Introduction
Competitive advantage can result from product differentiation or from being a low-cost producer. A low-cost producer, as the term implies, strives to have below average per unit costs while receiving at least average product prices. A farm pursuing product differentiation, on the other hand, strives to obtain above average unit product prices while maintaining a cost structure that is at least average. Traditionally, most farms focused on being a low-cost producer. Increasingly, the value chain is being reconfigured in such a way that there is more room for producers that focus on product differentiation. This reconfiguration is the result of consumers demanding more unique or differentiated food products, some of which have been developed before the processing stage, such as local or organic food or the use of appropriate animal treatment or welfare practices. Producing differentiated products may enhance income and mitigate risk.
Identifying a Competitive Advantage
How does a farm decide whether to be a low-cost producer or pursue a product differentiation strategy? It may sound trite, but it depends on what you are good at. For example, if you are currently producing an item for a competitive market where all producers receive a similar price, would you excel in identifying markets with above-average prices, and are you good at selling yourself and your farm’s products?
A series of questions can be used to help identify your competitive advantage. The questions are sequential. When answering these questions think about a resource or capability that garners you a competitive advantage. First, does your farm possess a resource or capability that enables you to respond to environmental threats and opportunities? I have yet to meet a farm that could not answer this question affirmatively. Second, how many competing farms already possess your resource or capability? A resource or capability that is not rare is not unique. Third, do farms without your resource or capability face a cost disadvantage in obtaining the resource or capability? A common example related to this question is specialized knowledge. You would probably charge other farms dearly to part with your specialized knowledge. Fourth, is your farm organized to exploit the full potential of your resource or capability? Organizational problems do not necessarily increase with increases in farm size or the number of employees. A sole proprietor without hired employees and who does not have a family member returning to the farm may not have as much incentive to fully utilize a resource or capability.
Once we have identified what we are good at, it is natural to ask a related question. Specifically, how does a farm know that its strategy is successful? The answer to this question is benchmarking. How does your cost per unit and net return per unit of production or sales compare to other farms? If this information is unavailable, you could benchmark your farm’s performance over time. Is efficiency improving? Are you receiving a higher price per unit than you have in the past? Is demand for the products you are producing increasing over time?
Strategic Positioning Skills
When thinking about strategy, it is also important to identify management gaps. Most producers wear multiple management hats. Given the importance of strategic management, gauging a farm’s management skills is helpful. By doing this, a management team can determine where to focus on professional development, how to delegate management tasks, and when to seek outside assistance.
Important strategic positioning skills include the following: articulating a vision for the farm business; identifying factors critical to the long-term success of the business; capitalizing on new and emerging markets; assessing your farm’s advantages and disadvantages compared to competing farms; updating written strategies and action plans at least annually; and updating equipment and facility replacement plans at least annually. Each farm operator should rank their ability with regard to each skill using a 1 to 5 scale, with one being relatively weak and five being relatively strong with respect to that skill. Skills with low rankings across operators need more emphasis.
Conclusions
This brief article defined what is meant by competitive advantage and discussed how to identify your farm’s competitive advantage and how to determine whether you have a gap in key strategic positioning skills. Farms that develop strategic plans, which include defining your competitive advantage, tend also to adopt other management practices. For example, a recent study illustrated that farms that had written succession plans had above-average managerial abilities and also tended to have written lease agreements used consultants, used financial ratios to make decisions, documented and evaluated pricing performance, and used standard operating procedures.
Additional Reading
Benanko, D., D. Dranove, M. Shanley, and S. Schaefer. Economics of Strategy, Sixth Edition. Massachusetts: Wiley, 2013.
Langemeier, M. “Identification of Unique Resources.” Farmdoc Daily (6):105, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 3, 2016.
Langemeier, M. “Assessing Strategic Positioning Skills.” Farmdoc Daily (9):142, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 2, 2019.
Langemeier, M. and M. Boehlje. “Drivers of Consolidation and Structural Change in Production Agriculture.” Economic Review, Federal Reserve Bank of Kansas City, Special Issue 2017.
Lippsmeyer, M., M. Langemeier, J. Mintert, and N. Thompson. “Factors Impacting Succession Planning.” Farmdoc Daily (13):163, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 8, 2023.