Case response for Mid-Misouri Energy - Harvard Business School case

This is my own personal analysis. Not my best case analysis but still good all the same. - C

Mid-Missouri Energy is considering the expansion of their ethanol plant. Based on an analysis of external factors, specifically considering the general, industry, and competitor environment, it is my recommendation to double the capacity of the ethanol plant.
General Environment Factors
Most of the general environmental factors point towards expansion. As the world continues to develop, and the population continues to grow, competition for the worlds limited supplies of oil will continue to increase. This is a primary cause of the rising cost of gasoline that can be seen in exhibit 13 of the case. Considering the fact that so much of the built environment in the US is only accessible by car, and also that people love to drive and are reluctant to give up their large vehicles, a drastic reduction in fuel consumption seems unlikely. As ethanol refining technology develops, and governments begin to mandate the use of gasoline blended with ethanol, it becomes a more viable and widespread technology. Since ethanol is most efficiently derived from sugarcane, which does not grow well in most of the US, it would be difficult to use it as an export with sustainable competitive advantage. Because ethanol can alternatively be produced using mostly domestic inputs however, the US as a whole may be less subject to global competition for oil imports. Together with a long American history of corn based agriculture, it is likely that the governments will further incentivize the use of ethanol. All this suggests that the general environment is right for expansion.
Industry Environment Factors
The Ethanol industry is difficult to compete in primarily due to the impact of suppliers. Corn growers dictate how much corn they will sell for ethanol, and this is based on the going price for corn at the time, which is affected by the weather, and the productivity of other nations. The fact that corn prices may be high or low means that corn supply for ethanol can be inconsistent. The strength of competitors is also an important consideration. This is a commodity business with many organizations competing for the lowest price, and it is hard for one competitor to differentiate from another, further each vying for not just the same buyers, but the same suppliers. Summing this up, as an MME manager mentions “The competition in this business is not in selling ethanol, but in buying corn. It doesn’t matter if you have an agreement with an elevator; if there is no supply you don’t get the corn.” (p15).
Being in the industry now, though MME has two distinct advantages: the cost of new construction, and their solid supply of corn commitments from growers. The building of processing capacity represents a significant investment, and represents a large barrier to entry. Original construction cost was $50 million, and to expand the plant at current construction pricing will cost $75 million. While some other barriers to entry may be low, these are not easy investments for a new company to make. In regards to corn commitments from MME members, these provide a steady supply of feedstock for the plant and are directly tied to the production of the investing farms. This represents an advantage over even the largest players in the ethanol industry, like Archer Daniels Midland, who are forced to buy all their stock or make other individual commitments. Looking at another force, the power of gasoline as a substitute may be waning as demand increases and costs rise. Exhibit 5 shows a rapidly growing industry. Because they are well placed in this industry they should take advantage and expand. Further, based on the I/O model of strategy, being in a desirable industry brings success. Since this industry is still growing fast, making it desirable, it would make sense under the same logic to expand further and reap the benefits of scale.
Competitor Environment Factors
The actions of MME’s competitors, most notably the new entrant whose plant is being built 15 miles from their own, seems to make a strong case against expansion. Still, MME is in a strong competitive position, being established in the region, having existing supply commitments, and a plant built by one of the top contractors. While some collective owners are divided over whether to sell out, MME as a whole hopes to maintain their place in the ethanol industry, and keep the company functioning as both a money making enterprise, and a hedge against commodity prices for their farmers. They are pursuing a strategy of cost leadership through consistent production, building captive supply through an agricultural collective. Other firms in the industry also seem to be pursuing this collective strategy, though it seems many of the larger ethanol producers are privately help companies or public corporations. The new local competitor seems to be pursuing this strategy to some extent as well, though their predominant strategy appears to rely on good access to the grain storage infrastructure. As mentioned above however, just because the elevators have agreements doesn’t mean the supply is there – MME has a more consistent supply. Nonetheless, the competitor “would be buying corn from some of the same sources MME relied upon,” (p14) which would put a pressure on MME since they cannot get all their grain from their member-owners. This is particularly complicated by expansion, because as the feasibility study cited on p14 notes, “there was sufficient corn in the area to supply an expanded plant so long as corn demand in the area did not significantly increase from other buyers.” This does not factor for the purchasing of grain from outside the region though, which while costly, may be offset by the benefits that scale and plant quality can bring them in expansion. Further, a very important consideration is that for MME to remain competitive in the Ethanol market, they must continue to expand. If they cannot keep ahead of industry consolidation and improve their efficiencies at least as fast as their larger competition, they will be out of the market anyway.
Conclusion
While there is still much information missing as to whether plant expansion is truly the best idea, it is recommended to consider this possibility strongly since MME is in a good competitive position relative to the industry, the market is growing, the global and national needs are there, and the survival of the firm may well depend on keeping up with increases in scale and efficiency.