ANDREW M. NOVAKOVIC

The Competitive Strategy of the New Zealand

Dairy Board

William D. Dobson

The core strategy of the New Zealand Dairy Board (NZDB) would transform thc organization into a

multinational food company. This strategy promises to work effectively if assumptions made by NZDB officials about the future environment are correct. Research and development represent a

problem for the firm and New Zealand's dairy industry. The innovative NZDB also faces major uncertainties if stripped of statutory authority to serve as monopoly exporter of New Zealand's dairy

products or large firms copy its core strategy. Early mover advantages gained by the NZDB make it a s trong competitor in international markets.

The New Zealand Dairy Board (NZDB) is the exporting arm of. New Zealand's 14,000 manufacturing milk producers and that country's cooperatively owned dairy product manufacturing companies. Once primarily an exporter of bulk butter and cheese to Great Britain, the NZDB has evolved into a multinational dairy product and food marketing firm with subsidiary and associated companies in 25 countries. l Consolidated gross revenues of the Wellington, New Zealand­based NZDB and its subsidiary companies totalled NZ$4.0 billion (US$2.6 billion) in 198811989. 1,2 Like many other New Zealand firms, the NZDB was stripped of subsidies (interest subsidies and tax advantages) after the Labour government came to power and launched a program of economic liberalization beginning inmid-1984.The substantial (and valuable) piece of assistance it has retained from New Zealand's government is statutory authority to serve as New

Financial support for this research was provided by the Massey University Research Fund.

William D. Dobson is Distinguished Professor, Department of Agricultural Economics, University of Wisconsin, Madison. He was on leave from Purdue University serving as Professor and Chair in Agribusiness at Massey University in New Zealand when this study was completed.

Agribusiness, Vol. 6, No.6, 541-558 (1990) © 1990 by lohn Wiley & Sons , lnc. CCC 0742-4477/90/060541-18$04.00

542 DOBSON

Zealand's single exporter of manufactured dairy products. Since the NZDB oper­ates in international markets for dairy products where government export sub­sidies to competing exporters are common, it faces risks. This article analyses strategies of the NZDB and risks it faces, drawing implications for farmer cooper­atives and food companies relating to strategic management. The analysis re­flects perspectives gained by the author from interviewing managers and direc­tors of the NZDB, New Zealand dairy company officials, New Zealand dairy farmers, and employees of other New Zealand businesses.

METHODOLOGY

Porter's scenario analysis techniques3 were used for the study. A scenario is an internally consistent view of what the future might turn out to be. Porter's pro­cedure for scenario analysis involves constructing independent industry sce­narios and evaluating the risk for a firm under each. Risk is a function of how poorly a strategy will perform if the wrong scenario occurs. Scenario analysis is potentially useful because every plan developed by a firm is based on an industry scenario, although the process is frequently implicit. 3

Porter suggests that the following points should be kept in mind when scenario analysis is used:

• Build at leas t one scenario around assumptions that reflect senior manage­

ment's commonly held views about the future.

• Scenario variables and fac tors affecting them should be the focal point for

gathering market intelligence.

• Environmental changes are not importanl for their own sake but because of

their possible effect on industry struclures.

These three considerations were Llsed to design and focus the scenario analy­sis. In the article , the term structure is used to describe the underlying economic and technical characteristics of an industry which affect competitive forces in an industry, the industry environment, and industry attractiveness; strategies; and the profitability of firms.

The article discusses factors that have shaped the NZDB's strategies, de­scribes strategies of the NZDB, builds a scenario reflecting beliefs of directors and senior managers of the NZDB about future industry conditions, assesses how well the NZDB's strategies will work if the future unfolds approximately as expected by those officials, and briefly describes how the strategies might func­tion if other, less likely, scenarios materialize.

FACTORS THAT SHAPED THE NZDB'S STRATEGIES

Current strategies of the NZDB have been shaped partly by structural variables relating to the nature of dairy farming in New Zealand, the evolution of New Zealand dairy companies, competitive conditions in international markets for dairy products, and preferences of New Zealand dairy farmers and the managers of their cooperatives.

