Economics for Business 100: Dairy Industry Structure and Strategy

This report analyzes the structure of the Australian dairy industry, examining its production stages, from raw milk collection to distribution, and its significant contribution to the national economy. It identifies the oligopolistic market structure, where a few entities control a large market share, and discusses the implications of this structure on market power, particularly in terms of pricing strategies and profit accumulation. The report also analyzes the current strategies of Inglenook Dairy, including vertical integration and product differentiation, and assesses the opportunities and threats to its long-run profitability, such as technological advancements, competition, and government policies. Finally, it suggests amendments to Inglenook's strategy, emphasizing value creation, stakeholder consultation, and risk management to maximize long-term profitability in the dynamic dairy market.

Running head: ECONOMICS FOR BUSINESS 100
ECONOMICS FOR BUSINESS 100
Name of the Student
Name of the University
Authors Note

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Table of Contents
Introduction......................................................................................................................................3
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
Question 3........................................................................................................................................7
Question 4........................................................................................................................................8
Question 5........................................................................................................................................8
Question 6......................................................................................................................................10
Conclusion.....................................................................................................................................11
Reference.......................................................................................................................................12

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Introduction
The aim of this report is to analyze on the structure of dairy industry in Australia and the stages
of production to distribution of dairy products to the consumers. Australia’s dairy industry has
continued to be one of the most vital agricultural industries that generates near about $13 billion
across the supply chain (Regulations 2013). This industry employs for more than 39000 people
and hence improves the employment level in the nation. Australia’s dairy sector enhance in
contribution to overall income and growth of this nation (Zhao et al. 2012). Globally, the dairy
sector in Australia ranks fourth in terms of trade volumes and exports for over 40% of nations
milk production. In this study, intermediate market structure involved in manufacture and
distribution of dairy products is also highlighted in this paper. Furthermore, market structure
implication in this industry is also assessed in this study. The report also elucidates on the
present strategy adopted by Inglenook dairy farm and focuses on their opportunities or threats to
their long run profits. The recommendation on amendment of Inglenooks current strategy for
long run profit is also analyzed in this report.
Question 1
Analyzing the structure of Dairy Industry in Australia and production stages of dairy products
It has been noted from recent study that there has been substantial change in structure of
Australia’s dairy industry for over the last 20 years. Reforms have occurred in size as well as
product mix of this nation’s dairy farms in this industry. In addition , mergers as well as takeover
have attributed in its structural adjustments, which in turn resulted in higher ownership
concentration in this industry. Moreover, huge reform in product mix of this industry has also

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taken place over the past few years. Australian Dairy Farmers (ADF) is a huge network that
supports the dairy industry of this nation. They offer support to this industry through additional
research or information for helping the farms in achieving their mission.
The stages involved in the production of dairy products from raw milk and marketed to final
consumers in this nation involves:
Collecting raw milk- The dairy farms in this nation uses antibiotics in order to control bacterial
infections in cows. However, this helps the farms in attaining good quality of raw milk.
Storing milk- The milk is then stored in hygienic container at 4 degree centigrade and then is
tested for fat content.
Standardization- This process involves filtration and separation of fat from milk.
Pasteurization as well as homogenization- In this process, heating of milk is done at temperature
of 72 degree centigrade and is then kept for at least 15 seconds. The heat used in this process
helps in killing microorganisms or harmful bacteria.
Chilling the pasteurized milk- This stage involves chilling the milk at 4 degree centigrade. This
treatment is necessary in order to kill microorganisms that have not been destroyed.
Packaging- The packaging of milk is done through laminated pouch, tin cans and plastic
containers in order to store the product for longer period.
Storing- The dairy farms stores the product at 4-7 degree centigrade by using chemical inputs
namely sanitizing agents before distribution.

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Marketing activities- The dairy farms promotes the product by advertising it in traditional
mediums that includes television, radio or other social media.
Question 2
Intermediate market structure involved in production and distribution of dairy products
Oligopoly market structure is basically involved in manufacture and distribution of dairy
products. In this type of market structure, fewer numbers of entities has huge majority of share in
the market. The industry in this nation has fewer farms and has huge interdependence among
them. In addition, the dairy farms in these industry manufacturers’ slightly homogeneous or
differentiated products for attaining competitive advantage. Each farm focuses on the action of
its competitors before setting the price of dairy product (Nettle et al. 2013). Non-price
competition prevails in this type of intermediate market structure as the price of the dairy product
is influenced by the farms. As few farms exist in this type of market structure, new entrants faces
huge competition in terms of product pricing and quality. In addition, the behavior of the dairy
farms changes according to the prevailing market condition (Wilson 2013). The kinked demand
curve model helps in illustrating the farms behavior in production and distribution of products,
which is shown below:

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Marginal cost
D=AR
Marginal revenue
Q
P
Price
Quantity
Figure 1: Kinked demand curve highlighting the farms behavior in oligopoly market
Source: (As created by author)
The above figure shows that at P, if the leader farm increases the price of dairy product, the
customers purchases the product from other dairy farms existing in the market. As a result, the
leading farm loses its market share value that in turn reflects elastic demand curve. Hence, it can
be assumed that the leader farm incurs huge loss by increasing the product price but this benefits
other farms as their profitability level increases due to this pricing strategy (Nettle et al. 2012).
This framework also explains that if the leader farms does not achieve any incentive for lowering
its product price, then its price set will be rigid for long time period.
It has been noted from recent cases that pricing arrangements and advancement of new
technology helps the farms in increasing productivity and gain competitive advantage in
oligopoly market structure. The competitive environment prevailing within this dairy industry is

