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Positioning the Farm for Long- term Viability Michael Boehlje Center for Commercial Agriculture Purdue University.

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Presentation on theme: "Positioning the Farm for Long- term Viability Michael Boehlje Center for Commercial Agriculture Purdue University."— Presentation transcript:

1 Positioning the Farm for Long- term Viability Michael Boehlje Center for Commercial Agriculture Purdue University

2 What Is Strategy? How a business creates value for its customers The key questions ◦ Who? – customer focus ◦ What? – products/services ◦ How? – processes/procedures to deliver Doing the right thing (doing things right is operations)

3 Strategic thinking is all about change: ◦ Anticipating the future ◦ Shaping the future ◦ Capitalizing on the future What is Strategic Thinking?

4 What is strategy? Strategy is …. ◦ Looking longer term ◦ Capitalizing on change ◦ A stream of decisions ◦ Focused on a purpose ◦ Managing strategic risks ◦ Creating a unique and valuable position ◦ Choosing what not to do

5 Successful Strategy Long-term, simple and agreed objectives Profound understanding of the competitive environment Objective appraisal of resources Common Elements in Successful Strategy EFFECTIVE IMPLEMENTATION

6 Monitoring and Measuring Performance Implementation The Strategy Decision Framework Goal/Mission/Vision Assess the Firm’s Capacity Assess the Business Climate Venture Choices The Strategic Initiatives

7 VISION/MISSION

8 Developing a Business/Mission What business are we currently in? Who are our customers, and what are they buying from us? How does our business go about satisfying our customers’ needs? What skills and capabilities is our business especially good at?

9 Components of a Vision Statement Core ideology ◦ Core Values - timeless guiding principles ◦ Core Purpose - reason for being Envisioned future ◦ Big Hairy Audacious Goals (BHAG) - clearly articulated goals ◦ Vivid description - a graphic description of what success and the future will be like Recognition of service to stakeholders ◦ Owners/creditors ◦ Employees ◦ Customers

10 The Business Climate

11 1. The Economic Recovery

12 Status of the Economic Recovery Tax Policy maintain lower rates, increase depreciation deduction Auto sales Fed policy (QE 2) and interest rates Business investment/lending (the last stage) 11 22 33 44 55 66 77 Year end retail sales Consumer confidence O to Impact Employment/Unemployment

13 Status of the Economic Recovery China policy (interest rate and reserve increases, price controls) Municipal/state debt Commercial real estate Government spending/Deficit/Budget Dilemma 88 99 10 11 12 13 O to Housing prices/sales European sovereign debt Oil Prices 14 International crisis (Middle East/Japan) 15

14 2. Global Food and Biofuels Demand Economic Growth Population Growth Dietary Transition Energy

15 Global Economic Growth IMF July World Output Projections o 2007 5.2% o 2008 3.0% o 2009 - 0.6% o 2010 4.6% o 2011 4.3% IMF -2nd half of 2010 slower due to financial turbulence in Europe (Greece, Spain, …)

16 2011 Real Economic Growth Rates %: IMF

17 Animal Protein as a Share of Total Protein

18 % of U.S. Corn Used for Ethanol

19 Price Costs Yields/productivity/efficiency Changing rules/regulations/relationships 3. More Volatility in Agriculture

20 U.S. Net Farm Income and Government Payments 10 Year Average = $67.7B

21 Margin Risk is Also Substantial

22 Resurgency of Risk Higher cash costs – fertilizer, seed, chemicals Higher land rents/values Higher feed costs Margin compression/risk Fewer risk management options Less effective government safety net More counter party risk Increased working capital needs Financial reserves critical

23 EPA/environmental Land use Energy policy Food safety Antitrust/GIPSA Immigration 4. Increased Regulations for the Sector

24 Higher interest rates Higher leverage for growing businesses Availability/access 5. Higher Capital Costs for Farming Businesses

25 Interest Rates on Real Estate Loans – Chicago Federal Reserve Bank Department of Agricultural Economics Purdue University

26 Forward 3-mo LIBOR Rates as of 4/15/2011

27 Global production Land access Labor/management access Contracts/preferred supplier arrangements 6. Increased Competitive Pressures

28

29 7. More Opportunities

30 Business Reinvestment  Upgrade/modernize  Distressed assets  Farmland  Deleverage Business Venture Choices

31 1. Strategic Fit  Your passion – focus  An experiment – flexibility 2. Expected annual earnings  Current income  Growth in earnings  Synergies  Tax consequences How Do You Choose?

