Strategic Business Planning for Agricultural Value-Adding Initiatives
Reviewed August 2009
Vincent Amanor-Boadu, Ph.D.
Department of Agricultural Economics
“I have been successful all my life without any planning. I’ve always known what to do and have done it. Why should we waste time and money on planning this value-adding initiative business?” John H asked matter-of-factly. John was not boasting; he is one of the most successful producers in the state by any means of measurement. And John is not alone in his response to the discipline of planning a business. It is true that for most people, success from business has come with hard work and good organization. But the times are changing and when the terrain is uncertain, it is prudent to think a few steps ahead before you plant your feet in the next step. This is what planning is all about: knowing where the next step is going to fall before it actually falls.
There is a lot of excitement about value-adding initiatives. But the business of value-adding is like no other, if we want to be sincere to ourselves and our pocket books. The business of agricultural value-adding usually transports producers from the familiar to the unfamiliar, from the known to the unknown and from the relative comfort of dealing with people of relatively similar ideals and values to the uncertainty of a world filled with people with a million different ideals and values. There is nothing familiar for a corn producer when confronted with an ethanol plant and negotiating marketing budgets with major retail chains or distribution conglomerates. These activities are never in a producer’s natural league of play. For this reason, when producers decide to embark on business ventures that are outside their domains, it is prudent for them to plan, making sure all unfamiliar issues are explained and understood. “But sometimes I don’t even know what to ask,” argued John H. after he had come around to agreeing that the emerging uncertainty surrounding the business requires forethought and planning to minimize or even eliminate potential pitfalls large and small.
The purpose of this paper is twofold: First, we want to illustrate the importance of strategic business planning to the many Johns among the farming and ranching population who are interested in value-adding initiatives but are reluctant to subject themselves to the discipline of planning. We do this with both anecdotal and statistical information about successes and failures of entrepreneurs who followed different paths. The most common refrain I hear in conversations with most sincere entrepreneurs who have succeeded at transforming their businesses is this: “I have made a lot of mistakes I could have avoided.” We hope to end this refrain by encouraging the appreciation of the importance of planning and its incorporation into the value-adding initiative business development process. Second, we provide a step-wise overview of how to develop a strategic business plan to help the various stakeholders make decisions selecting the best business venture from the many worthwhile ones that confront them.
Perhaps we should begin by asking what we mean by planning. The relevant meaning of planning in the context we are using, according to the Merriam-Webster dictionary is “to devise or project the realization or achievement of a program.” If we take this definition apart, we may observe that planning involves envisaging the end prior to the beginning. A good plan paints a picture of the future, helping its users to create that future using the picture as a guide. The ability to see the destination prior to departing helps us to also assess the journey – the turns, the hills and the valleys – and helps us to find the best way to tackle the journey.
While planning does not eliminate all uncertainties along the journey, it helps us to prepare for the obvious ones and minimize the disturbing impacts of the not-soobvious ones. Lester R. Bittel, professor emeritus at James Madison University, is quoted as saying “Good plans shape good decisions. That’s why good planning helps to make elusive dreams come true.” But Peter Drucker, a renowned management thinker, cautions us to not think about long-range planning as dealing with future decisions, “but with the future of present decisions.” Whenever we pause to think through how current decisions affect our future, we are, in essence, planning, and it is the best way to tackle our journey into the future.
The business plan, then, is a written summary of what we hope to accomplish in the stated business and how we intend to organize resources to achieve the accomplishments hoped for. Metaphorically, it is the map to the defined destination of the business. The business plan identifies the various routes, the rest stops, the helpers and the potential highway men along the route to the defined destination. Fundamentally, the business plan is a communication instrument that eliminates the misunderstandings that can arise when thoughts are not translated into a tangible, visible and challengeable format such as the written document. Among other things, the business plan outlines the current state of thinking about the future of the organization, allowing its intended readers to assess the organization’s ability to reach its stated destination given its current and future resources – human, financial, physical and organizational. A good plan can transform an elusive dream into reality by focusing thinking, energies and resources in the right places, on the right things and at the right time. Access to resources is not a guarantee of success but a good plan can bring smart resources to the organization. These resources accelerate the organization’s ability achieve its goals and objectives.
