The Case of the Grateful, Eponymous CEO
Bob was baffled by Charlie’s request
The “Fly in the ointment” for Bob
Charlie’s request should have been great news to Bob. Charlie, is Chief Executive Engineer of nov-corp. Nov-corp is Bob’s prime customer for BB. BB is a building block in the production of methionine, an animal nutrient.
Charlie wanted Bob’s company, in six months, to double its capacity to produce BB. His request would be met if Bob convinced his management to make the investment, .
The fly in the ointment
Bob and Charlie knew that Charlie’s European competitor was entering the US market. Bob’s engineers said teu-corp’s technology for making methionine was superior to Charlie’s
Charlie’s comment on the engineers’ assessment: “You need to trust me on this. When our firms worked together 15 years ago, the US market for methionine as a chicken nutrient was beginning its rocket rise. I am not allowed to tell you why doubling the capacity now is another good investment. Trust me, it is.”
Verify Before Trusting
Bob, as Sr. VP, was familiar with the market/technology intelligence projects I had done for his firm. He contacted me and gave the background of his methionine problem. Bob then said: “OK Sherlock, we have a mystery for you to solve. Can you discover why doubling capacity will be a good investment?”
Market/Technology Intelligence Report: Executive Summary
Chickens are “machines” for converting feed ingredients into protein for human consumption. Feed costs are 75% of the cost of producing chickens. 12 amino acids must be present in poultry feed. Methionine is the only amino acid added in its synthetic form.
My first task was to build a list of 230 knowledgable individuals in the chicken industry. Then, following the Rule of 30 method1 I called people on the list.
Conversations with 30 knowledgable individuals elicited strong interest in talking with my client. In each conversation I mentioned that the client found a new way of making BB.
Consensus of respondents was:
”Two areas of high level profitability in the chicken industry value chain”
- Integrated firms with value-added products sold to the consumer.
For example: Perdue Farms, Pilgrims Pride, Sanderson Farms, Tyson Foods
- BB production associated with synthetic methionine manufacture
Two manufacturers of BB in US; Bob’s firm and teu-corp.
“BB producers are in a classic Prisoner’s Dilemma pricing impasse.2 Prices of BB will stay high. There is no reason for (Bob’s firm) or teu-corp to be aggressive pricers. Integrated firms want lower methionine prices. It’s not going to happen through lower BB prices.”
Sr. VP and Dir. Res. & Nutrition — Golden Sun Feeds
Mystery Solved: The Grateful CEO
A respondent at the largest of the integrated firms suggested I talk with a recent retiree. During a long conversation with the retiree, he said:
“George, because I’m retired, I can talk to clear up your mystery.
Fifteen years ago Don, our CEO, was expanding his firm by buying weaker firms. He was also far ahead of our competitors in hiring software and nutrition experts.
- One result was the leading position we have in the industry today.
- Another result was he almost drove the firm into bankruptcy. His borrowing for expansion was extensive. Banks would no longer lend him money. He was about to lose his firm.
Nov-corp contacted him and said: ‘We will lend you the money you need to avoid bankruptcy. ’
He repaid the loan in 4 years.
He then told our purchasing agents. As long as I am in charge of this company, nov-corp is our only source of methionine.”
Retired VP, R&D — (Eponymous Integrated Firm)
- Bob convinced his management to invest in doubling BB capacity.
- Within two years, the investment was recouped.
- For thirteen years, BB retained its specialty profit margin.
Six months later, teu-corp announced expansion of its capacity to produce BB.
1. My work followed the Rule of 30 method
- Blind study
- Gathered intelligence through 30 elicitation conversations with experts in the chicken industry. They were from a random sample of 230 knowledgeable individuals.
2. Pricing and the Prisoner’s Dilemma
- Mark Striving explains this complex pricing dilemma in a website article. The dilemma is, do you want to win or do you want to make a profit? Pricing and the Prisoner’s Dilemma (Last accessed 1/6/20)