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Thursday, 04 February 2021 06:55

How does Fonterra's strategy stack up?

Written by  Simon Couper

This is the fifth of five articles by Simon Couper aiming to demonstrate dairy industry strategies in NZ and provide a perspective for viewing Fonterra's strategy.

 

When I first discussed writing these series of articles with a journalist I was told that, given that Fonterra had recently signed off on a new strategy, the news had moved on to capital structure. So I immediately asked what the new strategy was. Beyond “Value over volume” and rebalancing the balance sheet, the journalist offered no further insight.

“Value over volume” is a slogan, not a strategy. Selling assets is not a strategy, it is a tactic for getting the ship off the rocks.

The purpose of this article is to identify the key elements successful strategies most often contain.

So what is a strategy and why is it important?

A strategy is a framework for how we make business decisions. Every decision within an organisation should fit in or be guided by the strategy. A good strategy should determine what its long run goals are and scrupulously prioritise its capital of natural resources, intellectual ability and financial assets to achieve it. If a strategy is unfocused, an organisation runs the risk of going in too many directions, suffering confusion and loss of its competitive advantage.

But how is strategy formed?

There are two main schools of thought. Micheal Porter theory of the five forces suggests strategy is formed by analysing aspects of the market in which a firm operates. The second school of thought suggests that firms find their core competencies or competitive advantage over time through trial and error.

 It is not clear to me as to how Fonterra has formed its strategy.

What should we see in a good strategy?

In my view there are two key drivers. The strategic positions and processes a firm takes to gain competitive advantage, and secondly the vision, values and culture that drives it. In other words, what do we do best and what is the heart and soul that drives our success?

Firstly, if the best strategies really are simple then perhaps we need to look no further than our competitors. They have achieved success and their strategic approach is simple to observe.

If you have read the first four articles in this series (see www.ruralnewsgroup.co.nz/dairy-news/dairy-opinion) you will see the distinct strategic positions that Open Country Dairy (OCD), Tatua and a2 Milk take. OCD’s core strategic advantage of being operationally excellent makes it a cost leader. OCD complements this with an aggregated approach to selling its products to the world. Tatua’s core strategic advantage is its value adding technical specification which empowers it to lead with customer intimacy. Tatua complements this by adapting its product to the needs of its customer.  a2’s core strategic advantage is its hold of patents and clever supplier agreements that make it a differentiated product leader. 

In my view, this clarity and focus is a necessary step an organisation must demonstrate in order to remain competitive.

The many directions Fonterra has taken have all been embarked upon with good intent, but what was the strategic framework that bound them and what is the strategic framework that binds them now?

The vision or mission put forward for an organisation should galvanise its constituent parts. Fonterra has “Our co-operative empowering people to create goodness for generations. You, me, us together. Tatou, tatou.” The stated purpose has been generated with good intent and no doubt a lot of time was spent in consultation, but as neither “dairy” or “farmers” features in it, I am left wondering if this purpose would equally suit the local honey bee co-operative. Don’t get me started on the phrase “good together”.

Shouldn’t our purpose speak of our core strategic advantage or our owners and suppliers? The resilience and fortitude of Fonterra suppliers surely leads the world, particularly given we receive little more than a milk price in an unsubsidised industry.

Have we lost the essence of what delivered such a great industry?

Have we lost the desire to control the destiny of an intergenerational farmer owned cooperative?

Should we not be striving to be our Customers’ first choice for quality foodservice, ingredients and commodities?

As we go forward, any vagueness or lack of commitment to specific goals will most likely result in similar outcomes to what we have seen in the past.

Since starting this series of articles two important developments have affected the dairy industry. Firstly, the DIRA was adjusted to allow Fonterra future discretion in whether or not to take back supply that has left. Secondly, a2 milk company’s share price has halved.

To me these developments demonstrate how size does not guarantee security if performance is not achieved and shareholders want to leave.

We must recognise that legislation on its own will not save our cooperative. New stainless steel is most likely being built not because some farmers are unhappy, but because capital sees an opportunity to capture a better return than what Fonterra can offer.

I have written this series on dairy industry strategy because when I look into Fonterra I see excellence but also confusion of direction and purpose.

This confusion has lead to less than optimal performance. To me the recent review of the shareholders council was akin to waiting at the bottom of the cliff to club the messenger. As owners of the business we must instead focus on where we are going and how we are going to get there.

“Less than 150 years ago he built a farm and milked his few cows. A very ordinary man with no apparently remarkable attributes other than a fierce determination and a burning desire for independence. The structure that rose from these humble beginnings is surely less important in the long run than the philosophy of life he passed on to those who have followed him.” (Yerex, 1989)

Simon Couper is a Waipu dairy farmer and former chairman of Fonterra Shareholders Council.

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