Becoming a low-cost producer is essential to survival. Focusing on the value side of the equation is the key to profitability.
It's important to remember that the two aren't mutually exclusive. Instead, I'm arguing for the need to focus on being a low-cost producer within the broader context of creating value.
Peter Drucker said: “No business was ever created to control costs.” If costs and efficiency become the primary focus, then the product becomes secondary. And, that is a grave situation for any industry.
Efficiency is not the way to success. Ask yourself how much the phenomenal efficiency gains of agriculture have equated to increased producer profitability?
Other industries have learned they can't cut their way to success. It's true that the easiest way to increase profit is to reduce costs, and that the world will always belong, at least in part, to the low-cost producer.
But, can you name one business on Wall Street that has continued to grow when its focus was on cutting costs? The truth is that investors won't tolerate raising profit margins on a stagnant sales base.
A century of effort
For the last century, with very few exceptions, cattlemen have been obsessively devoted to managing the supply side of their business. The fact is, we are producing more beef from less feed than any time in our history. But with what result?
Our focus on cost has led to consolidation and ever-larger operations in order to take advantage of economies of scale. This focus on cost has also led to an entrenchment of the commodity form of business, as well as marketing structures and pricing schemes that actually attempted to remove value from the equation.
If one's competitive advantage is to be created through efficiency and market leverage, it's actually advantageous to create a pricing structure that doesn't differentiate on the basis of value.
Everyone must strive to lower costs, but here's the catch. Every reduction in cost results in a short-term profit spike followed by widespread adoption and no resulting increase in profit. The industry's focus has been on incremental improvements in efficiency, and these are not sustainable advantages.
Increasing revenue is the ultimate goal, and the goal of which the industry has lost sight. That's because we're mired in a commodity structure, economies of scale and efficiency measures were readily available, and increasing the top line for an industry is far more difficult.
To paraphrase Tom Peters, “Cutting costs is hard work; creating additional dollars is genius.”
As an industry, we've focused so long on cutting costs that we've forgotten to increase revenue. I'm not referring to incremental improvements in quality via such factors as improvements in growth, efficiency or quality grade. I'm referring to radically new and improved means of conducting business.
It begs the question: What has the industry done to radically improve itself in the last 200 years? Essentially, we operate under the same premise as our ancestors.
Incrementalism is the enemy of true innovation. The industry has done a great job of improving on the business our forefathers created. But, we're just polishing yesterday's apples when the marketplace is demanding not only new orchards but new varieties and products. The result of our focus on costs has been to repackage an old product instead of developing a new and improved version!
Wealth comes from innovation, not optimization. Nearly every industry complains its margins are shrinking, customer demands are increasing, market leverage is shifting toward distributors, and its product and service is becoming a commodity.
Profit is the result of making your product separate and distinct within the marketplace. We can no longer continue to buy market share from within, based on efficiencies. We must focus on creating new markets and adding significant value to the consumer's eating experience.
Innovation is key
Producers' focus should be on taking a quantum leap, something that reaches far beyond today's standards. To embrace change of this magnitude, we must abandon our focus on costs.
Dee Hock, the creator of the VISA credit card system, said it well: “The problem is never how to get new innovative thoughts into your mind, but how to get old ones out.”
The goal of this industry should be to make our products obsolete. Will your genetics be competitive in five years? They'd better not.
Will you still be offering the same old products in the same old way, and packing them the same old way? Without radical leadership, history tells us we'll be offering the same product, just incrementally improved.
Moving away from the cost trap that's stymied our industry for 30 years won't be easy. It means embracing risk, change, failure and the consumer, something we've not had to do.
The future belongs to the low-cost producer who embraces value-added production, not the low-cost producer. Value-added production makes sustainable profits a reality.
Troy Marshall is a regular contributing editor to> BEEF Cow-Calf Weekly, a free, electronic newsletter for cow-calf producers from BEEF magazine. For a free subscription, go to www.beef-mag.com.
Alberta producers to sue U.S.
A group called Canadian Cattlemen for Fair Trade (CCFT) said it intends to file the “first of many” Notices of Intent to Submit Claims against the U.S. under Chapter 11 of the North American Free Trade Agreement. The first of these are for about $150-million in claims for the continued U.S. border closure to Canadian live cattle.
CCFT contends the U.S. is acting in “an arbitrary and discriminatory manner” to keep the border closed administratively even though the U.S. government declared Canadian beef as safe.
Rick Paskal, a CCFT founding member, says: “The Americans kept telling us the border closure was a temporary measure. We're well into another year and nobody knows when the border will re-open, if ever. It's time to do something about this problem, before it's too late.
“There's just no good reason for the border to remain closed, when even the scientists have given the ‘all clear.’”
Paskal says the claimants are exercising the rights negotiated under NAFTA Chapter 11 to claim damages when another NAFTA government takes actions that give an unfair advantage to its own investors in the North American Free Trade Area. Find out more about the CCFT action at www.ccft.info.
Meanwhile, the Canadian Cattlemen's Association (CCA) was adamant that a mass cull of Canadian cattle was not a topic for discussion in early August with Agriculture and Agri-Food Canada. The meeting's purpose was to discuss contingency and industry adjustment strategies.
CCA says its strategies include:
Increased slaughter of Canadian cattle with a high priority to increase Canadian processing capacity.
Develop a delayed marketing strategy, and alternative tax strategies.
Cash advances/loan guarantees/debt restructuring.
Increased surveillance/slaughter of cattle born prior to the feed ban.
Continued pursuit of all avenues to restore live cattle export trade.
You can find a discussion paper with further details at www.cattle.ca.