"Look before or you'll find yourself behind."
- Benjamin Franklin
In a moment of great upheaval, with financial giants falling daily, and Wall Street reorganizing fundamentally, I thought you might enjoy some respite: a pleasant story about chickens and eggs. Particularly about how a unique band of chickens is helping their owners disrupt their much larger competition.
Cal-Maine (CALM) Foods is a small company that is taking its market by surprise. Its performance has been stellar. At the end of July it announced its end-of-fiscal year financial results, posting $151.9 million in annual fixed income, nearly five times its net income of $36.7 million last year.
This growth is surprising for two reasons. First, the cost of chicken feed is skyrocketing, forcing its key competitors’ operating margins into negative territory. Tyson Food (TSN), Sanders Farms (SAFM), and PPC lose money on every egg they sell, while CALM produces 22% operating margins.
Second, they are thriving and growing at a time when consumers are buying fewer eggs. We are in the post-Atkins age and trend-setters are not paying for eggs as they once did.
The decline in egg consumption caused Cal-Maine’s sales to dip for several years. But Cal-Maine saw the battle ground was about to shift. Unlike competitors who retrenched and sought to cut costs, Cal-Maine saw that consumers were beginning to demand organic and other specialty eggs. At a time when everyone wanted out of the egg production, Cal-Maine began buying smaller egg producers that were in trouble, focusing particularly on companies that produced reduced-cholesterol, cage-free, organic eggs, and even eggs laid by vegetarian hens. This focus on the next battle ground allows the company to sell at far higher prices. Cal-Maine’s specialty eggs, which account for 15% of the company’s sales, retail for as much as $6.00 per dozen, compared to $2.20 for the standard kind.
Await the Exhausted Enemy
At a time when egg consumption was decreasing and competitors were retrenching, Cal Maine was quietly building a position on the new battleground.
This is an example of pattern at work that the Chinese call “Await the Exhausted Enemy at Your Ease.” It advises that, “to weaken the enemy, it is not necessary to attack him directly. Tire him by carrying out an active defense, and in so doing his strength will be reduced, and your side will gain the upper hand.” It means to be first to the next battle ground.
Adaptable companies turn battleground shifts into advantages, overcoming even their largest competitors by identifying new battlegrounds, setting up a defensive position there, and waiting for their competition.Statistically, this strategy is one of the most powerful methods of overtaking the competition. Consider others who have used this stratagem:
- Nokia focused early on a deregulated EU telecom market and over ten years caught up with and overtook Motorola;
- Frontline saw that owning oil tankers would become a big business and grew from being worth $50M to being worth $7 billion;
- Toyota stuck to small cars and hybrids and is on the verge of becoming the largest in the world.
Apply this innovation patternTo benefit from this ancient pattern of innovation, ask yourself two questions:
Where is the next battleground?
What can you do now to beat your competitors there?