Final Exam
What is meant by a firm's purpose and objective?
Firm's Purpose • What firm is going to do? Firm's Objective •How to accomplish its purpose?
What are the benefits of a good marketing plan?
Firms achieve higher rates of return on invested capital when they have --A clear business purpose --A clear business objective that is reflected in a well-thought-out marketing plan with an effective marketing mix
How has the role of marketing changed in the agricultural industry?
Focus on lower cost & physical efficiency Marketing shift from physical efficiency to selling Adoption of marketing approach by ALL employees Remember: Only by satisfying a customer need does a business earn its right to make a profit
What is forecasting?
Forecasts of future levels of major economic variables Examples: GDP, interest rates, income, consumption rates, and so on are easy to find. Become valuable to an agribusiness if related Firm's sales Profits Costs and so on.
What is a marketing plan? What is included in a marketing plan?
• A complete assessment of all the factors surrounding the customer needs the firm hopes to fulfill • A marketing plan is like a road map used to steer a firm towards its production goals • A marketing plan involves art, science, discipline and analysis • The most basic components of a marketing plan include: - Marketing Mission - The current market situation - Opportunities and issues analysis - Marketing strategy or Marketing objectives
What are the four utilities of marketing?
• Form utility - Making the product more desirable - Physically altering the product • Place utility - Having the product in the right place - Transporting and processing the product Possession utility - Making it available & affordable to the consumer - Pricing the product, maintaining constant supply of the product Time utility - Having the product when the consumer wants it - Production and Logistical practices that ensure supply
What does the current market situation address in a marketing plan?
A description of - General market conditions - Availability of markets and prices - Type of customers and type of producers (geographic areas, lifestyles, age, tastes and preferences)
Marketing Mission
A clear and concise statement of the firm's purpose, and how the firm is going to accomplish its goals • Could be a catch phrase or short paragraph
What is ratio analysis? Why is it important to the agribusiness manager?
Ratio analysis Examines relationship • Various components of balance sheet • P&L statement Evaluate ratios Comparing changes over time Industry standards Four categories 1. Liquidity Ratios 2. Solvency Ratios 3. Activity Ratios 4. Profitability Ratios
What is the role of the agribusiness manager? How do we separate a good manager from the rest?
"A manager gets results that exceed the sum of the parts" • The size of this difference reflects the role of management and is the measure what separates the good manager from the rest
What is the underlying management objective?
- Efficient use of resources - Profit maximization - Customer satisfaction - Long‐term growth
Why is a business plan important, and how does it tie to marketing?
. What is our business? 2. Who are our customers? 3. What is value to our customers? 4. What will our business be? 5. What should our business be?
What factors are involved in forecasting?
1. Accuracy desired 2. Time permitted to develop forecast 3. Complexity of situation 4. Time period projected 5. Amount of resources available (e.g., money, personnel)
What is the difference between a budget and a statement?
A financial document that presents the financial position of a business at a given point in time It summarizes business investments (assets) -What types of assets are owned How were they financed (liability and net worth Shows solvency of the business as of the last day of the accounting period -Solvency - does the business own more than it owes? -Solvent if Assets > Liabilities -Owner's Equity is + -Insolvent if Assets < Liabilities -Owner's Equity is - •Business could file for Bankruptcy Valuation Methods -Cost Basis -Market-Value Basis
What is the role of implementation in strategic management?
A great strategic plan without flawless execution Like no plan Three ways to measure strategic plan's success if your first choice of : --Employees --Customers --Investors Highest ROIC in Industry
What is a budget? What is the purpose of a budget?
A realistic model of what management thinks the firm is going to do within a given time frame-the accounting period. Based on sales, cost, and productivity estimates developed in the marketing plan. A budget differs from a statement in that the budget is an anticipation of the future while a statement is a report of the past. Assists the manager in decision making Keeps management's attention on the achievement of financial objectives Increases the chances that financial objectives will be realized
What is a production function?
A rule describing the different levels of output associated with the different levels of inputs.
Why is decision making important to the agribusiness manager?
A successful manger needs to develop sound decision making skills that would: - Ease the decision‐making process - Improve the quality of those decisions - Reduce the time required to make those decisions - Increase the frequency of good decisions
Define diminishing marginal utililty.
Additional satisfaction from consumption of each additional unit declines
What is the economic problem agribusiness managers face? What questions must be answered? How can each be answered?
Agribusiness managers face three economic questions related to production management: -What to produce? -How to produce? -How much to produce? What to produce - Marketing - Depends on what consumers want to consume. - No market for the product no need to produce it at all. How to produce - Technical - Use the least-cost method of production. - The bottom line in any business is profits. - If high tech means higher per unit costs then go low tech. How much to produce - Economics - Use profit maximization - Produce so long as you can at least break even.
Who are the beneficiaries of the US agri-food system? Why?
American Consumers are beneficiaries of US Agri-Food System... - Safest Food Supply in the World - Lowest Cost Food Supply in the World
What are resources?
