In last month’s newsletter, we wrote about purpose being your “why” and strategy being the direction or the approach you take to achieve goals.

This month we will focus on developing appropriate strategies for farming businesses. But before you start developing a strategy, it can be helpful to identify what does a good strategy look like?

Recognising good strategy

Richard Rumelt’s distinction between Good Strategy and Bad Strategy can be useful here:

“Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favourable outcomes… Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need.”¹

1. Good Strategy/Bad Strategy” (Richard Rumelt 2011)

It should be noted there seems to be a lot of confusion between strategy and tactics, and a lot of people representing an operational plan as a strategic one. Once you are clear on what a good strategy looks like, you can begin developing one.

Strategy Development Good strategy responds to the changing competitive environment, and good strategy begins with an assessment of the starting position. Rumelt called this first phase ‘Diagnosis’ while McKinsey’s first three building blocks of strategy are called ‘Frame’, ‘Diagnose’ and ‘Forecast’2. This is where strategy is less art and more science, and good quantitative analysis can be applied to help with the diagnosis. Some tried and tested methods to help with a situational analysis are the Strengths, Weaknesses, Opportunities, Threats (SWOT) framework, and the more in-depth ‘Porter’s Five Forces model’ assists to analyse the key dynamics that shape every industry. 2. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/mastering-the-building-blocks-of-strategy

 

Strategy and Farm Business If we were to conduct a situation analysis of agriculture as an industry and consider some of the opportunities and challenges facing farm businesses, some are a little way off (eg feeding 9 billion people), some are fast approaching (eg environmental regulation and social licence to operate) and others are harder to forecast (eg impact of climate change and timelines). A lot of farm businesses we deal with are proactively responding to many of these issues, with key strategic objectives such as improving water use efficiency, reducing reliance on chemicals, introducing technological solutions to aid productivity, reducing/supplementing synthetic fertiliser etc.

 

However, one current competitive advantage of a lot of family farms that can easily become a weakness, is the fact they often do not have to pay a fair rate of return to the asset owners. In fact, if we consider equity in farmland as ‘contributed capital’ by the owner, there are not many other industries where the cost of capital is so low. For individual farms, this can result in a lack of focus on returns, and raises questions as to what that means for some family farm businesses over the long term?

Much like how tariffs strengthen a country’s position in the short term but weaken their competitiveness in the longer term, this advantage of a low cost of capital for one generation can quickly become a weakness for the next. And while low rates of return may have been acceptable by successive generations of owners in the past, expectations and practices are changing, to the point where transition of assets (and the expected returns from assets) is a risk to the long-term future of some family farming businesses.

Turning a weakness into a strength

One of the key challenges we find in succession planning can be introducing that expectation that the business pays a return to new, off-farm owners. If the business is already accustomed to paying the owners a fair rate of return and this is endemic in the business, a smooth transition will be much more achievable than if a new cost is introduced to the business. And it will increase the focus on profitability, compelling businesses to become more efficient and potentially creative.

So for many businesses the succession of a business doesn’t need to be viewed as a threat, but rather an opportunity that can be responded to with good strategic planning. And like most good plans, they require foresight, attention, revisiting and time.

If you need assistance with strategic planning, please get in contact with ORM  on 5441 6176.

 

Ben Hogan, Agribusiness Consultant.

For more information contact us here admin@orm.com.au