Strategic Positioning Under Agricultural Structural Change: A Critique of Long Jump Cooperative Vent

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Strategic Positioning Under Agricultural
Structural Change A Critique of Long Jump
Co-operative Ventures

• Peter Goldsmith and
• Hamish Gow
• University of Illinois at
• Urbana-Champaign
• USA

Cooperative Program in Agricultural Marketing and
Business Symposium 2001, June 13, 2001 University
of Alberta, Canada
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Background

• Structural Change
• Canadian Prairies
• 6000 (1999 2000)
• 7/year Attrition rate
• U.S. Hog Operations
• gt200,000 Since 1989
• 6.7/Year Attrition Rate
• US Hog Prices
• Steady Decline
• -1.24/Cwt./Year (1989 1999)
• Three Alternative Strategies
• Get Big Reposition - Get Out

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Producer-Owned Long Jump Ventures

• Over 40 Circulating in Illinois
• Hog Slaughter/Processing
• Ethanol
• Illinois Farm Bureau
• Producers Alliance
• 500,000
• Illinois Pork Producers Association/National Pork
  Producers Council
• Livestock Cooperative Capitalization Fund
• 200,000,000

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Rationale 1 of 3

• Take control of your crop.
• . the concept of producer owned processing
  is critical to farmers seeking to survive.
  margins are narrowing retaining commodity
  ownership until additional value added means
  more returns for producers. (Tilstra in Smith,
  1998)

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Rationale 2 of 3

• Capture Higher Returns and Lower Price Volatility
  Downstream
• It is clear the independent pork producer
  needs to capture a larger portion of the farm to
  market share. Owning and operating your own
  packing plant is the most profitable ad efficient
  way to secure a larger slice of the farm to
  market share (Ball, 2000)

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Rationale 3 of 3

• Replace Lost Markets
• American Premium Foods
• 16,000,000
• Carlinville, Illinois
• They had to do something because there were no
  longer any outlets for their hogs.

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Rationale

• To Take Control of their Own Crop
• To Capture Higher Returns and Lower Price
  Volatility Downstream
• To Replace Lost Markets
• Question Do these rationale make strategic
  sense?

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Fundamental Questions

• Do these rationale for vertical integration make
  strategic sense for producers?
• What are the risk return trade offs?
• Do these investments provide the best ROE for
  financial constrained producers?
• What are we missing?
• Where is value being created?

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(Prahalad, 1993)
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Fundamental Value

• What fundamental value do long jump ventures
  provide?
• Current analysis confuses Producer Needs and
  Wants with Market driven Needs and Wants
• How best can producers capture a greater
  proportion of the value in the downstream supply
  chain?
• Are there alternatives to Long Jumps?

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Strategic Positioning

• How do firms successfully strategically
  reposition?
• Create New Value
• Strategic Management Theory
• Rich Literature on Strategic Repositioning
• Two Key Concepts
• Core Competency
• Tacit Knowledge

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Strategic Positioning Core Competency

• Core competencies are the human capital, shared
  knowledge, corporate history, communication
  networks, organizational structure, and
  collective learning of an organization (Prahalad,
  1993)
• Successful Adaptors Bundles of Competencies Not
  Products (Quinn et al, 1990 Prahalad and Hamel,
  1990)
• Inimitable, Invisible (Intangible), and Difficult
  to Measure (Itami, 1987)

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Strategic Positioning Tacit Knowledge

• Knowledge contained in individuals- uncodifiable
  and informal
• The Difference Between What We Know and What We
  Can Tell (Polanyi, 1966).
• Dependent on Experience
• Managerial Success managing the knowledge flow
  internally and externally to the corporation and
  from the tacit to the explicit. (Nonaka and
  Takeuchi in Mintzberg, 1998)

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Strategic Positioning Tacit Knowledge

• Managers...need to get out of the old mode of
  thinking that knowledge can be acquired, taught,
  and trained through manuals, books, or lectures.
  Instead, they need to pay more attention to the
  less formal and systematic side of knowledge and
  start focusing on highly subjective insights,
  intuitions, and hunches that are gained through
  the use of metaphors, pictures, and experiences
• (Nonaka and Takeuchi, 1998)

