Strategic options for an agricultural firm

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Master thesis

Strategic options for an agricultural firm

Prodselect S.R.L.

Cornel Ionita

S2052881

Supervisor: Co-assessor:

dr. C.H.M. Lutz dr. C.K. Streb

Small Business and Entrepreneurship

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Acknowledgements

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Executive summary

Prodselect S.R.L. is an agricultural firm that operates a mill and a storage facility. The firm is currently faced with a strategic decision from two available options for investment. It can either modernize the mill to compete efficiently in milling industry or it can extend its storage capacity in order to enter the storage industry.

Each investment option is investigated using both an external and an internal perspective of the firm, in order to assure a comprehensive and thorough analysis. The external perspective is studied by determining the attractiveness of each industry using Porter’s Five Forces Framework. The attractiveness is influenced by the threat of new entry, the power of suppliers, the power of buyers, the threat of substitutes and the intensity of the internal rivalry. Also, four factors influencing industry structure are analyzed. Two perspectives are used: that of Prodselect S.R.L. and that of other potential competitors, as differences in the attractiveness of the industry between the two could have important implications.

The next step determines the suitability of the firm to enter each of these industries by identifying the key success factors. These are used as an input for the internal analysis of the firm, which is performed using the resource-based view. The capabilities of the company are determined, followed by its key performances, which depend on the key success factors of the industry. The resources influencing the key performances are then identified and the fit between these resources and the key success factors is analyzed. If the firm has all the required resources to perform in the industry, the strategic value of the resources relevant for the two industries is studied. The value of resource bundles and bundling of activities is also determined.

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1. Introduction

This research has been done with the use of a case study within an agricultural SME from Romania, named Prodselect S.R.L. As will be described in the following, the firm finds itself at a crossroad. It currently operates in three industries and, having a certain amount of cash reserves, the owner-manager needs to know which direction it is best to invest in to create a sustainable competitive advantage. This calls for a thorough analysis of the firm’s strategic position and the options it has to improve. After making a short description of the firm and its past and present activities, the main research question will be presented. Finally, both the practical and the academic relevance of the subject will be indicated.

The firm was established in 1992, three years after the Romanian Revolution of December 1989 that pushed away the communist regime. It first took the form of a neighbourhood shop, as did many others in the first years of capitalism in the country. The entrepreneur, Mr. Ion Dima, quickly grew the firm. Business was expanded to a fast moving consumer goods warehouse and also several shops. In 1995, the owner oriented the firm to a more stable and mature phase, entering the milling industry. A wheat mill was constructed and a bakery quickly followed. After a few years of capital accumulation, the owner decided to enter the farming industry, as his profession is that of an agronomist. He started growing wheat and sunflower on a surface that was increasing each year, both through buying and renting of land. In the mean time, all other activities except milling were stopped. Recently, two storage silos have been built, thus allowing him to store the production each year until a convenient price is reached on the market. Currently, the company is in a very stable position and the owner is very satisfied with the financial results. The firm’s mill and silos only have as input the production of cereals that the firm realizes. Over the past years, the company has again managed to create a cash reserve, which the owner desires to invest in order to secure the well-being of the firm for a long period of time. The company currently operates in three industries. Its main activity is farming and it has facilities that insure the firm’s presence in the storage and milling industries. The owner wishes to integrate into one of the latter but he is unsure about where it is best suited to invest. His main interest is to create a sustainable competitive advantage that would insure the existence and profitability of the company for a long period of time. This is why the main research question arises:

Research question

Which area of investment would enable Prodselect S.R.L. to reach the best strategic position?

In order to answer this question, the following subquestions arise:

1. What is the attractiveness of the storage industry and the milling industry?

Although the company is present in both industries, it is interesting to analyze which of them is more attractive for investment. An external analysis of the industry structure will provide more insight into this issue.

2. What are the key success factors of these industries?

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3. What is the fit between the resources of the firm and the key success factors of the industries?

It is important to understand whether the company can use its available resources to achieve the key success factors within one of the industries. If the company is missing this ability, then the performance of the enterprise cannot be guaranteed for a long period of time.

4. What are the critical internal resources of the firm?

The strategic value of resources can determine if the company can achieve a sustainable competitive advantage in one of the industries the owner is considering to enter.

5. What is the best investment option?

Considering all the above mentioned, a thorough analysis can determine the best strategic option that the company has for creating a sustainable competitive advantage.

Relevance of the topic

This research can prove to be very helpful for Mr. Dima, the owner of Prodselect S.R.L. It has the potential to offer him great insights about which direction his company should follow in the future in order to create an even more stable business that he can leave to his son.

This thesis is also relevant from an academic point of view. It will combine two models for generating strategic options: one that is based on an internal analysis and the other that is based on an external analysis of the firm. It will generate a very comprehensive view of the current status of the company and its possibilities. This will be accomplished by applying two perspectives to the analysis that, metaphorically speaking, complement each other like the internal and external part of a SWOT analysis: the resource-based view, which provides the “Strengths – Weaknesses” part and the Porter framework for competitive analysis, which supplies the “Opportunities – Threats” part (Foss, 1996).

An important academic contribution that this paper brings is represented by the introduction of key success factors that are taken as an input for the internal analysis of the firm. Rangone (1999) makes a model for identifying the critical resources of a firm. His analysis starts by defining the company’s strategic intent and key performances. Although he mentions that key performances depend on the key success factors of the industry a firm is operating in, he treats the key performances as isolated concepts that are only influenced by the firm and not by any external factors. By using the key success factors as an input for determining the key performances of the firm, the influence of critical resources on the company’s sustainability in the industry becomes clearer, thus filling a gap in Rangone’s model. This step will make the analysis more thorough and comprehensive, while taking into account all the concepts that influence a firm’s performance in a chosen market.