An honest and thorough assessment of resources helps the manager choose realistic strategies for achieving the goals of the firm. Resources - Physical‐ land, buildings, fences, breeding livestock, machinery and equipment, established perennial crops - Financial‐ cash, other capital and available credit - Labor‐ skills of the operator and other employees, likes and dislikes of individuals, availability/feasibility of hired labor - Managerial‐ Personal skills and knowledge base
What is comparative statement analysis? Why is it important to the agribusiness manager?
Comparative Statement Analysis Balance sheets and P&L statements Two periods Side by side Examine any significant changes • Dollars or percentages • Affect financial firm condition Measure changes over time and against industry standards Robert Morris Associates Comparative balance sheet analysis Comparative profit and loss statement analysis
Define the agri-food system. What sectors are involved?
Consists of every component of agriculture from farmer to consumer. - Input Suppliers - Producers - Commodity Processors - Food Manufacturers - Food Distributors - Food Retailers
What are the various classifications of items on the balance sheet? Examples of each?
Assets -Anything of value owned by the business -May be tangible or intangible -Includes obligations by others to the business -Does not include acquisitions that are not owned (leased, rented, borrowed) •Leased resources should be included as a footnote to reflect the size of the business Current Assets -Consumed within the accounting period -Converted to cash without affecting the functioning of the business •Cash •Accounts Receivable •Inventories •Inputs •Prepaid expenses Intermediate Assets -Assets that support production -Consumed beyond the accounting period -Not normally sold as part of the business •Machinery •Breeding Stock •Portable Buildings Fixed (Long Term) Assets -Benefit the business ongoing -Typically considered to live more than 10 yrs -Sale would impede business -Non-tangible assets as well •Buildings •Improvements •Farm Land
What is meant by the term autonomous profit center?
Autonomous profit centers • Puts people in charge of own destiny • Offers fast performance feedback • Keeps work units small enough - Sense of involvement and achievement • Accomplished with minimum number of management levels • Maximizes long run profits helping firm completely satisfy customers' needs by giving greatest value • Maximizes stock price because it maximizes long run ROIC
How is the break-even point determined?
BEP$ = TFC /CMP
What are the different financial statements? What is found on each? What does each tell a manager about a business?
Balance Sheet -Shows the financial condition of a company at a given point in time - assets, liabilities, and equity Income Statement or Profit and Loss (P&L) Statement -Shows the profitability of a company over a given period of time - revenues, expenses, and net profit Cash Flow Statement -Shows all sources and uses of cash in chronological order over a given period of time Equity Statement -Shows financial transactions during the accounting period that affect the net worth or equity of the business Enterprise Reports -Income Statements for each enterprise Inventory Report -Recording of purchases, sales, births, deaths, amounts harvested, amounts fed, inputs used, etc. -Tracks the quantity and value of livestock, crops or other commodities on hand
Why is forecasting important?
Become valuable to an agribusiness if related Firm's sales Profits Costs and so on
What are the limitations of budgets?
Budgets are estimates, not sure things Execution of a budget is not automatic Budgets cannot take the place of good management Good budgeting requires time and patience
What are the benefits of budgeting?
Budgets provide a way to measure business performance Budgets keep managers focused on the financial implications of their business decisions Budgets help managers communicate expectations and quickly spot deviation from expectations
Who should a business be first choice for when considering strategic management?
Business Mission/Vision Statement Values Purpose Objectives The Strategic Plan Market Threats and Opportunities (External) Market Strengths and Weaknesses (Internal) Implementation of the Strategic Plan
What is a centralized vs. decentralized decision-making system?
Centralized Decision-Making - All decision-making authority is held by a small number of top executives who are involved in every decision. Decentralized Decision-Making - Decision-making authority is delegated amongst specialized staff, while overall mission is controlled by top executives
Define consumer sovereignty.
Consumer Sovereignty - Customers decide what and how production will take place by deciding what they are willing to purchase. Marketing will succeed only if all the functional areas of the firm, such as production, financing, purchasing, etc, accept the idea of consumer sovereignty!
What is utility maximization?
Consumers always select the item that gives highest level satisfaction
What is contribution? How is it calculated?
Contribution is the amount available to pay overhead & profit On a per unit basis, Contribution • is the difference between the selling price and variable cost per unit • Equals overhead plus profit per unit selling price - variable costs = overhead + profit
What is a critical task? Why is it important?
Critical Tasks - The activities that must be done well if the business is to achieve its purpose and objectives. - Function smoothly and without restriction within the organizational structure
What is involved in the strategic planning process?
Define Values Set Purpose & Objectives Assess Internal Environment Assess External Environment Develop Strategic Plan Develop Marketing Plan
What is meant by Shut-down point?
Determining Shutdown Point If Contribution per unit is positive, even if it is not enough to pay all the fixed costs, it is better to accept the job because at least part of the total fixed costs are being paid If a job does not have a positive contribution, it is better to shut down than to take the job.
What is break-even analysis? Why is it useful?
