Q: How are you applying your expertise and background to your role in the U.S. Department of Homeland Security? What are the key challenges to keeping the food supply safe? In particular, what strategies and actions do you recommend to improve produce safety, both at federal and state levels, and within the produce industry?
A: What I do regarding my books and professional business are separate. I have a Chinese wall up with anything I do in government based on guidelines of an ethics agreement. I am unable to comment as a federal official on government matters under federal guidelines. The government chose to make this a Schedule A limited three-term appointment.
Because my position is categorized as such, I have the ability to do interviews like this one. Schedule A is not subject to the same guidelines as some of the other government posts. Therefore, I prefer to focus on the concept of centralization and decentralization in my book, The Starfish and the Spider.
Q: What is the main thesis of the book?
A: If I explain why we named it, The Starfish and the Spider, people will understand the fundamental hypothesis and theories on which the book is based.
If you compare these two creatures, superficially they appear similar with lots of arms and legs, but if you look inside, they are very dissimilar. By understanding the differences, you can learn a new model of two very contrasting types of organizations out there, at least in the extreme, with all businesses in a continuum of these concepts.
If you cut off one leg of an adult spider, it’s simply crippled. If you cut its head off, it dies. The spider represents a centralized organization. It has to have a brain command center to survive. We look at organizations in the West as hierarchical, run by a prime minister or president or CEO. That strategic concept is how a spider lives.
The world is being overtaken by a new type of organization that operates like a starfish. If you cut off an arm, it grows a new one with remarkable powers of regeneration. In the case of the Blue Linquia variety, if it is cut into five pieces, something amazing happens — the growth of five new starfish. It has intelligence, but distributed intelligence, not a centralized brain. Each has a stomach, circulatory system, and can live as another region.
This phenomenon serves as a great representation for the tremendous power of decentralized networks, on the negative side like Al Qaeda, or on the positive side like highly decentralized communities on the Internet, and the Internet itself, which is a decentralized network. In almost every industry, new players are growing, emerging and changing form, imbued with this starfish-like behavior.
In the book, we don’t say decentralization is better than centralization, but as a business you want to know where you fit on the pendulum. Then you can decide what direction you want to go consciously and with new awareness. Just as there are numerous business theories and market analyses, this is a new tool kit to evaluate your systems and the market place in which you work to better manage your company and develop more effective strategies.
Q: In what ways can these concepts translate to the produce industry? How can produce company executives and the industry as a whole apply the principles to help them survive and prosper in this fast-changing world? Do you have any associations within the produce business?
A: As a matter of fact, I do own a 60-acre strawberry and flower farm in Moss Landing, California, with 40 sheds I rent out. I chose to invest in the farm as lead partner, buying beautiful land with a view of the ocean. There was also a mushroom plant that moved out of state to take advantage of tax programs elsewhere. I’m in charge of running the farms, we rent out sheds of exotic-colored lilies, and some other crops are rotated through, connected with other agriculture businesses.
My mother grew up on a farm in Nebraska. She is German, and both sides of the family immigrated here from 1860 to 1880. All my cousins grew up on farms in the Midwest and made it, mostly corn farmers and the cattle business. There’s a story of how my cousin during the Great Depression quadrupled his holdings, one of the few with cash and no debts.
Q: What can companies do in this current economic crisis to quadruple their earnings, drawing back to the lessons of your book?
A: I actually mapped out hypothetical distribution frameworks for a conventional tomato grower and an organic farmer. Companies need to analyze the industry structure and how many steps are between you and the final customer.
Wal-Mart has a huge centralized structure, while on the other end, the farmer who owns his own farm and sets up a booth on the highway is completely decentralized. Most distribution channels are changing… Take a tomato farmer with 1,000 acres, right now a commodity producer, maybe selling out through a local processing facility a fairly generic product, and he’s not happy with that business model. He has a lot of options, and every farmer is the best judge of those options and the direction he should go.
Look at decentralizing: if he goes to organics, it takes a lot more labor and cost, and he’s going to lose income in the transition phase, but it could command a lot higher prices. He could partner with a big organic grower, or decentralize fields with small partnerships of people who want to get into the organic business but don’t have the land. This provides a way to get into a new business, see how well it works, who will buy it, without betting the farm.
Another option: he could look at diversifying, maybe tomatoes are not looking good, and it’s time to examine other crop potential. I don’t know the produce business well enough to suggest what commodities would work best, but spreading risk through diversification is applicable to crop expansion.
