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Strategic planning in response to global environment changes: the case of Israeli agriculture.

Abstract

Agriculture around the world is going though many changes, including globalization, new emerging technologies, environmental concerns, tendency to produce highly specialized goods, and global merging of food producers and retailers. These changes follow political, institutional, technological and financial trends. Israel is also going through accelerated densification and urban sprawl processes.

In this study we discuss several strategies for responding to these changes: product differentiation (such as developing unique products for large retailers), focus strategy (producing fresh, bulky produce for the local market), environmentally friendly agriculture, and specilization according to Israel's comparative advantage in factor inputs. Agricultural research can help in utilizing new technologies to produce high-value, innovative products.

Keywords. Densification; Urban Sprawl: Israeli Agriculture

JEL Classification : C82. D24. Q11, N55, 053

Introduction

Agriculture around the world is going through some global changes (1). These changes can be seen in India (2); France (3) Spain (4) and ill other countries. Israeli agriculture, too, is facing radical changes in its relevant environment that will transform the shape of agriculture. If it is to survive and prosper, it must adopt the right strategy to react to these changes.

The process of choosing the right strategy starts with situation assessment, identifying strategic assumptions, and integrating analytical planning methods into the planning process (5). Accordingly, the first part of our paper deals with situation assessment--the development and current situation of Israeli agriculture. Next we identify the strategic assumptions by forming a scenario of the future environment that Israeli agriculture will face. Finally, using existing strategic planning methods, we analyze the competitive advantage of Israeli agriculture according to standard economic theory, and suggest some strategies for Israeli agriculture to adapt to the expected changes in the environment.

The strategy analysis in this paper is loosely based on the PIMS approach to strategy analysiss. The PIMS approach to strategy analysis roughly follows the planning process.

* describe the situation;

* assess the current performance and strategic potential of the business;

* select businesses that are most like the ones being studied for comparison;

* assess the strength and weaknesses of competitors; and

* test profitability consequences of feasible changes.

In want follows we describe the situation and assess the current performance. Subsequently we deal with expected changes and the strategic potential.

Evolution of Israeli Agriculture

Israeli society has transformed in the past century from an agrarian society in the twenties, with two-thirds of its population living in villages (6), to an urbanized country, with 91 per cent of the population living in cities (7). Israeli agriculture has undergone several transformations during this past century, in response to changes in the environment. At the beginning of the twentieth century Israeli agriculture was based on fruit trees, mainly wine grapes (6). After the first world war, agriculture became based predominantly on fresh citrus for export-from 1918 to 1935, the area of citrus trees increased by over 7000 per cent (6). During the Second World War (1939-1945), agriculture adapted to producing a variety of products for sale in the insulated local market. After the war, in response to mass immigration to Israel, agriculture increased production rapidly to serve a large local market created by mass immigration. The 1950s and 1960s were characterized by a diversification of crops for exports, and by the beginning of extensive growing of wheat, cotton, vegetables and livestock. In the 1970s Israeli agriculture began extensive export of flowers and vegetables. In the 1980s began a high inflation, reaching over 350 per cent a year at its peak, and causing a financial crisis in the Israeli cooperative settlements, who took out loans whose payback had increased with inflation beyond their capability to pay.

The organization in small households cooperative settlements in Israel (called Moshavim) was based on individual production and consumption but cooperative municipal and productive services. This cooperation was based on the ability of individual farmers to return loans taken throughout the cooperative as intermediary. These loans could be returned through common marketing. When farmers began to market individually debts increased, initiating severe financial problems (8). The change in marketing and financial structure was followed also by a change in employment framework. Instead of working mainly on-farm, inhabitants began seeking off-farm employment opportunities which further cut off connections with the cooperative organization (9). Increased unemployment, mainly in peripheral areas, as combined with individual marketing and off-farm employment, enhanced organizational, financial, agricultural and structural changes (10).

