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April 2006
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Ideas at WorkUsing a Contingency Plan to Combat Human Resource RiskMaria I. Marshall Corinne Alexander Department of Agricultural Economics IntroductionExtension helps small businesses confront many different types of risk. However, little consideration is given to human resource risk and how the absence of key personnel can affect small businesses. Contingency planning is a method that Extension professionals can use to help small businesses combat human resource risk. A contingency plan is a structured way of deciding what to do when key operations are disrupted and key personnel are not available. Extension professionals can use this planning process to help small businesses identify and mitigate risks. It can also help small business owners identify their best options and ensure that their risk management dollars are spent wisely. Writing a Contingency PlanA contingency plan is a set of procedures that defines how a business will continue or recover its critical functions in the event of an unplanned disruption to normal activities. It is a process by which a business can assess its operations in order to determine how well it can function when key resources, such as personnel, are not available. When writing a contingency plan, use the knowledge and input of the business's key employees. You should encourage the business owner to establish a planning team in order to share the responsibility among key personnel. This is important because key employees will be a critical part of any recovery strategy that the business puts together. A contingency plan consists of six main sections:
The executive summary is written last but appears at the beginning of the contingency plan. It should include the business's risk management goals, a summary of the business's risk assessment, and the selected risk management strategies addressed in the plan. Risk Management GoalsIn this section, risk management goals should be identified. The purpose of risk management goals is to reduce uncertainty, but they can also help manage business opportunities. For example, a risk management goal can be as simple as wanting the farm to remain in the family, which would require the family to prepare an estate and/or succession plan. In the end, risk management goals help business owners decide which opportunities and risk management strategies to pursue. Risk AssessmentThis section of the contingency plan is about identifying and assessing the risks to the business. The business owner pinpoints the events that could cause financial or operational harm to the business. See Alexander and Marshall (2006) for an effective risk assessment tool. Human resource risk can be due to:
You should have the business owner answer two main questions in this section:
A rating of one would signify that the event had a low probability of occurring and a rating of ten would signify a high probability. For example, a corn producer might identify an injury on the job as a possible event and rate the likelihood of that happening as an eight. The next step is to determine the impact or consequence of that event on the business. Business Impact AnalysisThe impact of an event on a business can be assessed in three ways: operating impact, financial impact, and legal impact, and in many ways these are interrelated. Operating impact is loss of operating efficiency such as a decrease in sales volume. Loss of customers, increased costs, and cash flow problems are examples of financial impact. Legal impact entails the inability to fulfill business contracts with suppliers, customers, or vendors. For example, hiring an inexperienced person to cover the duties of an injured salesperson might lead to decreased sales and cash flow problems such that the business cannot pay its vendors, thereby causing a decrease in the business's credit rating and a lawsuit. Part of this section includes identifying critical functions within the business and how the loss of key personnel will affect those functions. You should have the business owner answer the following questions:
Risk Management StrategiesAfter the business owner has identified the risks to the business, the probability that those threats will occur, and the consequences of those threats, he or she should prioritize these threats and begin to establish risk management strategies. He or she can decide to retain, reduce, avoid, or transfer the risks detailed in the risk assessment section (Alexander & Marshall, 2006). Each strategy should contain the roles and responsibilities of everyone involved in the recovery of an event and the procedures to be followed if that event should occur. The main questions to be answered in this section are:
Plan MaintenanceIt is important that the contingency plan be kept up to date and revised once a year. The plan should reflect any changes in the business. You should help the business owner identify ways to keep the plan fresh and relevant. ConclusionThrough various workshops, we have found that when small business owners begin writing a contingency plan, they develop a better understanding of how their business actually operates. Many find that they have serious gaps in the way that knowledge is transferred within their business and use the opportunity to make changes in their business operations. ReferencesAlexander, C., & Marshall, M. I. (2006). The Risk matrix: Illustrating the importance of risk management strategies. Journal of Extension [On-line], 44(2) Article 2TOT1. Available at: http://www.joe.org/joe/2006april/tt1.shtml
Golden Rules of New Venture CreationAaron Johnson Rodney B. Holcomb IntroductionPeople will continue to turn to Extension for help in starting a business (Muske & Stanforth, 2000; Burney, 2001). The authors, two Extension economists at separate value-added centers, recognized patterns of behavior after assisting hundreds of clients in the new venture creation process. Two of the most common and detrimental mistakes people make are forsaking planning and research for tangible projects (i.e., product development) and not being realistic about their abilities. As a result, they've formulated two rules to help clients keep in mind the important but less obvious tasks that need to be completed. The rules are presented in this article, along with some specific direction for the adherence to each rule. The information will help Extension agents understand the need to pay closer attention to markets and management when helping their clientele with value-added start-up assistance. Also, they will be better able to communicate that need to their clientele. Golden Rule I: Know Thy Customer!Many entrepreneurs think they have a wonderful product, and friends/family often agree. Unfortunately, they often avoid the critical question: What does the customer really think? This question is vital to the success of small, niche marketers. There are at least three follow up questions to be concerned with.
