18 - Guerrillas v Gorillas – Levelling the playing field in Australia’s export grain markets

Peter Elliott - Manager - Strategy & Market Analysis (AEGIC)

As I mentioned in my previous post (The Power of Flexibility – How to think like a ninja), flexibility is a critical factor for overcoming disparities of size or brute strength between you and your competition.  In fact, just recognising this disparity is half the battle, with many a graveyard full of those who failed to recognise that perhaps it wasn’t a good idea after all to challenge anyone nicknamed “Brutus” to an MMA-style prison yard cage fight. 

There is an interesting category of cognitive bias called the Downing effect, which says that those with low IQs tend to overestimate their IQ, while those with high IQs tend to underestimate their IQ.  If we apply this theory to the question of scale and the extent to which we can use scale as a competitive advantage, it is clearly important that we measure, rather than assume.  This is a key reason why AEGIC's economics team has closely examined the supply chains of Australia, Canada, Russia and Ukraine.

The clarity we gain from such activities becomes the foundation for establishing a strategy based on the true dynamic between you and your competitors. So, with unprecedented levels of change in the global grain S&D (supply & demand) environment in recent years, understanding this dynamic becomes an important factor in choosing how the Australian grains industry adapts and then thrives over the coming decades.

A helpful first step is to consider the question as to whether Australia can use scale as a competitive advantage.  However, this question needs to be qualified by asking - Relative to whom and by which measure?

 Figure 1 – Australian grains sector in the scheme of things  (World Bank)

Figure 1 – Australian grains sector in the scheme of things (World Bank)

As Figure 1 shows, we are roughly in the middle of the pack on a range of metrics linked to scale.  Again, roughly speaking, we are barely 1/10th the size of our competition in Russia and the US, similar in scale to Canada and Argentina, while comfortably dwarfing Kazakhstan.  If anything can be drawn from this data, it would be that Australia may have sufficient scale to enjoy a competitive advantage against some competitors, but not all competitors.   Naturally, measuring ourselves relative to the competition will depend heavily on which yardstick is chosen, however, we are undeniably in a jungle with some bigger, hairier gorillas.

If scale was the sole factor determining the competitive strength of Australia’s grains industry, a pessimistic type might view this as no man’s land – reasonably large-scale, yet too small to truly harness the kinds of scale benefits available to Russia and the USA.  However, if we recognise firstly that scale (and its close relative – cost of production) is only one facet of competitive strength and then consider the strength of flexibility, perhaps we are right in the “sweet spot” (Downing effect notwithstanding).

Asymmetrical Warfare

For anything requiring a strategic approach, I find it helpful to think in terms of military parallels.  Since the Vietnam War, one of the most common expressions used in this context is asymmetrical warfare; or in general conversation – guerrilla warfare.  As a “post-Vietnam War” US military knows all too well, asymmetrical warfare recognises that it is highly unlikely that an inferior standing army will beat a larger standing army in an orthodox battle, which necessitates the use of guerrilla tactics that level the playing field. There are countless parallels between asymmetrical warfare and the Australian grains industry’s competitive landscape, however, let’s briefly look at three that seem particularly relevant.

However, before we do, I want to clarify that I am simply looking at the methods and principles.  I am not looking at the righteousness of the causes being fought for by guerrilla fighters; nor do I wish to glamorise the patently unglamourous business of warfare.  There are also tactics used by these types of militias that are inherently unethical, such as the use of land-mines, for which there are few non-military parallels that can be applied tastefully.  So the examples I have used are those that are not inherently unethical.  If strategies and tactics are the weapon, you need a moral compass to ensure they are aimed at the right target.

Know your terrain

Guerrilla-style militias use a superior understanding of their immediate surroundings to gain an edge over a larger foe.  If we apply this notion to the Australian grains industry, the export marketplace is the terrain.  A key aspect of this is using weaponry that is perfectly matched to the field of battle; or alternatively, drawing the opposing forces into terrain ill-suited to their weaponry.  Military dominance usually also means bigger or better weapons.  However, as any of our readers who have ever discharged an RPG inside the home during a particularly contentious Christmas lunch would know all too well, room to room fighting requires a different approach to the typical open battlefield encounters.  In the marketplace, our weapons are the products and services we provide, so it is critical that they are developed in accordance with the market (terrain).   It is also important to recognise that this terrain is constantly shifting under foot.  Understanding terrain is rarely a “set & forget” type activity.


Throughout history, a smaller power making a particularly potent technological leap ahead of others has been hugely influential in determining the outcome of individual battles or entire wars.  From the relatively small number of Spanish conquistadors who brought down the Aztecs, to more recently, where North Korea’s possession of a single technology has protected them from obliteration by the US military[1].

  Figure 2 - Russian Harvest - Ample land, low labour costs and investment into new technology has created a powerful disruptive force in global grain markets.

Figure 2 - Russian Harvest - Ample land, low labour costs and investment into new technology has created a powerful disruptive force in global grain markets.

If I had been more diligent at university and actually read the course materials, every textbook on economic development would have clearly shown me that countries go through discrete stages as their economies develop.  Australia is well past the stage where we can use cheap labour and a lower overall cost of production as a central tenet of our competitive strategy against countries like Ukraine, who can.  These same textbooks would have also told me that developed economies such as Australia must then turn to innovation and technological advancement to maintain competitive strength.