Scenario for the Future Environment

The following scenario for Israel's future environment is based on existing scenario for world agriculture, on existing scenario for agriculture in other small developed countries such as Denmarkt (11) and Netherlands (12), and on conditions that are specific to Israel. Agriculture around the world is going through changes due to globalization and trade liberalization, market economy, new emerging technologies (including information technology and agricultural biotechnology), and environmental concerns. Consumers are increasingly interested in food quality, safety, convenience and nutrition, as well as in niches such as exotic foods, health foods, natural foods and ready-made foods (13-14). There is also a trend in agriculture in developed countries to produce more highly specialized goods, termed as "boutique agriculture'' (15). Another relevant trend is merging of supermarkets and food producers into large global chains. In Germany, for example, five supermarket chains control almost two-thirds of the market. Increasingly, supermarkets make direct contracts with producers, cutting out the middlemen (15).

Israel is also going through some changes that are similar to those of small, industrial countries like Denmark and the Netherlands. These include densification and urban sprawl. City planners in Israel forecast densely populated cities and urban sprawl covering most of the arable land (16). The increase in densification and of urban sprawl in Israel is higher than in other developed countries, due to higher population growth in Israel and its small geographical size. Israel's average annual growth in the years 1995-2000 was 1.9 per cent, higher than the world average (1.4 per cent) and much higher than in the U.S.A. (0.8 per cent) and in Europe (0 per cent) for the same period (17). Another change is the decrease in the importance of food security : Meadows' doomsday scenario (18)--first mentioned by Malthus in 1798 (19), in which there will not be enough food to go around--is not relevant for a small, high-income country in a world of open trade.

Some of the expected changes are unique to Israel. The primary role of central planning of agriculture has diminished, and is now confined mainly to changing land use and zoning. The political importance of agricultural settlements has also diminished, and the space for new settlements has been nearly saturated.

Finally, agriculture has gone all the way along the product life cycle from the growth stage in the 1950s to the decline stage today. (For an explanation of product life cycles, see Day (5)).

Strategies for Response to this Scenario

Israeli agriculture must choose the right strategy to survive in this scenario. We discuss three strategies: product differentiation, environmentally friendly agriculture, and specialization to Israel's comparative advantage in factor inputs.

* Product Differentiation

Brester and Penn (1) present three strategies agriculture can employ to respond to the global changes mentioned above. These strategies are

* low-cost strategy;

* differentiation strategy; or

* focus strategy (which is product differentiation in a specific market niche).

Due to the high production costs in Israel, the first strategy is not plausible. Israel can adopt a combination of differentiation and focus strategy. Product differentiation means producing a different product for different product markets (20). For example, developing environmentally friendly agriculture, which can appeal to the environmentally conscious public. Another example of differentiation is adjusting a product to meet the retailers' needs. While growers often reap low profits, most of the profits from food production are concentrated in the food and packaged goods companies (21). By exploiting the global trends to merge into large companies and to produce highly specialized goods, Israeli agriculture can develop unique products to meet the needs of large supermarket chains or large food processing companies.

Focus strategy can be adopted by focusing on fresh, bulky produce for the local market. This produce is protected from competition by the high distance from source to market (in terms of both cost and time of transportation), and by the local tastes. If the barriers between Israel and its neighbors are removed, they will combine to create a larger, fast growing market. Producing products to meet the retailers needs can increase profitability and enable agriculture to share some of the profits that are currently reaped by the food companies and retailers. Focusing on the local market, however, may decrease profitability, as the profits from exports are generally higher than the profits from the local market. For example, the price per ton of Galia melons in 1996 in the local market was $463/ton, while the price in the export market was $919/ton per ton--almost twice the price in the local market (22).

* Environmentally Friendly Agriculture

In a densely populated country such as Israel, agriculture is the peripheral environment of the city (23). Agriculture provides environmental products such as recreation space, rural ambiance, fresh air, re-circulation filters of wastewater, scenery for the city and suburbs. These environmental products have the characteristics of public products--the producer can't prevent someone who doesn't pay for the product from consuming it (24). Therefore, these products are subject to market failure, and depend on public finance and support. There is increasing public support for environmental products and awareness that re-defining agriculture as a producer of environmental products can change both the agricultural products and production methods.