32 3. Risk  Earnings  Value 4. Capitalization  Credit/Leverage Required  Working Capital Funding  Equity Dilution How Do You Choose?

33 5. Entry/Exit  Entry/purchase premium  Liquidity/flexibility  Ease of exit  Succession/business continuity 6. Value Creation  Gain/loss potential  Inflation hedge  Option value  Terminal/residual value How Do You Choose?

34 7. Management  Your capacity/competencies  Complexity  Control 8. Portfolio  Diversification – related or unrelated  Concentration – horizontal or vertical  Options How Do You Choose?

35 Assessing the Capacity (strengths and weaknesses)

36 Resources Inputs into a firm’s production process such as capital equipment, skill of individual employees, patents, finance, and talented managers. ◦ Tangible Resources – Assets that can be seen and quantified ◦ Intangible Resources – Family commitment, networks, organizational culture, reputation, intellectual property rights, trademarks, copyrights By themselves resources do not create a strategic advantage for the firm.

37 Core Competencies Resources and capabilities that serve as a source of competitive advantage for a firm over its rival. Not all resources and capabilities are core competencies. Many suggest that firms should identify and concentrate on only 3 or 4 core competencies.

38 Core Competencies Identifying sustainable competitive advantages is the key Core competencies are normally the root of that sustainable competitive advantage Four requirements: ◦ Rare ◦ Durable ◦ Nonsubstitutable ◦ Costly to Imitate

39 STRATEGIC POSITIONING FOR SUSTAINABLE COMPETITIVE ADVANTAGE

40 Strategic Position Successful businesses will answer a fundamental question: Where will my firm focus its resources and its passion?

41 Strategic Position Is the way a firm goes to market. Is the fundamental way the firm creates value for the customer. Is the passion of the organization. Drives the organization’s resource investment decisions. Is built around the firm’s core competencies, the firm’s primary skills and sources of competitive advantage.

42 Example of Possible Positions in an Agricultural Production Firm ◦ Low-cost, bulk commodity producer ◦ Customer-oriented specialty products producer ◦ Full-service, consumer-focused custom farming operation ◦ Efficient, partnership-focused contract animal feeder ◦ Technology-focused, cutting-edge animal breeder Positioning Options

43 Alternative Strategic Directions

44 Commodity Product Strategy Production Emphasis – the focus is primarily on production activities rather than marketing or finance Manufacturing Mentality – the science and systematic process of producing food products rather than the art of raising commodities is emphasized Low Cost Producer – cost control is critical to being competitive in a commodity business Large Scale Operation – larger scale operations generally have cost advantages over smaller scale units Outsource Resources – land is rented; machinery is leased or custom hired Open/Impersonal Markets – markets are open to all who meet gross commodity product standards at publicly known prices Downside Price Risk – excess worldwide production can result in significant downward price movements Independent Decision-Making - the traditional independent farmer provides most of the managerial and other resources and makes most of the decisions

45 Differentiated Product Strategy End-user Focus – the focus is on a final consumer or food processors needs rather than commodities Distribution/Marketing Mentality – marketing and distribution decisions and expectations of consumers are as (or more) important than production considerations Value-Added Production – the additional revenue to be gained by further processing and distribution is emphasized Smaller Scale Operation – a focus on a segmented consumer market and niche markets allows and encourages small scale, more nimble and flexible producers Insource (own) Resources – more land and other resources are owned because the scale of operation is not beyond the financial resource base of the smaller producer Negotiated Markets – responding to consumer needs and producing products with specific attributes requires more direct communication throughout the chain Relationship Risk - contracts can be terminated and alliances severed unexpectedly Interdependent Decision-Making – the negotiated linkages with suppliers and processors reduces independence and forces joint, interdependent decision- making