Determining the combination of • Costs • Output • Selling Price That allow a firm to break even—no profits or losses. It is a first stage management tool that can be quickly used to determine the chances of success for a given production situation
How is the performance of economic systems evaluated? What criteria are used?
Efficiency: - How efficiently Goods and services flow from Producers to Consumers • Fairness: - How well marketing systems meet needs of consumers
What are management objectives?
Efficiently combine the available human, financial, and physical assets to ensure long‐run growth of the firm by profitably satisfying the customers' needs
What does each budget show?
Enterprise (Operating) Budgets Enterprise budget is an organization of revenues, expenses, and profits. • Summarizes the expected sales, production activities, and related costs for the budgetary period. • An estimate of the sales & income plus the fixed and variable expenses the firm must incur to support the expected sales Each crop or livestock that is grown is an enterprise and should have an enterprise budget. The entire farm as a business should also have an enterprise budget. The purpose of an enterprise budget is to: - Estimate costs, returns, and profits. - Identify the more profitable enterprises to be included in the whole farm plan. Cash Flow Budget A cash flow budget is a description of the projected cash inflows and cash outflows for a business over a given accounting period. - This accounting period is typically divided into quarters or months.A cash flow budget contains only cash transactions, it does not include any non-cash items. - Example of inclusions: • cash from sales of capital items, proceeds from new loans, principal payments on debts. - Examples of exclusions: • depreciation, changes in inventory, sales on credit. A cash flow budget concerns the timing of revenues and expenses. The budget should therefore, include: - When cash will be received or paid out; - Purpose of transaction - Amount of transaction Capital Expenditure Budget Records amount & timing of purchases of capital equipment The capital expenditure budget covers: - maintenance of existing equipment & plant - purchase of new equipment • Estimated Cost • Estimated Payment Plan - Cost-saving projects & renovations
What are the different types of budgets?
Enterprise or Operating Budget Cash Flow Budget Capital Budget
What is the Equi-marginal allocation principle?
Equimarginal Allocation Principle The economic strategy for profit maximization: MR=MC
What are the different forecasting procedures or methods?
Extrapolation: forecasting using idea that whatever happened in past will happen again in future. Graphical analysis: extrapolation is combined graphical analysis with plotting of data. (See figure 7-1) Inflation Adjusting Deflate or remove effect of inflation from price Graphical analysis: extrapolation is combined with graphical analysis with plotting of data. (See figure 7-1) Adjusting for Population Remove impact of changes in population by measuring sales on a per person (per capita) basis Adjusting for population is done by dividing sales by population (Table 7-2) Moving Averages Moving averages help reduce impact of short-run fluctuations in data by plotting average value of several data points rather than a single one Example: table 7-1, figure 7-3 Identifying Seasonal Patterns Seasonal patterns of prices and quantities: Lowest price at harvest time followed by: Slow rise each month throughout rest of year followed by: Decline just before next harvest Identifying Cyclical Patterns Cycles are more prevalent in livestock (hogs & cattle) Changes in livestock production Require longer period of adjustment Combining All Adjustments Combine several of forecasting procedure to make projection Reassemble parts in order using price data from Most current year Trend line Seasonal and cyclical pattern information
What are the prerequisites to an efficient economic system?
Free market economy • Prices reflect full value of resources • High degree of interaction between - Consumer - Producers
Know the different organizational approaches and characteristics of each.
Functional Approach (Business Function) - Departments and units are broken down by basic functions of the business, i.e. • Sales • Advertising • Production • Warehousing • Inventory • Maintenance • Accounting - Works best for large firms with similar production processes Functional Approach - Avoids Duplicate Activities - Streamline Record Keeping - Gives management greater control - Economies of Scale by centralizing basic business functions - Centralization can reduce flexibility in responding to market conditions - Not very suitable for agricultural production. Product Approach - Departments and units are broken down by Products Produced or Marketed, i.e. • Feed • Seed • Chemicals • Fertilizer - Works best for agricultural production because of specialization If given a high level of autonomy, each unit can operate as an independent, separate business with a full range of business functions - Smaller size and product specific focus allows the firm to quickly adjust to market environment. - Reduced efficiency and possible duplication of activities. - Central management exerts less control over each business unit Geographic Approach - Departments and units are broken down by Geographic regions - Puts the manager closest to the market - Market Flexibility is improved - Lose benefits of specialization as each unit must cover all tasks Matrix Approach - Combination of any of the above mentioned approaches to increase efficiency. - Multiple managers may be brought together with higher level management to resolve conflict in organizational goals • Focus of solution should always lead to greatest overall long-term profits
What are goals and objectives?
Goals • Goals should be specific, based on criteria that are measurable within a given time frame - Goals describe the production and long‐term viability of the business - The mission describes the overall atmosphere of the business. increase profits by X% - Maintain or increase standard of living - Increase equity by X% - Maintain stable income of $X - Increase net value of farm to $X - Increase free time by end of year by X hrs/day - Increase farm size from x acres to xx acres - Maintain or improve environmental quality. Objectives • Objectives describes in concise and detailed language how the business will attain its goals • There are several ways of arriving at the same goals - Different management - Different resources - Different resource flexibility.