About 90% of the milk produced in New Zealand is sold in the form of manufactured dairy products. Normally, 85 to 90% of those products are ex-

STRATEGIES 543

ported by the NZDB, making it the world's largest dairy product exporting firm.4 The Dairy Board's exports represent about 25% of international trade in dairy products. I Exporters from the European Economic Community (EC) who collec­tively account for about 50% of world trade in dairy products represent their main competitors. 5 NZDB officials concede that EC exporters "call the shots" in world dairy trade because of their collective size and export subsidies they receive.

Subsidized exports of EC dairy products were a major cause of the sharp decline in world dairy product prices in the mid-1980s. This decline had predict­able effects on the real payout made by the NZDB for New Zealand dairy farmers. For example, the payout to New Zealand dairy farmers (measured in 1988/1989 prices) fell from NZ$6.00/kg of milkfat in 1984/1985 to NZ$3.60/kg of milkfat in 1986/1987, a decline of about 40%.2 The NZDB's real payout will recover to about 198411985 levels in 1989/1990 pal1ly because of lower EC dairy exports and higher world dairy product prices.

New Zealand's dairy farmers are the lowest-cost milk producers in the world. The low housing and feed expenses associated with their relatively large (156 cows per farm in 1988/1989) pasture-based farms produce average costs which are only about one-half those of the average US milk producer. 6 This low-cost milk is the main raw product which goes into NZDB exports . But the firm also sources dairy products from other countries when trade restrictions prevent, or make prohibitively expensive, use of New Zealand dairy products and when New Zealand dairy products are not available. Dairy products obtained from non­New Zealand sources accounted for about 20% of the NZDB's business in 198811989. I

As a result of consolidations and rationalizations, which reduced the number of dairy companies in New Zealand from 180 in 196011961 to 19 in 1988/1989, New Zealand 's dairy companies have some the largest and most modern milk processing plants in the world. I ,7 But the advantages of the dairy companies are less than their size and new technology suggest because New Zealand's pasture­based farming system raises milk processing costs. Manufactured milk process­ing falls to near zero levels in this southern hemisphere country during the two winter months of June and July, when pasture growth is minimal and farmers dry off their cows. However, during October and November, milk processing rises about 75% above the mcmthly averages for the year. I Because manufacturing milk plants are built to handle peak seasonal production, this necessitates the injection of more capital than would be required for an even pattern of produc­tion. Moreover, in the United States, where the seasonality of milk production is less extreme, many milk manufacturing companies pay 5 to 10% price premiums to obtain the milk needed to keep their plants operating at high capaci ty, suggest­ing that reductions in throughput such as those evident in New Zealand raise average processing costs substantially. A study comparing manufactured milk processing costs for New Zealand and West Germany concluded that" .. . sea­sonality probably makes New Zealand processing less efficient (than that of West Germany), but that is more than offset by greater efficiency in the farm sector which results in an overall competitive advantage (for New Zealand) in dairy pro­duction. "7

Production figures for major categories of dairy products produced by New Zealand's dairy companies during 198311984 to 1988/1989 reveal familiar

544 DOBSON

trends. For example, butter production declined 22% and cheese production increased 14% during this period, reflecting adjustments made by the companies to better match their output to changes in international consumption. l In addi­tion, the figures show how whole milk powder has emerged as a growth item that recorded a 69% production increase from 198311984 to 1988/1989 for dairy companies and the Dairy Board. The strong, persistent growth of whole milk powder sales was partially offset by declines in sales of skim milk powder and buttermilk powder during this period.

