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Fonterra Co-operative Group’s Activity and Issues Case Study


Introduction and Organisation Background

The case that is presented in the file refers to the activity and potential problems of Fonterra, one of the most famous multinational co-operatives based in New Zealand. The discussed company was founded more than sixteen years ago and, during that period of time, it has managed to become one of the wealthiest enterprises in the country and join the ranks of the leading exporters of dairy products in the global market (“Our markets,” n.d.).

Continuing on the topic of the company, it is important to mention that Fonterra collaborates with more than ninety percent of farmers living and working in New Zealand. The supply chain of the company is based on a range of pastured-based farms located in the country (“About Us,” n.d).

As for the company structure, Fonterra has managed to implement the basic changes contributing to the success of the organization since 2001. The present structure of Fonterra involves aboard; the latter includes thirteen directors who are chosen by shareholders or other specialists related to the company. The board governs the company and, due to the fact that a combination of methods to appoint directors is presented, farmers can be sure that their interests are protected in the governing body of the company.

Continuing on the topic of organizational structure, it is important that it was decided to establish a special council that is aimed at protecting and representing the interests of the company’s shareholders. Among other things, the given body is responsible for controlling the performance of directors in order to minimize the possibility of adoption of decisions that can have a negative impact on farmers’ work environment and other things. Therefore, the management style that is used in the company is rather democratic, and it has a positive influence on the social image of Fonterra.

The mission and vision of the discussed company are strictly connected with their willingness to improve the quality of dairy products and mechanisms, allowing controlling it in an effective manner. In terms of financial performance, the company can be regarded as extremely successful: according to one of the most recent financial reports presented by the company, the number of customers and the demand for their dairy products in Asia, Latin America, and China have increased (“Business update,” 2017). Being an owner of six large brands, Fonterra continues to develop them and step up their presence in different parts of the world; as is clear from the reports, focused attention of the management is paid to China where dairy consumption is constantly growing (“Fonterra hailed as top NZ co-op,” 2017).

The range of products distributed by the company includes basic alimentary products such as milk, ice-cream, butter, various types of cheese, and yogurt. All types of products distributed by one of the brands owned by Fonterra are becoming more and more popular in China and other Asian countries due to the growing concerns related to bone health and the increasing incidence of musculoskeletal disorders.

At the same time, the company has launched a range of new products recently to improve the situation for farmers collaborating with Fonterra. In terms of the staff working for the organization, it is necessary to note that the number of people employed by the company in different countries exceeds sixteen thousand.

Analysis and Problem Definition

In order to better understand the current situation of the discussed company and evaluate its performance, it can be important to apply the most popular tools such as the model designed by Porter and SWOT analysis aimed at identifying the elements that can influence the further development of a company (Oakden & Leonaite, 2011).

The concept of five forces analysis is supposed to be one of the most frequently used tools to solve management problems. On a global level, there is always a threat of the introduction of substitutes sold at a more attractive price. It produces the goods that are not unique – therefore, the force must be paid focused attention to; obviously, dairy products from local manufacturers are widely presented in all countries where Fonterra operates. Apart from that, a range of their products, such as the infant milk formulas, meet with a ready sale due to the unique ingredients.

Another force listed among the key factors influencing sales and business performance is the threat that new entrants will appear and provide prospective customers with more attractive terms (Palacios-Marqués, Soto-Acosta, & Merigó, 2015). In the case of Fonterra, it can be supposed that new entrants do not belong to the number of the most relevant threats when the situation is analyzed within the frame of the country.

According to potential competitors of Fonterra Cooperative Group, the competitive ability of the company is extremely high even though it has experienced a certain decrease recently; nowadays, it is reported that the company possesses more than eighty percent share of the milk pool of New Zealand (Green, 2015). Even though the organization is claimed to have lost about in percent of share since the beginning of the twenty-first century, its positions in the market are still steady. Obviously, the new entrants do not pose a significant threat to its stability (if the situation is not analyzed on a long-term horizon).

