Executive Summary – John Deere

John Deere is an iconic one hundred and seventy-seven year old company and maker of agricultural machinery headquartered in Moline, Illinois. What started as a small business operation has sprung into a multibillion-dollar global operation. In 2013 alone, the company boasted sales of $37.80 billion. Founded in 1837 by a blacksmith, the company originally only built plows, and did not assemble their first tractor until they purchased a small tractor company, Waterloo Boy, in 1918. Now the green and yellow machinery is recognized around the world. Although agricultural equipment is still the main revenue generator for John Deere, they are also a major producer of forestry, construction, commercial and residential lawn equipment. John Deere has clearly done its homework on how to expand into new industries and stay ahead of its competition.

Nevertheless, with so many changing factors in the world, such as new technologies and greater global competition in the industry, what long-term strategies should John Deere leverage to stay ahead? It is important for the company to dedicate resources to determine what ground breaking evolutions within the industry will keep them most competitive. As underdeveloped countries continue to improve their quality of life, there will be a growing demand to cater to emerging economies as their agricultural industry becomes more industrialized and automated. A major focus of John Deere’s future strategies to expand its global footprint should include building manufacturing centers, expanding brand recognition, and developing human capital.

Company Description
Deere and Company, or better known as John Deere, is one of the world’s largest agricultural and construction equipment manufacturers, but the company is most widely recognized for its tractors. In 2013, John Deere ranked 86th in the American Fortune 500 and 308th in the Global Fortune 500 ranking. In 2011, John Deere earned a place on 24/7 Wall St.’s list of America’s 10 classic corporate icons for its famous leaping deer logo and continually illustrating the company’s motto: “Nothing runs like a Deere.”1 According to the company’s website, “175 years after John Deere created his steel plow, the company has expanded its offerings to advanced products and services for those whose work is “linked to the land”, including a few very modern variations on John Deere’s original plow.”2 John Deere has over 67,000 employees and manufactures equipment in fifteen countries.3 John Deere has operations that are categorized into three segments which include (1), agriculture and turf; (2) construction and forestry; and (3) financial services.

The agriculture and turf segment manufactures agriculture service products such as large utility tractors, harvesters, loaders, balers, mowers, and tillage equipment. Included in this sector of the company, John Deere also manufactures residential lawn care products such as riding lawn equipment, walk-behind mowers, and golf course equipment. The construction and forestry segment manufactures and distributes a diverse number of construction machines and service parts, including excavators, dump trucks, crawler dozers, log loaders, and other earthmoving and timber harvesting machinery.4 John Deere also provides financing services to its customers for sales and leases on new and used machinery and equipment. For fiscal year 2014, John Deere expected approximately $600 million in net income from its financial services operations.

Industry Analysis
The current condition of the world economy has a great impact on all industries. Prior to the great recession of 2008, the construction and agriculture industries were performing strongly. Booming conditions in the construction sector and strong demand for construction machinery created solid growth in revenue and profitability within the industry as a whole. However, since the financial crisis erupted in 2008, the industry’s growth has decreased dramatically, and John Deere has had to rely on revenue growth from its other service lines. The collapse in the housing market and a global recession dramatically reduced demand for construction equipment.

The current global economic state is slowly progressing, which is a positive indicator for the industry. Increasing farm income over the next five years will most likely boost demand for agricultural and turf machinery, but farmers will probably remain cautious with their purchasing decisions. Therefore, domestic sales will continue to be static. However, increasing demand in South America, China, India, and other global emerging markets is expected to significantly boost international sales of all product lines over the next few years as population and income growth in these emerging markets will drive this trend. In an effort to analyze the company’s place within the industry and to identify John Deere’s organizational strengths and weaknesses, as well as opportunities and threats in the industry, we’ve analyzed the company with two tools, the SWOT and the C5 analysis.

SWOT Analysis:
This section presents a detailed analysis of the company’s strengths, weaknesses, opportunities, and threats that affect John Deeres operation within the industry. Strengths:
Strong relationship with dealers and customers:
The company’s goal is to provide more than just a product. Deere “is committed to those linked to the land” as company strategy says. It enjoys high customer loyalty thanks to a superior customer service and maintains a long-lasting relationship with its clientele. To further strengthen connections with its customers the company uses social media and other digital tools, including YouTube. Deere’s fan base has more than 2 million likes to share with one another through Facebook or Twitter.6 Great Financial Performance:

