Konstantin Y. Smolentsev
Doctor of Political Sciences, the Academician of IIA, ÑÌÑ
Chairman of the Board of Directors
IC “SMOLENTSEV and Partners”
Agrarian sector is a major component of the world’s 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 an 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 will 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 deficit in food products which automatically lead to sudden increase in prices on those products.
Complex of problems
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 agricultural suburbs 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 agro-business 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 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 in 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 agro 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 work 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 most likely the objects for amalgamation. Main competition is happening among 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?
Where to “pour”?
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’sactions 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 in the country in the past two years.
First task that we often have to solve with 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 in fact 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 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 an 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.
MAISD as a variant
One of the most effective mechanisms to manage change is to transform separate processes of development into a powerful direction of a 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.
And other opportunities
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 projects and programs of development, work with different categories of clients, optimization of 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.
National Business, February (2008)