Help Fonterra Take Advantage Marketing Essay

The Report has been designed to identify the current organizational restructuring could be applied to help Fonterra take advantage of strategic opportunities in the global market.

The first part deals with the consumers, suppliers and competitors operating environment and develop strategies that position the firm most favorably in relation to competition and influence industry structure in order to enhance industry attractiveness. (Robert M. Grant, 7th edition, p.64)

The Second part covers Fonterra’s stated mission, vision, strategies, targets, goals and values, and structure and systems. The suitability of these strategies to the operating firm environment are then evaluated and the change of strategy development is recommended. (Robert et.al, p.12)

The report also indulges with the macro and micro environmental scan, present evolution of Fonterra, key strategic issues. It also identifies some of the key risk and opportunities faced by Fonterra.

Introduction

Fonterra at glance

Fonterra is a dairy company, which was formed in 2001, and since than it has excelled and enlarged the milk processing and became the fourth largest dairy company in the world. Fonterra’s annual turnover is NZ$19.9 billion. They have built powerful relation with other dairy companies globally and its partnerships extent the world. Fonterra believes in the interest of people so that they can increase their global market. (Fonterra Co-operative Group, 2010)

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Fonterra is the biggest diary exporter with 11,000 farmers and these farmers are only the shareholders of the company. All these members supply milk to the Fonterra Company for processing milk into the dairy products. 95% of dairy products made in New Zealand are exported to almost 140 countries in the globe. Principal hubs of Fonterra are located in Auckland, Melbourne, Chicago, Singapore, Amsterdam, Tokyo, Shangai and Sao Paulo. All the sales and marketing in controlled and managed by these principal hubs.14 billion litres of milk is collected every year. (Fonterra Co-operative group, 2011)

Fonterra’s strategy is to “lead in dairy.”

Following are product list which Fonterra produces: cheese, yoghurts, cultured foods, butter, liquid, powdered milks.

Following are the brand list of Fonterra: ANCHOR, ANLENE, ANMUM, FRESH ‘N FRUITY, MAINLAND, CAPITY, BROWNES, SOPROLE, WESTERN STAR, PERFECT ITALIANO, TIP TOP AND CHESDALE. (Fonterra Co-operative group, 2010)

1.2 Reports Structure and Objectives

The report aimed at highlighting the main objectives, vision of the company and for developing a strategic plan. The Report has been designed to identify the current organizational restructuring could be applied to help Fonterra take advantage of strategic opportunities in the global market.

Specifically, lowing the dependency on commodity markets and grasping knowledge as a means to pursue value added growth through Fonterra’s alliance and brands.

The strategic foundation of the report is divided into two parts:

a) The Industry Environment

b) The Firm Environment

The first part deals with the consumers, suppliers and competitors operating environment and develop strategies that position the firm most favorably in relation to competition and influence industry structure in order to enhance industry attractiveness. (Robert M. Grant, 7th edition, p.64)

The Second part covers Fonterra’s stated mission, vision, strategies, targets, goals and values, and structure and systems. The suitability of these strategies to the operating firm environment are then evaluated and the change of strategy development is recommended.(Robert et.al,p.12)

The report also indulges with the macro and micro environmental scan, present evolution of Fonterra, key strategic issues. It also identifies some of the key risk and opportunities faced by Fonterra.

Strategic Foundations

2.1 The Industry Environment

Dairy companies for years have been the important industry in New Zealand. In 1871 at Otago, the first dairy company was set up. By 1920, 85% of dairy factories were owned by co-operatives were as there were about 600 processing factories. By 1930s there were almost 500 co-operatives but it was after World War 2 there were improvements in these dairy factories such as transportation, technologies and working systems which led to a change of consolidation, where the dairy co-operatives started merging with the other factories or companies and since than became bigger and lesser in number.

At the end of 1990s, there were four dairy companies:

The Waikato (New Zealand Dairy Group)

The Taranaki (Kiwi Co-operative Dairies)

Westland Milk Products

Tatua Co-operative Dairy Company

With the merger of the two largest companies, New Zealand Dairy Group and Kiwi Co-operative Dairies, Fonterra was formed along with the New Zealand Dairy Board.

