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Farm Business Strategies: File C6-46 May 2016 WWW - Extension.iastate - Edu/agdm
Farm Business Strategies: File C6-46 May 2016 WWW - Extension.iastate - Edu/agdm
May 2016
www.extension.iastate.edu/agdm
B
usiness strategies focus on the direction • Replicate – This is a form of capacity expansion
of the business in terms of expansion, where the existing operation is replicated at a
maintenance, contraction, etc. Your business different location. This strategy is often used for
strategy should create and sustain a competitive livestock operation when further expansion at
advantage that enables you to consistently earn the current location is not feasible.
above-average returns. • Intensify/Modernize – This is another form
Five types of strategies are discussed below. They of capacity expansion where the real assets of
are: the business are not expanded. Rather, they are
modernized so more production can be pushed
• Growth Strategies – expanding the size of through a fixed asset base. This can occur in
the business both crop and livestock operation but is more
• Stability Strategies – maintaining the size of common in livestock production.
the business
• Diversify – This is another form of horizontal
• Restructuring Strategies – refocusing the expansion. However, instead of expanding the
business for improved performance existing enterprises, new enterprises are added.
• Succession Strategies – transferring the business A diversification strategy may be designed to
to the younger generation make use of economies of scope and other
• Exit Strategies – ending and leaving the synergies between the enterprises to achieve
farm business low cost status. However, efficiency may be
reduced because management is spread over
Farm business strategies are part of the strategic more enterprises.
planning process. An overview of Strategic • Specialize/Focus – This strategy involves
Planning for the Farm Business and the factors reducing the number of enterprises in the
that lead into selecting the strategy is available. business. These few enterprises are expanded
through horizontal strategy like capacity
Growth Strategies
expansion or a vertical strategy like integration.
Growth strategies involve various ways of expand-
One or just a couple of enterprises receive all
ing the size of the farm business. Growth may take
of the management attention. This is the
many forms and directions. Some of the common
opposite of the diversification strategy.
growth strategies are discussed below.
• Integrate – Integration is a vertical strategy
• Capacity Expansion – With this strategy, the because it may move forward into the processing
current enterprises are expanded. It means of products or commodities, or it may move
more acres of crops or more head of livestock. backwards into the input/supply segment of the
In essence it is “more of the same.” It is a supply chain. This strategy often involves a
horizontal form of expansion as opposed to a group of farmers working together to move up
vertical expansion which moves up or down the or down the supply chain. It may also involve
supply chain. A capacity expansion strategy may joint ventures with existing companies in the
be designed to take advantage of economies of supply chain. Potential strategies may include
size. Efficiency is also achieved because manage- the following.
ment is just focused on the existing enterprises.
Don Hofstrand
retired extension specialist
Page 2 File C6-46
• Become indispensable in the chain • Wait and See – The owner/operator considers
• Get to the ends of the chain the current economic and business environment
to be too uncertain for expansion at this time.
• Control the chain
So it is decided to wait until the future is more
• Reduce the number of links in the chain certain before expanding. However, if not
• Become part of a chain that will produce managed correctly, the owner/operator may wait
the next product too long and miss the opportunity for expansion.
operator. Arrangements for transferring to another party. For this strategy to work,
ownership and management of the business the business must be structured or organized so
from the older to the younger person that the business unit is of greater value than
are developed. the collective value of the individual assets.
• Spin-off – A younger person initially returns Type of Strategy Based on Operator’s
to the farm business but after a year or so starts
Life Cycle
his/her own farm business. The younger and
Business strategies are often closely tied to the life
older parties may work together and share
cycle of the farm operator. As the operator goes
machinery, equipment, etc. However, each
through the various phases of his/her life, the type
party operates his/her own business. At the
of strategy often changes due to the operator’s
retirement of the older party, the younger person
preference and planning horizon. Below are two
merges the two businesses together and operates
typical series of operator life cycle strategies.
them as one business.
Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture.
Cathann A. Kress, director, Cooperative Extension Service, Iowa State University of Science and Technology, Ames, Iowa.