We have deliberately focused our attention on strategic business plans. Strategy is defined as the continuous search for economic profits. Economic profits adjust accounting profits by the opportunity costs associated with the initiative and accounting profit is the difference between gross sales and accounting (explicit) costs. A strategic business plan seeks to develop strategies that extract all the rents available in venture so as to minimize its opportunity cost. In other words, the plan focuses on ensuring that there is no superior outcome to what has been developed in the summary of accomplishment expectations and its associated strategies. Strategic business planning forces planners to focus on the system dynamic effects of the business and its strategies and not on linear cause-effect relationships.
To sum the foregoing, we emphasize that planning is very important for success, not just in business but in everything. Because businesses often involve dealing with others – employees, partners, financiers, customers, etc. – it is even more crucial that potential misunderstandings are eliminated through the development of documented business plans. A business plan as a map, therefore, shows what destination the business is targeting and how it is going to reach it. A good plan can save organizations and their stakeholders untold pain and discomfort.
From the Trenches
In the last decade or so, research from USDA has confirmed the declining competitiveness of the producer in the agri-food supply chain. It has been estimated that the producer’s share of the consumer’s dollar has shrunk from about 31 cents in the 1980s to 19 cents in 2000. The argument is that 12 cents that used to come to producers is going to others somewhere in the supply chain post farm gate. Another observation is that total expenditure on food increased from $264.4 billion in 1980 to $661.1 billion in 2000. This implies that producers were receiving a decreasing share of an increasing pie.
The extrapolation of the foregoing trend suggests the need to pursue new and innovative strategies that allow producers to alter their share in the food supply chain and increase their net incomes. Some producers have recognized the declining relative importance of raw agricultural products and are attempting to so something about it. They are pulling their resources together and attempting to get closer to the consumer in the supply chain by participating in value-adding initiatives. Others are pursuing nonfood initiatives that allow them to enhance the value they get for their products.
What is a value-adding initiative? A value-adding initiative can be defined under either of two conditions: (1) If one is rewarded for performing any activity that has traditionally been performed at another stage further down the supply chain; or (2) if one is rewarded for performing an activity that is discovered to be necessary but had never been performed in the supply chain.
Despite their laudable rationale, the paths of value-adding initiatives are paved with the skeletons of many failed dreams and wounded pride, broken friendships and lost livelihoods. The songs of those left in the trenches of the value-adding marketplace are melancholic and forlorn. In most cases, these failures were not a result of insufficient resources but the lack of effective leadership, which results directly from an absence of a clear map that specifies the milestones and the expected results. It results from a lack of understanding of the marketplace – the players, their styles, the game rules, the exogenous variables and their ripple effects, etc. – and how its dynamics affect the expected results. It is a direct result of insufficient or inappropriate assessment and documentation of the business and its terrain before implementation.
Let us take the example of Future Beef Operations (FBO) in Arkansas City, KS. Its objective was to develop a new generation of processing and fabrication of beef that would address the food safety and inefficiency issues that have dogged the beef industry for decades. FBO planned to use the whole carcass, creating a line of products from every skin and bone of the animal – chromed hides, pet foods, specialty cuts, deli products, etc. Unfortunately, the company lasted only eight months, from August 2001 to March 2002, in the wake of its demise, it left banks, contractors and producers holding the bag for $250 million. Although the national success rate of new businesses is less than 25 percent, a failure of FBO’s magnitude raises questions about a lot of things, including its business plan.
