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Konstantin Y. Smolentsev
SMOLENTSEV & Partners » Press Centre » Publications and Speeches »

Modern technologies to manage agribusiness

Konstantin Y. Smolentsev
Ph.D., the Academician of IIA, ÑÌÑ
Chairman of Board of directors
IC “SMOLENTSEV & Partners”
http://www.smolentsev.com/

Agrarian sector is a major component of the world economy. Its importance is defined by indispensability and irreplaceable role of food products. In 1992 one hundred and sixty scientists from different countries of the world, all Nobel Prize laureates presented the international community with a message of memorandum called “Scientists are warning humanity” which stated that in upcoming decades there is going to be shortage of food and it is going to be a global problem. Today we are witnesses to how prophetic this message is. Active formation of middle class in India, China, Vietnam, other Asian and some African countries, usage of food products as a source for production of bio fuel made the world truly feel the deficit of food products which automatically lead to sudden increase in prices on those products.

Russia is worldly recognized to have the largest land, labor and energetic potential. At the end of last century and in the beginning of this one in terms of the consumption level per person of the population Russia has fallen way behind losing its own security. The labor potential of the agricultural suburb is degrading. Amount of unemployed in the countryside has surpassed the critical level. Moreover, this is happening in the time of aggressive expansion of imported food products in the Russian market.

What can the Russian agribusiness oppose to that? And should it?

When looking at this problem, quite often one goes about searching reasons for failure and problems in the external environment as oppose to internal.
Undoubtedly, the naturally imperfect soviet agriculture in the last decade has been completely destroyed. 

Obviously there are also objective risks of doing agribusiness: seasonal nature of business, climatic cataclysms, time consuming production cycle, high capital intensity, deficit of qualified employees, significant dependence on fluctuations of world prices on similar goods and on carriers of energy.
Current governors of Russia have been convinced that the stability of the country is in great degree dependent on stability and predictability of the food market. This resulted in putting through a priority program for development of the agriculture on a federal level and other regional programs of supporting agro producer, which, undoubtedly, is a plus.

There are also other advantages of the Russian agribusiness. One of them is the existence of “free land”. Overall in Russia land doesn’t cost that much. One can purchase fertile land for 500 – 1000 rubles while the cadastral estimate is 15000-30000 rubles! Among other advantages to take into consideration is low percentage of wages of the total cost of production; possibility of immediate introduction of latest technology and machinery (replacing old machinery and equipment is not necessary, because more often there is nothing in the company to replace in the first place).

Let’s look at factors decreasing market investment attractiveness of this particular sector of economics: high dependence on the government and officials; imperfection or absence of the regulating legislation; domination of foreign machinery and equipment means of protection and fertilizers in latest innovations. When looking at country’s competitiveness of agribusiness it is hard not to take into account different level of government support in various countries and as a result better competitive advantages of the North American and Eastern European agribusinesses, and accordingly their production. However, some minuses with a certain approach can be turned into pluses. For example, Canada is a visible competitor for Russian agri producers on many markets.  At the same time, from the point of view of strategic cooperation for many segments of Russian agribusiness it would be a very interesting partner. This is due to many factors, first of all both countries are similar in natural and climatic conditions, which accordingly becomes both a competitive aspect in the world markets and a uniting aspect for collaboration. If we look at the dynamics of developing relations in this sphere during the past 2-3 years we see intense activity from Canadian companies and government, and receptive but a bit shy interest from Russian business. The dilemma is simple: either to compete (and it won’t be in benefit of the Russian side) or cooperate and use advantages. Second option seems more appealing. This goes both ways. For business and geographical expansion of Russian agribusiness Canada is a very attractive economical and at the same time profitable starting point for entrance into North American markets.

It is necessary to mention, that while in leading agro companies technologies of production are being pulled to the world standards, more import equipment and machinery is being bought or leased, the technologies of managing agribusiness are highly imperfect. More often this key aspect of competitive advantage is being neglected. Replacing the machinery inventory is often considered more important. Why is that the deal with the Russian agribusiness? This may be explained by the overall degradation of the business culture of the country, with the lack of experience and lost traditions, absence of highly qualified managers in agricultural business, the disability to understand that agribusiness is like any other business only more difficult in some ways. It seems that we are witnesses to a whole complex of problems.