Structure of the paper

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this paper. Chapter 5 contains a presentation of the firm, including its current activities, history, mission and vision. Chapter 6 analyses the storage industry as an option for investment. An external analysis using Porter’s Five Forces Framework is performed in order to determine the industry attractiveness. The key success factors are then presented based on the interviews with the owner, the industry expert and a competitor from the storage industry. The internal analysis is performed from the perspective of the storage industry. This analysis aims to determine whether the company possesses the necessary resources to achieve the key success factors in the industry and whether it has any critical resources that could help create a sustainable competitive advantage. Chapter 7 presents the analysis of the milling industry, in the same manner as the previous chapter. Chapter 8 presents the conclusions to the entire analysis and the recommendations for the owner.

2. Literature review

The goal of this research is to build and apply a complete model for strategic analysis at the firm level. In order for the model to be exhaustive, it needs to cover both sides of the coin regarding the object of analysis, meaning that it is equally important for a company to consider both the internal and external aspects that define its strategic position (Spanos & Lioukas, 2001). This chapter aims to briefly present the methods chosen for analysis, the justification behind the choice and to question their suitability for this particular case. Also, the appropriateness of using the two methods together will be explored, as it is crucial that both the internal and the external analysis are compatible and that they can be used together in assessing the strategic options that the company has through investing in one of the potential industries and choosing the best alternative.

2.1 External analysis: the Five Forces Framework Competition and the particular characteristics of

the industry structure are very important aspects related to a company’s external environment. Porter (1980) creates a comprehensive framework for analyzing the external environment of a company, naming it the Five Forces Framework. It is used to analyze the competitive environment a firm operates in but it can also be used to determine the attractiveness of an industry for a potential entrant. If the competitive forces acting inside an industry are weaker, then entering and operating in the industry is less difficult, thus the industry is more attractive.

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2.1.1 The Five Forces Framework

The threat of new entrants

Every time a new entry occurs in an industry, new capacity is added and the desire of the new entrant to gain market share puts pressures on prices, thus eroding the market share and profits of the incumbents. The threat of new companies entering an industry depends on the height of entry barriers as well as the expected reaction of incumbents. The former have been approached by many authors (Porter, 2008; Besanko, 2010). Blees, Kemp, Maas and Mosselman (2003) paid special attention to the impact of entry barriers on SMEs. Porter (2008) highlights an important aspect: it is the threat of new entry, not whether it actually occurs, that holds down profitability.

The bargaining power of suppliers

Suppliers that have a high bargaining power are able to capture more of the value of a product by charging higher prices for the inputs they offer, limiting the quality of their services or by shifting cost to other industry participants (Porter, 2008). They can have direct or indirect power over their customers, which are the group of firms within the industry of analysis (Besanko, 2010). Only a high competitiveness of the input market can make a downstream industry more attractive and so encourage outside companies to enter the industry or incumbents to invest more in their production capacity.

The bargaining power of buyers

Buyers can capture more of the product’s value by forcing down prices or demanding better quality or services from the industry participants, thus driving up costs. Aside from these, buyers sometimes have the power to play competitors against each other, thus eroding the profitability of the entire industry (Porter, 2008). The negotiating leverage of customers is higher if the industry’s products are standardized or undifferentiated, buyers face few switching cost and if the threat of backward integration is realistic. Also, price sensitivity is another aspect to be taken into account when assessing the bargaining power or buyers (Porter, 2008).

The threat of substitutes

Indirect competition for the firms in an industry may come from companies in another industry that make products with the same or a similar function and that achieve the same goal, but by different means (Porter, 2008). A strategic analysis using the Five Forces Framework can be incomplete if not all substitutes are taken into consideration, as it is easy to overlook some potential pairs of products or services that fulfil the same need for different types of customers (Besanko, 2010).

The rivalry among existing competitors

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In addition to these five forces, Porter (2008) also mentions four factors that influence the industry structure: industry growth rate, technology and innovation, government, complementary products and services.

2.1.2 Criticisms to the Five Forces Framework

One of the first to criticize the framework was O’Shaunessy (1984), who argued that Porter gives no indication on how to assess the relative power of these forces, nor the counteractions that can be taken. Porter responds to this critique in his 2008 article in the Harvard Business Review, “The Five Forces that Shape Strategy”, by mentioning the factors that influence the intensity of the forces and what those factors depend on. He also gives numerous examples that can be used in analogy to determine the optimal result from the analysis. One of these examples refers to the intensity of internal rivalry, which, according to Porter (2008) is highest if competitors are numerous, industry growth is slow, exit barriers are high or rivals are highly committed to the business.

Barney (1991) identifies two assumptions behind the competitive analysis framework of Porter that he marks as simplifying. The challenges brought to these assumptions are at the heart of the resource-based view. He first observes that, according to environmental models of competitive advantage, which includes Porter’s framework, firms within an industry are identical with regard to the strategic resources they possess. In other words, the resource pools of all firms within an industry are homogenous. His second observation refers to the mobility of resources between firms. If resource heterogeneity should occur in an industry, i.e. through new entry, it will be neutralized in a short period of time. These assumptions are, indeed, limitations to Porter’s model, as they do not reflect real business situations. That is why this study will not be subject to the same assumptions and the strategic analysis of the firm will be completed with a model derived from the resource-based view. It is recommended to adopt this solution, as these two perspectives are found complementary by some authors (Foss, 1996; Spanos & Lioukas, 2001).

Winfrey, Michalisin and Acar (1996) bring two criticisms to the debate. First, they state that, when using the framework, the process of identifying industry boundaries is an arbitrary process. In relation to this case study, cereal farming and the industries of cereal storage and milling are not complicated in regard to their boundaries. It is rather easy to determine these boundaries as there are few substitutes for each of the industries’ products and the product market and geographical market the competitors are in are also easy to define and characterize.

Another critique given by Winfrey et al. (1996) refers to the fact that the framework does not address the relative proximity of competitive threats. The argument against this criticism is that industry analyses done through the Five Forces Framework are done in the presence of professionals who either operate in the industry or have great knowledge about the industry. It would have been very difficult, if not impossible, for the author, to define the relative proximity of competitive threats, as this may vary greatly from industry to industry.

