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How sustainable is Tyson Foods’ competitive advantage?

Tyson Q2 2016
Photo courtesy of Tyson Foods

Tyson Foods is not just putting up impressive growth and earnings numbers, it is competing in new ways.

August 12, 2016

Tyson Foods’ strong earnings performance has stock analysts raising their expectations not just for the company’s performance but farther into the future strategically. “How many years ahead do you think you are versus your competition?” one asked in Tyson’s 2016 third-quarter earnings call.

Not only did Tyson Foods report record third quarter earnings, operating income and return on sales, the company projected 40 percent EPS growth and raised adjusted earnings guidance for fiscal 2016 to $4.40 to $4.50 a share.

Donnie Smith, CEO, said, “[Tyson’s] differentiated business model and strong performance across all segments are contributing to higher, more stable margins.”

A question for Tyson’s investors, competitors

But how sustainable is Tyson Foods’ competitive advantage? That was the question posed by Robert Moskow, Credit Suisse Securities, who after acknowledging Tyson’s “extraordinary achievement” in differentiating its value-added chicken business, said, “It seems like a lot of [those] products could be easily duplicated by competitors.”

It is a question of importance for both investors and Tyson’s competitors. And as business consultants, Chris Zook and James Allen assert in “The Great Repeatable Business Model,” a company’s strategic differentiation and execution matter far more to its performance – their research suggests at least four times as much – than even the business it happens to be in. The leaders in any industry, they say, are typically the most highly differentiated.

Five elements of Tyson Foods’ competitive strategy

Tyson Foods President Tom Hayes outlined five elements of the company’s differentiated strategy:

  1. Tyson Foods has improved its cost structure by investing in operations with good ROIC projects and by taking out more than a billion dollars in inefficiencies from the system.
  2. The company has diversified pricing mechanisms.
  3. Product mix has been upgraded to more value-added branded products to meet demand from retail and foodservice customers.
  4. Tyson has implemented a buy-versus-grow strategy in chicken procurement.
  5. Providing industry leading quality and customer service is a key element.

Adapting to market conditions in 2017

The sustainability of any company’s competitive advantage in differentiation depends on the adaptability and durability in various economic and competitive conditions.     

Tyson’s buy-versus-grow chicken strategy may get a further shakeout in 2017 if meat and protein supplies rise by the 2 percent to 3 percent expected by company executives. As meat and poultry supplies rise and commodity chicken prices fall, the strategy would call for more chicken to be sourced on the commodity market. This strategy element would also work to insulate sales margins during periods of volatile grain prices.

With the 2017 supply of meat proteins expected to be plentiful, Tyson is continuing MAP spending to make sure its products have the desired shelf positioning. Price gaps also may be adjusted to maintain shelf positioning into 2017.

Innovation key in differentiation strategy

A key component to Tyson’s differentiation is making continuous investment and effort to identify unique market opportunities. Examples of products launched include Hillshire Farm Chicken Apple Sausage for convenience stores, cleaner labeled all-natural chicken for foodservice distributors, Jimmy Dean frittatas and stuffed hash browns, and Ball Park frozen meats for retail club stores.

Soon-to-be-launched products include Tyson Tastemakers in e-commerce and Tyson Naturals frozen value-added chicken and new varieties of Hillshire Snacking items.

The company’s product innovation, as measured by the vitality index or percentage of sales from products launched within the previous three years, is projected to exceed 21 percent for foodservice and 13 percent for retail in fiscal 2016.

Tyson’s brand investment and innovation since its acquisition of Hillshire Brands in 2014 has led to a doubling of number of “category captaincies” to more than 143, Smith told analysts.

“Our differentiated capabilities in both our scalable supply chain and our customer and consumer demand expertise are driving profitable growth in the marketplace,” he concluded.

Evaluating Tyson Foods’ competitive strategy

Business consultant and analyst Ben McClure writes, “A company’s long-term success is largely driven by its ability to maintain a competitive advantage – and keep it, even in the toughest, most volatile economic times.”

What are the indicators of a sustainable differentiation strategy? Zook and Allen suggest criteria by which to measure the sustainability of a differentiated strategy. Is it: (1) truly distinctive? (2) measurable against competitors? (3) relevant to what the company delivers to its core customers? (4) mutually reinforcing? (5) clear at all levels of the company?

As competitors evaluate Tyson’s differentiation strategy, it may be useful for them to keep in mind the difference between operational effectiveness and competitive advantage. Harvard Business School Professor Michael Porter argues in his essay, “What is Strategy?” that these two concepts must not be confused: operational effectiveness means a company is better than rivals at similar activities while competitive advantage means a company is performing better than rivals by doing different activities or performing similar activities in different ways. Competitors should know that competitive advantage cannot be boiled down to benchmark indicators and, as McClure observes, distinguishing between competitive advantage and operational efficiency is often difficult.

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