Monday 21 November 2011

Day 23: 100 Heifers run dry

The last three days gave me the opportunity to experience the workings of a dairy farm. In the farmhouse they converted 2 rooms into a bed & breakfast. A very basic B&B as could be evidenced from this photo of their information booklet (compiled and last touched in 1992!).
Here we have two businesses running as one. The 100 heifers produce organic milk and cream to all the local tourist destinations (Chatsworth and Kedlestone hall visitors can enjoy extra thick scrumpy cream scones, thanks to my Foster family). The farm house B&B provides a warm bed and dry heat for weary travelers and explorers. It is clear that they feel very differently about the two businesses.
The £2000 needed to buy a new heifer focuses their attention on caring for the beasts in a way that guests in the bed & breakfast don't. The dairy has a new pasteurizer, capital investment plan and sustainability strategy. The bed and breakfast still uses the same beds and bedding it did 30 years ago. The guests, most probably driven by the low room rate, do not seem to get the same attention that the cash cows do.
I suppose this is a classic tale of excess capacity being used to harvest some value from capital investments (ironically, keeping this 'dog' from cash cow status). It does point to the different standards and measures that companies use to define success for business.

What is the real opportunity cost tied up in ideas that get killed or suffer because they are not supported with the same attention and standards as the core, supported strategies? Two years ago I had a client who were very keen to bring a massively disruptive model to workplace wellbeing. The new ideas would have a massive impact on general workplace engagement and the energy levels of employees (modulated through better diets). The problem was though that it would not deliver the margins needed to qualify against the internal investment hurdle to build it. The new idea was competing against a 150 year old business with entrenched efficiencies of scale and the established sales channels to drive it. The fact that this new idea was essential to differentiate this commodity business and protect it from new global entrants was besides the point. On a narrow measure, the cash the company has would deliver a higher return when invested in the established business model. The irony is that this way of measuring opportunity cost (against the existing profit margin) leads to investments only when the existing business crashes and the hurdle becomes low enough to pass. This has become pervasive in the pharma industry where a lot of life saving drugs don't see the life of day because they don't compete against the "blockbuster" model. As trendy as the idea of "disrupt yourself before others do" is, have you had that conversation with a CFO?
How could we level the playing field for new ideas to unlock their real value? How do we get businesses to migrate before their 100 heifers run dry?

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