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owner-manager. In farming, milling and storage, the firms are not part of co-dependent systems, or economic webs, and they don’t have privileged relationships.

The authors continue to criticize Porter’s framework by observing that, according to the model, the only source of value within an industry is represented by structural advantages, or by the creation of barriers to entry. The authors themselves state that there are some categories of firms exempted from this critique, including those in the basic materials industries. As Prodselect S.R.L. operates in the farming, storage and milling industries, which are basic materials industries, the critique the authors make does not apply to the current firm. The final argument that Coyne and Subramaniam (1996) bring against the framework refers to Porter’s assumption that uncertainty is low in every industry, allowing participants in a market to plan for and respond to competitive behaviour. However, the authors develop four levels of uncertainty, explaining that, at level one, uncertainty is low and strategists are able to develop a single useful prediction for the future and that, at this level, the framework is appropriate. Other than this characteristic, the authors do not specify other means of including an industry on this level or not. It can be argued that the industries in which Prodselect S.R.L. operates in are indeed in the first level of uncertainty, as they are bulk materials, with similar characteristics in the entire world. Moreover, the prices for cereals are set at a global level, depending on the demand of the world population for these products. The price for flour is directly dependent on the price for wheat, as the production techniques are very similar in the global market, making price differences between regions insignificant.

2.1.3 Justification behind the choice

The result of the literature review on the Five Forces Framework is that it is an appropriate model to be used in the strategic analysis of Prodselect S.R.L. It is very comprehensive, allowing for a multitude of aspects to be analyzed, and although it may have some flaws that other authors have identified, they do not apply to the specific conditions that the studied SME faces. Only Barney (1991) has identified two assumptions behind this framework that need to be challenged in order for a strategic analysis to be complete. This can be done with the help of a model derived from the resource-based view, as it is even recommended by some authors. In this way, both the internal and the external aspects influencing a company within an industry can be analyzed and a more valid conclusion can be drawn.

Another reason is that the framework covers interesting phenomena that has affected the activity of the studied SME more and more in the recent years. In the agricultural landscape from Romania, new entry has occurred at quite a high pace, as the cultivated agricultural surface more than doubled in the past three years. Also, production is bought in large quantities by a small number of buyers, and necessary inputs are purchased also in large quantities from a small number of suppliers. In this sense, the bargaining power of buyers and that of suppliers might prove very useful to analyze. It could be very interesting to observe what effect these forces have on the internal rivalry within the industry and what implications will the result of the analysis have on the recommended strategic position that the company should pursue.

2.2 Key success factors

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organization. Critical success factors are the few areas where ‘things must go right’ for the business to flourish” (Bullen & Rockart, 1981).

Rockart (1979) identifies five sources of key success factors, of which two are relevant for this case study:

• The industry, i.e. product characteristics, demand characteristics, technology employed etc.

• Competitive strategy and industry position of the business in question

2.2.1 The link with Porter’s framework

By mentioning the sources of key success factors, Rockart (1979) sets the premises for creating a relationship between Porter’s framework for competitive analysis and the concept of key success factors. The latter are clearly influenced by the former as they depend, as sources for identification, on the industry as a whole and on the competitive strategy and industry position of the company. This is also observed by Grunert and Ellegaard (1992). Furthermore, Leidecker and Bruno (1984) mention Porter’s competitive model as a technique for identifying key success factors within an industry. Although it is certain that industry structure, analyzed through Porter’s framework, influences the key success factors within that industry, neither theoretical studies nor empirical research have made clear how these influences manifest. That is why an analysis of the industry structure would aid in validating the critical success factors, after they have been determined.

2.2.2 Identifying critical success factors

Leidecker and Bruno (1984) mention eight techniques for identifying the key success factors in an industry: environmental analysis, analysis of industry structure (Porter’s model), interviews with industry or business experts, the analysis of competition, analysis of the dominant firm in the industry, company assessment, temporal/intuitive factors and PIMS (Profit Impact of Market Strategy) results.

However, most empirical studies up to date have mostly used the method of interviewing industry experts or constructing expert panels in order to determine key success factors. This is the case of the studies done, for example, by Evans and Evans (1986), Huck and McEwen (1991), Duncan (1991), Prescott (1986), Steiner and Solem (1988), Campbell (1991), Gaskill and Hyland (1989), Gunter et al. (1995) and many others. Rockart (1979) proposed a two-step interview method. This method has received critiques regarding the difficulty of applying it and the large amount of time it consumes, so a simplified method consisting of one interview with predefined open questions is sufficient, as long as the interviewees are well prepared and well educated experts that could contribute to this case study.

2.2.3 The fit with the internal resources

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priorities for the company’s resource allocation process, playing an important role in the resource analysis, which is a common element of the strategy process (Hofer & Schendel, 1978). Also, De Vasconcellos and Hambrick (1989), in an extensive study on key success factors in the mature industrial-product sector, develop a model which indicates that firm profitability depends on having strengths that match an industry’s key success factors. In the terminology of traditional strategic analysis, the strengths of a firm are represented by the resources it has to define and implement their strategies (Learned, Christensen, Andrews & Guth, 1969). In other words, if a company has access to the resources that will allow it to meet the key success factors in an industry, it will be successful.

Rangone (1999) develops a model to generate strategic options for SMEs based on their critical resources. The strategic analysis he proposes is completed after five steps. First, the analyst needs to identify the firm’s strategic intent and the key performances. The latter depend on the industry’s key success factors. Then, the company’s resources influencing the key performances must be identified. The next step is to assess the strategic value of resources, i.e. whether they are critical or not. The last two steps consist of verifying whether resources contribute to achieving the strategic intent and to generate strategic options.

