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Monday, October 22, 2012

Perdue Case Study

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Executive Summary


Purpose of the Report


The purpose of this report is to 1) analyze Perdue Farms as a poultry producer, ) to make an analysis of the industry and Perdue’s competitors, ) to perform a SWOT analysis of Perdue Farms, 4) to identify key issues, and 5) to make recommendations.


Analysis Summary


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Our analysis shows that Perdue Farms is performing well in the poultry industry. They have a brand name that many people recognize as a seal of quality. They lead the industry in research and development, in the area of environmental, biological, and genetic research. Perdue Farms lacks market coverage because they only cover the eastern half of the United States, and a few foreign countries. They also lack market share in the foodservice segment of the market. Their information and distribution system was recently upgraded and it created a source of competitive advantage for them.


Key Issues and Recommendations


We recommend that Perdue Farms implement the following actions


• Maintain and improve the current market share in the consumer retail segment. They will need to expand their market coverage into the western half of the United States. They also need to create more meal replacement items.


• Expand in the foodservice sector. Perdue’s market share in the foodservice sector is not proportional to its overall market share. Foodservice market is important because it is where all the growth will come from.


• Environmental problems should be solved. This will eventually hurt them if it is not taken care of soon.


• International expansion should be pursued, but it should be done with caution, as there are many uncertainties in the international market.


History


Perdue was first started by Arthur W. Perdue in 10, when he left his job with Railway Express and entered the egg business full-time near the small town of Salisbury, Maryland. Even as a small business, the emphasis was put on quality. By the 140s, Perdue Farms was already known for quality product and fair dealing in a tough, highly competitive market. The company began offering chickens for sale when Arthur saw that the future lay in selling chickens, not eggs.1


In 150, Frank Perdue took over leadership of the company. He started implementing vertical integration, operating his own hatchery, starting to mix his own feed formulations and operating his own feed mill. Also in the 150s, they started to contract with others to grow chickens for them. By furnishing the baby chickens and the feed, they could better control the quality. In the 160s, Perdue Farms continued to vertically integrate. They built their first grain receiving and storage facilities, and Maryland’s first soybean processing plant. The company entered the poultry processing business when they bought a Swift and Company processing plant in Salisbury. Quality continues to be the focus point. Frank Perdue actually tossed out chickens that state graders passed as grade A and which he didn’t think had sufficient quality. At one point, Perdue chickens were shipped to the market packed in ice, justifying the company’s advertisement at that time that it sold only fresh, young broilers. In the 180s, Perdue Farms expanded southward into Virginia, North Carolina, and Georgia. It also began to diversify by acquiring other producers such as Carroll’s Foods, Purvis Farms, Shenandoah Valley Poultry Company and Shenandoah Farms. During the 180s, the firm decentralized under a consulting firm’s recommendation. But the decentralization had created duplication and enormous administrative costs. In 188, the firm experienced its first year in the red. The company refocused, concentrating on efficiency of operations, improving communications throughout the company, and paying close attention to detail to pull the company together.1


Jim Perdue, Frank’s son, took the leadership role in 11. More formally educated, Jim focused on operation, infusing the company with an even stronger devotion to quality control and a bigger commitment to strategic planning. Under Jim Perdue’s leadership, Perdue Farms expanded into Florida, Michigan and Missouri. The international business segment was formalized serving customers in Puerto Rico, South America, Europe, Japan and China.1


Goals and Implementation


Perdue’s vision of the future is to be the leading quality food company with $0 billion in sales in 00. They have several goals to help them realize their vision. Perdue’s several goals are to provide a superior quality product, offer their consumers a portfolio of trusted food and agricultural products, rank Perdue Farms Inc. among the best places to work, expand in the domestic retail and food service area, and expand internationally.


Superior Quality Product


Penned by and unchanged from Frank Perdue Farms Inc.’s original wording, the Perdue Farms Inc. Quality Policy is, We shall not be content to be of equal quality to our competitors. Our commitment is to be increasingly superior. Contribution to quality is a responsibility shared by everyone in the Perdue organization.


From the first batch of chickens that it processed, Perdue’s standards were higher than those of the federal government. One anecdote that proves this is that told by one of the state graders who was concerned that he had rejected too many chickens as not being Grade A. Upon finishing his inspections the first day, he turned to see Frank inspecting the birds that the inspector had previously approved. To his astonishment, Frank placed them all in the reject pile. 1


Frank had refused to have his broilers frozen for shipping. He made sure that they were packed in ice for shipping to maintain freshness. Today some still are shipped that way, when possible. 1


Frank used selective breeding to produce a chicken with more white breast meat than the typical chicken.(Rumor has it that his chickens were so envied by the competition that they have been stolen on occasion to improve competitor flocks.) 1


One of Perdue’s first strategies was implemented when he saw that Maine chicken growers could charge more “because their birds skin had a yellow hue,” so “he added marigold petals and corn gluten to his flocks diets, and pitched them as more tender and well-fed than his competitors chickens.” Perdue thought that if he could emulate the competition in Maine by making a more yellow chicken, he could charge a three-cent premium.4