What is a target market?
Identify Consumer needs, desired benefits, and preferences Product Satisfaction Sought after characteristics Matching Preferences with Demographic Information of potential customers See if the resulting target market or market segment can be serviced profitably.
What are the six steps in the decision-making process?
Identify the problem - This step is the most critical - Separate symptoms from problems - Identifying the correct problem increases the likelihood of obtaining a correct solution Determine alternative courses of action - List all possible solution - regardless of whether you can afford them or not - Doing nothing is also a viable option Analyze the alternatives - Always use a cost vs benefit approach - Always use measureable criteria to measure the costs and benefits of each alternative Some measurable costs include: - financial - physical buildings - how much space will I need - risk level - education- how much do I have to learn - time - manpower Some measurable benefits or visible improvement include: - the size of the customer base - volume of sales - size of leftover inventory after the production season - the probability of failure - the total financial profit - timeliness of profits - changes in equity- measures of long‐run success Select the best alternative - With measurable criteria the best alternative from #3 is obvious - Doing nothing is still an alternative - Make sure the most important criteria are satisfied - Consider the long‐run and short‐run Implementing the decision - This is accomplishing tasks through people - Be quick and efficient Follow up: • With good measurable criteria, this step becomes just a matter of observation. • Assess your decision‐making skills - Always ask • What did it take to arrive at my choice • What did I learn from the process • If I had to do this all over again what will I improve • Learn from your mistakes • Learn from other good decision makers working for you
What is an agribusiness?
In the US, agribusiness is one of America's best kept secrets. It functions so flawlessly that few people realize the extent of its reach. Agribusiness encompasses the production, processing, manufacturing, distribution and retailing of food and fiber
What additional records might be kept by a business?
Inventory Report -Recording of purchases, sales, births, deaths, amounts harvested, amounts fed, inputs used, etc. -Tracks the quantity and value of livestock, crops or other commodities on hand Enterprise Reports -Income Statements for each enterprise Transaction Journal -Record of all financial transactions -Includes check and deposit numbers, dates, payees and payers, amounts and descriptions. -Used to provide an audit trail and make entries into the general ledger. General Ledger -Contains different financial accounts for the business and the balances in these accounts. -Balances in the revenue and expense accounts are used to prepare the income statement -Balances in the asset, liability and net income accounts are used to prepare the balance sheet Depreciation Schedule -Annual Depreciation is required in the income statement as an expense -Contains •Description of the assets •Date purchased •Purchase Cost •Depreciation method used •Accumulated depreciation •Current Book Value Employee Record -Information on hours worked and type done, gross pay, payroll deductions, and benefits Income Tax Reports -The information from any record keeping system should be enough to prepare the farm tax returns Family living expense report -Not part of the business financial activities -Necessary for identifying profitability of business -Important for partnerships for tax purposes Family living expense report -Not part of the business financial activities -Necessary for identifying profitability of business -Important for partnerships for tax purposes
What are the four principles of organizational design?
Keep the structure Simple - Have only the number and ranks of managers that are essential to the business - Fewer people ensures that they know what they are responsible for. Allow Critical Tasks to function without restriction - Do not hinder with unnecessary processes/paperwork - Ensure continuous function Minimize Support Staff - Staff that do not contribute directly to profitability cause additional process and effort - Stick to only what is required - Consider hiring out non-essential positions Keep working units small - Employees should not be able to just blend in and go unnoticed - Groups should be large enough to accomplish their tasks, but small enough that each employee is able to contribute
Know the different legal structures.
Legal forms of Agribusiness - Sole Proprietorships - One single owner - Partnerships - Two or more owners • Limited partnerships • Ordinary partnerships - Corporations - Separate legal Entity • C-class corporations(regular corporation) • S-class corporations(tax option corporation) - Cooperatives - Member/user owned business
What are line activities? Staff Activities?
Line activities - Directly affect accomplishment • Firm's purpose and objectives - (e.g., sales, production) Staff activities - Indirectly support accomplishment • Firm's purpose and objectives - (e.g., human resource, legal)
What is liquidity?
Liquidity is the ability to meet the day-to-day cash needs of the firm and is of paramount importance to a manager. Three ratios are used to measure liquidity.
How can the market potential be estimated?
Market Potential Total level of sales possible in a target market for all firms. Sales Forecast Level of sales a single firm can expect to receive from a target market Market Share The percentage of total sales from the target market achieved by a single firm Macroeconomic approach Derive consumption of a product from easily obtainable macroeconomic statistics. -GDP -Retail Sales -Industry Production -Sales Population approach Develop estimates from the consumer side using population statistics Consumption approach Determine local consumption from national consumption figures
What is the role of marketing?
