Editors Viewpoint

Business strategies: The 98% rule

July 6, 2012
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With two decades of experience in the protein business, I have seen the same lesson offered repeatedly; when supply exceeds demand, there are many losers and few winners.

Economics should be prominent in the curriculum of poultry science students, because the principal lessons of economics are ignored by key management groups. I have seen many ambitious mavericks come and go. Some say eventually this will be a stable and profitable business.

The solution is obvious, and while easy to say it is hard to achieve. I call it “The 98% Rule.” Simply, if you raise or process only 98% of the product you need, you are never driving the market down.

Everyone remains hungry for a little more, and you are buying 2% of your raw material on the market. This drives up the market, giving you knowledge of what your competitors are doing from a price and quality standpoint.

Factored over the other 98%, the cost of the 2% is insignificant. This practice also brings focus to your strengths and deficiencies, allowing you to create a more successful position in the market.

Engineer your business model to remain profitable through downturns. The key to this is to build a diversified business base that has both commodity and value-added components.

Also build seasonal diversity, so that the non-peak periods deliver more volume than the industry average to balance out production schedules. People usually don’t grill out in December, but they do shop and eat at restaurants in disproportionate numbers.

Foodservice seasonal cycles are different than grilling season cycles. Foodservice may produce lower margins, but it is more consistent and predictable. If you’re not in the segment, consider it seriously. Good customers are like bedrock; they take longer to gain because they don’t change often. Be patient and consistent, and earn their trust.

Innovation and good marketing are essential to creating value with the consumers/customers. Driving out cost is critical to insuring your relevance as well — don’t leave money on the table.

We are still in the middle of a severe recession, similar to those in the early 1970s and late 1930s. However, this recession is not just in the U.S. — it is global, based on a truly global environment.

We must reinvent our economy to regain our momentum. European stability has a direct correlation to commodity prices. The people who build computers and electronics or make our textiles will demand more protein. The global demand for food in the next 40 years will be twice our current need! This will challenge our ability to supply.

A drought in Brazil, Australia or China will compensate for an oversupply of corn in the U.S. The governments in the U.S., Canada and Europe have no idea where food comes from, and they bow down to 3-5% of the population that manipulates their favor, while the other 95% of the population simply rides along as passengers.

We need to remember this is an election year and put our support behind candidates that understand food production, supporting the consumer’s right to choose meat. A little hunger could go a long way to finding a temporary cure for stupidity. When the masses can’t get enough food, the response from them can be violent.

What happened with BPI will be a case study in our business schools. When a food crisis occurs, perceived or real, you must respond appropriately within hours, or your fate will likely be similar.

Our business is very dynamic. You must monitor your supply and global market demand constantly to manage your 98%.

Remember, more is not better, whereas almost enough is perfect. By being a better manager with a clear, strategic direction, you will prosper when others become casualties. Count on the government for nothing but increased regulations and avoid disappointment.

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