In 168 Perdue Farms Inc. Farms made a key strategic purchase of a broiler processing plant from Swift Company completing the initial integration of the poultry operation, thus giving Perdue Farms Inc. complete quality control over its product. Thanks to Perdues choice of maximum vertical integration they can control every detail from breeding and hatching its own eggs, building Perdue-engineered chicken houses, all the way up to having their own trucking fleet for distribution.1&


In 170, Perdue began their primary breeding and genetic research program. In 1, among other PPE expansions Perdue Farms Inc. established a microbiology lab to further ensure product safety. To date, the company spends more on R and D as a percent of revenues than any other poultry processor. Because of this, Perdue gains experience from being involved in USDA pharmaceutical tests giving them a competitive advantage.1&


Portfolio of Trusted Food and Agricultural Product


In order to meet the goal of offering consumers a portfolio of trusted food and agricultural products Perdue has made dozens of acquisitions and comes up with new and different products annually. Perdue acquired Carrolls’ Foods, Purvis Farms, Shenandoah Valley Poultry Co., and Sahandoah Farms in 184. The latter two diversified the companies market to include turkey. In 185, the company introduced PERDUE DONE IT!, a line of fully cooked, fresh chicken products. The original items included chicken breast nuggets, cutlets, and tenderloins.


Perdue also has a grain and oil seed division that it has acquired and expanded over the years that diversifies the company and provides it with a synergy; although, only 15% of Perdue’s sales are generated from this sector. The grain and oil seed division complements their fowl business and allows them additional revenues. According to their website, they buy the grain from more than 5,500 farmers. They then process and send it to their own feed mills. “Each year, they purchase approximately 170 million bushels of corn, soybeans, wheat, milo, and barley.”


In addition to using the processed grain to form a synergy with their feed mills, Perdue “procures, processes and trades ingredients for the feed, food, and pet food and fertilizer markets. Their operations in this division allow them several opportunities.” The following are some highlights from the perdue.com site regarding their grain and oilseed division


• Their refinery produces edible vegetable oils and lecithin that major food companies use in products ranging from cookies to salad dressing.


• Their commodities trading operation, with offices in the U.S. and Canada, enables them to buy and sell feed ingredients in the domestic and international marketplace.


• Their protein conversion operations recycle poultry by-products into value-added products for the feed and pet food industries.


• They manufacture and sell custom-blended protein feed ingredients for the poultry, livestock and dairy industry and conduct research into animal nutrition.


• Perdue AgriRecycle, a joint venture company, is the first of its kind of operation to convert surplus poultry litter into organic fertilizer pellets formulated for precision agriculture.


Best Places to Work


The logic for trying to make Perdue one of the best places to work was summed up nicely by Jim Perdue when he explained why it is important to put associates first, If [associates] come first, they will strive to assure superior product quality- and satisfied customers.”1


An example of Perdue Farms Inc.’s employees first policy would be when Perdue Farms Inc. took action on behalf of an increasing number of Hispanic workers who were undereducated, lacked basic health care, and knew little of the English language. The firm now provides classes to help non-English speaking employees assimilate. They can now earn their GED. Other examples of employees first policy would include an ergonomics committee in each plant, and 10 clinics at 10 plants to provide wellness programs that are staffed by professional medical people under contract to Perdue Farms. “The company thus benefits from a reduction in lost time for medical office visits, lower turnover and a happier, healthier, more productive and stable work force.”1


The Food Service


The Food Service sector consists of 50% of the total domestic poultry sales with 0% of Perdue’s revenues generated from this sector. This sector has an annual growth rate of 1% from chicken and turkey sales domestically. Perdue’s main competitive advantage is the creation and exploitation of the strong Perdue brand name and history of quality of the Perdue products established in the minds of consumers.1


The visionary that he was, Frank Perdue believed that he could earn more by charging more, i.e. selling chicken at a premium price. However, for that to be possible the customers would have to ask for it by name. Against counsel from his ad agency, in 16 Frank added an additional $80,000 to the theretofore $50,000 advertising budget. Frank began studying and taking courses on advertising. He consulted experts and interviewed 48 ad agencies, finally ending with Scali, McCabe, and Sloves, who decided that Frank himself would be the best man to be the firm’s spokesperson. They began the ad campaign with Perdue coining the phrase, It takes a tough man to make a tender chicken.” He also boasted that his graders reject 0% of what the government inspectors accept as grade A”; thus adding to and proving the value of the Perdue name.1


According to Rubenson and Shipper , The food service business consists of restaurant chains, governments, hospitals, schools, prisons, transportation facilities and the institutional contractors who supply meals to them.” They said that because traditional grocery sales have gone down and the food service sector has grown, the best strategy for prevailing in the food service market is acquiring companies that already have the expertise such as Gol-Pak which was acquired in Sept, 18, and takes in revenues $00 million annually.1&


Domestic Retail


The strategies in the domestic retail area have been like other areas; to maintain high quality products efficiently, establish strategic partnerships with national supermarket chains, and provide convenient products to meet the evolving consumer markets. Domestic retail sails accounted for 60% of Perdue Farms profits in 000.5


