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Recognize and Investigate Value-Added Opportunities and Constraints

 

Sheila Knop and Russell Tronstad

 

KEYWORDS: marketing, efficiency, financing, and communication

 

Defining Value-Added

To recognize and investigate value-added opportunities and constraints we must first define what we mean by "value-added." There are varying definitions, but most include addition of "value" to a product/good, process or service, with accompanying cost and price increases at various steps (often in different places, by different businesses) along the way.

The "New Gates" initiative views value-added broadly to include: products and services processed/packaged/marketed in ways especially VALUED by consumers, agriculturalists, other local businesses, and the people and communities of the region where they originate.

To especially benefit rural people and the areas from which agriculture and forest products originate, "New Gates" stresses good communication and joint-work for the mutual benefit of a region's agriculturalists, businesses, and neighboring communities. It emphasizes locally desired, owned, and managed value-added initiatives which contribute to rural quality of life and economic well-being. Likewise, stewardship of rural-area natural, human, and other community resources are emphasized.

If thoughtfully pursued, value-added work can contribute to locally-desired diversification of an area's economic and employment base and to its general quality of life. It can be linked with other strategies to promote regional well-being, e.g., to home-based, retail, and wholesale trade; social/cultural and recreational/natural resource attractions for area residents; heritage tourism for visitors; health, education, transportation, and communications services.

Some "New Gates" Examples of Value-Added

Many specific examples of value-added effort fit "New Gates" definitions. Here are a few different types of value-added examples:

* Local processing, packaging, or marketing which adds value to raw agriculture/forest products;

* Cost-effective new/alternative crops for niche, "high value" markets (and which might also be locally packaged for added appeal);

* Supplements to agriculture production activity (e.g., farm/ranch bed and breakfast, farm/ranch working vacations, guided hunting/fishing vacations);

* Partnerships, networks, alliances, cooperatives among producers, small business, and neighboring communities to support value-added (e.g.: business referrals; separate small businesses in an area adding "step-wise" value to local raw products; business and business-community ventures for joint-marketing, purchasing, "incubator services," employee training/child care/insurance, pooled capital to encourage business start-up);

* Creative combinations of products/by-products, processing, and markets—for example, a locally-unique raw or processed agriculture product (such as specialty beans, popcorn, flower seeds, dried fruit or meat, fiber products) packaged in locally-produced boxes made from by-products of an area lumber mill, marketed via regional retailers and motels when hunters/fisherman or other visitors are present, and/or via a regional catalog of "value-added" products published on the Internet.

Guides to Help Your Team Recognize and Investigate Value-Added Opportunities and Constraints

Rapid reconnaissance. Work with others in your community/region to conduct a quick broad-gauged scan to gather information on factors especially relevant to value-added.

Invite a wide variety of people, organizations and communities in your region to contribute data, ideas, and opinions (e.g., producers, processors, retailers, lenders, local government, community leadership, area youth, economic development groups, colleges/universities, state/federal agencies, non-profit groups).

You will need some factual data and information on area resources, strengths, and constraints. Equally important, you will need to search for creative ideas, for example:

* new ideas for adding value to raw products;

* ideas for combinations of products or products and services which might be linked in new or different ways;

* ideas for linking agriculture/forest value-added efforts with other economic activities of the area (e.g., with tourism, retail trade, cottage industry);

* ideas which capitalize on interests, skills and life ways of people and communities of the area, and which recognize their limitations;

* likewise, ideas which take into account and are respectful of natural/environmental resources of the area…ideas which take into account the infrastructure, services, and social capacities of area communities.

More specifically gather information on:

* availability of locally-produced raw products, area natural and human resources, and especially those products in the region which might fairly easily have value-added to them locally.

* aspirations and goals of area producers, businesses, local communities—how might value-added efforts relate to and complement them?

* local/regional labor force considerations: are there available workers in the region, with required skills and interests to fill the types of new jobs that might be created? Are there times of the year when residents of our region need to supplement their incomes? Would workers need to be attracted from elsewhere?

* whether there are adequate local/regional resources and infrastructure to support value-added efforts (e.g., investment capital, transportation, communications, water, waste disposal, housing, schools, health care, other public facilities/services).

* whether producers and other business people, lenders, citizens/leaders, organizations in the area have interest in working to pursue value-added feasibility studies and potential new ventures.