FBO’s prospectus circulated in the spring of 2000 projected a profit margin of $266 per head because of its yield advantage and conformance as opposed to an industry average of $125. It also claimed that efficiency of its fabrication process will lead to a margin of $113 compared to the industry average of $23.70, almost 500 percent improvement. People signed on to the idea but few raised the obvious questions: What if, despite all the fabrication efficiency, FBO could not achieve the projected margins because of forces beyond their control? The company also adopted the “cost-plus” buying strategy, whereby it rewarded seedstock suppliers, ranchers and feed yards who committed to its plan with premium prices. There was no link between the commitment of suppliers and market conditions, forcing the company to incur losses of about $150 per head when market prices started slumping. Samuel Western, writing for the January 2003 edition of Beef Today magazine, notes that documents filed during bankruptcy proceedings of FBO present a “tale of dreams gone bad, poor timing, corporate blunders and one flaw that surfaced repeatedly: pride.” While former FBO executives and board members point to four major events to explain their failure – catastrophic world events of September 11 and mad cow disease (bovine spongiform encephalitis), an unexpected surplus of feeder cattle, problems with new equipment, and a complex and poorly structured contract with the company’s single customer, Safeway Inc. – the fact remains that inadequate understanding of the marketplace by the company’s management and a business plan that believed more in the gospel than the reality of the industry determined and sealed the company’s fate long before it processed the first animal. For example, since the plan depended so intensely on a single customer – Safeway – the principals should have conducted a more in-depth analysis of Safeway’s performance in relationships over time. Such an analysis would have revealed that Safeway’s meat managers are rewarded for margins and not quality. Therefore it is in their interest to buy lower quality products if they generate higher margins. Another issue at Safeway that was overlooked by the plan was how Safeway’s in-store meat cutters were going to react to the case-ready products that FBO proposed to supply. These two examples indicate that Safeway’s internal systems were not in line with FBO’s value proposition.
One beef industry observer noted that “the investment community has been soured by this meat industry initiative, and the difficulty of looking for capital is a only going to get worse.” Thus, attempts at these value-adding initiatives can have farreaching implications for whole industries just because these entrepreneurial ventures by producers are still novel in the investment community. For this reason, pioneers need to conduct careful analyses of opportunities, assess plans vigilantly and critically scrutinize success factors. While good business planning does not eliminate the failure, it helps to pin-point potential bumps, curves and potholes along the road to realizing the dream.
The Audience for the Business Plan
We have noted that the business plan is a written summary of what the organization hopes to accomplish in its stated business and how it intends to organize resources to achieve the desired goals. New business ventures usually have three categories of stakeholders interested in its business plan: investors, bankers and management. While the interests of these stakeholders all center on the venture’s ability to succeed, they each have a different emphasis on the indicators of success. Bankers, for example, are interested in the ability of the business to service its loans and whether it will have enough assets to cover its liabilities. In other words, the balance sheet and cash flow statements and the information they present are of particular importance to banker stakeholders. For all intents and purposes, the banker, acting solely as a banker, will be looking at the risks that affect these two aspects of the business and their impact on debt service ability.
The investor group may be divided into two groups: “insiders” and “outsiders.” “Outside” investors are often interested in the ability of the venture to deliver growth and income and may be speculators whose commitment to the business is driven solely by return on investment. For the “outside” investor, then, two businesses are the same as long as the risks associated with achieving a given level of return on investment are comparable. “Insider” investors are those interested in the pecuniary benefits engendered by the business, i.e., return on investment (both growth and income), as well as nonpecuniary benefits such as ownership, success for its own sake – what Joseph Schumpeter described as “non-utilitarian motives for action.” In other words, “insiders” are interested in how the business connects to the non-business to create opportunities or value that supports both financial and non-financial objectives. Inside investors will, therefore, generally accept lower returns on investments than outsiders as long as the business can demonstrate a significant non-pecuniary rate of return.