The domestic retail sector consists of five outlets 1) The fresh meat counter, whole chicken and parts; ) the delicatessen, processed turkey, rotisserie chicken; ) The frozen counter, individually quick frozen items like frozen whole chickens, turkeys and Cornish hens; 4) Home meal replacement, fully prepared entrees such as Perdue Short Cuts and Deluca Brand entr�es, and finally 5) shelf stable, canned products.1


The retail frozen products could create a possible conflict with past claims to freshness. The case authors say that they are currently researching what the term fresh means in the customers mind. They then will be able to develop new marketing themes that convey that concept.1


International


On the international scene, Perdue has somewhat of a “toehold” in Asia. In the early 0s, they began sending chicken feet to China. This is a good strategy because although the paws are not accepted as edible in the U.S., the Chinese see them as a delicacy. Another plus from this strategy is how the eastern and western markets complement each other. The west prefers white meat, while the Asians typically like dark meat, so each market gets what they want and nearly the entire chicken is used while charging a premium price to both markets. Usually whatever is leftover after that is used in making other products like pet food. By 18, they had achieved annual revenues over $140 million from selling a wide variety of chicken to China, Japan, Russia, and the Ukraine.1


Perdue has encountered trouble in attempting to expand abroad. It is hard to come by a refrigerated truck in China. One time a shipment bound for Russia disappeared. It had been impounded using forged documents. All this, coupled with the poor economies and high import duties, provides Perdue with quite a challenge. To prevent mistakes due to cultural differences, Perdue has gone into a joint partnership to develop a small processing plant in Shanghai. Unfortunately, it is not permitted to export poultry to the US, so it will be difficult for Perdue to capitalize on the excess white meat in China. Hopefully it will be permissible in the future. 1


External Environment


Industry Environment


According to the United Food and Commercial Workers, “Industry profits rose over 00 percent in the 10s. Worker productivity is at an all-time high. Increasing consumer demand has made poultry the highest selling meat product in the country. Poultry industry giant, Tyson Foods--dominates the market commanding over 7 percent of the U.S. poultry market share.”6


Perdue ranks as number 5 of the nations top broiler companies with 1 slaughter plants right behind ConAgra Foods with 1. Tyson is first with 41 slaughter plants.





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The U.S. meat and poultry industries account for the largest segment of the U.S. agricultural economy. Total meat and poultry production in 000 exceeded 80 billion pounds, a 1% increase since 187. This translates into an estimated $100 billion in annual sales. As previously stated, Americans consume 5 pounds of meat per person each year. Fifty-four pounds of that is chicken and 14 pounds is turkey. America produces 0,4 million pounds of chicken and 5,7 million pounds of turkey per year.8


Domestic per capita consumption has seen only minor growth in the past decade, and slow population growth in the U.S. suggests that demand has plateaued. The saturation of the U.S. market means that the industry must look to foreign markets to continue to increase in size. Thus, the market is dependent on expansion in the international market.


Competitor Analysis


Pilgrim’s Pride Corporation is the second-largest poultry producer in the US. Pilgrim’s operations are more or less the same as Perdue’s breeding, hatching, raising, processing, distributing, and marketing of chicken and turkey. They sell to restaurants, grocery stores, and frozen entr�e makers. They also sell fresh whole and cut-up chicken. They sell the products in North America, East Europe, and Asia. The Chairman Lonnie Pilgrim owns 61% of the company. They had in 00 a net income of $56 million. 10


ConAgra is similar to its competition in the operations aspect and who they sell to. What makes them different is that they also make and distribute seafood, dairy, food ingredients, mill flour and corn, and they trade food commodities. ConAgra foods are comprised of more than 0 brands including Banquet, Chef Boyardee, Healthy Choice, and Van Camp’s. ConAgra had a net income in 00 of $777.4 million. 10


Tyson Foods is the largest chicken producer. Tyson’s recent purchase of IBP Fresh Meats, make it the world’s largest meat processing company. They serve retail, wholesale, and food service in the US and more than 100 countries around the world, twice as many as Perdue. Tyson is also vertically integrated. Don Tyson controls 80% of Tyson’s voting power. Tyson had a net income in 00 of a whopping $7 million. 10


The following graph provides a comparison of Perdue’s top three competitors in annual sales.





Graph was created from a compilation of information from 10


Internal Environment


Resources


Financial resource


Although financial numbers for this private company are not available, most financial sources indicated the annual revenue for Perdue is at about .5 billion dollars and it employs about 0,000 associates. The company has been profitable since its inception, except in 188 and 16. If revenue is an indicator for financial strength, Perdue is doing pretty well.1


Location of the Firm’s Plant and Equipment


Perdue is headquartered in Salisbury, Maryland, and most of its production facility is located on the east coast, which is where most of its customers are. This allows them to deliver the freshest product to their customers at the lowest cost. They also have a freezing facility at New Port News, Virginia, to prepare chicken for export to Europe and Asia. The new facility in Shanghai is located strategically near Japan, which is a large export market for Perdue. 1


Access to Raw Material


Everything Perdue needs is either supplied by themselves or through a partnership with others. Perdue breeds and hatches its own eggs, selects its contract growers, builds Perdue-engineered chicken houses, formulates and manufactures its own feeds, oversees the care and feeding of the chicks, operates its own processing plants, distributes via its own trucking fleet, and markets the product. By integrating vertically, they can control the quality of their chicken by selecting quality raw material. 1


Technology


Perdue Farm was the first to put a computer on their customer service associates’ desks, allowing them to enter customer orders directly. Then they developed a system to track product inventory and truck location at all times. Computers were also put on customers’ desks to shorten the distance between customers and them. The latest addition to technology is the multi-million dollar IT system. They trained 100 associates to use this system to make it easier and more desirable for the customer to do business with Perdue Farms, easier for Perdue Farms associates to get the job done, and take as much cost out of the process as possible1.