46 IMPLEMENTING STRATEGY

47 Key Implementation Decisions  Business Enterprise Focus ◦ Product ◦ Production/process technology  Growth/Downsizing ◦ Focus/specialize ◦ Intensify/modernize ◦ Expand ◦ Diversify ◦ Replicate ◦ Integrate ◦ Network ◦ Delay/wait and see ◦ Downsize

48 Key Strategic Decisions  Marketing and Channel Linkages ◦ Sourcing and purchasing resources ◦ Merchandising and selling products/services  Financial/Organizational Structure  Business/legal choices  Leasing options  Equity sources  Debt decisions/instruments

49 Key Strategic Decisions  Social Responsibility  Managerial Style/Lifestyle ◦ Learning new skills ◦ Time/labor contribution ◦ Risk/stress level and attitudes ◦ Living expenditures

50 Expansion Focus Intensify Expand Diversify Replicate Integrate Network Phase I Phase II Figure 1. Strategic Growth Options

51 ASSESSING STRATEGIC RISK/UNCERTAINTY

52 Categories of RiskIllustrative Sources of Risk Financing and Financial StructureDebt servicing capacity, leverage, debt structure, non- equity financing, liquidity, solvency, profitability Market Prices and Terms of TradeProduct price volatility, input price volatility, cost structure, contract terms, market outlets and access Business Partners and PartnershipsInterdependency, confidentiality, cultural conflict, contractual risks Competitors and CompetitionMarket share, pricing wars, industrial espionage, antitrust allegations Customers and Customer Relationships Product liability, credit risk, poor market timing, inadequate customer support Distribution Systems and ChannelsTransportation, service availability, cost, dependence on distributors People and Human ResourcesEmployees, independent contractors, training, staffing adequacy The Universe of Risk Source: Adapted from Tech, Edward, “Microsoft’s Universe of Risk” CFO, pp. 69-71, March 1997

53 Categories of RiskIllustrative Sources of Risk Regulatory and LegislativeExport licensing, jurisdiction, reporting and compliance, environmental PoliticalCivil unrest, war, terrorism, enforcement of intellectual property rights, change in leadership revised economics policies Reputation and ImageCorporate image, brands, reputations of key employees Strategic Position and FlexibilityMergers and acquisitions, joint ventures and alliances, resource allocation and planning, organizational agility TechnologicalComplexity, obsolescence, the year 2000 problem, work- force skill-sets Financial Markets and InstrumentsForeign exchange, portfolio, cash, interest rate Operations and Business PracticesFacilities, contractual risks, natural hazards, internal processes and controls The Universe of Risk

54 STRATEGIES FOR SUCCESS

55 Strategies for Success in Turbulent Times: Ten Strategic Initiatives 1. Choose a Strategic Direction (Commodity vs. Differentiation) 2. Capture the Potential of Uncertainty 3. Manage/Mitigate Risk 4. Manage Slack/Flexibility 5. Manage Capital Cost and Structure 6. Adopt New Technology 7. Improve Operations/Efficiency 8. Partner with Buyers and Suppliers 9. Grow the Business 10. Become a CEO

56 Alternative Strategic Directions

57 Commodity Product Strategy Production Emphasis – the focus is primarily on production activities rather than marketing or finance Manufacturing Mentality – the science and systematic process of producing food products rather than the art of raising commodities is emphasized Low Cost Producer – cost control is critical to being competitive in a commodity business Large Scale Operation – larger scale operations generally have cost advantages over smaller scale units Outsource Resources – land is rented; machinery is leased or custom hired Open/Impersonal Markets – markets are open to all who meet gross commodity product standards at publicly known prices Downside Price Risk – excess worldwide production can result in significant downward price movements Independent Decision-Making - the traditional independent farmer provides most of the managerial and other resources and makes most of the decisions

