Smithfield Food’s Vertical Integration Strategy free essay sample

What are the most important elements of Smithfield Food’s strategy? 1. They chose the food industry – in particular the red meat sector. 2. Their core business focus was on mainly pork, and beef to a lesser extent. 3. The company opted for an aggressive growth strategy which is primarily based on amongst others a geographic expansion: oThey carried out 32 acquisitions since 1981. oThey expanded into foreign markets – Smithfield made acquisitions in Canada, France, Romania and Poland. Acquired meat processors in Poland and Romania; including a hog farming operation in the latter country. . They followed a product diversification strategy, in order to grow: 5. This resulted in diversification into new product segments – they marketed chops, roasts, lions, ground pork, bacon, hams, sausages, sliced deli meats 6. Most importantly, they followed a vertical integration strategy into the pork business: oThis entailed a full or partial integration (depending on location), with operations ranging from operations in hog farming, feed mill, meat packing plants and distribution. We will write a custom essay sample on Smithfield Food’s Vertical Integration Strategy or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 7. They also carried out joint ventures 8. Established joint ventures in Spain, Mexico, and China . In addition to that they sought to become a low cost provider: 10. They employed the newest technology available, their plants were efficient, their wages were low and operating costs were relatively low. The pricing was as such very competitive. â€Å"Every effort was made to reduce costs† There was a concerted effort to lower costs and push up sales. Not withstanding the company’s financial performance, this strategy has facilitated the rapid adoption of new technology, improved quality control, assured markets for the hogs and provided a steady flow of hogs for processing. This essentially created economies of scale and lowered production costs. The customers benefited as the company was able to respond to their changing preferences for quality and convenience type products. 2. Is there a moral problem with Smithfield Food’s vertical integration strategy and its resulting concentration of thousands of hog farms and several meat-packing plants within a relatively small geographic area? Is it socially responsible for a company like Smithfield Foods to pursue a rapid growth strategy when that strategy poses environmental problems and adversely affects living conditions in the communities where it operates? Should the company be proud of its business model and strategy? oNo, there is no moral problem with this strategy. Neither the vertical integration strategy nor concentration of operations in small geographic areas poses a moral dilemma. â€Å"A company’s strategy relates broadly to competitive initiatives and action plan for running the business† Hough et al (2008: 7). In a free, capitalist society, this remains the prerogative of the individual firm on how to compete, to make profit and grow the business. Against this background, the company’s strategy is an attempt to contain volatile pricing in the market by controlling the every stage of production, thereby ensure the satisfaction of consumers’ changing preferences. The case study does not make reference to unfair competitive practices, but rather the focus is on ethics and social responsibility. oThe local communities where Smithfield ran its hog farming operation complained about its imposition on them, implying lack of consultation. More importantly, there were allegations of substantial adverse effects of low wages and environmental degradation. Lack of consultation in running business operation is neither paramount nor mandatory; however allegations of environmental damage and unfair labour practices infringe laws of any democratic country. They must therefore be seen in serious light and investigated by authorities. It must be borne in mind that prior to Smithfield’s introduction of the concept of factory farming; the prices of hogs were on the decline, resulting in closure of local packing plants. Smithfield stabilized the local economy and changed the distribution of income. They saved local farms and brought jobs to this region. They also shouldered the risk of hog prices, thereby protecting the farmers. Smithfield was also able to satisfy customer demands of better products at lower prices. The local farming community showed their tacit support by their eagerness to do business with Smithfield as there was a two year long waiting list in 1998 for farmers wishing to enter into contract farming! oThe company should be proud of its business model. A business model refers to how and why the business will generate revenues, cover costs, and produce profits and a positive ROE. Annual sales in 2006 of $11 billion from $1. 5 billion in 1995 and an average compound growth rate of 24% during the decade speak volumes. However attention is required in addressing the following: †¢Concerns from the industry observers on contract farming – more specifically their â€Å"debt laden† nature †¢Allegations of unfair labour practices- low pay/ low quality, in addition the recruitment of migrant labour from Central or South America that may be open to exploitation. Allegations of detrimental environmental practices – impact of concentrated cluster of hog farms on the environment. †¢Limited purchase of feed, machinery and fuel from local sources. †¢Although, trivial the issue of the â€Å"smell† in the air Essentially this business model was able to ensure profitability and sustainability of the com pany, because economies of scale in production and marketing. 3. Does Smithfield Food’s hog raising operation in North Carolina harm anyone? Yes, the following were affected: †¢Grain Farmers Feed grains were no longer purchased locally. At times, grains were imported at lower cost from Australia and Argentina †¢Milling companies – Grain was purchased and milled in the Midwest †¢Farm equipment dealers – Local farm equipment dealers were forced to close as Smithfield purchased equipment directly from the manufacturers. †¢Local fuel dealers – Diesel fuel was purchased directly from the refineries. †¢Local truck dealers – All truck purchases were made in Detroit from national dealers. †¢Local farmers – Inability to bargain and exposure to the risk of default on contract by Smithfield should it suit them to cancel the contract. Furthermore, they could hardly negotiate the terms and conditions of the loans received from Smithfield, as the demand for contracting farming was huge, they became price takers. †¢Workers – Working conditions were hard and unpleasant. Their wages were low. High labour turnover was prevalent as a result of the stressful work environment. †¢Local store butchers – Most grocery chains opted to buy fresh meat cuts, wrapped, packaged and ready for sale from Smithfield. †¢Environment – Allegations were abound that : a. Contaminants from hog lagoons were getting into ground water b. Industry is running out of places to spread the waste c. Emission of large amounts of ammonia gas from hog farms †¢Local community a. The quality of the air declined because of the sharp, pungent odour from hog farms. b. Decline in jobs despite a rise in hog production c. Decline in property prices, perceived to be aftermath of the â€Å"new† look and smell of the countryside. d. Decline in tourism – as a result of the poor image of environment damage, more discernibly the pungent smell. 4. Who is benefited by Smithfield Foods strategy in the hog raising business? It goes without saying that, primarily, the strategy would have benefited the company, its management, employees and shareholders. This is evident in the good financial performance that resulted in the last decade. However other stakeholders also benefited: oFarmers – they were guaranteed a set price per hog hence market access or freedom from market risk. Processors paid the hog producers their full cost of production on average over time or they would have no hogs supplied to them by the farmers. Access to funding in the form of loans was readily available for capital investment on the farms. Inputs, of the right quality were in constant supply. Smithfield also offered them a free veterinarian service. This essentially resulted in the survival of over 1000 family farms. This strategy reduced the risk and managerial demands on the farmers, while increasing availability of credit. oEmployment creation – This resulted in the creation of new agricultural jobs. A typical farm employed five people. Total number of employees by Smithfield increased from 9000 in 1995 to 46 400 in 2004. oConsumers – Increasing concentration of hog raising and ultimately processing, resulted in the decrease of the marketing margins because of economies of scale, and this benefit was passed onto to the consumer as lower food prices. Local economies – Increased efficiency of labour and other resources in agriculture over time accounted for the higher standard of living. Prior to Smithfield hog raising strategy, the local economies were on the decline. oShareholders – Earnings per share increased from $0. 40 in 1995 to $2. 03 in 2004. Net income increased by almost $200 million over the same period. 5. What is your assessment of Smithfield Foods’ environmental policy (as represented in case Exhibit 3)? What evidence indicates that the policy is merely window dressing?