Strategic Management of Australian Dairy-Free-Samples for Student

Question: Discuss about the Strategic Management of the Australian Dairy Industry. Answer: Introduction The Australian Dairy industry has contributed massively to the countrys economy with numerous jobs created on dairy farms among other sectors. Indeed, the $13 billion sector is an important cornerstone to the wellbeing of majority of the Australians. According to Gourley et al. (2012), Dairy, in terms of farm gate value has a large export value with approximately 35% of the countrys dairy production exported annually. However, increased international competition particularly from countries such as the U.S and New Zealand means that the sector is currently experiencing a consistent decline (Chapman et al., 2014). This is evident from the closure of some processing plants, and this has weaken the individual ability of such companies to sufficiently pay dairy farmers. As such, this report examines the competitive environment of the Australian dairy industry, and this will entail a special insight into the dairy crisis that has engulfed the country. The report further explores the strategic landscape that will include an analysis of the Porters Five Forces within the Australian Dairy Industry. Moreover the report provides a comprehensive competitive advantage and quantitative analysis of the Australian Dairy industry. Competitive environment: Understanding the Australian dairy crisis The Australian dairy crisis started when the two major processing companies, Murray Goulbun and Fonterra announced unexpected and backdated price cuts. This decision affected most of the Australian farmers especially from the Southern regions whose only source of income had been disrupted (McDowell and Nash, 2012). Most of these farmers relied on the expanding Asian markets especially the Chinese increased demand for powder milk products. Tracing background of the crisis In essence, the Ukraine conflict is directly linked to the global milk crisis that also affected the Australian farmers. This was particularly true after the Malaysian Airlines flight MH17 was allegedly shot down by Russian backed rebels in Crimea killing everybody on board. The result was a protracted trade war which saw Russia slapped with numerous sanctions from the European Union and the U.S (Buys et al., 2014). Russia reacted by banning all imports from Western dairy companies from coming into the country. The Australian dairy farmers were greatly affected by this decision taken by Russian government. This is because milk and dairy products from the European Union and the U.S started flooding markets that were initially dominated by Australian companies. To be precise, dairy products from the EU that were initially branded for the Russian markets had to be rebranded and sold locally and to other new markets such as Asia (Buys et al., 2014). The outcome was a flooded market with dairy products which prompted major processing companies to slash their prices to remain competitive. As a result of the Russian ban of European dairy products, the EU embarked on its long-term objective of eradicating reliance on dairy production by exploring other viable alternatives and substitutes (Von Keyserlingk et al., 2013). The EU also removed the milk quotas further propelling a storm that was already ravaging the Australian dairy industry. The increased stockpiles of cheese and milk powder among other related products meant that production had outstripped demand. Prices of dairy products fell and this meant that farmers were paid less for their commodities. The Chinese market which the Australian farmers targeted also had a stretched supply of dairy products (Lees et al., 2012). Correspondingly, New Zealands decision to halt the building of milk dehydrators and explore other feasible production options further affected the Australian Milk industry (Tiwari et al, 2012). The country reasoned that the reducing global powder milk prices was bad for the economy and could easily affect other sectors if it was not adequately contained. The effects of the Australian milk crisis The immediate effect of the Australian milk crisis was a reduction in farmers incomes with most farmers struggling to keep afloat. Companies such as Murray Goulburn started diversifying into other nutritional product such as soy milk to sustain their competitive advantage (McDowell and Nash, 2012). The company was also forced to cut milk prices for Australian farmers and significantly re-evaluate its profit forecast. Notably, the decision by Murray Goulburn and Fonterra companies to cut prices exerted the biggest blow to the Australian dairy industry. Strategic landscape: Effects of the Porters Five Forces within the Australian Dairy Industry Threat of competitive rivalry There are numerous firms that are currently operating in the Australian dairy industry. As such, there is a comparatively higher level of competitive rivalry in this particular industry. The companies market share vary significantly depending on individual operational prowess among other market factors (Roberts et al., 2012). With the industry recording tremendous growth over the last few decades, dairy companies in the sector must upgrade their products if they are to sustain the fierce global competitions. According to Klerkx and Nettle (2013), most dairy product consumers relates high price to better quality and nutritious products, and companies operating in the industry must comply with such market requirements. Moreover, given the fierce competitive rivalry, most Australian dairy companies are currently focusing on the development of after-sale service, and include setting up free health clubs that provides nutrition information and advice to their consumers among other related consultancy service. Suppliers bargaining power There is relatively higher bargaining power of the suppliers in the Australian dairy industry. This is because most of the dairy farms in the country are specialized and produce in large scale. This implies that farmers can produce larger quantity of milk and control the quality and supply in the country and global markets (McDowell and Nash, 2012). This has strengthened the bargaining power of most farmers operating in this industry. Most of the farmers in the industry also have the requisite management experience, as well as large-scale farms that can facilitate and sustain higher production. Most of the countrys dairy products are consumed locally, and this has really plummeted the growth of the industry (Cary and Roberts, 2011). With the increase in demand for Australian milk products from some Asia