Focus greatest attention on ideas and potential ventures which build on community and business goals and strengths and which take into account realistic constraints of human, financial, natural/environmental, and community resources of the area. Recognize that efforts which start small, and those of a "scale" appropriate to the size, interests, and resources of the area often have greater likelihood of long-term success.

Seek assistance from community, business, professional agriculture, finance, and other professionals to further evaluate the value-added ideas which you have decided to pursue first. Discuss your ideas with other teams involved in the "New Gates" initiative, and with representatives of supporting agencies, colleges, and universities. As needed, encourage/gather resources to commission feasibility studies that take into account enterprise- and community-level costs and benefits of potential value-added actions.

Evaluating the Marketplace

Competition in the marketplace needs to be carefully evaluated for every new business venture. Even if you have a good idea and product that looks like a natural fit in the existing marketplace, getting into the market is not always easy. For example, in the mid-1980s Southeastern Arizona apple growers tried to penetrate the marketplace with fresh apples in the late summer and early fall at selected supermarket channels. Due to a warmer climate than other major apple producing regions, harvest was early enough so that their fresh apples would be competing with a poorer quality apple that had been stored at least 8 months in controlled atmosphere storage. But the marketplace was virtually impossible for them to penetrate because Washington State warehouses had established a firm stronghold in the market. Washington State had an established reputation as a reliable producer and supplier of apples. Consequently, retailers were very reluctant to switch from buying Washington apples for a relatively small window of their annual supply requirements. Arizona was also an unknown supplier and later found difficulty in delivering a quality and reliable supply. Arizona was not able to obtain reliable supplies and quality from one year to the next with frost, hail, and other production problems. Convincing retailers that you have the ability to deliver a reliable supply of quality goods as a new entrant into the marketplace is often the biggest hurdle to overcome for penetrating an existing market.

When Washington State tried to enter the Japanese market for apples recently, they found the marketplace there difficult to penetrate even though they possess a world renowned reputation in apple production. The best quality of apples that Washington State had to offer Japan were essentially given an unsatisfactory rating by Japanese consumers. First, the Fuji and Gala apples Japan is accustomed to are much sweeter in taste than the traditional Washington Red Delicious. Second, Japanese consumers' willingness to pay for fruit in an unblemished form and attractive package is beyond what the average US consumer or retailer would imagine. As global exporter Jim Woodson recently explained, the Japanese are really buying "gifts" rather than food with most of their apple, melon, and other fruit purchases.

Persistence is often another key ingredient for bringing new products to fruition. New product ideas are not generally readily accepted, even though they may eventually have broad appeal to consumers. The idea of marketing a "natural beef," beef grown without any hormones, feed additives, confinement, or vaccinations was conceived in the early 1970s by the Coleman Ranch in Colorado. But when they first contacted potential retail outlets in the Rocky Mountain region no one was interested. Then they headed to Los Angeles and finally found one specialty store that was interested in selling their beef. Growth was almost non-existent for over 15 years and they didn't operate in the black until the mid-1990s. Today Coleman beef products can be found in health food stores nationwide because they were persistent in selling the concept of "natural beef" to retailers and consumers. Persistence also paid off for them because they identified a product with growth potential and they were able to establish a solid distribution network for their products by proving themselves as a consistent supplier of quality products.

Penetrating into a new market is somewhat like exploring new territory—you never know for sure how the consumer or community is going to respond. Key items or questions that should always be evaluated or addressed are:

1) How does my product differ from existing or established products in the marketplace or what is the closest substitute for my product?

2) How difficult is my identified market to penetrate?

3) Do I have the proper contacts and distribution channels identified and how does my product and idea sell with them?

4) What is the growth potential for new customers and related products? and

5) How do my business venture and future plans fit in with the community?

Community support is becoming more critical since it is not uncommon for local county, city, or state governments to offer financial loans or incentives. Furthermore, the long-term goals of the community need to fit together with your plans or else the two will eventually clash. All of these questions are important to carefully evaluate since it only takes one "weak link" to keep a new business venture or product from succeeding. Entering a marketplace takes much more than a "competitive price." None of the marketing "failures" at getting into the marketplace above were because someone else had a lower price than they could offer.