Fonterra has the four sales channels which together sells around 2.3 million MT of product.

Fonterra Global Trade – It was the world’s first online trading centre and since then NZ$1 billion product was supplied. It indulged with lots of dairy commodities which include milk, powder, butter and cheese to reach the markets in the globe such as The Middle East and Africa, the Americas and Oceania and Asia.

Fonterra Ingredients – This channels sells specialized dairy ingredients for the manufacturers in the four countries such as US, Japan, Western Europe and Korea.

Fonterra Brands – Fonterra sells the branded products to the customers and consumers in more than 40 countries in the globe. The Anchor and the Tip Top brand is oldest brand of Fonterra.

Fonterra Foodservices – It provides dairy ingredients and dairy brands to the consumers or customers such as fast food chains, airline catering centers, hotels and restaurants.

Strength:

Access to efficiently produced, high quality milk.

An integrated business model.

Strong global reach.

Established customer relationships.

Strong consumer brand positions in selected markets.

Strong, broad product portfolio.

Efficient farms.( Fonterra Co-operative Group, 2012)

Weakness:

Leadership uncertainties affecting the moral of the organizations.

Frequent changes among board members.

Largest markets are under represented in strategic Association of Professionals (Apex)

Business structure relating to redemption risk, farmer choice, and capital for growth. (Keith Woodford,2008)

Opportunities:

Global demand exceeds the supply.

China and India will make up about 50% of growth in global demand for milk over the next 10 years so the share of the market opportunity will increase.

Forecast global volume demand growth of atleast 100 billion litres by 2020.

Value growth driven by customer and consumer needs in each geography.

Investing in underdeveloped countries which are experiencing rapid growth globally.( Country wide and Fonterra co-operative Group,2012)

Threats:

Global demand exceeds the supply

New Zealand’s market restrictions structure and relative low cost may attract the new entrants in the market.

Threats from the increasing global competitors.

Few organizations can rival the diverse skills found in the business.(Kate Askew, 2012)

Global Reach, Local Touch

Fonterra produces the products, they distribute and sell these ready to use products around the globe, the brands gives the consumers the combination of world strength and local knowledge.

They aim to have a deep and close understanding of customers demand and there changes in lifestyles, taste, eating and needs which vary from one market to other market. For example what customers prefer in Asia may not be the choice of those living in East Africa. Hence to meet the customer needs there is a group of local teams knowing the local consumers preferences and habits. (Fonterra Co-operative Group, 2010)

The suppliers of Fonterra (New or Existing):

Growth Supply Contract – Fonterra provides an offer of Growth Contract system to the suppliers. All milk from provided to the new entrants and additional surplus milk from existing Fonterra contract suppliers.

Deposit for new supply – The new suppliers need to give their 100% of shares purchased just before they start beginning the supply.

Owning shares – With a new initiative, the suppliers can also share the capital cost of growing supply with the sharemilker where they can hold their own share.

Maximizing the earnings of the supplier – Through specialty milks suppliers can achieve much more profit over the standard payment of milk.

Conditions for new land – For new dairy land the suppliers must contact area managers.

2.2 The Firm Environment

Vision, Mission, Strategies, Goals and Structure:

Fonterra’s vision is “to be the natural source of dairy nutrition for everybody, everywhere, every day”.

Its strategy is to expand in large numbers globally, aim at high-value areas of dairy demand and make targets to achieve it quickly.

Fonterra targets to build strong and long-term relationship with the partners and maintain the undertaking from the bottom level of the organization. (Fonterra cooperative Group, 2010)

Its Group Strategy is to increase the volumes and create more and more value by focusing more on new markets, and new products that meet the consumer needs for dairy requirements. It should be firm and have a deep look at the strengths, social and economic changes for increasing demand or needs for the dairy products.

Fonterra calls it as the three Vs:

Volume

Value

Velocity. (Theo Spierings, 2012)

The societies in which they are indulged are related to this vision and they aim to be a sustainable dairy business. They look into-depth to be socially responsible towards everyone which includes there employees, consumers and partners. They focus at accomplishing right means of employment to keep the customers safe and healthy, the minimizing the damage to the environment, by creating new and healthy products.(Fonterra Co-operative Group, 2010)

The Fonterra currently have new strength to achieve its goals, where it deals over 100 separate and different projects – many of them already have started making progress.  It includes:

An extreme move on the rapidly growing well known markets of China, ASEAN and Latin America where Fonterra already has a strong influence.