However, the figures for broad product categories conceal the trend toward production of differentiated dairy products. Approximately 35% of the dairy products manufactured by the dairy companies consist of branded and spe­cialized (nonbulk) products, including those listed below. l ,8,9

• Milk powders for use in bakery products

• Milk powders sold in consumer pac ks under the Anchor brand

• Filled milk powders

• Immunological milk powders • Cheese and yogurt powders for use by food processors

• Cheese in consumer packs sold under the Mainland brand

• Aerosol creams • Low-fat butter • Semisoft butter and butter sheets for use by bakers

• Natural emulsifiers • Casein and whey protein products used for food (confectionery produ cts,

cakes, and processed meat) and industrial uses (paper coatings, buttons, and

fabri cs)

• Infant foods

The NZDB works with the dairy companies to ensure their manufacturing programs match the demands of the international marketplace. It also integrates the industry's shipping, packaging, transport, and quality control needs and pro­vides support in the form of financial facilities, data processing, livestock im­provement, and administration. 4

Complex market coordination efforts are involved in carrying out these tasks. Industry committees, negotiations between the dairy companies and the NZDB, price differentials that provide incentives for dairy companies to produce the needed export product mix, standard cost formulas (used as a basis for reimburs­ing the companies) that encourage companies to use modern technology, and invitations to companies to submit competitive bids to supply butter to the Dairy Board all are used as market coordination devices . The NZDB also allocates earmarked earnings to the dairy companies for new plants and R&D for developing new processes and products. As the dairy companies have become larger, they have devoted more of their own resources to R&D, but the bulk of the research still is carried out by the semiautonomolls New Zealand Dairy Research Institute in Palmerston North, New Zealand. This Research Institute received during 1988/1989 over 80% of its income from the NZDB.9

A few companies, particularly those that have some of the largest processing plants in the world and personnel with strong marketing skills, are demanding more autonomy. For example, one company sees the need for "qualified person­nel who can liaise between the marketing section of the Dairy Board, the factory

STRATEGIES 545

manager and the end users. "10 While NZDB officials concede that such ini­tiatives have merit, they exhibit mild unease about increased involvement by dairy companies with foreign customers. SOqJe NZDB officials believe the com­panies might make agreements which the Dairy Board will find objectionable and problems with export coordination will increase if companies work independently with foreign customers. The autonomy issue promises to be an important, con­tinuing concern of the dairy companies and the NZDB.

Corporate directors for the NZDB in 1989 consisted of 11 elected dairy farm­ers, including three representatives of the New Zealand Coop Dairy Company (the largest of the 19 cooperatively owned dairy companies) and two government

Table I. Location, Size, and Number of 44 International Companies in which the

New Zealand Dairy Board had an Equity Interest, 198811989. a

Number of Total Number Average Number

Companies in of Employees of Employees

Regionb Region in Companies per Company

South East Asia 12 908 76

Singapore (2), Malaysia

(2), Indonesia (1),

Philippines (3), Thailand (1), Taiwan (1), Hong

Kong (1), and Sri Lanka (1)

North America 10 907 91

United States (10)

Europe, Mediterranean , 6 502 84

and Africa United Kingdom (3), West Germany (1), Malta

(1), and Mauritius (1)

Central and South America 5 1781 356

Mexico (1), Guatemala

(1) , Chile (2) , and Peru

(1)

Pacific 4 255 64 Australia (1) and New

Zealand (3) North Asia 3 56 19

Japan (2) and Korea (1)

Caribbean 2 413 206

Barbados (1) and

Jamaica (1)

Middle East 2 11 6

Bahrain (1) and Iran (1)

"Source: Computed from figures in New Zealand Dairy Board, Annual Report,

1989. bNumber in parentheses behind each country shows the number of companies in

the country.

546 DOBSON

appointees.} Farmer directors are elected by dairy companies which cast votes in proportion to the amount of product they process.