Business/Community Networks and Linkages

Community support can be the catalyst for deciding on where a value-added enterprise should be located. After evaluating the production, labor, and community resources that a location has to offer—business support programs related to financing, planning assistance, and joint marketing efforts need to be explored. Start-up loans are often available for attracting new enterprises to a community. For example, the greenhouse operation in Bonita, Arizona received some of their initial financing through a small business loan. In 1961, a small company named Iowa Beef Processors was organized in Dennison, Iowa, using a Small Business Administration loan for financing. Today IBP is one of a few industry giants in the meat packing business. Other organizing and support systems may include those such as partnerships, multiple enterprise-/employee-/community-owned cooperatives, business incubators, and less formal networks and alliances. In rural areas, sharing access with business-support services such as fax and copy machines, Internet connections, employee training, child care, insurance programs, accounting services, and other related services can greatly decrease the cost of doing business for small rural companies.

Processing Efficiency

The processing-manufacturing sector is estimated to employ as many as 14 million people (Beierlein and Woolverton). This sector is dominated by large companies that have grown to capture processing economies available through large scale production. Some of these large companies include Iowa Beef Processors (meat packing), Sunkist (citrus processing), Archer Daniels Midland (grain processing), and Mid-America Dairymen (dairy processing). Finding a niche around the food processing giants is essential since they have the edge on processing efficiency or cost of production (Beierlein, Woolverton, Hahn, and Niles).

Volume and regulatory issues play a key role in selecting an affordable processing technology. When starting out, it is always good to be on the conservative side when estimating volume. Every major food processor had its start as a "small entity" that eventually grew into a large corporation. Not enough can be said for the merits of starting on a small scale.

Starting small allows you to test your production and processing capabilities, devote more time and learning to quality control, obtain valuable market feedback from initial product sales, secure less financing, and assess the work load before a full-time commitment is made.

Health and regulatory issues also need to be addressed before identifying appropriate processing procedures for food products. Hazard Analysis Critical Control Points need to be identified and monitored to ensure food safety requirements are met and liability risks are minimized. Other requirements to consider are proper labeling, weights and measures, state standards, state workmenÕs compensation, building safety, zoning, and other regulations. Insurance coverage for product liability, premise liability, employerÕs liability, and physical damage should all be reviewed and considered.

Opportunities for complimentary sharing of processing facilities should be given in-depth thought and exploration. Because the ownership or fixed costs (i.e., committed costs that don't change with decreasing or increasing output) of processing are generally high, an idle processing facility is costing someone lots of money. A broader base of geographical production with a longer production period is one management practice commonly used to help pay for large processing facility costs. California's source for processing tomatoes moves from South to North so they can keep their processing plants busy for as long a season as possible. If possible, using the same processing facility for products with different harvest windows is most desirable since transportation costs are kept to a minimum.

Securing Input Supplies

Securing an adequate supply of raw materials throughout the year can be a challenge since most raw food products are seasonal in production and perishable in nature. Increasingly, food products are becoming more vertically integrated. That is, companies have moved backward and forward in the marketing channel of converting raw products into products desired by the final consumer. Companies integrate vertically to gain greater control of their final product and earn higher profits. For example, Coleman beef moved their product forward to the final consumer by processing "natural beef" that they could ship to retailers. Currently, Coleman beef is looking for ranchers that are willing to produce beef under the conditions required to meet their "natural beef" definition and they are willing to pay a premium. They are willing to contract for future delivery in Colorado at $5/cwt. above whatever the Chicago Mercantile Exchange futures price is for a delivery month. Coleman beef has also made significant networking expenditures for attracting their input supply of "natural beef." For example, one of their representatives recently flew from Colorado to Arizona in order to take advantage of a networking opportunity at a local ranch workshop. Few substitutes exist for a face-to-face contact when it comes to developing successful business relationships. These networking costs need to be budgeted in the cost of starting a business venture that has to secure input supplies.

Labor Force Considerations

Securing a labor supply that is skilled, trainable, and cost-effective is one of the most important bricks for building a sound company. Here are a few questions that people contemplating a potential enterprise and people from the larger community will want to consider:

* Might the new firm create safe, adequately-paying jobs which current local residents are interested in and qualified to fill? Will new workers from outside the area also need to be attracted? If so, what types of new workers, and how might current residents, businesses, schools, and government officials work to welcome and integrate them into the community? Is there adequate, affordable housing available for new workers and their families?