An example can be shown in the dairy farm. The dairy farm in Israel is based on high yielding cows living in the barn, fed there with concentrated food and milked in a milking parlor. The barne are located in the northern urbanized part of the country and are considered as a major source of pollution. Today's farm planners think that the cows have to be move to the southern part of the country, which is relatively not urbanized. City planners, however, attach high value to green open areas around and between the cities. The cities' residents wish to keep most of these open areas as rural scenery of farmland, and cow grazing on pasture fits this concept of scenery perfectly. In addition, many consumers believe that 'green' milk produced by cows grazing on pasture is good for them. The new agricultural technologies make it easier to grow cows on open pasture: The milking robot, which can be located in open area, has smaller advantages to scale than the current technology, and this makes the argument for high yielding cows less persuasive; and a technology that is now being developed will make irrigation of pasture by wastewater (from farm and city) feasible. Such re-thinking could change town and country planning, so that in the future we might see dairy cows pasturing in the open spaces between the densely populated cities in the northern part of Israel. Today, such an idea is regarded by most agricultural planners as most unlikely.

National development tends to proceed in three stages: agriculture first, then manufacturing, and finally services (25). Agriculture that supplies the cities' environment is making the leap from a product in the decline stage of the product life cycle (agriculture) to a product in the growth stage (services to the city residents). Most products of environmentally friendly agriculture are public products, and profitability depends on the level of public support.

* Specialization

Agricultural trade in the Middle East is limited due to political and social barriers. If these barriers to trade are removed, new markets will open up and new competitors will appear in the Israeli market. According to economic theory, in a world of open trade each country will specialize in the products in which it has a comparative advantage (25). Agricultural branches that require intensive use of certain production factors, will succeed in countries where these production factors exist in relative abundance. In sophisticated industries, production factors include such factors as infrastructure and specialized knowledge (26). But agriculture still depends on many basic "textbook" production factors ---unskilled labor, land, water and capital, and we can identify in advance which product will have a relative advantage in what country, by analyzing the countries' factor endowments and the products' production function and derived demand for production factors. The situation in the Middle East is relatively simple to analyze, because the physical environment (climate, land, pests) is similar in those neighboring countries, and the cost of transportation between the countries is low.

Methodology Used

We examined the factor endowments in different countries in the Middle East, and compared them with the factor demands for production of different agricultural crops, to predict the direction of specialization in each country. The following figures and table present an illustration of the method of predicting the direction of specialization. Figure 1 describes the production factor endowments in Israel and in two potential competing countries: Jordan and Morocco. The figure presents the gross domestic product (GDP) as an indication of labor. Per capita GDP is commonly used in economics as a variable to measure income level, which is an indicator of wage level (27).

[FIGURE 1 OMITTED]

Therefore, a high GDP means a low endowment of cheap. Capital is an input that is itself the output of the economy (25), and thus high GDP indicates both high capital endowment and high wages. In Figure 2 domestic credit per capita is used as an indicator of capital endowment, cropland as an indicator of land endowment: freshwater as an endowment of water endowment; and irrigated land as an indicator of both land and water endowment. These numbers are all presented per capita, divided by the world average endowment per capita for that factor, except for capital endowment, which is shown for Jordan and Morocco relative to Israel (Israel = 1). This method of presentation was chosen to enable the comparison of all data on the same scale.

Figure 2 describes the demand for production factors for several agricultural products measured in relation to the value of the output. Picking costs are mostly labor, so that picking and labor together indicate the demand for labor; investment (in the form of annual interest payments) and, to a lesser extent, materials indicate the demand for capital; land and water are self-explanatory.

[FIGURE 2 OMITTED]

Research Findings

Figure 1 shows that Israel has a high GDP and low endowment of other factors; Morocco has a high endowment of land, water, and labor, and a low GDP. Figure 2 shows that strawberries require high input of labor, low capital, land and water; oranges require medium input of capital, high land and water inputs, and medium labor; and melons require high capital, medium labor, and low land and water.

The following Table presents a simplified manner of predicting the direction of specialization. This table compares the patterns of production factor endowment in countries with the demand for production factors for several crops. A given country will specialize in a product if its pattern of production factor intensity fits the country's pattern of production factor endowment. For example, strawberries, which are labor intensive but require little investment and little use of land and water per unit of output, will suit the Palestinian Authority or Jordan, where capital, land and water are scarce, but labor is plentiful. According to our findings, Israel will specialize in melons, Jordan in strawberries and Morocco in citrus.

