Chapter 9 - Crafting Strategy

Overview:

This chapter shows how strategy is crafted by starting with a description of generic strategies and continuing with complementary strategic actions, specific strategies for specific situations, tests for evaluating strategies, improving strategic planning, using scenarios in crafting strategy, and incorporating risk management into crafting strategy.

Objectives:

After completing this chapter, you will be able to:

• Craft a strategy for a farm
• Test whether a strategy will fit and work for a specific farm

Key Points:

• Crafting strategy starts with choosing a basic generic strategy and then adapting it to a farm and its specific situation.
• The four generic strategies are low-cost leadership, differentiation, best-cost provider, and focus or niche.
• The seven complementary strategic actions are horizontal expansion, diversification, vertical integration, innovation, prospecting, protecting, and alliances and partnerships.
• Specific strategies are needed for specific situations: emerging markets and industries; maturing industries, stagnant or declining industries, fragmented industries, and weak or crisis-ridden businesses.
• Several tests are available to farmers for evaluating potential strategies. Eight example tests include vision consistency, goodness of fit, building for the future, performance, importance, feasibility, resource, and confidence.
• Four problems or weaknesses in strategic planning are planning under uncertainty, ivory tower planning, planning for the present, and managers’ biases. Three other ideas for improving strategic planning are devil's advocacy, dialectic inquiry, and using an advisory board.
• Managing strategic risk involves understanding the probability and potential impact of the potential sources of strategic risk.
• Scenarios can be used to evaluate potential outcomes under alternative scenarios.
• Strategy should change and evolve as the business environment changes and evolves.
• Farmers need to be entrepreneurial (i.e., creative, risk-taking, innovative) when crafting strategy, and they need to be able to do outside-in strategic thinking.
  

Key Terms:

• Best-cost provider: producing a commodity for a certain market at a reasonable cost and also meeting other special characteristics wanted by a buyer.
• Complementary strategic actions: actions that are used to adjust a generic strategy to create the specific strategy needed by a specific farm in a certain situation and industry.
• Crafting strategy: the managerial process of deciding how to achieve the targeted results within the farm’s physical and economic environment and its prospects for the future.
• Differentiation: striving to differentiate your farm’s products from similar products.
• Focus: serving a small and well-defined market niche.
• Generic strategies: basic approaches to strategy that could be used by any farm or business.
• Low-cost leadership: being the low cost producer.
• Niche: producing a specialty product for a specific market.
• Scenarios: Descriptions of different views or possibilities of what the future may be like.
• Strategic risk: Potential changes in an industry that could affect the best strategy for a farm. Strategic risk is not the same as operational risk.
  

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Study Notes:

Crafting strategy is the process of deciding what a farm could do to best accomplish the vision, mission, and objectives of the stakeholders in the light of its external environment, its internal situation, and the prospects for the future.

GENERIC STRATEGIES

The first step in crafting is to choose the best of four generic strategies.

• Low cost leadership: In this strategy, a farmer aims to develop a low-cost production position within the industry based on experience, size, and/or efficient operations. For most of agriculture, the only strategy available to producers is the low-cost strategy.
  
  
• Differentiation: A farm following this strategy strives to create unique perceptions about its product(s) among its consumers. A farm selling directly to the public will most likely be including elements of this strategy in its chosen strategy. The recent interest in identity preserved (IP) grains and meat and in contracts is one piece of evidence of farms striving to differentiate their products and to protect their markets.
  
  
• Best-cost provider: With this strategy, a farmer may be producing a commodity (milk, for example) but supplying it to a certain market at a reasonable cost and, at the same time, meeting other characteristics (such as delivery, quantity, etc.) that the buyer wants.
  
  
• Focus or niche: A farm with a focused strategy strives to serve a small but well-defined market niche. Examples of this include a supplier of organic vegetables to local markets and/or restaurants, a producer of rabbit or buffalo meat, a grower of organic blue corn for a food processor, and so on.
  

At this point, consider your farm (or a farm you know) and choose the best generic strategy (question 2 in Worksheet 9.1).

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COMPLEMENTARY STRATEGIC ACTIONS

Choosing a generic strategy is not the final step in crafting strategy. Every farm finds itself in a unique situation that calls for the generic strategy to be modified by one or more complementary strategic actions. The text describes these complementary strategic actions:

• Horizontal expansion – adding more capacity to produce more of the main product(s) of the farm.
  
  
• Diversification – adding more, different products to the list of what the farm produces.
  
  
• Vertical integration – moving up or down the value chain from the original basic product. Examples include livestock farms that raise their own feed, farms that decide to sell directly to the consumer, farms that add the capacity to repair their own machinery, farms that grow their own seedlings, and so on.
  
  
• Innovation – creating a new product before others start producing the new product.
  
  
• Prospecting – looking for new markets and buyers.
  
  
• Protecting – taking actions to protect an established market share.
  
  
• Alliances and partnerships – establishing new agreements and relationships to access the capabilities, connections, and knowledge of opportunities or counter threats.
  
  
• Functional strategies – each business function and enterprise within the farm has to have a strategy aligned with the overall strategy for the whole farm.
  

