New Ways of Thinking:
Embracing Change
"The importance of maintaining and developing relationships within the
agribusiness value chain"
Good morning and my thanks to the Agribusiness Association for the opportunity to present this address to you this morning.
The topic today is as broad as we want it to be. At the same time there is a simple one-line response which states the obvious. Of course it’s important to maintain relationships within the value chain. Isn’t it? At least that’s the rhetoric of the market! To try and keep some perspective I want to confine my remarks this morning to one area of agribusiness- the grains sector.
My experiences have mostly been with the grains business over the last 15 years and given recent developments it’s a pretty good model for today’s topicI want to relate to you how new ways of thinking are starting to permeate into our everyday work life. There are a few key messages I want to give to you today that are probably relevant to most other parts of Australian agribusiness as well:
We have a need to think differently :
Without stating the obvious the needs of our market place are changing rapidly. As they change we must accept the need to change our philosophies, our thinking. It’s also stating the obvious and easy to say we need to think differently but how many of us consciously put ourselves outside our comfort zone to push the barrier?
We have to find ways of doing our business differently:
The health of our industry will depend on our capacity to be far more collaborative than ever before without diminishing appropriate competition, more innovative and more prepared to accept commercial risks in venturing into uncharted waters.
The Grain Business- setting the scene:
Most of you would be aware that the grains industry is going through a period of massive and unprecedented change. Our market structure has historically been based on state boundaries, with state based marketing (national in the case of the AWB) handling and freight authorities forming the backbone of a market function. Market, price and operational stabilisation for the grower sector was a prerequisite and was perceived as a necessary component to protect producers from predatory practices of the private trade.
While these structures were believed appropriate for the time they also encouraged our markets to behave "horizontally" with little in the way of meaningful "through chain" dialogue that may have resulted in greater efficiencies and improved profitability.
This actually exacerbated the politicisation of grain production and marketing where protectionist structures tended to foster self-interest for relevant parties rather than the objectives that they publicly espoused.
What’s the legacy of this history?
While there is general recognition that times have moved on and structural and legislative change is appropriate some of our thinking inevitably still reflects where we’ve come from. In a lot of ways we still behave in an adversarial sense in the market as buyers and sellers of product and/or services.
It’s that stage we are at now in terms of change that is particularly interesting. In a broad sense we are now functioning with privatised enterprises but still in a socialised paradigm.
It really is the first phase of a major change process and it’s how we move on from here and how we change our thinking that will be a major challenge for all in the industry.
What’s been driving this change?
There’s been a remarkable convergence of market factors, which have promoted the acceleration of change, including but not limited to:
- Implementation of National Competition Policy
- Anticipation of dismantling of the AWB`s single desk for wheat exports in the next 4- 5years.
- Increasing move by state and federal governments to privatise public utilities.
- Major developments in world trade Liberalisation and flow effects into agriculture globally
- Continuing decline in terms of trade for farmers.
- Issues of sustainability and associated pressures on production
- Technology in all its manifestations and information transfer
- A maturing domestic market
- Deregulating international markets.
What have been the results to date?
After 50 odd years of a fairly prescriptive method of managing our supply chain the reaction has been amazing. Some parts of our industry are really making up for lost time! There is some legitimate urgency in this. But these days you can almost bank on some form of alliance, merger or acquisition being announced every week. With the development of market concentration and the need for a logical release to that concentration there are new pressures coming into the market place. Is it all necessary and right for our time?
The answer partly lies in people thinking differently in their assessment of where they are in the supply chain, who their competitors are, who they might be and how they might grow their business in the future. With so much at stake it’s not surprising that many industry players are now far more aggressive in staking their claim and seeking to protect their core businesses like they never had to before. In short, market players are now far more pro-active and are jockeying for position in anticipation of future change. People are now starting to live out the theory that what wasn’t possible yesterday is eminently possible tomorrow.
This also implies the necessity to think differently about relationships within the market place, some of which have had a long history to them. What we thought was right for our relationships may no longer be the case. How do we know and where do we go from here?
Future Drivers:
We’re already starting to apply new terminology to our market make up. If you’d used the term supply chain a few years ago most people in our industry would have thought it was an implement you hooked on behind the tractor to clear some mallee.
Importantly the terminology and the rhetoric is there, which is at least starting to reflect people’s intent.
In some senses the drivers of the future in the grains industry may not be much different to what we think they are today or at least those elements of the supply chain. We will after all have to continue to grow crops to produce into food that consumers will eat. It’s probably more who and how the drivers will operate.