* If job training is required for employees of the new firm, will the firm provide the training itself? Would employees and the firm benefit from some training assistance from additional groups (e.g., local schools, community colleges, Cooperative Extension educators), and how might this be arranged?

Employee morale is very important for achieving high productivity. Economic incentives or a reward structure based on individual or group performance has been recognized as a vital component for success by many large and small companies. Small companies starting out are generally short on cash so that financial incentives in the form of stock options are offered to key employees. This kind of incentive is beneficial for venture capitalists and employees when quality work turns into higher company profits. Also, employee benefits are generally a better deal for both employers and employees than wages due to the current tax structure. But certain restrictions apply for how much can be contributed to employee benefits like retirement accounts.

Encouraging employees to better themselves through additional training and education can help boost morale and improve company productivity. Likewise, access to safe, affordable child-care and transportation can strengthen employeesÕ commitment and productivity. Flex hours for talented employees to increase their human capital can be important for keeping employees up-to-date and on top of todayÕs rapidly changing technology.

Financing Availability

Finance, production, and marketing are often referred to as the three fundamental areas that require strong management expertise. Careful financial planning should precede the acquisition of any significant asset or change in business focus. Sales and expenses must be scrutinized in line item detail on at least a monthly basis to assure financial obligations are on target. Cash flow is crucial to wise financial planning and cash or similar current assets on hand should be 1.5 times the level of current liabilities. The amount of collateral required for loans will vary by industry but expect to provide at least 30 to 40 percent of the equity needed for traditional loan purchases. Five credit factors generally considered are character, capacity for repayment, capital, collateral, and loan conditions. All of these elements relate to ones ability to raise adequate capital.

In the 1930s, a former paper cup salesman named Ray Kroc was impressed with the number of people that the McDonald brothers were packing in to a small drive-in restaurant in California. He negotiated with the two McDonald brothers, who were hoping to become movie stars at the time, to let him franchise outlets nationwide. Although outlets grew slowly at first, McDonald's restaurants can now be found throughout the world. If a franchise fits in with your desired business venture, they can be another source of financing since the parent company will often finance the land and buildings if the franchisee is unable to do so. But franchisees must pay a franchise fee plus royalties on sales to operate at a specific site chosen by the parent company.

If you have virtually no equity to apply towards a business venture, you can try and sell your idea to venture capitalists. Because they are taking essentially all the financial risk for your business ideas, they will require a significant stake in ownership of your company and will generally require a say in major business decisions. If your business plan can stand up to the scrutiny of venture capitalists it probably has more likelihood of success than if you solicit financing from family members or friends. Although friends and family know your character they are probably not the best evaluators of the business venture you are proposing. Please refer to the MasterCard Small Business Financial Resource Guide in your team's Resource Library for a more complete discussion of identifying potential investors and sources of available capital.

Entrepreneurial/Managerial Ability

Managerial abilities are developed through time and there is no substitute for having a good feel for your industry. What are the standard profit margins for your industry? How capital intensive and cyclical is the business you are in? What is considered the optimal economic unit? How can one effectively minimize price risk? How can one most effectively use people in your business? All of these questions need to be answered in order to effectively plan and manage. Managerial talent also requires personal skills that are more natural to some than others but must be perfected by everyone. Communicating effectively with business partners, investors, service providers and employees are all needed to make a business operate smoothly and profitably. In short, sound industry knowledge, people skills, and a good handle on business management principles related to finance, marketing, and production are invaluable for making a successful business.

 

References

Beierlein, James G. and Michael W. Woolverton. Agribusiness Marketing: The Management Perspective. Prentice Hall, 1991: 15-21.

Beierlein, James G, Michael W. Woolverton, David E. Hahn, and James A. Niles. Cases in Agribusiness Management. Prentice Hall, 1989: 154-160.

Gary P. Green, Jan L. Flora, et. al., "Community-Based Economic Development Projects Are Small but Valuable," Rural Development Perspectives, vol. 8, no. 3, Economic Research Service, CSREES, USDA.


Internet Resources


Sheila Knop is Program Coordinator, Center for Rural Assistance, Colorado State University Cooperative Extension and Russell Tronstad is an Associate Specialist in the Department of Agricultural and Resource Economics at The University of Arizona.

 

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Last updated September 28, 2000
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