Strategic Alliances and Merger and Acquisition Strategies

We've already touched on some of these concepts mentioned in chapters 13 and 14 when evaluating Monsanto.

First let's look at strategic alliance.  You've already read about the cooperation of Monsanto with Dow in developing corn seeds.  A more significant part of their daily operations however are the relationships with Monsanto's suppliers.  And operating through global procurement, there are obvious advantages for the company. One is that they have a choice in who they deal with. They have flexibility within their supply chain to partner with suppliers in areas that are convenient for them, they're able to negotiate and take bids allowing them to keep their costs reasonable, and they can keep their level of diversity without having to micromanage and produce in each step of the production process.  Furthermore, using this approach allows a more sustainable procurement for Monsanto without burdening or overusing resources in one particular area.  For small areas or economically struggling, partnering with the company may lead to more local jobs and put more money into that local economy. Thus it is a better option for all involved.

There are also advantages for the suppliers that partner with Monsanto. For many of the small companies, landing Monsanto would be a very large account.  Also they can be located anywhere in the world and still have an opportunity at venturing with them.  Because Monsanto uses a large variety and number of suppliers, there's not an unreasonable expectation for one company to mass produce. Each company contributes what they can/what they commit to.

These partnerships are known as supply agreements.

Through licensing agreements, Monsanto builds another type of relationship through its corn states branch by selling some of its licenses to smaller seed companies.  A good analogy of this may be like a resource/research thrift shop.  It gives smaller seed companies an advantage because they do not have the money needed to invest in research or production for genetic modified products.  This gives them the ability to incorporate modification needed for their area such as herbicide resistance in a mixed tailored for their local area and gives local farmers more choices based on their financial abilities.  This also benefits Monsanto in a couple of ways. It builds relationships which is always a great means of marketing, and it allows them extra income for formulas they are no longer developing or selling because they are producing the next big thing.

Monsanto has formed equity alliances with numerous partners to ensure the advancement of technology and innovation.  Currently, Monsanto is actively seeking partners to help them advance in biotechnology, biologics, seed breeding, and chemistry.

Monsanto has been a part of a number of mergers and acquisitions.  The Jacob Hartz seed company as mentioned before was Monsanto's first acquisition.  In 1996 they acquired biotech companies Agracetus and Calgene.  The following year they purchased two more seed companies.  1998 they complete the purchase of Dekalb Genetics Corp.

In 2000, they entered into a merger and changed their name to Pharmacia.  Monsanto's pharmaceuticals and nutrition business known as Pharmacia was later purchased by Pfizer, and Monsanto split to become the "new Monsanto".

In 2005, Monsanto purchases Seminis, Inc, a global leader in the vegetable and fruit the industry, forms ASI, holding company for corn and soybean seeds purchases two more seed companies.  They also acquire Stoneville cotton company.

As the years continue, they buy more and more smaller companies.  Monsanto and Dow sign a global agreement for crosslicensing.  They form of business and licensing agreement with Bayer.  They form a joint research and development relationship with BASF. In 2011, they acquired the biotechnology R&D company Divergence which focuses on parasites.


http://www.monsanto.com/whoweare/pages/sustainability-and-procurement.aspx

http://www.monsanto.com/whoweare/pages/partner-with-monsanto.aspx

http://www.monsanto.com/whoweare/pages/commitment-to-partnerships.aspx

http://www.monsanto.com/whoweare/pages/monsanto-history.aspx

Implementing Corporate Diversification

Chapter 12 continues exploring diversification strategies and how companies can use them to make them more competitive if they plan appropriately.  Specifically chapter 12 focuses on implementing corporate diversification. As with anything one must weigh the difference between the risks and benefits to determine if the strategy will be successful.  In this case, will be competitive advantage gained by diversification be of greater value than the cost of implementing the strategy itself in the operational costs associated with maintaining the diversification.

While Monsanto is considered a GMO company, and primarily they are, they are not a GMO company that has diversified to provide chemicals and pesticides.  As discussed in previous posts regarding their history, they are a chemical company that has expanded to provide other agricultural products such as seeds and GMO. 

In 1901 upon opening, Monsanto's first product was saccharine.  In 1945, they began producing and marketing the first agricultural chemicals.  In 1964, they added herbicides.  In 1975, they opened their first cell biology lab.  In 1976, Roundup was released to the US market.  In 1981, Monsanto becomes the first to genetically modify a plant cell and they acquire the Jacob Hartz seed company.