The text also describes several strategies for specific situations: emerging markets and industries; maturing industries; stagnant or declining industries; fragmented industries; and weak and crisis-ridden businesses. These ideas may be useful to farms that find themselves in these situations.

After reviewing these ideas and fuller descriptions in the text, complete question 3 in Worksheet 9.1 – especially consider why you made your choices for your farm. As another exercise for understanding strategy and how to craft strategy, consider the Kinney farm case again and complete Worksheet 9.2.

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EVALUATING STRATEGIES

Several tests exist to help a farmer choose which potential strategy may be the best strategy for their situation. Since each test evaluates alternatives strategies from one perspective, several tests should be used to provide a better overall evaluation of the alternatives to result in the choice of the most robust strategy. The following tests can be used to evaluate the merits of one potential strategy over another.

• Vision Consistency Test. How well does the proposed strategy fit with the business and personal vision of the farmer and other stakeholders?
  
  
• Goodness of Fit Test. How well does the proposed strategy fit with the external and internal analyses?
  
  
• Building for the Future Test. How well does the proposed strategy help maintain and develop the building blocks of competitive advantage?
  
  
• Performance Test. How well does the proposed strategy contribute to achieving the strategic and financial objectives of the farm?
  
  
• Importance Test. Are important issues identified in the external and internal analyses addressed by the proposed strategy?
  
  
• Feasibility Test. Can the strategy be effectively executed?
  
  
• Resource Test. Are resources available to execute the strategy?
  
  
• Confidence Test. How high is the confidence that the anticipated outcomes of the proposed strategy will occur?

As described in the text, the farmer and other stakeholders give each proposed strategy a subjective score for each test chosen. The scores are then summed across the tests with the highest scoring strategy being the apparent best strategy for the farm. However, since the scores are subjective, we can also use the highest score to indicate which strategy is most likely the best and also reconsider the strategies which scored close to the highest score before making a final decision.

After reviewing these notes and the text, evaluate your potential strategies by completing Worksheet 9.3.

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IMPROVING STRATEGIC PLANNING

Farmers (and any company or organization) can encounter problems or weaknesses in their strategic planning. Anticipating problems and using tools to help overcome them can improve strategic planning. These are discussed here briefly and in the text.

1. Planning under uncertainty
   Problems due to uncertainty of the future show up in two ways. First, we think we can forecast the future accurately, so we do not incorporate risk and change into our plans. Second, we know we can’t predict the future accurately, so we do not think planning is worthwhile. Both problems can be solved by using techniques to manage strategic risks, especially by using scenarios to develop pictures of possible futures. These are described more in the next section on “Managing Strategic Risk.”
   
   
2. Ivory tower planning
   Planners may not stay in touch with the rest of the business and the marketplace, even on a small farm, so the planning could easily be unrealistic in what the farm can do and in what the market wants or how it will respond. The solution includes talkong to people at every level, having a “third-person” interview with themselves, benchmarking productivity and financial measures, and listening to other evaluations of the market and economic environment.
   
   
3. Planning for the present
   A very common problem in strategic planning is crafting a strategy that fits the world and our farm as we see it right now without considering the future. The solution is to develop a strategic intent, that is, a bold ambition for the future that requires bolder, broader thinking. This will force the manager to look past current conditions on the farm and in the industry.
   
   
4. Errors caused by cognitive biases
   Cognitive biases affect how we think, and what we assume to be truth. They cause problems when they cause incorrect views of the future and how others and the farm itself will react to changes. Several potential solutions to deal with them are listed in the text.
   
   
5. Devil’s advocacy
   Devil’s advocacy involves bringing up reasons that might make the proposed strategy unacceptable. This can be very effective for developing a robust strategy; but, if one person is doing this, that person may be painted as a negative person and thus hurt his/her future with the group.
   
   
6. Dialectic inquiry
   Dialectic inquiry involves developing a plan and a counter plan that represent possible but conflicting approaches to running the farm. The plan and counter plan are discussed and poked at to find weaknesses in assumptions, actions, and so on. Out of this discussion, a better plan should emerge.
   
   
7. Advisory Board
   Another idea for improving strategic planning for individual farmers is to have an advisory board. An advisory board of persons interested in and knowledgeable of the farm, but not directly involved in the farm, can help improve strategy by providing a third party evaluation of plans and ideas. This is discussed more fully in Chapter 25, Business Organization.

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MANAGING STRATEGIC RISK

Strategic risks can change the information on which a strategy was crafted. These changes may result in the chosen strategy being the wrong strategy. So these strategic risks need to be identified and dealt with as part of crafting strategy in order to craft the most robust strategy.

The text describes how to identify and then classify strategic risks in terms of their probability of happening and in terms of their potential impact on the farm. The use of scenarios is also described as part of the process of crafting strategy.

After reviewing the section on strategic risk and the final section of concluding thoughts, complete Worksheet 9.4 as a final step in crafting strategy.

Worksheets:

9.1 Crafting strategy.pdf

9.2 Crafting strategy for the Kinney farm.pdf (Resource needed: The Kinney Farm.pdf)

9.3 Testing potential strategies.pdf

9.4 Managing Strategic Risk.pdf

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