Strategic Options for John Deere and Company

JOHN DEERE & COMPANY John Deere This analysis of John Deere presents the external and internal analysis of the company including a SWOT analysis of the company. This analysis is then used to discuss informed strategic options and recommendations for John Deere. The external analysis of John Deere includes the history of the agricultural industry, sources of competitive rivalry in the industry, and a PESTEL analysis of the agricultural and construction equipment industry. This section also presents the external factors (opportunities and threats) for John Deere.

The internal analysis of John Deere is based on the company's internal factors (strengths and weaknesses). It presents a brief overview of recent issues that are facing the company and how the company has reacted to them. It is a functional analysis of the internal activities of John Deere - operation, administration, finance, and marketing. Strategic options and recommendations This section is informed by the external and internal analysis of John Deere.

This section provides the options for John Deere and recommendations for the company in the short-term and the long-term. Company overview Deere & Company is an American company that majorly deals with manufacturing of construction and agricultural equipment alongside other equipment such as lawn care equipment. The company began in the year 1837 and has grown into a strong business that is currently listed on the New York Stock Exchange.

The company currently employs close to 68,000 people all over the world and is the largest manufacturer of agricultural equipment all over the world. Significant operational divisions and significant products Deere & Company's largest department is the agricultural equipment manufacturing department. The company manufactures agricultural equipment such as combine harvesters, tractors, balers, cotton harvesters, silage machines, planters and seeders, and sprayers for use in agricultural activities.

The second largest department is that of construction equipment where the company is a key player in manufacturing excavators, loaders, backhoes, tracked loaders, bulldozers, graders, and skid-steers. Other products include lawn mowers, UTVs, and diesel engines for various uses. Company ownership and financial analysis Institutional holders majorly own Deere & Company. These include Vanguard Group, State Street Corp, Barclays Global Investors UK Holdings, Capital World Investors, and Wellington Management Company LLP. These institutional holders own close to 64% of the company. Non-institutional holders hold the remaining 36% of shares.

The company has a revenue base of about 38 billion U.S. dollars in the year 2013 from a total equity of 10.2 billion U.S. dollars. In the financial year ended 2013, the company reported a gross margin of 32% with a core operating margin of 16%. After deduction of expenses, the company reported a profit margin of 9%, which is excellent considering most companies report profit margins of roughly 10%. The company's pre-tax return on equity (ROE) was 53% and their after-tax return on equity was 34%.

The company's return on invested capital (ROC) is 8.4%, which though lower than most other companies is still good considering the high return on equity. The company has a negative cash flow. This is evidenced by their levered free cash flow margin of -1.89%. The company has a debt to equity ratio of 340.28% meaning they are operating majorly on borrowed capital with their liabilities to assets ratio being 82.46% meaning they have 82% more liabilities than their assets, which is a situation where the company has borrowed more than its assets.

This affects the long-term solvency of the company. In the financial year ended 2013, the company had an earnings per share ratio of 2.116 up from 1.74 in the previous year. This was driven majorly by the increase in revenue for the company. The company's profit to earnings ratio is 9.32, which is way below the industry average of 12.96 and sector average of 31.29.

over the last five years, the company has had a high profit-earnings ratio of 22.1 compared to an industry average of 25 and sector average of 43.5 Deere & Company's dividend yield for the financial year ended 2013 is 2.94 against an industry average of 2.7 and sector average of 1.73. The company's five-year average dividend yield is 2.07 compared to an industry average of 2.27 and sector average of 1.77. this means the company has grown their dividend yield by over 13% over the last five years compared to 16% growth in the industry and 13% growth in the overall sector.

Mandate John Deere's mandate is to provide solutions linked to land. The company believes in Karl Marx's economic theory and believes that since land is one of the four costs of doing business, it is important to provide essential solutions for landowners, builders, farmers, and ranchers. This is where the company began. John Deere is committed to the success of those who cultivate and harvest land as well as those who use it to build.