The company has a strong financial position to face a challenging environment. Despite the fact that Deere’s forecast for 2014 is a bit conservative (total sales are expected to decline around 3% due to farmers’ concerns about lower commodity prices7), the company weathered the headwinds so far very well. During the first quarter of 2014, Deere experienced a rise on global sales, pushed by higher sales on every segment. Deere’s financial strength is evidenced by a rise on revenues and net income since 2009 (2013 was company’s third consecutive year of record earnings). Huge Global Play:

The company runs its business worldwide, i.e. it does not only sell its products overseas, but also produces many of its products in other countries (new factories have been built in India, China, and Brazil). Deere focuses on six key areas: US and Canada, Europe, Brazil, Russia, India, and China (in these areas at least 75% of the world’s future growth will occur). Regions outside the US and Canada accounted for over 60% of Deere’s total equipment sales last year.9 This number is forecast to grow given company’s expansion strategy in fast-growing emerging markets. Diversified Product Portfolio:

Over the last few years John Deere launched several new products to meet customers’ demand not only for enhanced performance and uncompromising durability, but also for reduced emissions and increased comfort.10 From the design of its Final Tier 4 diesel engine to the launch of its Gator off-roading vehicle, Deere continues to demonstrate its commitment to building leading products for those “linked to the land”. The company also does not forget about the youngest by offering few kids products. By doing it, it ensures the continuity and strength of the industry.

Distribution Channels:
The company strives to build a dealership network that provides the best support and service. An ongoing dealer training helps them understand product complexity and advanced technology to communicate and explain it to their customers. Deere organizes a numerous customer-input sessions around the world to provide input and feedback.11 Environmental Commitment and Innovation:

The company respects the earth’s limited recourses and strengthens its commitment to responsible environmental practices; among them are reduction in water and energy usage and cut in greenhouse gas emission (a reduction by 15% per ton of production in 2013). Deere’s outstanding technology and innovation processes help to keep its emission performance low. Deere completed certification of its larger engines to meet more-stringent US and European emission standards that began taking effect this year. The goal is to recycle 75% of the waste from manufacturing facilities by 2018.12 Exceptional Code of Conducts:

The company has a well-established and deeply rooted code of business conduct. John Deere is very consistent in communicating the guiding principles and company’s values. It provides regular training to all employees irrespective of their geographic location or cultural mores. Weaknesses:

Limited global brand awareness:
John Deere enjoys a lot of brand awareness and loyalty at home but it is facing some challenges in building the brand in emerging markets. Through the message of “Solutions for World Hunger” the company tries to tie its brand to citizenship values and uses it effectively to support the business.13 The company’s goal is to ensure that it cares about improving people’s lives, and it’s not just offering another product. Workforce related issues:

The company has several benefit pension plans and benefit health care and life insurance plans. The company’s pension expenses accelerated in 2013 ($575 Million compared with $ 511 Million in 2012) and could be a heavy burden for the organization. Opportunities:

Emerging Market Potential:
Given the rapidly growing population driving agricultural production, there is an obvious need for providing food to people and infrastructure that would accommodate these needs. The company’s expansion into emerging markets like China and India is a great opportunity for increasing demand for agriculture and construction equipment. As their economies mature, they will be able to afford higher-end heavy machinery that John Deere provides.14 Moreover, noticeable urbanization effects in these markets (i.e. people migrating from rural to urban areas) has lead to reduced agricultural workforce. This in turn requires more efficient and specialized machinery to offset these effects.

Brazil:
Brazil, as one of the fastest growing markets for construction equipment in the world, and will play a crucial role in John Deere’s growth. The investment potential on infrastructure is very high. Moreover, the planned 2016 Summer Olympics and the tens of billions of dollars of associated construction will create a great ready-made opportunity to expand in the Brazilian market. With already established two production facilities in Brazil, the company should focus on strengthening their in country dealership network. Collaboration and Tie-Ups with Other Companies:

Forging alliances, and building joint-ventures with other companies, especially to maximize machinery performance by adding new solutions to the existing equipment or to share a technology, would help Deere to maintain its comparative advantage over its competitors and further expand its presence worldwide. Threats:

General Economic Conditions:
A subdued recovery of the US economy and the slowly improving domestic housing market poses a threat on the overall condition of the company. The US housing market is a bellweather to the construction industry and has a heavy influence John Deere’s construction and forestry segment’s performance. A lethargic economic improvement in Europe has also lowered the demand for machinery purchases and affects the number of leasing operations. Industry sales in the 28 European Union countries (especially in the agricultural and turf equipment segment) are forecast to decrease about 5% in 2014 due to a slow post-crisis recovery and financial woes. 15 Weather Conditions:

Weather and climatic conditions have an impact on overall land performance and crop production. For instance, drought or other natural disasters leads to lower crop yields. As a result less farm machinery is sold. Exchange Rates:

Uncertainty of currency exchange rates and varying foreign capital markets has an impact on the company’s expansion on international markets as a stronger dollar makes the products more expensive abroad and decreases exports. This further solidifies the company’s need to establish more manufacturing facilities abroad. Government Regulation:

Changes in labor regulations, in emissions regulations, in tax rates, and safety regulations, all have an impact on the company’s operations.
Compliance with US and foreign laws when expanding to new markets may be critical for company’s expansion decisions. Threats come from competition. The competitors are:

John Deere competes in agriculture equipment and construction machinery sector. This industry is highly competitive with many companies competing for limited customers and a share of the sector’s revenues. Competitors’ objective is to increase (or at least maintain) their position in the marketplace nationally and internationally. It is difficult for the smaller companies to enter the market because of the economies of scale, well-established relationships with the major suppliers and dealers, and huge expenses on research and development. John Deere has quite a few competitors. Out of all these companies, the main threats seem to be from Caterpillar and Kubota. Both rivals have made emerging markets a high priority; and Kubota has also aggressively targeted farmers in Africa. Deere has targeted Latin America as well, but it hasn’t been as aggressive with its international efforts as its peers. Deere’s stock price has reflected its lack of initiative in expanding globally.16 Caterpillar Inc.

Caterpillar’s products are focused more towards more construction. Their products include construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company provides technology for construction, transportation, mining, forestry, energy, logistics, electronics, financing and electric power generation. Caterpillar operates in four segments: Construction Industries, Resource Industries, Power Systems and Financial Products, but does not has a consolidated strategy to sell agricultural equipment.17 Kubota Corporation

The company, similarly to Caterpillar, is aggressively challenging Deere, specifically in the agricultural and turf equipment service lines. Kubota is a tractor and heavy equipment manufacturer founded in 1890 and based in Osaka, Japan. Kubota currently has operations in North America, Europe, and Asia. Kubota, together with its subsidiaries, manufactures and sells farm equipment, engines and, to a lesser extent construction machinery. The company has three business segments: Machinery, Water and Environment, and the Others segment. The latter involves design, construction and servicing of various works, as well as the manufacture and sale of housing equipment. Kubota is also involved in the provision of retail finance and finance leases, which primarily finance sales of equipment by dealers. The company sells its products directly, as well as through wholesale and retail dealers, agricultural cooperative associations, trading companies, and local distributors.18 John Deere C5 Analysis

This is a C5 overview of John Deere, to build a view of the company’s situational and strategic position among its competitors in the industry, and to understand the John Deere’s abilities, strengths, competition and customer base.

Company:

John Deere is a publicly traded, commercial farm and construction heavy equipment manufacturer that operates three business segments, agricultural and turf equipment, construction equipment and forestry equipment. The company also operates a credit and financial services company as an accessory service line to its customers. John Deere employs approximately 67,000 global employees and generated more than 37 billion dollars in gross revenue for fiscal year 2013. Collaborators:

Due to the interconnected, yet diverse nature of the products and services John Deere provides, each service line tends to have its own market collaborators and strategic partners in that specific market space. Modern agricultural and construction equipment have become as technology driven as our automobiles, and John Deere’s strategic partnership with the Denso corporation benefits John Deere by providing new technology that makes more powerful, yet more full efficient engines. John Deere’s collaboration with General Electric has resulted in precision agriculture technology called Greenstar. Greenstar is a GPS driven, topography scanning technology that has reduced the farmers need for fertilizers and herbicides by nearly 20% per acre, by more accurately tracking farm machinery planting and production processes which reduces waste. Customers:

John Deere’s customer base is as diverse as its service lines. The company’s clientele includes farmers, foresters and construction companies, as well as federal and state governments, both domestic and internationally based. John Deere prides itself on being committed to those linked to the land, so much so that it made it the company motto. Competitors:

John Deere occupies the same market space as more than a few dozen competitors, both large and small, but Deere’s primary competitors are Caterpillar Inc., and Kubota Corporation. Caterpillar is larger than Deere in such metrics such as gross revenue, market cap and geographic reach, but John Deere offers a more diverse product line which helps insulate it from economic instability around the world. While Deere has been in business longer than these two competing firms, both Caterpillar and Kubota have been more aggressive in their strategic global growth plans than Deere has.