These questions must be answered before effort and money is expended on product development or other tasks to which people naturally gravitate in this process. The answers are found through market research, a task with which Extension specialists often help. The primary objective of market research at this early stage is to help the company determine whether or not a sufficient sized market exists for their product. The second objective is to help drive decisions on what form a product needs to take, where that product will be sold, what price the ultimate consumer will pay for the product, how to minimize competition while maximizing market potential, and how to promote the product. All are critical aspects in building a successful consumer products business. Market research, whether conducted by the individual or contracted, will help the entrepreneur identify a specific niche to pursue. The niche must be associated with a specific want/need by a consumer group, a geographic location, and/or a characteristic (either of the product or of its packaging/labeling) that has some value to a target market. The reader is directed to Kotler (2002) for more on product positioning. Knowing the customer/market will provide greater focus and more efficiency in the rest of the business development process. One client knew her general target market, but because she failed to understand how they would receive her product, she didn't have clarity and focus in the product development stage. As a result, after two different product types and two years, she still has no business--and this is one of the more promising ideas one center has dealt with. Golden Rule II: Know Thy Self!While knowing the customer is necessary, it is not sufficient to ensure success. Entrepreneurs often pay little attention to their management skills. This certainly supports the findings of Bernhagen and Mott (1986): the failure of many small businesses is attributed to the lack of management skills and poor management practices. A good place to start is with the business. Firms must know the key factors and critical skills needed for their profitability/success (production choice, quality/image, marketing, costs, etc.). The critical skills needed to launch a new business vary by the type of product being introduced. For example, where several near-homogeneous products are competing for customers in a slow-growth market (e.g., jams/jellies), marketing skills are crucial, and production skills are secondary. Conversely, for some functional foods and those products tailor-made to meet specific dietary needs (e.g., high-antioxidant processed foods), production knowledge may be the most critical need. An entrepreneur must be able to determine if his or her strengths lie in the areas of production, marketing, or business management and how those strengths match up with the needs of the business. Strengths of an entrepreneur are often developed over time from experience. Previous experiences related to the industry of choice or the addition of personnel with those experiences, benefit a company during the development and launch phases. Experiences in a given industry segment, management experience in a variety of areas (production, personnel, marketing, financial), and previous entrepreneurial efforts extend the probability of a business having a successful launch. Marketing and management experiences are generally much more important for a new product launch than production experience. Contrary to the beliefs of most entrepreneurs, there are manufacturers with excess capacity who can make their product as well as they do at a contracted price. However, several publications and studies (e.g., Gaskill, Van Auken, & Manning, 1993; Jenkins & Jenkins, 1997; Muske & Stanforth, 2000) have identified marketing and financial management skills as primary deficiencies of small businesses. Many entrepreneurs with previous start-up experiences understand that it may take 3 to 5 years for a new business to generate a significant annual profit, if it is going to be profitable at all. Unfortunately, entrepreneurs without previous start-up experiences are often over-confident: they think their businesses will become profitable and cash flow within the first year. They fail to consider Murphy's Law and make contingency plans for possible adverse events. They also underestimate the time, money, and effort necessary to get the business started. Value-added centers, Extension specialists, Small Business Development Centers (SBDC), Senior Corps of Retired Executives (SCORE), and of course accountants can help entrepreneurs develop financial management skills. Value-added centers and Extension specialists, as well as state-sponsored programs, may also be able to help entrepreneurs hone their marketing skills and establish personnel management policies. However, marketing skills are often difficult to develop and may require specialized training or even outsourcing these responsibilities to professional marketers. Determining the value/importance of one's critical skills and relevant experiences is not difficult; determining how to combat one's weaknesses may be much more of a challenge. The bottom line is: If an entrepreneur doesn't have experiences in general management (i.e. developing and executing a business model), they would be well served by surrounding themselves with those who do. Sometimes, it is advisable to hold off on the development of one's business idea until the necessary skills and experience set are acquired. ConclusionsDeveloping and launching a new business requires considerable research and meticulous planning to improve the odds of