Leaders that Have Great Vision


Arthur Perdue started the business selling eggs, and he sees the future lies in selling chicken. Frank Perdue took over the company and saw that the future lies in processing of chicken. Under Jim Perdue, Perdue Farms expand geographically in the US and internationally. If not for those leaders, Perdue might not be here today. 1


Brand Name


Perdue Farms has one of the best-known brand names in the poultry industry. They were the first to brand their chicken, and ever since there has been a perception that Perdue’s Chicken is good chicken. This is a unique competitive advantage to them since the consumers now are willing to pay premium price for quality. Not many other chicken producers can do that. This is the most valuable resource to Perdue Farms, and it is the most difficult for competitors to imitate. 1


Capabilities


Adaptive to Environment


Perdue Farms is very flexible and able to adapt to different environments. They transformed from egg producer to chicken producer to poultry processor, and then vertically integrated to be more flexible. They are also catching on to the globalization, first by exporting to other countries, then establishing facilities in China to serve the local market but also serve as an exporting point. They don’t know the Chinese market very well, so they partnered with a local producer to learn the local cultural and legal environments. Perdue Farms utilize all those knowledge to be more efficient, such as selling chicken feet, which is a waste in the US, to Asian countries, where they are considered a delicacy. 1


Effective and Efficient Control of Inventories and Transportation


By vertical integration, Perdue Farms has its own trucking capability. They were the first ones in the industry to put computers on trucks to keep track of inventory. The new multi-million dollar information system can now more efficiently forecast demand and control production and inventory level. By locating their production facility near their customers, they can ensure their product will be delivered fast and fresh. 1


Core Competencies


Production of Quality Chicken


Perdue Farm’s chicken is like the Cadillac of the poultry industry. They were the first to brand their chicken and create brand loyalty. They control almost everything that goes into their production. This is their main source of competitive advantage that competitors cannot match. This core competency distinguishes Perdue Farm from its competitors. It emerged over 80 years through a process of learning how to produce high quality chicken. This emphasis on quality has performed well compared to competitors, and has added value to Perdue Farm and their products. 1


R&D


Perdue spends more on research as a percent of revenue than any other poultry processor. Their main focus on research differentiates their product by adding value and increasing quality. Their research resulted in products that became the basis of their early advertising, such as “Perdue Chicken contains 0% more breast than other chicken.” Their research has increased the conversion rate for the feeds, which cut down on the time needed to grow a pound of chicken. Extensive cooperation with USDA field tests gave Perdue knowledge and experience in R&D. Perdue Farm’s R&D program contributes to the quality of their chicken, and competitors do not easily imitate it. 1


Marketing


As the first company to brand their chicken, marketing is one of the core competencies for Perdue Farm. The slogan “It takes a tough man to make a tender chicken” was well recognized, and the overall campaign for Perdue to create a brand value for a commodity product is a large success. In 168, Perdue held about percent of the New York Market. By 17, one out of every six chickens eaten in New York was a Perdue Chicken. 51 percent of New Yorkers recognized the label. A lot of people, old and young, still recognize the brand in New York City when I went there. Even though other producers have their own brand now, Perdue still has an advantage in terms of creating a theme to market all their products because they can build on their existing basis. 1


Industry Environment


Threat of New Entrants


With two thirds of the market share being held by five major companies who each have large economies of scale, especially Tyson Foods, they have all been able to reduce the cost of manufacturing greatly, giving the current market shareholders the advantage over the rookies.


Thanks to branding and customer loyalty, companies like Tyson with a history in the market have the advantage of being seen as unique and reputable. Given the choice between John Doe Chicken and Tyson Chicken, Tyson will always win in the mind of the loyal consumer.


Any would-be new entrants would have to dig deep into their pockets to cover the amount of advertising it would take to overcome the bias of the consumer. That is in addition to the start-up costs for hatcheries, feed mills, processing plants, storage facilities, and other capital requirements, not to mention if they want to use maximum vertical integration.


Most of the seasoned companies in the industry have developed long-standing relationships with their distributors if they haven’t vertically integrated them yet. The distributors are dependent on these veterans of the market and would suffer from switching costs were they to grant access to the new entrant.


Most of the veterans have claimed all the best locations and have had time to develop technology, and have had time to develop all the strategic alliances necessary to assure survival. The governmental regulations such as environmental protection policy must be attended to as well such as the disposal of dead chickens, chicken parts, and manure and other waste. This would add to the start-up costs of new entrants in contrast to the veterans of the market who already have developed systems of compliance in place.


Bargaining Power of Suppliers


The suppliers have virtually no bargaining power. The industry to which they supply is more concentrated than that of the suppliers’. The companies can do business with any other farmer at the end of the contract instead of renewing it. There are little switching costs for the buyers.


