Outsourcing and Strategy.” © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies The Value Plate Firm Infrastructure Human Resource Management Technological Development Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Supporting Activities Primary Relationship with suppliers Relationship with buyers The Value Plate (or value chain) can help you think of the specific activities your business performs that could be candidates for outsourcing. The value plate is discussed in depth in the resource “Strategic Positioning for Farms: Options and Analysis Tools” and the lecture “What Tools are Available to Generate Strategies.” © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Summary Doing things right versus doing the right things. Choosing what to do and what not to do. Answering the what, how, who, why, and when of strategy. Strategic choice refers to the process of selecting one option for implementation. We’ve shown you some of the key choices that you will have to make in the strategy you select. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Strategic Business Planning for Commercial Producers © Purdue University, Center for Food and Agricultural Business, 2002

What Do You Need to Make Strategic Choices?

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