<%BANNER%>

Strategic Analysis and Recommendations for XYZ Research Corporation: A Case Study


PAGE 1

STRATEGIC ANALYSIS AND RECOMMENDATIONS FOR XYZ RESEARCH CORPORATION: A CASE STUDY By PAUL E. JARAMILLO VEGA A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLOR IDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE UNIVERSITY OF FLORIDA 2004

PAGE 2

Copyright 2004 by Paul E. Jaramillo Vega

PAGE 3

To my family.

PAGE 4

ACKNOWLEDGMENTS I would like to thank my parents, Patricio Jaramillo and Rita Vega, who have continuously supported me emotionally and financially throughout all my crazy endeavors. I am grateful for all the opportunities they have afforded me. I also want to thank my brother Ivan Jaramillo and my sister Patricia Jaramillo (and their families), all partners in crime with my parents in holding me up through these years. I wish to thank my supervisory committee chair, Dr. Lisa House; and my cochair, Dr. Allen Wysocki. Both of them tirelessly helped me since the inception of this project. Their guidance and patience encouraged me greatly. I am immensely indebted to Dr. Jane Luzar for all her unconditional help. I would like to thank Dr. William Brown and all the people at XYZ. Their openness and financial assistance made this study possible. Their help and trust in this project are deeply appreciated. Thanks also go to other faculty and staff members in the Food and Resource Economics Department, and to my fellow graduate students for their assistance and encouragement. Thanks are due to all my friends here in Gainesville and in Ecuador, for countless words and acts of support offered. Finally, I would like to thank Maria Fernanda Cifuentes, my friend and soul mate. Her enduring support and sincere love served as a foundation for building my goals. iv

PAGE 5

TABLE OF CONTENTS P age ACKNOWLEDGMENTS.................................................................................................iv LIST OF TABLES...........................................................................................................viii LIST OF FIGURES...........................................................................................................ix ABSTRACT.........................................................................................................................x CHAPTER 1 RESEARCH SETTING.................................................................................................1 1.1 Background and Justification................................................................................1 1.2 Problem Statement................................................................................................3 1.2.1 Description of the XYZ Research Corporation and of the U.S. Independent Food-Testing Laboratory Industry.......................................4 1.2.1.1 Description of XYZ Research Corporation...............................4 1.2.1.2 Description of the U.S. independent food-testing laboratory industry......................................................................................5 1.3 Objectives.............................................................................................................6 1.3.1 General Objectives....................................................................................6 1.3.2 Specific Objectives...................................................................................6 2 LITERATURE REVIEW..............................................................................................8 2.1 Strategic Analysis and Strategic Planning in Strategic Management Research...8 2.2 Influence of Economics on Strategic Management............................................10 3 METHODS PROPOSED.............................................................................................16 3.1 Alternative Strategies for Addressing the Research Problem.............................16 3.2 Case Study as the Preferred Research Strategy..................................................18 3.2.1 Strengths of the Case Study Research Approach....................................19 3.2.2 Concluding Remarks Regarding The Case Study Research Strategy.....20 3.3 Strategic Analysis Interviews and Focus Groups...............................................20 4 STRATEGIC ANALYSIS...........................................................................................22 4.1 Overview of the U.S. Independent Food-Testing Laboratory Industry..............22 4.1.1 Nature of the Industry.............................................................................27 v

PAGE 6

4.1.1.1 Outsourcing and the U.S. independent food-testing laboratory industry....................................................................................27 4.1.1.2 The U.S. food safety system and the U.S. independent food-testing laboratory industry...............................................29 4.1.2 The U.S. Food Supply Chain and the U.S. Independent Food-Testing Laboratory Industry................................................................................32 4.1.3 Factors Influencing Demand in the U.S. Independent Food-Testing Laboratory Industry................................................................................36 4.2 Forces Influencing the U.S. Independent Food-Testing Laboratory Industry....38 4.2.1 Degree of Rivalry was Moderate............................................................39 4.2.2 Threat of Substitutes was Low................................................................40 4.2.3 Buyer Power was Highest for Large Manufacturers and Lowest for Small Producers......................................................................................41 4.2.4 Supplier Power was High........................................................................42 4.2.5 Barriers to Entry/ Threat of Entry was Low...........................................43 4.3 Strategic Analysis of XYZ Research Corporation..............................................44 4.3.1 Marketing Resources..............................................................................45 4.3.2 Financial Resources................................................................................48 4.3.3 Human Resources...................................................................................49 4.3.4 Operation/Production Resources............................................................50 4.3.5 Management/Leadership Resources.......................................................52 4.3.6 Organizational Resources.......................................................................53 4.3.7 Information Resources............................................................................54 4.4 Strengths Weaknesses Opportunities and Threats (SWOT) Analysis for XYZ Research Corporation..........................................................................................55 4.4.1 Competitive Advantages (Strengths)......................................................56 4.4.2 Opportunities...........................................................................................58 4.4.3 Competitive Disadvantages (Weaknesses).............................................59 4.4.4 Threats.....................................................................................................61 5 RECOMMENDATIONS AND CONCLUSIONS......................................................62 5.1 Recommendations for XYZ Research Corporation............................................62 5.1.1 Defining a Strategy.................................................................................62 5.1.1.1 Considerations for XYZ choosing the cost leadership strategy.....................................................................................64 5.1.1.2 Considerations for XYZ choosing the differentiation strategy.....................................................................................65 5.1.2 Aggressive Strategy-Based Marketing...................................................65 5.1.3 Understanding and Shaping the Customer Base.....................................66 5.1.4 Decentralizing Leadership......................................................................67 5.1.5 Development of a New Incentive Program.............................................67 5.1.6 Tuning Up the Organizational Structure and Accounting System..........69 5.1.7 On Building New Facilities....................................................................69 5.1.8 Management Training Programs.............................................................70 5.2 Recommendations for Further Research.............................................................70 5.3 Conclusions.........................................................................................................71 vi

PAGE 7

APPENDIX A ANALYSIS TOOLS...................................................................................................72 B MAJOR QUALITY ASSURANCE PROGRAMS....................................................76 REFERENCES..................................................................................................................77 BIOGRAPHICAL SKETCH.............................................................................................82 vii

PAGE 8

LIST OF TABLES Table page 3-1 Relevant situations for different research strategies................................................17 4-1 Sillikers sales volume for domestic facilities..........................................................26 4-2 Microbacs sales volume for domestic facilities......................................................26 4-3 Independent food-testing laboratories by region......................................................27 4-4 Summary statistics from the XYZ Research Corporation interviews......................46 A-1 Performance assessment...........................................................................................72 A-2 Internal checklist......................................................................................................73 A-3 Strengths analysis.....................................................................................................75 A-4 Weakness analysis....................................................................................................75 viii

PAGE 9

LIST OF FIGURES Figure page 2-1 Sunk costs and scale economics definitions, effect on the industry, and influence on strategic management theory...............................................................................11 4-1 Distribution of U.S. independent food-testing labs by sales class...........................24 4-2 Overview of the label change process in response to regulation.............................31 4-3 Major alternative marketing channels of the U.S. food system...............................35 5-1 XYZs size position and available strategies...........................................................63 ix

PAGE 10

Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Science STRATEGIC ANALYSIS AND RECOMMENDATIONS FOR XYZ RESEARCH CORPORATION: A CASE STUDY By Paul E. Jaramillo Vega August 2004 Chair: Lisa House Cochair: Allen Wysocki Major Department: Food and Resource Economics This study is a collaboration of efforts between the Food and Resource Economic Department of the University of Florida and XYZ Research Corporation to (1) determine the main forces influencing the behavior of food-testing laboratories participating in the U.S. independent laboratory industry, (2) assist XYZ in developing a strategy and offer recommendations, and (3) generate a separate teaching case study. Limited information on the industry was available at the beginning of this study. Competitive analysis was used to determine a low level of rivalry in the industry. The low level of rivalry was due to an accelerated growth of the market observed in this relatively young industry. However, most forces were found to work toward high levels of rivalry in the absence of industry growth. Several interviews and focus groups were conducted at XYZ Research to gain insights into XYZs competitive advantages and disadvantages. An analysis of the strengths, weaknesses, opportunities and threats of XYZ revealed several competitive x

PAGE 11

advantages that the company possesses over its rivals as well as some areas of weakness that can be improved. Also, the analysis revealed the existence of numerous potential opportunities facing XYZ, and only a small number of weak threats. Specific considerations regarding the two alternative strategies proposed by this research (cost-leadership or differentiation) were developed for XYZ together with a set of recommendations on very specific issues the company should address. The final products of this study include a proposed business plan (based on the strategic analysis conducted for XYZ Research Corporation) and a teaching case study for use in Agribusiness and Human Resource classrooms. xi

PAGE 12

CHAPTER 1 RESEARCH SETTING This chapter is divided in three sections. Section 1.1 briefly discusses the background and setting of this study. Section 1.2 identifies the main problem and main issues concerning our study. Section 1.3 states both the relevant general and specific objectives. 1.1 Background and Justification The present and future role of the U.S. land grant university system has been a matter of discussion in the last few years, as the original conditions that provided the impetus for a nationwide cooperative extension system in the 1860s have changed over time. During the formation of the cooperative extension system, a large farm population existed that had unique and distinct characteristics compared to urban households. Farms were also dispersed and isolated, with slow transportation and communications networks. The national concern for food security combined with the needs of farmers, and the need of many agriculture colleges for a constituency and base of support created a demand for agricultural extension (National Research Council 1996). Today, farm families are not dispersed or isolated, transportation networks and communications are rapid and extensive, and farm households are not nearly as different from non-farm households as they used to be (National Research Council 1996). By 1991, education and income of farm households was already, on average, on par with the education and income of non-farm households (Dacquel and Dahmann 1993). The context of the national condition is very different than it was at the time the base for extension was laid. 1

PAGE 13

2 At the same time, governments around the world have continuously experienced increasingly tighter budgets. As a result of budgetary pressure, many countries have examined alternative arrangements for delivery of extension services, including public expenditure reductions, changes in approaches to generating tax revenue, charges for government extension services, commercialization and privatization (Howell 1985). In the United States, total federal funds for extension were $439 million in 1995. This represented 29 % of all cooperative extension funding from state, local (including county and private), and federal sources, down from 42 % 20 years prior (National Research Council 1995). According to Le Gouis (1991), three principal policies have been used by governments: (1) public financing by the taxpayer only for the kinds of services that are of direct concern to the general public; (2) direct charging for some individual services with direct return, such as improved income; and (3) mixed funding shared between public and private professional association contributions, for some services where benefits are shared. Presently, the U.S. land grant university system faces a country with few farmers and many consumers. Farms that account for most of the agricultural products entering commercial markets are highly sophisticated organizations, operating with cutting-edge production and information technologies. Under these circumstances the U.S. land grant system must compete or collaborate with a private sector that shows growing participation in offering extension as consulting services; while at the same time balancing a reduced budget to respond to all farm, rural, urban, and suburban needs. Some discussions point out the growing similarity of the current role of the land grant system to that of a consulting agency. In which ways and how much does the role

PAGE 14

3 of public universities reflect that of being consulting agencies for different private sectors in the economy? Furthermore, if this is the case, how can both the private and public sector take advantage of this kind of relationship? According to Feller et al. (1987), one way to look at this relationship is to see extension personnel as wholesalers of technical information; and private consultants as increasingly, the retailers. Our study is a result of a public-private partnership between University of Florida and XYZ Research Corporation. We analyzed the partnership for insights in the road to answering the questions stated above. 1.2 Problem Statement For the last 3 years, XYZ Research Corporation has been performing well financially. Such positive performance has sparked a desire from the company to grow and to improve even further. The company operates in an immensely complex and not well-defined U.S. independent food-testing laboratory industry. The industry offers food-testing services to food companies under a highly federal-regulated environment. A large number of very diverse firms (ranging in size from small mom-and-pop types of businesses to large multinational multi-site billion-dollar corporations) participate in the industry. Independent private laboratories, in contrast with publicly traded companies, are not required to make readily available to the public their financial situation or any other information. As a result, XYZ Research Corporations management staff deals with, among other things, a thin market for information on competitors and industry data (e.g., sales, size) that is needed for planning future moves. In its struggle to find the best plan of action, XYZs management team realized the need to address several internal and external factors that were constraining the company

PAGE 15

4 from developing to its full potential as a leader in the industry. XYZ Research Corporation contacted the Food and Resource Economics Department (FRED) in the University of Florida requesting assistance in identifying such internal factors and external industry-issues; and in suggesting ways to improve its competitiveness and growth. Considering the current issues relating to the present and future role of the land grant university system, our study posed a remarkable opportunity to set an example of public-private partnership arrangements that benefit both the private and public sector. The goals of our study are stated at the end of this chapter in Section 1.3. 1.2.1 Description of the XYZ Research Corporation and of the U.S. Independent Food-Testing Laboratory Industry 1.2.1.1 Description of XYZ Research Corporation Established in 1967 by Dr. William L. Brown, XYZ Research Corporation is a full-service laboratory based in Gainesville, Florida. The company started out with 20 scientists, and has grown to more than 50 scientists and a $1.5 million payroll. XYZ Research Corporation conducts daily chemical, physical, and microbiological analyses for its customer base of over 2000 food companies. This includes mostly large (but also small) fast-food chains, mainstream chain restaurants, food retail and wholesale firms, food-processing firms, packing firms, commercial farms, and some companies in foreign countries. XYZ Research Corporations organization and major departments are described as follows: (1) Top Management (CEO, Dr. William Brown; Vice President, Mr. Hart); (2) Quality Control; (3) Office Management; (4) Business Development (increasing XYZs capabilities to include product development, HACCP auditing, and biotechnology

PAGE 16

5 services); (5) Sales and Marketing; (6) Microbiology (tests for presence of pathogens in food, errors in food processes that result in spoilage, and purity of water; and offers regulatory assistance); (7) Research Microbiology (analytical, research, and consulting services); (8) Chemistry (analytical tests for physical properties); (9) Food Chemistry: analytical tests on general nutritional content; miscellaneous properties of foods (pH, flavor, odor, etc); and presence of pesticide residues, additives, and toxins; and (10) Chemistry/Problem Solving (offers problem solving services for any type of food product). 1.2.1.2 Description of the U.S. independent food-testing laboratory industry Independent food-testing laboratories are part of a large set of very different types of laboratories operating in the United States. In general, independent laboratories offer a wide range of services to several industries. Focus may vary immensely, from dental X-Ray laboratories, to Research laboratories, or Motion Picture laboratories. The SIC has 19 classification numbers that include the word laboratory or laboratories. The scope of our study is limited to independent food-testing and product-development laboratories. Food-testing laboratories are classified in the SIC under Division I: Services and under Industry Group 873: Research Development and Testing Services. Classification number 8731: Commercial Physical and Biological Research includes establishments primarily engaged in commercial physical and biological research and development on a contract fee basis. Facilities engaged primarily in food testing fall under classification 8734: Testing Laboratories. Specifically our interest is subdivision 8734-02: LaboratoriesTesting and 8734-14 LaboratoriesAnalytical. Finally, noncommercial research organizations (such as those funded by grants, endowments or contributions) are part of classification 8733: Noncommercial Research Organizations. When discussing

PAGE 17

6 the independent lab industry our study refers only to section 8731: Commercial Physical and Biological Research and the relevant sections of 8734: Testing Laboratories. Section 4.1 of our study offers a deeper look into the industry. 1.3 Objectives 1.3.1 General Objectives Two general objectives will be used as guides to achieve our research goals. They are 1. To introduce an analytical framework that could be applied to XYZ Research Corporation and to the U.S. independent food-testing laboratory industry. XYZ Research Corporation approached the Food and Resource Economics Department of University of Florida requesting assistance in identifying ways to achieve growth and improve competitiveness in its industry. 2. To explore and characterize the multiple mutually beneficial opportunities existent in public-private research partnerships and re-define the expanding-evolving role of the land grant university system to interact more directly with the private sector. Final output of our study will be both beneficial to the private sector (strategic plan) and educational (case study). 1.3.2 Specific Objectives Six specific objectives were identified as necessary to effectively carry out our research. They were based on the general objectives mentioned above. These are 1. To provide XYZ Research Corporation with a detailed description of the economic aspects of the U.S. independent food-testing laboratory industry and the relations between the industrys demand and factors affecting the U.S. food supply chain. Many factors concerning the whole food supply chain are factors that affect the lab industry and dictate how their demand is generated. 2. To conduct a strategic analysis of XYZ Research Corporation. The strategic analysis is composed of several focus groups conducted with employees and management in the company. Output includes employee/management ranked answers on the most important internal resources in the company. 3. To provide an analysis of the competitive forces functioning in the U.S. independent food-testing laboratory industry. Strong competitive forces imply increased rivalry and a reduced likelihood for sustaining industry-wide profitability.

PAGE 18

7 4. To conduct an analysis of the strengths, weaknesses, opportunities and threats (SWOT) confronting XYZ Research Corporation and the U.S. independent lab industry. Internal strengths and external opportunities reduce the strength of competitive forces, while internal weaknesses and external threats increase the strength of the competitive forces. 5. To assist XYZ Research Corporation in developing a strategic plan and propose them a set of strategic alternatives with the purpose of guiding their future development. The strategic plan is a core plan of action based on the competitive force analysis, the SWOT analysis and the strategic plan analysis. The strategic plan is intended to commit XYZ Research Corporation with a set of goals and objectives that will jumpstart their growth from a medium-size profitable company into a true corporation.

PAGE 19

CHAPTER 2 LITERATURE REVIEW This literature review is divided into two sections: Section 2.1 shows the use of strategic analysis and strategic planning in strategic management research. Section 2.2 discusses the influences of economics on strategic management. 2.1 Strategic Analysis and Strategic Planning in Strategic Management Research Miller and Dess (1996) define strategic analysis as the conjugation of three processes: (1) consideration of the organizations strategic intent; (2) exploration of the opportunities and threats presented in the immediate environment surrounding the organization; and (3) a study of the organizations internal strengths and weaknesses. This definition is very similar or equivalent to the concept of a Strengths Weaknesses Opportunities and Threats Analysis (SWOT ) plus any effort to define a companys strategy. On the other hand; strategic planning is defined by Aeker (1988) as the process of increasing a companys ability to anticipate changes that have strategic implication, by focusing on their immediate market environment to achieve an in-depth understanding of competitors and customers. Also defined by Pearce (1994), as an on-going process based on the implementation and development of better strategies. Finally, strategic management is described as the on-going dynamic process (involving both strategic analysis and strategic planning) leading to a set of analysis-driven decisions and actions taken by a firm to achieve its performance goals 8

PAGE 20

9 (Pearce 1994, Peterson 1994). Performance may mean desired level of profits, market share, customer satisfaction, or sales. Also, according to Zahra et al. (1993), competitive analysis is a process by which firms define and try to understand their industry; identify their competitors; determine strengths and weaknesses of rivals; and anticipate situations and moves. According to Beaver and Ross (2000), for small companies, strategic management is often an adaptive process. Such process is carried out to achieve positional and resource advantages. Decisions are taken from day to day, as needed, which is the way for meeting most small environmental changes. Our study stresses the importance for XYZ, as a medium-large company, in developing a more structured and systematical way of thinking strategically (regardless of what strategy they pursue) to address a rapidly growing industry. Sorensen, Valqui, and Engstrom (2003, p. 566), performed SWOT-based research to identify the issues constraining European businesses from developing effective strategies to adopt and incorporate Information Technologies (IT) to their operations. Insights and identified issues obtained through the SWOT analysis were used to develop alternative strategies for small businesses. Their research was conducted using the case study strategy. The case involved a small Swedish company referred to as Kirby. The authors state The SWOT analysis was used simply because the first contact with the firm made it clear that the sales manager had no idea of how to structure the complex situation. As the authors see it, there were not real alternatives to SWOT. With only one participating person, a rather restricted time frame (for interviews and the number of interviews that could be expected), and the authors ambition to leave behind at least one tool or idea Kirby could work with alone, SWOT seemed as the best option. As mentioned earlier, the application of SWOT was made through several meetings allowing the sales manager to reflect on both the issues and the situation and on the methodological approach for structuring the problem. The time between meetings made up a more productive and interactive analysis. By starting out

PAGE 21

10 discussions one day, the sales manager became more attentive to the SWOT factors discussed, and at next meeting he could always add on new relevant issues. However, it was also clear that the analysis could not have been applied without the technological knowledge of the facilitator. Application of SWOT requires a good information and sound knowledge base to succeed. The sales manager did not have sufficient knowledge especially about the external SWOT factors, and the direct engagement of the facilitator as an expert was a requirement for carrying out the analysis. In terms of using SWOT with an illustrative purpose, it is the authors perception that the manager did get so much insight into SWOT methodologically that he could be able to apply it himself or take on a facilitator role. Dyson (2003, p. 631) used SWOT based research to assist in formulating a development strategy for the University of Warwick, UK. In his words The application links SWOT analysis to resource-based planning, illustrates it as an iterative rather than a linear process, and embeds it within the overall planning process. Lessons are drawn both for the University and for the strategy formulation process itself. Wysocki (1997) used SWOT analysis and Porters Five Force framework to develop a strategic plan for Michigans Public Variety Field and Seed Potato Producers. The SWOT analysis was conducted through several meetings, face-to-face interviews, and surveys; similar to Sorensen, Valqui, and Engstrom (2003). 2.2 Influence of Economics on Strategic Management Five specific examples of how economics has affected strategic management include: (1) traditional entry-barrier theory yielded the concepts of scale economics and sunk costs, while mobility barrier theory stressed the importance of learning and first-mover advantages in making specialized investments; (2) the notion that high profits are returns to specialized high-quality resources supported by the Chicago school; (3) game theory provided models to analyze (and the basis for understanding) firms use of preemption, brand crowding, dynamic limit-pricing, signaling, and reputation for toughness to strategically protect market positions; (4) the economics of innovation

PAGE 22

11 brought focus on Schumpeterian competition, intellectual property, and the costs of technology transfer; and (5) transaction costs economics (Rumelt et al. 1991). Figure 2-1 shows the definitions of sunk costs and scale economies, their potential effect to the industry, and their influence to strategic management. Sunk costs refer to costs that once paid are impossible to recover. The magnitude of sunk costs required to start a business in a given industry represents a barrier to entry for new firms because it increases the size of the initial investment required. It also increases the level of risk associated, by increasing the amount of money that can be lost if the business fails. In terms of its influence to strategic management: (1) established firms do not worry as much for new firms entering the industry (which allows them to concentrate on existing competition); and (2) the rivalry among established firms is higher (the higher the magnitude of sunk costs, the higher the loss associated with going out of business). 1 Figure 2-1. Sunk costs and scale economics definitions, effect on the industry, and influence on strategic management theory. Sunk costsSunk costsDefinition:Definition:costs that once paid are impossible to recovercosts that once paid are impossible to recoverEffect:Effect:can represent an entry barriercan represent an entry barrierInfluence:Influence:1) barrier allows established firms to concentrate in 1) barrier allows established firms to concentrate in existing competitionexisting competition2) increases rivalry among existing competition2) increases rivalry among existing competition Scale economicsScale economicsDefinition:Definition:lower costs resulting from mass productionlower costs resulting from mass productionTypes:Types:technical, managerial, financial, marketing, technical, managerial, financial, marketing, commercial, externalcommercial, externalEffect:Effect:enhances companys ability to engage in price enhances companys ability to engage in price competitioncompetitionInfluence:Influence:ar g ument favorin g cost leadershi p strate g iesargument favoring cost leadership strategies Scale economies occur when mass-producing a good, results in lower average costs. Lower average costs can be caused by: (1) technical economies (making better use 1 For a detailed discussion of sunk costs see: Baumol, W. J., Panzar, J. C., and Willig, R. Contestable Markets: An Uprising in the Theory of Industry Structure. American Economic Review, 72(1)(1983):1-15.

PAGE 23

12 of equipment); (2) managerial economies (splitting managerial skills among higher levels of output); (3) financial economies (having access to loans with lower interest rates than smaller firms); (4) marketing economies (diluting advertising costs among more output); (5) commercial economies (buying inputs in bulk with discounts); and (6) external economies (e.g., local skilled or low-cost labor). Scale economies affect strategic management decisions by improving a companys ability to engage in price competition. Also, influencing strategic management is the concept of first mover advantage. First mover advantages give firms access to excess profits created by shocks to the market before any competitors have access to them. Furthermore, first mover advantages offer firms the opportunity to create long-run competitive advantages over competitors (e.g., brand name, customer recognition, control of distribution channels, technological lead). Three types of first mover advantages identified are: (1) technological leadership, (2) preemption of assets, and (3) switching costs. Technological leadership first mover advantage is related to the concepts of learning curve and experience curve. The learning curve effect states that the more often a task is performed, the less time will be required on each iteration. Wright (1925), first noticed this effect at the Air Force Base in America, where he determined that every time aircraft production doubled, the required labor time decreased by 10% to 15%. The experience curve effect is broader in scope than the learning curve effect, encompassing far more than just labor time. It states that the more often a task is performed; the lower will be the cost of doing it due to increased labor efficiency, standardization, specialization, experience, and technology driven learning (Boston Consulting Group 1972). The Boston Consulting Group strategists examined the consequences of the

PAGE 24

13 experience effect for businesses. They concluded that because relatively low cost of operations is a very powerful strategic advantage, firms should capitalize on these learning and experience effects. The reasoning is, increased activity leads to increased learning, which leads to lower costs, which can lead to lower prices, which can lead to increased market share, which can lead to increased profitability and market dominance. Today we recognize that there are other strategies that are just as effective as cost leadership so we need not limit ourselves to this one path. See for example Porter generic strategies discussed in Chapter 5 (Section 5.1) of this study, which talks about product differentiation and focused market segmentation as two alternatives to cost leadership. To avoid confusion between scale economies and the experience curve effects it is helpful to remember that economies of scale are those efficiencies that arise from an increased scale of production, and that experience effects are those efficiencies that arise from the learning and experience gained from repeated activities. Schumpeter, defined competition as a dynamic process wherein firms strive to survive under an evolving set of rules that constantly produce winners and losers. His 1912 book on The Theory of Economic Development established the links between innovation and competition. His 1928 paper on The Instability of Capitalism highlighted the transient character of competition conditions (Tavares 1999). Firms can have an advantage in this game by creating asymmetries in information. In such, creation and protection of intellectual property are also related to the technological leadership first-mover advantage since the experience curve effect is diminished as the inter-firm sharing of technological information is increased. This is an example of a cost of

PAGE 25

14 technological transfer. One factor that can increase the sharing of information is inter-firm mobility of workers. The second first mover advantage discussed is preemption of assets. Preemption is the appropriation of something in advance of others. For example, firms can gain advantage over competitors by pursuing strategies that enable them to exercise preemption over input factors or intellectual property (R&D and patents). The third first mover advantage has to do with increasing switching costs. For example; by creating brand loyalty through exclusive quality, or creating artificial brand loyalty through contractual switching costs like airlines do with frequent flier programs. However, according to Rumelt et al. (1991), the most influential change to strategic management came from Michael Porters work titled Competitive Strategy. Michael Porters work synthesized into a logical framework the Chicago Schools idea that different industry structures are reflected in different industry outcomes or performances as opposed to market power. His well-known and extensively used framework, Porters Five Forces, is built based on the structureconductperformance (SCP) paradigm of industrial economics. The key aspect when formulating a competitive strategy is relating the company to its environment. This environment includes social and economic forces, but mainly the industry or industries in which the firm competes. Industry structures have a strong influence in determining the competitive rules of the game and the strategies potentially available to the firm (Porter 1980). Our study makes use of Porters Five Forces framework as an aid to understand the forces and behaviors operating in the industry in which XYZ Research Corporation competes.

PAGE 26

15 Summarizing, our study argues that strategic analysis supported by Porter Five Forces framework and a SWOT analysis of the industry are appropriate foundations for the strategy formulation of a firm. In aiding XYZ Research Company to develop a strategy for their business, our study makes use of these tools and data gathering methods (strategic analysis, SWOT analysis, Porters Five Forces, face-to-face interviews, etc) to accomplish the objectives and goals proposed.

PAGE 27

CHAPTER 3 METHODS PROPOSED This chapter discusses the methods proposed to carry out our study. Section 3.1 shows the alternative strategies reviewed to address our research problem. Section 3.2 defines the case study strategy as the preferred research strategy. Section 3.3 describes the survey tool (interviews and focus groups) used. 3.1 Alternative Strategies for Addressing the Research Problem Several research strategies used to address social science research include experiments, surveys, case studies, histories and the analysis of archival information. The selection of which strategy is used by investigators depends upon three conditions: (1) the type of research question being asked, (2) the control the researcher has over actual behavioral variables or events, and (3) the focus on contemporary as opposed to historical phenomena (Yin 1994). Research phases affect which type of research strategy might be selected. Phases can be exploratory, descriptive, or explanatory. Phases differ from each other on the type of research questions they try to answer. Exploratory research is mainly concerned with answering what questions. Descriptive research is effective in answering who and where questions. Finally, explanatory research is meant to answer how and why questions. Table 3-1 summarizes the different relevant situations for five alternative research strategies. Each strategy is assessed according to the three conditions mentioned above. 16

PAGE 28

17 Table 3-1. Relevant situations for different research strategies Requires control Focuses on over behavioral contemporary Strategy Form of research question events? events? Experiment How Why Yes Yes Survey Who What Where How How No Yes many much Archival Who What Where How How No Yes or Analysis many much No History How Why No No Case Study How Why No Yes Obtained from Yin, Robert K. Case Study Research: Design and Methods. 2nd edition.Thousand Oaks, CA: Sage Publications, 1994. Questions like What are your strengths as an independent food-testing laboratory? are here called what questions constituting the exploratory phase of research. Although favoring the use of surveys and archival analysis, what questions can be addressed with any of the five research strategies. This study will be using face-to-face interviews and focus groups, and an extensive literature review, to carry out the exploratory research phase. The descriptive phase addresses who, where, how many, and how much types of questions. For example, Where are most of the independent laboratories located? How many laboratories participate in the industry? or Who do you consider your main competitors in the industry? Survey strategies or archival analysis are the best-suited strategies to carry out this phase of the research. Our study will consider the use of face-to-face interviews and focus groups, and archival records from Research Triangle Institutes Food Testing Laboratory Database (FTLD) to carry out the descriptive phase of this study.

PAGE 29

18 Explanatory research is pursued by answering how and why questions; case studies, experiments, and histories are commonly used to carry out this phase of research. Our study will make use of face-to-face interviews and focus groups, and the case study approach to tackle this phase of the research. Of all five research strategies, only experiments require the researcher to have control over behavioral variables and events. The type of research carried out in our study lends itself to very little control over variables; thus, conducting experiment-based research is not advised. Meanwhile, the case study and historical archives strategies do not require the investigator to have control over the variables studied and could be used to accomplish the objectives of our study. However, of these two (case study and historical archives), only the case study approach focuses on the study of contemporary events. Summarizing, the case study is the most recommended approach to address research that presents the three following characteristics: (1) answer how and why questions, (2) the investigator has little control over variables, and (3) when the focus is on contemporary phenomena with real life context (Yin 1994). 3.2 Case Study as the Preferred Research Strategy It is argued in this section that the case study strategy is the best suited for accomplishing the objectives of our study as stated earlier. The main focus of the case study research strategy is on understanding in detail the dynamics present in single settings. Study of cases involves meticulous examination of very few persons, items, or entities. Commonly used in medical and psychological research, the case study method is not as frequently used in the agricultural economics profession, though its use is becoming more common in agribusiness research.

PAGE 30

19 The trend in academic research is to use deductive methods of research over inductive methods, whenever possible. A transition has been observed from using case studies of actual situations to develop generalizations through induction, to deductive methods utilizing the falsification method of Popper, 2 and the statistical methods of multi-variate analysis (Rumelt et al. 1991). Although the case study approach is more effective for inductive research methods, it also has a role to play in deductive research. Typically, case studies involve a combination of data collection techniques; such as archives, interviews, questionnaires, and observation. The grouped evidence collected may end up being qualitative, quantitative, or both (Eisenhardt 1989). While multivariate analysis is good in dealing only with quantitative data sets, the case study approach can be used for all quantitative, qualitative, or mixed sets of data. 3.2.1 Strengths of the Case Study Research Approach Traditionally, case studies were thought only appropriate for the exploratory phase of an investigation; that surveys and histories were effective for the descriptive phase; and that only experiments were correctly used when doing explanatory or causal inquiries (Yin 1994). The hierarchal framework of research phases reinforced the idea that case studies could not be used to describe or test research propositions. A more current view is that case studies can be used for all three types of research: exploratory, descriptive and explanatory. The case study method is conceived as a simultaneous treatment and observation process that can be made over a period of time. According to Kennedy (1979), studies of 2 According to Popper, you can never demonstrate that something is materially true, but you can demonstrate that some things are false. For a more detailed explanation of Poppers views see Blaug (1992). The Methodology of Economics of How Economics Explain.