According to the National Interfaith Committee for Worker Justice, (NIWJ) The poultry giants usually offer a take-it-or-leave it contract to growers. That way they get out of certain environmental obligations of dead bird and manure disposal. Although contract farmers invest over half of the capitol required in the industry, it is the companies that reap as much as a 0% ROI and the contract farmers see little more than a 1-% return. This allows company giants like Tyson and Perdue to get away without covering health care, pension, or other benefits to catchers.4


Perdue may sound like quite the philanthropist with his lofty goal of making Perdue “one of the best places to work”; however, an article of the Monitor in 18 has suggested otherwise. It expound on how Perdue puts the “squeeze” on those whom it depends on


Perdue Farms brochures, for example, guarantee healthy returns to farmers who borrow $100,000 for a chicken house where they can raise flocks of day-old chicks on company feed. However, its contract must be renewed with each flock, and for a farmer facing a mortgage payment, the prospect of being cut off is frightening. We have no negotiating leverage, says David Mayer, one of Perdues 1,000 plus growers in North Carolina. 4


Not only has Perdue exploited the farmers but the “associates” as well, most of whom are black women. The monitor went on to say that; “Perdue has increased output by mechanizing parts of his processing plants and increasing the line speed. Workers who gut and cut-up 50 chickens a minute in the 70s are now doing as many as 0 a minute. The employees have to repeat the same movements thousands of times daily until they simply “wear out.” The article said that it was normal procedure for more than 60% of the workforce to visit the nurse daily and there have been a plethora of health problems ranging from tendonitis to carpel tunnel syndrome, and that Poultry workers quit their jobs at five times the rate of other workers. Not surprising considering that the injury rate for poultry processors is one of the 10 highest in manufacturing, higher even than mining. 4


It is nice that the “associates” have a place to visit and get an Advil if need be, but we believe it to be imperative that Perdue addresses this issue soon. He may be reducing his financial cost only to replace it with human cost, and who can put a real value on humanity, especially if one of Perdue’s main goals is to “Place Perdue Farms among “One of the best places to work”?


Bargaining Power of Buyers


The bargaining power of buyers from the poultry industry is held mostly by the supermarkets who buy a large portion of the total output of the industry. They could switch to any of the other suppliers with minimal switching costs provided the geography is on their side. As much as Perdue boasts about a superior product, many of the products in the poultry industry are standardized and often knock-offs copy those that are first seen as unique.


Product Substitutes


Perdue sells chicken, which have many substitutes. Any major categories of meat, seafood, or vegetable that have similar nutritional value have the potential to replace chicken. Overall, poultry is still the favored kind of meat around the globe. As stated, Americans consume 5 pounds of meat per person each year and fifty-four pounds of that is chicken and 14 pounds is turkey.8 Unless the preference for chicken changes due to social, cultural, or any other reason, there is not a huge imminent threat to replace chicken. The following graph shows the rise in consumption of chicken versus other meat.





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Intensity of Rivalry


Perdue is big but it is dwarfed in comparison to Tyson. This gives Perdue the advantage of acting quickly once it makes a decision to do so. Most of the industry is consolidating. The giants are absorbing the little no-name companies and assimilating them. Perdue’s top competitive advantages are the amount of money put into R&D and its brand name that stands for quality. Perdue cannot afford to be a price leader and a differentiator as easily as Tyson can.


Strategy


Business Level Strategy


Since its inception, Perdue Farms have adopted a differentiation strategy, where they command a premium price for the better quality chicken that they sell. As the competitors started gaining the same competitive advantages, Perdue Farms started losing market share and uniqueness. Customers started to feel that the price differential between Perdue Farms’ chicken and cost leader’s chicken is too large. Because of the expansion of market both domestically and internationally, Perdue has shifted its business strategy to integrated cost leadership / differentiation strategy. Customers in the food service segment put much more emphasis on cost rather than quality. They want to produce relatively differentiated products at relatively low cost so they can earn above average return. They will fully harness capability of the new and revitalized information networks to reduce cost, but at same time keeping up the implementation of total quality management that is in place to provide better quality products than competitors. It is good for Perdue to realize that they cannot command premium price based on quality alone, and they will have to compete on price, but if this integrated cost leadership / differentiation strategy does not work, they will lose their image as a differentiator and be stuck in the middle.


Corporate Level Strategy


Perdue Farms has a low level of diversification with it dominant business in poultry processing. They vertically integrated to provide much of what they need for growing and processing chicken. The only diversification that they have, although related, is to produce fertilizer pellets from chicken manures. The acquisitions that Perdue made all pertain to expansion of their market share and diversification within their dominant business. After all, growing and processing of chicken is what they know the best and are good at. Why risk expanding into unfamiliar territories if there is still a huge potential for growth?


International Strategy


On the international level, Perdue Farms is pursuing a transnational strategy. They are seeking to achieve both global efficiency and local responsiveness. The international market is a perfect complement to the US market. While consumers in the US prefer white meat, Asian consumers generally prefer dark meat. By having a presence in both markets, Perdue can better utilize the difference in preference and achieve higher efficiency. Perdue is also testing different concepts in China, such as tray items to see if the market is receptive to such a concept. The needs are very different abroad, so they are learning what local customers want and being flexible in that market.


