Editor's note: Click here to read Stewart-Peterson CEO Scott Stewart's review of Great by Choice. In January 2008, I sat next at the dinner table with a Colorado dairyman who was explaining the intricacies of his strategy to sell two bull calves for a heifer calf in order to rapidly expand his dairy herd size. The other dairymen dining with us were amazed by his scheme, which relied on a never-ending supply of capital, a bull market for milk (the all-milk price was $20.50 at the time) and lots of risk. Just over one year later, in the heart of the Great Recession, I read how that same producer’s business and his herd were being dispersed.
And the bank underwriting him would later fold. It wasn’t credit default swaps but rather “calf debt” swaps that had brought him down. I assume he believed his dairy’s economy of scale was too big too fail.
2009 introduced many in the dairy industry to a new normal – volatility. 2012 is already a refresher in many ways of the lessons from 2009.
So if the new normal is not normal at all but rather volatility, how is a dairy business to survive? I found several enlightening answers to this question while reading Jim Collins’ newest book, Great by Choice .
I’ve read Collins’ Good to Great and How the Mighty Fall . I enjoyed both of those books, but it was this newest book that had many applications for the dairy industry.
What follows are the passages I highlighted as I read that are most applicable to the dairy industry. I hope the summary helps and even encourages you to read the entire book, as many of the concepts cannot be fully summarized here.
Collins and his team of business researchers set out to find an answer to the following question: Why do some companies thrive in uncertainty, even chaos, and others do not? What they found is what any dairy business dreams of:
“Some companies and leaders navigate this [volatile] type of world exceptionally well. They don’t merely react; they create.
They don’t merely survive; they prevail. They don’t merely succeed; they thrive. They build great enterprises that can endure.”
They studied multiple businesses and found those that “started from a position of vulnerability rose to become great companies with spectacular performance and did so in unstable environments characterized by big forces out of their control, fast-moving, uncertain and potentially harmful.” Sound like the dairy business environment? It did to me.
Collins and his team laid out six repeatable characteristics of the enduring companies. A summary of how I think they apply to the dairy industry follows.
Ten times better
The defining characteristic of the “high-performing” companies Collins details in the book is that each did 10 times better than the other companies in their market index. He calls these examples “10xers.”
Throughout the book, Collins draws analogies between these companies and the landmark 1902 South Pole expeditions of Roald Amundsen and Robert Falcon Scott, detailed in by Roland Huntford.
Collins says enduring businesses are like Amundsen, who was the first man to successfully reach the South Pole and live to tell about it. Amundsen was disciplined and prepared.
I believe dairy producers could do well to follow Collins’ key characterization of the philosophy behind Amundsen’s success:
“You don’t wait until you’re in an unexpected storm to discover that you need more strength and endurance. You don’t wait until you’re shipwrecked to determine if you can eat raw dolphin.
You don’t wait until you’re on the Antarctic journey to become a superb skier and dog handler. You prepare with intensity, all the time, so that when conditions turn against you, you can draw from a deep reservoir of strength. And equally, you prepare so that when conditions turn in your favor you can strike hard.”
Much of the characteristics of 10xers were individualistic. Collins says they:
- Accept responsibility for their own fates.
- Reject pressure to conform in ways incompatible with their values, performance standards and long-term aspirations.
- Remain self-disciplined to do whatever it takes to create a great outcome, no matter how difficult.
- Look for empirical evidence to guide their decisions, not conventional wisdom or the advice of pundits and experts.
- Constantly consider the possibility that events could turn against them at any moment.
- Worry about creating something truly great, bigger than themselves, and not about protecting what they have.
Marching between the margins
Enduring businesses bounded their expectations. Collins explains: “To achieve consistent performance, you need a lower bound and an upper bound, a hurdle that you jump over and a ceiling that you will not rise above, the ambition to achieve and the self-control to hold back.”
Managers of enduring businesses tenaciously sought after consistency.
They “understood that grasping for the next ‘silver bullet’ reform – lurching from one program to the next, this year’s fad to next year’s fad – destroys motivation and erodes confidence. [Their] critical step lay not in finding the perfect program or in waiting for national … reform but in taking action: picking a good program, instilling the fanatic discipline to make relentless, iterative progress and staying with the program long enough to generate sustained results.”
I found it most enlightening that this does not mean 150 percent effort one day followed by 50 percent effort the next, as this inconsistency can catch you off guard in times of volatility.
Collins describes enduring business consistency as “a regime of consistent progress, never going too far in good weather, careful to stay away from the red line of exhaustion … yet pressing ahead in nasty weather to stay on pace.”