countries, the industrys competitive capacity especially in the global markets is set to improve. Moreover, most companies in the industry possess the inherent ability to control milk purchase contracts based on quality and quantity of their dairy products (Roberts et al., 2012). However, the recent dairy crisis in the country have exposed the local dairy industry in a flaccid position that if not adequately addressed will significantly affect the industrys long-term survival. The consumers bargaining power Consumers in the Australian dairy industry have higher bargaining power. This can be accredited to the large number of companies that are currently operating in the industry (McDowell and Nash, 2012). Also, there are numerous dairy products that are available in the market soaring the consumers options. Most dairy product consumers are not swayed by commodity prices. Quality, product variation and the power of the brand are some of the most important consumer purchase determinants (Nettle, Brightling and Hope, 2013). The industry also have numerous direct customers such as dairy products distribution agents, pharmaceutical stores and nutrition clubs in most parts of Australia (Roberts et al., 2012). These are some of the important players that are significantly influencing the purchase decisions of some consumers (Henry et al., 2012). The numerous dairy product distribution points have further expanded consumer options strengthening their respective bargaining powers. Substitute products Dairy products remains to be an instrumental nutritional supplement that is relatively hard to substitute. As such, the threat of alternative nutritious products is medium. The only threat to the Australian dairy industry is the control of global market share given the increase in global competitions. Also, other products such as soy milk and cereal beverages such as cocoa and coffee possess serious market threat to liquid dairy products (Cary and Roberts, 2011). New market entrants Venturing into the dairy industry requires large capital investment and adherence to strict operational standards. For example, large capital is required to facilitate Moreover, companies operating in the industry are majorly characterised by stability in growth, higher profits and larger market shares. As such, any company willing to venture into this market must be ready to overcome such aggressive market competition and requirements (Roberts et al., 2012). The industry stresses mostly on product quality, therefore, capturing customer loyalty may prove difficult especially for new competitors. Correspondingly, most of the production and distribution channels in the Australian dairy market are full. This implies that new market entrants must invest heavily to gain some control of the market that is currently dominated by firms such as Murray Goulburn and Fonterra farmer. Competitive Advantage Quantitative Analysis The Australian Dairy industry is greatly affected by international competition. The table below shows the world dairy industry production from 2013-2016. Global production of dairy products is currently up with the production growth estimated to increase especially in from developed countries. 2013 2014 2015 2016 Total production output (millions tons) 700.1 652.4 723.1 699.6 Total trade volume (millions tons) 50.4 41.5 40.4 53.4 Demand of developing nations (kg/person/year) 66.5 67.8 71.5 63.7 Demand of developed countries (kg/person/year) 246 214 256.2 245 During the 2015 Australian dairy crisis, there was an increase in production and supply of daily products, but the consumption of such products was limited especially in Russia (Bardsley and Pech, 2012). The table below also shows the contribution and position of the Australian dairy industry both locally and in the global markets. Total number of dairy farms 6,400 Number of people employed on farms 24,750 Number of people employed in processing firms 19,000 People working directly working dairy 43,750 Share of national milk production 100% Total value of milk leaving farms $3.8 m Contribution of the dairy farms to the Australian economy $2.9 b Value of dairy products exported $2.8b Volume of dairy products exported 800000 tonnes Notably, Australia contribute approximately 6% of the global milk production with the U.S, European Union and New Zealand leading the pack. Most of Australias dairy products are sold locally given its relatively large local consumer base (McDowell and Nash, 2012). Also, the country export most of its products to some parts of Asia, the Americas, EU and Africa. The country also receives dairy products imports especially cheese from the U.S and New Zealand exposing the industry to global competition. Furthermore, the most popular dairy product that are locally consumed include milk, cheese, butter and yoghurt as shown in the table below. Dairy product Consumption per capita Milk 102 litres Cheese 13 kg Butter 4 kg Yoghurt 7 kg Overall, the Australian dairy industry is experiencing considerable amount of competitive pressure particularly on these locally consumed products given the increase in international competition (Roberts et al., 2012). The table below shows some of the major export markets that Australia exports to approximately 50% of its milk and dairy products. Region % exported Americas 5% Africa 4% Middle East 10% Europe 2% South East Asia 30% Japan 19% Other parts of Asia 24% The figure above also shows that the Australian dairy products are majorly exported. This can be accredited to intense domestic competitions and lower local prices (Nettle, Brightling and Hope, 2013). However, being a relatively liberal sector, the Australian dairy industry has for a very long time been able to brace global competitions. This can be accredited to the countrys efficient production methods and development of strong herd genetics with comparatively high milk production (McDowell and Nash, 2012). Therefore, the industry is poised for strong export growth given the increasing demand for dairy products from some countries in Asia. Australia is currently the third largest exporter of dairy products after the EU and New Zealand with about 10% global market share. By country, Australias major export destinations include China and Malaysia. Conclusion In general, the future of the Australian dairy industry is relatively bright especially the increased demand for powder milk in most parts of Asia. Indeed, the industry is poised to capitalize on the glowing international demand, and this will further facilitate the growth of the industry and general economy of Australia. 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