using a marketing plan to manage market risk
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Using a Marketing Plan toManage Market Risk
(originally titled: Risk Issues in Alternative Markets)
Denise Mainville
Agricultural & Applied Economics
Virginia Tech
May 28, 2006
Danville
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Introduction
Types of risk
Different risks for different markets
Role of a marketing plan in mitigating risk
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Types of Risk
Operational (short-term) risk
Price
Yield
Quality
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Types of Risk
Strategic Risk Concerns producers positioning in the market relative
to longer-term forces
Examples Buyer power
Entry of new competitors
Evolution of consumer demand
Policytrade liberalization, regulations
These longer-term factors have direct influence onoperational risk
Producers have less ability to influence these factors,but can also do more to anticipate and plan for them
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Different Risks for Different Markets
Consider a spectrum of market types
Open Markets Contracting Alliances Vertical Integration
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Different Risks for Different MarketsAs you move from L to R along the spectrum, the nature of
the market and risk changes
Commodity Markets (e.g. soybeans, cattle)
Many buyers & sellers
Readily available info Operational risks predominate (Price, yield, quality) Risk mgt. options may include
Hedging w/futures & options Crop insurance
Revenue Insurance
Open (Commodity)
Markets
Contracting Alliances Vertical Integration
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Different Risks for Different Markets
As you move rightward across the spectrum Fewer buyers & sellers
Info less available about quality, price, volumes sold
Investments become more specific to relationship
As you move R, operational risk mitigated somethrough relationships (e.g. contracting)
Strategic risk becomes predominant
Open Markets Contracting Alliances Vertical Integration
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Contracting
Price, yield risk reduced, however other riskscan increase
E.g. Make an investment to qualify for acontract, but what will it be worth if buyerdecides not to renew contract? Gives buyer
strategic advantage in negotiation
Open Markets Contracting Alliances Vertical Integration
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Different Risks for Different Markets
Alliances
Issues of opportunism may be lesspronounced
However you become more subject to upsand downs in market as you share risk
Open Markets Contracting Alliances Vertical Integration
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Different Risks for Different Markets
Vertical Integration
You decide to undertake your own marketingactivitiesyou therefore accept all risk, must
undertake strategic action to protect market Risk management strategies include product
& market diversification, even more key is
undertaking strategic analysis prior toinvestment
Open Markets Contracting Alliances Vertical Integration
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Using a Marketing Plan to Mitigate
Risk
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The Marketing Plan
Good marketing plans dont startw/marketing
Marketing as commonly used refers to
how to get people to buy what you haveproduced.
A sound marketing plan must start w/the
decision of what to produce Must start with assessing both operational
and strategic risk
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The Marketing Plan
Consider several alternative enterprisesthat interest you (not just 1)
Only 1 gives you no alternative
After analysis, the seemingly less attractivemarket might win you over
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Consider 3 questions for each alternative
Q1. What are prices relative to productioncosts that you anticipate and investmentrequirements to enter market?
Snapshot of market
Indicates short-term attractiveness and feasibility of
entering market
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Q2. What are trends in the market in termsof levels and variability of product & inputprices, and how will that affect profitability
in the near-medium term? This question still relates to operational risk,
however hints at longer term issues
It is a retrospective question, however, looksat how things have been as if they willcontinue in the same manner
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Q3. Where is this market going over themedium-long term? Does the product meet consumers evolving
demand (quality, novelty, convenience, low-carb, etc.) (if not demand may decline overthe long term)
Is competition increasing due to changes in
technology or trade regulations? What is happening among buyers?
Consolidation? How might this affect you?
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This third question relates to the factorsunderlying supply & demand, the forces whichdetermine price and other trends considered inQ 2.
However it looks to the future, and allows you toanticipate major changes that may be on thehorizon
Doesnt mean you will necessarily decide not toenter, but a key means of risk management isanticipating issues and planning for them aheadof time.
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Each question is relevant to each market,however immediacy of strategic questionsincreases as you move rightward
Open Markets Contracting Alliances Vertical Integration
Q 1 --Today
Q2--Trends
Q3
Evolution
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Marketing Plan
In developing a marketing plan, need to
Identify strategic and operational risks inmarket, and tools available to deal with them
Match them with own Goals & values
Financial situation
Risk tolerance level Cash flow needs
Anticipated production costs
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Using a Marketing Plan to MitigateRisk
A Marketing Plan allows a producer linkGoals, values, objectives with Reality
Goals, values and objectives are what the
producer wants to respond to
Reality includes not only what the market istoday, but also what it is likely to become
tomorrow
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Marketing Plan
A Marketing Plan that reduces risk mustconsider
Short-term profit potential
What are todays prices, what are your likely costs ofproduction, and what investments are required?
Strategic issues An attractive market (one with high potential profitability) is
likely to attract more than just you
Is there anything to keep others from entering and drivingprices down?
Geographic advantages (e.g. farmers markets)
Production advantages (quality or price)
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Steps in a Risk Management Plan
1. Identify Specific Goals
To make as much profit as possible vs. To
make $10,000 in profit each year for next 5
years Specificity allows you to work back to
performance needed to achieve goals (ex. X
acres w/Y cost of production sold at Z price)
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Steps in a Risk Management Plan
2. Identify & Evaluate AlternativeEnterprises of interest
Can I get into the market (what investments
are needed?)
Can alternatives meet goals (profit potential)?
How variable are the parameters (price, yield,
quality) that must be adhered to in order tomeet goals?
Am I willing to bear the risk involved?
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Steps in a Risk Management Plan
3. Project to the Future Is this a market that is attractive to everyone
or is there some aspect of it that gives me an
advantage? High profit potential can attract many producers,pushing down prices
Is the market limited by geography, productionrequirements, or other issues that can limit entry?
Do you have an advantage (geographic,knowledge, production, or relationship) that givesyou an advantage?
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Steps in a Risk Management Plan
Factors affecting entry Size of market (a small market might be too
much trouble for the biggest players)
Geographic location of market (do you havethere location advantages)?
Nature of production High perishability & close to market
Cultural factors Relationship with buyer
Familiarity with market niche
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Steps in a Risk Management Plan
4. Consider Long-term Issues The decision to enter a market need not last a life
time, but as necessary investments increase, youneed to look further to the future
How is demand for this product likely to change? Does it meet consumers demand for products that are
convenient, tasty, nutritious, novel, low-carb, etc?
How is supply likely to change? Are technologies coming on board that will reduce costs for
someone or make entry easier? (e.g. mechanized harvest, newseed varieties)
Are new entrants likely to come on board due to changes inpolicy and/or technology? (E.g. China & apple concentrate,Mexico & tomatoes)
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Steps in a Risk Management Plan
4. Think Strategically
What strategies can I use to protect myselffrom risk?
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Conclusion
Different markets carry different risks
In choosing an alternative market, musttake a broad and informed view of risk tobe faced
Addressing strategic risk early allows youto anticipate and deal with operational risk
By evaluating multiple options, may endup in a different market than you thought
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Resources
Risk Management Association
www.rma.usda.gov
National Ag Risk Education Library
www.agrisk.umn.edu
http://www.rma.usda.gov/http://www.agrisk.umn.edu/http://www.agrisk.umn.edu/http://www.rma.usda.gov/ -
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Risk Issues in Alternative
Markets
Denise Mainville
Agricultural & Applied Economics
Virginia Tech
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