SWOT Analysis


Strength


Name Recognition


Because of Perdue’s quality control, they have a reputation for producing quality products. Their customers recognize Perdue’s name for quality and innovation. They chose maximum vertical integration in order to control every detail. Because of this, their name is a strength to them.


Vertical Integration


Perdue breeds and hatches its own egg, selects its contract growers, builds Perdue-engineered chicken houses, formulates and manufactures its own feeds, oversees the care and feeding of the chicks, operates its own processing plants, distributes via its own trucking fleet, and markets the product. This vertical integration allows them to control the quality of their products. The total process control and integration also enables Perdue Farms to ensure that nothing goes to waste. They sell what used to be waste, such as the chicken feet that is sold to the orients as a delicacy.1


Research & Development


R&D is necessary for providing quality products, and Perdue Farms has been the industry leader in research. They conduct more research than all competitors combined, and that research leads to competitive advantages. It was their research into selective breeding that resulted in the broader breast, which was widely advertised. The company employs specialists in avian science, microbiology, genetics, nutrition, and veterinary science. Productivity is increased dramatically due to research. In the 150s, it took 14 weeks to grow a three-pound chicken versus seven weeks for a five-pound today. 1


Technology


Since poultry has a limited shelf life, the delivery has to be timely and the forecast has to be accurate. Usually poultry companies have relied principally on the projection of demand, based on that of the past, industry networks and other contacts to make their estimates. Perdue Farms put PCs on each customer service associate’s desk so they can enter customer orders directly. Also, a system was developed to put dispatchers in direct contact with every truck in the system so that they would have accurate information about product inventory and truck location at all times. A multi-million dollar information technology system that represents the biggest non-tangible asset expense in the company’s history was purchased in order to control the entire supply chain management process. This sophisticated system can efficiently integrate all facets of operations including grain and oilseed activities, hatcheries and growing facilities, processing plants, distribution facilities, distributors, supermarkets, food service customers, and export markets. 1


Financial Management


Since Perdue is a private company and their financial information is proprietary. The stock is held primarily by the family with a limited amount held by management, so the decision lays on the Perdue family. They have been profitable every year since its founding with the exception of 188 and 16. Since they don’t raise capital from outside the company, they approach financial management conservatively. Mainly they use retained earnings and cash flow to finance most asset replacement projects and normal growth. Long-term debt is used for expansion projects and acquisitions. Because of this structure and management, they are more dynamic in response to market conditions. 1


Weakness


Corporate Structure


Since Perdue is a private company, someone with the last name likely makes all the decisions. Their structure is still like when they first started. Although they tried to decentralize in the 180s, their effort was not successful. 1 As markets are changing rapidly today, top management is not going be able to keep up with the changes. They need to decentralize and give each division more autonomy in making decisions in order to grow.


Environmental Issues


Chicken produces waste. Dead chickens and manure are major problems in soil and water pollution. In the Delmarva area chicken outnumber people 5 to 1. Perdue Farms actually trucks waste from a Delaware plant and injects it into Maryland soil. This practice is illegal in Delaware, but legal in Maryland. Small farms in the Chesapeake Bay region produce 75,000 tons of manure. This overwhelms the ability of crops to absorb the manure as fertilizer. Large amount of excess nitrogen and phosphorus run off fields and eventually end up polluting the bay. High levels of these elements have been implicated in the outbreak of the toxic microbe pfiesteria. In 16 and 17, a major pfiesteria outbreak killed hundreds of thousands of fish in the bay watershed. Exposure to pfiesteria has caused commercial fisherman, swimmers and water-skiers in Maryland to suffer from health problems ranging from pounding headaches to body lesions that won’t heal and short-term memory loss. In 17, Maryland’s Department of the Environment filed suit alleging that a Perdue chicken processing plant dumped organic waste and bacteria into a tributary of the Church Branch River in Worcester County. Perdue agreed to pay $80,000 in penalties and spend $150,000 on “remediation” according to the Attorney General’s office. As a major poultry producer in the region, Perdue is one cause of the problem. If the situation is not improved, it will cost Perdue money and their reputation.1


Market Coverage


Geographically, since Perdue still ships its chickens packed in ice to ensure quality, they don’t have a wide coverage area. They deliver mostly to the East Coast, so the Midwest is not well covered. Food service is an area in which Perdue has not been very competitive. Food service accounts for about 50 percent of total poultry sales while approximately 0 percent of Perdue Farms revenues come from this category. Perdue has neither strength nor expertise in the food service market. 1


Opportunity


International Sector


In the 10s, Perdue began exporting specialty products such as chicken feet to customers in China because it is considered a delicacy there. All Asian markets prefer dark meat, which is a perfect fit for the US market, which prefers white meat. Perdue Farms has developed a portside freezing facility in Newport News, Virginia, so poultry can be shipped directly to the port to reduce shipping cost. Perdue Farms has created a joint partnership with the Jiang Nan Feng brand in order to develop a small processing plant in Shanghai. This is a step in the right direction for Perdue to be successful in both domestic and international markets. First, Perdue stays more price-competitive by eliminating oversea shipping costs, new freezing facilities, and import taxes. Second, in order to maintain their high quality and build brand recognition, they have to have control of oversea operations. Third, Shanghai is geographically located to export to Japan and Korea. They represent a growing market that appreciates quality and is receptive to branding. Finally, having an operation abroad will alleviative some of the environmental concerns in Maryland. There is a great opportunity to expand to the international market, and Perdue needs to seize this opportunity if they want to survive. 1