A good example of this is Apple’s iPhone, which is conceived in the USA, but produced in China.  In the absence of innovation and brand strength (with innovation and the brand tightly entwined), Apple’s US-based operations become nothing more than an unnecessary middle-man.  Eventually, all consumer tech would be developed and manufactured wherever it is cheapest to do so.  However, Apple have cleverly sold the non-price related appeal of their products and consumers have responded by willingly paying a premium over other brands. Likewise, if cost of production (and therefore, the minimum price at which the grain can be sold) was the sole determinant of competitive strength, the agricultural sectors of Australia and any other developed economy would face uncertain future prospects.  Production would simply flow to wherever it is cheapest to produce. However, the undeniable fact is that our customers continue to buy our grain, and in some cases, they do so despite the availability of cheaper alternatives.  Aside from some exceptions to the rule, the interesting question is not whether there is a premium being paid for Australian wheat, but why and for which traits in particular.  Some valuable collaborative work in this space is already well under way, so stay tuned.

It is also important to mention that technology can be a double-edged sword and thus needs to be harnessed with care.  Sometimes an industry or individual company can develop a game-changing technology that actually hastens their own obsolescence.  Examples of this might include technologies or patent-protected processes that help lower paying grades to (functionally) perform like premium grades.  Short term, this might help us make inroads into a new market or generate IP-related royalties, however, with a potential long-term cost if not undertaken carefully .  This doesn't mean that this type of activity should be avoided in all cases.  However, when looking at the cost-benefit analysis, it is important to use a time-scale that captures downstream and second-order effects.

Offense requires a numerical advantage over defence

Recently, for my son’s birthday, our house became the site of a “Nerf Gun” (a plastic toy that shoots soft foam darts) battle, where it was immediately clear how difficult it is to take on an enemy that has dug into a defensive position behind the sofa.  This principle has been used by outgunned militias in various conflicts, from Vietnam and its thick, jungle terrain, to more recent conflicts in the Middle East where fighters hole up in a part of the city that allows them to hold off the far more powerful American military. The upshot of this is that in terms of our export grain markets, it is much easier defending, say, our dominant position in the Japanese udon market, than it is claiming a beach-head in a new market currently dominated by another origin.  The value of understanding both our defensive and offensive position in each market or segment is not to dissuade us from attacking new markets.  Rather, it helps us to –

  • identify weak points that require fortified defences
  • understand the resources required to (at least partially) dislodge a competitor from their dominant position
  • establish realistic time-frames for success

Perhaps the most useful application of this is when we need to prioritise the allocation of limited resources aimed at defending existing markets and attacking new ones.  We are great at quantifying the “size of the prize”, while often neglecting to overlay probabilities of success or failure.  This is understandable. One requires nothing more than Google, while the other requires a statistician or economist.  However, depending on what level of scientific veracity is needed, sometimes just understanding whether we are attacking or defending provides a quick and dirty probabilistic picture to temper heady market size figures.

Because much of the guerrilla’s strength lies in their defensive position, reinforced by their superior understanding of the surrounding terrain, this kind of fighting force tends to be defensive.  When they go on the attack, rather than painting their faces blue and charging Braveheart-style at the bigger army on an open plain, they will attack in raiding parties, operating semi-autonomously, but with a well-defined common objective.  This requires laser-like focus on a specific purpose, directed towards a point of weakness or isolation. 

So, does the Australian grains industry attempt to take the whole market (or market segment), or do we first identify niches that play to our natural strengths and concentrate our efforts there?

In practice

The purpose of this piece is not to create a shopping list of ideas, but to simply lay out a framework for potential ideas and a rationale for why this is important.  We are likely to see far more robust ideas from subject matter experts, however, for the purposes of illustration, let me mention some examples that draw on the guerrilla ethos mentioned earlier. 

Before we look at these examples, I should point out that in most cases we are already doing this stuff.  In particular, I consider plant breeding as a prototypical example of what happens when we get this right (I could do an entire blog post just looking at one variety – Mace)

Tactic #1

If you have less light, use a laser - e.g. - first target a niche, not the entire market (aka “Don’t be Braveheart”), focus funding towards specific objectives rather than a scattergun approach (You can’t outspend the USDA).  Rather than trying to take the whole island, take a lightly defended “beach-head” from where you can then eke out further territorial gains.

Tactic #2

(To implement Tactic #1 above) Use flexible and innovative supply chain solutions such as boutique marketing arrangements, which can –

  • identify unique functionality hidden within the bulk grade
  • incentivise growers to adopt varieties with these traits (particularly when there is a yield hurdle against “best in class alternatives) and;
  • make it available for export customers (aka “The Penfolds Wine approach”)

Tactic #3

Invest in technology such as plant breeding that increases yield or exposes grower to premium-paying niches to close any (cost of production) gap that might exist between Australia and our larger competitors (aka “The one where I couldn’t think of an aka”)

Tactic #4

Use innovative or creative workarounds to traditionally expensive undertakings – e.g. – instead of establishing a permanent physical presence in market (terrain), invest in mobility or any other process that encourages the two-way flow of information and ideas between HQ and the market/battlefield (aka “Armies march further and quicker on roads than they do on mud”)

Tactic #5

Shore up our defences in any market segment where we have traditionally enjoyed a hegemonic position (aka “Digging in”), while also using scouts to understand what might be heading our way and the nature of the risks this might present.

Anyone can create a specious list of ideas.  However, transforming words on a page into meaningful action, within a system that has many moving parts is much harder. So, in future posts I will expand on some of the above points, and seek input from the subject matter experts who have a much deeper understanding of the messy business of implementation. I will also be taking a closer look at a specific, practical example where being big, but not the biggest, can be a competitive advantage in and of itself.  Then I will expand on an earlier post by looking at the importance of focusing on value, rather than price or product in isolation, and the potential “levers” we can pull to achieve this.


[1] Of course, the US could, if they decided to, flatten North Korea.  However, there is no guarantee that they won’t flatten Seoul, Guam or even LA with one stray nuke before this happens.  Unless a madman gets into the White House, this potential outcome buys protection for North Korea.  Hang on….

Peter Elliott