So as you can see, Monsanto took the profits that they made from their chemicals and reinvested it into cell biology, genetic modification, and seed production, and from a operational standpoint that really became their focus is they began to grow into this untouched territory.  In the beginning, the implementation of diversification was a means to company growth.  Now, chemical production and seed production are both large operations and are managed and maintained on a global scale and are for the most part separate endeavors.  As a whole however, even though both categories are financially profitable and the investments in the research and development portion is very large, there are definitely some crossover and advantages that come from the diversification route they have chosen. For example, Monsanto produces herbicide. They also produced seeds that are herbicide resistant. Because they produce both, research efforts are made much easier. 

This also makes me wonder if building 2 products that are reliant on each other or that creates exclusivity is unethical or just good business strategy?  For example, Monsanto creates Roundup, then creates a Roundup resistant seed.  This implies other seeds used with Roundup may be at risk to yield an inconsistent crop.  It also implies that Monsanto Roundup resistant seed may be at risk if used with other types of herbicide.  This would lock the farmer into both choices.

Even though the company carries several brands and operates with global procurement working with various and diverse suppliers and external partnerships to lead to technological innovations, it all comes back to leadership under one small group of 13 comprised of a CEO, COO, VP's and a board of directors.

http://www.monsanto.com/whoweare/pages/monsanto-history.aspx

http://www.monsanto.com/whoweare/pages/board-of-directors.aspx

http://www.monsanto.com/whoweare/pages/monsanto-leadership.aspx

Diversification Strategies

Chapter 11 discusses how businesses use diversification or lack of as a strategy.  There is a broad range of possibilities of involvement levels.  Some companies choose to focus solely on one area (what they do best) and provide strictly one type of service or product.  This is called single business or limited diversification.  The most diversified companies participate in unrelated diversification, meaning the products or services are just as implied unrelated and broadly varied.

For Monsanto corporation, they practice somewhere around the middle in what is called related constrained diversification.  The products and support they provide are related, they all focus on agricultural sustainability, but they have a variety of offerings. They provide traditional seeds, GMO seeds, research and development leads of course to those products but also to expertise/advice to the farmers they serve, and they also provide pesticides and herbicides. Adding this variety makes them more appealing to their agricultural customers, because even if their needs change, they can still offer predictions, advice, and service.  This also helps them to sustain unexpected hurdles in production.  If a seed doesn't produce as planned or the pest population is slightly different, they can push another one of their products that do meet current needs.  Diversification is like always having a back-up, as long as you are prepared, budgeted, and experienced enough to support the variety of products you plan to produce.

Vertical Integration Strategies

In Chapter 10, Barney teaches the principles of vertical integration strategies.

Key definitions to understand:

Value Chain: "set of discrete activities that must be accomplished to design, build, sell, and distribute a product or service"

Vertical integration: "the number of stages in a product/service's value chain in which a firm engages"

The amount of value that the level of integration adds can be computed by using a formula the divides the value added by the level of integration minus net income and taxes by the amount of sales minus the net income and taxes, or in another way, value added is equivalent to depreciation plus amortization plus fixed charges plus income tax plus net income plus interest expense plus labor expense plus rental expense.

Of course the level of vertical integration that makes sense is industry and company specific often times.  While there would be significant cost-savings and benefits to controlling the process from point A through Z for some companies, the inability to focus efforts or the cost involved with all of the segments of the process can be detrimental for others.

In evaluating Monsanto, we find a good deal of vertical integration, however, they do not control every step of their production process.

Monsanto defines themself as "a sustainable agriculture company. We deliver agricultural products that support farmers all around the world."  (http://www.monsanto.com/whoweare/pages/default.aspx)

They provide genetically modified seeds (GMO), pesticides and herbicides (like Roundup), and also some traditional seeds as well.  They form and actively seek partnerships to aid them in the areas of the research and development of the GMO's (http://www.monsanto.com/sitecollectiondocuments/partnering-technology-focus-areas.pdf).   They contract out some of the seed production to various suppliers globally. They have also been a chemical company since their startup in the early 1900's and oversee that process.

Monsanto states that the companies that partner with them and work with them as a supplier must adhere to there values and serve with their mission to the globes farmers.  They list a variety of the companies that collaborate with them.

Ch 9: Tacit Collusion: Cooperation to Reduce Competition

Tacit collusion was actually addressed once in my blog posting "Evaluating Environmental Threats". 