Food service


The food service business consists of a wide variety of public and private customers including restaurant chains, governments, hospitals, schools, prisons, transportation facilities and the institution contractors who supply meals to them. Historically, these customers have not been brand conscious, requiring the supplier to meet strict specifications at the lowest price, thus making this category less attractive to Perdue Farms. But as more and more Americans eat a larger percentage of their meals away from home, the food service sector has shown strong growth. Across the poultry industry, food service accounts for half of the total sales while it only accounts for 0 percent of Perdue’s revenue. Perdue Farms acquired Gol-Pak to gain strength and expertise in the food service market, but they need to do more to become competitive and gain market share. 1


Environment Efforts


Perdue had some environmental issues with authorities. They were fined, and there is still a great amount of suspicion. Environmental issues present a constant challenge to all poultry processors. Perdue Farms tries to be pro-active in managing environmental issues. They have created an Environmental Steering Committee to oversee how the company is doing in such environmentally sensitive areas as waste water, storm water, hazardous waster, solid waste, recycling, bio-solids, and human health and safety. They have developed compact machine for use on each farm to dispose of dead birds, and they developed a way to reduce the waste by 50 percent by selling the liquid fraction to a pet food processor that cooks it for protein. One of the most fascinating solutions to the excess manure problem is they will process the excess manure into pellets for use as fertilizer. This would permit sale outside the poultry growing region. All these efforts will hopefully be translated into profit for Perdue Farms, and also improve their image tremendously. 1


Retail Market


There is a growing market for delicatessen and home meal replacements. Since Perdue chicken is known for quality, there is a great opportunity to partner with a national supermarket chain to market delicatessens under the Perdue brand name. They already have a large market share, and their new task is to create a unified theme to market a wide variety of products to a wide variety of customers. Industry experts believe that the market for fresh poultry has peaked while sales of value added and frozen products continue to grow at a healthy rate. So if Perdue can form a partnership with supermarkets in order to market high quality delicatessen and home meal replacements, there is a good chance for greater market share and profit. 1


Threats


Environment Threats


Environmental issues present a constant challenge to all poultry processors. Opponents argue that the growing, slaughtering, and processing poultry processes are dangerous to workers, inhumane to the poultry, hard on the environment and results in food that may not be safe.


Solving industry environmental problems presents five major challenges to the poultry processor.


1. How to maintain the trust of the poultry consumer


. How to ensure that the poultry remain healthy


. How to protect the safety of the employees and the process


4. How to satisfy legislators who need to show their constituents that they are taking firm action when environmental problems occur


5. How to keep costs at an acceptable level1


If Perdue cannot meet those expectations, they may incur fines, or even worse, there could be government laws and regulations that could fundamentally change how Perdue’s production operation operates.


Hostile Work Environment


Perdue sounds like quite the philanthropist; however, an article of the Monitor in 18 has suggested otherwise. It stated that Perdue has followed a profit-maximizing strategy expand production, shorten the birds life cycle and squeeze everybody involved in the process, beginning with the farmer. Perdue Farms brochures, for example, guarantee healthy returns to farmers who borrow $100,000 for a chicken house where they can raise flocks of day-old chicks on company feed. However, its contract must be renewed with each flock, and for a farmer facing a mortgage payment, the prospect of being cut off is frightening. We have no negotiating leverage, says David Mayer, one of Perdues 1,000 plus growers in North Carolina. 4


Not only has Perdue exploited the farmers but the “associates” as well, most of whom are black women. The Monitor went on to say that; “Perdue has increased output by mechanizing parts of his processing plants and increasing the line speed. Workers who eviscerated and cut-up 50 chickens a minute in the 170s now find themselves processing as many as 0 a minute. The employees have to repeat the same movements thousands of times daily until they simply wear out.” The article said that it was normal procedure for more than 60% of the workforce to visit the nurse daily and that there have been a plethora of health problems ranging from tendonitis to carpel tunnel syndrome, and that poultry workers quit their jobs at five times the rate of other workers. This is not surprising considering that the injury rate for poultry processors is one of the 10 highest in manufacturing, higher even than mining. 4


It is nice that the “associates” have a place to visit and get an Advil if need be, but we believe it to be imperative that Perdue addresses this issue soon. He may be reducing his financial cost only to replace it with human cost, and who can put a real value on humanity, especially if one of Perdue’s main goals is to “Place Perdue Farms among “One of the best places to work”?