PAGE 31

20 individual cases allow the researcher to learn intricate details and provides insight into the problem being considered, which aids in the process of prescribing a course of action. Casley and Lury (1987) consider detailed insight is required when it is necessary to probe deeply into systems governing behavior or when analyzing the interrelationships among people and institutions to explain attitudes and behaviors. 3.2.2 Concluding Remarks Regarding The Case Study Research Strategy Our study is based on research that is not designed to be tested with sophisticated statistical analysis or econometric methods. The detailed nature of our research, the limited number of observations, and the lack of specific numerical data prohibit standard hypothesis testing. This research lends itself to the testing of research propositions by in-depth analysis of industry structure, dynamic relationships, and forces influencing behavior in the U.S. food-testing laboratory industry. The exploratory and ongoing organic nature of our study limits the researchers ability to predetermine clear methods to test its propositions, and is best addressed by use of the case study research strategy. Yin (1994, p. 102) addresses this issue by stating: Unlike statistical analysis, there are few fixed formulas or cookbook recipes to guide the analysis for novices. Instead, much depends on the investigators own style of rigorous thinking, along with sufficient presentation of evidence and careful consideration of alternative interpretations. 3.3 Strategic Analysis Interviews and Focus Groups This section describes the series of interviews carried out at XYZ Research Corporation for purposes of our study. The strategic analysis involved a series of visits to the company to conduct focus groups with its employees and management. Five focus groups were carried out at XYZ Research Corporation. Each session took between three

PAGE 32

21 and four hours. Four of the five focus groups were comprised of employees across the company, involving an average of four participants per session. The fifth session was conducted directly with the CEO, Dr. Brown; and Vice President, Mr. Hart. In total, 17 employees and 2 top managers were interviewed. Participants were selected from each department in the company to make the sample representative. Interviewees were grouped according to their department. The interview was adapted from a previously developed interview, authored by Dr. Christopher Peterson 3 from Michigan State University. Peterson (who enjoys an extensive background in strategic management research) obtained his PhD from Cornell University in 1991, and his M.B.A. from Harvard University in 1981. The interview involved filling and discussing a questionnaire regarding: marketing, financial, human, operations/production, organizational and information resources in the company (See Appendix A for the complete questionnaire used). Each item in the questionnaire was to be ranked by the interviewee as a weakness or strength for the company. The scale used ranked from 1 (great weakness) to 5 (great strength). The results obtained from employees were averaged and compared to the average obtained from top management answers. Top management included the CEO and the vice-president of the company. The results were then used to compare perceptions and gain insights into the issues confronting the company. 3 Peterson, H. Christopher. Strategic Analysis Interview. Personal communication, January 2003.

PAGE 33

CHAPTER 4 STRATEGIC ANALYSIS This chapter contains: Section 4.1 shows an overview of the U.S. independent food-testing laboratory industry, its unique characteristics, and dynamic interaction with the food industry supply chain together with issues surrounding it and factors influencing its demand. Section 4.2 is an application of Porters Five Force framework to the U.S. independent food-testing laboratory industry is used to analyze the forces affecting the industry. Section 4.3 shows the results gathered from the strategic analysis interviews and focus groups are discussed. Finally, in Section 4.4 the findings from the Strengths Weaknesses Opportunities and Threats Analysis (SWOT) conducted on XYZ Research Corporation are summarized. 4.1 Overview of the U.S. Independent Food-Testing Laboratory Industry Much of the next section comes from Fanjoy et al. (2001) Food Testing Laboratories Database (FTLD). Fanjoy et al. (2001), from the Research Triangle Institute, used FDAs (1997) definition for private laboratories 4 to gather data on food-testing laboratories and compiled it into a database that documents several industry variables (e.g., location, economic variables, capabilities, and quality assurance programs). Their research recognizes two limitations: (1) the U.S. food-testing laboratory industry is not well defined which posed difficulties when screening companies that 4 The term "private laboratory" refers to those private sector laboratories that conduct testing of regulated products and submit analytical data to the FDA to demonstrate compliance with the FD&C Act. The term includes only those laboratories, which not regulated by Good Laboratory Practices and/or Good Manufacturing Practices. By definition, private laboratories are independent providers of analytical services and are not directly associated with firms utilizing their resources. 22

PAGE 34

23 qualified as food-testing laboratories from other types of laboratories, and (2) laboratory websites, maintained mainly for promotional purposes and association sources (e.g., American Council of Independent LaboratoriesACIL), do not include economic variables or economic data on sales volume and what was available was hard to confirm. In general, companies do not share such information in a freely manner. Fanjoy et al.s research used several screening methods to select laboratories and define the food-testing laboratory population: (1) use of multiple private and federal resources (e.g., company websites, FDAs OASIS), (2) use of a list purchased from infoUSA containing 5,000 laboratories that are included in SIC code 8734-02: LaboratoriesTesting which was filtered by initially excluding laboratories that do not test food or water, (3) grouping of the remaining laboratories in the list into categories by their names and reviewing 5 to 10 examples from each category, (4) giving closer scrutiny to exclude companies containing keywords in their names (e.g., agri, calibration, hemo, terra), (5) use of corroborating sources to reconsider laboratories excluded using the keyword filter, and (6) expert reviews from food science personnel at six universities (Cornell, NCSU, Penn State, Texas A&M, University of California Davis and Virginia Tech). The final database includes records for 546 companies that test food mostly within, but also outside the United States. Available economic data for 193 of the 546 firms suggests that industry sales volume easily surpasses $1.3 billion. However, this includes revenues from all activities and services offered by the laboratories, not only from food-testing services.

PAGE 35

24 In Figure 4-1 all independent food-testing laboratories for which data was available were grouped according to their sales volume or sales size. From the 193 available records, the diversity in size of firms operating in the industry is easily observed. Almost half of the laboratories (47%) have a sales volume of $500,000 to $2,499,000. Approximately a third (32%) have a sales volume ranging from $2,500,000 to $19,999,000. Only four firms showed larger sales volumes. A smaller number of firms (13.3%) fall under the small mom-and-pop type of business with sales volumes of $1,000 to $500,000. 13.29%25.95%21.52%17.09%14.56%5.06%1.27%0.63%0.63%1.00%1.46%2.42%4.80%8.17%5.69%2.84%3.55%71.07%0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%Less than $499$500-$999$1,000-$2,499$2,500-$4,999$5,000-$9,999$10,000-$19,999$20,000-$49,999$50,000-$99,999$1,000,000 or more Annual Sales Class (thousands)% of Total Laboratories V alue of Products & Services Sold Figure 4-1. Distribution of U.S. independent food-testing labs by sales class: 2001 According to the same data, around 71% of the estimated minimum of $1.3 billion sales for the 193 laboratories belong to one single company (U.S Filter/Zimpro Incorporated). Filter/Zimpro specializes in offering products, services and solutions for water, wastewater and selected industrial processes to several industries. The rest of the sales in the industry were distributed as follows: Medium-large sized companies (with

PAGE 36

25 sales ranging from $2,500,000 to $19,999,000) accounted for approximately 19% of the sales and medium-small sized laboratories ($500,000 to $2,499,000) accounted for 3.8% of the sales. Mom-and-pop ($1,000 to $500,000) businesses contributed less than 1% of the sales. The remaining 6.3% was made by the other three companies with volumes sales larger than $19,999,999. Two key competitors in the industry worth mentioning are Siliker Laboratories and Microbac. Table 4-1 shows estimates of Sillikers sales volumes for its U.S. based locations, Table 4.2 show estimates of Microbacs sales volumes. Both were obtained using Food Testing Laboratories Databases economic data. Information for 9 of Sillikers 11 U.S. locations suggests sales between 33.5 million and 67.5 million dollars. According to the FTLD, sales from 11 of Microbacs 16 U.S. facilities are between 17 and 39.5 million dollars. The FDA divides the U.S. territory in five regions. The Food Testing Laboratory Database (FTLD) contains regional location data for 502 of the identified 546 food-testing laboratories operating in the U.S. Table 4-3 shows the number of laboratories operating in each region. The Central region shows the highest concentration with 165 laboratories, while the lowest concentration is seen in the Northeast area, with only 67 laboratories. Such concentration in the Central and Pacific areas may be an indication of where the clients are, showing labs wanting to reduce transportation costs and enhance presence and communication by being close to their clients. On the other hand, it may also be simply related to cost efficiency decisions other than transportation costs, like lower labor costs, lower input costs, or closeness to input industry.

PAGE 37

26 The remainder of this section discusses the nature of the industry (Section 4.1.1). Then, Section 4.1.2 introduces a framework using the U.S. food supply chain to give a clear picture of the U.S. independent food-testing laboratory industry and its complex links and relationships with the food industry. After this, a list and description of the major factors influencing demand in the industry is presented in Section 4.1.3. Table 4-1. Sillikers sales volume for domestic facilities Sales volume (thousands) Location From To Illinois N/A N/A Iowa 2,500 4,999 Minnesota N/A N/A Texas 2,500 4,999 Ohio 2,500 4,999 Wisconsin 2,500 4,999 California 10,000 19,999 New Jersey 5,000 9,999 California 5,000 9,999 Georgia 2,500 4,999 Pennsylvania 1,000 2,499 Total 33,500 67,491 Table 4-2. Microbacs sales volume for domestic facilities Sales volume (thousands) Location From To Fayetteville, NC 500 999 Fort Meyers, FL N/A N/A Hampton, VA 1 500 Venice, FL 500 999 Scarborough, ME 1,000 2,499 Marlborough, MA N/A N/A Corona, CA N/A N/A Hammond, IN 500 999 Maryville, TN 1,000 2,499 Erie, PA 2,500 4,999 Pittsburgh, PA 10,000 19,999 Louisville, KY N/A N/A Camp Hill, PA N/A N/A New Castle, PA 500 999 New Ellenton, SC 500 999 Warrendale, PA N/A N/A Total 17,001 35,491

PAGE 38

27 Table 4-3. Independent food-testing laboratories by region Number o f Region laboratories Central i 165 Northeast ii 67 Pacific iii 105 Southeast iv 85 Southwest v 80 Foreign 87 Total 589 i Central: DE, KY, MD, NJ, OH, PA, VA, WV, IL, IN, MI, MN, SD, WI ii Northeast: CT, ME, NH, NY, RI, VT, MA iii Pacific: AK, ID, MT, OR, WA, CA, HI, NV, AZ iv Southeast: AL, FL GA, LA, MS, NC, Puerto Rico, SC, TN v Southwest: IA, MO, NE, KS, AR, OK, TX, CO, NM, UT, WY 4.1.1 Nature of the Industry Our study identifies two particularities that define and distinguish the U.S. independent food-testing laboratory industry from other industries in the United States: (1) the existence of the industry is closely linked to a trend in the food industry to outsource some of the activities required by their business, and (2) most of the demand in the food-testing laboratory industry is generated directly from the requisition from the federal government for food companies to comply with food safety regulations. 4.1.1.1 Outsourcing and the U.S. independent food-testing laboratory industry Outsourcing is the assignment of work to a third party for a specific length of time with an agreed-on price and service level (Giese 2001). According to International Data Corporation (1999), worldwide outsourcing services is a $100-billion industry, with sales of $99 billion for 1998 and expected sales for 2003 of $151 billion. The food industry is part of this outsourcing phenomenon, including the existence of the U.S. independent food-testing laboratory industry. Food firms in the U.S. operate in an intensely competitive, highly regulated, and mature industry. Many of these firms

PAGE 39

28 have resorted to downsizing in areas that are not central to their business for example, laboratory testing. In fact, many labs that today are contract labs are, or were in the past, directly associated with a major food company. Some examples include: R-Tech (Land OLakes), Medallion Laboratories (General Mills), TPC Labs (Pillsbury), Northland Laboratories (Sara Lee Corporation), and Covance (once a Ralston Purina Company division) (Marsili 1997). Compass Consulting International (2004) and Giese (2001) recognize the advantages for food companies from outsourcing. These are It can be a cost effective method of supplementing in-house testing. Costs associated with maintaining a state-of-the-art analytical food chemistry laboratory are expensive. For example, costs include lab chemists and lab technician salaries and fringe benefits, construction costs, chemical agents, glassware, instruments, and repair and maintenance. Food companies might have temporary needs for a certain test; buying the necessary equipment to never use it again is not an economically wise decision. Independent labs make a better use of economies of scale distributing the use of such equipment through many food companies. Outsourcing can also help food companies reduce their overhead. 5 Allows food companies to concentrate in their main business, their strategic assets or core competencies. For example, a manager in a food manufacturing company such as Kellogg Company or Quaker Oats Company would probably have a hard time in assigning his costly scientific staffs time to take over analytical tests to comply with FDA regulations instead of using their time in developing new products to capture new markets. Additional expertise. Large companies can benefit from having access to a vast legion of experienced and knowledgeable human resources. Knowledge and experience of meeting government approvals such as Food and Drug Administration or U.S. Department or Agriculture requirements or compliance standards such as Good Manufacturing Practices (GMPs) and Good Laboratory Practices (GLPs) can be important assets that labs offer. 5 Overhead is an operating expense, more in detail it is the expense of maintaining property (e.g., paying property taxes and utilities and insurance); it does not include depreciation or the cost of financing or income taxes ( www.cogsci.princeton.edu ).

PAGE 40

29 On the other hand, outside the U.S., most food firms in developing countries are quickly adapting and modernizing themselves to participate in an increasingly globalized world economy. Food firms in these countries resort to outsourcing services to the U.S. independent food-testing laboratory industry mainly for three reasons: (1) many cant afford the kind of personnel and installations needed to do in-house testing, (2) for those that could afford it; the problem is such personnel, installations, and equipment are not easily found in their home countries, and (3) U.S. based independent laboratories would be expected to be more familiar with the regulations and testing needed to import foods to the U.S. There are also potential negatives for a company to consider when outsourcing. These are Sharing of information. Some food companies are not exactly happy when realizing they have to share test-methods and information with outside labs. Especially when these labs do some work for the competitors. Outsourcing results in loosing some control. For example, food companies may have to depend on independent laboratories turnover and quickness when priority tests are needed. 4.1.1.2 The U.S. food safety system and the U.S. independent food-testing laboratory industry Much of this section was extracted from the FDA/USDAs U.S. food safety system Country Report. The section describes the U.S. food safety system and how it influences demand in the U.S. independent food-testing laboratory industry. The United States Constitution dictates the responsibilities of the executive, legislative and judicial branches with regards to the food safety system. The congress enacts statutes and authorizes executive branch agencies to implement them by developing and enforcing regulations.

PAGE 41

30 The system is guided by 5 principles: (1) only safe and wholesome foods may be marketed; (2) regulatory decision-making in food safety is managed according to risk assessments and is science-based; (3) the government has enforcement responsibility; (4) manufacturers, distributors, importers and others are expected to comply and are liable if they do no; and (5) the regulatory process is transparent and accessible to the public. The principal federal regulatory organizations are the Department of Health and Human Services (DHHS), Food Drug Administration (FDA), the U.S. Department of Agricultures (USDA) Food Safety and Inspection Service (FSIS), Animal and Plant Health Inspection Service (APHIS), and the Environmental Protection Agency (EPA). The FDA is responsible for protecting the public from impure, unsafe, and fraudulently labeled food other than in areas regulated by FSIS. FSIS is responsible for ensuring that meat, poultry, and egg products are safe, wholesome, and correctly labeled. EPAs mission includes protecting public health and the environment from risks posed by pesticides and promoting safer means of pest management. The major food safety authorizing statutes in existence are the Federal Food Drug, and Cosmetic Act (FFDCA), the Federal Meat Inspection Act (FMIA), the Poultry Products Inspection Act (PPIA), the Egg Products Inspection Act (EPIA), Food Quality Protection Act (FQPA), and Public Health Service Act (PHSA). The Nutritional Labeling and Education Act (NLEA) should also be considered, since it also generates demand for the U.S. independent food-testing laboratory industry. Regulations are a tool to help FDA in enforcing compliance with food safety acts. Such regulations usually translate into increased demand for food-testing services. For example, on November 8, 1990, President George Bush signed the Nutritional Labeling

PAGE 42

31 and Education Act, which intended to enable consumers to select a healthier diet by providing accurate and reliable information about nutritional content. This act amends the Food Drug & Cosmetic Act and as such falls under FDAs jurisdiction. Taken from Muth et al. (2003), Figure 4-2 gives an overview of the process by which the labeling information and graphics on food and dietary supplement products may be changed as a result of a regulation. Once a regulation is determined to affect a food or dietary supplement product, the manufacturer may conduct analytical testing to decide whether to reformulate the product or re-label it. The manufacturer then chooses between doing analytical testing and reformulation in-house or by outsourcing services from food-testing laboratories. Figure 4-2. Overview of the label change process in response to regulation. Obtained from Muth, K. Mary, Erica C. Gledhill, and Shawn A. Karns. FDA Labeling Cost Model. RTI Project Number 06673.010. Research Triangle Park, NC: Research Triangle Institute, 2003.

PAGE 43

32 In 1993, the FDA estimated the new NLEA would cost food processors between $1.4 billion and $2.3 billion over the next 20 years. A conservative estimate, calculated using FDAs Labeling Cost Model developed in the Research Triangle Institute by Muth et al. (2003), shows that at least 10% of such extra costs for food processors would be for analytical testing. This example shows how demand in the food-testing laboratory industry is closely linked and dependent on the creation of new government regulations. At the same time, government regulations respond to expressed needs and concerns from the public. Examples of food related regulations or statutes responding to public needs are: health concerns and the NLEA, consumer safety related to dietary supplements 6 and the Dietary Supplement Health and Education Act (DSHEA). 4.1.2 The U.S. Food Supply Chain and the U.S. Independent Food-Testing Laboratory Industry Supply chains are also known as value chains or demand chains. Supply chains can be defined as all the links involved in managing the flow of products, services, and information in the agro-food system from seed to table (Wysocki 2000a). The U.S. food supply chain and its major alternate marketing channels are depicted in Figure 4-3. Retail Food Stores are classified according to the North American Industry Classification System (NAICS) under subsection 445 (U.S. Census Bureau 2002). Establishments in this subsection usually retail food and beverage merchandise from fixed point-of-sale locations, they own special equipment for display (e.g., freezers, refrigerated display cases) and employ trained staff for the processing of food products to guarantee proper storage and sanity required by regulatory authority (Food Institute 6 Dietary Supplements Terms such as functional foods or nutraceuticals are widely used in the marketplace.

PAGE 44

33 2003). Supermarkets, grocery stores, convenience stores and fresh produce markets are all included in this sub-sector. For years 1998 to 2001, the industry grew at an annual average rate of 4%. Growth suffered a slump in 2002 (2.8%). Data gathered from U.S. Census Bureau (2003), shows the industry seems to be recovering its growth pace with sales for 2003 that scaled up to $505,933 millions, a 3.08% growth compared to 2002. Food Service Outlets (NAICS subsection 722) prepare meals, snack and beverages to customer order for immediate on-premises and off-premises consumption. Full-service restaurants (e.g., Applebee), limited-service restaurants (e.g., cafeterias, fast food), snack bars (e.g., coffee or frozen yogurt shops), food service contractors, caterers and drinking places (retailing alcoholic beverages for on-premises consumption); all fall under this subsection. Food Manufacturers and food processors (NAICS 311) transform livestock and agricultural products into products for intermediate or final consumption. The industry groups are distinguished by the raw materials (generally of animal or vegetable origin) processed into food products. The food products manufactured in these establishments are typically sold to wholesalers or retailers for distribution to consumers (U.S. Census Bureau). Many multimillion and billion dollar companies comprise the food processing industry. In the period 2001-2002, the top ten food manufacturer companies summed up $236,302 millions in sales. This includes companies like Nestle S.A. ($46,628), Kraft Foods Inc. ($38,119), PepsiCo Inc. (26,935), Diageo plc 7 ($16,644) and Mars Inc ($15,300). Some other companies not included in the top ten are Tyson Foods, Kellogg Co and Sarah Lee Corp (Food Institute 2003). Most food manufacturing companies sell 7 Owner of the subsidiary Burger King

PAGE 45

34 their diversified products to wholesaling companies that place them both in national and international markets. Food producers, manufacturers, and distributors are also under increasing public and regulatory pressure to assure the quality of their product. Without performing analytical tests, the potential for contamination exposure to the consumer is unknown. It only takes one negative event of contamination or a recall to destroy brand image and customer confidence. The result of a recall could translate into millions of dollars in losses for food manufacturing companies. Many of these are very well known companies, all managing very strong lines of brands. Accountants would attribute an important portion of the value of these companies to their goodwill accounts. Brand strength and constant quality are important features for any food manufacturer wishing to stay in the game for a long time. Thus, reliable test results are a must for independent food-testing laboratories that plan on increasing or maintaining their customer base. Every link in the U.S. food supply chain is required by law to perform some sort of testing activity that ensures their product to be safe and adequate for consumption. The U.S. independent food-testing lab industry has the capability to provide testing and/or research services for all the links involved in the food supply chain. For example: food manufacturers require product development services to speed up some of the steps in placing new products in the market or nutritional content testing to develop labels for their products; processors require chemical-analytical testing to avoid toxin poisoning and comply with maximum levels of pesticide residue; agricultural producers in the beef industry require tests for the presence of Bovine Spongiform Encephalopathy (mad cow disease); retailers and wholesalers are constantly sampled by the FDA to test for

PAGE 46

35 microbiological pathogens (e.g., Salmonella, E. Coli); food importers require GMO testing to discard worries about contamination from altered species; all levels of the food supply chain require HACCP programs be put in place. Figure 4-3. Major alternative marketing channels of the U.S. food system Obtained from Wysocki, A. Major Alternate Marketing Channels in the U.S. Food System. Food Wholesaling & Retail Marketing. Extension Institute of Food and Agricultural Sciences: University of Florida. No. 2 & 3. (April/May 2000b). In addition, the FDAs Bioterrorism Act and the USDAs Country of Origin Labeling provisions mandate that every business entity that comes into contact with food

PAGE 47

36 should know where it came from and where it is going. This one-step backward, one-step forward concept compels the whole U.S. food supply chain to maintain strict records of their output, while the new ability to trace food safety failures to the responsible entity will probably increase the number of food safety tests demanded across the whole supply chain. With this system in operation; in the case that a food safety failure takes place; it is probably food processors and food manufacturers who take the biggest hit. Retailers might end up having to recall product they had in their shelves; however, there is an option to point fingers backward and the volume of product recalled is minimum compared to the volume that manufacturers would have to recall if found in fault. On the other hand, total product volume and product value from manufacturers is in most cases larger than producers and packers. 4.1.3 Factors Influencing Demand in the U.S. Independent Food-Testing Laboratory Industry As shown in Section 4.1.1 and Section 4.1.2 of this chapter, the relationships and interactions between the U.S. independent food-testing laboratory industry and the different links in the U.S. food industry are many. A number of factors that influence demand for the laboratory industry and the food industry are 1. Role of government regulations. As discussed in Section 4.1.1.2, new regulations translate into increased demand from food companies for services from independent food-testing laboratories. 2. Public or private research translates into new technologies, new tests, and new services to be offered by independent food-testing laboratories. For example, on June 2001, USDAs Agricultural Research Service (2001), announced researchers had new information about the genetic makeup of Listeria, a bacterium that causes serious food-borne illnesses. Today, laboratories are expectant on FDAs new Listeria regulations and ready to make the first move and be the first ones to offer Listeria tests as part of their services and products.

PAGE 48

37 3. Consumer concerns, mainly health concerns in the present. Consumers play an important role in the development of regulations. They directly affect which regulations are put in place. For example, the NLEA was a response from the government to consumer concerns for eating healthier foods and to be well informed about what they eat. Today, the FDA is responding to consumer concerns about the safety of their foods in the presence of the threat of terrorist acts. 4. Homeland security and terrorism. Currently, only state public health laboratories that are part of the Laboratory Response Network (LRN) are permitted to identify or rule out bioterrorism agents in food products. Although independent commercial food-testing laboratories are not allowed to do such testing, the possibility of a terrorist threat has increased the level of alertness and the strictness of all food safety regulations. This of course means more business for independent food-testing laboratories. 5. International trade regulations and food imports. Similarly to FDA, article 5 of the WTOs Agreement on the Application of Sanitary and Phytosanitary Measures requires all import restrictions made to protect or improve human health, animal health or phytosanitary condition in any of its member countries, to be based on scientific evidence and risk assessment. Regulations placed on food imports entering the U.S. also generate demand for testing services from foreign companies wanting to place their output in national territory. 6. New Product Development. Inside the independent laboratory industry, product development is understood as the analytical testing aspect, stability and shelf life testing, packaging design, and other physical and chemical aspects of the product development process. Many independent food-testing laboratories offer product development services in addition to their list of testing services. The rationale behind this is that food companies spend most of their time and resources in developing their prototypes functional characteristics and the other aspects of product development (e.g., idea screening, concept testing, test marketing, economic analysis, national launching), and would rather outsource the physical-chemical testing and regulatory aspects to independent laboratories. Kotler (2000) gathered information from a large consumer packaged-goods company showing that only 2 of every 64 new product ideas are actually developed into products that are then launched into national markets. Total cost for every 2 products launched was $13.9 million, including costs of those ideas that never made the market. Up to 11.5% of the costs per idea were due to product development only, while the remaining costs were distributed between idea screening, concept testing, test marketing, and national launch costs. Kotler also mentions another estimate of between $20 million and $50 million per new product. The Food Institute (2003), reports that in 2002, 9,632 new food products were introduced into the U.S. market. Using Kotlers numbers means the whole food product development business entails around $66.9 billion spent by manufacturers on a yearly basis, and $7.3 billion spent only in the functional, physical and chemical

PAGE 49

38 aspects. How much of this business is outsourced and how much is done in-house is what directly influences demand for independent food-testing laboratories services. Considering many products can take months and even years of testing and re-testing to be ready for the market, long-term business relations between food companies and independent laboratories can be used by laboratories to secure business. 7. Labs operating with Accreditations and Quality Assurance Programs suggest reliability and can attract more business. As mentioned earlier in Section 4.1.2 in this chapter reliability of test results is a very important factor for independent laboratories in maintaining business. Giese (2001) identifies four main factors influencing food companies when deciding which laboratory to choose are: (1) pertinent accreditations and certifications, (2) means to address needs in terms of turnaround and communication, (3) appropriate facilities and personnel to do the required tests, and (4) pricing (see appendix B for the major accreditations in the industry). 8. Unpreventable catastrophes or incidents that have adverse impacts for the food manufacturing, wholesaling and retailing industries for example, the finding of a Bovine Spongiform Encephalopathy (mad cow disease) case in the U.S. are in fact demand generators and thus good news for the independent food-testing laboratory industry. In such cases, the government develops and implements regulations that restore public confidence in the U.S. food industry, while food companies look back for testing services to regain trust in their brands, comply with new regulations, and bring back customer confidence. 4.2 Forces Influencing the U.S. Independent Food-Testing Laboratory Industry In a purely and perfectly competitive market, competition among firms in an industry drives the profit rates to zero. According to theory, we should also expect in a perfectly competitive market with unsophisticated firms for profits to be evenly distributed across firms in the industry. However, in the real world competition is not perfect and in most cases firms are not passive price takers. Several studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five competitive forces: (1) Degree of rivalry, (2) Threat of substitutes, (3) Buyer power, (4) Supplier power and, (5) Barriers to entry/exit and threat of entry (Quick MBA 2004).

PAGE 50

39 The next section is an application of Michael Porters Five Forces framework to the U.S. independent food-testing laboratory industry. Each force is described in detail. 4.2.1 Degree of Rivalry was Moderate Degree of rivalry is defined as the level of competition observed in an industry. The intensity of rivalry in the U.S. independent food-testing laboratory industry is determined by the following factors and their implications: An accelerated market growth due to: (1) an increasing number of food safety regulations, (2) a high rate of appearance of new technologies and new tests, (3) increasing health concerns among public and, (4) the globalization of markets a la par with homeland security concerns for terrorist attacks; decreases the level of rivalry in the industry. A large number of firms participating in the industry increase the rivalry because more firms compete for market share. Numerous independent labs compete in the industry for customers. Relatively high fixed costs in proportion to variable costs results in economies of scale that require independent labs to operate close to full capacity to maximize profits. Laboratory equipment and installations can be very expensive enlarging fixed costs in the form of depreciation creating this economy of scale effect. Within the firm, the need for high levels of production increases rivalry among firms that compete to place their output in the market. Low switching costs paralleled with high levels of risk associated for customers when switching laboratories result in increased rivalry within the independent lab industry. The high level of risk associated for food firms when switching from one lab to another for food-testing results may drive wholesalers to perceive switching costs as high. For example, an erroneous negative result when testing for Salmonella enteritidis in meat products may result in illness or even death of many end customers. The monetary loss from dropping sales due to negative image impact and lawsuits filed for the meat wholesaler may scale up to thousands if not millions of dollars. Under these circumstances many wholesaling firms remain with their known reliable laboratories. On the other hand, if the wholesaler has a bad experience with one laboratory, it is very easy and inexpensive for a wholesaler to immediately switch to another laboratory. The level of rivalry is increased from laboratories competing to capture their customers loyalty with reliable results and better service. Also, in some cases, distance and location of the laboratories may increase switching costs for the wholesaler as a result of increased transportation costs.

PAGE 51

40 High asset specificity results in increased rivalry in the U.S. independent food-testing lab Industry. The industry presents a high level of asset specificity in terms of a limited ability to switch the use of their equipment to an alternative activity if its current activities result in failure. More specifically, human asset specificity. The standardized characteristics of tests themselves limit the level of differentiation possible in the industry and increase the level of rivalry. One alternative to differentiate is to offer reliable results with faster and more personalized service. 4.2.2 Threat of Substitutes was Low In Porters model, substitute products refer to products in other industries. Economic theory states that a substitute exists when a products demand is affected because of a price change or introduction into the market of another product. A close substitute product constrains the ability of firms in an industry to raise prices (Quick MBA 2004). Under this line of thought, it is possible to say that in-house testing represents a substitute product for outsourcing services offered by independent food-testing laboratories. More specifically, the tangible alternative exists for food companies to stop outsourcing and start using their own labs to do in-house analytical and chemical testing in case independent laboratories raise their prices excessively. This factor limits the extent to which independent laboratories are able to increase their prices and widen profit margins. As a consequence, conditions influencing the level of threat of substitutes result the same as those seen in Section 4.1.1.1 of this chapter as influencing outsourcing decisions. Substitution between outsourcing and in-house testing rests on measuring the advantages from outsourcing (economies of scale, concentration in core business, and additional expertise) against its disadvantages (sharing confidential information and loosing some

PAGE 52

41 control). The next list offers a detailed assessment of the threat of substitutes in the U.S. independent food-testing laboratory industry. Currently, advantages from outsourcing outweigh the disadvantages due to high costs of laboratory installations and high need of additional expertise to keep up with changing regulations; this lowers the threat of substitutes. A growing outsourcing industry reflects the trend from food companies, operating in a very mature and competitive industry, to downsize in areas not central to their business to widen already slim profit margins. Independent labs make better use of economies of scale by distributing the use of installations and testing equipment among various food companies. Substitution of outsource testing with in-house testing is not an option for all companies. Independent laboratories targeting small companies as their main clients do not have to deal with in-house testing as a threat of substitute. While for large companies in-house testing is an alternative to outsourced testing; for small companies, doing in-house testing is not viable due to a lack of resources. Consolidation and size of operations in the food industry may pose a threat to independent laboratories. The outsourcing trend in the food industry can be expected to continue as long as it remains reasonable for food companies to outsource testing services relying on the fact that independent laboratories make better use of economies of scale. Consolidation and growth in the food industry poses a threat to the extent of food companies becoming large enough to use their own testing equipment efficiently and close to capacity. 4.2.3 Buyer Power was Highest for Large Manufacturers and Lowest for Small Producers Porters theory defines power of buyer as the impact that customers have on a producing industry. Power is defined in terms of bargaining power, the relative strength of buyers/sellers in influencing the forms of exchange in a transaction. Several conditions may incline power to the buyers (food companies) side: (1) buyers are concentrated, (2) buyers show a credible threat of backward integration, and (3) buyers purchase a significant portion of output. Other factors may incline the balance to the sellers (independent labs) side: (1) threat of forward integration, (2) significant switching costs for the buyer, (3) atomistic or fragmented structure of buyers, (4) producers supply a critical input for buyers.

