Strategic Business Planning for Commercial Producers Monitoring and Control How Do I Stay on Track? Control involves measurement, evaluation, and monitoring. Resources are scarce and costly so it is important to keep your strategy on track. Control involves setting standards. The general manager will then compare actual progress against the standards. Corrective action (if any) is then taken. If corrective action is needed, an investigation will also need to be undertaken to establish precisely why the difference occurred.   © Purdue University, Center for Food and Agricultural Business, 2002

Monitoring and Control Requires: Strategic Business Planning for Commercial Producers Monitoring and Control Monitoring and Control Requires: Identifying factors critical to success Measuring performance Defining standards of expected performance Comparing actual and expected performance Assessing need for and type of adjustment Managers must decide what items are critical enough to merit monitoring. This will depend in part on the type of control or feedback information that is needed. Standards will be the benchmarks against which performance is measured. These can come from budget projections, research studies assessing new technologies, and the experiences of other farmers in the form of record summaries. When using standards from secondary sources it is important to know how the values being reported were calculated. There needs to be measurement of actual performance. Data needs to be recorded in an accurate, consistent and timely manner. In some cases a paper or manual system may provide an acceptable method of recording data. In other situations, a computer system may be needed to retrieve or summarize data in a timely fashion When making comparisons between expected and actual performance, it will be necessary to make a judgement about whether the difference is large enough to require an adjustment. If an adjustment is called for, what will be done? Should changes be made in the implementation of the plan or was the plan unrealistic, requiring a new plan? © Purdue University, Center for Food and Agricultural Business, 2002

Monitoring and Control Process Strategic Business Planning for Commercial Producers Monitoring and Control No Operations Problem? Devise Strategy No Determine Critical Success Factors Take Corrective Action Yes Determine What to Measure Does Performance Match Standards? Internal? Financial? Customers? Innovation and Learning? Establish Standards This figure builds to show the process of monitoring a strategy. It illustrates what must be done to get a strategy into action and how to keep it on course. These steps are done formally or informally for any strategy you try to implement. Monitoring will require resources. These will be in the form of items of information. To achieve each of these steps, what will be needed? One part of this process is to identify the critical steps that must be accomplished. These “sign posts” provide points at which it is possible to stop and assess progress and take any corrective action that is needed. The next slides discuss critical success factors. Continue Monitoring Yes Measure Performance © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Critical Success Factors Strategic Business Planning for Commercial Producers Monitoring and Control Identifying Critical Success Factors The few key areas or activities where things must go well if vision is to be achieved Should focus on answering: How do owners see us? (Financial perspective) How do customers see us? (Customer perspective) What must we excel at?(Internal perspective) Can we continue to improve and create value? (Innovation and learning perspective) What is absolutely critical to the success of your business? If your farm depends on rented land, then maintaining a good relationship with the landowners will be important. How will this be done? What items will you monitor to be sure that you are succeeding? One approach might include establishing regularly scheduled reports to the land owners. Another might be to ask the land owner to evaluate your performance. There are lots of things that must be done to have a successful farm operation. Is owning new machinery critical? Is getting the crop planted by mid-May? What about purchasing inputs for the lowest price? What about marketing crops at prices above the season average? In determining those items that are critical keep a strategic focus. Those items that are important to a successful operating plan may not be the same as those needed to accomplish our vision. Those factors that are critical will be influenced by many things. The type of farm and the life cycle of the business and the managers are just a couple. As the business reaches a size or the stage in which new managers are being brought into the business, methods for monitoring the progress that these new people make in developing needed management skills will be critical. © Purdue University, Center for Food and Agricultural Business, 2002