The notion of diversification in how I look at my own operation, also relates to income stream and getting my portfolio in order. In moving to more stability, I might lose on efficiency. Decentralization then becomes a management issue — how am I managing, like a spider making all the key decisions, or am I empowering managers? Maybe I’m hurting efficiency because the staff doesn’t feel motivated, and people feel like hired hands turning the crank. What is my management style in running farms and operations?
Large operations can form separate legal subsidiaries and ideally reward the right performance. Breaking the farm or business into subsidiaries can be a form of decentralization, if one has good managers with clear direction on what to accomplish.
Q: What about a huge food chain like McDonald’s, with reach in all corners of the globe? Would you describe its operations and strategic course as centralized or decentralized?
A: The processes and quality control are very centralized in McDonald’s. McDonald’s loves our book. It’s fundamentally decentralizing globally, starting 10 to 15 years ago, when it customized design and architecture in Sweden. It kept the golden arches, but no cheap vinyl seats. Culturally, certain aspects of the fast food chain were rubbing the wrong way in that country, and it motivated the person running the operation there to start innovating units.
McDonalds promoted this guy in Sweden to head of international to carry out the concept elsewhere. McDonald’s had American managers abroad, but now local managers were brought in along with unique items that met cultural and taste differences. McDonald’s still maintains its process and quality in a centralized manner. In 15 years, it transformed from a hamburger and fries to pushing regionalization in look, food, and pricing. McDonald’s deliberately decentralized a massive structure and if you look at the stock price, it paid off.
This is an example of a very large player that some think is centralized but moving to a decentralized spectrum. What’s centralized is concern about consistent quality food for a good price, quick service and clean restaurants and restrooms. It cares about certain drivers in the whole way the company was created.
Q: How has McDonald’s strategic structure impacted the way it has handled criticismthat it is the poster child for feeding the obesity epidemic?
A: McDonald’s faced a huge backlash with that movie, Supersize Me. It hurt short term, but they took the attack on them and turned it into a positive. McDonald’s put up calorie-counting posters. It didn’t say Supersize is good for you. It came out with healthier products, and used it to enhance product line. The reality is that most McDonald’s customers don’t want to order a salad, but McDonald’s offered options.
Q: Turning to large retail players, how do you view Wal-Mart’s approach?
A: Wal-Mart is going into a new fundamental phase in its corporate existence. It reminds me of what happened with Jack Welch leaving General Electric. Its new head is restructuring separate subsidiaries; not only must they be profitable in the market but they have to be high growth as well.
Until the last three to five years, Wal-Mart primarily focused on one thing, price — same product, lowest price, period. That worked until its phenomenal success capped, and the world expected corporate responsibility. What’s your commitment to the environment, what about quality of paints, and healthcare issues?
Wal-Mart has gone through a transition, maintaining commitment to price, but also responsibility as an environmental player. It responded to charges that it was not environmentally focused when it was buying out marshland. Now it has a review process of environmental impacts. Then it targeted energy loss and to see where it could save money. Refrigerated compartments used to be open-air. Putting cooling curtains up saved enormous amounts money, something like $100,000 per store. Because of its size, it realized that just selling a large percentage of more energy-efficient florescent lights could have an impact.
Wal-Mart has gone from just a buying business focused on low prices and profitability to an overall responsible green company. A lot of consumers don’t realize it yet, but Wal-Mart has good green standards, going all the way up the supply chain, asking what the carbon footprint of products coming into its company. This is a big change from just low price to a much broader set of issues; a shift in the culture of the organization.
Q: Is sustainability a mandate for firms?
A: If I’m a produce company and I believe in a more sustainable product, I might want to create a brand and put money behind it and educate customers. I may want to figure out a way to market more perceived value. For sure, produce executives should want to put their toes in the sustainability waters.
Sustainability is a big change farmers need to get ready for. Obama says he will put a cap in the trade system regarding the greenhouse gas market. This is not voluntary but a real market. When that happens, farmers on average stand to gain. Methane floats up in the air, and the amount generated by cattle and pigs is substantial.
This doesn’t relate as much to the produce industry, but no till farming stores a very large amount of carbon dioxide gases in the soil. The farmer can get paid for storing these gases by changing farming techniques. In discussing decentralization options, there is a new CO2 trading market. Carbon dioxide markets in general are a good opportunity for farmers.
Q: I read that you served on the board of the Environmental Defense Fund. Can you speak to the strategies here?
A: Companies need to study how they are going to approach environmental issues. I’m an economist by training, I helped create environmental markets in 1983, and a market-incentive recycling program at Stanford University campus, structured to reward recycling efforts and move more tonnage off the campus. I was co-chair of the Global Warming Air and Climate Committee for the Environmental Defense Fund until January of this year. I helped draft the Lieberman/McCain Kyoto bill.
