Business Model Innovation for Fonterra: A Case Study

This article explores the concept of business model innovation and its impact on Fonterra, a New Zealand based multinational dairy cooperative organization. It discusses the current business model of Fonterra, its strengths and weaknesses, and presents a major business trend of digital transformation. The article also recommends how Fonterra can use digital transformation to expand into new markets and industries.

Running head: BUSINESS MODEL INNOVATION
Business Model Innovation
Name of the student:
Name of the university:
Author’s note:

1BUSINESS MODEL INNOVATION
a) Business model and business model innovation
A business model of an organisation is a plan to generate the profit and to make revenue
out of it. The business model can explain the services or products of the organisations that they
manufacture or provide in the market. The business model provides the plan to make the account
of expenses with a step-by-step approach. As stated by Bocken et al., (2014), the business model
explains the value proposition for the organisation as it is the straightforward statement about the
company's offerings of services or products to the potential clients or customers. The business
model can differentiate the organisation from the competitors in the market. Different types of
organisations use different business models, franchising, direct sales, brick and mortar or
traditional business model. DaSilva & Trkman (2014) commented that business model can play
the crucial role in success and it is needed to optimise the innovative technology of the business.
In order to survive in this globally competitive market, the business model has the strength to
maximise the return of the business from the high-cost investment. The business model provides
help to drive the innovation that can help to find the new opportunities for the business.
Business model innovation can be defined as the development of unique and new
concepts that support the organisational financial viability along with mission and vision
statement. The business model innovation is the process taken by the organisations to bring the
innovative concepts to fruition. Gobble (2014) supported this by saying that the primary goal of
the business model innovation is to understand the new revenue resources by the developing
product or service values and the process of delivering the products and services to the
customers. In this digital age, most of the companies are focusing on the business model
innovation because of the technologies are changing dramatically. According to Martins,
Rindova & Greenbaum (2015), digital disruption has led to shortening the lifecycle of the

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business model of an organisation as innovation is the key to financial success. Companies those
take the business model innovation should react towards the increased systemic risks and
international competition. Therefore, business model innovation can foster the growth in the
competitive global market. The organisations focus narrowly on business model innovation as
most of the successful business model innovation requires the alignment of business objectives
and alignment of IT. Focusing on the business model is the effective way to appeal the market
segments and innovation in business model can broaden the market segments. In addition, the
management of the organisations can search for the commonalities across the services and
products when they opt business model innovation. The benefit of business model innovation is
the increase in the cost of revenues, gross margin. Business model innovation can lower the
investment in business and it can also reduce operating income of the business (Foss and Saebi,
2017). Moreover, one example of business model innovation could be Apple's introduction of
iPhone, iPod and iTunes that expanded the business beyond the desktop computers market.
iPhone introduction during the time of the 2000s was the breakthrough in the Smartphone market
and it introduced the iOS platform.
Most importantly, the business model can be customised with the needs of the
organisation and it can change easily if needed as successful business always strives to find the
innovation (Bohnsack, Pinkse & Kolk, 2014). Rapid business model innovation is taken by the
organisations to achieve the desired revenue and success with high-end technological
development, while innovation is the improvement of technological and strategic capabilities.
In this article, Fonterra organisation is chosen that currently operates in the dairy industry. The
business model canvas of Fonterra is produced with major characteristics of the model. One

3BUSINESS MODEL INNOVATION
major business trend is also explained with the theoretical model. The impact of this trend is also
shown on the Fonterra's business model.
b) Company summary
Fonterra is a New Zealand based multinational dairy cooperative organisation. Fonterra
was established in the year 2001 and it has its headquarter in Auckland. Fonterra serves
worldwide and this firm is owned by more than 10,500 farmers across New Zealand. Fonterra is
New Zealand’s largest company and Fonterra is responsible for almost 30% dairy exports in the
world. Fonterra currently has more than 22,000 employees (Fonterra.com, 2018). Fonterra was
formed by merging of New Zealand's two major dairy cooperatives.
Major products: Fonterra is in the dairy industry as they manufacture dairy-based
products and sells through retail. The major products of Fonterra are milk, butter, ice-cream,
cream, yoghurt, curd, flavoured milk, milk powder and cheese.
Revenues: Current revenue of Fonterra touched NZ$ 19.23 billion and operating income
of the organisation touched NZ$1.20 billion (2016-17). Total assets of the organisation were
NZ$17.82 billion in the year 2016.
Strengths and Weaknesses
Fonterra has a secure and stable supply of milk in long-term as this cooperative firm has
the strength of more than 10 thousand farmers. Fonterra has a global demand for the milk-based
products and they can meet the demand as the organisation through the uniqueness of
shareholder relationship. Fonterra was formed through the merging of the two large
organisations; therefore, the organisation enjoys the growth of economic scale and numerous

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resources (Fonterra.com, 2018). Fonterra is doing its business in higher productivity in New
Zealand and it has large numbers of workers within the company.
Relationship with the distribution channels needs to be good in order to export the
products fast. The competitors in the market can pinch the suppliers with a better price. Fonterra
has been facing the issue of technological infrastructure to communicate with the stakeholders.
The organisation was formed through merging; therefore, the infrastructure and resources get
resistance to relocate the resources. Fonterra is reliable on climate and it is less efficient on
productivity compared to competitors in the market.
Market position
Fonterra has string grip in Australia and New Zealand market and it produces 2 billion
litres of milk every year. It gains a large market share in Australia and New Zealand market as it
has 1,300 farmer suppliers in Australia and New Zealand. In New Zealand, it has more 85% of
market share in dairy industry.
c) Current business model

