When evaluating what cost advantage Monsanto exploits, one finds that Monsanto's approach is not necessarily to be a cost leader. Below is an exerpt from the Monsanto website discussing their seed pricing strategy.
"....as a business, we pride ourselves on products that provide the most value, and on being transparent in the way we price them...Our pricing philosophy is a key component of our commitment to serving the best interest of our farmer customers."
http://www.monsanto.com/newsviews/pages/seed-prices.aspx
Their business strategy is product differentiation (and sometimes tacit collusion) but not cost leadership. They are not shy about this, in fact, it is laid out squarely in this direct quote from their website (cited above).
"When determining the value provided by seed, we consider tangible and intangible benefits the product provides as compared to competing alternatives. Tangible factors include the money farmers save on inputs that our products reduce the need for (chemicals, labor, equipment, fuel, etc.) and the additional income from increases in yield. Intangible factors include convenience, reduction in financial risk and reduced exposure to chemicals. In some crops, these benefits differ between regions and we account for this through regional pricing. Much of the data we use to quantify benefits comes from annual field testing conducted in cooperation with our customers on their farms. Analysis of this data helps us price products so they deliver more value to farmers than competitors’ products."
This concept is interesting to me. While most industries I feel, focus on how much did it cost them to make and market their products, and how much will they need to sell at said price to yield profit, Monsanto focuses on what can they charge that customers will feel is reasonable based on all the benefits of their product. Then they further push or pull the pricepoint depending on the region and what competition exists for those local crops, how much people of that region are willing to pay for their advantages, and how much will people save in other expenses by choosing their product versus another without genetic modification.
Saturday, February 28, 2015
Saturday, February 21, 2015
Evaluating Firm Strengths and Weaknesses: The Resource-Based View
Applying the VRIO Framework to Monsanto:
VRIO: Value, Rarity, Imitability, and Organization
When evaluating the resources and capabilities of the firm, it is essential to strategize in a way that exploits the environmental strengths and minimizes environmental threats as much as possible.
Using the VRIO framework approach, one asks the question, "Is the resource or capability...valuable? rare? costly to imitate? exploited by organization?"
Applying this principle, where does Monsanto lie?
Their products are unique. They are relatively rare, because they take a significant amount of time and money to develop. The research that goes into development of genetically modified seeds rival that of drugs and vaccines. Also, it would be both costly and difficult to imitate. They definitely capitalize on this quality.
They are global. This capability is not extremely rare overall. However, it is valuable and they definitely exploit this capability. If there are production issues in certain countries or areas, there are numberous other locations that could potentially meet there needs. This would be costly to imitate for other agricultural companies.
Clients gain more than a product. If a farmer invests in seeds that are modified by Monsanto to produce bigger, better crops, they also come with an innate defense against certain pests. This type of insurance without having to add poisonous chemicals/pesticides to the crops and guaranteeing a ROI by the increase in producation is definitely valuable. Is it rare? Potentially. Rare because competition is relatively scarce. Also, because so many variables go into farming. The quality of the land and most of all the weather are big determinants of success in addition to the quality of the seed. One way that Monsanto exploits the knowledge of these variables is by providing data to the farmers to help them prepare for the season and giving them expert advice based on the data gathered from state of the art equipment. This is a great perk to a farmer without the means to invest in that type of research based investment.
It would appear that they are pretty wise about what it takes to stay competitive in this market when it comes to the basics.
VRIO: Value, Rarity, Imitability, and Organization
When evaluating the resources and capabilities of the firm, it is essential to strategize in a way that exploits the environmental strengths and minimizes environmental threats as much as possible.
Using the VRIO framework approach, one asks the question, "Is the resource or capability...valuable? rare? costly to imitate? exploited by organization?"
Applying this principle, where does Monsanto lie?
Their products are unique. They are relatively rare, because they take a significant amount of time and money to develop. The research that goes into development of genetically modified seeds rival that of drugs and vaccines. Also, it would be both costly and difficult to imitate. They definitely capitalize on this quality.
They are global. This capability is not extremely rare overall. However, it is valuable and they definitely exploit this capability. If there are production issues in certain countries or areas, there are numberous other locations that could potentially meet there needs. This would be costly to imitate for other agricultural companies.
Clients gain more than a product. If a farmer invests in seeds that are modified by Monsanto to produce bigger, better crops, they also come with an innate defense against certain pests. This type of insurance without having to add poisonous chemicals/pesticides to the crops and guaranteeing a ROI by the increase in producation is definitely valuable. Is it rare? Potentially. Rare because competition is relatively scarce. Also, because so many variables go into farming. The quality of the land and most of all the weather are big determinants of success in addition to the quality of the seed. One way that Monsanto exploits the knowledge of these variables is by providing data to the farmers to help them prepare for the season and giving them expert advice based on the data gathered from state of the art equipment. This is a great perk to a farmer without the means to invest in that type of research based investment.