Determining What to Measure Strategic Business Planning for Commercial Producers Monitoring and Control Determining What to Measure What information is needed to determine how stakeholders see us? If the information is gathered, how will it affect the decision-making process? Preliminary controls Concurrent controls Feedback controls When should the measures be taken to be useful? Monitoring critical success factors may require information from several sources. What is needed? If cash management is critical, it will be necessary to have information about the current position and expected income and expenses. It will also be important to know when changes may occur. It is also important to determine when the information is needed and what form it needs to be in. Some items might be needed on a regular basis, such as weekly. The level of pest infestations during the growing season might be one example. Other items might be needed only once or twice each year. Some items will be needed only when a major decision is being made. Finally, consideration should be given to the person that will be providing the information. Will this be something that I will do myself, or would it be better to obtain this information from someone else? Many farmers are developing the skill needed to analyze and interpret data from yield monitors. Still others are using consultants to handle much of this. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Controls Should. . . Involve only the minimum amount of information needed to give a reliable picture of events. Monitor only meaningful activities and results, regardless of measurement difficulty. Be timely. Be long-term and short-term. Pinpoint exceptions (trigger action). Be used to reward rather than punish. There is more information that we could gather that could poss8ible be used. This list helps us have a down what types of data we should track based on those critical controls (levers) that we can push to take corrective actions. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Example Measures Financial Operating Profit Margin, Asset Turnover Ratio, Return on Equity, Return on Assets, etc. Customer Quality, delivery, # of complaints, etc. Internal Planting and harvesting timing, weed control, employee satisfaction, etc. Innovation and Learning # of seminars attended, R&D investment (evaluation of new products, processes, etc.), etc. There are many approaches to control. Other measures may include the following: Productivity: Ratio of inputs to outputs – several measures can be used. Manager performance: How will you assess the quality of your management? What will you do to ensure that your management performance improves? Worker performance: What can you do to ensure that your employees are happy and productive? Sales analysis Quality controls, Budgets Ratio analysis Marketing research Feedback from customers Cash flow statements Location of buyers and potential buyers Activities of competitors to aspects of your plan Distributor support Performance of any promotional activities. Market reaction/acceptance to pricing polices Service levels And many other methods of monitoring and measurement. © Purdue University, Center for Food and Agricultural Business, 2002

Defining Standards of Performance Strategic Business Planning for Commercial Producers Monitoring and Control Defining Standards of Performance Benchmarking Looking for those businesses that are the best at doing something and learning how they do it so that we might emulate their methods Benchmarking is about answering, How are the best doing? How should we be doing? How are we doing? There are several types of benchmarking that can be done. Much of this is done in an informal way, through sharing of experiences with products at the coffee shop. Some benchmarking is formal and may be done by other professionals. For example, the loan officer at the bank will review loan requests and make judgments about the loan request based on the experience of other producers. Benchmarking can be related to financial or physical performance. It could be a comparison of the end result or an evaluation of all or part of a production process. Benchmarking is about finding best management practices – which is done by looking at the best in the field. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Benchmarking: How? Identify the area or process to be examined. Should be an activity that has potential for competitive advantage Find behavioral and/or output measures of the are or process to obtain measurements. Select an accessible set of competitors and best-in-class companies to benchmark. Performing similar activities Not necessarily in agriculture This will take creativity/imagination to find appropriate benchmarks in some areas. For example, perhaps employee satisfaction is a key success factor for your farm business. You may choose to benchmark your performance in this area against some of the best employee satisfaction companies in the world like Southwest Airlines or John Deere & Co. W@hile this may seem unrelated to your industry it is in some cases the best way to create a competitive advantage for your business. © Purdue University, Center for Food and Agricultural Business, 2002

Benchmarking Principles Strategic Business Planning for Commercial Producers Monitoring and Control Benchmarking Principles Be sure to understand and appreciate the differences between business environment and cultures. Understand how the aspect that is being studied fits with the other elements of the firm. The environment that a business operates in shapes what the business must do to compete. Studying a business in an environment that is similar to yours often makes the identification of similarities and differences easier. It also means that the practices that they are employing may be directly applicable to your business. If we have a cash grain operation, it would be possible to compare the operation to any number of operations. It is most likely that this comparison will be most useful if there is a similar climate, soils and crops being raised. While an effort is made to find similar environments, there will always be differences. Because of decisions made by others in the food chain, there will be some production opportunities available in some regions that are not available in others. Being close to large corn processors or large livestock operations will provide opportunities that are not available in other regions. It is important to recognize that any business is a system in which there are important links between the parts. While your benchmarking efforts may focus on a particular part of the business, it is important that you don’t overlook the links to other parts of the business. For example, the ability of the business to achieve exceptional performance in the area that you are studying may be rooted in other parts of the business. For example the ability of the business to grow and expand through acquiring rented acreage may be linked to the community and service activities of a key manager rather than solely the ability to produce high yields each year. It may mean accepting less in one area may be good if you’re getting more than another. © Purdue University, Center for Food and Agricultural Business, 2002

