Strategic Management Issues in Fonterra

The report assesses the factors affecting the dairy industry of New Zealand considering the case of Fonterra. The report aims to understand the aspects of organizational development and progress that resulted in the long term success of Fonterra. The report discusses the key issues, organizational dynamics, and long term external and internal analysis of the company’s environments.

Running head: STRATEGIC MANAGEMENT ISSUES IN FONTERRA
STRATEGIC MANAGEMENT ISSUES IN FONTERRA
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1STRATEGIC MANAGEMENT ISSUES IN FONTERRA
Table of Contents
Introduction......................................................................................................................................2
Industry Overview.......................................................................................................................2
Fonterra’s Journey since 2001.....................................................................................................3
Summary of Aims and Objectives...............................................................................................4
Key Issues....................................................................................................................................4
Conclusion.......................................................................................................................................5
Bibliography....................................................................................................................................7

2STRATEGIC MANAGEMENT ISSUES IN FONTERRA
Introduction
Industry Overview
The report is aimed towards assessing the various factors that have recently affected the
Dairy industry of New Zealand. In order to critically assess the factors affecting the industry the
study is being made considering the case of the Fonterra. The company is one of the country’s
largest milk co-operatives. The dairy industry is one of the largest food based industrial sector of
the country and the world. New Zealand has almost 1.7 million hectares of land dedicated to
dairy production. With companies like Fonterra the industry is among the largest farm based
production industries in the country. Moreover, around 3% of the total dairy production in the
world is done by New Zealand. The country exports around 95% of its production of dairy
(Shadbolt & Duncan, 2014). The top international markets for New Zealand dairy are in Asia,
Australia and the United States. The top dairy products manufactured by the company are butter,
milk powder and cheese. Additionally, the dairy companies in the country specialize in
producing milk for infants.
Dairy is a substantially large sector considering the main business sectors of the country
(Nilsson & Rydberg, 2015). The climate of the country facilitates the better management of
cows. New Zealand maintains a healthy cow population that helps towards increasing the dairy
production of the country. The country has a relatively strong position when it comes to dairy
production both domestically and international. The cattle of the country is relatively free from
diseases as it is essentially an island nation (Havea et al., 2017). The industry of the country is
regulated by the Ministry of Primary industries. The major companies that dominate the dairy
industry of the country are Fonterra, Tatua, Westland Milk Products, Oceania, Dairy goat co-

3STRATEGIC MANAGEMENT ISSUES IN FONTERRA
operative and other companies. The industry was relatively stable, however recently there have
been some losses incurred by some of the major players in the industry due to various reasons.
Fonterra’s Journey since 2001
Fonterra is officially known as the Fonterra Co-operative group. It is a dairy company
located in New Zealand. The company is multinational in its operations and is owned by around
1.5 thousand dairy farmers in New Zealand (Shadbolt & Duncan, 2014). The company maintains
one of the most dominant presence in the world dairy market. It reportedly accounts for around
30 per cent of the dairy produce export in the world. In New Zealand, Fonterra is arguably the
largest company with revenue figures that exceed 17 billion New Zealand Dollars.
The company was found in 2001 and until very recently never witnessed any loss since
its inception. The journey of the company has been remarkable considering the growth of the
country’s dairy industry that happened due to the operations of the company. The company came
into being in 2001 due to the merger between to large dairy co-operatives of the country
(Shadbolt & Duncan, 2014). The companies New Zealand Dairy Group and Kiwi Cooperative
merged with the dairy board of New Zealand to form Fonterra. The country had a strong
presence from the beginning. The company engaged in the purchase of a big factory in 2005
from Nestle in Victoria, Australia. In the same year the company successfully took over full
ownership of the company Bonlac from having 50% stake in the company (Stojkov, Noy &
Sağlam, 2016). Its sales from Australia generated revenue of 1 Billion Dollars. The company
further progressed in Australia by acquiring the dairy product business of desserts and yoghurt
from Nestle (Nilsson & Rydberg, 2015). It sold the dessert and yoghurt business in 2015. The
company changed the structure of its capital in 2009. Subsequently, the company ensured the
greater flexibility of the farmers that were associated with it. Since, 2001 the company

4STRATEGIC MANAGEMENT ISSUES IN FONTERRA
effectively managed its revenue earning functions through various subsidiary companies (De
Witt, 2017). During this time the company also associated itself with a number of environmental
initiatives. The company was awarded for energy efficiency (Brown, 2016). However, recently
in September 2018, the company reported to have incurred losses for the first time since 2001. A
loss of 196 million dollars was reported due to taxation related issues. The further reason for the
loss was reported to be the higher prices of butter and international competition (Pinxterhuis et
al., 2015).
Summary of Aims and Objectives
The report will aim towards understanding the aspects of organizational development and
progress that resulted in the long term success of Fonterra. The company until very recently has
not witnessed annual losses. The study is poised towards understanding the various challenges
the company has faced over the years and tackled the same towards effectively realizing their
crucial business goals. It has been seen that the company had performed significantly well since
2001. If the recent losses can be overlooked, the business operations of the company have been
smooth for a long period of time. The effective analysis of the organizational progress by using
SWOT, Porter’s five forces model and DEPSTGP can help to understand the factors that have
helped the company to sustain its long term progress in the industry. Finding out the reasons
behind the past organizational success of the Fonterra and estimating its future growth and
developmental potential are essential objectives of the study. Moving forward a crucial objective
of the study will be to analyze and evaluate the reactions of the company in many proposed
scenarios in order to understand the essential operational aspects of the company. Understanding
the essential implications of the study can help in the development of stronger long term
operational strategies for organizations functioning in various sectors in the future.