PAGE 53

42 As discussed in Section 4.1.2 of this chapter, the U.S. independent food-testing laboratory industry interacts with several industries across different levels of the U.S. food supply chain including agricultural producers, processors, manufacturers, imports, and others. According to the factors outlined in the last paragraph, different industries across the food supply chain showing different characteristics will have different levels of buyer power. The following assessment of buyer power in the industry takes into consideration this thought. Independent labs dealing with major food manufacturing companies face a highly concentrated industry. Concentration lessens gradually while going down the food supply chain (see Figure 4-3). Food processors are less concentrated than food manufacturers, and agricultural producers are less concentrated than food processors. Outsourced testing services are critical for small companies, and not so critical for large companies. Testing for food safety is mandatory for food companies. Large companies have the option of in-house testing while small companies do not. No threat of forward integration exists; the possibility exists for food companies to integrate backward. Independent laboratories pose no threat of taking over food companies, but food companies have the option at least of re-incorporating testing laboratories if economically necessary. In general, independent labs have a wide range of industries to interact with and in which to decide to participate according to their desired bargaining power. Independent labs dealing with major food companies will observe lower bargaining power than those targeting smaller growing companies. 4.2.4 Supplier Power was High Supplier power refers to the bargaining power of input suppliers over a producing industry. For the U.S. independent food-testing laboratory industry some examples would be chemical agents suppliers, and equipment and technology suppliers.

PAGE 54

43 The Food and Drug Administrations research activities provide the scientific basis for its regulatory decisions. The FDA is constantly coming up with new and better ways to test and ensure food safety. Independent laboratories update their testing services and equipment constantly to keep up with new regulations. Having the latest and most modern equipment is not inexpensive. In general, new technologies are sold in new markets and are offered only by a few companies. In this sense, concentration can be observed on the suppliers side, which shifts some bargaining power away from independent labs. 4.2.5 Barriers to Entry/ Threat of Entry was Low Competition within an industry is not only affected by existing rivals, but also by the possibility of new firms entering the industry. In a perfectly competitive market, firms should be able to freely exit or entry. However, in reality markets are not perfect. Any factor limiting entry to an industry is called a barrier to entry, and if it limits exit it is called a barrier to exit. Our study identifies several barriers to entry/exit exist in the U.S. independent food-testing laboratory industry. They are Mandatory and voluntary federal quality assurance programs and certifications function as entry deterring mechanisms. Food safety is a very important issue for the U.S. government and public. The FDA oversees the effective operation of independent food-testing laboratories to ensure that food results presented to them are reliable and that food is actually safe. The larger the number of laboratories, the harder it is for the government to keep control on them. Programs like the Good Laboratory Practices (GLPs) and Good Manufacturing Practices (GMPs) are examples of several mandatory regulations that independent laboratories have to follow to operate. To some extent this reduces the freedom of entry to the industry. Minimum Efficient Scale and start-up costs are high enough to create an entry barrier. Economies of scale and large costs involved with owning and operating a laboratory increase the minimum efficient scale needed Minimum capacity-use required to achieve minimum unit costs of production.

PAGE 55

44 Loyalty from food companies to laboratories that have proved their reliability makes it difficult for new firms to enter the industry. Considering the importance of reliable testing results, this factor truly creates a barrier to entry. 4.3 Strategic Analysis of XYZ Research Corporation This section discusses the results obtained from the focus groups and interviews conducted at XYZ Research Corporation, described in Chapter 3 of our study. Most of the text and ideas discussed are very similar to the Strategic Report Analysis provided to XYZ Research Corporation. Table 4-4 summarizes the results obtained from the interviews. The first column in the table shows the number of participants that answered each item. The number of participants varies by each item because participants had the option of leaving any item blank if they so desired. The second and third columns show the Average and Standard Deviation obtained from the participants answers. The fourth column represents the Average from the answers given by the top management (Dr. Brown and Mr. Hart). Finally, based on simple subtraction, the fifth column shows the difference between the Employee Average and the Top Management Average. For example, the difference between the employee assessment of product/service line breadth and depth top management assessment was -.69. This means that XYZ employees, on average, scored this item .69 (on a scale of 1-5) lower than top management. Large differences (larger than 0.99) are marked with (**) next to the number while medium size differences (larger than 0.5 but smaller than 0.99) are market with (*). Averages and averages differences supported with opinions expressed in the focus groups and interviews will be used to gain insight into the issues concerning the company and as an indicator of similarities and differences in perceptions between management and employees.

PAGE 56

45 The rest of this section discusses the results from the focus group interviews according to the following resource areas: marketing, financial, human, operation/production, management/leadership, organizational, and informational. 4.3.1 Marketing Resources With respect to marketing resources, top management and employees agree in their assessment that customer satisfaction with XYZs products and services is high and that this represents a strength (average score of 4) for the company. Meanwhile, both employees and management agree the companys ability to gain customers versus competition could be improved (average score of 3). These scores are consistent with verbal information gathered in the focus groups showing a perception of a weakness in attracting customers because of the companys inability to compete on price with some competitors (possibly due to economies of scale differences), but also of a strength in keeping customers by offering quality-personalized service (volume vs. quality). The average employees scores for marketing items (6) advertising and promotion activities, (7) product/service pricing, (8) facilities and methods used to sell to customers, and (9) market share, reflect the employees perception of a deficiency in the marketing area. Employees averages on grading marketing resources were in general lower than top managements scores. It remains a challenge for management to deal with this employees perception. It may be that such perception is due only to a lack of involvement and staff-management flow of information. Or it may be that employees are indeed aware of both a true deficiency and an opportunity to improve marketing activities. Perhaps, the situation can be addressed as a chance to draw ideas from the personnel on ways to improve the companys marketing effort.

PAGE 57

46 Table 4-4. Summary statistics from the XYZ Research Corporation interviews Employees Mgmt. Employee AveN=19 Ave Std Dev Ave Mgmt. Ave I. MARKETING RESOURCES 1. Customer satisfaction with products/services 19 4.00 0.58 4.0 0.00 2. Ability to gain customers versus competition 19 2.97 0.59 3.0 -0.03 3. Knowledge of market 18 3.72 1.07 4.0 -0.28 4. Product/service line breadth and depth 18 4.31 0.77 5.0 -0.69* 5. Product/service quality in terms of function, image, place, time, possession, ease of use 15 4.17 0.70 4.0 0.17 6. Advertising and promotion activities 17 2.43 1.15 3.0 -0.57* 7. Product/service pricing 19 3.71 0.84 4.5 -0.79* 8. Facilities and methods used to sell to customers 16 2.99 0.83 4.0 -1.01** 9. Market Share 15 3.01 0.64 4.0 -0.99** II. FINANCIAL RESOURCES 1. Strong and recurring operating profits 9 3.61 0.56 5.0 -1.39** 2. Efficient asset management 8 3.66 0.66 5.0 -1.34** 3. Strong and recurring return on investment 2 3.60 0.85 5.0 -1.40** 4. Proper balance of debt and equity 1 5.00 N/A 5.0 0.00 5. Strong and recurring return on equity 2 4.60 0.57 5.0 -0.40 6. Strong and recurring cash flow 3 4.40 0.53 5.0 -0.60* 7. Ready access to outside/new funds 4 3.13 1.03 3.0 0.13 8. Well managed customer credit 7 4.21 0.70 4.0 0.21 9. Well managed supplier credit 6 4.45 0.46 3.5 0.95* III. HUMAN RESOURCES 1. Adequate number of people to do the work 18 3.14 0.97 3.5 -0.36 2. Adequate quality of people to do the work 17 3.74 1.03 3.0 0.74* 3. Personnel plans 15 2.87 0.40 3.5 -0.63* 4. Job design and descriptions 16 2.76 1.29 3.5 -0.74* 5. Performance standards and evaluation procedures 18 3.08 1.03 5.0 -1.92** 6. Training programs 17 2.94 1.08 3.0 -0.06 7. Good morale as evidenced by absenteeism, turnover, tardiness, complaints, bickering, employee growth and development 19 3.14 1.01 3.5 -0.36 8. Compensation system that promotes performance and satisfaction 19 2.45 0.81 4.0 -1.55** 9. Equitable and competitive pay 18 2.60 0.83 4.0 -1.40** 10. Equitable and competitive fringes 18 2.54 0.78 4.0 -1.46** 11. Appropriate use of teams 15 3.17 0.96 4.0 -0.83* 12. Work ethic of individuals and teams 18 3.87 1.01 3.5 0.37 Differences larger than 0.5 but smaller than 0.99 ** Differences larger than 0.99

PAGE 58

47 Table 4-4. Continued Employees Mgmt. Employee AveN=19 Ave Std Dev Ave Mgmt. Ave IV. OPERATIONS/PRODUCTION RESOURCES 1. Quality of facilities to serve customers 19 3.32 1.01 4.0 -0.68 2. Capacity of needed facilities to serve customers 15 3.14 0.96 4.0 -0.86* 3. Up-to-date and appropriate technology 16 3.07 1.09 3.5 -0.43 4. Effective and efficient physical layout 16 2.56 1.2 2.5 0.06 5. Effective and efficient work flow 15 3.54 0.61 3.0 0.54* 6. Effective and efficient inventory control 12 3.08 1.28 3.5 -0.42 7. Effective and efficient purchasing practices 12 3.48 0.97 3.0 0.48 8. Effective and efficient production practices 16 3.86 0.59 3.0 0.86* V. MANAGEMENT/LEADERSHIP RESOURCES 1. Effective management style 17 3.59 0.83 3.5 0.09 2. Timely decision making 17 4 0.81 3.0 1.00** 3. Effective delegation 16 3.47 0.72 4.0 -0.53* 4. Effective participation 16 3.63 0.97 3.5 0.13 5. Effective risk taking 13 3.35 1.11 3.0 0.35 6. Effective leadership 17 3.59 0.81 3.5 0.09 VI. ORGANIZATIONAL RESOURCES 1. Appropriate mix of resources (people, money, equipment) available 18 3.28 0.81 5.0 -1.72** 2. Resources properly placed to do the job 18 3.33 0.79 4.0 -0.67* 3. Effective interdepartmental communications 19 2.74 0.75 4.0 -1.26** 4. Effective reporting relationships 15 3.53 0.64 4.0 -0.47 5. Firm's public image 18 3.75 0.94 4.5 -0.75* 6. Strong organizational culture (productivity, honesty, dispute handling, tolerance of change) 18 3.5 0.87 4.0 -0.50 VII. INFORMATION RESOURCES 1. Appropriate financial and cost accounting systems 10 3.25 0.79 5.0 -1.75** 2. Planning system appropriate for internal analysis 10 2.52 0.84 5.0 -2.48** 3. Planning system appropriate for external analysis 7 3.21 0.81 3.5 -0.29 4. Control system that highlights problems and generates corrective action 14 3.36 0.98 2.5 0.86* 5. Information systems that use the best technology available 14 3.46 1.08 4.0 -0.54 6. Effective information for strategic decision making 11 3.32 0.72 4.0 -0.68* 7. Effective information for operational decision making 12 3.46 0.72 4.0 -0.54* 8. Ability to utilize internet and e-commerce 17 3.52 0.74 5.0 -1.48** Differences larger than 0.5 but smaller than 0.99 ** Differences larger than 0.99

PAGE 59

48 Using verbal information obtained from the interviews, our study identified three repeatedly expressed perceptions on company and industry issues concerning marketing activities: (1) that there is an overwhelming quantity of propaganda and magazine advertising made by the large number of laboratories participating in the industry, and that this compromises the effectiveness of such marketing methods, (2) that highly specialized testing personnel is usually not trained to perform marketing activities; while marketing specialized personnel is unable to effectively promote the company due to their lack of understanding of chemistry, biology and other sciences concerning the companies services and products, and (3) considering the high costs per hour of labor and the personnels high level of education and specialization, a management type of problem exists on deciding the most economically efficient way to distribute time between testing and marketing activities. For example, how much time should a scientist spend on performing tests and how much on answering the phone? 4.3.2 Financial Resources The low number of responses obtained from employees suggests that they have little knowledge about the companys profitability and financial performance. However, employees did show at least a little knowledge on the some financial resources, such as strong and recurring operating profits and efficient asset management. Employees rated these as slightly better than average. In general, employees ranked their answers lower than top management. While it is understandable that management may not wish to make financial numbers public in a privately held company, in some cases the lack of awareness of employees with respect to the companys performance may pose a threat to the

PAGE 60

49 companys morale, motivation, and stability in terms of turnover, and productivity. Managers should monitor this particular issue. 4.3.3 Human Resources The most recurring discrepancy between top managements perception and employees perception occurred in the human resource management section. In reference to performance standards and evaluation procedures, a compensation system that promotes performance and satisfaction, equitable and competitive pay, and equitable and competitive fringe benefits, employees rated these human resource management components considerably lower than top management. While top management rated them 4 and 5 (strengths), employees averaged a rating of 3.08 or lower. Although it is expected for employees to feel underpaid, the depth of this feeling and the lack of motivation resulting from the perception of low pay tied with low ratings for incentives and evaluation implies a serious underlying problem for the company. Such results show the need to look more closely at the compensation and incentives programs in the company. The decrease in productivity that can arise from a low level of motivation in an organization can adversely impact its performance and profitability. An effective incentive program should produce higher returns by increasing morale and productivity and more than offset the costs of such programs. When examining responses to: adequate quality of people to do the work, personnel plans, design and descriptions and appropriate use of teams; both top management and employees rated these items as being average at best (with employee ratings slightly lower than top management. Ineffective job descriptions can reduce productivity and efficiency by: (1) over-lapping job duties leading to duplication of efforts, (2) inefficiencies of assigning more people than needed to a given job, and (3) unclear job

PAGE 61

50 responsibilities leading to confusion as to who is responsible for a given area. As expressed in the interviews, the very specific nature of tasks in the companys area of business may make it difficult to implement extremely detailed job descriptions. However, this does not imply that job descriptions should not be used at all. While XYZ Research Corporation does indeed have job descriptions; many middle managers felt these job descriptions could contain more details and expectations. Job descriptions can also be used as evaluation tools by assigning direct tasks and responsibilities to each employee. 4.3.4 Operation/Production Resources Efficient and effective use of production and operations resources affects productivity in a very direct manner. As a whole, this section received only average grades, meaning it is considered neither a weakness nor strength. Most of the items were answered by more than 75% of the interviewees. Owners and employees concur in giving average grades to: up-to-date and appropriate technology (item 3), effective and efficient inventory control (item 6), and effective and efficient purchasing practices (item 7). Low scores were given to effective and efficient physical layout (item 4). According to the interviewees answers, technology could be kept more up-to-date in the company. As discussed in Section 4.1.1.2 of this chapter, the FDA and other executive branch agencies base each of the regulations put in place on scientific discoveries and the increasing number of better technologies to perform tests. Laboratories have to keep up with the latest technologies to offer tests required to comply with the latest federal regulations. Coping with the latest technologies poses a potential opportunity for having a first-move advantage over other laboratories in offering the

PAGE 62

51 latest and newest tests first. With respect to XYZ, it seems that changing this issue from not being weakness or strength to being a strength, is more a matter of enabling internal company processes that speed up managerial decisions to acquiring equipment than a matter of short cash flows. With respect to inventory control and purchasing practices, these are two factors that greatly determine a companys cost structure. Assuming XYZ actually faces limitations to successfully compete on a price basis (see marketing resources in this section) with larger companies and that such limitations are indeed a consequence of economies of scale, it results most important for the company to achieve a cost structure that is as efficient as possible. Developing written procedures that regulate inventory control and purchasing practices are recommended by our study as one alternative solution to this issue. Two items that scored lower by employees than top management in this section were: quality of needed facilities to serve customers (item 1), and capacity of needed facilities to serve customers (item 2). Two items that employees scored higher than top management were: effective and efficient work flow (item 5), and effective and efficient production practices (item 8). The difference in perception between employees and managers on capacity and quality of installations could be restraining top management from recognizing that current facilities represent a constraint for the employees and the companys growth. Managers believe installations to be a strength for the company, while employees consider them as average. Some of the employees explained their answers by mentioning the facilities were not initially designed for its current use but instead adapted, and that

PAGE 63

52 this somewhat affects flow and efficiency. All parties recognized that the current physical location of XYZ is not the ideal physical set-up for the business as it has grown. It is possible that top management rated these higher as they are more aware than the employees of the problems associated with trying to move at this time. Employees did recognize there were some EPA issues that were involved in selling the current location that probably prohibited XYZ from selling and moving, but more direct communication may help employees realize why their firm has not moved into different facilities. With a better understanding, the employees may still feel that the physical facility is not ideal, but may lead to increased morale if the employees knew that management would prefer to move to a new location. 4.3.5 Management/Leadership Resources For this section, only for items 2, timely decision-making and 3, effective delegation, were employees and managers averages different from one another by more than a factor of .5. Both groups graded most items in this section as higher than average meaning leadership resources are perceived as strengths of the company. It is interesting to note that employees felt that timely decision making was more a strength (4 on a scale of 5) than top management (3 on a scale of 5). Perhaps this reflects the current level of satisfaction that employees have with decision making, while management would like to see more timely decision making by entry-level and middle managers. One general comment regarding delegation is in order. The average score given by employees was 3.47. Based on a qualitative assessment of the interview responses, most mid-level managers feel there is a great deal of delegation when it comes to long-range goals and objectives. However, these mid-level managers would welcome more flexibility when it

PAGE 64

53 comes to some of the day-to-day decisions such as the handling of customer service requests. Interviewees expressed a concern towards an excessive concentration of the leadership in the company relying in one single person (Dr. Brown). The question: What would happen to XYZ if Dr. Brown wasnt here? was repeatedly mentioned as posing a threat to the company given the industrys tendency to pair XYZs future success with the presence or absence of Dr. Brown in the company. This included a perception that clients were beginning to prepare for a time when Dr. Brown was no longer with XYZ, and that the clients also did not know what to expect, therefore might be making contingency plans to move to other companies. This reiterates the discussed (see Section 4.1.2 and Section 4.1.3) importance of the role played by trust, experience, and reliability in generating demand for a given laboratory operating in this industry. In this case, food companies may observe a large portion of these attributes in the person Dr. Brown, and not in XYZ the company. 4.3.6 Organizational Resources Top management scored all organizational resources in the company as a 4 (strengths) or higher while the average employee score for each item in the section was 3.75 or lower. Again, personnel in the company recognize the threat of a possible absence of Dr. Brown as constraining the firms public image from being a substantial strength to being perceived only as little better than average. While top management perceived there was an appropriate mix of resources (item 1) and that effective interdepartmental communications were operating (item 3), as seen in their scores of 5 and 4 respectively; employees scored these considerably lower at 3.28 on appropriate mix of resources and 2.74 for effective interdepartmental communications.

PAGE 65

54 Some of the middle managers were finding it difficult to take on marketing and sales roles in addition to the scientific roles they were trained for. There was some discussion regarding the relatively high turnover of entry-level positions that may be a result of a lack of appropriate resources, however, there where no other indications corroborating this issue. Many of the interviewees indicated that interdepartmental communications were in need of extensive improvement. Interview discussions suggest interdepartmental communication improvements could be made in areas such as: (1) supply usage and replenishment, (2) customer contacts, the needs of customers common to multiple departments, (3) general knowledge of what is going on in each department and how this related to other departments, and (4) the future direction of XYZ Research Corporation. 4.3.7 Information Resources Effective information resources are crucial for the timely and efficient evaluation of business plans being implemented. Large differences were observed between top management and employees average scores. Top management considered that the company makes good use of efficient and effective financial and cost accounting systems, and has an appropriate planning system for internal analysis. In contrast, the employees perceived that financial and cost accounting systems are neither strengths nor weaknesses for the company; and that the planning system represents a weakness. In referring to the current accounting system, one employee statement summarizes the impression received from the employee interviews: under this system, we are forced to manage to avoid a loss instead of managing to make a profit.

PAGE 66

55 Employees rated the planning system appropriate for internal analysis as a 2.52, while top management rated this as a 5. The general impression from interviews was that many of the current tools were used more to show what went wrong in a given department versus what could go right in the future. Another factor affecting this scoring was a general belief that planning exercises, such as this strategic analysis of XYZ Research Corporation, have resulted in little change to company culture or operating procedures. A more effective planning system developed and implemented with the participation of middle management could result in better planning and consequently in higher productivity and profitability of each project and the company. In terms of marketing and increasing business through the Internet, the employees believe there is considerable room for improvement. Many employees believe XYZ Research Corporation needs a more involved web presence. 4.4 Strengths Weaknesses Opportunities and Threats (SWOT) Analysis for XYZ Research Corporation Internal and external forces affect firms; a way to analyze these forces is to conduct a thorough SWOT analysis. A SWOT analysis can be thought of as a balance sheet where internal strengths represent competitive assets, while internal weaknesses represent competitive liabilities. Opportunities, which are external, are outside-of-the-firm situations that can be taken advantage of via strategic moves to improve a companys competitive advantage over rivals. Threats, also external, on the other hand are factors that increase the influence exerted by competitive forces acting in the industry and tend to reduce a companys profitability (Wysocki 1997).

PAGE 67

56 The next SWOT analysis is based on the information gathered through focus groups and face-to-face interviews with XYZs personnel (see Chapter 3 for a description of the questionnaire used) and through extensive readings done by the researcher on industry related topics. It also summarizes the findings of this studys discussions regarding the dominant economic traits, key success factors, economic forces influencing the market, and drivers of change in the industry, which were identified and discussed in earlier sections of this chapter. 4.4.1 Competitive Advantages (Strengths) Competitive advantages, or strengths, are ways of doing business that one company does exceptionally well over its competitors. The term advantage implies that those ways of doing business are desirable for companies in the industry. As mentioned at the beginning of this section, strengths are internal to the company. The next list enumerates XYZs strengths. Strengths were identified with the help of several employees in the company, the managers, and with our studys in-depth analysis of key success factors and forces affecting the industry (see all previous sections of this chapter). They are Stable financial structure. XYZs privileged position in terms of current profitability and stability has sparked their desire to grow. XYZ is a good example of a medium-size company that is very profitable. Currently, the company is free of debts, which offers an advantage in its cost structure and ability to offer better prices in comparison to many competitors that have incurred in debts to expand their business. Reliability and experience are key success factors in the industry. Food companies will not risk a recall on their products by working with inexperienced and unreliable labs. XYZ has an advantage over many younger laboratories because of its business longevity of 37 years of experience in the industry. For example, a client might choose XYZ over other laboratories because of XYZs years of repeated successful business experiences with known food companies. XYZ has worked for 26 of the 30 largest food companies. Also, as expressed by several people in the company, XYZs reputation of offering quality services together

PAGE 68

57 with Dr. Browns recognized and renowned position in the industry, make XYZ to be perceived as a very reliable company in the industry. Concentrated broad-based scientific expertise, knowledge base and quality personnel. Food companies look for labs to be a source for additional expertise. In contrast with multi-site laboratories, XYZs extensive and complete stock of human resources is concentrated in a single-location. One client-visit or phone call gives them access to all of XYZs expertise. Broad range of services offers convenience. XYZs full-service capabilities offer an advantage over limited-service laboratories when it comes to serving a client. It results more convenient for food companies to use one single trusted laboratory to do all testing instead of using one lab for each test needed. Also, being a full-service laboratory allows for easier expansion into new areas of business like nutraceutical, GMO or pharmaceutical testing, compared to limited-service competitors. Proximity to University of Florida ability to draw resources (labor, installations) from the university. XYZs good relations with the university represent access to a source and stock of social and human capital that many of XYZ competitors do not have. Joint-programs and partnerships with the university may enhance XYZs credibility and reliability. Personalized customer service. Flexibility with customers (responsiveness), personalized service to customers and care for customer satisfaction, are traits that many too-large corporations lack. XYZs medium-size operations make it possible for them to concentrate efforts and effectively offer a personalized service to its clientele, something their larger competitors might find more difficult due to their size. Large customer base and established clients. XYZ has a large list of clients. This poses a competitive advantage over many laboratories that depend on a small number of clients for business. The difficulty observed for new laboratories to establish themselves as reliable entities in the market, increases the importance of already having established clients. ISO-17025 compliant, biological testing and chemical testing accredited laboratory. The importance of accreditations in generating demand for a food-testing laboratory was discussed in Section 4.1.3 in our study. Laboratory Information Management System (LIMS) and quick turnaround. XYZ offers their clients with easy and quick access to results for their solicited tests. Verbal information from the interviews estimated a turnaround of only three hours for the Analytical and Food Chemistry division of XYZ.

PAGE 69

58 4.4.2 Opportunities Opportunities are circumstances over which the firm has no control. If taken advantage of, the result may be reducing the effect of competitive forces over the firm and increasing its profitability. According to Oster (1994), one way a company can earn higher returns than its similar competitors is by recognizing and seizing new lucrative opportunities early, before entry intro the industry accomplishes its profit-leveling function. He calls this activity entrepreneurship. Taking advantage of opportunities means: (1) recognizing them by understanding the industry environment surrounding the firm and (2) developing abilities and strengths within the firm that match up with such opportunities. Below is a list of all the opportunities facing XYZ. Opportunities were identified by our study with the help of XYZs employees and management team: Growing market increasing regulations; appearance of new technologies, increasing trend from the public to consume healthy foodssmart-eating 8 concerns for homeland security, and globalization of markets; all seem to point to a long period of growth in the food-testing market. XYZ is in the right moment to use its financial momentum to grow. Advances in information technology (like progress in internet communications) can be used to make test results more accessible to the clientele or to strengthen XYZs presence in the market by using website promotion. Laboratories that take advantage of this opportunity will probably have an edge on those that do not. Alternative industries to work with seafood, imports, food service, food brokers, organic, labeling and audits where all identified by XYZs employees as alternatives areas of their business into which XYZ could focus to increase demand for their output. Alternative industries to work in even though pharmaceutical and nutraceutical testing may be considered a business apart, food-testing laboratories are perfectly capable of performing the analytical process of drug development. For example, Covance is a laboratory that offers services to both the food and the pharmaceutical 8 Desire from public to learn about the nutritional components of food before consuming it.

PAGE 70

59 industry. However, a whole different line of laboratories that are dedicated solely to the pharmaceutical industry provide their drug-developing clients not only with services for the analytical testing aspect of their business but also with the clinical related and data analysis services needed in the many stages of clinical trials and the drug development process. For XYZ, seizing this opportunity would mean developing not one but several abilities that would permit them compete against specialized pharmaceutical testing laboratories. The nutraceutical testing business seems more appropriate and closer to food-testing business. Public pressure to the government has resulted in recent approval of nutraceutical product regulations that will generate business for testing laboratories. Increased concern for homeland security as a result of the recent terrorism threats. As mentioned in Section 4.1.3 in our study, currently only the state public health laboratories that are part of the Laboratory Response Network (LRN) are permitted to identify or rule out bioterrorism agents in food products. However, there is an opportunity for private laboratories to develop collaboration programs with state-owned laboratories. For example, University of Georgias partnership with the food industry to form the Center for Food Safety (CFS 9 ) in Griffin, Georgia. 4.4.3 Competitive Disadvantages (Weaknesses) Competitive disadvantages are things a company does worse or poorly in comparison with its competitors. A competitive disadvantage makes a firm more vulnerable to industry competitive forces and increases the chances of the firm observing low levels of profitability compared to the average in the industry. Competitive disadvantages observed for XYZ Research Company are outlined below. Again, our study drew from XYZs personnel feedback to identify the companys weaknesses: XYZ could gain in productivity by improving its benefits & incentives program. Responses to the interviews carried out at XYZ Research Corporations suggest that there is some room to improve in the area of employees morale. XYZ is already a lucrative business; improving personnels morale can further improve its performance. Concentrated leadership. It seems the companys image and in some ways its performance, as employees expressed in the interviews, relies excessively on the companys CEO. There is a risk in putting all your eggs in the same basket; in this case the risk is the big shock that expects XYZ when the CEO leaves active 9 Center for Food Safety Website http://www.griffin.peachnet.edu/cfs/

PAGE 71

60 business. Suggestions for XYZ to prevent this from happening will be discussed in Chapter 5 (Section 5.1) of this study. Weak internal communication & organizational system. XYZ can gain from developing clear and effective written procedures to perform certain activities like budgeting/planning, inventory control, and purchasing activities. These written procedures may not result so critical for medium sized companies, but they surely increase in importance as a company grows. Improvable Internet presence and non-aggressive marketing. XYZ can enhance its marketing effort and presence in the market by directing resources into web promotion. In comparison to its competitors, XYZs website has wide room to improve. Non-aggressive marketing approach leaves XYZ vulnerable to companies with more aggressive advertising. Lack of curb appeal and physical room to expand in current location. Even though it may not be true to what is in the inside, the outer front face of the building is the first impression the client gets. XYZ lacks the extensive gardens and fancy architecture that some of its competitors use to project themselves to their clients as organized and modern laboratories. Absence of project managers. Project manager is the name given by the company to a position involving technical and management duties. XYZs management expressed a difficulty in finding and hiring individuals that excel in both aspects. Absence of a customer service department. More than affecting the firms customer service quality, this affects its productivity. According to several employees, by not having a customer service department, the responsibility of giving customer service falls on them. Scientific personnel ends up divided between performing tests and answering the phone. Price competition limitations against a few very large companies. This is an advantage for larger companies resulting from the ability to lower average costs by distributing fixed costs between larger quantities of output. It does not imply that larger companies are more profitable, stable, or that they offer better services or more accurate results. Being a single location laboratory may represent a disadvantage against multi-site laboratories in three aspects: (1) to some extent it may limit customer access to the firm and presence of the firm in the market to a smaller geographic area, (2) it may result in higher transaction costs like transportation costs of sending results, and (3) it may increase the turnaround time. However, XYZs Laboratory Information Management System (LIMS) reduces number two and three.

PAGE 72

61 4.4.4 Threats Threats are circumstances outside the control of the firm that increase the degree to which the firm is affected by competitive forces and may result in profits decreasing. A firm should develop abilities and set up their strategy to minimize the impact of threats to its business. The following is a list of identified threats facing XYZ Research Corporation: In-house testing trends in industry determined by equipment costs. One reason for food companies to outsource for testing services is the elevated costs associated with purchasing and maintaining the needed cutting-edge technology to perform such tests by themselves. If equipment costs drop, the result may be food companies finding it more economically logic to stop outsourcing and do in-house testing. However, considering the fact that cutting-edge technology is usually expensive, it remains very improbable that this threat would materialize. In-house testing trends in industry determined by economies of scale. Another reason for food companies to outsource is the more intensive use that independent food-testing laboratories give to testing equipment by repeating the same test for different companies. It does not make sense economically for food companies to purchase a machine, perform a test once and then leave the machine in a corner, unused. However, as food companies become larger and internationalize their operations, it may be that output and turnover grows to a point where demand for some tests is large enough to justify purchasing the equipment. If so, that companys outsourcing for those tests would stop. Changes in food regulations. Although the trend is for regulations to increase and generate more business for testing laboratories, there is always a chance for regulations to take a path that negatively affects the food-testing laboratory industry. For example, the government may decide to increase their control over testing laboratories or may try to reduce the margin of error in food safety tests in the nation by increasing the number and strictness of quality assurance and good lab practice regulations. Failure to comply may result in firms going out of business, and tardiness in complying may result in competitors taking a reliability edge in the industry over XYZ by complying first. Pharmaceutical labs switching more and more into XYZs type of business. This is the other side of the opportunity outlined in Section 4.4.2 with regards to food-testing laboratories moving into the pharmaceutical testing business. As well, pharmaceutical testing laboratories are perfectly capable of performing many food related tests. Dealing with this threat would require enhancing and increasing the number of unique benefitsfor example, experience in the food industrywhich food-testing laboratories have to offer to food companies.