58 Differentiated Product Strategy End-user Focus – the focus is on a final consumer or food processors needs rather than commodities Distribution/Marketing Mentality – marketing and distribution decisions and expectations of consumers are as (or more) important than production considerations Value-Added Production – the additional revenue to be gained by further processing and distribution is emphasized Smaller Scale Operation – a focus on a segmented consumer market and niche markets allows and encourages small scale, more nimble and flexible producers Insource (own) Resources – more land and other resources are owned because the scale of operation is not beyond the financial resource base of the smaller producer Negotiated Markets – responding to consumer needs and producing products with specific attributes requires more direct communication throughout the chain Relationship Risk - contracts can be terminated and alliances severed unexpectedly Interdependent Decision-Making – the negotiated linkages with suppliers and processors reduces independence and forces joint, interdependent decision- making

59 Capture Potential of Uncertainty  Mitigate the downside  Capture the upside  An “options” approach

60 Manage/Mitigate Risk  Operating margin risk  Financial risk  Strategic uncertainty

61 Manage Slack/Flexibility  Lean operations  Slack or reserves on strategic resources  Financial reserves  Management-growth/start-up  Choose what not to do/pursue  Maintain flexibility

62 Manage Capital Structure/Debt Use  Lock in rates – 5 year  Moderate debt use/pay down  Hold reserves (working capital)  Fund growth with equity  Slow growth rate

63 Adopt New Technology  Simplification technology  Precision/process control technology  Automation/information technology

64 Improve Operations/Efficiency  Use standard operating procedures (SOP)  Focus on quality/consistency  Improve operations/efficiency  Continuous process improvement  Closed loop systems

65 Grow the Business  Natural result of success (reinvest earnings)  Economies of size critical  Replication strategy  Growth from the core  Collaborate/cooperate/partner

66 Partner With Buyers/Suppliers  Preferred customer for suppliers – better deals  Preferred customer for buyers – know your customer

67 Be a CEO TEPAP revised Traditional ◦ Walk around hands on management ◦ Hierarchical command and control structure ◦ Incenting behavior not critical ◦ Operations oriented ◦ Do it all ◦ Little/no compensation ◦ Internal expertise ◦ Can add activities without giving up ◦ Closed information system ◦ No need for replication ◦ Family personal dynamics dominate ◦ Interpersonal skills not critical New ◦ More remote, “in the office” management ◦ Team structure ◦ Right incentives critical ◦ CEO mentality – people, money, relationship, strategy ◦ Leadership and delegation ◦ Well compensated ◦ Out-source/hire capacity ◦ Trade off’s – can’t add without giving up ◦ Open access information to get right messages and incentives ◦ Must scale or replicate ◦ Business relationships combined with family dynamics ◦ Interpersonal skills are critical

68 Management Practices of Modern Producers Adapt quickly to new technologies that are either cost lowering or value increasing Develop a standardized system of command and control or standard operating procedures Utilize alliances with “partners” both to learn from them, and also to extend the scope of the business Are supply chain oriented seeking ways to maximize value/lower cost from farm inputs to the dinner table

69 Management Practices of Modern Producers Continually seek to gain economies of size Perfect a technology/management/scale structure and then replicate it in other locations or in other businesses Effectively use both debt and equity capital to continually grow the business

70 Management Practices of Modern Producers Use automation and information technology to improve precision and systematically control production processes Focus on quality of product and consistency of production processes Recognize and emphasize buyer expectations in their choice of product and production practices

71 The New Agriculture What we will do – biological manufacturing of specific attribute raw materials for nutritional, pharmaceutical, industrial products, animal agriculture and other end-uses. How we will do it – integrated value chains that enable genetics to “plate” traceability How we will compete ◦ Quality (better) ◦ Speed to market (faster) ◦ Cost (cheaper) ◦ Ability to manage risk.


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