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Strategic Positioning

• How do you access knowledge?
• How does the supply chain organize around
  knowledge?
• Shift attention to opportunity gap
• Develop Strategic Intent
• Leverage Resources
• Identify Core Competencies
• Identify Core Products
• Identify appropriate Governance Structure or
  Strategic Architecture

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Capacity to Leverage Corporate Resources
Aspiration Levels of the Organization
Competing For the Future Outcomes
Strategic Architecture Core Competencies Core
Products
Creating New Competitive Space New
Business Development
Strategic Intent
Energizing the whole organization, shared
mindset, competency acquisition, corporate
challenges, individual and team motivations
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Value Creation Triad
Resource Leveraging Spot
Market Contracting Minority JV Vertical
Integration Internal Knowledge 0
0 External Knowledge
0 Management Burden 0
Rent Capture 0
Value Creation 0 ,,
,, 0
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Relationship Management

• Supplier Client Relationships Not Transactions
• Process Focus versus Product Focus
• Mutually Beneficial, but Client Driven
• Market deference
• Dynamic
• Joint Learning Systems
• Leveraging Core Competencies, not selling
  products
• Marketing Attributes and Services
• Rent Creation Through Unique Service
• Rent Capture Through Mutual Commitment

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Strategic Repositioning ExampleLean Meats NZ
Cooperative

• 1985 Wairarapa Sheep farmers, New Zealand
• Commodity Price Crash
• Over Capacity
• Traditional Marketing Channels Not Viable
• Market Opportunity Identified in Bay Area, CA
• Chilled Lamb Product
• High Disposable Income
• Ethnic Group
• Supermarket Chains
• Restaurants

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Lean Meats NZ Cooperative

• Two Issues
• How to develop the market.
• Products and Services
• How to develop the chain.
• Farm to Market Flow
• Governance
• Resource Leveraging

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Lean Meats NZ Cooperative

• Developed Co-op
• 50 Farmers
• Closed
• Equity participation 100
• Commitment
• NZD 10,000 to 40,000
• 2X annual net income
• Goal of NO Hard Assets
• Soft Asset Investment
• Bank Financing
• Working K
• Secured by Inventory

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Lean Meats NZ Cooperative

• Subsidiary in the U.S. (Berkeley)
• International Food Marketing Consultant
• Tacit Knowledge Source
• Tacit Knowledge Transfer/Learning
• Dedicated Farmer/Marketer In Market
• Relationship with meat manager
• Cost Management
• Meat Manager Specs
• Varies Across Store/Restaurant
• Customized Cuts/Promotion/Packaging/Recipes

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Lean Meats NZ Cooperative

• Relationships
• Cool-Store
• Rented Space
• Transactional
• Local Processing Facility
• On-site with Butchers
• Daily Requirement
• Dynamic Specs
• Local Butcher Wins higher value product
• Key Relationship

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Lean Meats NZ Cooperative

• Processing Plant
• Primal Cuts
• Special Packaging Technology (CAPTEC)
• Processing Flexibility
• Direct Communication between NZ and Berkeley
• Co-op members in direct contact with Production
  Manager

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Lean Meats NZ Cooperative

• Co-op
• Address Year-around Supply Issues
• Cost/Unit Increased
• Management Complexity Increased
• Core Competency
• Internal pricing
• Co-op Specific Grid
• Strict Quality
• High Minimum Requirements
• Sold on Open Market
• Contracted for Additional Supply

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Empirical Research

• Examining successful and failed NGC from a value
  perspective
• Discerning entrepreneurial serendipity from
  broad-based opportunity
• Assessing Producer Core Competencies
• Understanding Client Needs

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Contact
Peter Goldsmith Food and Agribusiness Management
Group Department of Agricultural and Consumer
Economics University of Illinois 433 Mumford
Hall 1301 West Gregory Drive Urban, Illinois
61801 217-333-5131 Fax-333-5502 pgoldsmi_at_uiuc.edu
Hamish Gow Food and Agribusiness Management
Group Department of Agricultural and Consumer
Economics University of Illinois 425 Mumford
Hall 1301 West Gregory Drive Urban, Illinois
61801 217-265-0320 Fax-333-5502 hgow_at_uiuc.edu