Ranchers, Porter’s Five Forces, and Choosing Customers

Ranchers, Porter’s Five Forces, and Choosing Customers

Note: If you’re vegan or vegetarian, the opening line of this may offend you.

Twelve weeks ago, I called the east Texas rancher who sells my family our beef and pork. It’s a long drive from Austin, but I know the people who raise it, how it’s raised, and for 200-300 pounds to feed my family of 6, the price is right for grass-fed, grass-finished, antibiotic and hormone-free meat.

“Danny, can I get a half a steer and a whole hog? Maybe some extra sausage, brisket, and ribs? But no steaks. Kids won’t appreciate them.”

“Adam, I’d love to, but we’ve shut down our retail operation. I can get you half a steer, or a whole. And we sold our last pig, so no pork.”

“What happened?”

“Well, Covid was great, and then it wasn’t. Everyone with a cow scheduled with the processors.  Not just those running a business. They’re all booked a year out. That was on top of processing prices going up so much. We can’t manage a business like this, so we’ve had to shut down. We’ll do a whole or half, but nothing else.”

And like that, I lost a supplier. The capitalist purists will mention Adam Smith, and maybe they’re right, but I spent a few hours thinking about this on the drive home. What it means for industries in general, and maybe small businesses in practice.

I’ll mention sales to stay on-brand, but you know.

 

A growing ranching operation, selling high quality meats, is going under. The processor, sitting between the producer and customer, has been the bottleneck.

The processor, getting an influx of orders, takes them all and books out for twelve months.

The growing ranch operation, a steady and growing customer for the last several years, gets lumped in with all the other customers, and soon, because of cash flow issues, can’t run his operation, as we’ve seen above.

The processor didn’t think about the following:

• What happens when all these small orders go away?
• On whom do I depend for regular business?
• What happens to me if my regular business is gone on the other side of this economic anomaly?

Or maybe the processor did, and has better answers than I assume.

But I doubt it. Because great thinking is often in short supply.

Let’s do this little thought experiment, and go back to our friend, Michael Porter’s 5 Forces Framework.

When all the small orders go away, I (the processor) am dependent again on my regulars. In this case, the growing ranching operations who are steady sources of revenue.

If many of those customers can’t get to me, or someone like me, what happens to them? They go under.

What happens then? Well, I probably do more business with the larger suppliers, if they want to do business with me. Which I may need if I expand capacity during the boom times: I’ll have overhead I need to cover. Or which I’ll need if I lose some meaningful number of customers and their revenue.

(Now is when some reader references Adam Smith and says, “But some competitor will fill the void. They always do.” Perhaps. But which customer? And under what terms?)

So now, I’m probably pitching larger producers. And guess what they have, if my situation is indicative of what is going on with other processors? They have bargaining power.

The large producer – his or her processor prioritized their golden goose when it mattered. And they still do.

If more processors want to compete for that larger producer’s business, they’re going to do so at unfavorable terms.

Who has all the leverage? Not the processor.

Who loses margin? Processor.

See where this is going?  There’s a great business case on Crown Cork & Seal and the canning operation industry that demonstrates what happens when several suppliers fight over the business for a few large producers. Let me tell you – it ain’t pretty. Except it was for a long time for CC&S because they understood strategy. Thanks to Richard Rumelt for the insight.

 

This isn’t about loyalty. This isn’t about taking care of customers who took care of us some time ago.

Those are good and honorable things, though. And I’m not arguing against them.

This is about a long view on self-interest.

The wise operator recognizes he’s in an ecosystem of interdependence. It’s in one’s best interest to help out suppliers and customers who do two things:

• Provide meaningful revenue and margin
• Reduce dependence on any large customer where we might see revenue concentrated

It’s in the processor’s best interest to more highly value customers like the growing rancher. He’ll be there, if he’s prioritized now, to provide consistent business on the other side of the storm.

So what do you with this information, if you’re a service or product provider? You have to make decisions on whom to serve, and when.

That decision entails trade-offs.  So let’s get very practical, and out of the realm of economic theory.

I don’t have many answers, but I can give you one framework. Here’s what I do with clients, though the flavor and application vary from industry to industry, and business to business.

We stack rank their clients. (You can’t rank kids, at least not out loud, but you can rank clients.) We ask ourselves, “Who is most important to our business, and why?” We discuss this and get into what makes an account important.

Sometimes we simply grade them.

Across two to four categories.

The criteria or categories vary. For some companies, we look at current and potential revenue. For others, we look at margin. In others, we look at the opportunity to develop new capabilities. Or marketing advantages offered. In most, we look at relationship level and depth.

The work is deciding on the criteria. And the real work – the grind – is in honestly assessing our customer or client base.

And then…. We have to do something with it.

Let’s pretend we discover that some accounts do well on current and potential revenue, but are lacking in relationship level; we’re too low. That is a risk.

In another account, we discover the revenue potential isn’t great, but the margin is, and the relationship is solid. And the account provides some combination of referenceability (is that a word?), introduction to other opportunities, or the development of new capabilities without too much complaining. We take care of this account.

In others, we discover there’s a great relationship, but not great revenue potential, and not much strategic fit with where we’re going. This is going to be uncomfortable. We have a decision to make. And it’s not pretty either way, but the decision is pretty cut and dry, if emotion stays out of it. It doesn’t have to be thoughtless – we can help them find a new vendor or supplier, but it’s not a fit going forward. Or we can have a conversation about where we’re headed and what needs to change in the relationship if we’re to keep doing business together.

The result of this exercise is a clear map on how to manage a client or customer base, especially if you’re in the service world.

If done correctly, it’s sobering. If done without a lot of story-telling, fantasizing, and reminiscing, it’s tough-minded.

You may just find that you get close enough to the right customers at just the right time.