2.2.4 Criticisms to the concept of key success factors

Ghemawat (1991) brought four critiques to the concept of key success factors. The first observation was that they lack identification, meaning that many critical success factors can be identified, thus making it difficult to decide which ones to focus on. Second, the author stated they are not concrete, which translates into ambiguity about the causal processes that link the company’s success factors to its performance. The next issue pointed out by Ghemawat is that they lack generality, i.e. to be success factors they should be undervalued, meaning that the benefit from these factors should be greater than the cost to develop them. Last, the author states that they also lack necessity, which refers to the failure of this approach to explain dynamic aspects of strategy. These are indeed challenges that key success factors are facing. However, as Amit and Schoemaker (1993) point out, there would be no space for discretionary managerial decisions on strategy formation in the absence of uncertainty, complexity and conflict. In that case, asymmetric performance could only be explained by differences in initial endowments or luck. In other words, the characteristics pointed out by Ghemawat (1991) are not necessarily flaws, as they provide managers with the necessary flexibility for adapting the strategy of a firm to the conditions it faces.

Key success factors form an important standard that determines the performance of companies in their industries. Only by meeting the levels that these standards impose, an enterprise can be sure of its success in the market. That is why it is crucial to know what critical success factors an industry has before attempting to penetrate the market even further. Certain investments must be made only if the managers of the firm are certain that their organization has the internal resources to succeed.

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analysis are complementary, the critical success factors come to strengthen the strategic analysis model and to make it even more comprehensive, in order to cover all important aspects that influence the investment decision.

2.3 Internal analysis: the resource-based view and critical resources

If, according to Porter’s competitive strategy framework, a firm is viewed as a bundle of activities, in the resource-based view, a firm is seen as a bundle of unique resources (Spanos & Lioukas, 2001).

2.3.1 Defining concepts

In order to better understand the resource-based view and its principles, clearly defining the concept of resources is the first step. The definition of this concept has varied over time. Daft (1983) stated that firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge etc. controlled by a company that enable it to define and implement strategies that improve its efficiency and effectiveness. Maijoor and Witteloostuijn (1996) add to these characteristics and mention that resources as those tangible and intangible assets that are tied semi-permanently to the firm.

Amit and Schoemaker (1993) make the distinction between firm resources and capabilities. In their view, resources are assets that are either owned or controlled by a firm and capabilities refer to the ability that a company has to exploit and combine resources, through organizational routines in order to achieve its targets. Furthermore, Collis (1994) defines capabilities as socially complex processes that influence the efficiency with which firms are able to transform inputs into outputs.

A distinction is also made between individual resources and bundles of resources. Some authors give credit to the unique bundle of resources that each firm has in explaining differences in performance within the same industry (Kor & Leblebici, 2005). Kraaijenbrink, Spender and Groen (2010) mention that, according to the resource-based view, it is not the value of an individual resource that helps explain performance but rather the synergistic combination or bundle of resources created by the company. Also, Kor and Leblebici (2005) point out the fact that firms enter new areas of business in order to be able to use their underutilized resources and capabilities. When firm growth occurs in directions and rates consistent with their bundle of resources and capabilities, they obtain synergy-based efficiencies and enhance their knowledge bases. This is an important aspect to take into account when balancing the investment options of the studied company.

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within the firm. But not all firm resources have the potential to create sustainable competitive advantage. Only those that are critical, or strategic, have this potential (Rangone, 1999).

2.3.2 Identifying critical resources

Identifying the critical resources that a company possesses or controls can be a difficult task, especially in the case of an SME. The models presented in the literature are mainly constructed for large firms which, due to their size, power and complexity, have access to more resources and have more capabilities than small firms. Rangone (1999) develops a model for strategy analysis constructed on the principles of resource-based theory, specifically for SMEs. The model contains five steps that enable owner-managers to generate strategic options for their companies based on the resources they control. Determining whether resources are critical or not is completed after following the first three steps of this framework.

The first step involves defining the firm’s strategic intent and its key performances, which relate to three general capabilities: marketing, production and innovation. As noted before, the key performances of the company depend on the key success factors of the industry in which the enterprise operates. The second step consists of identifying the resources that influence key performances. This is done by analyzing each key performance so that the resources necessary to achieve them can be determined. Step three implies assessing the strategic value of the resources, or determining whether they are critical or not. This is done by verifying if each identified resource has a certain set of characteristics. Barney (1991) is among the first to propose a set of characteristics. In his view, in order for a resource to have strategic value, it must prove to be:

• Valuable – enable a company to form or implement a strategy that improves its efficiency and effectiveness

• Rare – are not possessed by a large number of competitors

• Imperfectly imitable – due to unique historical conditions, causal ambiguity or social complexity

• Non-substitutable – cannot be substituted neither by similar nor by different resources that enable the implementation of the same strategies

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Using the key success factors of the industry as an input, following the steps proposed by Rangone (1999) and applying the tests put forward by Barney (1991), the critical resources necessary for a firm to perform in that industry are identified. The investment decision will then take into account which industry is the firm more prepared to perform in, based on its internal bundle of critical resources. Also, the long-term performance of the company can be studied, based on the new resources, capabilities and bundles of resources acquired after making the necessary investment to enter another industry.

2.3.3 Criticisms to the resource-based view

The resource-based theory has received some critiques since the start of its development. It is important to mention them and test whether they have a great influence on the current case study.

Kraaijenbrink, Spender and Groen (2010) perform a review of these critiques. Citing different authors, they mention several potential flaws in the resource-based view. The first criticism is that the resource-based view does not provide managerial implications or operational validity (Priem & Butler, 2001). This is not a valid criticism, as the resource-based view is a theory aimed at explaining some firms’ advantages over others and was not intended to offer managerial prescriptions.

Another critique refers to the fact that the resource-based view entails infinite regress (Collis, 1994). This is explained by different order capabilities that firms could possess. For example, a firm with superior capabilities to develop structures that innovate products will surpass another with the greatest product innovation capability today. This step can be extended infinitely, going further and further into the order of the capability that assures sustainable competitive advantage. However, this is not true in the practical sense, as the number of levels of analysis is always limited, and each increase in level takes the analysis further away from any practical implications of the theory.