5STRATEGIC MANAGEMENT ISSUES IN FONTERRA
Key Issues
The key issues that will be focused for the better study of the matter will be the
organizational dynamics displayed by Fonterra, the long term external and internal analysis of
the company’s environments, assessing the vital aspects that led to the long term success of the
company and evaluating the future business situations that the company can face (Pedersen &
America, 2015). The past and present conditions within which the company had to operate are
key focus areas. The company has been able to sustain its essential growth as it had judiciously
faced serious marketing challenges since 2001. A key area that is needed to be understood is the
long term business strategies taken by the company to ensure sustained growth and development.
The major challenges the company faced for almost two decades are also key discussion areas.
The study is aimed towards gaining positive implications concerning all the key identified issues.
Conclusion
The analysis of the various factors that affect the progression of the company have been
done and they have essentially pointed out towards better future prospects of the company. Thus,
in conclusion in can be said that despite the setback the company has great chances of re-
emerging as a formidable force in the corporate sector of New Zealand and the world. The
historical evidences point towards the effective decision making functions that the higher
management of Fonterra have always taken on behalf of the organization. The company has set a
unique example of long term growth concerning its corporate environment. From 2009 to 2018
the company has increasingly focused towards acquiring smaller and medium sized dairy
companies especially in Australia and some other parts of the world. Thus, the major
implications of the recent phase of growth of the company have been its business consolidation
in the dairy oriented market.

6STRATEGIC MANAGEMENT ISSUES IN FONTERRA
The financial data of the company in the recent phase has definitely not been satisfactory.
The company has witnessed loss in business for the first time in close to two decades. The profit
margins for the year were down by 11%. However, a rise in revenue by 12% meant that there can
be productive future prospects. Presently, the company is facing a tough situation and it may
definitely take more time for it to gather strength to regain its original productivity. The present
conditions have also been affected by some unfortunate market conditions with regards to dairy
products worldwide. The SWOT analysis has pointed out the essential weakness of the company
to be the rising demand and the falling quality of some of its products. The threats are definitely
the rise of significant competition in the industry. However, given the fact that the company has
expertise and accumulated capital due to its long running success in the market, it can definitely
return to profitability through better productivity. The external environment is tough currently
due to the changing laws and regulations across many of the important markets of Fonterra.
However, the demand for dairy products across the globe can mean that the company can be able
to reach a position of optimal productivity if even the laws become more stringent. The company
is quite well balanced as far as the forces of market operations are concerned. However,
significant pressure is there with regards to threat of new entrants and substitute products.
The alternative strategies suggested may help Fonterra to regain much of its lost position.
Moving forward the strategies can help the company to re-emerge in better ways in the industry.
Given the situation the company still has a lot of work to do in order to make itself achieve the
position that it had created over the years. The accumulated capital if used judiciously can help
the company continue in further progress path. The company is well poised to become the
overwhelming dominant force in the world dairy market if everything goes according to plan.

7STRATEGIC MANAGEMENT ISSUES IN FONTERRA
Bibliography
Brown, J. N. (2016). Improving nutrient management for dairy factory wastewater land treatment
systems. Integrated nutrient and water management for sustainable farming.
De Witt, M. (2017). Discretion in Decision Making: The Fonterra Case (Doctoral dissertation,
University of Waikato).
Deephouse, D. L., Bundy, J., Tost, L. P., & Suchman, M. C. (2017). Organizational legitimacy:
Six key questions. The SAGE handbook of organizational institutionalism, 27-54.
Dooley, A. E., Shadbolt, N. M., Khatami, K., & Tauer, L. W. (2017). Application of the
Adjusted Weak Axiom of Profit Maximization to New Zealand Dairy Farming. Journal
of Applied Farm Economics, 1(2), 4.
Havea, P., Grant, J. E., Hii, M. J. W., & Wiles, P. G. (2017). U.S. Patent Application No.
15/362,216.
McKague, K., Zietsma, C., & Oliver, C. (2015). Building the social structure of a
market. Organization Studies, 36(8), 1063-1093.
Nilsson, J., & Rydberg, C. (2015). Factors behind the Fonterra shareholders’ rejection of the
board’s capital restructuring plan of 2007.
Pawson, E., & Perkins, H. C. (2017). New Zealand going global: The emerging relationships
economy. Asia Pacific Viewpoint, 58(3), 257-272.

8STRATEGIC MANAGEMENT ISSUES IN FONTERRA
Pedersen, R., & America, F. N. (2015, February). Becoming Globally Relevant: Sourcing Dairy
from Around the World. In Agricultural Outlook Forum 2014 (No. 205073). United
States Department of Agriculture.
Pinxterhuis, J. B., Beare, M. H., Edwards, G. R., Collins, R. P., Dillon, P., & Oenema, J. (2015).
Eco-efficient pasture based dairy farm systems: a comparison of New Zealand, The
Netherlands and Ireland. Grassland Science in Europe, 20, 349-366.
Shadbolt, N., & Duncan, A. (2014). Fonterra as a case study of co-operative capital structure
innovation. International Summit of Cooperatives, Quebec, Canada, 6-9.
Stojkov, K., Noy, I., & Sağlam, Y. (2016). The trade impacts of a food scare: The Fonterra
contamination incident. Journal of Agricultural & Food Industrial Organization.