The company majorly provides machinery for two broad sectors -- the agricultural sector and construction sector. Over the years, the company has diversified their product offering to include two (2) additional equipment - forestry and turf equipment. These two businesses support and enrich the experience of landowners by supporting and strengthening them to be more environmentally friendly. The company is uniquely and strongly positioned to be the equipment supplier of choice in the land sector as a result of its commitment to innovation.

John Deere's main goal is to become the agricultural, forestry, construction and turf equipment supplier of choice all over the world. The company is doing this by relentlessly and constantly improving their products and the company's business efficiencies in order to achieve an exceptional operating performance. The company realizes that to achieve this it is essential for them to have a strong base of human power and thus they have a high-performance team culture and goes a long way in helping them achieve their goals.

John Deere's mission statement is as below: "John Deere's mission is to 'Double and Double Again the John Deere Experience of Genuine Value for Employees, Customers, and Shareholders.' This will be accomplished by rapidly expanding global customer coverage on the farm site, worksite, home site, and turf site by being first in creating smart and innovative customer solutions through machines, service, and concepts.

The company's business strategies of Running Smart, Running Fast, and Running Lean will help John Deere achieve its mission." External analysis Industry background The agricultural industry has changed greatly over the years. In the early 1970s and 1980s, there was huge mechanization of agriculture that led to expansion of business within this industry. The industry, on the other hand, has seen a decrease in the number of people who are employed in this industry.

In the 1900s, the agricultural industry employed about 40% of the American population but today it employs less than 3% of the population. As a result of the agricultural industry being less popular to the workforce, there has been a huge need for technological advances and many farmers are moving towards mechanized farming. The company's opportunities and threats are as outline below: Opportunities Threats 1. International expansion is a huge opportunity for the company to grow.

Deere should expand into less developed markets in Africa, Asia, and South America where there is less mechanization. 2. Online markets provide the opportunity to reach more people. 1. Strength of the U.S. dollar weakens agricultural exports from the U.S. 2. The agricultural industry is heavily seasonal and cyclic in nature so no assured returns. 3. The agricultural industry is greatly reliant on the U.S. economy, interest rates, and government regulations.

Source of competitive rivalry The agricultural and construction equipment industry has several players and John Deere is second to the industry leader. John Deere commands about 25% of the market. The industry has 37 key players all trying to win customers and increase their revenues through increasing their market share. Smaller companies have less strength to compete against industry giants but they also command a portion of the overall market creating strong competitive rivalry. Caterpillar is John Deere's main competitor commanding about 35% of the market.

The company is very comparable to Deere with distribution centers around the United States and over 200 countries. Their products and services are also similar all over the world. Caterpillar has however, concentrated more on the construction equipment segment with earthmovers, material handling machinery, general construction machinery, and heavy-duty engines. Other competitors include Case Corporation that manufactures light to medium sized construction equipment including loaders, backhoes, tractors, and self-propelled combines. Case Corporation has 12% market share. New Holland is also a competitor with 10% market share.

Apart from New Holland, all the other companies are American companies. New Holland is a British company. Political environment of agricultural equipment sales The agricultural and construction equipment sector is greatly affected by the political environment of the country. Since agriculture is one of the most diverse industries, it depends largely on political decisions that weaken the dollar thus strengthening the competitiveness of exporting agricultural produce from the U.S.

Similarly, when the government decisions lead to high interest rates, most farmers shy away from borrowing and thus impacting sales of agricultural and construction equipment greatly. Economic factors affecting agricultural equipment sales Sales of agricultural equipment are dependent on several factors. The first is the price of farm commodities. When the price of farm commodities is low, many farmers are unable to purchase agricultural equipment since the returns of using these equipment would be low and not make financial sense for them.

The second factor is the number of acres planted. Farmers are more likely to use agricultural equipment when they are planting many acres of land compared to small scale farmers. This is because the cost savings as a result of mechanization are at a larger scale for the large scale farmer. The third factor is the crop yield.

Crops that yield more per acre are more likely to be planted using agricultural equipment than those that only yield a small amount per acre as a result of the cost savings of using agricultural equipment. Farm and land prices also greatly affect sales of agricultural equipment. If a farmer has to purchase land at a high price, they are less likely to use agricultural equipment since they may be unable to purchase the equipment.

