Strategic Business Planning for Commercial Producers

What Tools Are Available to Generate Strategies?

Strategic Business Planning for Commercial Producers

Generating Alternative Strategies from SWOT

• SWOT analysis is a tool for helping assess the current situation for the firm.

• However, we need to be able to combine the information in the SWOT analysis in a meaningful way to generate alternative strategies that we might pursue.

• The TOWS matrix is a tool designed to match external opportunities and threats with internal strengths and weaknesses.

Strategic Business Planning for Commercial Producers

SWOT Analysis

Internal Environment

Strengths

1.

2.

3.

Weaknesses

1.

2.

3.

External Environment

Opportunities

1.

2.

3.

Threats

1.

2.

3.

Strategic Business Planning for Commercial Producers

TOWS Matrix

• Technique used in strategy formulation for combining – External analysis • Opportunities • Threats – Internal analysis • Strengths • Weaknesses

Strategic Business Planning for Commercial Producers

TOWS Matrix

From External Analysis (EFAS) From Internal Analysis (IFAS)

Strengths:

1.

2.

3.

Weaknesses:

1.

2.

3.

Opportunities:

1.

2.

3.

Threats:

1.

2.

3.

SO Strategies

Use strengths to take advantage of opportunities

WO Strategies

Take advantage of opportunities by overcoming weaknesses

ST Strategies

Use strengths to avoid threats

WT Strategies

Defensive strategies to minimize weaknesses and avoid threats Source: Weihrich

Strategic Business Planning for Commercial Producers

Business-Level Strategy

Strategic Business Planning for Commercial Producers

What Is Business-Level Strategy?

Strategy

is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage.

Business-level strategy

is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets.

Strategic Business Planning for Commercial Producers

Strategic Position

• Successful farms will answer a fundamental question:

Where will my farm focus its resources and its passion?

Strategic Business Planning for Commercial Producers

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.

Strategic Business Planning for Commercial Producers

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

Strategic Business Planning for Commercial Producers

Customer Focus

• Adding value for customers ultimately determines a firm’s success.

• But we need to know who the customers for our product are, what those customers needs are, and how to satisfy those customers’ needs.

Strategic Business Planning for Commercial Producers

Customer Focus

– – –

Who

serve.

is about determining what segment of customers we will • Is it the broad market? Or a specific customer in our local marketplace?

What

is about determining what the customer groups’ needs are that our products and services can satisfy.

• Is it organic GMO-free products? Is it consistent timely delivery of the product over an entire year?

How

is about exploiting our core competencies to implement value-creating strategies to satisfy our customers needs.

• How can we take advantage of what we do well to deliver our targeted customers’ needs in a way that gives us a competitive advantage with this set of customers?

Strategic Business Planning for Commercial Producers

Overall Strategic Orientation

Cost

Core Competency

Coordination Differentiation Broad

Market Scope

Niche

Low-Cost Leader Coordination Differentiation Customization

Strategic Business Planning for Commercial Producers

Strategic Orientation

Core Competency

Coordination Differentiation Broad

Market Scope

Niche

Low-Cost Leader

Strategic Business Planning for Commercial Producers

Low-Cost Leader Strategy

PRICE = $10 PROFIT = $5 COST = $5 INDUSTRY AVERAGE PRICE = $8 PROFIT = $6 COST = $2 COST LEADERSHIP

Strategic Business Planning for Commercial Producers

Low-Cost Leader Strategy

Actions are integrated and designed to produce or deliver goods or services at the lowest cost, relative to that of competitors, with features that are acceptable to customers.

Firms seeking competitive advantage through this business-level strategy often sell no-frills, standardized goods and services to the industries typical customers Successful implementation requires a consistent focus on driving costs lower, relative to competitors’ costs.

Strategic Business Planning for Commercial Producers

Characteristics of a Low-Cost Leader

• Usually make investments in efficient-scale facilities • Maintain tight cost and overhead control • Usually minimize costs in areas such as service offerings, labor force, and R&D – Minimizing costs in the labor force is NOT giving away management and family labor • Typically have standardized processes, limited variety, supply chain mentality, and a frugal culture

The Value Chain for a Low Cost Strategy

Firm Infrastructure

– cost-effective management information systems (MIS), few managerial layers, simplified planning practices.

Human Resources:

consistent policies to reduce turnover, intense focus on training employees to be efficient and multi-skilled.

Technology:

Easy-to-use production technologies, investment in technology that improves production efficiencies.

Procurement:

procedures to find the lowest cost inputs, frequent evaluation of suppliers’ performances.

Inbound Logistics

Efficient systems to link supplier products with production processes.

Operations

Use of Economies of scale.

Construction of efficient scale facilities.

Outbound Logistics

Delivery schedule that reduces costs.

Selection of low-cost carriers.

Marketing & Sales

Small, highly trained sales force.

Products priced to generate sales volume.

Service

Efficient quality control to reduce buyer complaints.

Strategic Business Planning for Commercial Producers

Low-Cost Strategy and the Five Forces

• • • • •

Rivalry

– can sustain low prices better than competitors

Power of buyers

– price pressure not likely to be below that of next-most-efficient competitor

Power of suppliers

– better able to absorb price increases than other competitors

Threat of new entrants

– ever improving efficiency levels to create entry barriers

Substitutes

– has more flexibility to reduce prices to thwart customers switching to substitutes

Strategic Business Planning for Commercial Producers

Low-Cost Leadership

• Organization attempts to outperform competitors by doing everything it can to produce goods or services at a lower

cost

than competitors • Emphasis is on operational efficiency • May be achieved through process innovations • Results in above average returns

Strategic Business Planning for Commercial Producers

Examples of Low Cost Leadership

• Southwest Airlines • Wal-Mart • Gateway Computers • Nucor Steel • Nissan

Strategic Business Planning for Commercial Producers

Cost Leadership

• What are some things that can help us be cost leaders in production agriculture?