It would appear that they are pretty wise about what it takes to stay competitive in this market when it comes to the basics.
Thursday, February 12, 2015
Evaluating Environmental Opportunities
In Chapter 4 of Gaining and Sustaining Competitive Advantage, we take what we have learned in analyzing threats and extrapolate that into identifying opportunities.
Here, we will look at what strategies can be or are used by Monsanto to neutralize the various threats.
Neutralizing the threat of entry: To neutralize threat of entry, one would choose a strategy of erecting barriers to entry for other potential competitors. For Monsanto, the threat of new competitors is lower than in some other industries because of product differentiation and prohibitive costs related to product development.
Neutralizing the threat of rivals: One method of finding an advantage over the competition is to evolve product based on customer needs. The expense of genomic research and product development means it is vital to ensure product differentiation if possible. Another method is forming strategic alliances, which Monsanto has also done in the past as discussed briefly in the last post.
Neutralizing the threat of substitutes: The same strategies apply as thwarting the threat of rivals.
Neutralizing the threat of suppliers: Monsanto does not rely on any major supplier. For needs that they don't internally meet, they reach out to a diverse group of farmers. They claim to strive to meet the social commitment they have to the communities they serve. They also spread out globally. For this threat to be significant, Monsanto would have to do something significant to turn multiple groups against them to be effected by this threat.
Neutralizing the threat of buyers: Two primary methods of neutralization are product differentiation and seeking additional buyers. Monsanto participates in both of these measures.
One strategy that may benefit all of the these threats except the first one, is some PR overhaul. While Monsanto's website looks very "Kumbaya", their press is often anything but! If Monsanto wants to truly optimize their competitive advantages, having a public perception of benevolence and ethic conscience would go far. Not only do they have to be honest and forthcoming with their direct customers in the farming community, but the end products of their seeds are the general public, and they must be supportive as well or the farmers will not want to grow their product.
Here, we will look at what strategies can be or are used by Monsanto to neutralize the various threats.
Neutralizing the threat of entry: To neutralize threat of entry, one would choose a strategy of erecting barriers to entry for other potential competitors. For Monsanto, the threat of new competitors is lower than in some other industries because of product differentiation and prohibitive costs related to product development.
Neutralizing the threat of rivals: One method of finding an advantage over the competition is to evolve product based on customer needs. The expense of genomic research and product development means it is vital to ensure product differentiation if possible. Another method is forming strategic alliances, which Monsanto has also done in the past as discussed briefly in the last post.
Neutralizing the threat of substitutes: The same strategies apply as thwarting the threat of rivals.
Neutralizing the threat of suppliers: Monsanto does not rely on any major supplier. For needs that they don't internally meet, they reach out to a diverse group of farmers. They claim to strive to meet the social commitment they have to the communities they serve. They also spread out globally. For this threat to be significant, Monsanto would have to do something significant to turn multiple groups against them to be effected by this threat.
Neutralizing the threat of buyers: Two primary methods of neutralization are product differentiation and seeking additional buyers. Monsanto participates in both of these measures.
One strategy that may benefit all of the these threats except the first one, is some PR overhaul. While Monsanto's website looks very "Kumbaya", their press is often anything but! If Monsanto wants to truly optimize their competitive advantages, having a public perception of benevolence and ethic conscience would go far. Not only do they have to be honest and forthcoming with their direct customers in the farming community, but the end products of their seeds are the general public, and they must be supportive as well or the farmers will not want to grow their product.
Sunday, February 8, 2015
Evaluating Environmental Threats
In this chapter, we learn about the Structure-Conduct-Performance Model as a means to understand the relationship among a firm's environment, behavior, and performance. This model evaluates industry structure, firm conduct, and performance.
By applying the model, one can predict some constraints, competition, and potential barriers facing the company in question and likelihood of struggle for a new entrant into the market.
Let's look at Monsanto,
Type of industry: agricultural genetic modification/breakdown of operations equals providing seed and research/genomics
Number of competing firms-There are several large companies competing for providing seed to farmers worldwide. In the area of agricultural genomics however, there are only about 4 companies to note (Archer Daniels Midland, Dow Chemical, Evogene, and Syngenta)
Homegeneity of products- Products are complex and diverse. Seed type, variety of production results, and continuous changing demands and needs due to environmental and market issues lead to little homegeneity in this industry.
Cost of entry and exit- The cost of entry would be costly. Average cost to get a new GMO plant to market is about $126 million and takes approximately 13 years from start of research and development to launch!