The third force to be applied to the situation is the growing power of customers that can result in a decline in earnings for a company; in the case of Fonterra Cooperative Group, the given factor must be analyzed in connection with the price sensitivity of prospective customers (Dobbs, 2014). Fonterra puts emphasis on pushing up sales in India and China, whereas these countries do not belong to the number of the wealthiest ones – therefore, the price sensitivity of certain customers can result in moderate sales. More than that, the growing power of customers can have a negative impact on the performance of the discussed company if the latter will not demonstrate that their dairy products possess unique characteristics.

To continue, an important factor analyzed within the frame of the approach proposed by Porter is the power of suppliers; in the case of Fonterra Cooperative Group, there is a danger that farmers may want to improve business arrangements in case of insufficient revenues or express other objections just like ten years ago (Nilsson & Rydberg, 2015).

Also, the level of industry rivalry is considered within the frame of the model (Cusumano, Kahl, & Suarez, 2015). The latter belongs to the most important sources of potential problems for the organization – considering the most recent reports, Fonterra can still be considered as one of the leading players in the global dairy industry, but the positions of its primary business rivals are improving as well. More than that, the increased fear connected with the level of competition is obvious due to the decision of the organization to improve its production volumes in order to be able to maintain its competitive ability in the industry.

SWOT analysis is another important tool that can be applied to the case. As it follows from the information presented in the case study, the strengths of the company are presented by its being a significant player in the global dairy market, and the ability to adapt to new circumstances. More than that, Fonterra is the primary supplier of dairy products in the Chinese market.

When it comes to weaknesses, the public notice associated with the organization is not perfect; in fact, the company has been a figurant of a few product safety scandals that had a negative influence on its public image (Pavlovich, Sinha, & Rodrigues, 2016). Even though the influence of Fonterra is still strong, the company is gradually losing its positions due to different reasons, including the mentioned controversial situations.

As for opportunities that exist for Fonterra, there is a range of scientific research results that can be used by the company to encourage further growth in the dairy market. For instance, it possesses intellectual property in the sphere of whey isolates manufacturing (Phillips, 2016). More than that, the company is capable of extending its influence in European countries due to the unique products it produces and the growing demand for dairy foods.

In terms of threats that can influence the company, different levels of competition need to be taken into consideration. The Chinese market is often presented as the one which is already dominated by Fonterra, whereas Europe presents a less hospitable environment for the company.

Considering the features of supply chains utilized by the managers of Fonterra, it is possible to define a few problems. As indicated in the case, one of the primary objectives identified within the frame of the active supply chain strategy is to protect the positions of Fonterra in the market with the help of increased manufacturing volumes. As is clear from the opinions of the executive management of the organization, the necessity for Fonterra to improve its production volumes stems from the threats associated with growing competition in the dairy industry.

Therefore, one of the problems is related to the overall effectiveness of supply chains used by Fonterra in reference to the Asian market. Another problem that led to important changes associated with supply chains used by the discussed organization touches upon the unwillingness of Fonterra to deliver milk in China, one of the key markets for Fonterra, in powdered or dried form. As indicated in the case, the demand for fresh milk in the given country has increased recently.

First, it has happened due to the fact that the economic situation for an average Chinese citizen has improved. Apart from that, it is obvious that consumer preferences present one of the most changeable factors in business; in order to be able to satisfy the needs of Chinese customers and face the competition of other large and influential suppliers of dairy products, the company was supposed to find the solution as soon as possible.

Even though the distance between China and New Zealand, where the company is headquartered, is not the largest, there is still a range of difficulties associated with the transportation of liquid milk. The load-carrying ability of any transport is limited, and the use of powdered milk has always been a more appropriate alternative for Fonterra. In addition, it must be said that the use of powdered milk is better due to its date of expiry. The problem associated with the transportation of fresh milk to China exists due to the distance and increasing costs of supply chains. The negative impact of the problem on the organization is obvious as the latter will lose a great number of standing customers in China if it fails to fulfill their needs.

There are numerous issues that can arise in case if the management of the company fails to provide Chinese consumers with the product they need. First, the extensive use of powdered milk can become a cause of significant customer attrition. At the same time, the positions of Fonterra’s primary competitors, whose geographic location is more favorable, will be strengthened.