It believes the New Zealand milk business make better return on capital.

Development by combining milk pools (secure, high-quality sources of milk integrated with Fonterra’s business) abroad to carry higher value returns back to New Zealand and protect New Zealand exports.

Increasing volumes of higher value consumer branded and out-of-home nutrition.

A firm focus on meeting the advanced nutrition wants of mothers and babies, as well as ageing populations supported by targeted innovation in these areas as well as out-of-home nutrition. (Fonterra Co-operative Group, 2010)

Fonterra’s seven strategic paths:

Optimize New Zealand milk

Build and grow beyond our consumer’s position.

Deliver on food service potentials.

Grow our position in mobility.

Develop selected leading positions in paediatrics and maternal.

Selectively invest in milk pools

Alignment of business and organization to enable strategy. ( Fonterra Co-operative Group Ltd, 2012)

Fonterra’s aim is to continue to do well in the globally traded market, while capturing the international growth opportunities in fresh dairy. Dairy demand through to 2019 is expected to be:

India (highest) – 45 million MT

China – 36 million MT

rest of Asia – 19 million MT

Latin America – 18 million MT

Middle East/North Africa – 13 million MT.

With the exception of the trade-protected market of India, Fonterra has well-established positions in each of these markets.

Fonterra’s strategy is to develop strong customer partnerships with leading companies in the food and nutrition industries to become their supplier of choice, and to continue to build its brands in growth markets within Asia, the Middle East, and Latin America.

With large international customers wanting the confidence of a year-round, global supply, Fonterra is increasingly complementing New Zealand-sourced milk with overseas supply, to provide and continue supporting the growth of fresh consumer dairy products.

In 2010/11, Fonterra sourced 22 billion litres of milk globally, including 20 percent of Australia’s production and 24 percent of Chile’s, both countries where Fonterra has well established consumer brand operations. In Latin America it sourced 2.6 billion litres of milk for its joint venture with Nestlé. New Zealand milk collection was 15.4 billion litres, representing around 89 percent of the country’s milk production.

Growth in global sourcing will continue with Fonterra aiming to develop its own milk production capabilities within key growth markets. China is one example and there are feasibility studies currently underway involving opportunities in other markets such as India.

Fonterra have always been extra ordinary at the simple nutrition of dairy. For years, its farmers work hard to give quality milk to number of people around the world. They have passed their farming expertise down through the generations, keeping alive the time-honoured traditions that have catapulted New Zealand to the forefront of the world dairy industry. (Fonterra Co-operative Group, 2010)

3 Environmental Scan

3.1 Macro environmental scan

Globally the demand for the milk by the consumers will increase by more than 100 billion litres by 2020, as there is economic growth and increased population in markets which is pushing the growth demand, where as New Zealand is expected to contribute just 5 billion litres of additional milk supply by that time. With the overall increasing demand, Fonterra needs to increase their milk quantity to be on a safe position as a leading dairy exporter. At present, the demand for milk has increased especially among the young and the elderly which are getting more urgent and specific.(Theo Spierings, 2012)

PESTEL Analysis: (Oxford University press,2007)

Political: Trade protectionism and restrictions including trade marks, labeling, bio-diversity, free trade arrangements and quotas arguments, guide sustainable action in the dairy

Economic: Fluctuations in foreign currency, increase in demand rather than supply globally, production of commodity and milk prices. Continued consolidation of suppliers and customers.

Social: Rapid increase in needs of consumer markets, demand in healthy and nutritive dairy milk and products. Traditional differences with regards to the demand of milk. Growth in nutrition and bio markets.

Technological: Increase manufacturing efficiency while bringing down operating costs is the challenge, technology for product streams which requires indirect heating and cooling by each other, to continue in the same way developing innovative farm to factory practices, implementation of new innovative technology to achieve cost, time and waste savings across the whole business,need of technology for fewer trucks which are required to transport the same quantity of milk.