Chery International in China is also a competitor of John Deere. According to a Deere executive, Chery was solely an auto company until about five years ago, but has now advanced into the manufacturing of heavy agriculture machinery. There is concern about how fast this company is expanding in the marketplace due to preferential treatment by their government and generous tax credits and subsidization. Deere has concerns that the “playing field” will no longer be level if Chery enters the North American market. Community:

John Deere prides itself in not just working in communities across the country, but belonging to them, and allocates employee work time to more than 30 philanthropic and charitable organizations across the nation. John Deere also operates the John Deere Foundation, a educational and human services philanthropy that donates more than 8 million dollars per year to other foundations, businesses and schools around the world. Recommendations

As mentioned previously, Deere has an elaborate plan to double its profit to $50 billion by 2018. According to Deere executives, current CEO Samuel Allen is business-oriented and competitive and feels the company is in a perfect spot to grow its profitability by taking advantage of global opportunities. The prior CEO, Robert Lane, stepped down in 2009 and spent much of time at the helm focusing on management and operations rather than the monetary growth of the company. Deere seems to be on track to meet the goal of doubling its profits by 2018.

As of fiscal year 2013, the company’s profit was $37.8 billion. In order to guarantee completion of this goal and to ensure upward mobility in the next five years, John Deere must develop an innovative corporate strategy. This strategy must: (1) Focus on growth in emerging markets outside of the United States and North America such as China, Brazil and the Black Sea region; (2) Fortify Deere’s leadership in precision farming; and

(3) Expand its sales offerings into the selling and marketing of its own seed and fertilizer. Take Advantage of Emerging Markets:
John Deere has spent much of its 172-year lifespan largely focused in the North American markets while its competitors have made international expansion a priority. The company aims to increase its market share every year in North America, but John Deere must move its focus to outside of the United States. With opportunities in emerging markets due to technology, population growth, increased wealth and urbanization, Deere has an opportunity to grab hold of these opportunities to grow its market share outside of this region.

Specific markets that Deere should target are Brazil, Argentina, the Black Sea region (Russia, Uzbekistan, etc.) as well as more broadly, India and Africa. As mentioned above, urbanization, technology and access to the Internet has made these regions become more developed and because of that development, there are now huge opportunities for John Deere growth. These regions have historically met food production needs via small, yet inefficient family farming practices, but are now capable for large scale agriculture production and John Deere must educate, market and sell its machinery to these emerging market stakeholders. Deere has already begun to build a manufacturing presence in these regions to create local jobs and provide efficient distribution channels. Currently, Deere has built two factories in China, two in Brazil and is assembling one in Russia. They are also working on a joint venture with India. These efforts must be fortified for the next five years.

Become the Leader in Precision Farming Technology:
Despite significant gains in technology, especially GPS systems over the last few decades, seed planting and tools to cultivate the land have largely remained the same. For generations, planting has been done on the farmer’s ability to know his field and his equipment. Production efficiencies were more a function of the farmer, than of his equipment. Frequently, one field is more productive than the other and the farmer just accepts that predicament. In the last decade, John Deere has created technological systems on its tractors that give the farmer the ability to understand the composition of his soil, foot-by-foot. This technology includes detailed mapping, soil makeup, archived crop yields and the water and fertilizer needs of each plant. The technology presents this information in an organized fashion that assists the farmer in making a plan for future planting and more productive crop rotations.

According to John Deere executives, whichever company (Monsanto, Dupont, Chery, etc.) masters this technology will have a competitive advantage in the industry. However, one of the biggest challenges in this new development is getting independent John Deere dealers and farmers to understand and use these complicated systems. John Deere has overcome the first hurdle, by being one of the first agriculture machinery companies to develop this technology that is embedded in its tractors, now the company must focus on educating, selling and constantly improving the technology.19

Develop and Expand into the Seed and Fertilizer Market:
John Deere is one of the largest manufacturers of agricultural machinery in the world. They focus on heavy machinery and they do it well. In order to continue growth and evolve, John Deere needs to create new products and profit centers, strategies to augment its existing business. One solution would be to develop and sell its own seed and fertilizer. This new venture would differentiate John Deere from its competitors in the industry, and give it a sizeable competitive advantage. Independent dealers who sell farmers equipment in small communities could also directly market and sell fertilizer and seed which would provide a new source of yearly revenue. John Deere could become a unified agricultural solution for its farming customers by both selling them the seed and fertilizer they need on an annual basis, and the equipment and machinery used to plant, harvest and spread it.