Meakin Enterprise is to decide whether they should expand its farming business, trucking business or maintain the current level of business. It cannot expand both at a time due to management time restrictions as well as financing issues. It is recommended that Meakin should expand the trucking business and accept a new contract. This would result in a significant profit of around 153,781 CAD which is more than the combined profits of both businesses in the last three years. This would also reduce the volatility of cash flows and improve the per acre profits of farming.
David Meakin, the owner of Meakin Enterprise is wondering how to go into the future considering the uncertainty in his Farming business and the Trucking business. He did not opt to renew a lease of around 20% of total farming land last year due to high lease rate but now he has the option to lease at the same rate he is paying for other leases. Moreover, one of his clients has asked to review the contract for bin overhauling. Both businesses require management time of Meakin as well as same financial resources.
Should DavedMeakin expand agriculture business?
Should DavedMeakin expand trucking business which will require contracting Agriculture business
Or, should he maintain the current level of Trucking and Current level of agriculture business Situational Assessment Findings
Both the industries where Meakin is operating in difficult and volatile. There are regulatory affairs as well as economic affairs hampering the progress of the industry as mentioned in Appendix 3 and Appendix 4. Then, both the industries also require technological innovation and leverage it into the business for continuous success. Weather is also a concern for both the businesses particularly Farming as in the last year almost all the profit was eroded due to poor weather conditions.
The barriers to entry are low to moderate in a farming business (Appendix 1) and then the farming labor is difficult to obtain particular the equipment operators. On the other hand, there are many substitutes as well and competition is also intense. So, the farming industry is not that attractive. On the other hand, there are several political, social, economic, technological and environmental issues that are a hindrance to its continued success like weather destroyed a huge amount of crops lost year. It also needs cutting-edge equipment to cut costs and also needs to focus on non-GMO crops which can although attract premium price but also needs certain favorable land and weather which can be difficult to obtain.
If we look at the trucking business, that is a lot more stable than the farming as the barriers to entry is low and bargaining power of customers is moderate. However, legal and political factors are needed to be addressed for continued successful operations in shape of permits, licensing and coordination with the power suppliers. Underpricing is also prevailing in the industry that can impact the revenue. However, clients can come back to you if your service is superior.
Identification and analysis of Strategic Options
This can be tough because if the weather interrupts the crops for two continuous years, the cash flow problems could be very severe. Moreover, losses cannot be prevented as well because most of the operating costs are already incurred before the crop is ready. Expanding into agriculture business would expose it to even greater risk as even competition can also hamper its progress because it is a highly saturated industry with moderate barriers to entry.
Trucking business has large part of fixed costs as appeared from the financial statements of last three years where costs did not move much in response to the revenue. Moreover, barriers to entry are high and customer power is moderate. Then, Meakin has reputation of superior service as compared to competitors and so customers came back to it. Expanding in to trucking business would also give it higher profits without much costs as evident from Appendix 5.
It is not a viable option because it would mean that Meakin would be leaving a viable profitable opportunity. 8% interest rate is not much considering the profitability if the company undertakes the new contract from the old customers as evident from the Appendix 5. On the other hand, maintaining current business level on Farming and Trucking line may result in halting growth.
It is recommended that Meakin should expand the trucking business and accept a new contract. This would result in a significant profit of around 153,781 CAD which is more than the combined profits of both businesses in the last three years. This would also reduce the volatility of cash flows and profitability because trucking business is a lot more stable than the farming. This would also improve per acre profitability of farming businesses because the company would not be paying any lease rentals.
The company should by the new Trucks and other equipment necessary to service the new Bin client. Moreover, the company should also increase marketing efforts to ensure the growth of the trucking business as there seems huge potential in this business.
The best evaluation criteria are the profitability. Meakin should assess the profitability of the company next year after focusing on trucking business.
Other performance evaluation criteria could be cost/mile, revenue per mile and revenue/ marketing dollar.
Farming Industry Analysis
Bargaining Power of Suppliers- Moderate to Weak Force
Bargain power of suppliers is a weak force because the farms are getting bigger and bigger with more individual power as a buyer as in case of Meakin Farms. As a result, the local suppliers of seeds and chemicals may depend on each farm for significant revenue. The Equipment suppliers have a moderate force because as compared to their overall business, an individual farm purchase may not be material. Moreover, the farms are price takers.