Management is a group of individuals who, like the movie producers, make things happen. They organize the organization’s resources in a timely and effective manner to deliver products and services in ways and forms that create the most value for customers, who in turn reward the organization with loyalty. Managers, as the people who are going to transform the ideas of the business into reality for its owners, are interested in the minute details of the business plan. For them, the business plan is a blueprint of the building they are constructing, the script of the movie they are producing. They are interested in the strategies that transform resources into shareholder value and the availability of the required resources. Because management is the only one among the three classes of stakeholders who is actually responsible for transforming the plan into reality, it focuses on seeking from the plan the answer to the question: Does the business have what will help it succeed if the appropriate level of human energy and creativity are brought to it? Managers are, therefore, interested in the details of the strategic direction (which defines the organization’s cultural milieu) and how risks are to be managed. They are also interested in the definition and timelines for financial and non-financial expectations as well as the venture’s functional goals and objectives.
A good business plan, as a written summary of what the organization seeks to accomplish and how it plans to achieve its accomplishments, details the competitive strategies the organization intends to pursue. For this reason, it makes sense to provide different stakeholders with the business plan of expected detail so they can get the best from them and also reduce the risk of the detailed plan falling into competitors’ hands.4
Developing the Plan
We assume throughout this document that the business venture has been shown to be both technically and economically feasible. This assumption is critical because opportunities that are neither technically nor economically feasible cannot be successful as businesses. And if the objective is to enhance the net income of producers, then any opportunity that is technically and/or economically infeasible must be abandoned.
We have also noted that the business plan is a valuable asset for the start-up firm, and different levels of detail of the plan must be prepared from the original detailed plan for the venture’s different stakeholders. The detailed plan, we noted, is of interest to management and the organization’s governing board. Thus, it is strongly recommended that the original business plan be developed from management’s perspective. The exercise of detailing the strategic direction of the business and its strategies, of understanding the competitive pressures confronting the initiative and the sources of scarce resources can help focus energies in the right places from the start.
We take a step-by-step approach to developing a strategic business plan. We delineate six steps, the “cascading approach,” for the development of the comprehensive strategic business plan. The approach cascades because the activities at each step provides the foundation for the next, building on the information and the analysis to create a picture of what the business hopes to accomplish and how it plans to achieve its accomplishments (Figure 1). The cascade begins with the strategic overview of the business. For a start-up, this step defines the vision, the mission and the core values that will guide behavior of the organization’s people – employees, directors and officers. It also describes the governance, management and the organizational structure. For established businesses, it revisits these broad strategic directions and assesses how the new business initiative fits into them. The strategic overview provides a framework for management to nurture the organization’s culture and build its reputation.
Figure 1: Cascading Approach to Business Plan Development
The second step presents the value proposition that justifies the business’ raison d’etre. This is where a clear and compelling case is made, indicating that the business is not only going to be profitable but that it will support the organization’s core values and lead to the realization of the its vision. The third step describes the competitive environment of the business and presents an analysis of its market – competitors, their cultures and their principal strategies, potential allies and rationale for alliances, size of market and overall profitability, etc. This analysis provides the platform for the development of functional strategies, which leads to a presentation of the financial projections. The critical component of the functional strategies and financial projections is the assumptions. It is important for the business plan to clearly and without any obfuscation specify the assumptions leading to each assumption and each projection. Every effort should be made to avoid the stating inferences as facts, and the duty of those overseeing the development of the business plan is to challenge assumptions until their clarity and purpose are understood or the assumption discarded. The final step is the harvest and exit strategy, which specifies the triggers of exit opportunities and how those opportunities will be executed. Now, we take each step and discuss it more extensively.
Strategic overview encompasses the vision, mission, core values and the overall objectives the organization seeks to achieve.
The value proposition of the business is clear articulation of the unique characteristics of the business’ products and services, as perceived by its customers. In other words, why would your potential customers choose your products and services instead of those of the competitors?
Harvard Business School’s Michael Porter offered the five forces model for describing competition within any industry. Its simplicity and clarity has contributed to its acceptance in industry as an analytical tool for the impact of market forces on a firm’s competitiveness.
The market analysis is as external to the analyses going into the business plan as the functional analysis is internal. The functional analysis is the engine of the business plan, providing the specific strategies that management intends to use to seize opportunities, minimize weaknesses, challenge threats and enhance strengths.
