Uncertainty is normal in a new industry

by Allan Nation

Harvard professor, Michael Porter, in his finance textbook Competitive Strategy said that all new industries have certain common characteristics.

I have taken Porter’s list and interpolated them into a grassfed context.

He said the common characteristics were:

1. Technological Uncertainty

In a new industry no one is quite sure the best way to produce the new product.

We can see that in today’s grassfed industry as some people are trying to produce fattened beef on cow-calf quality pastures. Some have even made non-improvement of pastures (native range) as a part of their marketing statement.

Others are convinced they must have some sort of energy supplement and cannot do it on grass alone. The ultimate example of this is Niman Ranch with its advertised “grassfed beef grain finished for flavor.”

This is the technological uncertainty Porter was talking about.

People start out trying to do something new with the skills they presently have. It is only when they see others become more successful with newer skills that they themselves are willing to change. Sometimes this is too late.

A common characteristic found in new industries is that the earliest pioneers frequently find themselves leap-frogged by new participants not held back by the old paradigms.

This is why it is very dangerous to build a marketing statement around a specific production technique. You may need to change this in the future to stay competitive.

2. Strategic Uncertainty

In an early stage industry, there is no one “right” marketing strategy.

Compounding marketing difficulties is the fact that the consumer of the product may be philosophically very different than the pioneer producer. Market and customer research is usually very limited in the startup phase. This is particularly the case as to who one’s competitors are.

For example, a major competitor to grassfed beef in some alternative food markets is a pseudo meat product made from soybeans.

Porter said the degree of marketing freedom is greatest in the early stage of market development. Some people find this exhilarating. Others find this freedom to be terrifying.

A common characteristic is that new industries require very short and inexpensive distribution chains. To maintain the wider margin needed for a startup industry, there is little money to feed a full-time distributor.

However, developing a distribution chain is essential for the industry to grow. People cannot buy what they cannot find.

3. High Initial Costs Due to Low Volume

Porter said that market pioneers had to look at the “potential” cost structure rather than the “actual” cost structure. Many of the high costs faced by new industries are the result of low volume. As volume increases these costs will fall.

A good example of this are the high abattoir costs currently faced by pioneer producers.

Porter said all new industries faced the dilemma of surviving the high costs of the low volume start-up period. However, such volume caused costs tend to fall rapidly as volume increases.

4. Poor Business Skills of Proprietor

Porter said that all new industries are created by people who can create an exceptional new product. As a result, most new industries are started by production-oriented people.

However, once the production model has been perfected the producer must quickly add the skills of marketing and finance for it to grow.

These skills can be added by hiring consultants, a crash program of personal education, by the hiring of employees with the new skills or by the taking in of partners with these needed skills.

5. First Time Buyers

Porter said that first time buyers are both hard to find and expensive to educate. No one is starving to death in North America so all food product marketing must induce substitution.

This is substitution effect is created primarily through product sampling and is why new products have to considerably better than what currently exists.

Industries such as grassfed beef which are primarily targeted to well-educated consumers must make sure they are up to date on the latest health-oriented research and that the product fully reflects this research.

6. Short Time Horizons

The pressure to meet consumer demand and create cash flow in a new industry is so great that production shortcuts are often taken that hurt the industry in the long-run. A good example of this is the current widespread practice of harvesting animals that are not fully finished to meet short-term demand. This results in a sale today but the loss of a future customer forever.

Often newcomers to an industry imitate the practices of the earliest pioneers even when those practices have been shown to have long-term negative implications.

7. Seeking Subsidies

New industries are short on cash and so often seek out government subsidies for product and marketing research. The most common of these in the grassfed industry are USDA Market Development Grants.

Porter said such grants add a great deal of instability to an industry because the recipients become dependent upon the outside funding. This funding is politically motivated and can quickly disappear under the pressure of a threatened established industry.

These subsidies also involve the government in an industry, which Porter said can be a mixed blessing. Again, the reason I have been going through these new industry characteristics and problems is to show you that everything we are currently experiencing is normal.

We are a new industry on a steep learning curve. For most of us, this creates feelings that are a combination of both exhilaration and fear. What we need to constantly remind ourselves is that those feelings are normal too.

© by The Stockman Grass Farmer

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