Wednesday, February 20, 2008
Analogy #158: It’s in the Bag
I love those brown paper bags from the supermarket. When I was a young child, they were my favorite toy. I liked to cut them open, lay them out flat and draw miniature cities on them. Then, I’d get my little toy cars and run them up and own the streets. Other times, I’d draw a board game on the back and try to get my sister to play the new game with me. You could also turn the bag into a mask.
When I got a little older, I used the brown grocery bags to cover my school books. They were great. Not only did they protect my books, but they gave me lots of space to doodle on.
As I became an adult, the bags were very handy for covering packages that I wanted to mail. I also loved to use them when packing for long car trips, because the bags wouldn’t tip over.
Now, I use the bags to sort out my recyclable bottles and cans. When the supermarket asks me if I want paper or plastic, I usually say paper, because paper bags have so many more uses around the house. Sometimes, however, I get the plastic bags because my cat likes to sleep on them.
From the point of view of the supermarket, the bags are nothing more than a cost to be minimized. Plastic bags are cheaper and more efficient for the baggers, so that’s what they want to use.
For me, those bags are a valuable resource around the house. Sure, they help me get the groceries home. But after that, I still find additional uses for them. That’s why I tend to prefer the paper bags.
So there is a disconnect on perception regarding the bags. The store sees it as a cost, while I see it as a valuable resource. This explains why they push plastic while I prefer paper.
Perceptions can impact all sorts of strategic decisions. Depending on how we perceive something, we will make different strategic decisions. If something is perceived as a cost, the attempt will be to minimize it or eliminate it. However, if we look at the situation differently, we may see a new source of value within that cost. Now, instead of trying to eliminate the process, the goal is to extract a monetary return out of that newfound value.
The principle here is that strategic planning needs to do more than just examine the current sources of profit. Concurrently, a good strategic plan should look for additional profit sources within the system. Often times, things that are currently perceived as burdensome costs could actually be untapped sources of profit if we were just to look at them a little differently. For example, if you want a valuable bag when shopping for groceries at Aldi, you have to pay for it.
Since “burdensome costs” would be treated differently in a strategy than “untapped sources of profit,” it is important that we label things properly when creating our strategy. With “untapped sources of profit” sounding a lot more desirable than “burdensome cost,” it may be worth your while to ponder ways to convert costs into profits.
In this blog, we will look at a few examples of this principle in action.
Australians drink a lot of beer. In the process of brewing beer, a waste product is developed, called a yeast extract. At first, this would be seen as a wasteful byproduct of brewing—something costly to dispose of. Fred Walker, however, looked at the situation differently.
Fred realized that this yeast extract had nutritional value. It is extremely concentrated in B vitamins. The trick was to find a way to exploit this hidden value in the waste product. So, in 1923, Fred’s chief scientist, Dr. Cyril P. Callister, added a few ingredients and converted the yeast extract into a sandwich spread. It was named Vegemite.
In the 1930s Fred Walker’s company teamed up with Kraft Foods and really started to promote Vegemite. In the 1940s, Vegemite was a key part of an Australian soldier’s rations. There are songs and poems about Vegemite. Australian children get in the habit of eating it at a very early age.
Today, over 22 million jars of Vegemite are sold by Kraft every year. That is more than one jar a year for every man, woman and child in Australia. So much for yeast extract being a wasteful byproduct.
Tyson Foods is one of the world’s largest meat processors. In the process of preparing meat, a lot of byproduct waste is produced. Much of that waste is in the form of meat fat. Instead of just viewing this as a wasteful cost to be disposed of, Tyson Foods looked for a way to make this fatty byproduct more valuable.
What they discovered was that ConocoPhillips had found a way in Ireland to convert fat into fuel. Therefore, on April 16, 2007, Tyson announced an alliance with Conoco Phillips to convert their fatty by-product into biodiesel fuel.
The expectations are that by 2009, this byproduct will produce 175 million gallons of biodiesel per year. That would represent about 3% of the diesel produced by ConocoPhillips in the US.
Later, on June 25, 2007, Tyson Foods made another announcement. They had formed a 50/50 joint venture with Syntroleum, a synthetic fuels technology company. The new venture, called Dynamic Fuels LLC, would use the byproducts from Tyson to create diesel, jet and military fuel.
The first facility would produce about 75 million gallons of synthetic fuel annually. Construction would start in 2008 and fuel production would begin in 2010.
By using a new set of eyes, Tyson has converted its fatty waste into usable fuel. Their new strategy has allowed them to diversify from food processing into renewable energy development.
On any given day, Wendy’s fries a lot of hamburgers. If a meat patty is left on the grill too long, it starts to get dry and hard—unsuitable for use as a hamburger. Sometimes, Wendy’s will fry up more than they can sell, creating this unsuitable hamburger meat.
So what do you do with this waste, throw it out? Looking at this situation differently, Wendy’s converted this cost into a profit center. They found a way to remoisten the meat by putting it into a chili sauce. Now, instead of having to throw the meat away, they have another profit center, Wendy’s Chili. This was then extended into even more profit centers by putting the chili on baked potatoes and salads.
There was a period of time when HEB Supermarkets in Texas had a reputation for running a state-of-the-art information technology department. HEB was always getting requests from other firms who wanted to tour their IT facilities. Eventually, HEB decided to charge a fee for these tours. Then they started to do a little IT consulting for other firms at an even higher fee. It may not have amounted to a lot of money, but it helped subsidize the IT department and helped HEB continue to afford to be state-of-the-art.
One of the biggest costs for McDonald’s is real estate. The rent cost on all of those restaurant sites is huge. So the question is—how can McDonald’s convert that cost into another profit center?
Well, those restaurants tend to be in places near a lot of houses and a lot of people. Not only is there a lot of demand for burgers in these locations. These are also places where cell phone usage demand would be high. However, these also tend to be neighborhoods where the local folks do not want to see ugly cell phone towers near their houses.
So, McDonald’s pondered this concept—could we design our restaurants in such a way that you could hide a cell tower in them that would not create an eyesore? AT&T is supposedly working with McDonald’s on this solution. The upside potential for McDonald’s in collecting fees from AT&T is enormous.
One of the objectives of strategic planning should be to help executives take a fresh look at the business. By doing so, one may find that items which today are seen as burdensome costs can actually be new sources of profit. These types of discoveries can help create new strategies for growth and expansion that would otherwise have been missed. The beauty is that because these new ventures are already related to your core processes (and often turn waste into profit), the returns should be fairly good.
This idea of turning waste into profits plays well with the green movement. Therefore, not only may you find new sources of profit, but you may also improve your image as a green citizen. What more could you ask for?