Environmental factors: Frequent changes in New Zealand weather have a great impact on the environment, as the need for product changes from season to season, reducing impact of global greenhouse gases as it will improve the quality of New Zealand’s environment. They have effective and safe management of farm practices that protects the environment from the pollution.

Legal: Legal challenges for the requirement of healthy and safe environment. Threats from new entrants coming into the markets, following the legal procedure and laws for the minimum wages and working hours.

Fonterra must come up with education units for training and educating the farmers for teaching about how to manage farm effluent, how to improve the quality of water, how to reduce energy use and waste from site.

Farmers should be provided by the time limit to ensure that they meet the deadlines according to the rules and regulations.

Fonterra requires focusing at upcoming projects to expand its relation in terms of partnership so that they can give much better services such as can give more and higher-value products to the customers throughout the world.

Fonterra has earned a lot in countries like Latin America, Asia, Australia, New Zealand, Africa and Middle East but they should aim at profit buffer above the average return of the product, which is very important in times when there are commodity at lower price.

There are two possible outcomes in the near future as the increase in demand can be divided into two parts, globally the overall demand for the dairy commodities in traded market is forecasted to increase by 1.2% where as the annual increase in dairy is forecasted to be 4%. Every year there is an increase in demand for dairy products by 2.7 %, where as in a decade time the demand is forecasted to be 147 billion litres.

Level of competition has increased at very high level even though the Fonterra has maintained their global reach, this is Fonterra’s biggest strength as they know that lifestyles, taste and choices is different from place to place. To meet the particular demands of the customers the regional team is appointed to deal with requirement of the consumers as they will know the local demand.

3.2 Micro Environmental Scan

Since the Fonterra was formed in 2001, it almost every year they had a market share in excess of 95% of all New Zealand milk product, but it had a fall at 90% in 2008- 2009, with further falls is still expected.(Keithwoodford,2008)

The supply of milk by Fonterra has increased slightly, this is a big challenge for them as they aim at increasing the supply.

In marketing sector the competition from the new entrants has increased rapidly this is one of the reason for Fonterra to redeem risk more than as it was in the past. It is a fact that at present they make it very easy for the new entrants to take interest in dairy farmer suppliers by keeping a high value share on the fair value share which is actually not related to the add value to the component of the milk price. (Keithwoodford,2008)

As the redemption risk is high of their shares, Fonterra should have an optional business structure which will not only help in meeting their growth strategy, but also help in reducing their redemption risk of the shares as they can properly distribute returns to the suppliers or farmers.

To meet the business strategies, objectives, goals and all legal procedures, Fonterra must emphasis on effective risk management. They should maintain the balance between the working of board and management and must have a healthy relation with the consumers, stakeholders, suppliers, shareholders, government and employees.

Their should be a Formal strategy development which delivers substantial process and content dividends – giving more strategic perspective, for setting priorities and making key decisions.

Customers demand for the products keeps on changing, several customers demand much more better quality at same price. These changes in demand show that, the Fonterra can expect that in future their consumers will demand much better quality at same price. The new customers demand for those product or services which were never been created ever before, and old customers demand for the new services or product features. This creates a tensed situation as we need to focus on both current and new consumers. Whatever may be the choice, it’s difficult to manage this situation which can at arise at any time. (Bain & Company, 2005)

Fonterra’s deals with perishable products, so it’s very difficult to transport these fresh milk products economically at a long distance. Furthermore, it deals with very high trade barriers on dairy products. To deal with this trade barriers and transport issue they must establish strategic step to increase the efficiency in the working. (Gehlhar M.J,2009)

Fonterra should use their research and development for establishing much more quality products, healthy products, those products which are naturally and ecologically are consistent. They must aim to establish their image in the minds of young customers as they are life-long customers. (Gehlhar, M.J,2009)

Fonterra should convert on their capabilities as they can earn much more returns on the product rather than just being a branded manufacturer. Fonterra can maintain their leadership if they can differentiate their product features offerings from those of the competitors. To sustain as a leaders in the market it requires branding power and product innovation. (Gehlhar, M.J,2009)

Fonterra should change its overhead expenses so that it can target on rapidly growing markets.