How big is your weapon?
The book explains that enduring businesses were careful in the application of capital – as Collins says, “firing bullets, then cannonballs.” Bullets are low-cost, low-risk and low-distraction. Cannonballs are the exact opposite.
Of all of the book’s suggestions, I believe this is the one that dairy producers already do the best at. I don’t know many dairymen that don’t do a thorough job of “kicking the tires” before buying something or trying out a new idea on a small scale first before jumping in.
However, this principle could also apply to employee management. You wouldn’t bring a family partner onboard without confirming he or she is a hard worker, would you? It’s likely the employment of human capital is where this principle could most be improved in the dairy industry.
No business owner is perfect. And everyone will make mistakes, even those in Collins’ enduring business case studies.
But what they had in common was the ability to avoid the knockout punches. Volatility increases the frequency of encountering those.
Collins wrote: “The only mistakes you can learn from are the ones you survive.” Relating this principle to the extreme explorers explained in the book, he calls this concept “leading above the death line.”
“10xers always prepare for what they cannot possibly predict, stowing away lots of extra oxygen canisters (big margins of safety) and increasing their options before they meet the Black Swan.”
This, he says, includes the application of financial resources:
“Financial theory says that leaders who hoard cash in their companies are irresponsible in their deployment of capital. In a stable, predictable and safe world, the theory might hold – but the world is not stable, predictable or safe. And it never will be.”
Overall, Collins reports that enduring companies were more financially conservative and risk-averse. The exact opposite was true of the proud dairyman I mentioned at the start of the article.
Enduring companies, he says, map the current risks to their business and watch for changes to those risks, being prepared to “act blindingly fast in the event the risk profile began to change rapidly.”
That doesn’t mean they make knee-jerk reactions.
When reading this advice, I thought of how some could errantly approach risk management in the dairy industry:
“You want to be cognizant of lurking dangers and vigilant about possible disruptions, but this is very different from taking quick, immediate action because you want the anxiety and uncertainty to go away.”
Recipe for success
Collins says each business created a list of practices that were specific, methodical and consistent or “SMaC.” These “recipes” were both particular and durable, Collins reports.
Each company included in the research had uniquely different lists. But they were all disciplined in using them.
“The principal finding is how the 10X companies adhered to their recipes with fanatic discipline to a far greater degree than the comparisons, and how they carefully amended their recipes with empirical creativity and productive paranoia,” Collins writes.
Possible examples of SMaC principles for dairy producers could include:
- Maintain an employee-to-cow ratio of Y to X.
- Cull cows not producing X income over feed cost.
- Breed the top X percent of the herd to the top $NM bulls.
- Achieve an X percent pregnancy rate or better at all times of the year.
- Never forward-contract more than X percent of production.
- Methodically hire employees, never just because we’re in a pinch.
Collins says a business recipe should be easily read and understood by any employee in the company. And the more employees realize what they can do to follow the guiding principle, the better the recipe.
As you can see, a good recipe is very specific. They are not merely “buy feed low and sell milk high” or “breed cows on time.”
The enduring businesses had discovered several key metrics that lead to repetitive success. More examples of enduring companies’ recipes are provided in the book.
The final principle Collins describes about enduring companies is their “return on luck.” Some pundits, he says, will claim that the enduring companies were merely more “lucky” than their competitors. Collins and his team disagreed. They write:
“If we all get some combination of both heads (lucky flips) and tails (unlucky lips), and if the ratio of heads to tails tends to even out over time, we need to be skilled, strong, prepared and resilient to endure the bad luck long enough to eventually get good luck.”
Collins acknowledges that some companies capitalized on good-luck events better than their competitors, but it was the endurance through bad- luck events that made the difference for enduring companies.
“A single stroke of good luck, no matter how big the break, cannot by itself make a great company. But a single stroke of extremely bad luck that slams you on the Death Line, or an extended sequence of bad-luck events that creates a catastrophic outcome, can terminate the quest,” Collins writes. “Luck favors the persistent, but you can persist only if you survive.”
The dairyman I discussed at the beginning of this commentary might claim 2009 was just bad luck.
And while the other producers sitting at his table that night may have been jealous of his short-term gains, which seemed 10 times better than their own, I know several of those then-jealous producers survived 2009 and would better fit Collins’ description of an enduring dairy business.
Recipes for short-term success will not endure the industry’s future volatility. Today’s dairy producers would do well to build an enduring business by reading and applying the principles Collins discusses in Great by Choice. PD