Present players on the market of crop production include old agricultural collectives without strong leaders in new organizational legal form, farms, old professional leaders of agriculture heading new Ltd., CJSC and JSC, businessmen who do not have any experience of working in agribusiness, but who have the desire and money and connections with foreign companies. Naturally, first group of players are competitive only to the ones just like them, and they are the most likely objects for amalgamation. Main competition is happening among the last groups of players, each one of them has its competitive advantages.

Ownership of land sizes 10 to 15 hectares is a serious demand for a share in regional market. Owning 50 – 100 thousand hectares is practically a door way to the attention zone of federal players and politicians. Producer of 1 million tone of grain is a large producer in the Federal region. Producer of 30000 – 50000 tons of seeds is considered a large producer not only among producers of Russia but also Europe (only largest North American producers give their production up to 150000 – 200000 t.). For example, in Kirgizstan, by 2010 within the possibilities of the government it is being planned to increase production of grain seed to the volume of 50 thousand tons.

How much funding does the grower need today? As practice shows to simplify calculations we can take total expenses of quality processing of one hectare per year which is around10000 rubles. Everything else is mathematics. These calculations do not take into account expenses on developing business as it is. Modern factories dealing with finalizing production, elevators, and terminals only add to the “weight” of the business. The question however is in the following: even with all the above stated how it is suppose to be effectively managed?

One of the standard situations on agro enterprise: after serious financial investments in “metals” a question immediately arises: how do we properly manage all that?  One minute of imported tractor’s inactivity costs hundreds of rubles, one season of inactivity means catastrophic loses. This question is for new organization of production, reengineering of business processes, logistics. The question: what should this tractor seed so that production is highly profitable and easily sold? Investments in machinery should be returned. We know that preparation of land, change of varieties of plants take at least one year. So in order to plan one’s activity it is necessary to step away from managing a season intuitively and focus on keeping a clear vision of one’s actions planned out for several years ahead.

Can we create a modern and competitive agribusiness in Russia? Our successful work experience with agro-industrial enterprises confirms that it can be done! Things that used to appear as chronic limitations in work may become serious competitive advantages. The main competitive advantage would be modern technologies of management. One good example could be successful realization of a project that was carried out by us together with the shareholders to reform the Group of Companies “AgroIntel” which became one of the largest seed agro holdings of the country in the past two years.
First task that we often have to solve with the owners is their intake on goals of the business’s existence and its role in achieving personal goals of shareholders, harmonization between interests of shareholders and the management. Agricultural production is business. BEFORE ANYTHING ELSE it is business no matter how one can try to cover it with the love for land or family traditions. No one is taking the love away, however without performance and profitability it is hard to trace or express that love. Some things are easily understood, but hard to accept. But the moment there is this complete mind change than a lot of aspect fall into their place. V.A. Kalyagin, the Chairman of Board for strategic development of GC “AgroIntel” completely agrees with this point: “The greatest effect from work is accomplished on the stage of shareholders expressing their personal life goals, which in turn helps to avoid future radical changes of views on strategy of the company”.

Next step is beginning to adequately and truly assess your current state or diagnostics. Moreover, taking into account the length of the production cycle preferably it is good to assess dynamics of change of the condition and indicators for the past 3 – 4 years. Accurately and professionally done diagnosis of the current condition of the business, analysis of the external environment, product range, competitors and clients are already forming a fundamental basic for building effective business. The value and necessity of this stage is in the fact that it gives an opportunity to assess from many positions various factors of management which in regular activity may not be shown and are on a “down low” or which aren’t easily shown and are hidden. Then a structured concrete wholesome picture of the business appears with its strong and weak sides, “painful” zones and point of growth. Condition of the management of the organization is being assessed, its problem field is being formed and new resources of effective management are defined. Calculation of financial indicators allows the assessment of economical condition not only in absolute measurements, but also carries out a comparison with competing companies. Adequate assessment of the personnel assumes formation of conscious politics of management of personnel. Legal audit traditionally shows defects in the design of property rights. Analysis of the organizational structure allows objective assessment of the competitiveness of the current product, its life cycles ( both from the point of view of producers and merchants, which often shows completely different views and approaches to the same tasks!). Segmentation of client base is the foundation of the whole program of managing risks. Assessment of material and nonmaterial resources of the company is in its own a business inventory that by itself can raise level of capitalization of business! There can be additional arguments in favor of thoroughly done diagnosis which is a priceless instrument for any thinking owner and manager. In another words, by combining special technologies and methods organizational diagnosis allows the creation of multifactor, multidimensional, volumetric “cut” of the organization, hear its “weak” signals, define main problems and their interconnections, assess from other positions the team as a whole and key employees separately. Not only direct goals are defined during the diagnosis phase but also we see the beginning of team building, relief of certain inner organizational contradictions and tensions and increase of coherence, improvement of controllability.