The resource-based view is also criticized as having too limited applicability. Connor (2002) argues that this theory applies only to large firms with significant market power. The sustainable competitive advantage of small firms cannot be based on their static resources and that is why they do not fit into the resource-based view. This argument is dismissed if non-tangible resources are taken into account, giving small businesses unique advantage generating capabilities. However, when referring to the limited applicability of this theory, Barney (2002) makes an important observation: the theory remains valid only as long as circumstances in an industry remain relatively stable. This is indeed the case of the industries in which the studied firm operates in: these are bulk material industries which have been very stable over time.

In relation to the sustainable competitive advantage, Fiol (2001) argues that this is in fact not achievable. He explains his view by the fact that resources, capabilities and the ways companies use them constantly change, thus creating continuously changing temporary advantages. In defending the concept of sustainable competitive advantage, Kraaijenbrink, Spender and Groen (2010) state that, although sustainable competitive advantage cannot last forever, it directs the attention of managers to the dynamics that support it. Managers are inclined to search for ways to quicken innovation or to slow its imitation.

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neither necessary nor sufficient for creating sustainable competitive advantage. The sufficiency side of this criticism refers to the fact that, aside from resources with strategic value, a firm must also have the capabilities to deploy these resources successfully in order to achieve sustainable competitive advantage (Peteraf & Barney, 2003). This is true and later developments of the resource-based theory confirm this.

The necessity side of the criticism comes from Foss and Knudsen (2003) and Becerra (2008). The former argue that uncertainty and immobility are the only basic conditions for sustainable competitive advantage. The latter states that uncertainty, resource specificity and innovation at firm level are necessary conditions for achieving sustainable competitive advantage. The problem behind their arguments is that these authors do not take into account the key idea behind the characteristics proposed by Barney (1991): in order for a firm to achieve sustainable competitive advantage, it must possess resources that no other firm can possess. If this is true, then it is said that those resources are critical, or have strategic value. Resource uncertainty, immobility or specificity, or innovation at firm level, do not make any contribution to testing whether a resource is possessed uniquely by the firm that is striving to obtain a sustainable competitive advantage.

Furthermore, in relation to the current case study, the main purpose of the critical resources of the firm is to aid it in achieving the key success factors of the industry it decides to enter. Later sustainable competitive advantage might be achieved by the bundle of resources that the firm will possess after the investment has been made. This is similar to the view of some authors who argue that it is not the value of individual resources but the synergistic combination of these, or, in other words, the bundle of resources created by the firm.

Kraaijenbrink et al. (2010) point out that the resource-based view is a tautology, based on analytic statements that are true by definition and not able to be tested. More specifically, the problem lies in the fact that the value of a resource is indefinite because it doesn’t consider exterior sources that it can be related to. This critique is solved only by complementing the resource-based view with an external analysis and external factors that influence the company. This is the case of the key success factors, that are influenced by the industry structure and that also serve as an input to determining the critical resources of the firm. Priem and Butler (2001) criticize the definition of resources as being over inclusive. However, distinctions have been made between the resources and capabilities of the firm by Amit and Schoemaker (1993). Also a difference between individual resources and the bundles of resources and the synergies they create have also been made clear in the extant literature. Furthermore, it can prove useful to suspect any strength that the firm has as being a resource. This allows the internal strategic analysis to be exhaustive and to put all resources within the company to the test of strategic value. In this way, the probability that a critical resource of the enterprise might be overlooked is reduced drastically. This, in turn, allows for a more thorough analysis to be made in order for the best strategic option to be chosen.

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Without taking resources into account, the firm might make the mistake of choosing a strategic option that it cannot follow due to the lack of a specific resource. The owner might find himself in the situation of not being able to pursue the chosen strategy. This would mean that, aside from making an investment and having sunk costs, profitability could not be easily be attained and the exit out of the industry might occur much sooner than expected.

Also, many authors have mentioned the complementarity between the competitive strategy perspective and the resource-based view. Even more, the latter was developed as a response to two insufficiencies behind Porter’s framework, mentioned by Barney (1991). This means that the industry analysis is not sufficient for performing a comprehensive strategic analysis for a company and the need for an assessment following the resource-based perspective is obvious.

3. Conceptual model

The conceptual model of this study will follow the findings of the literature review on strategic analysis for a firm. Two complementary views are applied to the analysis: Porter’s industry analysis framework that assesses industry attractiveness and the resource-based view in order to test the resources of the company for strategic value. This model will be applied twice, for each of the two industries the owner is considering to enter. In this way, the sustainability and the performance of the company after integrating activities in each of the industries can be simulated. Following this decision, the best strategic decision for diversification can be taken.

Key success factors have the role of strengthening the model even further and of making it more comprehensive. Although these critical success factors will be taken from experts in the studied industries, their validity will be compared to the findings from the industry analysis. Then, they will serve as an input in the process of identifying the critical resources of the firm that will help the company achieve the key success factors in the chosen industry.

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It is worth mentioning that the strategic decision the firm faces only refers to one of the two choices:

• Expanding the storage capacity that the firm currently possesses by building more silos with all necessary functionalities to store cereals according to EU standards. • Modernizing the production equipment and machinery from the mill so flour

production can be performed according to the latest EU standards. This implies investing in an additive unit and a laboratory for the regular analysis of the batches of wheat and flour.

That is why the pool of critical resources that the firm has is not expected to change after one of the potential investments is made. Only technological updates or storage capacity will be added, so the change to the resource pool will be insignificant. So the critical resources that the firm currently possesses aid the firm in achieving the key success factors of both of the industries it will operate in: be it the farming and the storage industries or the farming and the milling industries. It is interesting to see what synergies the bundle of resources can achieve when considering the firm to be active in one of two variants described above. Also, it is interesting to determine the firm’s underutilized resources and capabilities and the business area they could prove to be the most useful.