success. It is hoped that new entrants into value-added efforts, and the Extension specialists who assist them, will carefully consider the rules of "know thy customer" and "know thy self" before starting their ventures. Both will help the would-be entrepreneur develop a more desired product, and a more successful business. ReferencesBernhagen, W. R., & Mott, W. T. (1986). Small business: An opportunity for Extension. Journal of Extension [On-line], 24(3). Available at: http://www.joe.org/joe/1986fall/sa2.html Burney, A. (2001). Food entrepreneur assistance program. Journal of Extension [On-line], 39(4). Available at: http://www.joe.org/joe/2001august/iw5.html Gaskill, L. R., Van Auken, H. E., & Manning, R. A. (1993). A factor analysis of the perceived causes of small business failure. Journal of Small Business Management, 31(4), 18-31. Jenkins, M., & Jenkins, G. (1997). Entrepreneurial intentions and outcomes: A comparative causal mapping study. Journal of Management Studies, 34(6), 895-920. Kotler, P. (2002). Marketing management. Upper Saddle River, New Jersey: Prentice Hall, Inc. Muske, G., & Stanforth, N.. (2000). The educational needs of small business owners: A look into the future. Journal of Extension [On-line], 38(6). Available at: http://www.joe.org/joe/2000december/a4.html |
Rodney B. Holcomb
Associate Professor and C. B. Browning Endowed Chair of Food Science
Food and Agricultural Products Center
Oklahoma State University
Stillwater, Oklahoma
rodney.holcomb@okstate.edu
Aaron Johnson
Assistant Professor
Food Innovation Center Experiment Station
Oregon State University
Portland, Oregon
aaron.johnson@oregonstate.edu
The entrepreneurial desire in the U.S. is alive and well. Over 99% of employers in the U.S. are small businesses, and there are more than 15.6 million self employed (U.S. Small Business Administration, 2005). Universities have developed numerous programs to assist entrepreneurs (Burney, 2001; Holcomb & Muske, 2000; Muske & Stanforth, 2000). Two examples are the Food & Agricultural Products Center at Oklahoma State University and the Food Innovation Center of Oregon State University.
From their work with hundreds of start-up businesses, the Extension economists at these centers have defined a set of "launch rules" to help new businesses avoid common pitfalls. These "rules" are highly recommended actions to be taken by entrepreneurs as they stake their time and resources to a new venture.
These rules will benefit Extension faculty whose responsibilities include helping entrepreneurs. In addition, this information will positively affect the stakeholder clients of these programs as the Extension faculty become better equipped to provide the assistance they need.
Considerable work is required before a business launch should be considered (Johnson & Holcomb, 2006). Once these pre-launch activities have been performed, an entrepreneur must focus on the planning functions associated with a business launch.
A production plan goes far beyond the process of manufacturing a product. The production plan includes all aspects of input procurement, processing, and inventory management.
It is recommended that more than one supplier for each ingredient and packaging/labeling input be identified, even if contractual arrangements are only made with one supplier. In the event of an immediate need, these back-up suppliers can be contacted. Manufacturing is notorious for employee turnover, so considerations must be made to have enough trained employees present to maintain production levels as well.
Inventory management is crucial for maintaining a flow of products to buyers. Finding the right balance for inventories is best determined on a case-by-case basis. Experience will help small business owners identify seasonal swings and adjust inventory levels. Accountants and business specialists may be useful in evaluating the logistics and costs associated with storage time and space.
The distribution plan details how merchandise will get from its production point to the selling venue. There are two types of distribution: direct store delivery and indirect distribution.
Direct store delivery means that the manufacturer directly delivers the products to the individual retail establishments. For small start-up businesses, direct distribution is a means of getting product to the buyer/retailer while avoiding fees and handling costs associated with the use of wholesale warehouses or chain-specific distribution centers. Other times, it is a necessity as the startup doesn't have the volume of sales to warrant other distribution methods.
Direct distribution does, however, create management challenges. It may be difficult for a small business owner to fulfill all the responsibilities associated with production and distribution. Too often the owner will gravitate towards one, resulting in problems with the other. Additionally, managing promotion materials and displays is a vital part of direct distribution, but the time and expenses associated with such activities are often overlooked in the development of a distribution plan.
Indirect distribution means using brokers, wholesalers and/or distributors to manage distribution and promotions. These players come at a cost: commissions for brokers or slotting fees to get into a warehouse. One must carefully select the brokers she or he uses to launch a new product and the commissions required for their services. A good, motivated broker may collect purchase orders for several truckloads of the new product, while a broker with too many clients may neglect the newly launched product in favor of consistent business from his/her other clients (Brooks, 2004).