Bargaining Power of Buyers- Strong Force
This is because there is a huge number of suppliers and then there are many substitutes for them in shape of crops. So the switching costs are very low for the customers.
The threat of New entry- Moderate Force
This is because farming can easily be started on leased land. Labor can also be trained to work on the farm. However, equipment operators are difficult to find. Moreover, farming also required complex machinery which can be very expensive as well. Moreover, if you do not have inherited land, financing the business may be tough. However, owning farmland is tough due to higher prices. Then there requires longer cash lock in a period which makes financing difficult.
The threat of Substitutes –
This is because several alternative crops are available and then imported food is also available in the market for the consumers.
Competitive Rivalry- Strong Force
There is a large number of farms and they are huge and well established. So competition is getting tougher and tougher.
Analysis of Trucking Industry
Bargaining Power of Suppliers- Weak Force
There are a huge number of suppliers for equipment and services and therefore bargaining power of suppliers is low in the industry. However, the drivers with Class 1 license are in short supply and this labor limitation can limit the operations as well.
Bargaining Power of Buyer- Moderate Force
In the Trucking industry, often the customers need customized services and so it is difficult for them to switch supplier thus rendering the power of Industrial Ag Corp higher as a supplier. Then there is also a limited number of firms operating in a particular area.
The threat of New entry – Moderate Force
The threat to the trucking industry is moderate because high capital investment is required in the industry. Then, the management also needs experience in the industry due to complex nature of operations. Moreover, drivers with class 1 license are also difficult to find.
The threat of Substitutes – Weak Force
Although there are few trucking options for the customers, they sometimes do not prefer them due to high cost. Moreover, their ability to penetrate into remote Rural and Hilly areas is also limited.
Competitive Rivalry- Strong Force
There are many established large companies in the industry and therefore the competition is intense. The competitors often attract the drivers and labor of competitors by offering higher pay and benefits.
PESTEL Analysis- MEAKIN FARMS
Political factors can affect the firm negatively as the change in export law and tariffs from the exporting nations and local export law can impact the 90% canola export.
High capital and revenue expenses are incurred where the working capital is locked in longer cycles. High capital investment is also required. Greater lock-in period is also required while due to capital appreciation, leasing land has also become expensive.
The use of pesticides and herbicides and pesticides have drawn criticism due to health concerns. Whereas, there is increasing trend of green crops and foods that may impact the way company operating.
Technology has impacted the farming greatly because the highly advanced machinery is shaping up the farming. As a result, farming has become relatively easy with operations becoming increasingly efficient due to modern methods and machinery like threshers, combines, like zero till approach
Legal factors that are impacting and can impact the industry are government laws and the free market system that has helped farmers in capitalizing on market opportunities and also brought a new type of risks.
Environment factors are also very important because the Weather conditions can impact the crops and profitability of the companies significantly and then the use of fertilizers is also decreasing the quality of the soil.
PESTEL Analysis - 4
The business requires permits from Ministry of Highways as well as coordination with the power companies to lift the electricity lines passing over the roads. Any law directly impacting these areas would impact the Meakin as well
Economic factors are important for not only farming but trucking business as well. There is practice in the industry of undercutting in the delivery charges and then there is the high-interest rate in the industry up to 8%.
The social factors are not much important as it is basically a Business to Business service. However, still direct marketing and personal selling, as well as word of mouth, are important for the industry.
Technological factors are also important for the industry. New and improved machinery and vehicles are important for the industry success particularly in an industry where rates are also important along with the service. As mentioned in the case, Hydraulic lift system and the specially designed trailers for the fertilizer movement are innovations that require significant capital investment but will also result in cost savings.
There are several legal factors that are to be taken care of in order to work successfully in this industry. They include special licensing requirements or the drivers, hazardous chemical handling training and permit requirements etc.
Grain hauling revenue increased in last year by =122043/98722= 23.6% and Seed, Fertilizer and Chemical Hauling revenue increased in the last year by =75459/56543 by 33.45%. It is assumed that these revenues will again increase by the same amount next year whereas bin hauling revenue will achieve the 2014 sales level after the new contract.
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