Targets should be to exit unprofitable, uncompetitive and non-core categories and markets.

Number of improve efficiency and effectiveness of corporate centers.(Fonterra Co-operative Group,2012)

Fonterra supplies are secured through the co-operative structure but the threat exits if they can not make competitive milk payouts to the shareholders and suppliers. Competitors may respond to trade liberalization through increasingly global growth strategies.

Evaluation

Fonterra has changed their direction at higher value markets, they have greatly managed to maintain the same strategies of its firm which is at high volume and at low cost leadership. By an analysis macro and micro environment a number of issues have been highlighted. Fonterra’s ability to maintain the position is at risk and its structure limits its ability.

Within the dairy industry there is a clear view that the current Fonterra capital restructuring proposals are not acceptable. They necessarily need 75 percent shareholder approval but at present it displays to be very low. The farmers at present are continuously rejecting the proposal but it does not mean that farmers are avoiding the change but they want to be sure with the dependency of the final outcome. (Allio, M.K,2005)

Fonterra should have special capabilities inspite of being capable of differentiating their products. They should include physical input that should be used in food manufacturing so that the new products can be serve but can be differentiate from those of competitors. (Allio, M.K,2005)

There is increase in healthy, convenient and environmentally friendly foods products in overall world food markets. There is a replacement of mass customization with mass production. So Fonterra should be practical for the changing present environment opportunities for branded food manufacturing by applying successful product differentiation strategies.

To be at the same position, Fonterra should be capable in customer marketing, process innovation and product innovation. Differentiating a product may provide an organisation a competitive benefit as differentiated products have a unique or special attributes and there is a need for an organisation to develop unique capabilities which are not followed by competitors.

Biology and science supports the dairy organisation not only in on-farm production but also in dairy product manufacturing. With the help of biotechnology, Fonterra can modify the workings along biological systems, either by using the natural resources or more advanced technological tools. (Datamonitor,2008)

To develop some specific products, Fonterra must use a nutrition and health team that aims at specific health advantage. The team should be trained to target at world consumer health concerns such as: gastrointestinal health, immune health, dermatology, infant nutrition, sports health, bone health, therapeutics and animal health. Fonterra’s focus on the establishment of new products will definitely help to increase there demand in consumer products. (Datamonitor,2008)

Fonterra should take a responsibility for educating the customers to promote some of the products. Guiding the market in their favour rather than allowing the market to guide the firm. They should use their particular capabilities to influence the new markets as to get hold on the new market. As said above they should provide consumer education as well and at the same time they must give more choices of products to their consumers. (Chris Bart, Nick Bontis,2003)

At present there is rapid changes in the business environment, there are many so many unknowns and unpredictable situations arising in the business so there should always be an optional plan or strategy ready for these kind of situations. When industries can consolidate (or fragment) at breathtaking speed; when regulations can overnight either unleash or cripple marketplace participants; and when the price and availability of critical inputscan fluctuate wildly – So the task of Fonterra’s strategy development must now be undertaken under conditions of extreme uncertainty.( David Calfee,2006)

Winning strategies will therefore incorporate multiple scenarios for Fonterra to generate a range of feasible strategic solutions; they will also retain significant flexibility to allow rapid adjustments as industry or marketplace conditions change and alternative scenarios become more attractive. (Veit Etzold, Ted Buswick, 2008)

Products come and products go in the business. Product life cycles that trace the rise and fall of a product. For example, the Walkman with the cassette enjoyed great popularity in the Eighties before it was displaced by the Discman. This was then displaced by the MP3 player, which in turn was displaced by the Apple iPod. And it is highly probable that the iPod will be displaced too one day by yet another product. So the firm should always have an altenative strategy . So demand can change with the time so Fonetrra must be flexible in meeting those demand within the time frame. (Veit Etzold, Ted Buswick,2008)

However, if adequate changes are not made, or if made but its not sufficient to prevent the danger of financial risks, it should use the monetary policy as a secondary option for addressing those risks – proceeding cautiously and always keeping in mind the inherent difficulties of that approach. (Tristan Nguyen,2011)