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slightly concentrated. Additionally, some leading players (farms) operate in this market and the
action taken by this leading farm is followed by other farms. Hence, the competition within the
farms becomes fierce as the dominant farm influences the pricing strategy of other farms.
Alternatively, barriers in entry is relatively weak for new entrants those who are selling products
in the local market.
Question 3
Market structure implication for distribution of market power in diary industry
The oligopolistic market form in the dairy farms of Australia has high implications for market
power distribution in this industry basically over the product pricing strategy and profit
accumulation at various stages of production chain. As leading farms affects the pricing strategy
of small farms, price leadership exists in this intermediate market structure (Kilelu et al. 2013).
This means that if one farm lowers the price of the dairy products, smaller farms tries to follows
it by declining their product prices in order to attract more customers and retain existing ones.
On the other hand, if one dairy farm increases the price of products, other farms do not stick to
this price or follow it. Therefore, the pricing strategy of the leading farm affects the profitability
level of other farms and this leads to decline in value of market share.
Market power refers to the ability of the firm in increasing the price of the commodity above the
competitive price level. It has been opined by Klerkx and Nettle (2013), assessment of market
power involves modeling as well as evaluating the difference between prevailing market price
and marginal output cost. Oligopoly market structure has huge implication for market power
distribution in this industry. As less number of farms dominates in this market structure, the
leader farm has the ability in raising the price above the equilibrium level. Hence, the leader farm

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in Australia’s dairy industry has market power and is illustrated as price makers as they
establishes price of the dairy product without relinquishing its share in the market.
Question 4
Current strategy of Inglenook Dairy
The current strategy of Inglenook dairy farm reflects that they adopt vertical integration method
for processing milk and in the activities that are involved with the distribution of products to the
consumers. The present strategy of this farm involves product differentiation according to the
wants and preferences of consumers. Along with this strategy, this farm strategizes to implement
new technology in order to enhance their productivity level. In addition, this farm makes revision
on its set price by focusing on the present market conditions, target customers and its competitors
(Eastwood et al. 2012). They also try to innovate new product by updating on their technique
used for production. Moreover, in order to attain good brand value, they keep on changing their
marketing strategy that includes advertising platforms. The farm also focuses on packaging and
distributing the product in order to attract more customers and gain competitive advantage. The
present strategy also aids in controlling huge share in the market and attain huge profitability
level for longer period (Gourley et al. 2012). Hence, implementation of this strategy improves
Inglenook’s financial performance and its position in the global market.
Question 5
Analyzing opportunities or potential threat to long run profits of Inglenook Dairy
Adoption of proper strategy helps the firm in expanding their business and improves their
business growth. Inglenook’s dairy farm highlights high potential in business growth owing to

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adoption of proper strategy that includes, technological advancement, marketing strategy etc. In
addition, extension of new channels for customers increases their product demand in domestic as
well as in international market (Douphrate et al. 2013). This in turn influences the producer’s
abilities and offers huge opportunities in expanding their business in the global market. The
current strategy of this farm adds value in some key areas that includes-
 Introduction of value added products leads to huge presence as well as flexibility in
market and provides opportunities in the building brand value.
 Innovation of new products improves their reputation in the marketplace.
 It further opens up huge opportunities for exports.
 It also helps in building strong relation with other nations.
Competitors of Inglenook farms are their main potential threat that influences their product
quality and pricing. Other potential threat of Inglenook includes-
 Complexity as well as indirect cost associated with milk procurement is the main point
that their competitors focuses on and this act as potential threat.
 Increase in procurement price often squeezes profit margins of processors
 Huge cost incurred by dairy processors streamline their business operations.
Moreover, Australian government also plays crucial role in the dairy industry of this nation.
Changes in new policies and tax influence the business growth of this dairy farm. Therefore,
competitors as well as government of Australia affect their long run profit. Additionally, low
investment in the dairy sector and improper development plan in business adversely affects the
farms performance during a specific time period.

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Question 6
Suggestions on the amendment of current strategy of Inglenook for achieving long run
profitability
Inglenook dairy should focus on the value creation principle in every segment of the production
chain in order to achieve success and attain highest position in this industry (Crawford et al.
2012). There are few suggestions on the amendment of Inglenook current strategy that will aid
them in maximizing profit in the long run.
 As stakeholders play an important role in business decision making , Inglenook must
consult with their stakeholders before launching their product in the marketplace. This
will help them in achieving new ideas in promoting the product.
 As there is huge volatility in milk prices, Inglenook must adopt risk management system
in order to avoid risk that comes in the way of business process and helps them in facing
difficult market situations.
 Development in agriculture has been dynamic that is associated with farm structure,
product prices and consumers perceptions (Dahl et al. 2013). Therefore, it is
recommended that Inglenook must amend on their current strategy by monitoring and
evaluating each product from the customer perspectives and improvise it accordingly.
 This farm must also evaluate dairy programs before implementing any business strategy
in order to create target beneficiaries. This will facilitate this farm in enhancing returns
from investment in the dairy development.

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Conclusion
From the above report, it can be concluded that the manufacturers must focus on the intermediate
market structure before producing any dairy product. As oligopolistic competition exists in
Australia’s dairy industry, leader dairy farms dominate the smaller farms in terms of pricing,
quality and other marketing strategy. The Inglenook dairy farm that has been highlighted in this
case study adopts different business strategies for attaining competitive advantage and higher
profitability level in longer time period.

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Reference
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