Warehouses provide the means for reaching several retail outlets while maintaining a single drop-off point. Because warehouses service retail outlets with truckloads of multiple products, the distribution costs per unit are lower for all items, thus products can be distributed over a larger geographic region at less expense.
Warehouses typically operate at or near full capacity with low per-unit margins on the products they carry. Slotting fees--i.e., the initial cost of "buying" space for a new product in a warehouse--can occur in some industries and are prominent in the food industry. Several factors figure into the level of slotting fees (e.g., sales potential, storage requirements, and the product's perishability).
In addition to slotting fees, a warehouse may request, on behalf of the retail outlets it represents, that the manufacturer pay for and participate in specific promotional efforts to bolster retail sales of the product and increase turnover in the warehouse.
If product turnover declines or quality problems are experienced, the warehouse may require the manufacturer to "buy-back" the products at a higher-than-wholesale price (even up to retail price) to recapture costs associated with warehouse storage expenses.
The amount of money needed to successfully launch a new enterprise is commonly underestimated, largely because a business and/or product launch takes longer and cost more than anticipated. One should estimate how much capital will be needed for the start-up effort, and then have a larger amount on hand.
At or after the launch, one of the most common cash management mistakes results from the incorrect notion that products manufactured are immediately sold and the revenue collected. In the early stages of a new business, a considerable amount of money may be used manufacturing products to meet initial orders and build inventory. Further, retailers or warehouses may wait a month to pay the invoice amount for a shipment. Thus, the level of accounts receivable grows while available cash quickly declines. A wise entrepreneur will plan ahead for such activities and be prepared with factoring agents and an accounts receivable loan at his/her bank.
A working capital plan also needs to include contingencies in the event a large customer is lost. Balancing the number and size of one's clients is a difficult task, and the upside of having a few large, consistent clients overshadows the potential drawbacks.
Developing and launching a small, new business requires considerable research and meticulous planning to improve the odds of success. These "rules" are highly recommended actions to be taken by entrepreneurs as they stake their time and resources to a new venture. It is hoped that new entrants into any industry and the Extension specialists assisting them will carefully consider the suggestions and examples that have been incorporated into this article before starting new ventures.
Brooks, J. (2004). Are food brokers right for you? Oklahoma Cooperative Extension Service, OSU Food & Agricultural Products Center Fact Sheet, FAPC-130.
Burney, A. B. (2001). Food entrepreneur assistance program. Journal of Extension [On-line], 39(4). Available at: http://www.joe.org/joe/2001august/iw5.html
Holcomb, R. B., & Muske, G. (2000). The role of Extension specialists in helping entrepreneurs develop successful food-based businesses. Journal of Extension [On-line], 38(1). Available at: http://www.joe.org/joe/2000february/a2.html
Johnson, A. J., & Holcomb, R. B. (2006). Golden rules of new venture creation. Journal of Extension [On-line], 44(2). Article 2IAW2. Available at: http://www.joe.org/joe/2006april/iw2.html
Muske, G., & Stanforth, N. (2000). The educational needs of small business owners: A look into the future. Journal of Extension [On-line], 38(6). Available at: http://www.joe.org/joe/2000december/a4.html
U.S. Small Business Administration, Office of Advocacy. (2005). Small business profile: United States. Retrieved October 25, 2005, from http://www.sba.gov/advo/research/profiles/05us.pdf
Cole R. Gustafson
Professor
Department of Agribusiness and Applied Economics
North Dakota State University
Fargo, North Dakota
cole.gustafson@ndsu.nodak.edu
Broadly defined, Extension programming has been geared towards helping producers manage risk, whether the source of stress is disease, weather, or financial. It is ironic, though, that Extension faculty have struggled to engage producers in workshops devoted solely to risk management. A colleague in economics has often used a "bait and switch" tactic by teaming up with crop/livestock specialists and delivering risk management education in conjunction with other production programs.
The need to engage more producers in risk management education has recently been heightened when the U.S. Department of Agriculture announced another $9 million request for risk management education proposals (USDA). This is in addition to monies that are available from regional risk management education centers. For example, the North Central Risk Management Education Center (NCRMEC) has funded 80 projects totaling $1.2 million from 2001-04. Extension faculty have actively participated in these programs, sometimes delivering multiple programs within a single state. If future funding for risk management education continues at this rate, one has to question producers' continued interest in the subject.