However, this also depends on the debt level of the farmer since a farmer who has managed their debt level sufficiently will most likely be able to purchase agricultural equipment on loan. Other factors that affect sales of agricultural equipment include trends in the agricultural sector, weather, and climatic conditions. The agricultural industry is extremely seasonal since planting, ploughing, and harvest seasons differ depending on state, crop, season, etc. Therefore, the company can only achieve sales during certain periods and not throughout the year.

Social factors affecting agricultural equipment sales John Deere is a well-diversified company with operations all over the United States and other countries around the world. The company has also grown over the years to a high degree to now when the company's name is well-known for supply of agricultural equipment. Deere is the leader in providing farm equipment and therefore it enjoys huge advantage of people all over the world understanding the company's brand and products.

Technological factors affecting agricultural equipment sales The maturity of the agricultural equipment industry is defined using total sales, dividends paid out by the industry players, age of the industry, and the level of consolidation in the industry. The industry is said to be mature with a relatively slow rate of growth. Therefore, to achieve faster growth, industry players must invest in technological advancement because consumers within the industry tend to rely more on the cost savings of using agricultural and construction equipment in their activities to make the purchase decision.

Many industry players are looking to reduce the complexity of their machines in order to offer greater quality machinery and more reliability. This reduction of complexity involves technological advancement to reduce the number of parts or components in each piece of equipment. The industry players are also concentrating on precision farming by improving the design of their equipment. Legal factors affecting agricultural equipment sales Changes in the U.S. agricultural policy greatly affects demand of farm equipment. In 1996, the U.S.

government passed the Federal Agriculture Improvement and Reform Act that restricted the acreage planted by farmers. This has reduced the amount of land available for expansion of farming and made land prices high. This means that the current farmers have to rely on agricultural equipment to achieve high yields since expansion has been limited. The government has also improved the industry by providing the farmers with a price support policy where they are guaranteed a minimum price of their crops despite other market factors.

This means farmers can borrow more and can also invest more in agricultural equipment since they are assured of good returns in the end. Environmental factors affecting agricultural equipment sales The government has set strict standards for two-cycle engine emissions. Deere has been committed to innovation that recently helped them to launch a breakthrough in design of small engines to meet these emission requirements. There is also push from the Environmental Protection Agency (EPA) to be more ecofriendly by reducing fuel consumption.

Deere has worked to reduce the fuel consumption of their equipment. Internal analysis The table below shows John Deere's strengths and weaknesses. Strengths Weaknesses 1. Strong brand that is well-known across the world 2. Customers are loyal to John Deere brands 3. John Deere invests in research and development that drives their innovation 4. John Deere has diversified its product portfolio to offer light, medium and heavy-duty equipment 5. John Deere has a strong workforce that drives their competitiveness 1. John Deere has a strong presence in the United States and Europe.

However, their international expansion has been a bit slow compared to competitors such as Caterpillar, Case Corporation and New Holland. 2. John Deere's distribution strategy leads to high costs since the company only manufactures in the U.S. And Europe. Therefore, their distribution costs are high. 3. Because of the company's product diversification, they suffer from low product knowledge among the customers.

Current internal issues facing the company The most recent issue for the company has been the hiring of Citigroup to explore options for crop insurance as the company sells its assets in order to focus on the core business of manufacturing agricultural equipment.

In the statement provided by one of the company's executives, Ken Golden, he stated that the company has reevaluated its strength in offering crop insurance and provide a unique service and found that it is not the core business of the company In the past, the company became part of the crop insurance market in 2005 fighting with competitors such as Well Fargo & Company and Ace limited since farm production was surging.

However, as there have been several periods of drought and decline in prices, the crop insurance has become business less profitable, thus informing Deere's exit decision In May, Deere & Company also sold its irrigation operations to a private equity firm in Israel after seven years of involvement in irrigation products. The company also made this move in order to focus on its manufacturing operations that are the core of the business.

