Measuring Industry and Firm Effects in Food and Agribusiness Firms AREA II: Effective Food Chain Management

Managers craft strategies that, if successfully implemented, can improve profitability and financial performance over time. Can firms repeat their performance over time? If so, then a manager who crafted a successful strategy could expect her/his firm to achieve greater profitability relative to other firms within its industry. The objective of this study was to compare business performance (accounting profitability) for publicly traded and cooperatively-owned food and agribusiness firms. We used the Standard and Poors Compustat database using the methodology of McGahan and Porter's paper which used on 4,112 manufacturing firms. Return on investment for each SIC code in each year was calculated. A regression equation with return on investment as the dependent variable and the average returns on the right hand side were used in a weighted least squares regression. The data was broken out into processing, wholesaling, restaurants, and retail supermarkets. Industry effects are greatest across all business segments and the processing sector. The retail supermarket sector has had relatively stable profits due to both industry and firm effects over time. This would suggest that the retail industry structure is conducive to stable profits and that firms within the industry are able to differentiate themselves, which also contributes to permanence of profits. Our results suggest that industry structure does not contribute to stable profits in the wholesale and restaurant sector. Industry effects are more persistent than corporate effects. These implications are also of interest to land grant universities. Agribusiness economics research and extension programs exist at many land grant universities to educate producers and management about producer-owned businesses. Finally, persistence of profitability in certain firms has long been noted by economists. Further research is needed on identifying characteristics of those firms that contribute to their persistent profits. 3 Measuring Industry and Firm Effects in Food and Agribusiness Firms In recent years, the level of vertical coordination (contracting and integration) has intensified in certain U.S. agriculture sectors, with farmers actively participating in this phenomenon (Harris et al.). Some specific examples of these efforts by producers include of these businesses have been formed based on the assumption that a producer-owned business can perform certain functions at a lower cost than a privately or publicly held business. This concept can be thought of as firm-specific resources that enable a producer-owned business to achieve economic rents (Barry, Soka, and Lajili). Additionally, these producer-owned businesses are formed with the concept that firms engaged in …