Former Fonterra Shareholders Council chairman Simon Couper explores Fonterra's core advantage.
This is the second of five articles aiming to demonstrate dairy industry strategies in NZ and provide a perspective for viewing Fonterra’s strategy.
The last article looked at the three strategic positions taken by leading firms in the NZ dairy industry: cost leader, customer intimacy or product leadership.
It is not clear to me that Fonterra has considered its position within this strategic framework.
It is clear that some of Fonterra’s more nimble competitors can utilise their capital more efficiently by requiring their suppliers to supply milk throughout the season, and they enjoy a transport advantage as they cherry pick their suppliers.
But surely Fonterra’s economies of scale and expertise should counteract this.
Therefore the strategic positions Fonterra’s competitors take is a key factor in their success.
The aim of this article is to describe further how leading dairy firms in New Zealand defend their competitive advantage and then secondly, to examine why this is important.
The three firms – OCD, Tatua and a2 Milk – have very different strategic positions. These three strategic positions can best be described as points on a triangle (see image above right).
Since the three points on the triangle represent the three distinct strategic positions that can be taken in the market, the lines of the triangle that connect the three strategic positions represent the efficient frontier between distinct strategic positions. In other words, a firm can find and maintain its competitive advantage if it focuses on doing business at any one corner or on the line between two corners, but not all three corners.
It is not possible within this strategic framework to operate in all three areas and be at the efficient frontier; a firm that tries to do everything for everybody will lose its competitive advantage. It will be “stuck in the middle” and over time fall behind its competitors, or provide opportunities for new competitors to enter the market at one of the points on the triangle where its concentrated efforts can achieve an advantage.
Why can’t you operate successfully in all three strategic positions?
Simply put, these three different strategic positions require different operational cultures to maintain their efficient competitive edge. Trying to maintain all three strategic positions, for a large firm (at scale) is too confusing.
Why not stay in one strategic position?
Staying in any extreme strategic point could leave a firm vulnerable to competition from the arrival of a new and better competitor. For example, OCD is now more efficient as a cost leader than Fonterra in the production of the commodities it produces, but could be vulnerable to another entity with newer more efficient processes. Or perhaps another firm from a higher returning strategic position will choose to grow in their geographic region. Working across two strategic positions allows firms to more easily adapt to changing market conditions while avoiding too great a dilution of effort.
How does a firm strengthen its strategic position?
This might occur where a firm which starts as a cost leader decides to differentiate their offering, looking for some leverage in product leadership. This is the case with OCD, which pushes NZ provenance and quality, and is now processing organic milk.
Another example is the way Tatua, which has a strong emphasis on its quality and unique provenance (creating a point of difference), has moved to enhance its focus on customer intimacy. This enables it to carve out niches as it capitalises on its values of responding with agility and exceeding customer expectations, therefore aiming to differentiate Tatua’s customer service and product as being better than other specialty ingredient firms. Demonstration of this is Tatua’s offshore offices in Japan, which for a small firm is a considerable investment.
OCD and Tatua both aim to give their firms a point of difference that other firms will find it harder to emulate.
What strategic position should Fonterra be competing in?
In the next article we will look at basic strategic choices firms have when operating in international markets.
- Simon Couper is a Waipu farmer and former chairman of Fonterra Shareholders Council.