All business is about the bottom line, period! Regardless of the lofty rationales of social good and community well-being, if the financial outlook is bleak, nothing else happens.
The final component of a good business plan is the exit strategy. It specifies the triggers and mechanisms for exiting the business by harvesting the value that has been created.
We noted that a business plan is the summary of what a company seeks to achieve and the steps it intends to take to attain those achievements. We also noted that there are different stakeholders in the business with different interests in different components of the business plan. Therefore, the appropriate emphasis must be presented in the business plan to meet the requirements each stakeholder group. However, we emphasized that the “master plan” must form the foundation of the different stakeholder-specific version. This master plan must be written with the objective of guiding the decision-making and actions of management and the board of directors as they navigate the company to its desired future.
For the business owners and management, completing the business plan marks the beginning of the work needed to achieve the vision, mission and stated outcomes for the business. It is the beginning of going out to raise funds from potential investors by showing the potential returns the company is capable of generating, and allowing investors to compare the companies potential and risks to others within their consideration. Completing the business plan is the beginning of marketing the business! Usually, the marketing effort will lead to feedback from potential investors that could cause a revision of the plan. For that reason, we recommend the “master copy” of the plan should not be bound, but kept in a 3-ring binder to facilitate easy changes resulting from credible improvement suggestions from outsiders who take interest in the company.
For management, the business plan is the blueprint for decisions associated with achieving the objectives of the business. Thus, it is not shelved to collect dust, but referred to frequently to understand the assumptions that were made, the results that were expected and the differences in what is being observed. It allows management to update and explain variances between the reality of executing the plan and the projections that were made. Good managers use a good plan as a guide to making great decisions.
The board of directors supports management by providing the policy framework within which they make decisions. The policy framework must be driven by the business plan since that is what defines the aspirations of the company. The board oversees management behavior to protect investors and other stakeholders from inherent management opportunism. The director’s responsibilities demand strength, knowledge and passion about the business. It also requires them to respect and trust each other, and in that respect and trust, be comfortable in their candor with each other.
A good plan is very important because it defines the indicators of success for the business in the strategic overview of the company, and reinforces that definition in the market analysis, functional analysis and financial projections in measurable formats. It also provides a good picture of the future and the strategies that the company proposes to use in seizing it so that its stakeholders can come to a consensus before tying their futures together with the exchange of money and stock certificates. When strategies need to change, as they often do, the board members and management will have the defined strategies as the foundation on which to make the necessary changes, and the decisions supporting the changes will be clear to those who need to implement them. This enhances the company’s success potential. In short, a good business plan can help build a great company and surround it with great people who together perform great feats.
References and Further Reading
Bennis, W. (1994). On Becoming a Leader, New York: Perseus Publishing.
Bygrave, W.D. (1997). The Portable MBA in Entrepreneurship, 2nd Edition, New York:
John Wiley and Son.
Eccles, T. (1994). Succeeding with Change: Implementing Action-Driven Strategies,
London, UK: McGraw-Hill Book Company.
Leavitt, H.J. (2003). “Why Hierarchies Thrive,” Harvard Business Review, Boston,
MA: Harvard Business School Publishing, 6 pp.
McGregor, D. (1960). The Human Side of Enterprise, New York: McGraw Hill.
Peters, T. and R. Waterman (1982). In Search of Excellence, New York: Harper and
Porter, M. (1980). Competitive Strategy, New York: Free Press.
Roney, C.W. (1999). Assessing the Business Environment: Guidelines for Strategists,
Westport, CT: Quorum Books.
Ryan, R. (2001). Entrepreneur America: Lessons from Inside Rob Ryan’s High Tech
Start-Up Boot Camp, New York: Harper Business.
Sonnenfeld, J.A. (2002). “What Makes Great Boards Great,” Harvard Business Review,
Wheatley, M. (2001). Leadership and the New Science: Discovering Order in a Chaotic
World, New York: Berrett-Koehler Publishers, Inc.