PAGE 73

CHAPTER 5 RECOMMENDATIONS AND CONCLUSIONS 5.1 Recommendations for XYZ Research Corporation The next recommendations are given on the basis of the work and information obtained and presented in our study so far. Each recommendation presents a possible course of action to be addressed by XYZ in the future. 5.1.1 Defining a Strategy XYZ could greatly benefit from investing time and effort in defining itself and its competitive strategy in a detailed manner. As discussed in Chapter 4 (Section 4.3.1), XYZ does a good job in retaining customers due to its personalized service, but seems to have a hard time getting new customers due to its inability to compete based on price with larger rivals. This assertion was extracted from the data gathered in the interviews. In his books, Competitive Strategy (1980) and Competitive Advantage (1985), Michael Porter identifies three generic strategies that firms in any industry can follow. Business theorists often categorize business behaviors using Porters three distinct strategies. They are cost leadership, differentiation, and focus strategies. Cost leadership involves concentrating in selling a standardized product at low costs targeting the larger portion of a price-sensitive clientele (Wright 1987). Cumulative volume of output, conceptualized by the experience curve, is what allows cost leader strategists to offer competitively priced services to a large portion of the industrys market through a combination of economies of scale, capital-labor substitution possibilities and an incrementally increasing learning curve (Hout, Porter, and Rudden 1982; Allan and 62

PAGE 74

63 Hammond 1985; Abernathy and Wayne 1983; Boston Consulting Group 1972). Product differentiators offer an industry-wide unique product or service (e.g., personalized and fast, quality service) to the larger portion of a price-insensitive clientele. Finally, focus strategists concentrate in addressing needs of particular buyers in the industry, which are fewer in number (Wright 1987). It is highly unusual, and equally as unprofitable, for a company to attempt to excel at more than one strategy at the same time. For example, Wal-Marts size allows the company to offer the lowest prices, but it is unlikely to see Wal-Mart aiming to match the highest quality in the industry. Many argue that pursuing two strategies at a time may result in a firm ending up in the middle with no competitive advantage at all. Wright (1987) further argues that larger firms in an industry with greater access to resources may primarily compete with cost leadership or differentiation strategies. He also argues that small firms, on the other hand may only viably compete with the focus strategy. Using this framework, figure 5-1 shows our studys assessment of XYZs current position. Size of the firm and its access to resources Generic strategies smaller firms with lesser focus access to resources larger firms with greater cost leadershipaccess to resources differentiati on ABC Figure 5-1. XYZs size position and available strategies. Obtained from Wright, P. A Refinement of Porters Strategies. Strategic Management Journal 8(1)(January 1987):93.

PAGE 75

64 XYZs medium-large size operations and privileged financial position allow for cost leadership or differentiation strategies. However, consideration should be given to the fact that defining a strategy involves many important factors. For example, a strategy dictates whom you compete against and how you compete. According to Porter (1980), different strategies imply different organizational arrangements, control procedures, and inventive systems. Considering the importance and wide set of economic and organizational repercussions associated with selecting a strategy, the careful logic-based approach to picking a strategy should involve XYZ choosing that one that best uses its internal strengths and best exploits areas of opportunity in the industry; while minimizing the potential effects of identified weaknesses and probable threats. This is where our studys detailed Strengths Weaknesses Opportunities and Threats Analysis (SWOT) and Porter Five Forces framework step in. 5.1.1.1 Considerations for XYZ choosing the cost leadership strategy Cost leadership involves concentrating in selling a standardized product at low costs targeting the larger portion of a price-sensitive clientele (Wright 1987). Before taking this road, XYZ should consider the next issues. Other labs would have a first-mover advantage in this strategy. For example, Silliker Labs already seems to operate under this strategy. What is the level of price-sensitiveness of the clientele? Our study found information suggesting that other factors might be as important or more important than price for food companies (e.g., reliability in terms of accreditations and accuracy on test results, quick turnaround). Growing to take advantage of economies of scale. Cost leadership is achieved by having the lowest production costs in the industry; this in turn is possible because of a firms ability to distribute fixed costs between larger quantities of output. Given the medium-large size of XYZs operations, becoming cost leader in the industry would require increasing market share or demand and building new facilities to increase output.

PAGE 76

65 Growing industry allows for firms growth. There is space to grow in the food-testing market. Several factors already mentioned in Section 4.2 of Chapter 4 (increasing regulations, health concerns, new technologies, etc) suggest a long-term period of growth for the industry. 5.1.1.2 Considerations for XYZ choosing the differentiation strategy Product differentiators concentrate in offering an industry-wide unique product or service to the larger portion of a price-insensitive clientele (Wright 1987). For XYZ, important considerations if taking this strategy include. How to differentiate? First thing is identifying the value traits desired by food companies on their outsource laboratory of choice. The standardized characteristic of tests does not allow for differentiation on the physical quality of the product other than increased levels of accuracy in results. Differentiation is also possible on the quality-of-service aspect of the product. XYZs reputation for quality offers a forefront position to pursuing the differentiation strategy. Results and employees opinions obtained from the strategic analysis interviews conducted at XYZ Research were presented in Chapter 4 (Section 4.3) of our study. Results show employees and managements perception of XYZs output quality as a strength for the company. 5.1.2 Aggressive Strategy-Based Marketing XYZ can enhance its marketing effort. First, by training a group of employees with the necessary skills to effectively operate in both the scientific and economic areas of the business. Having this versatile people to interact directly with the clients would increase productivity by reducing scientific staffs time on the phone and would probably increase the quality of service offered to the clients. At the present moment, XYZs management personnel already shows intentions of pursuing this matter by developing Project Managers, which are positions involving technical and management duties. A second way to enhance marketing effort would be by directing and allocating marketing resources (including Internet) into one identified marketing goal and direction based on

PAGE 77

66 XYZs chosen strategy. Avoiding vagueness in marketing goals will allow XYZ to achieve a more aggressive marketing posture with the same resources used now. 5.1.3 Understanding and Shaping the Customer Base It would be recommended as a next step for XYZ to proceed in analyzing their customer base as a means to validate the suggested companys performance in attracting and keeping customers. That is: What exactly does the customer base of XYZ Research Corporation consist of? What are the various categories of customers by size, by type of service required, what percent of their business does XYZ Research Corporation get, how often do they purchase, and how much does each type of customer contribute to the bottom line? Analysis done in our study related to buyers power and threat of substitutes suggests smaller clients, having no resources to do in-house testing, may result more steady demand than large food companies which at any moment may switch from outsourcing to in-house testing if they feel its economically wiser. It would not hurt XYZ trying to maintain a percentage of their customer accounts destined to this segment of the market. Potentially focusing on serving this group of smaller food companies that may not be a priority for large competitors would leave the door open for XYZ to be the first mover in targeting the segment. Segmenting the market into different types of clients and analyzing each separately could give the company a lot of insight into better ways of doing business. For example, a trend to generalize foreign food companies as debt defaulters was expressed in the interviews; it would be interesting to group XYZs customer base using a smalllarge-or-foreign criteria and analyze profitability from each group. Another interesting criteria to

PAGE 78

67 group and analyze could be type of business or position in the food supply chain (e.g., processors, retailers, manufacturers). Another important consideration for XYZ and any other laboratory would be remembering not to place all your eggs in one basket. It is impossible to ignore the bargaining power that multi-millionaire food companies are able to exert when doing business. As beneficial as a partnership with one of these companies would be in securing business, it results risky to dedicate yourself almost exclusively to one company. It would be interesting to analyze XYZs 2000 customer base keeping in mind that a large number of clients contributing evenly to your sales, is a lot safer than creating a dependency by doing business mostly with one huge client. 5.1.4 Decentralizing Leadership In addition to deciding on the overall company strategy, management of XYZ Research Corporation needs to clearly identify and communicate a transition strategy for the time when the CEO (Dr. Brown) will be less active in the day-to-day management of XYZ Research Corporation. While formulating a transition strategy and finding the appropriate personnel to carry out this transition strategy have been a priority for XYZ Research Corporation management, events have occurred to delay the implementation of this strategy. Clearly communicating the transition strategy to the entire company would reduce uncertainty and employee anxiety, and increase morale, and allow for a better competitive response to questions being raised by current customers and competitor of XYZ Research Corporation. 5.1.5 Development of a New Incentive Program Employees gave low ratings for incentives and evaluation in the strategic analysis interviews. This implies a serious problem. The extent to which an unmotivated

PAGE 79

68 employee can diminish the productivity of a company is surprising. Unmotivated personnel will result not only in lower productivity but also in a higher rate of turnovers, leading to the costly process of hiring and training new employees. Retaining valued employees must be a top priority for any business hoping to succeed over the long-term. When developing an incentive program one should consider that incentives can be monetary and non-monetary. Although money often plays an important role in someone's decision to join or leave a company, it ranks no higher than fifth among the most important factors for why employees stay with an organization (American City Business Journals Inc. 2001). XYZ Research Corporation should re-evaluate all of its monetary and non-monetary incentive programs, as changes could be made in both of these areas. While it is true that when searching for a job, every professional looks for financial security, it is not the only factor. Every person wants to succeed, but being well paid is not the complete definition of success to most people. Five Alternative Motivating Techniques are: 1. The manager personally congratulates associates who do the job. 2. The manager writes personal notes about good performance. 3. The organization uses performance as a basis of promotion. 4. The manager publicly recognizes employees for good performance. 5. The manager holds morale-building meetings to celebrate success. All of these address the employees self-esteem. In other words, the best way to retain valuable employees is by building personnels confidence, increasing their self-esteem and getting people to think that by being in the company they are not only making money, but also being successful. It is noteworthy to emphasize that although non-monetary incentives should not be the only focus at XYZ Research Corporation, most non-monetary incentives cost little or nothing to implement.

PAGE 80

69 Non-monetary motivators are powerful tools and due to their almost inexpensive characteristics they can have very high rates of return. On the other hand, money can be a dangerous motivator. When rewarding an employees effort only with money, we may end up teaching our employees to stay just for the money and to expect raises after every achievement or to leave at the soonest, best offer. Development of an incentives program is an important future step stressed by our study for XYZ Research Corporation. 5.1.6 Tuning Up the Organizational Structure and Accounting System A number of small things could be done to improve performance related to organizational structure and the accounting system. For example, this may include developing clear internal monthly financial reports for departmental managers that effectively communicate monthly performance, including information on how that department contributed to the overhead of the company. As stated in Section 4.3.3 of this study, job descriptions are an important part of evaluation procedures and should be improved and used as a part of the evaluation process (instead of the evaluation process using financial statements). Monthly departmental reports of on-going projects and plans for new projects, a more effective system for handling stocks and supplies, and improved methods for interdepartmental communication would also be helpful in optimizing the companys cost structure and increasing its productivity. 5.1.7 On Building New Facilities In terms of solving some of the issues mentioned above, moving to a new facility might not be the top priority answer at the moment. Even though both top management and employees would like to move into a new facility, such a move should only take place after the company is clear on what strategy it will follow. It is true that moving to a brand new building will have some effect in the whole companys morale, but it is also

PAGE 81

70 true that if some of the other issues mentioned above are left unsolved this increase in morale will only be temporary. 5.1.8 Management Training Programs Management training programs and seminars could be organized to build a more versatile scientific personnel. Considering the demanding nature of scientific careers, it is not a surprise to find scientific personnel that is not so well rounded in areas other than their expertise. In fact, science calls for such high levels of specialization. XYZs business however calls for personnel trained in both management and science, management seminars customized to bring scientists gradually into touch with management skills would surely have enormous repercussions over the companys performance. 5.2 Recommendations for Further Research Our study identified several factors influencing demand in the U.S. independent food-testing laboratory industry. Other than price, some factors that are expected to influence clienteles demand include: reliability/accuracy of tests, speed of tests turnaround, experience and promotional effort. However, the order of importance of these factors with respect to each other was not analyzed. It would be challenging very rewarding to pursue customer-preference research for this market. Willingness-to-pay research using surveys or focus groups to gather information from food companies would be one option. Goals of such research would include trying to determine the level of price-sensitiveness of the market, or if price comes before reliability in importance for customers or vice-versa, and test several accreditation programs to probably conclude which one projects more reliability to customers.

PAGE 82

71 5.3 Conclusions Returning to the Chapter 1 of this study (Section 1.1), the evolving and adapting role of the U.S. land grant system was addressed and to some extent questioned. The next issues where discussed: (1) the U.S. economy has evolved from an agricultural-based economy to a service-based economy, (2) the U.S. land grant system which was created to serve a predominantly, dispersed and isolated rural population, now faces a predominantly urban-suburban, massively communicated and interconnected society, (3) tighter government budgets in many countries have called for new innovative ways to fund and operate land grant systems, including private-public partnerships for projects where benefits are shared, and (4) farms have become more business oriented operating with cutting edge technology. Shared benefits are observed in this research. First, the private sector benefits from the analysis and recommendations presented in our study. Second, the production of didactic material and opportunity to interact directly with the private sector are benefits for the public sector, in this case, the University of Florida. Nobel Prize Theodore Schultz, in his work Investment in Human Capital (1961), showed the immense contribution of human capital to growing levels of national output in many Western countries including the U.S. The output rendered by this research should be measured by the ability of the case study developed to help as a tool in teaching management skills and increasing national human capital by beginning in the classroom.

PAGE 83

APPENDIX A ANALYSIS TOOLS Table A-1. Performance assessment Please assess the overall performance of XYZ Research in the following areas. Performance can be low or high based on the current situation, comparison to goals, trends for the future, or the overall satisfaction of company participants. Customer Satisfaction-ability to attract and maintain customers Low Performance 1-----2-----3-----4-----5 High Performance Evidence: Competitiveness-ability to do better than your competition. Low Performance 1-----2-----3-----4-----5 High Performance Evidence: Productivity-ability to provide products/services efficiently and effectively based on Internal management processes. Low Performance 1-----2-----3-----4-----5 High Performance Evidence: Profitability-ability to attract resources based on level of return to key stakeholders. Low Performance 1-----2-----3-----4-----5 High Performance Evidence: Which performance concerns (if any) warrant strategic analysis and planning? 72

PAGE 84

73 Table A-2. Internal checklist Goal: To determine a firms internal strengths and weaknesses Directions: For each item below, circle the number on the scale that best corresponds to you honest assessment of XYZ Researchs strength or weakness in the indicated area. Great Great Weakness Strength I. MARKETING RESOURCES 1. Customer satisfaction with product/services 1-----2-----3-----4-----5 2. Ability to gain customers versus the competition 1-----2-----3-----4-----5 3. Knowledge of the market 1-----2-----3-----4-----5 4. Product/service line breadth and depth 1-----2-----3-----4-----5 5. Product/service quality in terms of function, 1-----2-----3-----4-----5 image, place, time, possession, ease of use 6. Advertising and promotion activities 1-----2-----3-----4-----5 7. Product/service pricing 1-----2-----3-----4-----5 8. Facilities and methods used to sell to customers 1-----2-----3-----4-----5 9. Market share 1-----2-----3-----4-----5 II. FINANCIAL RESOURCES 1. Strong and recurring operating profits (PM*) 1-----2-----3-----4-----5 2. Efficient asset management (TAT*) 1-----2-----3-----4-----5 3. Strong and recurring return on investment (ROI*) 1-----2-----3-----4-----5 4. Proper balance of debt and equity (EM*) 1-----2-----3-----4-----5 5. Strong and recurring return on equity (ROE*) 1-----2-----3-----4-----5 6. Strong and recurring cash flow 1-----2-----3-----4-----5 7. Ready access to outside/new funds 1-----2-----3-----4-----5 8. Well managed customer credit 1-----2-----3-----4-----5 9. Well managed supplier credit 1-----2-----3-----4-----5 *Key financial ratios used to assess these areas III. HUMAN RESOURCES 1. Adequate number of people to do the work 1-----2-----3-----4-----5 2. Adequate quality of people to do the work 1-----2-----3-----4-----5 3. Personnel plans 1-----2-----3-----4-----5 4. Job design and descriptions 1-----2-----3-----4-----5 5. Performance standards and evaluation procedures 1-----2-----3-----4-----5 6. Training programs 1-----2-----3-----4-----5 7. Good morale as evidence by absenteeism, 1-----2-----3-----4-----5 turnover, tardiness, complaints, bickering, employee growth and development 8. Compensation system that promotes performance 1-----2-----3-----4-----5 and satisfaction 9. Equitable and competitive pay 1-----2-----3-----4-----5 10. Equitable and competitive fringes 1-----2-----3-----4-----5 11. Appropriate use of teams 1-----2-----3-----4-----5 12. Work ethic of individuals and teams 1-----2-----3-----4-----5

PAGE 85

74 Table A-2. Continued Great Great Weakness Strength IV. OPERATIONS/PRODUCTION 1. Quality of needed facilities to serve customers 1-----2-----3-----4-----5 2. Capacity of needed facilities to serve customers 1-----2-----3-----4-----5 3. Up-to-date and appropriate technology 1-----2-----3-----4-----5 4. Effective and efficient physical layout 1-----2-----3-----4-----5 5. Effective and efficient work flow 1-----2-----3-----4-----5 6. Effective and efficient inventory control 1-----2-----3-----4-----5 7. Effective and efficient purchasing practices 1-----2-----3-----4-----5 8. Effective and efficient production practices 1-----2-----3-----4-----5 V. MANAGEMENT/LEADERSHIP RESOURCES 1. Effective management style 1-----2-----3-----4-----5 2. Timely decision making 1-----2-----3-----4-----5 3. Effective delegation 1-----2-----3-----4-----5 4. Effective participation 1-----2-----3-----4-----5 5. Effective risk taking 1-----2-----3-----4-----5 6. Effective leadership 1-----2-----3-----4-----5 VI. ORGANIZATIONAL RESOURCES 1. Appropriate mix of resources (people, money, equipment) available 1-----2-----3-----4-----5 2. Resources properly placed to do the job 1-----2-----3-----4-----5 3. Effective interdepartmental communications 1-----2-----3-----4-----5 4. Effective reporting relationships 1-----2-----3-----4-----5 5. Firms public image 1-----2-----3-----4-----5 6. Strong organizational culture (productivity, 1-----2-----3-----4-----5 honesty, dispute handling, tolerance of change) VII. INFORMATION RESOURCES 1. Appropriate financial and cost accounting systems 1-----2-----3-----4-----5 2. Planning system appropriate for internal analysis 1-----2-----3-----4-----5 (assessing strengths and weaknesses) 3. Planning system appropriate for external analysis 1-----2-----3-----4-----5 (assessing opportunities and threats) 4. Control system that highlights problems and 1-----2-----3-----4-----5 generates corrective action 5. Information systems that use the best technology 1-----2-----3-----4-----5 available 6. Effective information for strategic decision making 1-----2-----3-----4-----5 7. Effective information for operational decision 1-----2-----3-----4-----5 making 8. Ability to utilize internet and e-commerce 1-----2-----3-----4-----5

PAGE 86

75 Table A-3. Strengths analysis Directions: Assess XYZ Researchs five most important strengths* using the questions from above and your own beliefs about your firm. In the final column, cite specific evidence that supports your believe that the item is a strength or competitive advantage. Strength Evidence *Strength: Something a company does well or a characteristic that gives it an important capability. Table A-4. Weakness analysis Directions: Assess XYZ Researchs five most important weaknesses* using the questions from above and your own beliefs about your firm. In the final column, cite specific evidence that supports your believe that the item is a strength or competitive advantage. Weakness Evidence *Weakness: Something a company does poorly or characteristic that puts it at a disadvantage.

PAGE 87

APPENDIX B MAJOR QUALITY ASSURANCE PROGRAMS This list was taken from Research Triangles Food Testing Laboratory Database. Quality Assurance Programs are divided into four categories: oversight programs, national programs, ISO-related programs, and association-sponsored programs: Oversight Programs (national and international programs assuring uniform standards of execution for quality programs: American National Standards Institute (ANSI) Registrar Accreditation Board (RAB) National Programs (Nationally and state sponsored indicators of laboratory quality) Accredited Laboratory Program (ALP) Good Laboratory Practices (GLPs) Good Manufacturing Practices (GMPs) National Environmental Laboratory Accreditation Program (NELAP) or State Water Accreditation USDA-Recognized Laboratory for Pasteurized Egg Products USDA Recognized State Certification Trade Association-Sponsored Programs (quality programs such as proficiency testing and certified laboratory or analyst) AOAC International (AOAC) American Association of Cereal Chemists (AACC) American Association of Feed Control Officials (AAFCO) American Oil Chemists Society (AOCS) ISO Related Programs (non-governmental worldwide association of 130 countries to ensure international standardization of several industry sectors) ISO 9000 series ISO 17025 76

PAGE 88

REFERENCES Abernathy, W. and K. Wayne. Limits to the Learning Curve. Harvard Business Review, 1983, pp. 114. Aeker, David A. Strategic Market Management. 2nd ed. New York: John Wiley & Sons, 1988, pp. 11. Allan, G. and J. Hammond. Note on the Use of Experience Curves in Competitive Decision-Making. Harvard Intercollegiate Clearing House of Cases, 1975. Available at http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=175174 (Accessed June 2004). American City Business Journals Inc.. Money Not Key Motivator for Most Employees. Business First, June 2001. Available at http://louisville.bizjournals.com/louisville/stories/2001/06/25/editorial1.html (Accessed June 2004). Baumol, W. J., Panzar, J. C., and Willig, R. Contestable Markets: An Uprising in the Theory of Industry Structure. American Economic Review 72(1)(1983):1. Beaver G. and C. Ross. Enterprise in Recession: The Role and Context of Strategy. International Journal of Entrepreneurship and Innovation 1(1)(February 2000):2331. Boston Consulting Group. Perspectives on Experience. Boston, MA: Boston Consulting Group, 1972. Casley D.J. and D.A. Lury. The Case Study. Chapter 5 in The Data Collection in Developing Countries. 2nd ed. Oxford: Clarendon Press, 1987. Compass Consulting International Incorporated. Outsourcing: Is It Right For Higher Education Technology Services? Available at http://www.compassconsulting.com/articles/outsource.html (Accessed March 2004). Dacquel, L. T., and D.C. Dahmann. Residents of Farms and Rural Areas: 1991. U.S. Bureau of the Census, Current Population Reports Series P20, No. 472. Washington, DC: U.S. Government Printing Office, 1993. 77

PAGE 89

78 Dyson, Robert G. Strategic Development and SWOT Analysis at the University of Warwick. European Journal of Operational Research 152(3)(February 2003):631. Eisenhardt, Kathleen M. Building Theories From Case Study Research. Academy of Management Review 14(4)(1989):532. Fanjoy, Monica S., Michaela C. Coglaiti, Heather L. Carter-Young, and Shawn L. Karns. Food Testing Laboratory Database: Final Report, RTI Project Number 06673.011. Research Triangle Park, NC: Research Triangle Institute, 2001. Available at http://www.foodriskclearinghouse.umd.edu/Doc/6673_11_FR.pdf (Accessed June 2004). Feller, I., P. Madden, L. Kaltreider, D. Moore, and L. Sims. The New Agricultural Research and Technology Transfer Policy Agenda. Res. Policy 16(1987):315325. Food Institute, The. Food Industry Review 2003. CD-ROM ed. Elmwood Park, NJ: The American Institute of Food Distribution, 2003. Giese, James. Selecting an Outside Food Testing Laboratory, Food Technology 55(11)(2001):11. Available at http://www.ift.org/publications/docshop/ft_shop/11-01/11_01_pdfs/11-01-lab.pdf (Accessed April 2004). Hout, T., M. E. Porter and E. Urden. How Global Companies Win Out. Harvard Business Review, September 1982, pp. 98. Howell, J. Recurrent Costs and Agricultural Development. London: Overseas Development Institute, 1985. International Data Corporation. U.S. and Worldwide Outsourcing Markets and Trends, 1998-2003 Report. Product code R104-388: IDC, 1999. Available at http://www.mindbranch.com/catalog/product.jsp?code=R104-388 (Accessed April 2004). Kennedy, Mary M. Generalizing from Single Case Studies. Evaluation Quarterly 4(3)(November 1979):661. Kotler, Philip. Developing New Market Offerings. Marketing Management. Millennium ed. Upper Saddle River, NJ: Prentice Hall, 2000. Le Gouis, M. Alternative Financing of Agricultural Extension: Recent Trends and Implications for the Future. In Agricultural Extension: Worldwide Institutional Evolution and Forces for Change. W. M. Rivera and D.J. Gustafson, eds. Amsterdam: Elsevier, 1991.

PAGE 90

79 Marsili, R. Sending It Out: Outsourcing Pros and Cons. Food Product Design, May 1997. Northbrook, IL: Weeks Publishing Company. Available at http://www.foodproductdesign.com/archive/1997/0597QA.html (Accessed April 2004). Miller, Alex, and Gregory G. Dess. Strategic Management, 2nd ed. New York: McGraw Hill, 1996, pp. 38. Muth, K. Mary, Erica C. Gledhill, and Shawn A. Karns. FDA Labeling Cost Model. RTI Project Number 06673.010. Research Triangle Park, NC: Research Triangle Institute, 2003. Available at http://www.foodriskclearinghouse.umd.edu/Doc/labeling_cost_model.pdf (Accessed June 2004). National Research Council. Colleges of Agriculture at the Land Grant Universities: A Profile. Washington, DC: National Academy Press, 1995. National Research Council. Colleges of Agriculture at the Land Grant Universities: Public Service and Public Policy. Washington, D.C.: National Academy Press, 1996. Available at http://books.nap.edu/html/landgrant/ (Accessed June 2004). Oster, Sharon M. Modern Competitive Analysis. 2nd ed. New York: Oxford University Press, 1994. Pearce, John A. Formulation, Implementation, and Control of Competitive Strategies. 5th ed. Homewood, IL: Irwin, 1994. Peterson, H. Christopher. Strategic Posture: Choosing a Business Direction in an Uncertain World. Paper presented at the Management Clinic in Louisville, KY, February 1994. Porter, M. Techniques for Analyzing Industries and Companies. Competitive Strategy. New York: Free Press, 1980. Porter, M. Creating and Sustaining Superior Performance. Competitive Advantage. New York: Free Press, 1985. Quick MBA. Porters Five Forces. QuickMBA.com, 2004. Available at http://www.quickmba.com/strategy/porter.shtml (Accessed June 2004). Rumelt, Richard P., Dan Schendel, and David J. Teece. Strategic Management and Economics. Strategic Management Journal 12(Winter Special Issue 1991):5. Schmidt, Ronald H. Government Regulations in the Food Industry. Class Notes for FOS 4731, University of Florida. Spring Semester 2004. Schultz, T. W. Investment in Human Capital. The American Economic Review 1(2)(1961):1.

PAGE 91

80 Schumpeter, J. The Theory of Economic Development. Cambridge, MA: Harvard University Press, 1912 (1934 translation). Schumpeter, J. The Instability of Capitalism. The Economic Journal 38(151)(September 1928):361. Sorensen L, Rene V. Valqui V., and E. Engstrom. Using Soft OR in a Small Company: The Case of Kirby. European Journal of Operational Research 152(3)(February 2003):555. Tavares, J. Schumpeterian Competition and its Policy Implications: The Latin American Case. A paper prepared for the Second Meeting of the FLACSO/IDRC, Organization of American States (OAS) Trade Unit, 1999. Available at http://www.sice.oas.org/compol/Articles/schumcop.asp (Accessed June 2004). U.S. Census Bureau. NAICS Definitions: 2002. 2002. Available at http://www.census.gov/epcd/naics02/def/NDEF311.HTM (Accessed June 2004). U.S. Census Bureau. Unadjusted and Adjusted Estimates of Monthly Retail and Food Services Sales by Kinds of Business: 2003. 2003. Available at http://www.census.gov/mrts/www/data/html/nsal03.html (Accessed June 2004). U.S. Department of Agricultures, Agricultural Research Service. USDA Research Agency Sequences Genome of Food-borne Pathogen. Article by Mary Clark, 2001. Available at < http://www.ars.usda.gov/is/pr/2001/010607.htm > (Accessed May 2004). U.S. Department of Agriculture (USDA), and U.S. Food and Drug Administration (FDA). United States Food Safety System. Country Report, 2003. Available at http://www.foodsafety.gov/~fsg/fssyst2.html (Accessed April 2004). U.S. Food and Drug Administration (FDA). Private Laboratory Grassroots Meetings 1996: Definition of Private Laboratory. 1996. Available at http://www.fda.gov/ora/science_ref/priv_lab/grassr96/grassr.html Definition%20of%20Private (Accessed April 2004). U.S. Food and Drug Administration, Center for Food Safety and Applied Nutrition (CFSAN). Good Reading for Good Eating. FDA Consumer. Article by Paula Kurtzweil, 1993. Available at: http://www.cfsan.fda.gov/~dms/fdlabel2.html (Accessed May 2004). Wright, P. A Refinement of Porters Strategies. Strategic Management Journal 8(1)(January 1987):93. Wright T. Factors Affecting the Costs of Airplanes. Journal of Aeronautical Science 3(4)(1936):122.

PAGE 92

81 Wysocki, A. Strategic Analysis, Proposed Strategic Plan, and Recommendations for Michigan Public Variety Field and Seed Potato Producers. Masters Thesis, Michigan State University, 1997. Wysocki, A. Supply Chain Management: Past and Future. Food Wholesaling & Retail Marketing. Institute of Food and Agricultural Sciences, University of Florida. No. 5 July 2000a. Wysocki, A. Major Alternate Marketing Channels in the U.S. Food System. Food Wholesaling & Retail Marketing. Institute of Food and Agricultural Sciences, University of Florida. No. 2 & 3. April/May 2000b. Yin, Robert K. Case Study Research: Design and Methods. 2nd edition. Thousand Oaks, CA: Sage Publications, 1994. Zahra, Shaker A., and Sherry S. Chaples. Blind Spots in Competitive Analysis, Academy of Management Executive 7(2)(1993):7.

PAGE 93

BIOGRAPHICAL SKETCH Paul Esteban Jaramillo Vega was born in Quito, Ecuador on March 29, 1979. He graduated from Colegio Americano High School in Quito, in 1997. In December 2000 he received his Agronomo Degree from Escuela Agricola Panamericana El Zamorano in Tegucigalpa, Honduras, where he was awarded the Board of Trustees Scholarship for academic achievement. He graduated from the University of Florida with honors in August 2002, receiving his bachelors degree with a specialization in agribusiness, from the Food and Resource Economics Department in the College of Agriculture and Life Sciences. 82


Permanent Link: http://ufdc.ufl.edu/UFE0006262/00001

Material Information

Title: Strategic Analysis and Recommendations for XYZ Research Corporation: A Case Study
Physical Description: Mixed Material
Copyright Date: 2008

Record Information

Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
System ID: UFE0006262:00001

Permanent Link: http://ufdc.ufl.edu/UFE0006262/00001

Material Information

Title: Strategic Analysis and Recommendations for XYZ Research Corporation: A Case Study
Physical Description: Mixed Material
Copyright Date: 2008

Record Information

Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
System ID: UFE0006262:00001


This item has the following downloads:


Full Text












STRATEGIC ANALYSIS AND RECOMMENDATIONS FOR XYZ RESEARCH
CORPORATION: A CASE STUDY















By

PAUL E. JARAMILLO VEGA


A THESIS PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE

UNIVERSITY OF FLORIDA


2004

































Copyright 2004

by

Paul E. Jaramillo Vega


































To my family.















ACKNOWLEDGMENTS

I would like to thank my parents, Patricio Jaramillo and Rita Vega, who have

continuously supported me emotionally and financially throughout all my crazy

endeavors. I am grateful for all the opportunities they have afforded me. I also want to

thank my brother Ivan Jaramillo and my sister Patricia Jaramillo (and their families), all

partners in crime with my parents in holding me up through these years.

I wish to thank my supervisory committee chair, Dr. Lisa House; and my cochair,

Dr. Allen Wysocki. Both of them tirelessly helped me since the inception of this project.

Their guidance and patience encouraged me greatly. I am immensely indebted to Dr. Jane

Luzar for all her unconditional help. I would like to thank Dr. William Brown and all the

people at XYZ. Their openness and financial assistance made this study possible. Their

help and trust in this project are deeply appreciated. Thanks also go to other faculty and

staff members in the Food and Resource Economics Department, and to my fellow

graduate students for their assistance and encouragement.

Thanks are due to all my friends here in Gainesville and in Ecuador, for countless

words and acts of support offered. Finally, I would like to thank Maria Fernanda

Cifuentes, my friend and soul mate. Her enduring support and sincere love served as a

foundation for building my goals.
