This model was adapted from the study done by Spanos and Lioukas (2001). In their article, they emphasized the complementarity between Porter’s industry analysis framework and the resource-based view and they built a model for explaining a firm’s market performance and

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profitability. In the model they presented, the strategy of the firm was influenced by firm assets (the resource-based view) and, in turn, it influenced the industry forces the company is operating in. This is a relationship that is not true for small firms, as they rarely have the strength to influence the industry they operate in. Rather it is the other way around, with industry forces influencing the strategic decisions of small firms, as the case of Prodselect S.R.L. As the model is designed to study phenomena ex-post, it cannot be used to assess the market performance and profitability in two industries ex-ante, one of which it hasn’t entered yet. That is why only a part of their model is kept and adapted to the specific needs of this case study.

4. Methodology

As the object of this research is one firm only, namely Prodselect S.R.L., and the subject of the study concerns a strategic decision that the firm has to make, the most appropriate method is the case study. This is due to the fact that the case study is a qualitative method of research which allows a comprehensive analysis of the conditions that a firm is facing and the possibilities it has to adapt to them.

The owner-manager will not be the only source for data in order to avoid interviewee bias. Secondary sources strengthen the validity of the collected data and, thus, of the results of this study.

The research will follow the steps defined by the subquestions. First, the attractiveness of the two industries will be assessed using Porter’s Five Forces Framework. The following aspects, mentioned by Porter (2008) will be taken into consideration when performing data collection: Industry forces:

1. Threat of entry: barriers to entry (supply-side economies of scale, demand-side benefits of scale, customer switching costs, capital requirements, incumbency advantages independent of size, unequal access to distribution channels, restrictive government policy), expected retaliation

2. Supplier power: negotiating leverage (concentration, dependency on the industry, switching costs, differentiated products, substitutes for suppliers’ products, threat of forward integration)

3. Buyer power: negotiating leverage, price sensitivity

4. Threat of substitutes: attractive price-performance trade-off, switching costs

5. Internal rivalry: intensity (number of competitors, industry growth rate, level of exit barriers, level of commitment to the business), dimension (price, non-price), price competition

Factors that affect the industry structure, as mentioned by Porter (2008): a. Industry growth rate

b. Technology and innovation c. Government

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Data for the external analysis will be collected through interviews with the owner-manager, an expert in storage and milling and a competitor from each industry to be analyzed. The expert will be a local representative of The Romanian Ministry of Agriculture, as they are well educated and well prepared professionals that have an overview of the industries to be analyzed. So for each of the two industries, three interviewees will be approached. This number is sufficient because it covers three perspectives that offer the complete picture in relation to each of the analyzed industries. The most important source of information is the owner, who knows best facts about his company and the position it has in each of the two industries. Also, there are certain aspects in the industry forces that the owner-manager might be best suited to respond to, i.e. buyer power in the local market for flour, or supplier power in the local market for grain. The competitors from the industries will provide information that will be verified if it matches that provided by the owner. They have more experience in their field of activity and they can offer interesting insights that the owner might miss or not be aware of. Finally, the industry expert has a different view than that of the owner and the competitor; while the latter are directly involved in the daily activities within those industries, the industry expert could provide a more objective view along with some data from the Ministry of Agriculture and Rural Development, which is the authority that regulates the storage and the milling industries in Romania. Also, the industry expert will be more prepared to offer data on the industry growth rate or the government as a factor that influences industry structure. Aside from these sources, qualitative data will be collected from reports published by The Ministry of Agriculture or The National Statistics Institute. In case reports on some phenomena are not published in publicly accessible sites, special requests will be made to the above mentioned institutions. Other sources for quantitative data might also be available and, depending on their author and publisher, their reliability will be determined.

The key success factors for each industry will be determined by interviewing the industry expert and by checking his data against that offered by the owner and the industry competitor. Local representatives of The Ministry of Agriculture are suitable. Also, the identified key success factors will be validated using the findings from the industry analysis.

The key success factors will serve as an input for the next sub question, which aims to determine the critical resources of the company. Data collection about the capabilities, the key performances, the resources that influence key performances and the testing of the resources will be done by interviewing the owner-manager and through direct observation, on site. Direct observation will minimize the owner-manager’s bias as the researcher will be present on site in order to analyze the firm’s resources and the way they contribute to the firm’s profitability.

The next step is to determine whether the critical resources that the company has can help it achieve the key success factors of each industry. This analysis will be performed based on data collected from the previous steps. The result of this analysis will have a great influence on determining the best investment option that the firm has at the moment.

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5. The firm

This chapter and the following ones aim to analyze the data gathered from the interviews with the owner, the representative of the Ministry of Agriculture and Rural Development, which is the expert for the two industries, and two competitors in the storage and milling industries. The end goal is to provide a recommendation on which industry it is best to invest in at the moment, considering its attractiveness, its key success factors and the strategic resources that the firm has in order to succeed in one of the industries.

Prodselect S.R.L. is situated in Dobrosloveni, just 5 km outside the town of Caracal, in the south-west of Romania. It is a small business run by Mr. Dima, the owner. He is assisted in his day to day activities by his wife, who is the accountant of the firm, so all the working members of the family are involved.

Mission and vision

As the owner stated, the small business currently has no well defined mission. It serves the sole purpose of providing a pleasant working environment for the owner and his family and to insure a high standard of living. As for the vision, Mr. Dima sees the firm to be totally integrated, as it used to be a few years ago, only at a much larger scale. Total integration refers to the fact that the firm was involved in all activities from the supply chain of bread, making everything from wheat seeds to wheat, flour, and bread and distributing it in the entire town of Caracal, through privately owned commercial spaces. In his view, this would assure a competitive advantage due to economies of scale and scope that no other competitor in the area could achieve.