Marketing completes the production process • Producers—make large amounts of a few things • Consumers—buy small quantities of many things • Marketers resolve these differences The Five Barriers to Consumer Satisfaction The Nine Marketing Functions The Four Utilities of Marketing
What is the mission of marketing?
Marketing mission- To bridge the gap between the conflicting needs of producers and consumers - What to produce - How much to produce - When to produce - Who (how) to produce - Who gets it
What is meant by structure-conduct-performance?
Model The model is based on the notion that • the way firms are organized in a Market (their structure) • tells a great deal about how they make Decisions (their conduct) • which in turn influences the level of Efficiency and fairness present in a market (their performance)
What is meant by gross profit? Net income?
Net Income or Profit: The remainder after all expenses and taxes have been paid. •What is actually available for the business Gross Margin (Gross Profit) - what remains after subtracting the cost of goods sold from the total revenue. •Also called Value of Farm Production. • •Shows profitability of the production process.
What is involved in formulating a competitive strategy?
Operational Efficiencies (Lowest Cost) Strategic Positioning (Differentiated Products)
How is management defined?
Part art and part science of combining the right amounts of management skills with good judgment to profitably accomplish tasks through people Management is accomplishing tasks through people so as to maximize the collective value of their individual strengths Management, therefore, means you are constantly making the right decisions... Decision making is the very heart of management
What are the four functions of management? What takes place in each?
Planning: The objective of planning: - Put the firm in the best possible position relative to future business conditions and customer demands - What to produce, how much to produce, who will buy it, how much should I sell for... • Planning Begins: - Developing Organization - Marketing Plan Planning is a continuous process of - Developing the Mission, Goals and Objectives to focus the firm's efforts • Define the firm's purpose • Statement of the firm's objective - Identifying resources, and allocating them to competing uses - Establishing control standards - Establishing policy and procedures A mission statement is a formal, written statement of the purpose of a company or organization. The mission statement should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decision‐making. • It gives those involved in the firm a vision of the future and a basis for strategic long‐term planning • It describes - what the firm is - what it is trying to accomplish - what its values are - where it is heading • The length depends on the business itself Goals should be specific, based on criteria that are measurable within a given time frame - Goals describe the production and long‐term viability of the business - The mission describes the overall atmosphere of the business Increase profits by X% - Maintain or increase standard of living - Increase equity by X% - Maintain stable income of $X - Increase net value of farm to $X - Increase free time by end of year by X hrs/day - Increase farm size from x acres to xx acres - Maintain or improve environmental quality Objectives describes in concise and detailed language how the business will attain its goals • There are several ways of arriving at the same goals - Different management - Different resources - Different resource flexibility Assessing Resources • An honest and thorough assessment of resources helps the manager choose realistic strategies for achieving the goals of the firm Resources - Physical‐ land, buildings, fences, breeding livestock, machinery and equipment, established perennial crops - Financial‐ cash, other capital and available credit - Labor‐ skills of the operator and other employees, likes and dislikes of individuals, availability/feasibility of hired labor - Managerial‐ Personal skills and knowledge base Organizing: • Organizing means grouping together activities, people and other resources to implement the objectives. Organizing involves figuring out - How the activities of the firm will be carried out - Who should be carrying them out - What kind of background support is required • Accomplish the firm's purpose & objective effectively and efficiently. Determine the organizational structure best suited to your business: - The legal structure-Proprietorship; Partnership; Corporation - Departments - sales, purchasing, production, etc - Products - cotton field, watermelon field, etc - Geographic location Controlling: Controlling involves evaluating the goals and objectives set in the Planning stage against the duties and tasks established in the Organizing stage - Concerned with giving management feedback. Includes evaluating or monitoring the activities and procedures used by employees in reaching the businesses goals - Monitoring results and comparing them to given standards - Correcting deviations from standards - Revising and adjusting standards and methods of evaluation. Directing: Implementation of the other three management functions - planning, organizing, and controlling • Consists of providing instructions and guidance to employees. Successful directing relies on good leadership to accomplish the business mission - The manager's ability to motivate employees - Fully understand the other three functions - Use the right mix of management skills. Directing means providing each employee with: - An understanding of how each job helps to accomplish the firm's objectives - Clear and concise instructions or directives so that the firm's objectives and goals are met - The proper tools equipment and training - Meaningful and frequent feedback on performance
What is Porter's Five Forces Model?
Potential Entrants Buyers Substitutes Suppliers
What are the four Ps of marketing?
Product: The right product Price: The right product, with the right price Place: The right product, with right price for sale, in the right place Promotion: The right product, with the right price, for sale in the right place, and given the right advertising
What are the characteristics of the production sector today? How has this changed over time?
Production Sector & Productivity Gains: - Farmers have grown larger and more specialized - All inputs are now purchased - Technological advances led to a separate agriculture input sector(one of the best integrators of technology) - Increased storage and transportation led to processing and manufacturing sector
What are reasons to hold or not hold inventory?
Reasons Not to Hold Inventory • High Maintenance Costs • High Protection Costs • Depreciation & Obsolescence • Taxes
What are revenues? Expenses?