Two years ago, I became involved with crop insurance for potatoes and instantly recognized a need for additional risk management education. Potato crop insurance programs are among the most complicated, with special endorsements for seed, quality, processing quality, and storage. Few producers, agents, or lenders understood the program's intricacies and coverage provided. I was fortunate to obtain an NCRMEC grant to: 1) increase familiarity with unique features of the potato crop insurance program and 2) assist growers, agents, and lenders with evaluation of alternative program options.
My only real challenge was finding a way to motivate my target audience (producers, crop insurance agents, and lenders) to participate in another meeting!
Rather than invite them to another education meeting, I engaged them by requesting their input on several new program alternatives that USDA was considering. My reasoning was that, in order for them to provide thoughtful comments on any alternative, they had to first understand fundamentals of the existing program!
One hundred North Dakota potato growers were asked to participate in five focus groups that were designed to improve crop insurance provisions for potatoes. Use of focus groups is a relatively new method for obtaining qualitative research data (Krueger & Casey, 2000). This slant was expected to increase program attendance and meeting interaction.
Each meeting started with an overview of the present potato crop insurance program, including a description of each endorsement. An understanding of these basic program features was necessary if participants were to make informed comments later. Time was left at the end of each topic for peer-to-peer discussion. This valuable interchange reinforced and extended participant knowledge, particularly if they were hesitant to formally raise questions about the base program. Each participant then ranked the importance of features contained in the base program. Being able to list and rank these features was the first targeted goal of the education program.
Next, several alternative program designs being contemplated by USDA-Risk Management Agency (RMA) and their merits were presented. Care was taken to not bias participants, but to objectively discuss implications for individual potato grower segments as well as the industry as a whole. Special attention was devoted to policies that increase opportunities for over-production and fraud. Again, at the conclusion of this presentation, participants ranked the importance of each policy alternative. Being able to evaluate and provide a reason for their decision was an indication that higher learning was taking place.
Finally, the highest form of learning was expected to take place when the participants shared and discussed program materials with someone else after the meeting. In other words, it caused them to think and share something they learned that was important to them. A telephone survey of participants was conducted 3 months after the sessions to determine the extent of this communication.
How did I engage agents and lenders? A similar novel slant was used to engage them as well. These groups are always interested in what producers are thinking. Thus, results of the producer focus meetings were tallied and presented to agents and lenders at their annual meetings. The opportunity to hear what program changes their customers prefer stimulated their interest in learning more about the intricacies of the potato crop insurance program.
The strategy of using focus groups proved very successful. Over 85 producers participated in the five focus groups. Exit evaluations completed by participants ranked the overall program 4.00 (on a scale 1=poor, 5=excellent) and indicated it increased their awareness 4.04 (on a scale 1=none, 5=greatly). Overall, 92% of participants discussed the workshop's material with someone else, which was the primary goal of the risk management education project.
These forums differed from traditional workshops in several ways. First, the initial overview of the base program was intentionally brief to minimize "lecturing." Surprisingly, producers asked numerous questions at this stage, especially after results of the first exercise, asking them to rate the importance of features in the base program, was completed.
Second, the opportunity to provide input on program alternatives that directly affected them financially led to considerable discussion. Producers actively debated ramifications of alternative program designs. The group leader's challenge was to keep discussion on track and ensure that people who were less informed of program details could learn. Often, the leader had to stop discussion and comment, "This happens because language in that section of the base policy means . . ."
Third, discussion tended to be more far-ranging than in traditional workshops. When asking for producer input, the leader has to be prepared for questions on any potential topic. Fortunately, a technical expert who was knowledgeable on most facets of the base program and alternatives attended all sessions and adequately responded to impromptu questions raised
Finally, producers had the expectation that their comments were going to be used. At the end of the each alternative, a consensus of the discussion was agreed upon, and producers were assured that it would be provided to appropriate leaders in USDA and the potato industry (which it was).
The method of focus groups can be a useful means of engaging producers in Extension programming. The method can lead to both higher attendance and interaction among participants. Discussion leaders must be prepared for a wide range of responses and assure the group that their comments are valued.
Krueger, R. A., & Casey, M. A. (2000). Focus groups : A practical guide for applied research. Sage Publications, Thousand Oaks, CA.
North Central Risk Management Education Center. Retrieved March 31, 2005 from: http://www.farmdoc.uiuc.edu/ncrisk/
U.S. Department of Agriculture, Risk Management Agency. Retrieved March 31, 2005 from: http://www.rma.usda.gov/aboutrma/agreements/index.html
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