History

The firm started as a small shop in 1992, 2 years after the Romanian Revolution, which put an end to the communist regime. Private property was recently introduced as a right of the citizens and the owner saw this first opportunity. The company was later extended to a warehouse for fast moving consumer goods. After deciding to go into the production side of business, the owner constructed a wheat mill very close to the town he lives in. Then, in order to forward integrate, he also built a bakery near the city centre. As he needed shops to sell bread in, Mr. Dima bought several commercial spaces in Caracal. Later, he entered the agriculture business. As he is an agronomist by profession, the choice seemed only natural for him. Then, two years ago, he built a storage silo to keep the crop in until the market offered a better price. In the mean time, he closed most of the other businesses. The focus is now on farming, milling and storage, with the former being the main area of income.

Current activities

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mill hasn’t been updated technologically in a long time so the company can’t compete with large mills on the basis of flour quality and additives. Also, the company owns and operates two storage silos. At the moment, the storage capacity is 2000 tons, which is a little more than the yearly average wheat production. Also, Mr. Dima owns several commercial spaces that he rents and a small shop in town, which sells bulk flour and bran, but is insignificant to the entire business. As for the way the activities are organized, the owner coordinates all the activities within the company, working together with his wife, which is the accountant of the company. There are five employees in the agriculture department, four employees for the mill and two employees for the shop in town.

Strategy

Mr. Dima believes that the environment is unpredictable and no efficient strategy can be formed. He states that it is best to be flexible and preferably to have some financial reserves in order take advantage of opportunities when they arise. He argues that this is way he has done business until the present day and it is a philosophy that served him well. He mostly refers to the opportunity that was presented to him when a medium-sized agricultural association was closed and he took over the renting contracts that the association had. He states that this could not have been predicted and included in the strategy of the firm.

Following the data about the firm, the two industries will be analyzed in separate chapters. Finally, conclusions will be drawn and the recommendations for the firm and their justification will be presented.

6. The storage industry

As stated by the industry expert and a well-established competitor, the storage industry in Romania is currently rising very rapidly. Mr. Doru Neacsu, the Ministry’s representative, even declared that entry into this industry is “a train to catch”. However, this phrase must not be taken for granted, so the industry attractiveness is analyzed in detail using Porter’s Five Forces Framework. The key success factors in this industry are then identified and the strategic value of the resources that the firm has will be determined. It is worth mentioning that the influence of the forces and the factors from the industry are analyzed in the perspective of a small business’s entry, with a relatively low storage capacity compared to large storage facilities and corresponding amount of financial availability for the initial investment.

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6.1 External analysis

6.1.1 The threat of new entry

The threat of new entry is most influenced by the barriers that potential competitors might encounter when trying to invest in the industry and the difficulty of overcoming them. All the interviewees identified the initial investment as being the largest barrier. The owner estimated this to be of a minimum EUR 50.000 for each silo of 1.000 tons storage capacity. This cost applies when the entrepreneur builds the foundation for the silo using his own resources, and the cost of the land is not included. Also, another need for available financial resources arises when the first purchase of goods occurs. The owner estimated that, at current prices, a total of EUR 150.000 is needed in order to fill a silo with 1.000 tons of wheat. This amount is considerable and needs to be taken into account very seriously. This implies that the financial resources necessary for the initial investment reduces the threat of new entry.

He also identified the location as being important, as it needs to be in the centre of an agricultural area, connected with the infrastructure of the zone. Also, it is preferable that the placement is nearby important transport facilities, such as a harbour. Furthermore, entry is deterred when there are other small storage facilities nearby, as they are seen as incumbents that represent direct competition that will retaliate when entry occurs. The importance of the infrastructure to and from the facility has been confirmed by the competitor but it has not been mentioned by the Ministry of Agriculture and Rural Development representative; he might have overlooked this, as he is not directly involved in the storage activity and has less experience about minor details. Overall, the location is an entry barrier that reduces the threat of new entry considerably.

The owner and the competitor also emphasized the importance of trading relationships, especially those with suppliers. The main suppliers are farmers that produce cereals and transport companies that provide transport services to the silos in the harvesting period and from the facility at selling time. The relationship with transport companies is crucial because there could be a shortage of transport trucks when they are most needed, or the prices that transport firms could ask during the harvesting period could be very high. It is important to have available transportation during the harvesting period because farms usually don’t have adequate spaces for storage of cereals and they need to take their crops to a silo quickly. If trading relationships with farmers are good, they could prefer to sell their products to the entrepreneur, given that the prices offered are the same. Trading relationships with farmers are especially important for the years when drought or other calamities determine a low production of cereals and other agricultural goods. The lack of trading relationships with supplying farms is an important entry barrier that may deter some potential competitors to invest in this area.

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agricultural production in the region acts as a neutralizer for most of these barriers, as abundant merchandise insures high transaction levels and business activity for all the firms in the industry.

The expected retaliation of the incumbents depends highly on the size of the potential new entrant. From the perspective of a small storage facility, expected retaliation is low. This is presented in more detail in section 6.1.5.

In conclusion, the threat of new entry in this industry is medium. There are entry barriers such as the initial capital requirements, the location and the trading relationships with suppliers that deter entry into the industry. There are also some entry barriers that are weak and their importance decreases in years in which cereal production volumes are very high. These are the unequal access to distribution channels and incumbency advantages independent of size, except for location. Also, the low expected retaliation of large incumbents could encourage some investors that can overcome the toughest barriers to enter the storage industry.

Although the threat of new entry is medium, the attractiveness of this industry for Prodselect S.R.L. is not reduced, as the entry barriers that deter entry into the storage industry do not apply for the firm. The company possesses available financial resources, it has a convenient location, as will be described in the internal analysis of the firm, and the owner already has good relationships with potential suppliers for the storage facility. Low expected retaliation from incumbents and high production volumes encourage the owner to invest in expanding the storage facility.

6.1.2 The power of suppliers

All the interviewees agree to the fact that farms, as suppliers, have a weak negotiating power. This is due to the fact that, in general, farms don’t have adequate storage space and they need to place their crops in a storage facility immediately after harvesting. Furthermore, these businesses have a high need to sell their crops in that period in order to repay some debts that have accumulated over the year and that are due at the mentioned time and to restart the production process.