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Business Model Canvas
Key Partners
More than 10,200
farmers provide
milk as it is a
cooperative
organisation
It has 1,300
suppliers
Key resources
Milk processing
plants
String suppliers
Farmers
Human resource
Value
proposition
New milk-based
products
Strong market
share
Global
customers’
demands are
solved
Price
Accessibility of
products
Key activities
Business plan
development
A strong network
of suppliers
Customer
relationships
Automation
service
Co-creation
Communities
Customer
segments
Global market
Niche market
Mass market
Segmentation
Diversified
Channels
Awareness in
market
Deliver values
Purchase of
products through
retails
Cost structures
Fixed costs
Variable costs
Economies of scale
Revenue streams
Fixed pricing
Asset sales
Volume dependent

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The business model of Fonterra is much like a linear business model as farmers work
hard to produce milk from the cattle and workers create value to produce valuable milk-based
products for the customers. The key partners of the business are the farmers and the key
suppliers that help the business to export international market. Fonterra provides ‘minimum
viable products' to the customers; however, the value proposition of the business is associated
with the different types of milk based products. Value-driven design of the business is based on
mainly multidisciplinary of the design optimisation. Fonterra tries to maximise the values so that
the business can require the performance. Values of Fonterra lies within the concept of
cooperative business model and this organisation has large production plan that is enabled to
produce a large amount of products. The suppliers can send the products across the globes. The
large market segment of the organisation provides another value as Fonterra has more than 87%
of market share in New Zealand. Moreover, Fonterra also follows the Multi-sided business
model and it is solely associated with the value delivery of the organisation. The value creation
of the organisation is associated with the customers. Fonterra listens to the customers and they
make new products through co-creation. Value capture in the market can be understood through
the revenue generation of the organisation (Dee, 2016). The current revenue of the organisation
is growing as the market share is also increasing.
d) Presentation of major business trend
In recent time, digital transformation is the process of integration of technology digitally
into all areas of business that can fundamentally change the operation and delivery process to
customers (Matt, Hess & Benlian, 2015). The digital transformation of the business can change
the organisational culture as it requires the continuous challenge the status quo and it likes to
experiment the business process. Digital transformation can also be defined as walking away

7BUSINESS MODEL INNOVATION
from the long-standing business process that can help to favour new practices. Digital
transformation can help the organisation to have extra customers that live across the globe. As
stated by Majchrzak, Markus & Wareham (2016), the digital transformation of the business
refers to the different thinking, change of the leadership, innovation encouragement and new
business models. The organisations need to focus on the digitisation assets that help to increase
the use of technology to utilise the experience of the employees. The organisations can use
digital transformation to make the organisation more profitable as the statistics found that
organisations that use digital transformation are 25% more profitable than average market
competitors. Digital transformation is used to attract the external customers or for the internal
employees.
The organisations are trying to use digital technology integration so that the technology
leader should consider embarking on digital transformation. Most of the organisation starts from
the first stage of Digital Infancy and it is the reaction phase; the organisation needs to find out
the change for digitally empowering. The second stage is digital childhood; in this stage, the
organisation finds out the strategy so that it can develop the capacities to begin to make customer
persona to design the customers' preferences. The third stage is digital adolescence, in this phase,
the organisation needs to the synthesis of the strategy by carrying digital technology in
unexplored territories (Wajcman, 2016). It is possible to focus on the minimal condition of
digital strategy to create database management. The last stage is digital maturity, in this phase,
the organisation can start with optimisation of the digital programme where the organisation can
learn endless new channels and it can cater towards functionality and method.
e) Impact of the trend on company's business model

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Digital transformation means adoption of digitisation that would impact on the
organisational operational agility customer experience, culture and leadership and workforce
enablement (Hess et al., 2016). In Fonterra, the organisation does not use digital technology
much as they only use digital technology to communicate with the customers. Fonterra can use
digital transformation for two purposes, communication among employees and communicate
with the customers. Digital transformation can be used in Fonterra taking the help of Big Data
and analytics. Fonterra can sell the milk-based products to the customers using online media,
they can track the suppliers using online media and they can communicate with the external
customers. Fonterra can start live reporting and tracking to facilitate responses to alter the
situation in order to gain cost benefits and reduce the decision-making time. Fonterra can use the
digital transformation in improving the opportunity capture through using intranet software
(Kulins, Leonardy & Weber, 2016). Fonterra can better monitor the supply chain by notification
through correcting the schedule of non-conformance issue. Fonterra can achieve the immediate
result of optimising the sources and reduce the time lag of price visibility on the internet.
Conclusion and recommendations
Fonterra has been using the traditional business model of linear and value-driven business
model. Fonterra can use digital transformation in order to focus on the outcome-based model as
determined by the results of the customers' business. The organisation can expand into new
markets and industries using the digital transformation as they expand the business to produce
fruit juice. Fonterra can use persuasive digitisation of services and products that can accelerate
the ways of designing and deliveries of the products. Digital transformation provides a
realisation of the value of using digital platform that is cost effective and it helps to reach large
customer segments.

9BUSINESS MODEL INNOVATION
Fonterra needs to identify the transformation objectives of the digitalisation. This
objective can increase digital customers and it can transform the business process to decrease the
costs, integrate the supply-chain partners and improve the productivity. Fonterra can study the
technology enablers in the market where the organisation can use intelligent automation, Internet
of Things and cyber-security. Fonterra needs to use the future platform using the eco-system of
on-demand services. Digital transformation can enable the digital workplace, it can also start
digital communication and it can adapt the simplifying management.

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