Profitability Consequences of Specialization:

Taking the crops in our example, the profitability in Israel of strawberries is $ 26,488/ha, the profitability of melons is $ 3,229/ha, and the profitability of oranges is $ 651/ha. For Israel, specialization in melons is more profitable than specialization in citrus, but less than specialization in strawberries. This, of course, does not imply that specialization will cause this change in overall profitability--choosing other crops for the example would yield other profitability results. Also, this is an oversimplified example, and in practice there are other factors affecting specialization. Knowing the demand and supply of production factors will not automatically give us an answer as to the direction of specialization, but can serve as an aid in prediction.

Role of Agricultural Research

National advantage is achieved through innovation (26). Agricultural research can take part in advancing agriculture in two ways. The research can predict in advance the course of agriculture find direct itself accordingly; and agricultural research can serve as a catalyst for a major change which will lead to the emergence of new agricultural technologies.

Many technological opportunities can be found where mature industries meet the new generic techniques. Such opportunities occur where agriculture can exploit generic techniques in the areas of molecular genetics, sensoring and information technology to create an agriculture that will be based on less land, water and labor, and on more brain power and capital. A very high value per unit of weight will make the logistic barrier negligible. This agriculture can produce a variety of valuable intermediate products to be used by other industries as raw materials.

One example is a research performed in the Agricultural Research Organization (ARO), which developed the capability to torn any grape variety with seeds into a seedless variety through genetic engineering methods. This research developed genetically modified seedless grape varieties of Red-Globe and Italy. Both varieties are grapes with seeds that are in high demand around the world, and market research has shown that turning them into seedless grapes, without damaging their other qualities, has a high market potential.

Conclusions

Israel has gone through rapid change in the agricultural environment, and needs to design a strategy to respond to the changing environment, and regain the central role it once played in the country. Strategic planning has been shown in many cases to help many agricultural firms increase their profits3[degrees], and can help Israel increase its profits from agriculture on the national level. The lessons learned could be relevant beyond the boundaries of Israel, to many countries that will face the same issues that Israel faces now.

REFERENCES

(1.) Brester, G.W. and Penn, J.B., Strategic Business Management Principles for the Agricultural Production Sector in a Changing Global Food System, Policy Issue Paper No. 11, Trade research Center (Washington D.C., 1999)

(2.) Storm, S., On the role of agriculture in India's longer-term development strategy, Cambridge Journal of Economics (19:1995)

(3.) Lueschen, L.S., French agriculture: trends and policies, Agribusiness : New York (11:!995)

(4.) Etxezarreta, M., Labour and agriculture: changes in the labour system in an agricultural system undergoing change, Agriculturay Sociedad (72:1994)

(5.) Day, G.S., Analysis for Strategic Market Decisions (Minnesota: 1986)

(6.) Arnon, I., Trends in Israeli agriculture, in Arnon, I. (ed.): The Encyclopaedia of Agriculture (Tel Aviv, Israel: 1985)

(7.) World Bank, World Development Indicators 2000 (Washington D.C., 2000)

(8.) Haruvy, N., Common marketing and credit supply in an all-village cooperative: potentials and limitations, Journal of Rural Coorperation (23:1995)

(9.) Haruvy, N., Recent structural changes in the Israeli Moshavim : Decooperativisation of marketing leads to financial crisis, Journal of Financial Management and Analysis (8:1995)

(10.) Hamvy, N., Eger, M., Kraus, M. Focus on employment and unemployment patterns in selected rural peripheral areas of Israel: survey findings, Journal of Financial Management and Analysis (11"1998)

(11.) Primdahl, J. and Vroom, M.J., Changing agricultural landscopes of Europe, Landscape and Urban Planning (18:1990)

(12.) Netherlands Scientific Council for Government Policy, A Policy-Oriented Survey of the Future (The Netherlands: 1982)

(13.) Petreyeik, R.M., Bennett, S., Weinstein, S., Sansolo, M., Donegan, P. and Wold, M., The 1990 Supermarket Sales Annual, Progressive Grocer (July 1990)

(14.) Richman, N.J., The Growing Natural Foods Market: Opportunities and Obstacles for Mass Market Supermarkets, Working Paper 00-02, University of Minnesota (Minnesota : 2000)

(15.) Anon, Growing Pains, Survey of Agriculture and Technology. The Economist (March 2000).