Monitoring and Taking Action Strategic Business Planning for Commercial Producers Monitoring and Control Monitoring and Taking Action Are we meeting the standard? If yes, continue to monitor or move to next level. If no, is the performance gap due to extenuating circumstances? Wait and measure again, but be careful! If no, is the performance gap due to operational breakdowns? Take corrective measures to fix the problem. If no, is the performance gap due to changes in the firm’s external or internal environment? Assess strategic position and prepare new strategy The information that is being collected may also allow different types of analysis to be performed. It may now be possible to use some statistical control methods as a part of the monitoring system. The information may also provide guidance for the evaluation of production processes. What should be modified? What should be eliminated? © Purdue University, Center for Food and Agricultural Business, 2002

Using Dupont Analysis in Monitoring and Control Strategic Business Planning for Commercial Producers Monitoring and Control Using Dupont Analysis in Monitoring and Control Let’s look at how benchmarking can be used with an analysis tool to examine the financial position of a business, in this case, the MBC Farms case study. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Operating Performance DuPont Analysis Gross Revenue Fixed Costs Variable Net Income - = Interest Expense Net Income Gross Revenue Operating Profit Margin + ÷ = ROA x ROE Interest Assets - x Total Assets Gross Revenue Turnover Ratio = ÷ This diagram presents the the overall model of operating performance known as the DuPont model. This model illustrates the links between the revenues we generate, the costs we incur, the financial structure of the business, and the return on assets and return on equity. It helps us visualize the determinants of ROA and ROE. It can be done very easily. It only takes essentially six numbers to do this: gross revenues, fixed costs, variable costs, interest, assets and equity. Starting with gross revenue we subtract fixed and variable costs to get net income. Fixed costs include depreciation, taxes, insurance, term debt interest, family living, and other items that would not change with the level of production. Variable expenses are those items that vary with the level of production. Seed, fertilizer, and fuel are examples of these expenses. The remaining blocks in the diagram illustrate the calculations that are used to arrive at the rate of return on assets and the rate of return on equity. After net income is determined, interest is added back and we divide by gross revenues to obtain the operating profit margin -a calculation that we are familiar with from the earlier material. Multiplying this by the asset turnover provides ROA. We incorporate leverage (financial structure) into the analysis by dividing assets by equity (net worth). The cost of borrowed funds is accounted for by dividing interest costs by total asset value (interest cost adjustment) and subtracting from ROA. Multiplying the ratio of assets to equity and the adjusted ROA gives ROE. There is not a single decision you make that won’t be captured in this analysis. Total Assets Equity Financial Structure = Financial Structure ÷ © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Worksheet 4: MBC Farms Financial Data 1. Gross Revenue $1,796,651 2. Fixed Costs 385,638 3. Variable Costs 1,280,494 4. Net Income 130,519 5. Total Farm Assets 4,655,476 6. Owner's Equity 3,534,037 7. Interest Expense 98,716 The financial data for MBC Farms using the top half of Worksheet 4 is presented here. Remember that the numbers used as inputs here use assets valued at market. When comparing ratios to other farms, which is what we’re doing here, the numbers need to be comparable across farms. To gain consistency for these comparisons market values are used. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Worksheet 4: MBC Farms MBC Farms Benchmark Operating Profit Margin 12.8% 13.5% Asset Turnover Ratio 38.6% 43.0% Return on Assets 4.9% 5.8% Interest Cost of Assets 0.021 Financial Structure 1.32 Return on Equity 3.7% 5.7% The data for the case problem is presented here. It has been benchmarked against the top 25% of grain farms in the Illinois Farm Business Farm Management program over the period 1998-2000. In conducting his financial analysis, Mike learned that his ROA was 4.9% and ROE was 3.7%. The fact that his ROE was less than his ROA indicates that financial leverage is working against the farm and improvement is needed. In addition, all of the other benchmarks are better than MBC Farms. What suggestions for improving operating performance do you have for Mike? At this point the Recommendations exercises should be used. The next slide shows some ideas for where improvement might come from. © Purdue University, Center for Food and Agricultural Business, 2002