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incurring additional costs. However, this effect is neutralized by the international price of cereals. There are many cases in which storage facilities in the area offer the same price for cereals. The other aspects, which are substitutes for suppliers’ products and threat of forward integration, were deemed as not having any influence on the negotiating leverage of suppliers. In conclusion, the attractiveness of the storage industry is increased by the low negotiating power of suppliers and by their low concentration and high dependency in the industry.

6.1.3 The power of buyers

The negotiating leverage of buyers is higher than that of suppliers, especially due to their size. Whether buyers are large storage facilities, export companies or large mills, these buyers have the ability of purchasing very large quantities of products. Due to their size, these firms have demand-side benefits of scale and put extra pressure on small businesses. The owner admitted that only one client could end up buying the entire stock of merchandise for one year. This gives them higher negotiating power. However, all interviewees agree to the fact that prices are set on the commodities stock market at a global level and this influences the negotiated price most. This, in turn, determines a weakening of the buyers’ power. The final price will always be very close to the international price, so the amount negotiated is not considerable. The aspects found in the literature do not have much influence on buyers’ bargaining power, as price is the most important aspect for transactions in this industry. Concentration is considered to be low, but the large size of buyers makes this irrelevant.

Because price is the most important when negotiating the sales price of cereals, the price sensitivity of buyers is very high. The only exception is represented by large mills, where the quality of the wheat also plays an important role, as it is determinant for the later quality of flour.

To conclude this section, the negotiating power of buyers is considered to be higher than that of suppliers. Also, the buyers are very sensitive to price. However, this doesn’t have a negative effect on the industry’s attractiveness, as the prices are set on a global level and all transactions in the market are done at a similar price.

6.1.4 The threat of substitutes

The storage industry offers a crucial service in the entire supply chain of flour based products such as grain: it stores raw materials in the form of agricultural products for latter processing. This storage service has been declared by all the interviewees as non-substitutable. This is why the threat of substitutes for this industry is non-existent are there are no switching costs.

6.1.5 Internal rivalry

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The expert in the storage industry stated the industry is currently growing a rapid pace. This statement is backed up by recent data offered by the Minister of Agriculture and Rural Development (Antenasatelor.ro, 2011). He declared that Romania needs storage capacity for cereals. He also mentioned that, at national level, there are 3.342 storage spaces for cereals, with a total capacity 16.208.829 tons, of which about 4.131.000 tons of storage capacity, or 25%, is held by authorized storage facilities. The minister said the current needs rise to almost 30.000.000 tons, which is double the actual storage capacity. He adds that the modernization of old storage facilities is not very helpful, as current standard storage conditions can most effectively be achieved by newly built ones. One important detail is that storage facilities with a total of 3.461.920 tons have been built in the last 10 years. This represents 27,15% of the previous storage capacity for cereals and it shows the high growth rate that this industry has had over the years.

Besides industry growth rate, there are also other factors found in literature that affect the intensity of internal rivalry: the number of competitors, the level of exit barriers and the level of commitment to the business. The total number of competitors in the country is seen to be of little importance from the owner’s perspective. The main reason is that a small storage facility in the area could have a niche of its own, in a small radius, without representing a major nuisance for larger firms. He calculated that, within a 7 km radius, there are 6 agricultural associations, excluding his own farm; these work, in total, almost 5.700 hectares, from which about 60% are cultivated with grain each year. At an average yearly productivity of the land of 4 tons/hectare, there is 14.000 tons of wheat produced each year within a 7 km radius, making it easy for farmers to come and deposit their production directly at the storage facility. Also, this insures that the storage facility will be supplied with wheat. Competition is not likely to arise in the area in the near future, as most associations are run by boards of administration composed mainly of land lords that are not very eager to reinvest profits. The Ministry’s representative states that, although there are many competitors in the market, it is far from saturated and there is room for more. This is in line with the competitor’s view and the declaration of the Minister of Agriculture and Rural Development. This concludes that, although there are many competitors in the market, the intensity of internal rivalry is not increased.

This is also true for the effect of exit barriers, which are seen to be medium, as there are some interested investors in this industry, both domestic and foreign, who would desire to buy a storage facility. Commitment to the business is seen to be low by all the interviewees.

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within an industry. All the interviewees agree to the fact that prices are set on the commodities stock market and these values are taken as a guideline. These facts lead to the conclusion that, although price is a very important determinant of the internal rivalry within the storage industry, price competition has a low influence on its intensity.

In conclusion, the low internal rivalry and the high industry growth rate have a positive effect on the industry’s attractiveness. Although price is by far the most important dimension of competition, there is a low retaliation of incumbents against the entry of small business into the market, thus increasing the attractiveness for potential small entrants even further.

6.1.6 Factors that affect industry structure

Literature identifies four factors that affect industry structure: industry growth rate, technology and innovation, government, complementary products or service. The first will fragment the industry in the following years, as the building of new storage facilities is currently in progress. This includes both small and large investments, from both domestic and foreign businessmen. The competitor gave the example of the Dutch company Toepfer, which has recently bought a large storage facility in the harbor city of Giurgiu. According to the Minister of Agriculture and Rural Development, technology and innovation will make a difference between modernized old storage facilities and those that are newly built, thus creating heterogeneity in the industry structure between old and new investments. The influence of the government is acknowledged by all interviewees to be minor, as the “First Silo” program designated for small business has had little success. This is an important signal from the environment, which means that the actual attractiveness for this industry is low for small businesses. So Prodselect S.R.L. could profit from this weak response of entrepreneurs to government stimuli and gain important first mover advantages. Complementary services such as transportation play an important role for the industry and its structure, as storage facilities need to use the services of transport companies in order to move the products from the farmers to the storage facilities and then to buyers’ location.

Strategic options for an agricultural firm

Master thesis