Revenue - refers to the amount of money the firm earned from the sale of goods and services this period. Operating Expenses - the general cost of operating and administering the business, outside of the direct cost of goods sold for this period. -Building payments -Management Salary -Advertising -Transportation
What is SWOT?
SWOT Analysis - A set of steps to perform internal assessments (including an analysis of performance) and external assessments (including an analysis of the operating environment) that result in the identification of strengths, weaknesses, opportunities and threats. Internal Assessment - Strengths - Advantages pertaining to your particular business or product - Weaknesses - Challenges faced by your particular business or product • There are always weaknesses!! External Assessment - Opportunities - Potential advantages within the target market or business environment - Threats - Challenges within the target market or business environment • There are always Threats!!
What role does price play with scare resources?
Scarcity—Forces people to make choices In free markets, Price allocates scarce resources to the highest bidder Insures most efficient use of resources Two principles that drive consumer behavior: Consumers always select the item that gives highest level satisfaction (utility maximization) Additional satisfaction from consumption of each additional unit declines (diminishing marginal utility)
What factors influence consumer demand?
Seven factors affecting the demand include: Price of the product—Quantity Demanded Seasonality Price of competitors' (substitute) products Price of complement goods Income Population Taste and preferences
What are the different classifications on a Cash Flow Statement?
Shows the flow of cash through the operation over a given period. Cash gives the manager flexibility to invest and direct resources to profitable uses that in turn generate additional cash Cash rather than net income is used to provide family withdrawals, repay loans, invest in new capital, etc.
What are the pros and cons of each?
Sole proprietorship Easiest to establish Continuity of existence - Death of owner means business will have to be liquidated or reorganized under new ownership. Transfer of Ownership - Business cannot be transferred. - Assets can be transferred and re-organized into a business under new ownership Credit - Most restricted because credit limit is determined by the worthiness of the owner. - Personal and business assets available to creditors. (Good) Liability - Personal and business assets available to creditors. (Bad) Participation in Management - Sole proprietor is the manager - Management is rarely compensated. Tax Planning - Sole proprietorship's business profits are taxed at personal income rates. - Tax laws and tax rates vary significantly with the structure of the business. Partnership Characteristics of an Ordinary Partnership: - Parties operate under a firm name, - Parties have a joint bank account for the firm, - Parties keep a single set of records. - Assets are jointly owned, and contributed according to agreement. - Each partner participates in management decisions. - Profits and / or losses are shared according to agreement. Ordinary Partnership Establishment - Easy to establish. - Can be established by verbal or written contract (written is recommended). Continuity of existence - Death of any partner means business will have to be liquidated or reorganized under new ownership. Transfer of Ownership - No assistance with ownership transferOrdinary Partnership Credit - More access to resources from more than one person. - Each member's personal and business assets available to creditors. (Good) Liability - Each member's personal and business assets available to creditors. (Bad).Participation in Management - Management is provided by partners. - Degree of involvement is decided upon by partners. - Managers are usually not expected to draw compensation. Record Keeping - Fair amount of record keeping is required for tax purposes.Tax Planning - Incomes are taxed at personal income rates. - Tax laws and tax rates vary significantly with the structure of the business. - Partnerships do not pay income tax directly but files an information income tax return reporting returns and expenses. - Income, capital gains, expenses, depreciation, etc, is reported individually based on their share of the partnership Ordinary partnership- - Similar to the sole proprietorship, but with more than one owner. Limited partnership- - Partners do not have managerial control. - Partners are only liable for their share of investment in the partnership (like investors in a company). Registered Limited Liability Partnership (LLP) - Partners do not have managerial control. - Partners are only liable for their share of investment in the partnership (like investors in a company). - Not liable for obligations due to negligence, wrongful acts, or misconduct by another partner or lawful representative of the firm. - Must carry liability insurance or other financial security Corporation Created by state law for the purpose of carrying on a business for profit or non-profit. It has most of the legal rights and duties of an individual and stands as a separate "person" from its "owners". Corporation established for profit are created through - the sale of stocks (shares of ownership) - the sale of bonds (promises to repay loan). Characteristics of a Corporation: - Income (profits) are shared proportionally among shareholders. - Corporation is a legal entity with all the rights and responsibilities of a person. Characteristics of a Corporation: - Types of people in a corporation: • Shareholders (owners), • Directors ( to supervise the management), and • Officers (managers responsible for day-to-day operations of the business). • Employees (workers including production managers). Establishment - Incorporators file a preliminary application and reserve a name. - Draft a pre-incorporation agreement outlining major rights and duties of the parties. - Design articles of incorporation and bylaws and file with state officials. Establishment - Turn property and cash over to corporation in exchange for stocks/bonds. - Shareholders meet to organize the business and elect directors. - Hold board of directors meeting to plan the corporation. C" corporation (regular corp.)— - Taxed on output and as income. - Unlimited number of shareholders. - No restrictions on nationality of shareholders. "S" corporation (tax option corp.) is not taxed on output but taxed on income. - Be a domestic corporation. - Has no more than 100 shareholders. • Individuals • Certain trust • Estates - Have only one class of stock. - No nonresident alien, partnership, or corporation can hold shares. Credit - Better access to resources because it exists to make profit, and is usually run by more than one person. - Established record keeping ensures accountability. Liability - Shareholders personal assets are separate from the corporation's. Continuity of existence - Corporations have perpetual live. Transfer of Ownership - Perpetuity of a corporation facilitates transfer of ownership( through shares and bonds), assets and management Participation in Management - Management is separate from ownership. - Corporations have potential for higher profits. - Profit sharing & fringe benefits are used to encourage management. Record keeping - Corporations require very detailed record keeping including minutes of board meetings. Tax Planning - Tax laws and tax rates vary significantly with the structure of the business. Cooperative Agribusiness An agricultural cooperative is a user-owned and user-controlled business whose benefits are distributed equitably to the owners on the basis of use. Coops are special types of corporations. Cooperatives help the farmer to: - integrate vertically backwards into the farm supply sector. - integrate vertically forwards into the manufacturing and processing sector
What are the five barriers to consumer satisfaction? What does each ask? How are they overcome?