TABLE OF CONTENTS
Page
ACKNOW LEDGM ENTS ........................................ iv

LIST OF TABLES .................. ...... ............................ viii

LIST OF FIGURES ....................................... ix

ABSTRAC T ............. ............ ................. ........ ........x

CHAPTER

1 R E SE A R C H SE T TIN G ...............................................................................

1.1 Background and Justification............................................................ ........... 1
1.2 Problem Statement .............................. ................. .............. .... .3
1.2.1 Description of the XYZ Research Corporation and of the U.S.
Independent Food-Testing Laboratory Industry .......................................4
1.2.1.1 Description of XYZ Research Corporation ............... ..............4
1.2.1.2 Description of the U.S. independent food-testing laboratory
in d u stry ........................................................5
1.3 Objectives ................ .. .. ........................ .6
1.3.1 General Objectives..............................................6
1.3.2 Specific Objectives ................... ............................6

2 LITERATURE REVIEW .................................................. ...............8

2.1 Strategic Analysis and Strategic Planning in Strategic Management Research ...8
2.2 Influence of Economics on Strategic Management ..............................10

3 M E T H O D S PR O P O SE D ..................................................................................... 16

3.1 Alternative Strategies for Addressing the Research Problem..........................16
3.2 Case Study as the Preferred Research Strategy ..................................... 18
3.2.1 Strengths of the Case Study Research Approach.................................19
3.2.2 Concluding Remarks Regarding The Case Study Research Strategy.....20
3.3 Strategic Analysis Interviews and Focus Groups .......................................... 20

4 STR A TE G IC A N A L Y SIS ..................................................................................... 22

4.1 Overview of the U.S. Independent Food-Testing Laboratory Industry ..............22
4.1.1 Nature of the Industry ............. ...................... 27









4.1.1.1 Outsourcing and the U.S. independent food-testing laboratory
indu story ........................ .. .. ... .. .. ..................27
4.1.1.2 The U.S. food safety system and the U.S. independent
food-testing laboratory industry.................................... .........29
4.1.2 The U.S. Food Supply Chain and the U.S. Independent Food-Testing
L laboratory Indu stry ........................... ...... ..........................32
4.1.3 Factors Influencing Demand in the U.S. Independent Food-Testing
L laboratory Industry ................... ....... ... ............................36
4.2 Forces Influencing the U.S. Independent Food-Testing Laboratory Industry ....38
4.2.1 Degree of Rivalry was M oderate.....................................................39
4.2.2 Threat of Substitutes was Low................................. .. .......... 40
4.2.3 Buyer Power was Highest for Large Manufacturers and Lowest for
Sm all Producers ............................................... ..............4 1
4.2.4 Supplier Power was High................................ ............... 42
4.2.5 Barriers to Entry/ Threat of Entry was Low ........... .............43
4.3 Strategic Analysis of XYZ Research Corporation................. ..............44
4.3.1 M marketing Resources ................................. ............... 45
4.3.2 Financial R sources ........................................................ 48
4.3.3 H um an R sources ............................................ ............... 49
4.3.4 Operation/Production Resources ................. ................. ............50
4.3.5 M anagement/Leadership Resources ........................................ ...52
4.3.6 Organizational Resources .......................................... 53
4.3.7 Information Resources ................... ..... .............. .................54
4.4 Strengths Weaknesses Opportunities and Threats (SWOT) Analysis for XYZ
Research Corporation...........................................55
4.4.1 Competitive Advantages (Strengths).................................................. 56
4.4.2 Opportunities.................. ........ ............. ... ..............58
4.4.3 Competitive Disadvantages (W weaknesses) ...........................................59
4.4.4 Threats..................... ............. ......... 61

5 RECOMMENDATIONS AND CONCLUSIONS ........................................... 62

5.1 Recommendations for XYZ Research Corporation.............. ...............62
5.1.1 Defining a Strategy .....................................62
5.1.1.1 Considerations for XYZ choosing the cost leadership
strategy ............... ........ .... .. .... .... ... ........ 64
5.1.1.2 Considerations for XYZ choosing the differentiation
strategy ........... ........... ............... ........65
5.1.2 Aggressive Strategy-Based Marketing ...................................... 65
5.1.3 Understanding and Shaping the Customer Base...............................66
5.1.4 D ecentralizing Leadership ............................................ .......67
5.1.5 Development of a New Incentive Program.......... .................67
5.1.6 Tuning Up the Organizational Structure and Accounting System..........69
5.1.7 O n Building N ew Facilities .............................................. ......69
5.1.8 M management Training Programs......................................70
5.2 Recommendations for Further Research................................. ..............70
5.3 Conclusions .................. .. ............. ............71









APPENDIX

A AN A LY SIS TO O LS .................................................. 72

B MAJOR QUALITY ASSURANCE PROGRAMS.................................... 76

R EFER EN CE S ........................................

BIOGRAPHICAL SKETCH ...................................................82
















LIST OF TABLES

Table page

3-1 Relevant situations for different research strategies ........................................... 17

4-1 Silliker's sales volume for domestic facilities............ .......... ...............26

4-2 Microbac's sales volume for domestic facilities........................ ...............26

4-3 Independent food-testing laboratories by region.........................27

4-4 Summary statistics from the XYZ Research Corporation interviews..................46

A -i Perform ance assessm ent................................................. 72

A-2 Internal checklist ....................................... ......... ..... ...73

A-3 Strengths analysis................ ...... .. ............ 75

A-4 W weakness analysis............... ........ ................ 75
















LIST OF FIGURES


Figure page

2-1 Sunk costs and scale economics definitions, effect on the industry, and influence
on strategic management theory.............................. ........... ......... 11

4-1 Distribution of U.S. independent food-testing labs by sales class.........................24

4-2 Overview of the label change process in response to regulation. ............................31

4-3 Major alternative marketing channels of the U.S. food system .............. ...........35

5-1 XYZ's size position and available strategies. ................ .................. ...........63















Abstract of Thesis Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Master of Science

STRATEGIC ANALYSIS AND RECOMMENDATIONS FOR XYZ RESEARCH
CORPORATION: A CASE STUDY

By

Paul E. Jaramillo Vega

August 2004

Chair: Lisa House
Cochair: Allen Wysocki
Major Department: Food and Resource Economics

This study is a collaboration of efforts between the Food and Resource Economic

Department of the University of Florida and XYZ Research Corporation to (1) determine

the main forces influencing the behavior of food-testing laboratories participating in the

U.S. independent laboratory industry, (2) assist XYZ in developing a strategy and offer

recommendations, and (3) generate a separate teaching case study.

Limited information on the industry was available at the beginning of this study.

Competitive analysis was used to determine a low level of rivalry in the industry. The

low level of rivalry was due to an accelerated growth of the market observed in this

relatively young industry. However, most forces were found to work toward high levels

of rivalry in the absence of industry growth.

Several interviews and focus groups were conducted at XYZ Research to gain

insights into XYZ's competitive advantages and disadvantages. An analysis of the

strengths, weaknesses, opportunities and threats of XYZ revealed several competitive









advantages that the company possesses over its rivals as well as some areas of weakness

that can be improved. Also, the analysis revealed the existence of numerous potential

opportunities facing XYZ, and only a small number of weak threats.

Specific considerations regarding the two alternative strategies proposed by this

research (cost-leadership or differentiation) were developed for XYZ together with a set

of recommendations on very specific issues the company should address.

The final products of this study include a proposed business plan (based on the

strategic analysis conducted for XYZ Research Corporation) and a teaching case study

for use in Agribusiness and Human Resource classrooms.














CHAPTER 1
RESEARCH SETTING

This chapter is divided in three sections. Section 1.1 briefly discusses the

background and setting of this study. Section 1.2 identifies the main problem and main

issues concerning our study. Section 1.3 states both the relevant general and specific

objectives.

1.1 Background and Justification

The present and future role of the U.S. land grant university system has been a

matter of discussion in the last few years, as the original conditions that provided the

impetus for a nationwide cooperative extension system in the 1860s have changed over

time. During the formation of the cooperative extension system, a large farm population

existed that had unique and distinct characteristics compared to urban households. Farms

were also dispersed and isolated, with slow transportation and communications networks.

The national concern for food security combined with the needs of farmers, and the need

of many agriculture colleges for a constituency and base of support created a demand for

agricultural extension (National Research Council 1996). Today, farm families are not

dispersed or isolated, transportation networks and communications are rapid and

extensive, and farm households are not nearly as different from non-farm households as

they used to be (National Research Council 1996). By 1991, education and income of

farm households was already, on average, on par with the education and income of non-

farm households (Dacquel and Dahmann 1993). The context of the national condition is

very different than it was at the time the base for extension was laid.









At the same time, governments around the world have continuously experienced

increasingly tighter budgets. As a result of budgetary pressure, many countries have

examined alternative arrangements for delivery of extension services, including public

expenditure reductions, changes in approaches to generating tax revenue, charges for

government extension services, commercialization and privatization (Howell 1985). In

the United States, total federal funds for extension were $439 million in 1995. This

represented 29 % of all cooperative extension funding from state, local (including county

and private), and federal sources, down from 42 % 20 years prior (National Research

Council 1995). According to Le Gouis (1991), three principal policies have been used by

governments: (1) public financing by the taxpayer only for the kinds of services that are

of direct concern to the general public; (2) direct charging for some individual services

with direct return, such as improved income; and (3) mixed funding shared between

public and private professional association contributions, for some services where

benefits are shared.

Presently, the U.S. land grant university system faces a country with few farmers

and many consumers. Farms that account for most of the agricultural products entering

commercial markets are highly sophisticated organizations, operating with cutting-edge

production and information technologies. Under these circumstances the U.S. land grant

system must compete or collaborate with a private sector that shows growing

participation in offering extension as consulting services; while at the same time

balancing a reduced budget to respond to all farm, rural, urban, and suburban needs.

Some discussions point out the growing similarity of the current role of the land

grant system to that of a consulting agency. In which ways and how much does the role









of public universities reflect that of being consulting agencies for different private sectors

in the economy? Furthermore, if this is the case, how can both the private and public

sector take advantage of this kind of relationship? According to Feller et al. (1987), one

way to look at this relationship is to see extension personnel as wholesalers of technical

information; and private consultants as increasingly, the retailers. Our study is a result of

a public-private partnership between University of Florida and XYZ Research

Corporation. We analyzed the partnership for insights in the road to answering the

questions stated above.

1.2 Problem Statement

For the last 3 years, XYZ Research Corporation has been performing well

financially. Such positive performance has sparked a desire from the company to grow

and to improve even further.

The company operates in an immensely complex and not well-defined U.S.

independent food-testing laboratory industry. The industry offers food-testing services to

food companies under a highly federal-regulated environment. A large number of very

diverse firms (ranging in size from small mom-and-pop types of businesses to large

multinational multi-site billion-dollar corporations) participate in the industry.

Independent private laboratories, in contrast with publicly traded companies, are not

required to make readily available to the public their financial situation or any other

information. As a result, XYZ Research Corporation's management staff deals with,

among other things, a thin market for information on competitors' and industry data (e.g.,

sales, size) that is needed for planning future moves.

In its struggle to find the best plan of action, XYZ's management team realized the

need to address several internal and external factors that were constraining the company









from developing to its full potential as a leader in the industry. XYZ Research

Corporation contacted the Food and Resource Economics Department (FRED) in the

University of Florida requesting assistance in identifying such internal factors and

external industry-issues; and in suggesting ways to improve its competitiveness and

growth.

Considering the current issues relating to the present and future role of the land

grant university system, our study posed a remarkable opportunity to set an example of

public-private partnership arrangements that benefit both the private and public sector.

The goals of our study are stated at the end of this chapter in Section 1.3.

1.2.1 Description of the XYZ Research Corporation and of the U.S. Independent
Food-Testing Laboratory Industry

1.2.1.1 Description of XYZ Research Corporation

Established in 1967 by Dr. William L. Brown, XYZ Research Corporation is a full-

service laboratory based in Gainesville, Florida. The company started out with 20

scientists, and has grown to more than 50 scientists and a $1.5 million payroll. XYZ

Research Corporation conducts daily chemical, physical, and microbiological analyses

for its customer base of over 2000 food companies. This includes mostly large (but also

small) fast-food chains, mainstream chain restaurants, food retail and wholesale firms,

food-processing firms, packing firms, commercial farms, and some companies in foreign

countries.

XYZ Research Corporation's organization and major departments are described as

follows: (1) Top Management (CEO, Dr. William Brown; Vice President, Mr. Hart); (2)

Quality Control; (3) Office Management; (4) Business Development (increasing XYZ's

capabilities to include product development, HACCP auditing, and biotechnology









services); (5) Sales and Marketing; (6) Microbiology (tests for presence of pathogens in

food, errors in food processes that result in spoilage, and purity of water; and offers

regulatory assistance); (7) Research Microbiology (analytical, research, and consulting

services); (8) Chemistry (analytical tests for physical properties); (9) Food Chemistry:

analytical tests on general nutritional content; miscellaneous properties of foods (pH,

flavor, odor, etc); and presence of pesticide residues, additives, and toxins; and (10)

Chemistry/Problem Solving (offers problem solving services for any type of food

product).

1.2.1.2 Description of the U.S. independent food-testing laboratory industry

Independent food-testing laboratories are part of a large set of very different types

of laboratories operating in the United States. In general, independent laboratories offer a

wide range of services to several industries. Focus may vary immensely, from dental

X-Ray laboratories, to Research laboratories, or Motion Picture laboratories. The SIC has

19 classification numbers that include the word laboratory or laboratories. The scope of

our study is limited to independent food-testing and product-development laboratories.

Food-testing laboratories are classified in the SIC under Division I: Services and

under Industry Group 873: Research Development and Testing Services. Classification

number 8731: Commercial Physical and Biological Research includes establishments

primarily engaged in commercial physical and biological research and development on a

contract fee basis. Facilities engaged primarily in food testing fall under classification

8734: Testing Laboratories. Specifically our interest is subdivision 8734-02:

Laboratories-Testing and 8734-14 Laboratories-Analytical. Finally, noncommercial

research organizations (such as those funded by grants, endowments or contributions) are

part of classification 8733: Noncommercial Research Organizations. When discussing









the independent lab industry our study refers only to section 8731: Commercial Physical

and Biological Research and the relevant sections of 8734: Testing Laboratories. Section

4.1 of our study offers a deeper look into the industry.

1.3 Objectives

1.3.1 General Objectives

Two general objectives will be used as guides to achieve our research goals. They

are

1. To introduce an analytical framework that could be applied to XYZ Research
Corporation and to the U.S. independent food-testing laboratory industry.
XYZ Research Corporation approached the Food and Resource Economics
Department of University of Florida requesting assistance in identifying ways to
achieve growth and improve competitiveness in its industry.

2. To explore and characterize the multiple mutually beneficial opportunities
existent in public-private research partnerships and re-define the expanding-
evolving role of the land grant university system to interact more directly with
the private sector. Final output of our study will be both beneficial to the private
sector (strategic plan) and educational (case study).

1.3.2 Specific Objectives

Six specific objectives were identified as necessary to effectively carry out our

research. They were based on the general objectives mentioned above. These are

1. To provide XYZ Research Corporation with a detailed description of the
economic aspects of the U.S. independent food-testing laboratory industry and
the relations between the industry's demand and factors affecting the U.S. food
supply chain. Many factors concerning the whole food supply chain are factors that
affect the lab industry and dictate how their demand is generated.

2. To conduct a strategic analysis of XYZ Research Corporation. The strategic
analysis is composed of several focus groups conducted with employees and
management in the company. Output includes employee/management ranked
answers on the most important internal resources in the company.

3. To provide an analysis of the competitive forces functioning in the U.S.
independent food-testing laboratory industry. Strong competitive forces imply
increased rivalry and a reduced likelihood for sustaining industry-wide
profitability.






7


4. To conduct an analysis of the strengths, weaknesses, opportunities and threats
(SWOT) confronting XYZ Research Corporation and the U.S. independent lab
industry. Internal strengths and external opportunities reduce the strength of
competitive forces, while internal weaknesses and external threats increase the
strength of the competitive forces.

5. To assist XYZ Research Corporation in developing a strategic plan and
propose them a set of strategic alternatives with the purpose of guiding their
future development. The strategic plan is a core plan of action based on the
competitive force analysis, the SWOT analysis and the strategic plan analysis. The
strategic plan is intended to commit XYZ Research Corporation with a set of goals
and objectives that will jumpstart their growth from a medium-size profitable
company into a true corporation.














CHAPTER 2
LITERATURE REVIEW

This literature review is divided into two sections: Section 2.1 shows the use of

strategic analysis and strategic planning in strategic management research. Section 2.2

discusses the influences of economics on strategic management.

2.1 Strategic Analysis and Strategic Planning in Strategic Management Research

Miller and Dess (1996) define strategic analysis as the conjugation of three

processes: (1) consideration of the organization's strategic intent; (2) exploration of the

opportunities and threats presented in the immediate environment surrounding the

organization; and (3) a study of the organization's internal strengths and weaknesses.

This definition is very similar or equivalent to the concept of a Strengths Weaknesses

Opportunities and Threats Analysis (SWOT ) plus any effort to define a company's

strategy.

On the other hand; strategic planning is defined by Aeker (1988) as the process of

increasing a company's ability to anticipate changes that have strategic implication, by

focusing on their immediate market environment to achieve an in-depth understanding of

competitors and customers. Also defined by Pearce (1994), as an on-going process based

on the implementation and development of better strategies.

Finally, strategic management is described as the on-going dynamic process

(involving both strategic analysis and strategic planning) leading to a set of

analysis-driven decisions and actions taken by a firm to achieve its performance goals









(Pearce 1994, Peterson 1994). Performance may mean desired level of profits, market

share, customer satisfaction, or sales.

Also, according to Zahra et al. (1993), competitive analysis is a process by which

firms define and try to understand their industry; identify their competitors; determine

strengths and weaknesses of rivals; and anticipate situations and moves. According to

Beaver and Ross (2000), for small companies, strategic management is often an adaptive

process. Such process is carried out to achieve positional and resource advantages.

Decisions are taken from day to day, as needed, which is the way for meeting most small

environmental changes. Our study stresses the importance for XYZ, as a medium-large

company, in developing a more structured and systematical way of thinking strategically

(regardless of what strategy they pursue) to address a rapidly growing industry.

Sorensen, Valqui, and Engstrom (2003, p. 566), performed SWOT-based research

to identify the issues constraining European businesses from developing effective

strategies to adopt and incorporate Information Technologies (IT) to their operations.

Insights and identified issues obtained through the SWOT analysis were used to develop

alternative strategies for small businesses. Their research was conducted using the case

study strategy. The case involved a small Swedish company referred to as Kirby. The

authors state

The SWOT analysis was used simply because the first contact with the firm made it
clear that the sales manager had no idea of how to structure the complex situation.
As the authors see it, there were not real alternatives to SWOT. With only one
participating person, a rather restricted time frame (for interviews and the number
of interviews that could be expected), and the authors' ambition to leave behind at
least one tool or idea Kirby could work with alone, SWOT seemed as the best
option. As mentioned earlier, the application of SWOT was made through several
meetings allowing the sales manager to reflect on both the issues and the situation
and on the methodological approach for structuring the problem. The time between
meetings made up a more productive and interactive analysis. By starting out









discussions one day, the sales manager became more attentive to the SWOT factors
discussed, and at next meeting he could always add on new relevant issues.
However, it was also clear that the analysis could not have been applied without the
technological knowledge of the facilitator. Application of SWOT requires a good
information and sound knowledge base to succeed. The sales manager did not have
sufficient knowledge especially about the external SWOT factors, and the direct
engagement of the facilitator as an expert was a requirement for carrying out the
analysis. In terms of using SWOT with an illustrative purpose, it is the authors'
perception that the manager did get so much insight into SWOT methodologically
that he could be able to apply it himself or take on a facilitator role.

Dyson (2003, p. 631) used SWOT based research to assist in formulating a

development strategy for the University of Warwick, UK. In his words

The application links SWOT analysis to resource-based planning, illustrates it as an
iterative rather than a linear process, and embeds it within the overall planning
process. Lessons are drawn both for the University and for the strategy formulation
process itself.

Wysocki (1997) used SWOT analysis and Porter's Five Force framework to

develop a strategic plan for Michigan's Public Variety Field and Seed Potato Producers.

The SWOT analysis was conducted through several meetings, face-to-face interviews,

and surveys; similar to Sorensen, Valqui, and Engstrom (2003).

2.2 Influence of Economics on Strategic Management

Five specific examples of how economics has affected strategic management

include: (1) traditional entry-barrier theory yielded the concepts of scale economics and

sunk costs, while mobility barrier theory stressed the importance of learning and first-

mover advantages in making specialized investments; (2) the notion that high profits are

returns to specialized high-quality resources supported by the Chicago school; (3) game

theory provided models to analyze (and the basis for understanding) firms' use of

preemption, brand crowding, dynamic limit-pricing, signaling, and reputation for

toughness to strategically protect market positions; (4) the economics of innovation










brought focus on Schumpeterian competition, intellectual property, and the costs of

technology transfer; and (5) transaction costs economics (Rumelt et al. 1991).

Figure 2-1 shows the definitions of sunk costs and scale economies, their potential

effect to the industry, and their influence to strategic management. Sunk costs refer to

costs that once paid are impossible to recover. The magnitude of sunk costs required to

start a business in a given industry represents a barrier to entry for new firms because it

increases the size of the initial investment required. It also increases the level of risk

associated, by increasing the amount of money that can be lost if the business fails. In

terms of its influence to strategic management: (1) established firms do not worry as

much for new firms entering the industry (which allows them to concentrate on existing

competition); and (2) the rivalry among established firms is higher (the higher the

magnitude of sunk costs, the higher the loss associated with going out of business).1

Sunk costs
Definition: costs that once paid are impossible to recover
Effect: can represent an entry barrier
Influence: 1) barrier allows established firms to concentrate in
existing competition
2) increases rivalry among existing competition

Scale economics
Definition: lower costs resulting from mass production
Types: technical, managerial, financial, marketing,
commercial, external
Effect: enhances company's ability to engage in price
competition
Influence: argument favoring cost leadership strategies

Figure 2-1. Sunk costs and scale economics definitions, effect on the industry, and
influence on strategic management theory.

Scale economies occur when mass-producing a good, results in lower average

costs. Lower average costs can be caused by: (1) technical economies (making better use


1 For a detailed discussion of sunk costs see: Baumol, W. J., Panzar, J. C., and Willig, R. "Contestable
Markets: An Uprising in the Theory of Industry Structure." American Economic Review, 72(1)(1983):1-15.









of equipment); (2) managerial economies (splitting managerial skills among higher levels

of output); (3) financial economies (having access to loans with lower interest rates than

smaller firms); (4) marketing economies (diluting advertising costs among more output);

(5) commercial economies (buying inputs in bulk with discounts); and (6) external

economies (e.g., local skilled or low-cost labor). Scale economies affect strategic

management decisions by improving a company's ability to engage in price competition.

Also, influencing strategic management is the concept of first mover advantage.

First mover advantages give firms access to excess profits created by shocks to the

market before any competitors have access to them. Furthermore, first mover advantages

offer firms the opportunity to create long-run competitive advantages over competitors

(e.g., brand name, customer recognition, control of distribution channels, technological

lead). Three types of first mover advantages identified are: (1) technological leadership,

(2) preemption of assets, and (3) switching costs.

Technological leadership first mover advantage is related to the concepts of

learning curve and experience curve. The learning curve effect states that the more often

a task is performed, the less time will be required on each iteration. Wright (1925), first

noticed this effect at the Air Force Base in America, where he determined that every time

aircraft production doubled, the required labor time decreased by 10% to 15%. The

experience curve effect is broader in scope than the learning curve effect, encompassing

far more than just labor time. It states that the more often a task is performed; the lower

will be the cost of doing it due to increased labor efficiency, standardization,

specialization, experience, and technology driven learning (Boston Consulting Group

1972). The Boston Consulting Group strategists examined the consequences of the









experience effect for businesses. They concluded that because relatively low cost of

operations is a very powerful strategic advantage, firms should capitalize on these

learning and experience effects. The reasoning is, increased activity leads to increased

learning, which leads to lower costs, which can lead to lower prices, which can lead to

increased market share, which can lead to increased profitability and market dominance.

Today we recognize that there are other strategies that are just as effective as cost

leadership so we need not limit ourselves to this one path. See for example Porter generic

strategies discussed in Chapter 5 (Section 5.1) of this study, which talks about product

differentiation and focused market segmentation as two alternatives to cost leadership. To

avoid confusion between scale economies and the experience curve effects it is helpful to

remember that economies of scale are those efficiencies that arise from an increased scale

of production, and that experience effects are those efficiencies that arise from the

learning and experience gained from repeated activities.

Schumpeter, defined competition as a dynamic process wherein firms strive to

survive under an evolving set of rules that constantly produce winners and losers. His

1912 book on The Theory of Economic Development established the links between

innovation and competition. His 1928 paper on The Instability of Capitalism highlighted

the transient character of competition conditions (Tavares 1999). Firms can have an

advantage in this game by creating asymmetries in information. In such, creation and

protection of intellectual property are also related to the technological leadership

first-mover advantage since the experience curve effect is diminished as the inter-firm

sharing of technological information is increased. This is an example of a cost of









technological transfer. One factor that can increase the sharing of information is

inter-firm mobility of workers.

The second first mover advantage discussed is preemption of assets. Preemption is

the appropriation of something in advance of others. For example, firms can gain

advantage over competitors by pursuing strategies that enable them to exercise

preemption over input factors or intellectual property (R&D and patents).

The third first mover advantage has to do with increasing switching costs. For

example; by creating brand loyalty through exclusive quality, or creating artificial brand

loyalty through contractual switching costs like airlines do with frequent flier programs.

However, according to Rumelt et al. (1991), the most influential change to strategic

management came from Michael Porter's work titled Competitive Strategy. Michael

Porter's work synthesized into a logical framework the Chicago School's idea that

different industry structures are reflected in different industry outcomes or performances

as opposed to market power. His well-known and extensively used framework, Porter's

Five Forces, is built based on the structure-conduct-performance (S-C-P) paradigm

of industrial economics.

The key aspect when formulating a competitive strategy is relating the company to

its environment. This environment includes social and economic forces, but mainly the

industry or industries in which the firm competes. Industry structures have a strong

influence in determining the competitive rules of the game and the strategies potentially

available to the firm (Porter 1980). Our study makes use of Porter's Five Forces

framework as an aid to understand the forces and behaviors operating in the industry in

which XYZ Research Corporation competes.






15


Summarizing, our study argues that strategic analysis supported by Porter Five

Forces framework and a SWOT analysis of the industry are appropriate foundations for

the strategy formulation of a firm. In aiding XYZ Research Company to develop a

strategy for their business, our study makes use of these tools and data gathering methods

(strategic analysis, SWOT analysis, Porter's Five Forces, face-to-face interviews, etc) to

accomplish the objectives and goals proposed.















CHAPTER 3
METHODS PROPOSED

This chapter discusses the methods proposed to carry out our study. Section 3.1

shows the alternative strategies reviewed to address our research problem. Section 3.2

defines the case study strategy as the preferred research strategy. Section 3.3 describes

the survey tool (interviews and focus groups) used.

3.1 Alternative Strategies for Addressing the Research Problem

Several research strategies used to address social science research include

experiments, surveys, case studies, histories and the analysis of archival information. The

selection of which strategy is used by investigators depends upon three conditions: (1) the

type of research question being asked, (2) the control the researcher has over actual

behavioral variables or events, and (3) the focus on contemporary as opposed to historical

phenomena (Yin 1994).

Research phases affect which type of research strategy might be selected. Phases

can be exploratory, descriptive, or explanatory. Phases differ from each other on the type

of research questions they try to answer. Exploratory research is mainly concerned with

answering "what" questions. Descriptive research is effective in answering "who" and

"where" questions. Finally, explanatory research is meant to answer "how" and "why"

questions.

Table 3-1 summarizes the different relevant situations for five alternative research

strategies. Each strategy is assessed according to the three conditions mentioned above.









Table 3-1. Relevant situations for different research strategies
Requires control Focuses on
over behavioral contemporary
Strategy Form of research question events? events?
Experiment How Why Yes Yes

Survey Who What Where How How No Yes
many much

Archival Who What Where How How No Yes or
Analysis many much No

History How Why No No

Case Study How Why No Yes
Obtained from Yin, Robert K. "Case Study Research: Design and Methods." 2nd
edition.Thousand Oaks, CA: Sage Publications, 1994.

Questions like "What are your strengths as an independent food-testing

laboratory?" are here called "what" questions constituting the exploratory phase of

research. Although favoring the use of surveys and archival analysis, "what" questions

can be addressed with any of the five research strategies. This study will be using face-to-

face interviews and focus groups, and an extensive literature review, to carry out the

exploratory research phase.

The descriptive phase addresses "who," "where," "how many," and "how much"

types of questions. For example, "Where are most of the independent laboratories

located?" "How many laboratories participate in the industry?" or "Who do you consider

your main competitors in the industry?" Survey strategies or archival analysis are the

best-suited strategies to carry out this phase of the research. Our study will consider the

use of face-to-face interviews and focus groups, and archival records from Research

Triangle Institute's Food Testing Laboratory Database (FTLD) to carry out the

descriptive phase of this study.









Explanatory research is pursued by answering "how" and "why" questions; case

studies, experiments, and histories are commonly used to carry out this phase of research.

Our study will make use of face-to-face interviews and focus groups, and the case study

approach to tackle this phase of the research.

Of all five research strategies, only experiments require the researcher to have

control over behavioral variables and events. The type of research carried out in our study

lends itself to very little control over variables; thus, conducting experiment-based

research is not advised. Meanwhile, the case study and historical archives strategies do

not require the investigator to have control over the variables studied and could be used

to accomplish the objectives of our study.

However, of these two (case study and historical archives), only the case study

approach focuses on the study of contemporary events. Summarizing, the case study is

the most recommended approach to address research that presents the three following

characteristics: (1) answer "how" and "why" questions, (2) the investigator has little

control over variables, and (3) when the focus is on contemporary phenomena with real

life context (Yin 1994).

3.2 Case Study as the Preferred Research Strategy

It is argued in this section that the case study strategy is the best suited for

accomplishing the objectives of our study as stated earlier. The main focus of the case

study research strategy is on understanding in detail the dynamics present in single

settings. Study of cases involves meticulous examination of very few persons, items, or

entities. Commonly used in medical and psychological research, the case study method is

not as frequently used in the agricultural economics profession, though its use is

becoming more common in agribusiness research.









The trend in academic research is to use deductive methods of research over

inductive methods, whenever possible. A transition has been observed from using case

studies of actual situations to develop generalizations through induction, to deductive

methods utilizing the falsification method of Popper,2 and the statistical methods of

multi-variate analysis (Rumelt et al. 1991). Although the case study approach is more

effective for inductive research methods, it also has a role to play in deductive research.

Typically, case studies involve a combination of data collection techniques; such as

archives, interviews, questionnaires, and observation. The grouped evidence collected

may end up being qualitative, quantitative, or both (Eisenhardt 1989). While multivariate

analysis is good in dealing only with quantitative data sets, the case study approach can

be used for all quantitative, qualitative, or mixed sets of data.

3.2.1 Strengths of the Case Study Research Approach

Traditionally, case studies were thought only appropriate for the exploratory phase

of an investigation; that surveys and histories were effective for the descriptive phase;

and that only experiments were correctly used when doing explanatory or causal inquiries

(Yin 1994). The hierarchal framework of research phases reinforced the idea that case

studies could not be used to describe or test research propositions. A more current view is

that case studies can be used for all three types of research: exploratory, descriptive and

explanatory.

The case study method is conceived as a simultaneous treatment and observation

process that can be made over a period of time. According to Kennedy (1979), studies of



2 According to Popper, you can never demonstrate that something is materially true, but you can
demonstrate that some things are false. For a more detailed explanation of Popper's views see Blaug
(1992). "The Methodology of Economics of How Economics Explain."









individual cases allow the researcher to learn intricate details and provides insight into

the problem being considered, which aids in the process of prescribing a course of action.

Casley and Lury (1987) consider detailed insight is required when it is necessary to probe

deeply into systems governing behavior or when analyzing the interrelationships among

people and institutions to explain attitudes and behaviors.