Decisions and Rates of Return Strategic Business Planning for Commercial Producers Monitoring and Control Acceptable Operating Profit Margin Needs Improvement Look at Cost Controls. Look for ways to decrease expenses without reducing revenues. Reevaluate: Production costs Rents Capital Spending Plans Purchasing Practices Family Needs Business Organization Financing Costs Employment Inventory Management Outsourcing Records Control Procedures Management Priorities If both asset Turnover and Operating margin are acceptable, Increase size Asset Turnover Needs Improvement Look for ways to increase the revenues from existing assets. Re-evaluate: Thruput Crop Mix/Product Mix Marketing Program Yields Resource Use Custom Work Enterprise Look for non-performing assets to cull. Reevaluate: Leasing vs Owning Custom vs. Owning Sharing Assets This flow chart may help you think about the cost-volume-profit relationship on your farm and how improvements in profitability might be made. Using the asset turnover ratio and the net profit margin, it suggests a two step process. By first considering asset turnover, we are likely to identify changes that will have a beneficial effect on both revenues generated per dollar of assets and profit per dollar of revenue. Any action that increases revenue without increasing costs will increase both asset turnover and operating profit margin. Once asset turnover has been increased as much as possible, then managers should focus on actions that will reduce cost without a corresponding decrease in revenue. Once asset turnover and operating profit margin have been pushed to their upper limits, the farm business manager should look at expanding the total volume of the business. This may involve changing the amount of leverage. MBC Farms should first look to improving its Asset Turnover Ratio. While there aren’t enough specifics in the case to say just how, we can generally suppose that a number of changes are possible. For instance, a 10% increase in crop yields results in about $34,000 more gross revenue with no increase in costs, resulting in an increase to 14.4% in profit margin (from 12.8), an increase in the turnover ratio to 39.3% and an increase in ROA to 5.7 (from 4.9) and ROE to 4.7 (from 3.7). Or a cut in non-performing assets of 10% yields an increase in turnover to 42.9%, ROA to 5.5 and financial structure to 1.19. Try this for your own farm. © Purdue University, Center for Food and Agricultural Business, 2002

Linking Ideas & Actions Strategic Business Planning for Commercial Producers Monitoring and Control Linking Ideas & Actions Action Steps Behavior Controls Policies, rules, and SOP’s to get an idea implemented Output Controls Using objectives and performance targets to achieve an idea Resources People Financial Equipment Information What must be done to get an idea into action? These steps are done informally for any idea that we try to implement. The form that is presented in Table 1 asks you to develop a more formal plan for implementing an idea. One part of this process is to identify the critical steps that must be accomplished. These “sign posts” provide points at which it is possible to stop and assess progress and take any corrective action that is needed. Implementation will require resources. These may be in the form of people, money, things and equipment, or items of information. To achieve each of these steps, what will be required? © Purdue University, Center for Food and Agricultural Business, 2002

Linking Ideas & Actions Strategic Business Planning for Commercial Producers Monitoring and Control Linking Ideas & Actions Responsible Individual Performance Monitor Time Table Corrective Adjustments The person responsible assuring that the step is completed should also be identified. The method that will be used to monitor performance also needs to be identified. What will be measured to determine if the task is being performed at an acceptable level of performance? If we are scouting for insects, there may be threshold levels available for determining when it is time to spray for control. A time by which the task is to be completed can also be specified. This provides another check on the progress that is being made. The last item to specify is the type of corrective action that will be taken if performance is not within an acceptable tolerance. This requires thinking about alternatives that can be used in these cases. If we are not getting the crop planted at the time desired, we may chose to hire additional labor or rent additional machinery. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Exercise Work on the action plan table. Try to identify critical actions/controls. Include both behavioral and output actions. Make sure to identify the resources need to accomplish the action. Make someone be responsible for the action. Determine how you will measure achievement. Think of the responsible person’s authority to take corrective action. The person responsible for assuring that the step is completed should also be identified. The method that will be used to monitor performance also needs to be identified. What will be measured to determine if the task is being performed at an acceptable level of performance? If we are scouting for insects, there may be threshold levels available for determining when it is time to spray for control. A time by which the task is to be completed can also be specified. This provides another check on the progress that is being made. The last item to specify if the type of corrective action that will be taken if performance is not within an acceptable tolerance. This requires thinkinhg about alternatives that can be used in these cases. If we are not getting the crop planted at the time desired, we may chose to hire additional labor or rent additional machinery. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Monitoring and Control Strategic Business Planning for Commercial Producers © Purdue University, Center for Food and Agricultural Business, 2002