Firm Conduct:
Price taking- Monsanto is often criticized for setting the price and basking in profit.
Product differentiation- While their GM seeds give farmers an advantage by innately warding off pests and producing more crop, they also often provide seeds that must be replenished annually versus seed that will reproduce. This is viewed by customers and the general public of course as market manipulation.
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.
Performance:
Firm level-Competitive disadvantages (Bad PR, often viewed in a negative light), Competitive advantages (longevity, money, variety of offerings on a global level)
Society- Productive and allocative efficiency (good, however, criticized for providing products without enough safety data), Level of employment (approximately 22,000 employees worldwide), Progress (strong for R/D and providing innovative solutions/attention needed to marketing and public relations)
The five forces model of environmental threats attempts to determine the amount of competitve power that exists in an industry. Expected level of performance can be predicted by measuring the barriers that a company faces.
Threat of entry: The threat of entry is relatively low because of the time and cost involved for genomics.
Threat of rivalry: As mentioned before, there are 4 major companies that compete as GM agricultural provider. Dow Chemical, an American company, in particular poses threat. Monsanto in the past has had a very poor image in the public eye which also puts them at a competitive disadvantage.
Threat of substitutes: This is lower than in many industries, due to the research and development and specialization required for this field.
Threat of powerful suppliers: This is low, because Monsanto needs little from outside vendors to aid in their production.
Threat of powerful buyers: This is high. While Monsanto does operate globally which would offset any localized issues they may have such as boycot or competitive disadvantage and their are many farmers worldwide, if the public or a regulating body deemed a product as potentially unsafe, it could have a serious effect on Monsanto's sales, especially if it is regarding one of their seeds that have a short shelf-life.
References:
http://www.investopedia.com/ask/answers/120314/who-are-monsantos-main-competitors.asp
http://gmoanswers.com/ask/how-much-time-does-it-take-and-how-much-does-it-cost-successfully-develop-hybrid-one-or-more
R.D. Ireland, R Hoskisson, M Hitt. Understanding Business Strategy: Concepts and Cases. Chapter 9. 2009.
By applying the model, one can predict some constraints, competition, and potential barriers facing the company in question and likelihood of struggle for a new entrant into the market.
Let's look at Monsanto,
Type of industry: agricultural genetic modification/breakdown of operations equals providing seed and research/genomics
Number of competing firms-There are several large companies competing for providing seed to farmers worldwide. In the area of agricultural genomics however, there are only about 4 companies to note (Archer Daniels Midland, Dow Chemical, Evogene, and Syngenta)
Homegeneity of products- Products are complex and diverse. Seed type, variety of production results, and continuous changing demands and needs due to environmental and market issues lead to little homegeneity in this industry.
Cost of entry and exit- The cost of entry would be costly. Average cost to get a new GMO plant to market is about $126 million and takes approximately 13 years from start of research and development to launch!
Firm Conduct:
Price taking- Monsanto is often criticized for setting the price and basking in profit.
Product differentiation- While their GM seeds give farmers an advantage by innately warding off pests and producing more crop, they also often provide seeds that must be replenished annually versus seed that will reproduce. This is viewed by customers and the general public of course as market manipulation.
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.
Performance:
Firm level-Competitive disadvantages (Bad PR, often viewed in a negative light), Competitive advantages (longevity, money, variety of offerings on a global level)
Society- Productive and allocative efficiency (good, however, criticized for providing products without enough safety data), Level of employment (approximately 22,000 employees worldwide), Progress (strong for R/D and providing innovative solutions/attention needed to marketing and public relations)
The five forces model of environmental threats attempts to determine the amount of competitve power that exists in an industry. Expected level of performance can be predicted by measuring the barriers that a company faces.
Threat of entry: The threat of entry is relatively low because of the time and cost involved for genomics.
Threat of rivalry: As mentioned before, there are 4 major companies that compete as GM agricultural provider. Dow Chemical, an American company, in particular poses threat. Monsanto in the past has had a very poor image in the public eye which also puts them at a competitive disadvantage.
Threat of substitutes: This is lower than in many industries, due to the research and development and specialization required for this field.
Threat of powerful suppliers: This is low, because Monsanto needs little from outside vendors to aid in their production.
Threat of powerful buyers: This is high. While Monsanto does operate globally which would offset any localized issues they may have such as boycot or competitive disadvantage and their are many farmers worldwide, if the public or a regulating body deemed a product as potentially unsafe, it could have a serious effect on Monsanto's sales, especially if it is regarding one of their seeds that have a short shelf-life.
