Transcript 2007 Farm Bill

Positioning the Farm for Longterm Viability
Michael Boehlje
Center for Commercial Agriculture
Purdue University
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)
What is Strategic Thinking?

Strategic thinking is all about change:
◦ Anticipating the future
◦ Shaping the future
◦ Capitalizing on the future
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
Common Elements in Successful Strategy
Successful
Strategy
EFFECTIVE IMPLEMENTATION
Long-term,
simple and
agreed
objectives
Profound
understanding of
the competitive
environment
Objective
appraisal of
resources
The Strategy Decision Framework
Goal/Mission/Vision
Assess the
Business Climate
Assess the
Firm’s Capacity
The Strategic Initiatives
Venture Choices
Implementation
Monitoring and
Measuring Performance
VISION/MISSION
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?

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
The Business Climate
1. The Economic Recovery
Status of the Economic Recovery
Impact
Tax Policy
1
• maintain lower rates, increase depreciation
deduction
2
Fed policy (QE 2) and interest rates
3
Year end retail sales
4
Auto sales
5
Business investment/lending (the last
stage)
6
Employment/Unemployment
7
Consumer confidence
O
to
Status of the Economic Recovery
8
Commercial real estate
9
Housing prices/sales
10
European sovereign debt
11
China policy
12
Municipal/state debt
13
Government spending/Deficit/Budget
Dilemma
14
Oil Prices
15
International crisis (Middle East/Japan)
O
(interest rate and reserve increases, price controls)
to
2. Global Food and Biofuels Demand
•
Economic Growth
•
Population Growth
•
Dietary Transition
•
Energy
Global Economic Growth
•
IMF July World
Output Projections
o
o
o
o
o
2007 5.2%
2008 3.0%
2009 - 0.6%
2010
4.6%
2011
4.3%
IMF -2nd half of 2010
slower
due to financial
turbulence
in Europe (Greece,
Spain, …)
2011 Real Economic Growth
Rates %: IMF
12
9.6
10
8.4
Percent
8
5.5
6
4.2
4
2
1.5
1.6
2.3
4.4
4.5
4.6
3.0
0
Euro
Area
Japan Canada
U.S.
Mexico World Russia
Mid
east
Africa
India
China
Animal Protein as a Share of Total Protein
% of U.S. Corn Used for Ethanol
40%
35.0%
35%
40.0%
30.5%
30%
23.7%
25%
18.9%
11.4%
12.4%
04/05
7.2%
10.5%
03/04
6.4%
01/02
10%
00/01
15%
02/03
20%
14.2%
5%
10/11
09/10
08/09
07/08
06/07
05/06
0%
3. More Volatility in Agriculture
Price
 Costs
 Yields/productivity/efficiency
 Changing rules/regulations/relationships

U.S. Net Farm Income and
Government Payments
100
90
94.7
Net Farm Income
87.4
Government Payments
78.8
80
Billion $
70
86.6
79.0
10 Year Average = $67.7B
60
57.4
50
62.2
40
30
20
10
0
24.4
12.2
10.6
Margin Risk is Also Substantial
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

4. Increased Regulations for the
Sector
EPA/environmental
 Land use
 Energy policy
 Food safety
 Antitrust/GIPSA
 Immigration

5. Higher Capital Costs for
Farming Businesses
Higher interest rates
 Higher leverage for growing businesses
 Availability/access

Interest Rates on Real Estate Loans –
Chicago Federal Reserve Bank
11
10
8
7
6
5
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
4
1991
Interest rate
9
Year
Department of Agricultural Economics Purdue University
Forward 3-mo LIBOR Rates as of
4/15/2011
6%
5%
4%
3%
2%
1%
0%
Forward 3-mo LIBOR Rates
Actual 3-mo LIBOR Rates
6. Increased Competitive
Pressures
Global production
 Land access
 Labor/management access
 Contracts/preferred supplier arrangements

7. More Opportunities
Business Venture Choices

Business Reinvestment
 Upgrade/modernize
 Distressed assets
 Farmland
 Deleverage
How Do You Choose?
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?
3. Risk
 Earnings
 Value
4. Capitalization
 Credit/Leverage Required
 Working Capital Funding
 Equity Dilution
How Do You Choose?
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?
7. Management
 Your capacity/competencies
 Complexity
 Control
8. Portfolio
 Diversification – related or unrelated
 Concentration – horizontal or vertical
 Options
Assessing the Capacity
(strengths and weaknesses)
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.
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.