Space barrier - Is it where the consumer is found? • Time barrier - Is it available when the consumer wants it? • Information barrier - Does the consumer know what is out there? • Value barrier - Is it what the consumer wants, the way he/she wants it? • Ownership barrier - Is it available/ affordable?
What are the different stages of the production function? Why is it rational to operate within some stages yet irrational to operate within others?
Stage I — - The point at which the MP lies above the AP curve. - Average Product is rising continuously - Irrational stage to stop because inputs can still do better Stage II — - Begins when MP = AP and ends where MP=0. - Marginal Product is less than Average Product. - Rational range to produce. At the end of stage, stop production as inputs are not doing so well. - Equimarginal allocation principle** Stage III — - Starts when MP < 0. - Irrational stage to produce since you are losing output.
What is strategic management?
Strategic Management is the process by which managers choose a set of strategies (broad approaches) that will allow their firm to be the first choice of their customers and employees so they can achieve the superior financial performance—the highest ROIC and stock price in the industry—their investors require. What businesses must do to stay in business... How do you strengthen your firm's competitive edge over the long run?
What are the generic building blocks of competitive advantage?
Superior Quality, Superior Customer Responsiveness, Superior Innovation, Superior Efficiency
Define the two types of efficiency
Technical efficiency - Maximize the output obtained from the inputs (maximum productivity). • Economic efficiency - Maximize returns and minimize cost of production (maximum profits)
What skills does an agribusiness manager need?
Technical skills - Proper production technique - Understanding of factors affecting production (environment, disease, domestic and foreign markets, government policy, etc.) Communication skills - Use of current communication technology - Ability to transfer information to others within /outside the field - Ability to understand information from others within /outside the field Motivation skills - Strong human resource and personnel management abilities - Strong leadership skills Business skills - Marketing - Production using economic principles - Budgeting/ Accounting Ability to mix the technical, communication, motivation and business skills to obtain more than the sum of the parts
Know the Key Terms discussed
Technology - Method in which inputs are combined to obtain a particular output Production - Process of using inputs or resource(s) to produce some output. Inputs (Resources or Factors of Production) - Anything that can be used to produce an output that can satisfy human wants Plant - Physical establishment where production takes place
What is elasticity? How is it classified?
Tells you whether revenue will increase or decrease from changes in prices, income, and so on. • Elasticity = % change in quantity % change in price • Demand can be either elastic, unitary, or inelastic. • It is important to know this for your product to make good pricing decisions >1 Elastic Price rise total revenue down Price decline total revenue up
What are the nine functions of marketing?
The Exchange Functions Buying - Making product available Selling - Making the product available The Physical Functions Storage - Maintains regular supply - Allows producer to take advantage of higher prices • Transportation - Takes the product to the consumer • Processing - Allows for storage and transportation - Makes produce available to distant consumers Facilitating Functions • Grading and standardization • Financing - Should I spend more money meeting the needs of consumers in the hope that they will buy more of my product? Risk taking - Should I sell now or later? - Should I sell this innovative product or not? - Should I move into this new market or not? Market information - Disseminates and gathers information on both consumers and producers
Be able to identify each of the statements.
The Profit-and-Loss Statement A summation of revenues and costs over a given period Statement of Owner Equity Presents value and changes to owner's equity over a given period. Links beginning and ending Balance Sheet and the corresponding Income Statement Provides a better understanding of financial statement information -How much change caused by each source of equity
Define the importance of the agri-food system on the economy.
The US Agri-food system is the largest part of our economy. - 1/6th of the US GDP - 1/8th of US Employment - 80% employed in agriculture outside of production
What is the importance of a marketing plan?