3.2.2 Concluding Remarks Regarding The Case Study Research Strategy

Our study is based on research that is not designed to be tested with sophisticated

statistical analysis or econometric methods. The detailed nature of our research, the

limited number of observations, and the lack of specific numerical data prohibit standard

hypothesis testing. This research lends itself to the testing of research propositions by

in-depth analysis of industry structure, dynamic relationships, and forces influencing

behavior in the U.S. food-testing laboratory industry.

The exploratory and ongoing organic nature of our study limits the researcher's

ability to predetermine clear methods to test its propositions, and is best addressed by use

of the case study research strategy. Yin (1994, p. 102-103) addresses this issue by

stating:

Unlike statistical analysis, there are few fixed formulas or cookbook recipes to
guide the analysis for novices. Instead, much depends on the investigator's own
style of rigorous thinking, along with sufficient presentation of evidence and
careful consideration of alternative interpretations.

3.3 Strategic Analysis Interviews and Focus Groups

This section describes the series of interviews carried out at XYZ Research

Corporation for purposes of our study. The strategic analysis involved a series of visits to

the company to conduct focus groups with its employees and management. Five focus

groups were carried out at XYZ Research Corporation. Each session took between three









and four hours. Four of the five focus groups were comprised of employees across the

company, involving an average of four participants per session. The fifth session was

conducted directly with the CEO, Dr. Brown; and Vice President, Mr. Hart. In total, 17

employees and 2 top managers were interviewed. Participants were selected from each

department in the company to make the sample representative. Interviewees were

grouped according to their department.

The interview was adapted from a previously developed interview, authored by Dr.

Christopher Peterson3 from Michigan State University. Peterson (who enjoys an

extensive background in strategic management research) obtained his PhD from Cornell

University in 1991, and his M.B.A. from Harvard University in 1981.

The interview involved filling and discussing a questionnaire regarding: marketing,

financial, human, operations/production, organizational and information resources in the

company (See Appendix A for the complete questionnaire used). Each item in the

questionnaire was to be ranked by the interviewee as a weakness or strength for the

company. The scale used ranked from 1 (great weakness) to 5 (great strength).

The results obtained from employees were averaged and compared to the average

obtained from top management answers. Top management included the CEO and the

vice-president of the company. The results were then used to compare perceptions and

gain insights into the issues confronting the company.


3 Peterson, H. Christopher. "Strategic Analysis Interview." Personal communication, January 2003.















CHAPTER 4
STRATEGIC ANALYSIS

This chapter contains: Section 4.1 shows an overview of the U.S. independent

food-testing laboratory industry, its unique characteristics, and dynamic interaction with

the food industry supply chain together with issues surrounding it and factors influencing

its demand. Section 4.2 is an application of Porter's Five Force framework to the U.S.

independent food-testing laboratory industry is used to analyze the forces affecting the

industry. Section 4.3 shows the results gathered from the strategic analysis interviews and

focus groups are discussed. Finally, in Section 4.4 the findings from the Strengths

Weaknesses Opportunities and Threats Analysis (SWOT) conducted on XYZ Research

Corporation are summarized.

4.1 Overview of the U.S. Independent Food-Testing Laboratory Industry

Much of the next section comes from Fanjoy et al. (2001) Food Testing

Laboratories Database (FTLD). Fanjoy et al. (2001), from the Research Triangle

Institute, used FDA's (1997) definition for private laboratories4 to gather data on food-

testing laboratories and compiled it into a database that documents several industry

variables (e.g., location, economic variables, capabilities, and quality assurance

programs). Their research recognizes two limitations: (1) the U.S. food-testing laboratory

industry is not well defined which posed difficulties when screening companies that

4 The term "private laboratory" refers to those private sector laboratories that conduct testing of regulated
products and submit analytical data to the FDA to demonstrate compliance with the FD&C Act. The term
includes only those laboratories, which not regulated by Good Laboratory Practices and/or Good
Manufacturing Practices. By definition, private laboratories are independent providers of analytical services
and are not directly associated with firms utilizing their resources.









qualified as food-testing laboratories from other types of laboratories, and (2) laboratory

websites, maintained mainly for promotional purposes and association sources (e.g.,

American Council of Independent Laboratories-ACIL), do not include economic

variables or economic data on sales volume and what was available was hard to confirm.

In general, companies do not share such information in a freely manner.

Fanjoy et al.'s research used several screening methods to select laboratories and

define the food-testing laboratory population: (1) use of multiple private and federal

resources (e.g., company websites, FDA's OASIS), (2) use of a list purchased from

infoUSA containing 5,000 laboratories that are included in SIC code 8734-02:

Laboratories-Testing which was filtered by initially excluding laboratories that do not

test food or water, (3) grouping of the remaining laboratories in the list into categories by

their names and reviewing 5 to 10 examples from each category, (4) giving closer

scrutiny to exclude companies containing keywords in their names (e.g., agri, calibration,

hemo, terra), (5) use of corroborating sources to reconsider laboratories excluded using

the keyword filter, and (6) expert reviews from food science personnel at six universities

(Cornell, NCSU, Penn State, Texas A&M, University of California Davis and Virginia

Tech).

The final database includes records for 546 companies that test food mostly within,

but also outside the United States. Available economic data for 193 of the 546 firms

suggests that industry sales volume easily surpasses $1.3 billion. However, this includes

revenues from all activities and services offered by the laboratories, not only from food-

testing services.










In Figure 4-1 all independent food-testing laboratories for which data was available

were grouped according to their sales volume or sales size. From the 193 available

records, the diversity in size of firms operating in the industry is easily observed. Almost

half of the laboratories (47%) have a sales volume of $500,000 to $2,499,000.

Approximately a third (32%) have a sales volume ranging from $2,500,000 to

$19,999,000. Only four firms showed larger sales volumes. A smaller number of firms

(13.3%) fall under the small mom-and-pop type of business with sales volumes of $1,000

to $500,000.


$1,000,000 or more 0L. 6 -- 71.07%

'CI $50,000$99,999 o5.5

$20,00"49,999 2.8
0
$10,000$19,999 5.W1

$5,000-$9,999 14.5O/
Ch $2,500-$4,999 4. 17.

o $1,000$2,499 242/ 21.52%
$500$999 1256.
< Less than $499 1. 13.29%

0.00/o 10.00/o 20.000/ 30.000/o 40.000/ 50.00%/o 60.00%/o 70.00% 80.00%
% of Total

Laboratories 1 Value of Products & Services Sold

Figure 4-1. Distribution of U.S. independent food-testing labs by sales class: 2001

According to the same data, around 71% of the estimated minimum of $1.3 billion

sales for the 193 laboratories belong to one single company (U.S Filter/Zimpro

Incorporated). Filter/Zimpro specializes in offering products, services and solutions for

water, wastewater and selected industrial processes to several industries. The rest of the

sales in the industry were distributed as follows: Medium-large sized companies (with









sales ranging from $2,500,000 to $19,999,000) accounted for approximately 19% of the

sales and medium-small sized laboratories ($500,000 to $2,499,000) accounted for 3.8%

of the sales. "Mom-and-pop" ($1,000 to $500,000) businesses contributed less than 1%

of the sales. The remaining 6.3% was made by the other three companies with volumes

sales larger than $19,999,999.

Two key competitors in the industry worth mentioning are Siliker Laboratories and

Microbac. Table 4-1 shows estimates of Silliker's sales volumes for its U.S. based

locations, Table 4.2 show estimates of Microbac's sales volumes. Both were obtained

using Food Testing Laboratories Database's economic data. Information for 9 of

Silliker's 11 U.S. locations suggests sales between 33.5 million and 67.5 million dollars.

According to the FTLD, sales from 11 of Microbac's 16 U.S. facilities are between 17

and 39.5 million dollars.

The FDA divides the U.S. territory in five regions. The Food Testing Laboratory

Database (FTLD) contains regional location data for 502 of the identified 546

food-testing laboratories operating in the U.S. Table 4-3 shows the number of

laboratories operating in each region. The Central region shows the highest concentration

with 165 laboratories, while the lowest concentration is seen in the Northeast area, with

only 67 laboratories. Such concentration in the Central and Pacific areas may be an

indication of where the clients are, showing labs wanting to reduce transportation costs

and enhance presence and communication by being close to their clients. On the other

hand, it may also be simply related to cost efficiency decisions other than transportation

costs, like lower labor costs, lower input costs, or closeness to input industry.










The remainder of this section discusses the nature of the industry (Section 4.1.1).

Then, Section 4.1.2 introduces a framework using the U.S. food supply chain to give a

clear picture of the U.S. independent food-testing laboratory industry and its complex

links and relationships with the food industry. After this, a list and description of the

major factors influencing demand in the industry is presented in Section 4.1.3.


Table 4-1. Silliker's sales volume for domestic facilities


Location
Illinois
Iowa
Minnesota
Texas
Ohio
Wisconsin
California
New Jersey
California
Georgia
Pennsylvania
Total


Sales volume (thousands)
From To
N/A N/A
2,500 4,999
N/A N/A
2,500 4,999
2,500 4,999
2,500 4,999
10,000 19,999
5,000 9,999
5,000 9,999
2,500 4,999
1,000 2,499
33,500 67,491


Table 4-2. Microbac's sales volume for domestic facilities


Location
Fayetteville, NC
Fort Meyers, FL
Hampton, VA
Venice, FL
Scarborough, ME
Marlborough, MA
Corona, CA
Hammond, IN
Maryville, TN
Erie, PA
Pittsburgh, PA
Louisville, KY
Camp Hill, PA
New Castle, PA
New Ellenton, SC
Warrendale, PA
Total


Sales volume (thousands)
From To
500 999
N/A N/A
1 500
500 999
1,000 2,499
N/A N/A
N/A N/A
500 999
1,000 2,499
2,500 4,999
10,000 19,999
N/A N/A
N/A N/A
500 999
500 999
N/A N/A
17,001 35,491









Table 4-3. Independent food-testing laboratories by region
Number of
Region laboratories
Central' 165
Northeast" 67
Pacific 105
Southeast l 85
Southwest 80
Foreign 87
Total 589
i Central: DE, KY, MD, NJ, OH, PA, VA, WV, IL, IN, MI, MN, SD, WI
ii Northeast: CT, ME, NH, NY, RI, VT, MA
iii Pacific: AK, ID, MT, OR, WA, CA, HI, NV, AZ
iv Southeast: AL, FL GA, LA, MS, NC, Puerto Rico, SC, TN
v Southwest: IA, MO, NE, KS, AR, OK, TX, CO, NM, UT, WY

4.1.1 Nature of the Industry

Our study identifies two particularities that define and distinguish the U.S.

independent food-testing laboratory industry from other industries in the United States:

(1) the existence of the industry is closely linked to a trend in the food industry to

outsource some of the activities required by their business, and (2) most of the demand in

the food-testing laboratory industry is generated directly from the requisition from the

federal government for food companies to comply with food safety regulations.

4.1.1.1 Outsourcing and the U.S. independent food-testing laboratory industry

Outsourcing is the assignment of work to a third party for a specific length of time

with an agreed-on price and service level (Giese 2001). According to International Data

Corporation (1999), worldwide outsourcing services is a $100-billion industry, with sales

of $99 billion for 1998 and expected sales for 2003 of $151 billion.

The food industry is part of this outsourcing phenomenon, including the existence

of the U.S. independent food-testing laboratory industry. Food firms in the U.S. operate

in an intensely competitive, highly regulated, and mature industry. Many of these firms









have resorted to downsizing in areas that are not central to their business for example,

laboratory testing. In fact, many labs that today are contract labs are, or were in the past,

directly associated with a major food company. Some examples include: R-Tech (Land

O'Lakes), Medallion Laboratories (General Mills), TPC Labs (Pillsbury), Northland

Laboratories (Sara Lee Corporation), and Covance (once a Ralston Purina Company

division) (Marsili 1997).

Compass Consulting International (2004) and Giese (2001) recognize the

advantages for food companies from outsourcing. These are

* It can be a cost effective method of supplementing in-house testing. Costs
associated with maintaining a state-of-the-art analytical food chemistry laboratory
are expensive. For example, costs include lab chemists and lab technician salaries
and fringe benefits, construction costs, chemical agents, glassware, instruments,
and repair and maintenance. Food companies might have temporary needs for a
certain test; buying the necessary equipment to never use it again is not an
economically wise decision. Independent labs make a better use of economies of
scale distributing the use of such equipment through many food companies.
Outsourcing can also help food companies reduce their overhead.5

* Allows food companies to concentrate in their main business, their strategic
assets or core competencies. For example, a manager in a food manufacturing
company such as Kellogg Company or Quaker Oats Company would probably
have a hard time in assigning his costly scientific staff s time to take over analytical
tests to comply with FDA regulations instead of using their time in developing new
products to capture new markets.

* Additional expertise. Large companies can benefit from having access to a vast
legion of experienced and knowledgeable human resources. Knowledge and
experience of meeting government approvals such as Food and Drug
Administration or U.S. Department or Agriculture requirements or compliance
standards such as Good Manufacturing Practices (GMPs) and Good Laboratory
Practices (GLPs) can be important assets that labs offer.





5 Overhead is an operating expense, more in detail it is the expense of maintaining property (e.g., paying
property taxes and utilities and insurance); it does not include depreciation or the cost of financing or
income taxes (www.cogsci.princeton.edu).









On the other hand, outside the U.S., most food firms in developing countries are

quickly adapting and modernizing themselves to participate in an increasingly globalized

world economy. Food firms in these countries resort to outsourcing services to the U.S.

independent food-testing laboratory industry mainly for three reasons: (1) many can't

afford the kind of personnel and installations needed to do in-house testing, (2) for those

that could afford it; the problem is such personnel, installations, and equipment are not

easily found in their home countries, and (3) U.S. based independent laboratories would

be expected to be more familiar with the regulations and testing needed to import foods

to the U.S. There are also potential negatives for a company to consider when

outsourcing. These are

* Sharing of information. Some food companies are not exactly happy when
realizing they have to share test-methods and information with outside labs.
Especially when these labs do some work for the competitors.

* Outsourcing results in loosing some control. For example, food companies may
have to depend on independent laboratories' turnover and quickness when priority
tests are needed.

4.1.1.2 The U.S. food safety system and the U.S. independent food-testing laboratory
industry

Much of this section was extracted from the FDA/USDA's U.S. food safety system

Country Report. The section describes the U.S. food safety system and how it influences

demand in the U.S. independent food-testing laboratory industry.

The United States Constitution dictates the responsibilities of the executive,

legislative and judicial branches with regards to the food safety system. The congress

enacts statutes and authorizes executive branch agencies to implement them by

developing and enforcing regulations.









The system is guided by 5 principles: (1) only safe and wholesome foods may be

marketed; (2) regulatory decision-making in food safety is managed according to risk

assessments and is science-based; (3) the government has enforcement responsibility; (4)

manufacturers, distributors, importers and others are expected to comply and are liable if

they do no; and (5) the regulatory process is transparent and accessible to the public.

The principal federal regulatory organizations are the Department of Health and

Human Services (DHHS), Food Drug Administration (FDA), the U.S. Department of

Agriculture's (USDA) Food Safety and Inspection Service (FSIS), Animal and Plant

Health Inspection Service (APHIS), and the Environmental Protection Agency (EPA).

The FDA is responsible for protecting the public from impure, unsafe, and

fraudulently labeled food other than in areas regulated by FSIS. FSIS is responsible for

ensuring that meat, poultry, and egg products are safe, wholesome, and correctly labeled.

EPA's mission includes protecting public health and the environment from risks posed by

pesticides and promoting safer means of pest management.

The major food safety authorizing statutes in existence are the Federal Food Drug,

and Cosmetic Act (FFDCA), the Federal Meat Inspection Act (FMIA), the Poultry

Products Inspection Act (PPIA), the Egg Products Inspection Act (EPIA), Food Quality

Protection Act (FQPA), and Public Health Service Act (PHSA). The Nutritional Labeling

and Education Act (NLEA) should also be considered, since it also generates demand for

the U.S. independent food-testing laboratory industry.

Regulations are a tool to help FDA in enforcing compliance with food safety acts.

Such regulations usually translate into increased demand for food-testing services. For

example, on November 8, 1990, President George Bush signed the Nutritional Labeling













and Education Act, which intended to enable consumers to select a healthier diet by


providing accurate and reliable information about nutritional content. This act amends the


Food Drug & Cosmetic Act and as such falls under FDA's jurisdiction. Taken from Muth


et al. (2003), Figure 4-2 gives an overview of the process by which the labeling


information and graphics on food and dietary supplement products may be changed as a


result of a regulation. Once a regulation is determined to affect a food or dietary


supplement product, the manufacturer may conduct analytical testing to decide whether


to reformulate the product or re-label it. The manufacturer then chooses between doing


analytical testing and reformulation in-house or by outsourcing services from food-testing


laboratories.


Food or dietary supplement label
change anticipated/announced

Determine which products are
potentially affected

If necessary, conduct
analytical testing

F- Ii' 11. 11 F? *~.i I-JI
Maintain existing Y
labels Determine whether to i *i .i -
reformulate
N |Product development ^
Research _
SAnalytical testing
Administratitve
activities Consumer evaluation
of organotropic
F Graphic design characteristics
Market testing
(if conducted)

SPrepress
Plate or cylinder
engraving and color
T matching s
Print new packaging
or labels
Exhaust/discard old
inventory




Figure 4-2. Overview of the label change process in response to regulation.
Obtained from Muth, K. Mary, Erica C. Gledhill, and Shawn A. Karns.
"FDA Labeling Cost Model." RTI Project Number 06673.010. Research
Triangle Park, NC: Research Triangle Institute, 2003.









In 1993, the FDA estimated the new NLEA would cost food processors between

$1.4 billion and $2.3 billion over the next 20 years. A conservative estimate, calculated

using FDA's Labeling Cost Model developed in the Research Triangle Institute by Muth

et al. (2003), shows that at least 10% of such extra costs for food processors would be for

analytical testing. This example shows how demand in the food-testing laboratory

industry is closely linked and dependent on the creation of new government regulations.

At the same time, government regulations respond to expressed needs and concerns from

the public. Examples of food related regulations or statutes responding to public needs

are: health concerns and the NLEA, consumer safety related to dietary supplements6 and

the Dietary Supplement Health and Education Act (DSHEA).

4.1.2 The U.S. Food Supply Chain and the U.S. Independent Food-Testing
Laboratory Industry

Supply chains are also known as value chains or demand chains. Supply chains can

be defined as all the links involved in managing the flow of products, services, and

information in the agro-food system from seed to table (Wysocki 2000a). The U.S. food

supply chain and its major alternate marketing channels are depicted in Figure 4-3.

Retail Food Stores are classified according to the North American Industry

Classification System (NAICS) under subsection 445 (U.S. Census Bureau 2002).

Establishments in this subsection usually retail food and beverage merchandise from

fixed point-of-sale locations, they own special equipment for display (e.g., freezers,

refrigerated display cases) and employ trained staff for the processing of food products to

guarantee proper storage and sanity required by regulatory authority (Food Institute



6 Dietary Supplements Terms such as functional foods or nutraceuticals are widely used in the
marketplace.









2003). Supermarkets, grocery stores, convenience stores and fresh produce markets are

all included in this sub-sector. For years 1998 to 2001, the industry grew at an annual

average rate of 4%. Growth suffered a slump in 2002 (2.8%). Data gathered from U.S.

Census Bureau (2003), shows the industry seems to be recovering its growth pace with

sales for 2003 that scaled up to $505,933 millions, a 3.08% growth compared to 2002.

Food Service Outlets (NAICS subsection 722) prepare meals, snack and beverages

to customer order for immediate on-premises and off-premises consumption. Full-service

restaurants (e.g., Applebee), limited-service restaurants (e.g., cafeterias, fast food), snack

bars (e.g., coffee or frozen yogurt shops), food service contractors, caterers and drinking

places (retailing alcoholic beverages for on-premises consumption); all fall under this

subsection.

Food Manufacturers and food processors (NAICS 311) transform livestock and

agricultural products into products for intermediate or final consumption. The industry

groups are distinguished by the raw materials (generally of animal or vegetable origin)

processed into food products. The food products manufactured in these establishments

are typically sold to wholesalers or retailers for distribution to consumers (U.S. Census

Bureau). Many multimillion and billion dollar companies comprise the food processing

industry. In the period 2001-2002, the top ten food manufacturer companies summed up

$236,302 millions in sales. This includes companies like Nestle S.A. ($46,628), Kraft

Foods Inc. ($38,119), PepsiCo Inc. (26,935), Diageo plc7 ($16,644) and Mars Inc

($15,300). Some other companies not included in the top ten are Tyson Foods, Kellogg

Co and Sarah Lee Corp (Food Institute 2003). Most food manufacturing companies sell


Owner of the subsidiary Burger King









their diversified products to wholesaling companies that place them both in national and

international markets.

Food producers, manufacturers, and distributors are also under increasing public

and regulatory pressure to assure the quality of their product. Without performing

analytical tests, the potential for contamination exposure to the consumer is unknown. It

only takes one negative event of contamination or a recall to destroy brand image and

customer confidence. The result of a recall could translate into millions of dollars in

losses for food manufacturing companies. Many of these are very well known companies,

all managing very strong lines of brands. Accountants would attribute an important

portion of the value of these companies to their goodwill accounts. Brand strength and

constant quality are important features for any food manufacturer wishing to stay in the

game for a long time. Thus, reliable test results are a must for independent food-testing

laboratories that plan on increasing or maintaining their customer base.

Every link in the U.S. food supply chain is required by law to perform some sort of

testing activity that ensures their product to be safe and adequate for consumption. The

U.S. independent food-testing lab industry has the capability to provide testing and/or

research services for all the links involved in the food supply chain. For example: food

manufacturers require product development services to speed up some of the steps in

placing new products in the market or nutritional content testing to develop labels for

their products; processors require chemical-analytical testing to avoid toxin poisoning

and comply with maximum levels of pesticide residue; agricultural producers in the beef

industry require tests for the presence of Bovine Spongiform Encephalopathy (mad cow

disease); retailers and wholesalers are constantly sampled by the FDA to test for











microbiological pathogens (e.g., Salmonella, E. Coli); food importers require GMO


testing to discard worries about contamination from altered species; all levels of the food


supply chain require HACCP programs be put in place.

CONSUMPTION
U.S. Consumers



RETAILING Retail Food Specialty Food Service
Stores Retailers Outlet;



Integrated Non-Integrated Non-Integrated Integrated
Grocery Grocery Food Service Food Service
Wholesalers Wholesalers Wholesalers Wholesalers/Distributors

WHOLESALING


SExportMarkets


FURTHER Government
FURTHER p Food Manufacturers Purchases
MANUFACTURING

INITIAL
S Initial Food Procesors
PROCESSING
Import
Terminal
Assemblers
COMMODITY
ASSEMBLY
Assemblers

AGRICULTURAL
PRODUCTION Agrcultural Producers -
PRODUCTION


INPUT Agricultural Input
SUPPLIES Suppliers



Figure 4-3. Major alternative marketing channels of the U.S. food system
Obtained from Wysocki, A. "Major Alternate Marketing Channels in the
U.S. Food System." Food iTT7ildcling & Retail Marketing. Extension
Institute of Food and Agricultural Sciences: University of Florida. No. 2 &
3. (April/May 2000b).


In addition, the FDA's Bioterrorism Act and the USDA's Country of Origin


Labeling provisions mandate that every business entity that comes into contact with food









should know where it came from and where it is going. This one-step backward, one-step

forward concept compels the whole U.S. food supply chain to maintain strict records of

their output, while the new ability to trace food safety failures to the responsible entity

will probably increase the number of food safety tests demanded across the whole supply

chain.

With this system in operation; in the case that a food safety failure takes place; it is

probably food processors and food manufacturers who take the biggest hit. Retailers

might end up having to recall product they had in their shelves; however, there is an

option to point fingers backward and the volume of product recalled is minimum

compared to the volume that manufacturers would have to recall if found in fault. On the

other hand, total product volume and product value from manufacturers is in most cases

larger than producers and packers.

4.1.3 Factors Influencing Demand in the U.S. Independent Food-Testing
Laboratory Industry

As shown in Section 4.1.1 and Section 4.1.2 of this chapter, the relationships and

interactions between the U.S. independent food-testing laboratory industry and the

different links in the U.S. food industry are many. A number of factors that influence

demand for the laboratory industry and the food industry are

1. Role of government regulations. As discussed in Section 4.1.1.2, new
regulations translate into increased demand from food companies for services
from independent food-testing laboratories.

2. Public or private research translates into new technologies, new tests, and
new services to be offered by independent food-testing laboratories. For example,
on June 2001, USDA's Agricultural Research Service (2001), announced
researchers had new information about the genetic makeup of Listeria, a
bacterium that causes serious food-borne illnesses. Today, laboratories are
expectant on FDA's new Listeria regulations and ready to make the first move
and be the first ones to offer Listeria tests as part of their services and products.









3. Consumer concerns, mainly health concerns in the present. Consumers play
an important role in the development of regulations. They directly affect which
regulations are put in place. For example, the NLEA was a response from the
government to consumer concerns for eating healthier foods and to be well
informed about what they eat. Today, the FDA is responding to consumer
concerns about the safety of their foods in the presence of the threat of terrorist
acts.

4. Homeland security and terrorism. Currently, only state public health
laboratories that are part of the Laboratory Response Network (LRN) are
permitted to identify or rule out bioterrorism agents in food products. Although
independent commercial food-testing laboratories are not allowed to do such
testing, the possibility of a terrorist threat has increased the level of alertness and
the strictness of all food safety regulations. This of course means more business
for independent food-testing laboratories.

5. International trade regulations and food imports. Similarly to FDA, article 5
of the WTO's Agreement on the Application of Sanitary and Phytosanitary
Measures requires all import restrictions made to protect or improve human
health, animal health or phytosanitary condition in any of its member countries, to
be based on scientific evidence and risk assessment. Regulations placed on food
imports entering the U.S. also generate demand for testing services from foreign
companies wanting to place their output in national territory.

6. New Product Development. Inside the independent laboratory industry, product
development is understood as the analytical testing aspect, stability and shelf life
testing, packaging design, and other physical and chemical aspects of the product
development process. Many independent food-testing laboratories offer product
development services in addition to their list of testing services. The rationale
behind this is that food companies spend most of their time and resources in
developing their prototype's functional characteristics and the other aspects of
product development (e.g., idea screening, concept testing, test marketing,
economic analysis, national launching), and would rather outsource the physical-
chemical testing and regulatory aspects to independent laboratories. Kotler (2000)
gathered information from a large consumer packaged-goods company showing
that only 2 of every 64 new product ideas are actually developed into products
that are then launched into national markets. Total cost for every 2 products
launched was $13.9 million, including costs of those ideas that never made the
market. Up to 11.5% of the costs per idea were due to product development only,
while the remaining costs were distributed between idea screening, concept
testing, test marketing, and national launch costs. Kotler also mentions another
estimate of between $20 million and $50 million per new product. The Food
Institute (2003), reports that in 2002, 9,632 new food products were introduced
into the U.S. market. Using Kotler's numbers means the whole food product
development business entails around $66.9 billion spent by manufacturers on a
yearly basis, and $7.3 billion spent only in the functional, physical and chemical









aspects. How much of this business is outsourced and how much is done in-house
is what directly influences demand for independent food-testing laboratories'
services. Considering many products can take months and even years of testing
and re-testing to be ready for the market, long-term business relations between
food companies and independent laboratories can be used by laboratories to
secure business.

7. Labs operating with Accreditations and Quality Assurance Programs suggest
reliability and can attract more business. As mentioned earlier in Section 4.1.2
in this chapter reliability of test results is a very important factor for independent
laboratories in maintaining business. Giese (2001) identifies four main factors
influencing food companies when deciding which laboratory to choose are: (1)
pertinent accreditations and certifications, (2) means to address needs in terms of
turnaround and communication, (3) appropriate facilities and personnel to do the
required tests, and (4) pricing (see appendix B for the major accreditations in the
industry).

8. Unpreventable catastrophes or incidents that have adverse impacts for the
food manufacturing, wholesaling and retailing industries for example, the
finding of a Bovine Spongiform Encephalopathy (mad cow disease) case in the
U.S. are in fact demand generators and thus good news for the independent
food-testing laboratory industry. In such cases, the government develops and
implements regulations that restore public confidence in the U.S. food industry,
while food companies look back for testing services to regain trust in their brands,
comply with new regulations, and bring back customer confidence.

4.2 Forces Influencing the U.S. Independent Food-Testing Laboratory Industry

In a purely and perfectly competitive market, competition among firms in an

industry drives the profit rates to zero. According to theory, we should also expect in a

perfectly competitive market with unsophisticated firms for profits to be evenly

distributed across firms in the industry. However, in the real world competition is not

perfect and in most cases firms are not passive price takers. Several studies have affirmed

that different industries can sustain different levels of profitability; part of this difference

is explained by industry structure. Michael Porter provided a framework that models an

industry as being influenced by five competitive forces: (1) Degree of rivalry, (2) Threat

of substitutes, (3) Buyer power, (4) Supplier power and, (5) Barriers to entry/exit and


threat of entry (Quick MBA 2004).









The next section is an application of Michael Porter's Five Forces framework to the

U.S. independent food-testing laboratory industry. Each force is described in detail.

4.2.1 Degree of Rivalry was Moderate

Degree of rivalry is defined as the level of competition observed in an industry. The

intensity of rivalry in the U.S. independent food-testing laboratory industry is determined

by the following factors and their implications:

* An accelerated market growth due to: (1) an increasing number of food safety
regulations, (2) a high rate of appearance of new technologies and new tests, (3)
increasing health concerns among public and, (4) the globalization of markets a la
par with homeland security concerns for terrorist attacks; decreases the level of
rivalry in the industry.

* A large number of firms participating in the industry increase the rivalry
because more firms compete for market share. Numerous independent labs compete
in the industry for customers.

* Relatively high fixed costs in proportion to variable costs results in economies
of scale that require independent labs to operate close to full capacity to maximize
profits. Laboratory equipment and installations can be very expensive enlarging
fixed costs in the form of depreciation creating this economy of scale effect. Within
the firm, the need for high levels of production increases rivalry among firms that
compete to place their output in the market.

* Low switching costs paralleled with high levels of risk associated for customers
when switching laboratories result in increased rivalry within the independent
lab industry. The high level of risk associated for food firms when switching from
one lab to another for food-testing results may drive wholesalers to perceive
switching costs as high. For example, an erroneous negative result when testing for
Salmonella enteritidis in meat products may result in illness or even death of many
end customers. The monetary loss from dropping sales due to negative image
impact and lawsuits filed for the meat wholesaler may scale up to thousands if not
millions of dollars. Under these circumstances many wholesaling firms remain with
their known reliable laboratories. On the other hand, if the wholesaler has a bad
experience with one laboratory, it is very easy and inexpensive for a wholesaler to
immediately switch to another laboratory. The level of rivalry is increased from
laboratories competing to capture their customer's loyalty with reliable results and
better service. Also, in some cases, distance and location of the laboratories may
increase switching costs for the wholesaler as a result of increased transportation
costs.









* High asset specificity results in increased rivalry in the U.S. independent food-
testing lab Industry. The industry presents a high level of asset specificity in
terms of a limited ability to switch the use of their equipment to an alternative
activity if its current activities result in failure. More specifically, human asset
specificity.

* The standardized characteristics of tests themselves limit the level of
differentiation possible in the industry and increase the level of rivalry. One
alternative to differentiate is to offer reliable results with faster and more
personalized service.

4.2.2 Threat of Substitutes was Low

In Porter's model, substitute products refer to products in other industries.

Economic theory states that a substitute exists when a product's demand is affected

because of a price change or introduction into the market of another product. A close

substitute product constrains the ability of firms in an industry to raise prices (Quick

MBA 2004).

Under this line of thought, it is possible to say that in-house testing represents a

substitute product for outsourcing services offered by independent food-testing

laboratories. More specifically, the tangible alternative exists for food companies to stop

outsourcing and start using their own labs to do in-house analytical and chemical testing

in case independent laboratories raise their prices excessively. This factor limits the

extent to which independent laboratories are able to increase their prices and widen profit

margins.

As a consequence, conditions influencing the level of threat of substitutes result the

same as those seen in Section 4.1.1.1 of this chapter as influencing outsourcing decisions.

Substitution between outsourcing and in-house testing rests on measuring the advantages

from outsourcing (economies of scale, concentration in core business, and additional

expertise) against its disadvantages (sharing confidential information and loosing some









control). The next list offers a detailed assessment of the threat of substitutes in the U.S.

independent food-testing laboratory industry.