See exerpt from Feb 8:

"Tacit Collusion-  In the past, Dow and Monsanto have worked to strategically cooperate on development of GM corn seeds.  While care was taken to avoid explicit collusion (which is illegal), they also had to attempt to avoid tacit collusion as well, which is sometimes difficult in horizontal alliances." (http://en.wikipedia.org/wiki/Tacit_collusion)

To better understand what tacit collusion is (as the lines seem blurry), let's start with wikipedia that defines it like this:

1. "Tacit collusion occurs where firms undergo actions that are likely to minimise a response from another firm, e.g. avoiding the opportunity to price cut an opposition. Put another way, two firms agree to play a certain strategy without explicitly saying so."

While competition in any industry is good for the consumer, it pushes product and service quality, helps keep prices down, and gives the consumer choices, it is reasonable to see how businesses could benefit from not competing if possible.  This would only be possible if (1) the company had a monopoly on the market or (2) the companies at odds agreed to share amicably serving the best interests of both.

When the latter is the condition, things can get sticky.  A price leader is defined by Barney in the text as "a firm that sets acceptable industry prices or margins."  This characteristic sets the stage many times for collusion.  In an industry where costs for research and development are significant and the time for a product to make it to market is lengthy, there would seem to be much temptation for collusion.  If Monsanto knows that company B Iin the above case, Dow) is working on a specific line of corn seeds, it would be in the best interest of both companies not to invest years and millions of dollars into an identical product.  Thus they cooperate. 

Also, there is much to consider when setting the prices to ensure the costs of R&D are recouped, especially in the agriculture industry where depending on the season/weather/pests and various factors, needs may change and the window of opportunity for sales might be difficult to predict.

That being considered, as long as the competition knows what is in the pipeline for their adversaries, tacit collusion is a non-issue due to the costly-to-duplicate nature of the GM industry.

Flexibility: Real Options Analysis Under Risk and Uncertainty

Businesses must have strategies that allow them to make it through difficult periods.  Depending on the type of market, the level of risk and uncertainty must be weighed and tools should be implemented to help protect the company against times of challenge.  For Monsanto, their strategizing has come under serious scrutiny.  Two of their choices in particular strike a nerve.  

The first: they claim that they have a right to a percentage of sales on all genetically modified resulting crops.  For example, they sell the seed. The farmer grows the crop.  The renewal crop that results the following year is subject to a royalty of 2% each year according to Monsanto.

The second: they are big guns that shoot at little guys.  They are the world's largest seed provider, yet they have sued farmers who unknowingly used genetic modified seeds through third party purchase and were unaware of the renewal royalties expected from Monsanto.

How are they trying to enforce these rules and ensure the continued pay in case R&D is lacking or there are issues with new product?  They are attempting to recreate the copywright/patent that would make any plant derivative of a GMO that started with Monsanto their intellectual property!  Many call this "unnatural".  

"The issue as it concerns Monsanto is not whether the company has a right to sell products and charge for them as it chooses. But essentially, Monsanto holds crops hostage with its position on royalties. The farmer grows his crop using manifold resources including labor. He also grows the seeds that he intends to replant – but finds he cannot until Monsanto is paid again … and again."

If Monsanto owns the rights to a portion of the profits from all future crops because their products were key in developing the original one, this gives them increased flexibility and padding in the event of a bad season for producing or sale of a new product.  Because research and development is very costly to imitate, manufacturing decisions are crucial and can result in heavy losses if the wrong choices are made. 

http://www.infowars.com/monsantos-business-model-a-devious-strategy-to-extend-copyright-into-perpetuity/

Monsanto: Product Differentiation

In Chapter 7, Barney discusses how businesses use product differentiation to their advantage.  There are various way that firms can differentiate their products or services:

Product features

Product complexity

Timing of product introduction

Location

Product customization

Consumer marketing

Product reputation

Linkages among functions within a firm

Linkages with other firms

Product mix

Distribution channels

Service and support

Monsanto utilizes a few of these to their advantage. 

Product features: Monsanto provides seeds that are genetically modified to fight off infestation from weeds and certain pests.  Research and development is constant to stay abreast of the needs of farmers and keep an edge over the competition.

Product complexity: Similar to product features, Monsanto uses this to stay ahead.  Making sure their products meet a particular need, they also have seeds that must be replanted annually to increase sales and stay current.

Timing of product introduction is key to ensure the product is available in time for planting season.

Location:  They produce globally and provide globally.

Consumer marketing and product reputation are two areas where Monsanto could perhaps use a little help.  Lack of regulation on GMOs means they are widely criticized and many end product consumers are speculative regarding the safety and wholesomeness of their genetically modified seeds.  Also, with the company being a producer of chemicals from it's beginning, they carry a stigma they can't seem to shake.