We can argue about push and pull effects in supply chains but for me the ideal would be to reach a point where there is joint recognition right through a chain of a need to do business a certain way.
As a few historical examples, our bulk handlers have developed a reputation for imposing their own operational requirements on freight providers, customers and consumers rather than looking for synergies where everyone derives a benefit.
- Our growers have tended to produce crops and abrogate any further involvement post farm gate.
- Processors have often been more production than sales/ market driven.
- This dislocation has tended to foster the thinking that once we’d done our bit it was time to hand over the lot to someone else. We tended not to think that we could possibly improve our own business by improving someone else’s. A lot has changed in these and other areas in the last few years from where we were but there’s always more to be done.
Some of the drivers that will perhaps have a higher profile than others:
- A sense of responsibility for all parts of the chain.
- Some of this may be developed through negotiation, or possibly government intervention where the industry can’t self determine it. There are three ways in which we can develop that responsibility:
- Control, influence or equity.
- But by whatever method if there is a notion that through collaboration supply chain participants can all actually help each other to be more profitable then we are making progress.
Increasing regulatory and consumer compliance
- There’s been much made in the press in recent times of increasing consumer sophistication, of the need for more traceability in food products and greater levels of food safety and so on. The consumers reactions to recent industry related issues is self-evidence that the "sharp end of the boat" will have a greater influence over supply chain management than ever before.
- Moving from commodities to produce:
- We will increasingly move away from thinking about grain as a commodity and more as a food product
An Increased State of Uncertainty:
We are now educating our children in anticipation of jobs that haven’t yet been invented. With that example of such a heightened level of uncertainty (which can be viewed as a positive) we should also expect that companies will spend more time trying to work out the probabilities of what their market position is going to look like and what the impacts of new technologies will bring. In doing so we will be forced to think differently and be more responsive to circumstance.
Why think differently?
Pure market forces are the main reason.
We need to think differently if only to question where we are generating or deriving value in the supply chain. What companies may have perceived to be their core business or competency historically may no longer be the case particularly if their customers no longer see it that way? In an industry that has often found it difficult to cost out its business we are now really trying to understand what the cost structures of our supply chains are. Increasingly optimisation and trying to take the variability out of a commodity based market are top of mind to achieving higher levels of efficiency and market certainty.
Rules for engagement:
There are a few points or "rules of engagement" to consider:
Accept change in a relationship:
We will have to accept that relationships with suppliers, service providers and customers will increasingly become more fluid and in some cases may deteriorate or disappear altogether.
By recognising this and trying to deal with the situation honestly it encourages us to be more prepared to either stay together and get on with it for mutual benefit or agree to part company.
Accept a greater level of commercial risk:
If we are more unsure than ever about the future how do we know that putting a stake in the sand today is the right thing? The short answer is we don’t know fully except to say that now we have to put more on the table to get more back out of the chain. This implies issues of confidentiality, trust, and respect for your business partner and a sense to know when you can and cant take things any further.
You need to sell yourself to the market:
As Australia’s largest food company and consumer of grains it would be easy to assume that we have leverage with our suppliers in the chain.
We do but it’s particularly true for the input side of our business that we need to sell ourselves back to our service providers. Why? Because we have never been perceived as someone who could actually facilitate a benefit back down the chain (apart from our contribution to another company’s turnover). Never assume that the market will come to you.
Make sure your position in the market place is known and understood:
Trying to make sense at times of what we’re seeing is difficult. If you look at the alliances that have developed to date they are mostly within horizontal layers of the supply chain. A lot of that has to do with history and where companies have seen their competitive threats or even their sense of place in the market rather than market opportunities.
Some might argue that the approach has been along the lines of Don Corleone`s maxim to "keep your friends close and your enemies closer". Perhaps a little extreme but the logic of some of those alliances probably tells us that we haven’t quite got rid of the politics in our game nor have we truly developed a vertically aligned supply chain.
But we are moving that way. Those who seriously consider it necessary as part of their strategic intent are likely to have significant competitive advantage. The challenge for the market is to realise that that is what they really should be looking for.
Have a view!
It’s true enough of trading commodities that to make a market you must have a view. Whether anyone else agrees with your position is not so important as to actually have one. In the case of relationships the difficulty in this accelerated period of change is being consistent in that view.
To sum up:
- We have been dealing with an outmoded market architecture that is rapidly being dismantled.
- Market players are now regrouping for the second phase of change.
- Our thinking still reflects the history of how our industry has grown up.
- A need for new relationships will challenge our existing paradigms.
Thank you for your attention.