However, the company stated that it would continue to offer customers products that improve the performance of their farming through their machines, thus cementing the business' ambition to grow their manufacturing business. A second pending issue for the company is their plan to scale back production of equipment made in August this year since grain prices have been declining significantly thus meaning farmers have less to spend. The company also cut its profit forecast as a result of this decision to scale back their production.

The new projection was 6% decline in sales of agricultural equipment compared to their prediction of a 4% decline made in May In August, the company also announced plans to lay off over 450 employees indefinitely. This is in response to reduced demand for their products. The employees that were laid off were working in the company's tractor cab assembly and drivetrain departments. The company stated that it would still be able to meet the market demands despite the significant reduction in workforce at their Waterloo facility.

The company stated that the layoffs were necessary to ensure the company remained competitive in the global space and that these employees would be hired back if demand for their manufactured products increased. This announcement came after another that the company announced that 600 employees would be placed on indefinite layoff. These layoffs are for the company important to lower their production to match demand for their products in order to reduce inventory to manage their cash flow and liquidity ratios better.

This is in line with the company's traditional move where they reduce their workforce during seasons of low demand and increase their workforce once demand increases. According to the company's spokesperson, this is an essential strategy to manage the profitability of the company. He stated that it is easier to increase production once demand spikes than to keep the workforce and pay higher costs that lead to losses.

Strategic options for John Deere From the internal and external analysis of John Deere that is presented, several strategic options emerge for the company. The first is that John Deere should use their strong brand recognition to expand into new international markets, specifically Asian and African markets where the agricultural industry is still very labor intensive and presents great opportunity for mechanization.

The primary reason for this is for the company to leverage on the fact that it is well-known all over the world and that their name is associated with high quality, reliability, and value. While expanding, John Deere should tread carefully in the ecofriendly and international labor arena. The company should make sure they reduce the chances for human rights activists and other media players to hurt the company's reputation when they do not play according to local laws and regulations.

The second option is for consolidation with other similar industry players. As was recently experienced when Case Corporation merged with New Holland, John Deere should look to merge or acquire other similar companies in order to increase their relative size in the industry. This will also reduce the competitive rivalry since it will eliminate some competitors and allow the company to achieve greater economies of scale because of their size. Diversification is also an important option for John Deere.

John Deere should decrease their dependence on the agricultural equipment sector and focus on providing other machinery as Caterpillar has. This shift in focus will diversify the company's product portfolio and provide a constant cash flow for the company. Consolidation through mergers and acquisition will help the company to diversify their product portfolio. The advantage of diversification through consolidation is that John Deere will not have to go through the entire learning curve of introducing new products and services rather will utilize the strength of the company they are acquiring.

With expansion, John Deere will need to have an effective communication network between their different offices and operations around the world. The company, therefore, will need a highly efficient and effective intranet to communicate and exchange files internationally. This intranet will also allow John Deere to improve their response time to customer issues and complaints around the world. Training of staff to use this software will also be essential to ensure effective optimal use of the software. The Internet offers several possibilities for John Deere.

First is that it provides a new market for John Deere to sell their products online. The customers can request equipment, replacement parts, or even product information through the internet. It can also be used for monitoring customer feedback and suggestions and providing customer service to customers all over the world. Since the agricultural equipment industry is capital intensive and lags behind the changes in the economy, John Deere is able to react to changes in the economy with ease.

John Deere should continue to actively monitor the economic changes and outlook of the economy in order to adjust their inputs such as workforce, and expenses such as overheads to give them a competitive advantage internationally. The last strategic option for John Deere is to improve their international distribution pattern and channel in order to achieve cost savings and meet future demand. This will require the company to apply the Six-Sigma concepts in their distribution chain to make it as efficient and effective as possible.

Recommendations for John Deere In the short-term, John Deere should reduce its short-term debt. This will enable the company to increase their working capital and become more competitive in the market. Working capital will be essential for the company to invest more in technological and product innovations. The changes in the distribution channel will be achieved through investment and thus the need for the company to increase their working capital. John Deere can increase their working capital.