In the beginning of the work for organizational improvement it is crucially important to develop and introduce a system of support for organizational changes. This “spark” will be responsible for keeping the “fire” of transformation. The support system should consist of obligatory procedures like regular cascading meetings of owners, top management and regular employees devoted only to the questions of organizational development, motivational support, forming informational environment (including an element such as issuing corporative informational page or a magazine); allocation of target resources and budgets; holding regular corporative trainings; PR campaigns; organization of effective feedback and much more.

One of the effective mechanisms of managing change is a transformation of separate processes of development into a powerful direction of developed mechanism of active innovational self development (MAISD) as a system of inner organizational influence. Under “active” it is meant that the development is built on inner potential of the organization with support of intensification of the human factor and not as a result of favorable external conditions (subsidies, loans and etc.) or other force majeure. If we want to provide continuous active development in the organization than it is necessary to create a mechanism of active innovational self development covering:


• search, development and mastering new products; technical and organizational development (modernization, technical upgrading, reconstruction, expansion);
• introduction of new methods of managing labor and production;
• search of more effective , in comparison with applied, methods of solving standard routine tasks in all spheres of company’s activity;
• transfer of latest practical experience and so on.

Mechanism of active innovational self development (MAISD) is primarily oriented on intensification of inner potential of the company and formation of certain motivation of personnel, providing all complex of necessary conditions for realization of innovational processes. In its work there are conjoint elements of linear and functional and project organizational structures of management. MAISD ensures such change of the inner environment of the enterprise that all innovational processes step into one line with functioning of the enterprise. Introduction of MAISD in agricultural enterprises showed great effectiveness of its functioning. Let’s examine a small example from practice. In the process of introducing MAISD mechanism in GC “AgroIntel” the first project to accept for realization was the project of changing the principles and system of heating in warehouses which in turn brought considerable economy of electrical energy. Furthermore, it brought true understanding of all team mates that their initiative is welcomed, supported and adequately assessed by the management.

Today agricultural products and goods are slowly equalizing in quality and price range. Thus, the sphere of competition shifts from the difference in product to the difference in the system of working with the client, attractiveness of the product and company for the buyer (attract function). This understanding is complex and multidimensional. All efforts of owners, top managers and employees should be concentrated on a cone turned towards consumer of the product that the organization provides. This cone is the attract function of the organization resulting in all activity of the company from the point of view of consumers, buyers and partners. In more simple words it is the attractiveness of the organization as a whole. The result of that would be the loyal customers, which regardless of equal objective characteristics of the product will prefer to work only with you.   Improvements in the sphere of developing attract function should be done on a constant basis. It is important to turn the organization to face the client as a whole organization including all its subdivisions and levels of management, involving in the process all employees. This can be done by highly motivating and increasing preparedness of front and back personnel, top managers and owners, organization as a whole with the use of methods and skills of client oriented work with different categories of partners, development of client base and building loyal relations with clients and partners.

Complex building of the projects and programs of development, work with different categories of clients, optimization of the product range, search and development of its own uniqueness, its competitive advantages, introduction of compensatory arrangements for existing and potential threats and risks, constant monitoring of the competitive environment – these are real advantages that prepare the soil for a powerful and qualitative leap in the development  and formation of leading modern competitive agribusiness.

In the last years changes occur more often and rapid, while the business environment remains complex. Most agribusinesses face the same problems: slowing down growth, declining profitability, loss of market share, loss of controllability. Restoring competitiveness is becoming a subject of increasing concern for managers. Logical solution to this problem is the development of the plan for strategic development. Owners and top management should clearly understand what they want to achieve from owned or managed by them enterprises. Today it is obvious that only by visualizing a concrete image of how the business should be and agreeing on ways and factors of achieving this image can the possibility of effective development, minimization of risks and increasing controllability can happen. By having a strategy the manager has a thought through course of direction and fully elaborated program of action for attaining the desirable results, and he is now able to concentrate resources in those spheres that have maximum of perspective potential.
However, it is not enough to develop a good strategic plan. It is necessary to provide its realization, integrate into the operative work of the organization. Precisely here on the stage of integration is when main points of inertia, resistance and failures occur. Reversing such resistance again can be done through the support system of carrying out organizational changes. However, this often is not enough.