Strategic Business Planning for Commercial Producers

Strategic Orientation

Core Competency

Coordination Broad

Market Scope

Niche

Low-Cost Leader Differentiation

Strategic Business Planning for Commercial Producers

Differentiation

• Organization attempts to create a product that is perceived by customers as unique in some important way • Emphasis is on strategic positioning • May be achieved through – Superior quality – Superior customer responsiveness – Superior innovation • Results in above average returns through premium pricing

Strategic Business Planning for Commercial Producers

Differentiation

PRICE = $12 PRICE = $10 PROFIT = $6 PROFIT = $5 COST = $6 COST = $5 INDUSTRY AVERAGE DIFFERENTIATION

Strategic Business Planning for Commercial Producers

Differentiation Strategy

• Integrated set of actions is designed to produce or deliver goods or services that customers perceive as being different in ways that are important to them.

• Firms following this business-level strategy rely on unique features of their product or service to drive superior margins to those of their competitors.

• A firm’s product can be differentiated in an almost countless number of ways, such as: – Unusual features – Responsive customer service – Rapid product innovation – Technological leadership – Perceived prestige and status – Different tastes

Strategic Business Planning for Commercial Producers

Characteristics of Differentiated Firms

• Mental focus on the customers’ needs • Entrepreneurial business structure, creativity, and innovation prized and encouraged • Efforts spent communicating value to customers • Efficiency important, but cost secondary to delivering value to the customer

The Value Chain for a Differentiation Strategy Firm Infrastructure

– Highly developed MIS to capture customer preferences, firm-wide focus on high-quality products.

Human Resources:

Compensation encourages creativity, subjective performance measures, superior training.

Technology:

strong capability in basic research, investment in technologies that allow for production of highly differentiated products.

Procurement:

procedures to find the highest quality inputs, purchase of highest quality replacement parts, strict standards for suppliers.

Inbound Logistics

Superior Consistent production of attractive minimize

Operations

products.

damage and Rapid response to customers’ improve production quality.

demands.

Outbound Logistics

Accurate and responsive order processing.

Rapid and timely deliveries.

Marketing & Sales

Extensive granting of credit buying.

Extensive personal relationships with buyers.

Service

Extensive buyer training to assure max.

value from Product.

Strategic Business Planning for Commercial Producers

Differentiation Strategy and the 5 Forces

• • • • •

Rivalry

– creates customer loyalty that reduces price sensitivity

Power of Buyers

– the uniqueness of the good or service reduces number of suppliers and increases switching costs

Power of Suppliers

– higher margins insulate the firm, and price insensitivity by buyers allows the firm to pass on price increases

Threat of New Entrants

– loyalty of customers and need to invest in differentiating techniques reduces this threat

Substitutes

– loyal customers and high switching costs

Strategic Business Planning for Commercial Producers

Examples of Differentiated Companies

• Nike • Harley-Davidson • Levi Jeans • Mercedes-Benz • John Deere

Strategic Business Planning for Commercial Producers

Differentiation Strategy

• What are some activities that we can focus on to differentiate ourselves in the production agriculture marketplace?

Strategic Business Planning for Commercial Producers

Strategic Orientation

Core Competency

Broad

Market Scope

Niche

Low-Cost Leader Coordination Differentiation

Strategic Business Planning for Commercial Producers

Coordination

• Focus: playing the facilitator role linking suppliers and customers • Competitive advantage based on innovative relationships/linkages • Key strengths in ability to control without ownership, identify market opportunities • Push for a more coordinated agriculture to create a potential role for such organizations

Strategic Business Planning for Commercial Producers

Coordination

• May add substantial value through re configuring the supply chain • Heavy focus on soft assets, information and people, as opposed to hard assets, plant and equipment • Real focus on building trust among channel partners, developing incentive, and payment mechanisms that keep partners engaged

Strategic Business Planning for Commercial Producers

Overall Strategic Orientation

Core Competency Market Scope

Low-Cost Leader Coordination Differentiation Customization

Strategic Business Planning for Commercial Producers

Customization

• Focus: developing highly tailored solutions to fit a specific set of customers • Deep relationships with the segment of choice • Can be applied to differentiation, cost minimization, coordination • Pursued by both large and small firms in an increasingly fragmented market

Strategic Business Planning for Commercial Producers

Customization

• Focus: solving problems/creating results for chosen segments • Unparalleled tailoring of solutions • Support tailoring through range of products and services consistent with needs, seamless access to resources, localized decision making • “Customer wins/we win” attitude

Strategic Business Planning for Commercial Producers

Summary

Successful farms of the new millennium will: – Thoroughly understand the dimensions of the external environment – Not take the market environment as a given, and will drive change through their own actions – Choose a strategic position that is consistent with the marketplace and their own competencies – Deliver on the critical elements supporting that strategic position

Strategic Business Planning for Commercial Producers

Exercise

• Consider one of the business units on your farm.

• Who are the customers you are trying to serve from this business unit?

• What opportunities and threats exist for this business unit?

• What strengths and weaknesses do you have in this business unit relative to your competitors?

• Using the TOWS matrix, is there a set of low cost strategies you can pursue for this business unit? What about differentiation strategies?

Strategic Business Planning for Commercial Producers

Strategic Business Planning for Commercial Producers