(16.) Mazor, A. and Sverdlov, E., "Israel 2020", Master Plan for Israel in the 2Pt Century: The Range of Options, Alternatives and Their Evaluation, The Faculty for Architecture and City Construction, the Technion. (Israel: 1997)

(17.) World Resources Institute, World Resources 2000-2001 (Washington D.C., 2000)

(18.) Meadows, D.H., The Limits to Growth, A Report for the Club of Rome's Project on the Predicament of Mankind (New York, 1975).

(19.) Malthus, T.R., An Essay on Principle of Population (U.K., 1985 and originally published in 1798)

(20.) Kotler, P., Marketing Management (New Jersey: 1980)

(21.) Cook, J.D., Emptage, Leslye S:, Miller, F.W., Rauch, S. and Ruiz-Funes, J.M., Food biotechnology: can you afford to be left out? McKinsey Quarterly (3:1997)

(22.) Gal, B. and Natur, M., Vegetable Crop Budgets, Ministry of Agriculture (Israel: 1997)

(23.) European Commission, Situation and Outlook: Rural Development--CAP 2000, European Commission Working Document for Director general for Agriculture and CAP Working Notes, Special Issue: Agriculture and Development (1997)

(24.) Field, B.C., Environmental Economics--An Introduction (New York: 1994)

(25.) Samuelson, P.A., Economics (Japan: 1976)

(26.) Porter, M.E., The competitive advantage of nations, Harvard Business Review (March-April 1990)

(27.) Motley, P., Globalization, economic policy and convergence, The World Economy (23:2000)

(28.) International Monetary Fund, International Financial Statistics Yearbook (Washington D.C.: 1998)

(29.) Gal, B., Regev, A. and Sadovsky, A. Citrus Crop Budgets, Ministry of Agriculture, (Israel: 2000)

(30.) Phillips, J.C. and Peterson, H.C., Strategic Planning and Firm Performance: A Proposed Theoretical Model for Small Agribusiness Firms, Staff Paper 99-41, Department 9f Agricultural Economics, Michigan State University (Michigan: 1999).

SARIT SHALHEVET, M.B.A.

Department of Economics

e-mail: sarit.shalhevet@gmail.com

saritrz@barak-online, net

Nava Haruvy, Ph.D.

Institute of Soil, Water and Environmental Sciences

e-mail: mavaharu@netvision.net.il

ISHAI SPHARIM, Ph.D

Department of Economics

Agricultural Research Organization

BEN DA GAN, ISRAEL

The authors are thankful to Dr, Noam Seligman for his invaluable help in editing and for useful comments on their--Agricultural Research Organization Research Report

Israeli Agriculture in a Changing Environment which has formed the basis for many parts of this paper The authors own full responsibility for the contents of the paper.
TABLE

PREDICTING THE DIRECTION OF SPECIALIZATION

                Country          Jordan

                Production       High labor
                factor supply    Low land &
                                 water;
                                 Low capital

Crop            Production
                factor demand

Strawberries    High labor       Jordan will
                Low land &       specialize in
                water;           strawberries
                Low capital

Oranges         Medium labor
                High land &
                water;
                Medium capital

Melons          Medium labor
                Low land &
                water;
                High capital

                Morocco         Israel

                High labor      Low labor
                High land &     Low land &
                water;          water; High
                Low capital     capital

Crop

Strawberries

Oranges         Morocco will
                Specialize in
                oranges

Melons                          Israel will
                                specialize in
                                melons
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Author:Shalhevet, Sarit; Haruvy, Nava; Spharim, Ishai
Publication:Journal of Financial Management & Analysis
Article Type:Abstract
Geographic Code:7ISRA
Date:Jul 1, 2012
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