The nine functions of marketing help to: - Resolve the conflicting needs of producers and consumers - Overcome the barriers to consumer satisfaction - Provide the four utilities of marketing • This can only happen with a proper marketing plan. • We will discuss the components of a marketing plan in the following chapter
What is the marketing mix?
Things a Manager can Control Combination of 4 controllable variables • Product • Price • Place • Promotion Great managers know how to manipulate these four items to maximize their advantage over their competitors
What is total product, average product, and marginal product? What does each tell the agribusiness manager?
Total Product - The total output of a particular good or service produced by a firm Marginal Product - The additional output that can be attained by adding one additional unit of input Average Product - The average amount produced by each unit of a variable factor of production (labor or capital)
Know the various costs, revenues, and profits of production discussed in the chapter; What is the definition of each? How is each calculated? What does each tell the agribusiness manager? o Explicit o Implicit o Total Costs o Average Costs o Fixed Costs o Variable Costs o Marginal Costs o Total Revenue o Marginal Revenue o Profit o Accounting Profit vs. Economic Profit
Types of costs • Opportunity • Implicit/explicit • Controllable/uncontrollable • Incremental, avoidable, and sunk • Fixed and variable Cost—that which is given up to acquire a good or service Total Cost of Production is the cost associated with the use of all inputs and includes implicit and explicit costs Explicit costs - out-of-pocket expenditures related to the production process. Implicit costs - estimated values when no out-of pocket expenses were incurred. Implicit costs are therefore, opportunity costs. Total cost can be divided into: - Fixed or uncontrollable costs - costs that do not vary with the level of input use. Can be either implicit or explicit. Variable or controllable costs - costs that vary with the levels of inputs used. Can be either implicit or explicit. Fixed or uncontrollable costs- - Associated with owning a fixed input or resource. - Have to be incurred once the commitment to production has been made whether these inputs are used or not. - Establish the scale (maximum production capacity) of the farm. - Ex. Land rent; cost of buildings; cost of equipment Variable or controllable costs- - Can be increased or decreased at the manager's discretion depending on the level of production decided during that period. - Cost the manager has control over at any given point in time. - Associated with the profitability of the farming operation. - Ex. Cost of feed/seed; cost of hired labor; cost of supplies. Average Cost - Per unit costs - Total cost divided by output at any point in time. - The level of cost associated with the level of output. - ATC answers the question: • On the average, how much does it cost to produce one unit of output? Marginal costs - Addition to cost with addition of output. - Marginal cost answers the question: • By how much will my costs increase if I choose to produce an extra unit of output? Marginal Revenue (MR) is the change to total revenue from the sale of one more unit of output.
How are forecasts used as a manager?
Understanding assumptions behind forecast Frequently Update forecasts Use Alternative Outcomes
What is inventory management and why is it important?
Value of Good Inventory Management • If inventories are too high, costs are high to "carry" inventory • If inventories are too low, firms risk losing sales because of stockouts & risk lower profits from higher operating costs • Objective is to keep costs low while keeping customer satisfaction high Value of Good Inventory Management • In an IDEAL world, this means holding only those items that are needed and just enough to meet demand. Supply Chain Management • The management & control of all materials, funds, and information in the supply process from the acquisition of raw materials to the delivery of finished products to the end user Reasons Not to Hold Inventory • High Maintenance Costs • High Protection Costs • Depreciation & Obsolescence • Taxes Reasons to Hold Inventory • Match Supply with Demand • Stockout Prevention • Lower Purchasing Costs
What role does government play in marketing?
• Sherman Antitrust Act of 1890 • Clayton Antitrust Act of 1914 • Food & Drug Administration • Meat Inspection Act of 1906 • Food Products Act of 1917 • Packers & Stockyard Act of 1921 • Perishable Commodities Act of 1930 • Capper-Volstead Act of 1922—Ag Cooperatives
What is meant by a marketing strategy?
• This is based on the market situation and an analysis of opportunities and issues • The marketing strategy refers to how the product will be presented to the customers. • It expresses the chosen mix of the utilities and functions of marketing. ~ID Target Market ~Sales Promotion ~Product Positioning ~Res. & Develop ~Product Line ~Market Research ~Price ~Distribution ~Sales Force ~Level of Service ~Advertising—when and where
Why is record keeping important?
•Accounting is the process of recording, classifying, and summarizing business transactions according to a uniform set of generally accepted accounting principles (GAAP) •A firm's accounting system must •Present an accurate picture of the firm's current profitability •Give an estimate of the firm's current and future financial position •Provide input to the firm's MIS, which gives managers the information they need for day-to-day decision making •Provide an accurate record of past financial performance for owners and tax collectors and other reporting as required by local, state, and federal government officials •Accounting records are the foundation of an agribusiness's financial controlling management function. • •Accounting records classify and record all the money going in and out of a business. • •Provide data for business decision making -Information on results of past decisions -Information for current and future decisions
What is the purpose of an accounting system?
•Present an accurate picture of the firm's current profitability •Give an estimate of the firm's current and future financial position •Provide input to the firm's management information system •Provide an accurate record of past financial performance