With respect to global warming and the carbon dioxide market, this is an opportunity for farmers, which can be quite profitable if done right; companies need to get sophisticated and not sell off environmental rights too quickly. Capturing methane off the pigs, you don’t have to ship that service anywhere, building a facility on site is not rocket science.
This is a very big opportunity.
We’re not talking environmental costs here, but the ability to make money by just changing what you’re doing. No till farming involves an initial investment upfront. If you are able to sell carbon rights, you can decide worth and sell in advance. You may be spending more short term, but it’s a big gain.
Q: You mentioned earlier about companies assessing the organic market. The locally grown movement seems to be picking up steam, while organic growth is somewhat ebbing. How does a company stay on top of trends, while not acting too impulsively?
A: Locally grown is a decentralized concept and a value-added trend in place of organic. This issue you bring up has led me to do some quick web analysis. I pulled up an online tool whereby producers can use the power of the decentralized web to better understand new trends. You can find it here.
Google Trends is a service that analyzes how many times people have searched on a term such as “locally grown.” As you can see on the attached link, this is a relatively new concept. It was not even searched on five years ago! It only appears within the past 24 months.
Contrast that with a search on organic, which has more search results but which is steady or declining. You can find the search here.
Google Trends is a free, but information-rich way to analyze part of what is going on in consumers’ minds. Pulling together millions of individual, decentralized searches, into a common database provides rich insights.
Look at the issue of food safety and branding. In a decentralized world, customers are both overwhelmed with information and also want more. If information describes what they want in a product, they will pay more for it.
There were scares related to catfish coming out of Vietnam last year; concern of too many herbicides and pesticides in water levels contaminating fish. My guess is that American producers run more cleanly. How do you get customers to know and value that? That is a branding opportunity.
Q: In the produce industry, people argue the dangers of marketing food safety. Due to seasonality issues, and selling produce year round, American producers bring in product from Chile, Mexico… all parts of the world. Also, the issue of marketing one brand of tomato as safer than another could create an aura of confusion and fear, tarnishing the whole industry…
A: Those are valid points. In this day and age, in a decentralized world, the truth tends to get out through bloggers and the media. If you have a better product, do you convey that as an individual company or as an industry?
Harris Ranch Beef, a provider in California, created its own brand and premium product. It runs a huge steak house and sells its meat across the state in retail stores and on line, building a branded product with a quality reputation generating higher prices. They made the concept work with some 200,000 cattle. They decided to become a large player and get close to the consumer, rather than the approach of a Tyson selling through everyone else. To make the investment in brand pay-off, you need critical mass. The other way is to bring together all farmers in a state to build a brand, like California cheese.
If I were a farmer, I’d want to analyze the crux of my business and find out who are my customers. At the end of the day, how do I add more value, what does my distribution look like, where is it evolving and where do I want it to go?
My Nebraska cousins invested in ethanol plants because they wanted another buyer for their product. The move creates more local demand for their product, and saves on shipping. In the same way they invested in pork operations, teamed with other farmers to build really large pork operations, changing the distribution. When I grew up, all farms had pigs, cattle, some chickens and then all their fields sold corn for feed, and soybeans. Now, none of the farms have cattle and pigs on their own. They joined with other companies to do that.
The industry is going to change, produce companies need to ask themselves: Am I just going to be a low-cost commodity producer, positioned for what some big buyer wants for Costco or Wal-Mart? Do I want to go more niche like Driscoll’s, creating one’s own brand with a unique quality perception? My book is a tool kit to think strategically and conceptually. Companies can use it as a lens to bring more sense to the transitions going on.
Rod is blessed with a remarkably playful and insightful intelligence. We are looking forward to exploring some of his ideas further. We have done a lot of work on sustainability and are seeing buyers back off all around the globe.
We also wonder if some of the solutions Rod suggests, although perfect for a particular organization, are really solutions on an industrywide basis. After all, if everyone became like Driscoll’s, wouldn’t that be just another commodity too?
It is the opportunity to explore these types of issues with the presenters, with the facilitators, in formalized groups and around the bar late at night that makes the Leadership Symposium such a special experience.
Act quickly to get the best value. Early bird registration rates for the Symposium end this Friday, December 19, 2008. We’ve never known any attendee who didn’t feel they profited from the experience.
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The back story is compelling.
The Leadership Symposium will be held January 14-16, 2009, at the Omni Dallas Park West in Dallas, Texas. Full information can be found here.
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