AGEC 485: Strategic Management and Agribusiness

Concepts and Definitions of Agribusiness

I) Agribusiness Management and Strategy

1)Agribusiness

  1. Def’n: “Agribusiness can be viewed as a number of interrelated sub sectors which work together formally and informally to produce goods and services”

2) Distinctive characteristics and drivers of the food sector

  1. Food is intertwined with culture, domestically and internationally
  2. Uncertainty underlying biologic basis of crop and livestock production
  3. Political Intervention across sub sectors and between nations (US farm bill)
  4. Ag and Food Technology development
  5. Private and public funded in food production (yield gains) and processing (product innovations)
  6. Competitive Structures: Highly concentrated

3)Goals of Agribusiness Management

  1. To understand and improve the performance of decisions makers through the use of Economics and Strategic Management principles?

II) Concept of Strategy

1)Concept of Strategy

  1. “Strategy is a pattern of resource allocation that enables firms to maintain or improve their performance. A “good” strategy is a strategy that neutralizes threats and exploits opportunities while capitalizing on strengths and avoiding or fixing weaknesses” (Barney, 27, 1997)
  2. Founded on the concept of competitive advantage
  3. Competitive advantage: actions/resources creating economic value relative to competing firms

2)Firm mission as the embodiment of firm strategy

  1. Mission is a firm’s fundamental purpose and long term objectives
  2. What a company desires to be.
  3. Strategy is a means to implement vision and vice versa
  4. Impacts the allocation of resources with in a firm (HR, Marketing, Production and Finance) to achieve a competitive advantage

3)SWOT analysis: Leverage of Competitive advantages

  1. Strengths: A firm’s Resources and capabilities used to generate economic value
  2. Weaknesses: A firm’s resources and capabilities that reduces the economic value potential of a firm
  3. Opportunities: unexploited market opportunities
  4. Threats: competitors or external factors reducing the level of firm performance

IV Industrial Organization (IO)

1)Anti-trust laws (Sherman Act) (competitiveness)

  1. Prohibit conspiracies to deny market access or suppress competition (e.g. ADM price fixing)
  2. Prohibit use of predatory and/ or exclusionary conduct to acquire or maintain monopoly / monopsony position (e.g.exclusive conduct in food retail
  3. Prohibits mergers and acquisition that less competition

2)The S-C-P framework

  1. “Industry structure determines the behavior or conduct of firms, whose joint conduct then determined the collective performance of the firms in the market place” (Porter, 1981)

V Structural Analysisof Industry Structure

1)Porter’s 5 Forces

  1. 5 forces (threats) and their relation to industry performance
  2. Threat of entry: New entrants motivated to enter and compete due to above normal economic profits (e.g. barriers to entry)
  3. Threat of rivalry: is the intensity of competition among a firm’s direct competitors (e.g. number of competitors, industry growth)
  4. Threat of substitutes: product similar but not identical to industry offering in which such substitutes place ceiling on prices charged by industry (e.g. relative price of substitutes)
  5. Threat of suppliers: Ability for input suppliers to charge above normal economic prices to an industry (e.g. high supplier concentration)
  6. Threat of buyers: Reduces industry revenue through reductions in industry price (i.e. monopsony)): A

2)Generic strategies

  1. cost leadership: be the lowest cost producer
  2. differentiation: produce a differentiated or innovative product where there are minimal substitutes
  3. focus: specialize in target or niche markets (geographically, age, income)
  4. Don’t be stuck in the middle

VI) Intra-Industry Analysis: Strategic Groups

1)Strategic Groups

  1. Def’n: “a strategic group is a set of firms that face similar threats and opportunities that are different from the threats and opportunities facing other firms in the industry” (e.g. Starbucks vs.Seattle’s Best)

1)Various classifications for strategic groups (product, function, strategy, geography, etc)

2)Strategic Group Performance hypothesis

  1. Performance of strategic groups differs from one group to the next.

1)firms within a group face similar threats and opportunities, and therefore respond in a similar fashion

2)Mobility barriers: Limits movement of firms from one group to the next

XII) Strategic Alliances

1)Strategic Alliances

  1. Def’n: when two or more independent organizations cooperate in the development, manufacture, or sale of products and services

2)Reasons for strategic alliance

  1. Learning from competitors
  2. Managing risk and sharing costs
  3. Facilitate Tacit collusion
  4. Pooling of resources

3)Threats to an alliance

  1. Adverse selection (exante):: Potential cooperative partners can misrepresent the skills, abilities and others resources that they bring into an alliance
  2. Moral Hazard (expost):Partners in an alliance may possess high quality (valuable) resources and capabilities but fail to make these resources available to alliance partners.
  3. Hold up:Presence of asset specificity raises potential for alliance member (s) to appropriate disproportionate returns from partner(s)

XIV) Vertical Integration

(Coase, Williamson)

1)Vertical Integration

  1. A firm that participates in more than one successive stage of the production or distribution of goods and services
  2. Raises question of Make (hierarchy) or Buy (make)?
  3. Rising concern in Agriculture

2)Objectives of TCE analysis: Key questions of interests

  1. Comparative analysis of alternative modes of governance markets vs. hierarchies
  2. Governance choice based on Transaction cost min logic

3)Types of Transactions costs (with market exchange)

  1. Information costs (Ex-ante): cost to obtain prices, product information, finding suitable buyers/sellers.
  2. Negotiation costs: costs of negotiating an exchange, drawing up a contract, commission costs, Cost of renegotiation
  3. Monitoring/enforcement costs (Ex-post): cost of ensuring that the terms of the transaction (quality, price) are upheld.

4)Combining Human factors and Dimensions of Transactions to determine TC

  1. Human factors: Bounded rationality and opportunism
  2. Bounded rationality (Simon): recognizes the cognitive and computational limits of human decision making
  3. With Bounded rationality (BR), contract (market exchange) writer cannot possible know all future circumstances and therefore higher TC occurs from the needs to re-write, re-negotiate contracts due to uncertainty of the future
  4. Opportunism: Individuals are self-seeking with guile (cheating, lying etc.)
  5. Calculated efforts to mislead, disguise and confuse and generally to take advantage of another.
  6. The absence of TRUST
  7. Each side may try to interpret the terms of a contract to its advantage, especially when terms are vague or even missing (BR)
  8. Other parties to the contract if given the chance will behave opportunistically and not live up to their promises in the contract (shirk on quality) leading to higher enforcement costs
  9. Opportunism creates higher TC due to increased ex-post cost of monitoring and enforcement costs
  10. Dimension of Transaction: Uncertainty, Asset specificity, Number of players in the market
  11. Uncertainty in exchange renders an inability to write a contract that specifies all contingencies to therefore yield high TC in renegotiation and re-writing of contracts
  12. Asset Specificity reference to degree to which an asset can be redeployed to alternative use without sacrifice of productive value.
  13. High AS increases opportunistic behavior such as hold up and therefore increases TC
  14. Small numbers situations: Few players creates greater conditions for opportunism -> High TC
  15. Large numbers situation: Such as highly competitive conditions, limits opportunism -> Lowers TC

VII) Firm Level Analysis: Resource Based View (RBV)

1)The RBV (Jay Barney)

  1. firm performance directly related to the underlying characteristics of its resources (i.e., land, labor, knowledge, organizational culture etc)

2)Identifying sources of Sustainable competitive advantage

  1. Value? Does a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?
  2. Rarity?How many competing firms already possess a particular valuable resource?
  3. Inimitability?: Do firms with out a resource face a cost disadvantage in obtaining it compared to firms that already possess it?

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