International Expansion


Much of Perdue’s competitive advantage is gained from branding. In Asia, however, there is not a strong sense of branding. Shipping to Asia has its problems. Most delivery trucks in China are not refrigerated. So the poultry can begin to thaw as it is being delivered, limiting the distance it can be transported prior to sale. There was one shipload of Perdue Farms chickens that had been impounded using forged documents in Russia. Import duties and taxes are also a barrier. In China, import duty rates for poultry are a whopping 45 percent for favored countries and 70 percent for unfavored countries. And there is a 17 percent value added tax for all countries. Import duties and taxes in Russia have been similarly high. By investing in the international markets, there are social and economic consequences. There will be some negative feeling toward using Mexican and Chinese production facilities instead of producing locally. External customers may view international expansion as a threat to American jobs, and employees may have anxiety about losing their jobs as well. 1


Key Strategic Issues


Environmental Problems


As mentioned in the threat section, there is an environmental problem in the Delmarva Peninsula due to the chicken waste. The problem is caused by waste water polluting the area’s water. It is still yet to be proven that the poultry industry is to blame for this, but it is the common understanding among local people. Perdue has been fined for various environmental violations, and they are trying to find ways to improve on this situation. One of the things that they did through their R&D is coming up with a solution to make fertilizer pellets from chicken waste, and ship them out to other states. Another thing is selling dead chicken to pet food producers to cook proteins for pet food. They are also relocating their production facility to other areas away from the peninsula to decrease the concentration of chicken producers there. 1 All these actions are positive for the environment and Perdue’s image, but they need to move most of their production facilities out of that area to avoid more problems.


International Expansions


International markets are very attractive to Perdue due to its large potential and saturation of US market. Their main export is to Asia and Europe, and they even have a production facility in China. Everybody likes chicken, not just the Americans, Asians, and the Europeans. There is opportunity to expand to Latin America to get a head start on grabbing market shares. International expansion is not without it down sides. Exporting costs are high, and there is always the uncertainty of social cultural problems.


Advertising for the Product Line


Most of the advertising done by Perdue is mainly focused on their chicken, but right now they sell more than just chicken. They have a line of ready to eat meal replacements and other products. As more and more Americans eat out and consume ready-to-eat meals, Perdue needs to establish a name for themselves for their product line, not just their chickens.


Geographical Expansion to Midwest


Perdue does not have a market presence here in Minnesota or any states west of the Mississippi. There is the potential to double their domestic sales if they expand and cover the remaining states. There is serious competition in the Midwest, because there are many poultry producers here. By entering these markets, there might be retaliations by other producers to enter markets currently dominated by Perdue.


Creating a Brand Name Abroad


International expansion for Perdue is good in Japan because the Japanese have the concept of brand name commodity, but not in the country of China. They don’t understand why one chicken from Perdue is superior to chickens from the local producers. This is a major problem to Perdue because their reputation of producing quality chicken is their main competitive advantage in the US. As more and more US companies start doing business in China, the Chinese will eventually grasp the concept of brand recognition. Perdue needs to have an advertising campaign abroad, and keep up the quality of their product in order to establish this brand recognition in China.


Recommendation


Competitive Advantage


It is important for Perdue Farms to realize that the competition is catching up in terms of product quality, name recognition, and vertical integration. Although Perdue Farms still leads the industry in those areas, competitors are not far from matching, or even bettering Perdue Farms in those areas. All the top competitors in the industry have the similar structure and strategy. To accomplish their goal of $0 billion in sales by 00, they need to develop a more distinguishable competitive advantage to flourish in the future. With the current industry status, Perdue Farms will have a tough time in meeting their goal if nothing changes.


Food Service


Perdue does not have a large market share in this segment of the market. Studies have shown that more and more Americans eat out at restaurants, and this means that the demand for more chicken in this segment of the market. Also, restaurants want better quality chicken to prepare dishes that they can command a premium price. This is great news for Perdue Farms. They need to increase their market share in this segment because this is where the growth in the U.S. will come from. Emphasis on quality needs to be reemphasized, and they should have an advertising campaign to target the foodservice market buyers.


Consumer Retail


The consumer market in the US is saturated. The growth in this market is minimal. Perdue already has dominating market share in some geographical segment of the United States, mainly in the East and Southeast. As studies have shown, there are more and more meal replacement items eaten by Americans. Perdue needs to cover the entire United States, since it is easier to do that than expand internationally. They also need to create more meal replacement items since they will be the majority of the growth in the consumer retail segment.


International Sector


International markets have the highest potential for growth, but they also have the highest risk involved as well. Uncertainties can really hurt the company. The international market is attractive enough that it is worth the risk of entering. Perdue is headed in the right direction with their international expansion, but they are still behind when compared to Tyson Foods, which has international operations in more than 100 countries. Perdue needs to implement their international strategy one step at a time, and keep forming strategic partnerships with foreign producers to learn and enter the foreign markets. They don’t have the size that Tyson Foods has, so they don’t really have a second chance if one of their international operations were to go disastrously awry.


Environment


The environmental issue is a double edge sword. They can hurt Perdue if there are government regulations or penalties targeted at poultry producers, but it can benefit Perdue if they can find a way to reduce the problem, and at same time, build a positive image for the company. Their R&D has developed a way to convert waste into fertilizer, and Perdue should integrate this operation into their business. They need to come up with a solution to solve the pollution problem in the peninsula before the regulations hurt them.





WORKS CITED


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www.poultryegg.org/EconomicInfo/index.html#consumption


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