In order to manage modern production it is necessary to have modern systems of management. Often we recommend to apply the Balanced Scorecard (BSC) in order to unite business processes, financial, material and intellectual resources, informational technologies, systems of assessment and controlling, structure subdivisions and each employee for effective attainment of strategic objectives. In the developing regime this technology allows to balance development of business, take into account economic and noneconomic aspects of management, coordinate interests of shareholders, top management and employees, properly distribute financing from the point of view of ensuring existing liquidity and formation of future profitability of these goals and what is most important to form a team which is able and motivated to carry out the tasks.

Formation of investment attractiveness should be like a red thread going through all stages of business development. That’s thinking on grand scheme. Investment attractiveness should be formed for financial institutions (forming liquid collateral base, building relations and histories with investment and credit institutions, developing and realizing program for attracting financial resources – bills and bonds). For strategic and portfolio investors this means building an understandable transparent perspective and profitable business which gives return on investments higher than the average indicators in the industry. For employees of the organization it means formation of attractive conditions of work. For community it means desire to see your business on its territory.

Accomplishing the above stated tasks will be maximally effective if at the same time business processes will be optimized and there will be improvements in systems of management accounting, budgeting and controlling, introduction of Customer Relations System (CRM) and Strategic Cost Management (SCM), regular complex audit, automation of all elements of management.

Accepting a decision on bringing in any organizational changes isn’t that easy. This is why we recommend holding corporate seminars (business practicum) for shareholders and top management of the company in order to prepare before each stage of work for organizational improvement. During seminars it is beneficial to look at the new in systems of managing enterprises in agricultural industry, as well together practice questions of strategic planning and management, realization of strategy and establishment of the Balanced Scorecard (BSC) on the example of your own enterprise. It is very important to work thoroughly on appropriateness, pluses and minuses of different approaches and projects. Try to answer all the major questions. Benefit of such inner corporate seminars is undeniable in its own. In addition, it allows for thought through and well weighed further steps. Furthermore, during corporate business practicum the team consolidates, owners, top management and employees learn a lot from each other and most importantly begin talking in “one language”.

Success of realization of any organizational changes directly depends on involvement of owners, top management and regular employees. Sometimes the organization of the process is taken on by the General Director and executive directorate and sometimes by the Board of directors and its Chair. In some cases it is wise to form a Council on strategic development. In any case, the function of the body responsible for carrying through organizational changes and realizing strategic planning of development consists in the following:

• formation of strategic goals and realization of strategic planning of development;
• coordination of work according to the strategic directions of work;
• elaboration of the plan for development;
• elaboration of legal and methodical documents on the formation of a strategic program
• formation of zones of development and innovative activity
• formation of a list of innovational projects, defining priorities and its development and introduction in an according manner with plans of strategic development;
• coordination of processes for developing business plans of priority directions and important innovational projects, control of their realization;
• analysis of changing external and internal environment, planned problem diagnosis of all structured subdivisions.

Internships of employees with foreign companies give a very strong impulse for development of business. This comes from the notion that any theory even fully loaded with practical examples and study of business cases taken from real life cannot replace experience gained from doing field work at leading enterprise. Furthermore, being in the atmosphere of existing successful business, having an opportunity to learn almost all nuances of leading management technologies gives a unique chance and a powerful impulse for intensification and increase of competitiveness of one’s business. Additionally, internships give a chance to establish business partner relations.

Result. Undoubtedly, establishment of a modern system of management takes time, effort and resources. Moreover, the first results of reforming business will give visible result. The stability and controllability of business increases, production and financial indicators grow, motivation of personnel strengthens, capitalization and investment attractiveness increases. Here is an opinion from General director of GC “AgroIntel” A.N. Chalkov after our mutual two year work on strategic development of the group of companies: “Obviously not everything is simple, but there are goals and clear actions, and most importantly unshakeable confidence in the righteousness of the decision”.

Profession DIRECTOR, 12.2007

Republications:

People Business, # 12 (89), December 2007

E-xecutive, 2007, http://www.e-xecutive.ru/community/articles/654208/index.php?ID=654208

Agroforum, ¹ 2 (17) February 2008

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