* Currently, advantages from outsourcing outweigh the disadvantages due to
high costs of laboratory installations and high need of additional expertise to
keep up with changing regulations; this lowers the threat of substitutes. A
growing outsourcing industry reflects the trend from food companies, operating in
a very mature and competitive industry, to downsize in areas not central to their
business to widen already slim profit margins. Independent labs make better use of
economies of scale by distributing the use of installations and testing equipment
among various food companies.

* Substitution of outsource testing with in-house testing is not an option for all
companies. Independent laboratories targeting small companies as their main
clients do not have to deal with in-house testing as a threat of substitute. While
for large companies in-house testing is an alternative to outsourced testing; for
small companies, doing in-house testing is not viable due to a lack of resources.

* Consolidation and size of operations in the food industry may pose a threat to
independent laboratories. The outsourcing trend in the food industry can be
expected to continue as long as it remains reasonable for food companies to
outsource testing services relying on the fact that independent laboratories make
better use of economies of scale. Consolidation and growth in the food industry
poses a threat to the extent of food companies becoming large enough to use their
own testing equipment efficiently and close to capacity.

4.2.3 Buyer Power was Highest for Large Manufacturers and Lowest for Small
Producers

Porter's theory defines power of buyer as the impact that customers have on a

producing industry. Power is defined in terms of bargaining power, the relative strength

of buyers/sellers in influencing the forms of exchange in a transaction. Several conditions

may incline power to the buyer's (food companies) side: (1) buyers are concentrated, (2)

buyers show a credible threat of backward integration, and (3) buyers purchase a

significant portion of output. Other factors may incline the balance to the seller's

(independent labs) side: (1) threat of forward integration, (2) significant switching costs

for the buyer, (3) atomistic or fragmented structure of buyers, (4) producers supply a


critical input for buyers.









As discussed in Section 4.1.2 of this chapter, the U.S. independent food-testing

laboratory industry interacts with several industries across different levels of the U.S.

food supply chain including agricultural producers, processors, manufacturers, imports,

and others. According to the factors outlined in the last paragraph, different industries

across the food supply chain showing different characteristics will have different levels of

buyer power. The following assessment of buyer power in the industry takes into

consideration this thought.

* Independent labs dealing with major food manufacturing companies face a
highly concentrated industry. Concentration lessens gradually while going
down the food supply chain (see Figure 4-3). Food processors are less
concentrated than food manufacturers, and agricultural producers are less
concentrated than food processors.

* Outsourced testing services are critical for small companies, and not so critical
for large companies. Testing for food safety is mandatory for food companies.
Large companies have the option of in-house testing while small companies do not.

* No threat of forward integration exists; the possibility exists for food
companies to integrate backward. Independent laboratories pose no threat of
taking over food companies, but food companies have the option at least of re-
incorporating testing laboratories if economically necessary.

In general, independent labs have a wide range of industries to interact with and in

which to decide to participate according to their desired bargaining power. Independent

labs dealing with major food companies will observe lower bargaining power than those

targeting smaller growing companies.

4.2.4 Supplier Power was High

Supplier power refers to the bargaining power of input suppliers over a producing

industry. For the U.S. independent food-testing laboratory industry some examples would

be chemical agents suppliers, and equipment and technology suppliers.









The Food and Drug Administration's research activities provide the scientific basis

for its regulatory decisions. The FDA is constantly coming up with new and better ways

to test and ensure food safety. Independent laboratories update their testing services and

equipment constantly to keep up with new regulations. Having the latest and most

modern equipment is not inexpensive. In general, new technologies are sold in new

markets and are offered only by a few companies. In this sense, concentration can be

observed on the supplier's side, which shifts some bargaining power away from

independent labs.

4.2.5 Barriers to Entry/ Threat of Entry was Low

Competition within an industry is not only affected by existing rivals, but also by

the possibility of new firms entering the industry. In a perfectly competitive market, firms

should be able to freely exit or entry. However, in reality markets are not perfect. Any

factor limiting entry to an industry is called a barrier to entry, and if it limits exit it is

called a barrier to exit.

Our study identifies several barriers to entry/exit exist in the U.S. independent

food-testing laboratory industry. They are

* Mandatory and voluntary federal quality assurance programs and
certifications function as entry deterring mechanisms. Food safety is a very
important issue for the U.S. government and public. The FDA oversees the
effective operation of independent food-testing laboratories to ensure that food
results presented to them are reliable and that food is actually safe. The larger the
number of laboratories, the harder it is for the government to keep control on them.
Programs like the Good Laboratory Practices (GLPs) and Good Manufacturing
Practices (GMPs) are examples of several mandatory regulations that independent
laboratories have to follow to operate. To some extent this reduces the freedom of
entry to the industry.

* Minimum Efficient Scale and start-up costs are high enough to create an entry
barrier. Economies of scale and large costs involved with owning and operating a
laboratory increase the minimum efficient scale needed Minimum capacity-use
required to achieve minimum unit costs of production.









* Loyalty from food companies to laboratories that have proved their reliability
makes it difficult for new firms to enter the industry. Considering the
importance of reliable testing results, this factor truly creates a barrier to entry.

4.3 Strategic Analysis of XYZ Research Corporation

This section discusses the results obtained from the focus groups and interviews

conducted at XYZ Research Corporation, described in Chapter 3 of our study. Most of

the text and ideas discussed are very similar to the Strategic Report Analysis provided to

XYZ Research Corporation.

Table 4-4 summarizes the results obtained from the interviews. The first column in

the table shows the number of participants that answered each item. The number of

participants varies by each item because participants had the option of leaving any item

blank if they so desired. The second and third columns show the Average and Standard

Deviation obtained from the participants' answers. The fourth column represents the

Average from the answers given by the top management (Dr. Brown and Mr. Hart).

Finally, based on simple subtraction, the fifth column shows the difference between the

Employee Average and the Top Management Average. For example, the difference

between the employee assessment of product/service line breadth and depth top

management assessment was -.69. This means that XYZ employees, on average, scored

this item .69 (on a scale of 1-5) lower than top management. Large differences (larger

than 0.99) are marked with (**) next to the number while medium size differences (larger

than 0.5 but smaller than 0.99) are market with (*). Averages and averages' differences

supported with opinions expressed in the focus groups and interviews will be used to gain

insight into the issues concerning the company and as an indicator of similarities and

differences in perceptions between management and employees.









The rest of this section discusses the results from the focus group interviews

according to the following resource areas: marketing, financial, human,

operation/production, management/leadership, organizational, and informational.

4.3.1 Marketing Resources

With respect to marketing resources, top management and employees agree in their

assessment that customer satisfaction with XYZ's products and services is high and that

this represents a strength (average score of 4) for the company. Meanwhile, both

employees and management agree the company's ability to gain customers versus

competition could be improved (average score of 3). These scores are consistent with

verbal information gathered in the focus groups showing a perception of a weakness in

attracting customers because of the company's inability to compete on price with some

competitors (possibly due to economies of scale differences), but also of a strength in

keeping customers by offering quality-personalized service (volume vs. quality).

The average employees' scores for marketing items (6) advertising and promotion

activities, (7) product/service pricing, (8) facilities and methods used to sell to customers,

and (9) market share, reflect the employees' perception of a deficiency in the marketing

area. Employees' averages on grading marketing resources were in general lower than

top management's scores.

It remains a challenge for management to deal with this employees' perception. It

may be that such perception is due only to a lack of involvement and staff-management

flow of information. Or it may be that employees are indeed aware of both a true

deficiency and an opportunity to improve marketing activities. Perhaps, the situation can

be addressed as a chance to draw ideas from the personnel on ways to improve the

company's marketing effort.










Table 4-4. Summary statistics from the XYZ Research Corporation interviews
Employees Mgmt. Employee Ave-
N=19 Ave Std Dev Ave Mgmt. Ave
I. MARKETING RESOURCES
1. Customer satisfaction with products/services 19 4.00 0.58 4.0 0.00
2. Ability to gain customers versus
competition 19 2.97 0.59 3.0 -0.03
3. Knowledge of market 18 3.72 1.07 4.0 -0.28
4. Product/service line breadth and depth 18 4.31 0.77 5.0 -0.69*
5. Product/service quality in terms of function,
image, place, time, possession, ease of use 15 4.17 0.70 4.0 0.17
6. Advertising and promotion activities 17 2.43 1.15 3.0 -0.57*
7. Product/service pricing 19 3.71 0.84 4.5 -0.79*
8. Facilities and methods used to sell to
customers 16 2.99 0.83 4.0 -1.01**
9. Market Share 15 3.01 0.64 4.0 -0.99**
II. FINANCIAL RESOURCES
1. Strong and recurring operating profits 9 3.61 0.56 5.0 -1.39**
2. Efficient asset management 8 3.66 0.66 5.0 -1.34**
3. Strong and recurring return on investment 2 3.60 0.85 5.0 -1.40**
4. Proper balance of debt and equity 1 5.00 N/A 5.0 0.00
5. Strong and recurring return on equity 2 4.60 0.57 5.0 -0.40
6. Strong and recurring cash flow 3 4.40 0.53 5.0 -0.60*
7. Ready access to outside/new funds 4 3.13 1.03 3.0 0.13
8. Well managed customer credit 7 4.21 0.70 4.0 0.21
9. Well managed supplier credit 6 4.45 0.46 3.5 0.95*
III. HUMAN RESOURCES
1. Adequate number of people to do the work 18 3.14 0.97 3.5 -0.36
2. Adequate quality of people to do the work 17 3.74 1.03 3.0 0.74*
3. Personnel plans 15 2.87 0.40 3.5 -0.63*
4. Job design and descriptions 16 2.76 1.29 3.5 -0.74*
5. Performance standards and evaluation
procedures 18 3.08 1.03 5.0 -1.92**


6. Training programs 17
7. Good morale as evidenced by absenteeism,
turnover, tardiness, complaints, bickering,
employee growth and development 19
8. Compensation system that promotes
performance
and satisfaction 19
9. Equitable and competitive pay 18
10. Equitable and competitive fringes 18
11. Appropriate use of teams 15
12. Work ethic of individuals and teams 18
Differences larger than 0.5 but smaller than 0.99
Differences larger than 0.99


2.94 1.08


3.14 1.01


2.45
2.60
2.54
3.17
3.87


0.81
0.83
0.78
0.96
1.01


-0.06


-0.36


-1.55**
-1.40**
-1.46**
-0.83*
0.37










Table 4-4. Continued
Employees Mgmt. Employee Ave-
N=19 Ave Std Dev Ave Mgmt. Ave
IV OPERATIONS/PRODUCTION RESOURCES
1. Quality of facilities to serve customers 19 3.32 1.01 4.0 -0.68
2. Capacity of needed facilities to serve
customers 15 3.14 0.96 4.0 -0.86*
3. Up-to-date and appropriate technology 16 3.07 1.09 3.5 -0.43
4. Effective and efficient physical layout 16 2.56 1.2 2.5 0.06
5. Effective and efficient work flow 15 3.54 0.61 3.0 0.54*
6. Effective and efficient inventory control 12 3.08 1.28 3.5 -0.42
7. Effective and efficient purchasing practices 12 3.48 0.97 3.0 0.48
8. Effective and efficient production practices 16 3.86 0.59 3.0 0.86*
VI MAANAGEMENT/LEADERSHIP RESOURCES
1. Effective management style 17 3.59 0.83 3.5 0.09
2. Timely decision making 17 4 0.81 3.0 1.00**
3. Effective delegation 16 3.47 0.72 4.0 -0.53*
4. Effective participation 16 3.63 0.97 3.5 0.13
5. Effective risk taking 13 3.35 1.11 3.0 0.35
6. Effective leadership 17 3.59 0.81 3.5 0.09
VI. ORGANIZATIONAL RESOURCES
1. Appropriate mix of resources (people,
money, equipment) available 18 3.28 0.81 5.0 -1.72**
2. Resources properly placed to do the job 18 3.33 0.79 4.0 -0.67*
3. Effective interdepartmental communications 19 2.74 0.75 4.0 -1.26**
4. Effective reporting relationships 15 3.53 0.64 4.0 -0.47
5. Firm's public image 18 3.75 0.94 4.5 -0.75*
6. Strong organizational culture (productivity,
honesty, dispute handling, tolerance of
change) 18 3.5 0.87 4.0 -0.50
VII. INFORMATION RESOURCES
1. ApproDriate financial and cost accounting


systems 10
2. Planning system appropriate for internal
analysis 10
3. Planning system appropriate for external
analysis 7
4. Control system that highlights problems and
generates corrective action 14
5. Information systems that use the best
technology available 14
6. Effective information for strategic decision
making 11
7. Effective information for operational
decision making 12
8. Ability to utilize internet and e-commerce 17
Differences larger than 0.5 but smaller than 0.99
Differences larger than 0.99


3.25 0.79 5.0

2.52 0.84 5.0

3.21 0.81 3.5

3.36 0.98 2.5


-1.75**

-2.48**

-0.29

0.86*


3.46 1.08 4.0 -0.54


3.32 0.72

3.46 0.72
3.52 0.74


-0.68*

-0.54*
-1.48**









Using verbal information obtained from the interviews, our study identified three

repeatedly expressed perceptions on company and industry issues concerning marketing

activities: (1) that there is an overwhelming quantity of propaganda and magazine

advertising made by the large number of laboratories participating in the industry, and

that this compromises the effectiveness of such marketing methods, (2) that highly

specialized testing personnel is usually not trained to perform marketing activities; while

marketing specialized personnel is unable to effectively promote the company due to

their lack of understanding of chemistry, biology and other sciences concerning the

companies services and products, and (3) considering the high costs per hour of labor and

the personnel's high level of education and specialization, a management type of problem

exists on deciding the most economically efficient way to distribute time between testing

and marketing activities. For example, how much time should a scientist spend on

performing tests and how much on answering the phone?

4.3.2 Financial Resources

The low number of responses obtained from employees suggests that they have

little knowledge about the company's profitability and financial performance. However,

employees did show at least a little knowledge on the some financial resources, such as

strong and recurring operating profits and efficient asset management. Employees rated

these as slightly better than average. In general, employees ranked their answers lower

than top management.

While it is understandable that management may not wish to make financial

numbers public in a privately held company, in some cases the lack of awareness of

employees with respect to the company's performance may pose a threat to the









company's morale, motivation, and stability in terms of turnover, and productivity.

Managers should monitor this particular issue.

4.3.3 Human Resources

The most recurring discrepancy between top management's perception and

employees' perception occurred in the human resource management section. In reference

to performance standards and evaluation procedures, a compensation system that

promotes performance and satisfaction, equitable and competitive pay, and equitable and

competitive fringe benefits, employees rated these human resource management

components considerably lower than top management. While top management rated them

4 and 5 (strengths), employees averaged a rating of 3.08 or lower. Although it is expected

for employees to feel "underpaid", the depth of this feeling and the lack of motivation

resulting from the perception of low pay tied with low ratings for incentives and

evaluation implies a serious underlying problem for the company.

Such results show the need to look more closely at the compensation and incentives

programs in the company. The decrease in productivity that can arise from a low level of

motivation in an organization can adversely impact its performance and profitability. An

effective incentive program should produce higher returns by increasing morale and

productivity and more than offset the costs of such programs.

When examining responses to: adequate quality of people to do the work, personnel

plans, design and descriptions and appropriate use of teams; both top management and

employees rated these items as being average at best (with employee ratings slightly

lower than top management. Ineffective job descriptions can reduce productivity and

efficiency by: (1) over-lapping job duties leading to duplication of efforts, (2)

inefficiencies of assigning more people than needed to a given job, and (3) unclear job









responsibilities leading to confusion as to who is responsible for a given area. As

expressed in the interviews, the very specific nature of tasks in the company's area of

business may make it difficult to implement extremely detailed job descriptions.

However, this does not imply that job descriptions should not be used at all. While XYZ

Research Corporation does indeed have job descriptions; many middle managers felt

these job descriptions could contain more details and expectations. Job descriptions can

also be used as evaluation tools by assigning direct tasks and responsibilities to each

employee.

4.3.4 Operation/Production Resources

Efficient and effective use of production and operations resources affects

productivity in a very direct manner. As a whole, this section received only average

grades, meaning it is considered neither a weakness nor strength. Most of the items were

answered by more than 75% of the interviewees.

Owners and employees concur in giving average grades to: up-to-date and

appropriate technology (item 3), effective and efficient inventory control (item 6), and

effective and efficient purchasing practices (item 7). Low scores were given to effective

and efficient physical layout (item 4).

According to the interviewees' answers, technology could be kept more up-to-date

in the company. As discussed in Section 4.1.1.2 of this chapter, the FDA and other

executive branch agencies base each of the regulations put in place on scientific

discoveries and the increasing number of better technologies to perform tests.

Laboratories have to keep up with the latest technologies to offer tests required to comply

with the latest federal regulations. Coping with the latest technologies poses a potential

opportunity for having a first-move advantage over other laboratories in offering the









latest and newest tests first. With respect to XYZ, it seems that changing this issue from

not being weakness or strength to being a strength, is more a matter of enabling internal

company processes that speed up managerial decisions to acquiring equipment than a

matter of short cash flows.

With respect to inventory control and purchasing practices, these are two factors

that greatly determine a company's cost structure. Assuming XYZ actually faces

limitations to successfully compete on a price basis (see marketing resources in this

section) with larger companies and that such limitations are indeed a consequence of

economies of scale, it results most important for the company to achieve a cost structure

that is as efficient as possible. Developing written procedures that regulate inventory

control and purchasing practices are recommended by our study as one alternative

solution to this issue.

Two items that scored lower by employees than top management in this section

were: quality of needed facilities to serve customers (item 1), and capacity of needed

facilities to serve customers (item 2). Two items that employees scored higher than top

management were: effective and efficient work flow (item 5), and effective and efficient

production practices (item 8).

The difference in perception between employees and managers on capacity and

quality of installations could be restraining top management from recognizing that

current facilities represent a constraint for the employees' and the company's growth.

Managers believe installations to be a strength for the company, while employees

consider them as average. Some of the employees explained their answers by mentioning

the facilities were not initially designed for its current use but instead adapted, and that









this somewhat affects flow and efficiency. All parties recognized that the current physical

location of XYZ is not the ideal physical set-up for the business as it has grown. It is

possible that top management rated these higher as they are more aware than the

employees of the problems associated with trying to move at this time. Employees did

recognize there were some EPA issues that were involved in selling the current location

that probably prohibited XYZ from selling and moving, but more direct communication

may help employees realize why their firm has not moved into different facilities. With a

better understanding, the employees may still feel that the physical facility is not ideal,

but may lead to increased morale if the employees knew that management would prefer

to move to a new location.

4.3.5 Management/Leadership Resources

For this section, only for items 2, timely decision-making and 3, effective

delegation, were employees' and managers' averages different from one another by more

than a factor of .5. Both groups graded most items in this section as higher than average

meaning leadership resources are perceived as strengths of the company. It is interesting

to note that employees felt that timely decision making was more a strength (4 on a scale

of 5) than top management (3 on a scale of 5). Perhaps this reflects the current level of

satisfaction that employees have with decision making, while management would like to

see more timely decision making by entry-level and middle managers. One general

comment regarding delegation is in order. The average score given by employees was

3.47. Based on a qualitative assessment of the interview responses, most mid-level

managers feel there is a great deal of delegation when it comes to long-range goals and

objectives. However, these mid-level managers would welcome more flexibility when it









comes to some of the day-to-day decisions such as the handling of customer service

requests.

Interviewees expressed a concern towards an excessive concentration of the

leadership in the company relying in one single person (Dr. Brown). The question: "What

would happen to XYZ if Dr. Brown wasn't here?" was repeatedly mentioned as posing a

threat to the company given the industry's tendency to pair XYZ's future success with the

presence or absence of Dr. Brown in the company. This included a perception that clients

were beginning to prepare for a time when Dr. Brown was no longer with XYZ, and that

the clients also did not know what to expect, therefore might be making "contingency"

plans to move to other companies. This reiterates the discussed (see Section 4.1.2 and

Section 4.1.3) importance of the role played by trust, experience, and reliability in

generating demand for a given laboratory operating in this industry. In this case, food

companies may observe a large portion of these attributes in the person Dr. Brown, and

not in XYZ the company.

4.3.6 Organizational Resources

Top management scored all organizational resources in the company as a 4

(strengths) or higher while the average employee score for each item in the section was

3.75 or lower. Again, personnel in the company recognize the threat of a possible absence

of Dr. Brown as constraining the firm's public image from being a substantial strength to

being perceived only as little better than average.

While top management perceived there was an appropriate mix of resources (item

1) and that effective interdepartmental communications were operating (item 3), as seen

in their scores of 5 and 4 respectively; employees scored these considerably lower at 3.28

on appropriate mix of resources and 2.74 for effective interdepartmental communications.









Some of the middle managers were finding it difficult to take on marketing and sales

roles in addition to the scientific roles they were trained for. There was some discussion

regarding the relatively high turnover of entry-level positions that may be a result of a

lack of appropriate resources, however, there where no other indications corroborating

this issue.

Many of the interviewees indicated that interdepartmental communications were in

need of extensive improvement. Interview discussions suggest interdepartmental

communication improvements could be made in areas such as: (1) supply usage and

replenishment, (2) customer contacts, the needs of customers common to multiple

departments, (3) general knowledge of what is going on in each department and how this

related to other departments, and (4) the future direction of XYZ Research Corporation.

4.3.7 Information Resources

Effective information resources are crucial for the timely and efficient evaluation of

business plans being implemented. Large differences were observed between top

management and employees' average scores.

Top management considered that the company makes good use of efficient and

effective financial and cost accounting systems, and has an appropriate planning system

for internal analysis. In contrast, the employees perceived that financial and cost

accounting systems are neither strengths nor weaknesses for the company; and that the

planning system represents a weakness. In referring to the current accounting system, one

employee statement summarizes the impression received from the employee interviews:

"under this system, we are forced to manage to avoid a loss instead of managing to make

a profit."









Employees rated the planning system appropriate for internal analysis as a 2.52,

while top management rated this as a 5. The general impression from interviews was that

many of the current tools were used more to show what went wrong in a given

department versus what could go right in the future. Another factor affecting this scoring

was a general belief that planning exercises, such as this strategic analysis of XYZ

Research Corporation, have resulted in little change to company culture or operating

procedures.

A more effective planning system developed and implemented with the

participation of middle management could result in better planning and consequently in

higher productivity and profitability of each project and the company.

In terms of marketing and increasing business through the Internet, the employees

believe there is considerable room for improvement. Many employees believe XYZ

Research Corporation needs a more involved web presence.

4.4 Strengths Weaknesses Opportunities and Threats (SWOT) Analysis for XYZ
Research Corporation

Internal and external forces affect firms; a way to analyze these forces is to conduct

a thorough SWOT analysis. A SWOT analysis can be thought of as a balance sheet where

internal strengths represent competitive assets, while internal weaknesses represent

competitive liabilities. Opportunities, which are external, are outside-of-the-firm

situations that can be taken advantage of via strategic moves to improve a company's

competitive advantage over rivals. Threats, also external, on the other hand are factors

that increase the influence exerted by competitive forces acting in the industry and tend to

reduce a company's profitability (Wysocki 1997).









The next SWOT analysis is based on the information gathered through focus

groups and face-to-face interviews with XYZ's personnel (see Chapter 3 for a description

of the questionnaire used) and through extensive readings done by the researcher on

industry related topics. It also summarizes the findings of this study's discussions

regarding the dominant economic traits, key success factors, economic forces influencing

the market, and drivers of change in the industry, which were identified and discussed in

earlier sections of this chapter.

4.4.1 Competitive Advantages (Strengths)

Competitive advantages, or strengths, are ways of doing business that one company

does exceptionally well over its competitors. The term advantage implies that those

"ways of doing business" are desirable for companies in the industry. As mentioned at

the beginning of this section, strengths are internal to the company. The next list

enumerates XYZ's strengths. Strengths were identified with the help of several

employees in the company, the managers, and with our study's in-depth analysis of key

success factors and forces affecting the industry (see all previous sections of this chapter).

They are

* Stable financial structure. XYZ's privileged position in terms of current
profitability and stability has sparked their desire to grow. XYZ is a good example
of a medium-size company that is very profitable. Currently, the company is free of
debts, which offers an advantage in its cost structure and ability to offer better
prices in comparison to many competitors that have incurred in debts to expand
their business.

* Reliability and experience are key success factors in the industry. Food
companies will not risk a recall on their products by working with inexperienced
and unreliable labs. XYZ has an advantage over many younger laboratories because
of its business longevity of 37 years of experience in the industry. For example, a
client might choose XYZ over other laboratories because of XYZ's years of
repeated successful business experiences with known food companies. XYZ has
worked for 26 of the 30 largest food companies. Also, as expressed by several
people in the company, XYZ's reputation of offering quality services together









with Dr. Brown's recognized and renowned position in the industry, make
XYZ to be perceived as a very reliable company in the industry.

* Concentrated broad-based scientific expertise, knowledge base and quality
personnel. Food companies look for labs to be a source for additional expertise. In
contrast with multi-site laboratories, XYZ's extensive and complete stock of human
resources is concentrated in a single-location. One client-visit or phone call gives
them access to all of XYZ's expertise.

* Broad range of services offers convenience. XYZ's full-service capabilities offer
an advantage over limited-service laboratories when it comes to serving a client. It
results more convenient for food companies to use one single trusted laboratory to
do all testing instead of using one lab for each test needed. Also, being a full-
service laboratory allows for easier expansion into new areas of business like
nutraceutical, GMO or pharmaceutical testing, compared to limited-service
competitors.

* Proximity to University of Florida ability to draw resources (labor,
installations) from the university. XYZ's good relations with the university
represent access to a source and stock of social and human capital that many of
XYZ competitors do not have. Joint-programs and partnerships with the university
may enhance XYZ's credibility and reliability.

* Personalized customer service. Flexibility with customers (responsiveness),
personalized service to customers and care for customer satisfaction, are traits that
many too-large corporations lack. XYZ's medium-size operations make it possible
for them to concentrate efforts and effectively offer a personalized service to its
clientele, something their larger competitors might find more difficult due to their
size.

* Large customer base and established clients. XYZ has a large list of clients. This
poses a competitive advantage over many laboratories that depend on a small
number of clients for business. The difficulty observed for new laboratories to
establish themselves as reliable entities in the market, increases the importance of
already having established clients.

* ISO-17025 compliant, biological testing and chemical testing accredited
laboratory. The importance of accreditations in generating demand for a food-
testing laboratory was discussed in Section 4.1.3 in our study.

* Laboratory Information Management System (LIMS) and quick turnaround.
XYZ offers their clients with easy and quick access to results for their solicited
tests. Verbal information from the interviews estimated a turnaround of only three
hours for the Analytical and Food Chemistry division of XYZ.









4.4.2 Opportunities

Opportunities are circumstances over which the firm has no control. If taken

advantage of, the result may be reducing the effect of competitive forces over the firm

and increasing its profitability. According to Oster (1994), one way a company can earn

higher returns than its similar competitors is by recognizing and seizing new lucrative

opportunities early, before entry intro the industry accomplishes its profit-leveling

function. He calls this activity entrepreneurship.

Taking advantage of opportunities means: (1) recognizing them by understanding

the industry environment surrounding the firm and (2) developing abilities and strengths

within the firm that match up with such opportunities. Below is a list of all the

opportunities facing XYZ. Opportunities were identified by our study with the help of

XYZ's employees and management team:

* Growing market increasing regulations; appearance of new technologies,
increasing trend from the public to consume healthy foods-"smart-eating8"-
concerns for homeland security, and globalization of markets; all seem to point to a
long period of growth in the food-testing market. XYZ is in the right moment to
use its financial momentum to grow.

* Advances in information technology (like progress in internet communications)
can be used to make test results more accessible to the clientele or to strengthen
XYZ's presence in the market by using website promotion. Laboratories that take
advantage of this opportunity will probably have an edge on those that do not.

* Alternative industries to work with seafood, imports, food service, food
brokers, organic, labeling and audits where all identified by XYZ's employees as
alternatives areas of their business into which XYZ could focus to increase demand
for their output.

* Alternative industries to work in even though pharmaceutical and nutraceutical
testing may be considered a business apart, food-testing laboratories are perfectly
capable of performing the analytical process of drug development. For example,
Covance is a laboratory that offers services to both the food and the pharmaceutical

8 Desire from public to learn about the nutritional components of food before consuming it.









industry. However, a whole different line of laboratories that are dedicated solely to
the pharmaceutical industry provide their drug-developing clients not only with
services for the analytical testing aspect of their business but also with the clinical
related and data analysis services needed in the many stages of clinical trials and
the drug development process. For XYZ, seizing this opportunity would mean
developing not one but several abilities that would permit them compete against
specialized pharmaceutical testing laboratories. The nutraceutical testing business
seems more appropriate and closer to food-testing business. Public pressure to the
government has resulted in recent approval of nutraceutical product regulations that
will generate business for testing laboratories.

* Increased concern for homeland security as a result of the recent terrorism
threats. As mentioned in Section 4.1.3 in our study, currently only the state public
health laboratories that are part of the Laboratory Response Network (LRN) are
permitted to identify or rule out bioterrorism agents in food products. However,
there is an opportunity for private laboratories to develop collaboration programs
with state-owned laboratories. For example, University of Georgia's partnership
with the food industry to form the Center for Food Safety (CFS9) in Griffin,
Georgia.

4.4.3 Competitive Disadvantages (Weaknesses)

Competitive disadvantages are things a company does worse or poorly in

comparison with its competitors. A competitive disadvantage makes a firm more

vulnerable to industry competitive forces and increases the chances of the firm observing

low levels of profitability compared to the average in the industry. Competitive

disadvantages observed for XYZ Research Company are outlined below. Again, our

study drew from XYZ's personnel feedback to identify the company's weaknesses:

* XYZ could gain in productivity by improving its benefits & incentives
program. Responses to the interviews carried out at XYZ Research Corporations
suggest that there is some room to improve in the area of employee's morale. XYZ
is already a lucrative business; improving personnel's morale can further improve
its performance.

* Concentrated leadership. It seems the company's image and in some ways its
performance, as employees expressed in the interviews, relies excessively on the
company's CEO. There is a risk in putting all your eggs in the same basket; in this
case the risk is the big shock that expects XYZ when the CEO leaves active


9 Center for Food Safety Website http://www.griffin.peachnet.edu/cfs/









business. Suggestions for XYZ to prevent this from happening will be discussed in
Chapter 5 (Section 5.1) of this study.

* Weak internal communication & organizational system. XYZ can gain from
developing clear and effective written procedures to perform certain activities like
budgeting/planning, inventory control, and purchasing activities. These written
procedures may not result so critical for medium sized companies, but they surely
increase in importance as a company grows.

* Improvable Internet presence and non-aggressive marketing. XYZ can enhance
its marketing effort and presence in the market by directing resources into web
promotion. In comparison to its competitors, XYZ's website has wide room to
improve. Non-aggressive marketing approach leaves XYZ vulnerable to companies
with more aggressive advertising.

* Lack of curb appeal and physical room to expand in current location. Even
though it may not be true to what is in the inside, the outer front face of the
building is the first impression the client gets. XYZ lacks the extensive gardens and
fancy architecture that some of its competitors use to project themselves to their
clients as organized and modem laboratories.

* Absence of project managers. Project manager is the name given by the company
to a position involving technical and management duties. XYZ's management
expressed a difficulty in finding and hiring individuals that excel in both aspects.

* Absence of a customer service department. More than affecting the firm's
customer service quality, this affects its productivity. According to several
employees, by not having a customer service department, the responsibility of
giving customer service falls on them. Scientific personnel ends up divided
between performing tests and answering the phone.

* Price competition limitations against a few very large companies. This is an
advantage for larger companies resulting from the ability to lower average costs by
distributing fixed costs between larger quantities of output. It does not imply that
larger companies are more profitable, stable, or that they offer better services or
more accurate results.

* Being a single location laboratory may represent a disadvantage against multi-
site laboratories in three aspects: (1) to some extent it may limit customer access to
the firm and presence of the firm in the market to a smaller geographic area, (2) it
may result in higher transaction costs like transportation costs of sending results,
and (3) it may increase the turnaround time. However, XYZ's Laboratory
Information Management System (LIMS) reduces number two and three.