The Solution

In order to solve the problem related to the need to provide consumers in China with fresh milk instead of using powdered products, it was decided to introduce major changes to the supply chain and establish a few Fonterra farms in China to meet the needs of customers (“Sustainable dairy farming in China,” 2015). Even though the decision involves additional costs, there is no doubt that the use of foreign farms helps to reduce transportation costs and increases the effectiveness of product distribution.

Apart from that, the discussed decision makes a positive contribution to the public image of Fonterra in Asia as the removed need for transportation from New Zealand reduces customers’ complaints related to damages in transit. As for the additional details of the solution, two farms have already been established in the country, and the plans for the third one are still being developed (“New Zealand’s Fonterra Group in China,” 2013).

Considering the growing demand for fresh milk among people in Asia, the introduction of the entire cluster of farms is expected to become the next step allowing Fonterra to strengthen their positions in China. To improve the outcomes, even more, the organization may need to increase the number of cows on the farms to meet the growing demand.

Alternative Solutions

The necessity to protect Fonterra’s positions in the Chinese market is the problem that has been partially solved with the help of the established farms. As for the alternative solutions that could be chosen, they include the continuation of the use of powdered milk or the attempts to supply milk in its fresh form. It is obvious that both alternatives present least-evil solutions due to the additional issues they involve. As for the use of powdered products, it may pose a threat to the reputation of the company and increase the advantage of competitors.

In reference to the problems associated with the second alternative, additional costs would encourage the company to advance the prices, which could draw disfavor from Chinese customers (Jia, Luan, Huang, Li, & Rozelle, 2014). Therefore, the decision based on the introduction of new farms can be seen as the most goal-oriented despite the additional financial expenses.

Recommendations and Conclusion

As it follows from the analysis, the areas that Fonterra needs to focus on include the growing power of customers, and the level of competition. Apart from the discussed problem, the company may need to improve its positions using their projects related to whey protein isolates production. In terms of limitations, the establishment of new farms in Asia presents other difficulties related to quality control. Personally, I suppose that the use of additional farms presents the only way to prove that Fonterra deserves to be the leading company in the Chinese dairy market, and the opportunities associated with the decision are numerous.

References

About us. (n.d). Web.

. (2017). Web.

Cusumano, M. A., Kahl, S. J., & Suarez, F. F. (2015). Services, industry evolution, and the competitive strategies of product firms. Strategic Management Journal, 36(4), 559-575.

Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: A set of industry analysis templates. Competitiveness Review, 24(1), 32-45.

Fonterra hailed as top NZ co-op. (2017). Web.

Green, D. (2015). . Web.

Jia, X., Luan, H., Huang, J., Li, S., & Rozelle, S. (2014). Marketing raw milk from dairy farmers before and after the 2008 milk scandal in China: Evidence from greater Beijing. Agribusiness, 30(4), 410-423.

. (2013). Web.

Nilsson, J., & Rydberg, C. (2015). Factors behind the Fonterra shareholders’ rejection of the board’s capital restructuring plan of 2007. Journal of Cooperatives, 30(1), 1-27.

Oakden, R., & Leonaite, K. (2011). A framework for supply chains: Logistics operations in the Asia-Pacific region. New York, NY: McGraw-Hill.

Our markets. (n.d.). Web.

Palacios-Marqués, D., Soto-Acosta, P., & Merigó, J. M. (2015). Analyzing the effects of technological, organizational, and competition factors on Web knowledge exchange in SMEs. Telematics and Informatics, 32(1), 23-32.

Pavlovich, K., Sinha, P. N., & Rodrigues, M. (2016). A qualitative case study of MNE legitimacy: The Fonterra-Sanlu IJV corporate milk scandal in China. International Journal of Emerging Markets, 11(1), 42-56.

Phillips, S. M. (2016). The impact of protein quality on the promotion of resistance exercise-induced changes in muscle mass. Nutrition & Metabolism, 13(1), 64.

Sustainable dairy farming in China through improved effluent management. (2015). Web.

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