References:
http://www.investopedia.com/ask/answers/120314/who-are-monsantos-main-competitors.asp
http://gmoanswers.com/ask/how-much-time-does-it-take-and-how-much-does-it-cost-successfully-develop-hybrid-one-or-more
R.D. Ireland, R Hoskisson, M Hitt. Understanding Business Strategy: Concepts and Cases. Chapter 9. 2009.
http://www.monsanto.com/investors/pages/faqs.aspx
Sunday, February 1, 2015
Firm Performance and Competitive Advantage
This week we focus on firm performance and competitive advantage. The complexity of the advantages and disadvantages is what drew my interest to putting Monsanto on the disection table. The article found at the link below is a great summary of some of the competitive disadvantages the company faces and some speculations why.
http://modernfarmer.com/2014/03/monsantos-good-bad-pr-problem/
Monsanto was founded in 1901, So neither business nor public criticizism are new concepts to the industrial agricultural giant. It's original focus was chemicals. " Monsanto was one of a handful of companies that produced Agent Orange, and its main poison, Dioxin. It sold DDT, PCBs, the controversial dairy cow hormone, rBGH, and the cancer-linked Aspartame sweetener." Of course, while these products may have turned a profit, they did not set well in the public eye.
Now, as a GM company (Genetic Modification), that produces "super seeds". Society often criticizes them for "playing God".
From an economic perspective, however, the company continues to be profitable despite looking like the villain, even when their competitors suffer much less scutiny. This report by Monsanto, http://news.monsanto.com/press-release/financial/monsanto-first-quarter-milestones-reinforce-foundation-growth-fy15-and-confi, confirms that continued growth is foreseen for 2015. Net sales for the first quarter this year is $2.9 billion. This is down slightly from last year, but Monsanto operates globally, so when activity is projected to decrease in certain markets, they diversify their capital allocation within their portfolio to ensure they stay on track.
Their stock prices are among the most expensive of their competing GM's. Around $118 per share is right up there with Terra Nitrogen and Agrium, while CF Industries sell for $305 per share and all other competitors reign in at $65 and below. (http://www.nasdaq.com/symbol/mon/competitors) Ownership is composed of 90.50% institutional holdings. (http://www.nasdaq.com/symbol/mon/ownership-summary)
Overall, Monsanto focuses it's strategies on development and performance. Public relations and marketing should be given more consideration if they desire to optimize their profitability. While their intentions to help farmers produce at the highest capacity possible, they are often seen as the creators of "Frankenfood" focused on $$$. When coming under fire during the Mad Cow epidemic in Europe some years back, they did not approach the scrutiny with concern or compassion, and the image they maintain as the bad guys continues. http://modernfarmer.com/2014/03/monsantos-good-bad-pr-problem/
http://modernfarmer.com/2014/03/monsantos-good-bad-pr-problem/
Monsanto was founded in 1901, So neither business nor public criticizism are new concepts to the industrial agricultural giant. It's original focus was chemicals. " Monsanto was one of a handful of companies that produced Agent Orange, and its main poison, Dioxin. It sold DDT, PCBs, the controversial dairy cow hormone, rBGH, and the cancer-linked Aspartame sweetener." Of course, while these products may have turned a profit, they did not set well in the public eye.
Now, as a GM company (Genetic Modification), that produces "super seeds". Society often criticizes them for "playing God".
From an economic perspective, however, the company continues to be profitable despite looking like the villain, even when their competitors suffer much less scutiny. This report by Monsanto, http://news.monsanto.com/press-release/financial/monsanto-first-quarter-milestones-reinforce-foundation-growth-fy15-and-confi, confirms that continued growth is foreseen for 2015. Net sales for the first quarter this year is $2.9 billion. This is down slightly from last year, but Monsanto operates globally, so when activity is projected to decrease in certain markets, they diversify their capital allocation within their portfolio to ensure they stay on track.
Their stock prices are among the most expensive of their competing GM's. Around $118 per share is right up there with Terra Nitrogen and Agrium, while CF Industries sell for $305 per share and all other competitors reign in at $65 and below. (http://www.nasdaq.com/symbol/mon/competitors) Ownership is composed of 90.50% institutional holdings. (http://www.nasdaq.com/symbol/mon/ownership-summary)
Overall, Monsanto focuses it's strategies on development and performance. Public relations and marketing should be given more consideration if they desire to optimize their profitability. While their intentions to help farmers produce at the highest capacity possible, they are often seen as the creators of "Frankenfood" focused on $$$. When coming under fire during the Mad Cow epidemic in Europe some years back, they did not approach the scrutiny with concern or compassion, and the image they maintain as the bad guys continues. http://modernfarmer.com/2014/03/monsantos-good-bad-pr-problem/
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