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
STRATEGIC POSITIONING
FOR SUSTAINABLE
COMPETITIVE
ADVANTAGE
Strategic Position
Successful businesses will answer a
fundamental question:
 Where will my firm focus its
resources and its passion?
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.
Positioning Options

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
Alternative Strategic
Directions
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
Differentiated Product Strategy

End-user Focus – the focus is on a final consumer or food processors needs

Distribution/Marketing Mentality – marketing and distribution decisions






rather than commodities
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 decisionmaking
IMPLEMENTING
STRATEGY
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
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
Key Strategic Decisions
 Social
Responsibility
 Managerial Style/Lifestyle
◦
◦
◦
◦
Learning new skills
Time/labor contribution
Risk/stress level and attitudes
Living expenditures
Expansion
Phase I
Phase II
Diversify
Focus
Replicate
Intensify
Expand
Integrate
Network
Figure 1. Strategic Growth Options
ASSESSING STRATEGIC
RISK/UNCERTAINTY
The Universe of Risk
Categories of Risk
Illustrative Sources of Risk
Financing and Financial Structure
Debt servicing capacity, leverage, debt structure, nonequity financing, liquidity, solvency, profitability
Market Prices and Terms of Trade
Product price volatility, input price volatility, cost
structure, contract terms, market outlets and access
Business Partners and Partnerships
Interdependency, confidentiality, cultural conflict,
contractual risks
Competitors and Competition
Market share, pricing wars, industrial espionage, antitrust
allegations
Customers and Customer
Relationships
Product liability, credit risk, poor market timing,
inadequate customer support
Distribution Systems and Channels
Transportation, service availability, cost, dependence on
distributors
People and Human Resources
Employees, independent contractors, training, staffing
adequacy
Source: Adapted from Tech, Edward, “Microsoft’s Universe of Risk” CFO, pp. 69-71, March 1997
The Universe of Risk
Categories of Risk
Illustrative Sources of Risk
Regulatory and Legislative
Export licensing, jurisdiction, reporting and compliance,
environmental
Political
Civil unrest, war, terrorism, enforcement of intellectual
property rights, change in leadership revised economics
policies
Reputation and Image
Corporate image, brands, reputations of key employees
Strategic Position and Flexibility
Mergers and acquisitions, joint ventures and alliances,
resource allocation and planning, organizational agility
Technological
Complexity, obsolescence, the year 2000 problem, workforce skill-sets
Financial Markets and Instruments
Foreign exchange, portfolio, cash, interest rate
Operations and Business Practices
Facilities, contractual risks, natural hazards, internal
processes and controls
STRATEGIES FOR
SUCCESS
Strategies for Success in Turbulent Times:
Ten Strategic Initiatives
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
1.
Alternative Strategic
Directions
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
Differentiated Product Strategy

End-user Focus – the focus is on a final consumer or food processors needs

Distribution/Marketing Mentality – marketing and distribution decisions






rather than commodities
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 decisionmaking
Capture Potential of Uncertainty
Mitigate the downside
Capture the upside
An “options” approach
Manage/Mitigate Risk
Operating margin risk
Financial risk
Strategic uncertainty
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
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
Adopt New Technology
Simplification technology
Precision/process control technology
Automation/information technology
Improve Operations/Efficiency
Use standard operating procedures
(SOP)
Focus on quality/consistency
Improve operations/efficiency
Continuous process improvement
Closed loop systems
Grow the Business
Natural result of success (reinvest
earnings)
Economies of size critical
Replication strategy
Growth from the core
Collaborate/cooperate/partner
Partner With Buyers/Suppliers
Preferred customer for suppliers –
better deals
Preferred customer for buyers – know
your customer
Be a CEO

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
TEPAP revised
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

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

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

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.