Business Model Innovation

Prime Future 108: 9 blocks, limitless combinations


There are only 4 sustainable business models in tech: • ads • selling hardware • selling software/services to consumers • selling software/services to businesses If your favorite tech startup isn’t making money in one of these ways then it isn’t making money, period.

Set aside whether or not this is oversimplified, how would it read if it were about business models in production agriculture?

Today we are building on the idea that lunatic farmers have a high velocity of business model innovation, by looking at some specific examples from a wickedly impressive lunatic farmer, and 1 helpful framework.

Greg Bethard, CEO of High Plains Ponderosa Dairy, recently joined me in a wide-ranging conversation from how he thinks about growth and risk management, to his atypical path to managing a progressive dairy business, to some of the special projects he and his team are excited about. I highly recommend the entire interview, but here are a few particularly interesting pieces of their high velocity dairy business model.

(1) High Plains Ponderosa has partnered with Shell in a methane digester project to turn cow manure into renewable natural gas. This is turning *literal* waste into a new revenue stream while massively improving the GHG emissions profile of the business; instead of that manure emitting methane from lagoons as a liability, it is now an asset generating useful energy. For the magic of mentality, consider Greg’s words:

“We very much believe if we can produce milk and beef at a lower carbon footprint then we’ll have markets available to us that others will not. And that means opportunity. Whether or not you agree politically isn’t the issue, if our consumers want food produced in a certain way and we can do it profitably, then we'd be silly not to do it. We’re trying to find the spot where we can lower our carbon footprint in a way that is profitable for the business and lowers our cost or increases our revenue.”

Whether or not you agree politically isn’t the issue, if our consumers want food produced in a certain way and we can do it profitably, then we’d be silly not to do it. – Greg Bethard 🔥

(2) High Plains Ponderosa has aggressively built out their beef on dairy program, using dairy genetics on their highest quality females to produce replacement heifers and then using beef genetics on the remainder of the herd to produce calves that will perform better in the beef value chain. As Greg said:

“This is about creating a quality stream of high-quality beef that grades really well. What’s different from traditional beef is that we know everything that’s happened to the animal every day of its life, from the time it was conceived until it was harvested. We can tell the story and we can control production practices. Calving in traditional beef production is seasonal but we have the same number of calves born every day, year-round.”

This is a move towards increasing value by expanding the business’s market access:

“I’m not after premiums for these programs, I’m after market access. In today’s ag market, it’s about getting consistent high-quality product so customers want our product. You can’t just build a dairy and hope someone buys your milk, or raise calves and hope someone wants to buy them.”

(3) Greg believes in the superpower of low-cost production and has put people, technology, and systems in place to achieve that goal. Greg expanded on this:

“Dairy is a manufacturing industry. You have to keep your plant full and your factory full and run at capacity. The big diluter is fixed cost for fixed costs like labor and equipment, so you have to get more product out the door to get costs lower. Not getting low-cost by being the cheapest, but rather by getting reasonable productivity in the cows and keeping parlors full.”

‘Low cost is better than high cost’ may seem as generic of a statement as ‘buy low sell high’ at first glance. But, to Greg’s point, there are two flavors of low cost:

  1. Low input cost. The objective of the low input cost approach is to minimize expenses. Find the cheapest feedstuffs formulated into the cheapest per ton cost, keep labor expenses low, and avoid new technology that requires a cash outlay. There’s no equation to solve, this is simply about keeping expenses as low as possible, even at the detriment of performance.
  2. Low cost of production. The objective of the low-cost production approach is to minimize cost of goods sold. In the case of a dairy, that’s the cost to produce each pound of milk. The equation here is cost of goods = (fixed costs + variable costs) / total production. The producer in single-minded pursuit of low-cost production doesn’t mind increasing expenses when it results in increased yield and/or quality in a way that ultimately either reduces costs or increases revenue.

The words ‘low input cost’ and ‘low cost of production’ may be similar but the philosophies are clearly miles apart, and the business models are miles apart.

So what do we really mean when we say, business model? I like this definition: “A business model describes how an organization creates, delivers, and captures value.”

It’s the whole enchilada. It’s not just the sum of the pieces, it’s how the pieces work together; how the system functions to take dollars invested and spit out more dollars.

The Business Model Canvas is a good framework with 9 building blocks that add up to a business model:

  1. Value Propositions
  2. Customer Segments
  3. Channels
  4. Customer Relationships
  5. Revenue Streams
  6. Key Resources
  7. Key Activities
  8. Key Partnerships
  9. Cost Structure

One reason I love business model innovation is that there’s a ‘sky’s the limit‘ feel to it.

Those 9 blocks can be individually changed, or be combined in new ways….there are so many dimensions along which to innovate, a seemingly limitless set of potential combos. Like giving 10 people the exact same Legos and each person being able to build something unique, and uniquely valuable.

So why do so many business models in production ag not only look the same as one another but the same as their ancestors? Ahh, that’s for another day.

But do you see Greg’s ideas in those building blocks?

  • The methane digester project with Shell is both an example of #5 adding a new revenue stream, and #8 key partnerships.
  • The beef-on-dairy program is an example of drastically dialing up the value proposition of calves not needed for replacement heifers, so #1.
  • And the disciplined approach to low-cost production is obviously #9 in action.

All that to say, my conversation with Greg further reinforced this:

“My hypothesis is that scale is a lagging indicator; velocity of business model innovation is the leading indicator of success.

It seems that the really successful producers are the ones that have a vision of where they are going and how they will get there. There’s no doing it this way because that’s how we’ve done it, there’s no growth for the sake of the growth. There is only relentless learning and improvement. They constantly ask what’s the process that most effectively generates the output. They think in systems that can optimized.

The great producers realize that they aren't selling just a commodity output, they are selling their business model."

Oh, and this discussion so far has just been in thinking about production business models, not about the business models for those who sell products & services TO producers which might also be on the brink of innovation. One recent example is a Swedish company that sells a feed additive to reduce methane that partnered not just with producers, but with all value chain participants (through to the retailer) around a product that can be marketed to meat shoppers who care about low methane emissions.

Is that a scalable model? Depends. If the retailer wants an exclusive product, then the scalability of the model depends on the growth of the retailer. But tbd.

However this is the first example I can think of meat case marketing what’s IN meat, rather than what’s NOT in meat….so that’s definitely intriguing.

What a time to be alive😉

Question for you: who & what are the business model innovations in your space?

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