4.4.4 Threats

Threats are circumstances outside the control of the firm that increase the degree to

which the firm is affected by competitive forces and may result in profits decreasing. A

firm should develop abilities and set up their strategy to minimize the impact of threats to

its business. The following is a list of identified threats facing XYZ Research

Corporation:

* In-house testing trends in industry determined by equipment costs. One reason
for food companies to outsource for testing services is the elevated costs associated
with purchasing and maintaining the needed cutting-edge technology to perform
such tests by themselves. If equipment costs drop, the result may be food
companies finding it more economically logic to stop outsourcing and do in-house
testing. However, considering the fact that cutting-edge technology is usually
expensive, it remains very improbable that this threat would materialize.

* In-house testing trends in industry determined by economies of scale. Another
reason for food companies to outsource is the more intensive use that independent
food-testing laboratories give to testing equipment by repeating the same test for
different companies. It does not make sense economically for food companies to
purchase a machine, perform a test once and then leave the machine in a corner,
unused. However, as food companies become larger and internationalize their
operations, it may be that output and turnover grows to a point where demand for
some tests is large enough to justify purchasing the equipment. If so, that
company's outsourcing for those tests would stop.

* Changes in food regulations. Although the trend is for regulations to increase and
generate more business for testing laboratories, there is always a chance for
regulations to take a path that negatively affects the food-testing laboratory
industry. For example, the government may decide to increase their control over
testing laboratories or may try to reduce the margin of error in food safety tests in
the nation by increasing the number and strictness of quality assurance and good
lab practice regulations. Failure to comply may result in firms going out of
business, and tardiness in complying may result in competitors taking a reliability
edge in the industry over XYZ by complying first.

* Pharmaceutical labs switching more and more into XYZ's type of business.
This is the other side of the opportunity outlined in Section 4.4.2 with regards to
food-testing laboratories moving into the pharmaceutical testing business. As well,
pharmaceutical testing laboratories are perfectly capable of performing many food
related tests. Dealing with this threat would require enhancing and increasing the
number of unique benefits-for example, experience in the food industry-which
food-testing laboratories have to offer to food companies.














CHAPTER 5
RECOMMENDATIONS AND CONCLUSIONS

5.1 Recommendations for XYZ Research Corporation

The next recommendations are given on the basis of the work and information

obtained and presented in our study so far. Each recommendation presents a possible

course of action to be addressed by XYZ in the future.

5.1.1 Defining a Strategy

XYZ could greatly benefit from investing time and effort in defining itself and its

competitive strategy in a detailed manner. As discussed in Chapter 4 (Section 4.3.1),

XYZ does a good job in retaining customers due to its personalized service, but seems to

have a hard time getting new customers due to its inability to compete based on price

with larger rivals. This assertion was extracted from the data gathered in the interviews.

In his books, Competitive Strategy (1980) and Competitive Advantage (1985),

Michael Porter identifies three generic strategies that firms in any industry can follow.

Business theorists often categorize business behaviors using Porter's three distinct

strategies. They are cost leadership, differentiation, and focus strategies. Cost leadership

involves concentrating in selling a standardized product at low costs targeting the larger

portion of a price-sensitive clientele (Wright 1987). Cumulative volume of output,

conceptualized by the experience curve, is what allows cost leader strategists to offer

competitively priced services to a large portion of the industry's market through a

combination of economies of scale, capital-labor substitution possibilities and an

incrementally increasing learning curve (Hout, Porter, and Rudden 1982; Allan and









Hammond 1985; Abernathy and Wayne 1983; Boston Consulting Group 1972). Product

differentiators offer an industry-wide unique product or service (e.g., personalized and

fast, quality service) to the larger portion of a price-insensitive clientele. Finally, focus

strategists concentrate in addressing needs of particular buyers in the industry, which are

fewer in number (Wright 1987). It is highly unusual, and equally as unprofitable, for a

company to attempt to excel at more than one strategy at the same time. For example,

Wal-Mart's size allows the company to offer the lowest prices, but it is unlikely to see

Wal-Mart aiming to match the highest quality in the industry. Many argue that pursuing

two strategies at a time may result in a firm ending up in the middle with no competitive

advantage at all.

Wright (1987) further argues that larger firms in an industry with greater access to

resources may primarily compete with cost leadership or differentiation strategies. He

also argues that small firms, on the other hand may only viably compete with the focus

strategy. Using this framework, figure 5-1 shows our study's assessment of XYZ's

current position.

Size of the firm and its
access to resources Generic strategies

smaller firms with lesser focus
access to resources




ABC
larger firms with greater I cost leadership
access to resources
Differentiation

Figure 5-1. XYZ's size position and available strategies.
Obtained from Wright, P. "A Refinement of Porter's Strategies." Strategic
Management Journal 8(1)(January 1987):93-101.









XYZ's medium-large size operations and privileged financial position allow for

cost leadership or differentiation strategies. However, consideration should be given to

the fact that defining a strategy involves many important factors. For example, a strategy

dictates whom you compete against and how you compete. According to Porter (1980),

different strategies imply different organizational arrangements, control procedures, and

inventive systems. Considering the importance and wide set of economic and

organizational repercussions associated with selecting a strategy, the careful logic-based

approach to picking a strategy should involve XYZ choosing that one that best uses its

internal strengths and best exploits areas of opportunity in the industry; while minimizing

the potential effects of identified weaknesses and probable threats. This is where our

study's detailed Strengths Weaknesses Opportunities and Threats Analysis (SWOT) and

Porter Five Forces framework step in.

5.1.1.1 Considerations for XYZ choosing the cost leadership strategy

Cost leadership involves concentrating in selling a standardized product at low

costs targeting the larger portion of a price-sensitive clientele (Wright 1987). Before

taking this road, XYZ should consider the next issues.

* Other labs would have a first-mover advantage in this strategy. For example,
Silliker Labs already seems to operate under this strategy.

* What is the level of price-sensitiveness of the clientele? Our study found
information suggesting that other factors might be as important or more important
than price for food companies (e.g., reliability in terms of accreditations and
accuracy on test results, quick turnaround).

* Growing to take advantage of economies of scale. Cost leadership is achieved by
having the lowest production costs in the industry; this in turn is possible because
of a firm's ability to distribute fixed costs between larger quantities of output.
Given the medium-large size of XYZ's operations, becoming cost leader in the
industry would require increasing market share or demand and building new
facilities to increase output.









* Growing industry allows for firm's growth. There is space to grow in the food-
testing market. Several factors already mentioned in Section 4.2 of Chapter 4
(increasing regulations, health concerns, new technologies, etc) suggest a long-term
period of growth for the industry.

5.1.1.2 Considerations for XYZ choosing the differentiation strategy

Product differentiators concentrate in offering an industry-wide unique product or

service to the larger portion of a price-insensitive clientele (Wright 1987). For XYZ,

important considerations if taking this strategy include.

* How to differentiate? First thing is identifying the value traits desired by food
companies on their outsource laboratory of choice. The standardized characteristic
of tests does not allow for differentiation on the physical quality of the product
other than increased levels of accuracy in results. Differentiation is also possible on
the quality-of-service aspect of the product.

* XYZ's reputation for quality offers a forefront position to pursuing the
differentiation strategy. Results and employees' opinions obtained from the
strategic analysis interviews conducted at XYZ Research were presented in Chapter
4 (Section 4.3) of our study. Results show employees' and management's
perception of XYZ's output quality as a strength for the company.

5.1.2 Aggressive Strategy-Based Marketing

XYZ can enhance its marketing effort. First, by training a group of employees with

the necessary skills to effectively operate in both the scientific and economic areas of the

business. Having this versatile people to interact directly with the clients would increase

productivity by reducing scientific staff s time on the phone and would probably increase

the quality of service offered to the clients. At the present moment, XYZ's management

personnel already shows intentions of pursuing this matter by developing Project

Managers, which are positions involving technical and management duties. A second

way to enhance marketing effort would be by directing and allocating marketing

resources (including Internet) into one identified marketing goal and direction based on









XYZ's chosen strategy. Avoiding vagueness in marketing goals will allow XYZ to

achieve a more aggressive marketing posture with the same resources used now.

5.1.3 Understanding and Shaping the Customer Base

It would be recommended as a next step for XYZ to proceed in analyzing their

customer base as a means to validate the suggested company's performance in attracting

and keeping customers. That is: What exactly does the customer base of XYZ Research

Corporation consist of? What are the various categories of customers by size, by type of

service required, what percent of their business does XYZ Research Corporation get, how

often do they purchase, and how much does each type of customer contribute to the

bottom line?

Analysis done in our study related to buyer's power and threat of substitutes

suggests smaller clients, having no resources to do in-house testing, may result more

steady demand than large food companies which at any moment may switch from

outsourcing to in-house testing if they feel its economically wiser. It would not hurt XYZ

trying to maintain a percentage of their customer accounts destined to this segment of the

market. Potentially focusing on serving this group of smaller food companies that may

not be a priority for large competitors would leave the door open for XYZ to be the first

mover in targeting the segment.

Segmenting the market into different types of clients and analyzing each separately

could give the company a lot of insight into better ways of doing business. For example, a

trend to generalize foreign food companies as debt defaulters was expressed in the

interviews; it would be interesting to group XYZ's customer base using a small- large-or-

foreign criteria and analyze profitability from each group. Another interesting criteria to









group and analyze could be type of business or position in the food supply chain (e.g.,

processors, retailers, manufacturers).

Another important consideration for XYZ and any other laboratory would be

remembering not to place all your eggs in one basket. It is impossible to ignore the

bargaining power that multi-millionaire food companies are able to exert when doing

business. As beneficial as a partnership with one of these companies would be in securing

business, it results risky to dedicate yourself almost exclusively to one company. It would

be interesting to analyze XYZ's 2000 customer base keeping in mind that a large number

of clients contributing evenly to your sales, is a lot safer than creating a dependency by

doing business mostly with one huge client.

5.1.4 Decentralizing Leadership

In addition to deciding on the overall company strategy, management of XYZ

Research Corporation needs to clearly identify and communicate a transition strategy for

the time when the CEO (Dr. Brown) will be less active in the day-to-day management of

XYZ Research Corporation. While formulating a transition strategy and finding the

appropriate personnel to carry out this transition strategy have been a priority for XYZ

Research Corporation management, events have occurred to delay the implementation of

this strategy. Clearly communicating the transition strategy to the entire company would

reduce uncertainty and employee anxiety, and increase morale, and allow for a better

competitive response to questions being raised by current customers and competitor of

XYZ Research Corporation.

5.1.5 Development of a New Incentive Program

Employees gave low ratings for incentives and evaluation in the strategic analysis

interviews. This implies a serious problem. The extent to which an unmotivated









employee can diminish the productivity of a company is surprising. Unmotivated

personnel will result not only in lower productivity but also in a higher rate of turnovers,

leading to the costly process of hiring and training new employees. Retaining valued

employees must be a top priority for any business hoping to succeed over the long-term.

When developing an incentive program one should consider that incentives can be

monetary and non-monetary. Although money often plays an important role in someone's

decision to join or leave a company, it ranks no higher than fifth among the most

important factors for why employees stay with an organization (American City Business

Journals Inc. 2001). XYZ Research Corporation should re-evaluate all of its monetary

and non-monetary incentive programs, as changes could be made in both of these areas.

While it is true that when searching for ajob, every professional looks for financial

security, it is not the only factor. Every person wants to succeed, but being well paid is

not the complete definition of success to most people. Five Alternative Motivating

Techniques are:

1. The manager personally congratulates associates who do the job.
2. The manager writes personal notes about good performance.
3. The organization uses performance as a basis of promotion.
4. The manager publicly recognizes employees for good performance.
5. The manager holds morale-building meetings to celebrate success.

All of these address the employee's self-esteem. In other words, the best way to

retain valuable employees is by building personnel's confidence, increasing their self-

esteem and getting people to think that by being in the company they are not only making

money, but also being successful. It is noteworthy to emphasize that although non-

monetary incentives should not be the only focus at XYZ Research Corporation, most

non-monetary incentives cost little or nothing to implement.









Non-monetary motivators are powerful tools and due to their almost inexpensive

characteristics they can have very high rates of return. On the other hand, money can be a

dangerous motivator. When rewarding an employee's effort only with money, we may

end up teaching our employees to stay just for the money and to expect raises after every

achievement or to leave at the soonest, best offer. Development of an incentives program

is an important future step stressed by our study for XYZ Research Corporation.

5.1.6 Tuning Up the Organizational Structure and Accounting System

A number of small things could be done to improve performance related to

organizational structure and the accounting system. For example, this may include

developing clear internal monthly financial reports for departmental managers that

effectively communicate monthly performance, including information on how that

department contributed to the overhead of the company. As stated in Section 4.3.3 of this

study, job descriptions are an important part of evaluation procedures and should be

improved and used as a part of the evaluation process (instead of the evaluation process

using financial statements). Monthly departmental reports of on-going projects and plans

for new projects, a more effective system for handling stocks and supplies, and improved

methods for interdepartmental communication would also be helpful in optimizing the

company's cost structure and increasing its productivity.

5.1.7 On Building New Facilities

In terms of solving some of the issues mentioned above, moving to a new facility

might not be the top priority answer at the moment. Even though both top management

and employees would like to move into a new facility, such a move should only take

place after the company is clear on what strategy it will follow. It is true that moving to a

brand new building will have some effect in the whole company's morale, but it is also









true that if some of the other issues mentioned above are left unsolved this increase in

morale will only be temporary.

5.1.8 Management Training Programs

Management training programs and seminars could be organized to build a more

versatile scientific personnel. Considering the demanding nature of scientific careers, it is

not a surprise to find scientific personnel that is not so well rounded in areas other than

their expertise. In fact, science calls for such high levels of specialization. XYZ's

business however calls for personnel trained in both management and science,

management seminars customized to bring scientists gradually into touch with

management skills would surely have enormous repercussions over the company's

performance.

5.2 Recommendations for Further Research

Our study identified several factors influencing demand in the U.S. independent

food-testing laboratory industry. Other than price, some factors that are expected to

influence clientele's demand include: reliability/accuracy of tests, speed of tests'

turnaround, experience and promotional effort. However, the order of importance of these

factors with respect to each other was not analyzed. It would be challenging very

rewarding to pursue customer-preference research for this market. Willingness-to-pay

research using surveys or focus groups to gather information from food companies would

be one option. Goals of such research would include trying to determine the level of

price-sensitiveness of the market, or if price comes before reliability in importance for

customers or vice-versa, and test several accreditation programs to probably conclude

which one projects more reliability to customers.









5.3 Conclusions

Returning to the Chapter 1 of this study (Section 1.1), the evolving and adapting

role of the U.S. land grant system was addressed and to some extent questioned. The next

issues where discussed: (1) the U.S. economy has evolved from an agricultural-based

economy to a service-based economy, (2) the U.S. land grant system which was created

to serve a predominantly, dispersed and isolated rural population, now faces a

predominantly urban-suburban, massively communicated and interconnected society, (3)

tighter government budgets in many countries have called for new innovative ways to

fund and operate land grant systems, including private-public partnerships for projects

where benefits are shared, and (4) farms have become more business oriented operating

with cutting edge technology.

Shared benefits are observed in this research. First, the private sector benefits from

the analysis and recommendations presented in our study. Second, the production of

didactic material and opportunity to interact directly with the private sector are benefits

for the public sector, in this case, the University of Florida. Nobel Prize Theodore

Schultz, in his work Investment in Human Capital (1961), showed the immense

contribution of human capital to growing levels of national output in many Western

countries including the U.S. The output rendered by this research should be measured by

the ability of the case study developed to help as a tool in teaching management skills and

increasing national human capital by beginning in the classroom.
















APPENDIX A
ANALYSIS TOOLS

Table A-1. Performance assessment


Please assess the overall performance of XYZ Research in the following areas. Performance can
be low or high based on the current situation, comparison to goals, trends for the future, or the
overall satisfaction of company participants.

Customer Satisfaction-ability to attract and maintain customers


Low Performance


1-----2-----3-----4-----5 High Performance


Competitiveness-ability to do better than your competition.


Low Performance


1-----2-----3-----4-----5 High Performance


Pronlctivir -ability to provide products/services efficiently and effectively based on
Internal management processes.


Low Performance


1-----2-----3-----4-----5 High Performance


Profitability-ability to attract resources based on level of return to key stakeholders.


Low Performance


1-----2-----3-----4-----5 High Performance


Which performance concerns (if any) warrant strategic analysis and planning?


Evidence:


Evidence:


Evidence:


Evidence:










Table A-2. Internal checklist


Goal:


To determine a firm's internal strengths and weaknesses


Directions: For each item below, circle the number on the scale that best corresponds to you
honest assessment of XYZ Research's strength or weakness in the indicated area.


Great
Wekpneps


Great
's< n .-i1,


L MARKETING RESOURCES
1. Customer satisfaction with product/services
2. Ability to gain customers versus the competition
3. Knowledge of the market
4. Product/service line breadth and depth
5. Product/service quality in terms of function,
image, place, time, possession, ease of use
6. Advertising and promotion activities
7. Product/service pricing
8. Facilities and methods used to sell to customers
9. Market share


II. FINANCIAL RESOURCES
1. Strong and recurring operating profits (PM*)
2. Efficient asset management (TAT*)
3. Strong and recurring return on investment (ROI*)
4. Proper balance of debt and equity (EM*)
5. Strong and recurring return on equity (ROE*)
6. Strong and recurring cash flow
7. Ready access to outside/new funds
8. Well managed customer credit
9. Well managed supplier credit
*Keyfinancial ratios used to

III. HUMAN RESOURCES
1. Adequate number of people to do the work
2. Adequate quality of people to do the work
3. Personnel plans
4. Job design and descriptions
5. Performance standards and evaluation procedures
6. Training programs
7. Good morale as evidence by absenteeism,
turnover, tardiness, complaints, bickering,
employee growth and development
8. Compensation system that promotes performance
and satisfaction
9. Equitable and competitive pay
10. Equitable and competitive fringes
11. Appropriate use of teams
12. Work ethic of individuals and teams


1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5

1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5


1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
assess these areas


1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5


1-----2-----3-----4-----5

1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5
1-----2-----3-----4-----5


Weaknes .I/ /n I/-- '










Table A-2. Continued


Great
Won-a m c


Great
r>, ,- ,. b/


IV OPERATIONS PRODUCTION
1. Quality of needed facilities to serve customers 1-----2-----3-----4-----5
2. Capacity of needed facilities to serve customers 1-----2-----3-----4-----5
3. Up-to-date and appropriate technology 1-----2-----3-----4-----5
4. Effective and efficient physical layout 1-----2-----3-----4-----5
5. Effective and efficient work flow 1-----2-----3-----4-----5
6. Effective and efficient inventory control 1-----2-----3-----4-----5
7. Effective and efficient purchasing practices 1-----2-----3-----4-----5
8. Effective and efficient production practices 1-----2-----3-----4-----5

V MANAGEMENT LEADERSHIP RESOURCES
1. Effective management style 1-----2-----3-----4-----5
2. Timely decision making 1-----2-----3-----4-----5
3. Effective delegation 1-----2-----3-----4-----5
4. Effective participation 1-----2-----3-----4-----5
5. Effective risk taking 1-----2-----3-----4-----5
6. Effective leadership 1-----2-----3-----4-----5

VI. ORGANIZATIONAL RESOURCES
1. Appropriate mix of resources (people, money,
equipment) available 1-----2-----3-----4-----5
2. Resources properly placed to do the job 1-----2-----3-----4-----5
3. Effective interdepartmental communications 1-----2-----3-----4-----5
4. Effective reporting relationships 1-----2---3-----4----5
5. Firm's public image 1-----2-----3-----4-----5
6. Strong organizational culture (productivity, 1-----2-----3-----4-----5
honesty, dispute handling, tolerance of change)

VII. INFORMATION RESOURCES
1. Appropriate financial and cost accounting systems 1-----2-----3-----4-----5
2. Planning system appropriate for internal analysis 1-----2-----3-----4-----5
(assessing strengths and weaknesses)
3. Planning system appropriate for external analysis 1-----2-----3-----4-----5
(assessing opportunities and threats)
4. Control system that highlights problems and 1-----2-----3-----4-----5
generates corrective action
5. Information systems that use the best technology 1-----2-----3-----4-----5
available
6. Effective information for strategic decision making 1-----2-----3-----4-----5
7. Effective information for operational decision 1-----2-----3-----4-----5
making
8. Ability to utilize internet and e-commerce 1-----2-----3-----4-----5










Strengths analysis


Directions: Assess XYZ Research's five most important strengths* using the questions from
above and your own beliefs about your firm. In the final column, cite specific
evidence that supports your believe that the item is a strength or competitive
advantage.
Strength Evidence


*Strength: Something a company does well or a characteristic that gives it an important
capability.





Table A-4. Weakness analysis

Directions: Assess XYZ Research's five most important weaknesses* using the questions from
above and your own beliefs about your firm. In the final column, cite specific
evidence that supports your believe that the item is a strength or competitive
advantage.
Weakness Evidence


*Weakness: Something a company does poorly or characteristic that puts it at a disadvantage.


ii


Table A-3.














APPENDIX B
MAJOR QUALITY ASSURANCE PROGRAMS

This list was taken from Research Triangle's Food Testing Laboratory Database.

Quality Assurance Programs are divided into four categories: oversight programs,

national programs, ISO-related programs, and association-sponsored programs:

Oversight Programs (national and international programs assuring uniform standards of
execution for quality programs:

* American National Standards Institute (ANSI)
* Registrar Accreditation Board (RAB)

National Programs (Nationally and state sponsored indicators of laboratory quality)

* Accredited Laboratory Program (ALP)
* Good Laboratory Practices (GLPs)
* Good Manufacturing Practices (GMPs)
* National Environmental Laboratory Accreditation Program (NELAP) or State
Water Accreditation
* USDA-Recognized Laboratory for Pasteurized Egg Products
* USDA Recognized
* State Certification

Trade Association-Sponsored Programs (quality programs such as proficiency testing
and certified laboratory or analyst)

* AOAC International (AOAC)
* American Association of Cereal Chemists (AACC)
* American Association of Feed Control Officials (AAFCO)
* American Oil Chemists' Society (AOCS)

ISO Related Programs (non-governmental worldwide association of 130 countries to
ensure international standardization of several industry sectors)

* ISO 9000 series
* ISO 17025
















REFERENCES


Abernathy, W. and K. Wayne. "Limits to the Learning Curve." Harvard Business
Review, 1983, pp. 114-131.

Aeker, David A. Strategic Market Management. 2nd ed. New York: John Wiley & Sons,
1988, pp. 11-12.

Allan, G. and J. Hammond. "Note on the Use of Experience Curves in Competitive
Decision-Making." Harvard Intercollegiate Clearing House of Cases, 1975.
Available at
http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/itemdetail.jhtml?i
d=175174 (Accessed June 2004).

American City Business Journals Inc.. "Money Not Key Motivator for Most Employees."
Business First, June 2001. Available at
http://louisville.bizjournals.com/louisville/stories/2001/06/25/editoriall.html
(Accessed June 2004).

Baumol, W. J., Panzar, J. C., and Willig, R. "Contestable Markets: An Uprising in the
Theory of Industry Structure." American Economic Review 72(1)(1983):1-15.

Beaver G. and C. Ross. "Enterprise in Recession: The Role and Context of Strategy."
International Journal of Entrepreneurship and Innovation 1(1)(February 2000):23-
31.

Boston Consulting Group. Perspectives on Experience. Boston, MA: Boston Consulting
Group, 1972.

Casley D.J. and D.A. Lury. "The Case Study." Chapter 5 in The Data Collection in
Developing Countries. 2nd ed. Oxford: Clarendon Press, 1987.

Compass Consulting International Incorporated. "Outsourcing: Is It Right For Higher
Education Technology Services?" Available at
http://www.compassconsulting.com/articles/outsource.html (Accessed March
2004).

Dacquel, L. T., and D.C. Dahmann. "Residents of Farms and Rural Areas: 1991." U.S.
Bureau of the Census, Current Population Reports Series P20, No. 472.
Washington, DC: U.S. Government Printing Office, 1993.









Dyson, Robert G. "Strategic Development and SWOT Analysis at the University of
Warwick." European Journal of Operational Research 152(3)(February
2003):631-40.

Eisenhardt, Kathleen M. "Building Theories From Case Study Research." Academy of
Management Review 14(4)(1989):532-50.

Fanjoy, Monica S., Michaela C. Coglaiti, Heather L. Carter-Young, and Shawn L. Kams.
"Food Testing Laboratory Database: Final Report," RTI Project Number
06673.011. Research Triangle Park, NC: Research Triangle Institute, 2001.
Available at http://www.foodriskclearinghouse.umd.edu/Doc/6673_ I FR.pdf
(Accessed June 2004).

Feller, I., P. Madden, L. Kaltreider, D. Moore, and L. Sims. "The New Agricultural
Research and Technology Transfer Policy Agenda." Res. Policy 16(1987):315-
325.

Food Institute, The. Food Industry Review 2003. CD-ROM ed. Elmwood Park, NJ: The
American Institute of Food Distribution, 2003.

Giese, James. "Selecting an Outside Food Testing Laboratory," Food Technology
55(11)(2001): 11. Available at http://www.ift.org/publications/docshop/ft shop/i 1-
01/11_01_pdfs/1 1-01-lab.pdf (Accessed April 2004).

Hout, T., M. E. Porter and E. Urden. "How Global Companies Win Out." Harvard
Business Review, September 1982, pp. 98-108.

Howell, J. Recurrent Costs andAgricultural Development. London: Overseas
Development Institute, 1985.

International Data Corporation. U.S. and Worldwide Outsourcing Markets and Trends,
1998-2003 Report. Product code R104-388: IDC, 1999. Available at
http://www.mindbranch.com/catalog/product.jsp?code=R104-388 (Accessed April
2004).

Kennedy, Mary M. "Generalizing from Single Case Studies." Evaluation Quarterly
4(3)(November 1979):661-78.

Kotler, Philip. "Developing New Market Offerings." Marketing Management.
Millennium ed. Upper Saddle River, NJ: Prentice Hall, 2000.

Le Gouis, M. "Alternative Financing of Agricultural Extension: Recent Trends and
Implications for the Future." In Agricultural Extension: Worldwide Institutional
Evolution and Forces for Change. W. M. Rivera and D.J. Gustafson, eds.
Amsterdam: Elsevier, 1991.









Marsili, R. "Sending It Out: Outsourcing Pros and Cons." Food Product Design, May
1997. Northbrook, IL: Weeks Publishing Company. Available at
http://www.foodproductdesign.com/archive/1997/0597QA.html (Accessed April
2004).

Miller, Alex, and Gregory G. Dess. Strategic Management, 2nd ed. New York: McGraw
Hill, 1996, pp. 38-40.

Muth, K. Mary, Erica C. Gledhill, and Shawn A. Karns. "FDA Labeling Cost Model."
RTI Project Number 06673.010. Research Triangle Park, NC: Research Triangle
Institute, 2003. Available at
http://www.foodriskclearinghouse.umd.edu/Doc/labeling_cost model.pdf
(Accessed June 2004).

National Research Council. Colleges ofAgriculture at the Land Grant Universities: A
Profile. Washington, DC: National Academy Press, 1995.

National Research Council. Colleges ofAgriculture at the Land Grant Universities:
Public Service and Public Policy. Washington, D.C.: National Academy Press,
1996. Available at http://books.nap.edu/html/landgrant/ (Accessed June 2004).

Oster, Sharon M. Modern Competitive Analysis. 2nd ed. New York: Oxford University
Press, 1994.

Pearce, John A. Formulation, Implementation, and Control of Competitive Strategies. 5th
ed. Homewood, IL: Irwin, 1994.

Peterson, H. Christopher. "Strategic Posture: Choosing a Business Direction in an
Uncertain World." Paper presented at the Management Clinic in Louisville, KY,
February 1994.

Porter, M. "Techniques for Analyzing Industries and Companies." Competitive Strategy.
New York: Free Press, 1980.

Porter, M. "Creating and Sustaining Superior Performance." Competitive Advantage.
New York: Free Press, 1985.

Quick MBA. "Porters Five Forces." QuickMBA.com, 2004. Available at
http://www.quickmba.com/strategy/porter.shtml (Accessed June 2004).

Rumelt, Richard P., Dan Schendel, and David J. Teece. "Strategic Management and
Economics." Strategic Management Journal 12(Winter Special Issue 1991):5-29.

Schmidt, Ronald H. "Government Regulations in the Food Industry." Class Notes for
FOS 4731, University of Florida. Spring Semester 2004.

Schultz, T. W. "Investment in Human Capital." The American Economic Review
1(2)(1961):1-17.









Schumpeter, J. The Theory of Economic Development. Cambridge, MA: Harvard
University Press, 1912 (1934 translation).

Schumpeter, J. "The Instability of Capitalism." The Economic Journal
38(151)(September 1928):361-86.

Sorensen L, Rene V. Valqui V., and E. Engstrom. "Using Soft OR in a Small Company:
The Case of Kirby." European Journal of Operational Research 152(3)(February
2003):555-70.

Tavares, J. "Schumpeterian Competition and its Policy Implications: The Latin American
Case." A paper prepared for the Second Meeting of the FLACSO/IDRC,
Organization of American States (OAS) Trade Unit, 1999. Available at
http://www.sice.oas.org/compol/Articles/schumcop.asp (Accessed June 2004).

U.S. Census Bureau. "NAICS Definitions: 2002." 2002. Available at
http://www.census.gov/epcd/naics02/def/NDEF311 .HTM (Accessed June 2004).

U.S. Census Bureau. "Unadjusted and Adjusted Estimates of Monthly Retail and Food
Services Sales by Kinds of Business: 2003." 2003. Available at
http://www.census.gov/mrts/www/data/html/nsal03.html (Accessed June 2004).

U.S. Department of Agriculture's, Agricultural Research Service. "USDA Research
Agency Sequences Genome of Food-borne Pathogen." Article by Mary Clark,
2001. Available at < http://www.ars.usda.gov/is/pr/2001/010607.htm > (Accessed
May 2004).

U.S. Department of Agriculture (USDA), and U.S. Food and Drug Administration
(FDA). "United States Food Safety System." Country Report, 2003. Available at
http://www.foodsafety.gov/~fsg/fssyst2.html (Accessed April 2004).

U.S. Food and Drug Administration (FDA). "Private Laboratory Grassroots Meetings
1996: Definition of Private Laboratory." 1996. Available at
http://www.fda.gov/ora/scienceref/priv lab/grassr96/grassr.html -
Definition%20of%/o20Private (Accessed April 2004).

U.S. Food and Drug Administration, Center for Food Safety and Applied Nutrition
(CFSAN). "Good Reading for Good Eating." FDA Consumer. Article by Paula
Kurtzweil, 1993. Available at: http://www.cfsan.fda.gov/~dms/fdlabel2.html
(Accessed May 2004).

Wright, P. "A Refinement of Porter's Strategies." Strategic Management Journal
8(1)(January 1987):93-101.

Wright T. "Factors Affecting the Costs of Airplanes." Journal ofAeronautical Science
3(4)(1936):122-28.









Wysocki, A. "Strategic Analysis, Proposed Strategic Plan, and Recommendations for
Michigan Public Variety Field and Seed Potato Producers." Master's Thesis,
Michigan State University, 1997.

Wysocki, A. "Supply Chain Management: Past and Future." Food Wholesaling & Retail
Marketing. Institute of Food and Agricultural Sciences, University of Florida. No. 5
July 2000a.

Wysocki, A. "Major Alternate Marketing Channels in the U.S. Food System." Food
Wholesaling & RetailMarketing. Institute of Food and Agricultural Sciences,
University of Florida. No. 2 & 3. April/May 2000b.

Yin, Robert K. Case Study Research: Design and Methods. 2nd edition. Thousand Oaks,
CA: Sage Publications, 1994.

Zahra, Shaker A., and Sherry S. Chaples. "Blind Spots in Competitive Analysis,"
Academy ofManagement Executive 7(2)(1993):7-25.
















BIOGRAPHICAL SKETCH

Paul Esteban Jaramillo Vega was born in Quito, Ecuador on March 29, 1979. He

graduated from Colegio Americano High School in Quito, in 1997. In December 2000 he

received his Agronomo Degree from Escuela Agricola Panamericana "El Zamorano" in

Tegucigalpa, Honduras, where he was awarded the Board of Trustees Scholarship for

academic achievement. He graduated from the University of Florida with honors in

August 2002, receiving his bachelor's degree with a specialization in agribusiness, from

the Food and Resource Economics Department in the College of Agriculture and Life

Sciences.