In 1986, the NZDB employed about 625 people in New Zealand. This cadre included 17 senior executives, 35 marketing strategists and coordinators of regional offshore activities, and about 570 people involved in mostly service functions relating to exporting, e.g., finance, managing foreign exchange risks, documentation of export orders, storage, shipping, stock control, and related functions. II

By far the largest percentage of the employees of the NZDB and essentially all the firm's marketing work is conducted offshore by affiliated, joint venture, or associate companies. Figures for 44 of the NZDB's international companies appear in Table 1. These companies, which provide diversification for the NZDB across products and countries, perform different functions including importing and selling bulk New Zealand cheese, butter, and other products; repackaging milk powder into consumer packs; marketing and distributing consumer and industrial food products; refining and marketing vegetable oils; marketing fertil­izer, cars, and tractors; processing fruit juices; manufacturing and marketing snack foods; and serving as an agent for sales of New Zealand lamb. Some nondairy products sold by the offshore companies are acquired through barter arrangements. In the United States, the NZDB's largest subsidiary companies are Dorman-Roth, Inc. (importer, manufacturer, and marketer of cheese with 500 employees in 1989 which is wholly owned by the NZDB) and Bagel Crisps, Inc. (manufacturer and marketer of snack foods with 200 employees in which the NZDB had a 51 % equity interest in 1989).1

The NZDB has acquired many offshore companies through a process which permits risk control. Under this process, the NZDB initially works through an agent to make sales in a foreign country. Next, the agent and the Dairy Board may form a joint venture to expand sales. Finally, if risks and rewards appear to be appropriate the NZDB may acquire the joint venture partner. This sequential process permits the NZDB to experiment with working relationships and markets before acquiring equity interests in foreign companies.

STRATEGIES

The main strategies of the NZDB as revealed in comments of the Chairman of the Dairy Board and executives of the firm are as follows:

(1) The Core Strategy. "Lift the 30 to 40% of milk which is sold as value­

added (differentiated) products to as close to 100% as we can get, and as

soon as possible ... " (D. Spring, Chairman, NZDB). t2

(2) "The Board has already moved most of its marketing operation over-

seas ... The Board 's role would concentrate on coordinating marketing

policy, and investment strategy, while real market expertise would develop

overseas close to the market action" (IVI. Gough, CEO, NZDR).13

(3) "We will still be involved in bulk commodity produc tion (in the

mid-1990s), but we won't sell it that way. Bulk produce will go through our overseas subsidiaries who wiIl pack it, reprocess it or add value to it in

some way or another and market it in a multitude of different presenta­tions" (P. Lough, Deputy CEO, NZOB).II

STRATEGIES

(4) "In 10 years lime (in the mid-1990s), our business will be spread over a wide range of counlries wilhoul excessive exposure in any particular one. We currently do not commit over 20% to anyone country. We will .continue to divers ify" (P. Lough, Deputy CEO, NZDB).ll

547

Thus, the NZDB's main strategies are to increase exports of specialized, value­added products, increase sales through foreign subsidiaries, and diversify across products and countries. The core strategy of increasing sales of differentiated products is superimposed onto a strategy of being supplied by the world's lowest cost milk producers.

Complementary, subsidiary strategies accompany those listed. One strategy will increase and refocus R&D efforts both in the New Zealand Dairy Research Institute and the dairy companies to develop the additional value-added products needed to carry out the core strategy. A second uses a newly established Food Ingredients Division within the Dairy Board to increase sales of specialized food ingredients. Staffed by food technologists and craft workers such as bakers, this division is concentrating initially on work with bakeries, ice cream manufactur­ers, and chocolate manufacturers in Australia, South Asia, and New Zealand to better meet their needs for specialized products.

A third has evolved to improve returns where import restrictions impede the expansion of sales. The US quota on cheese and other dairy products represents an example. There the NZDB's strategy is to maximize returns on the fixed volume permitted by the US dairy product quota by moving into higher returning products and further downstream in the distribution chain, using the Dorman­Roth acquisition in 1987 as a vehicle for implementing the strategy.l4 In the United States, licenses issued to cheese impOiters specify both the category of cheese that may be imported under quota and the country of origin. Such licenses cannot be transferred between firms, except by acquiring the entire business. By purchasing Dorman-Roth, the NZDB acquired a firm which imported and dis­tributed high-value European specialty cheese into the United States under quota. The familiar counterpart to this strategy was the decision by Japanese automakers during the 1980s to meet their voluntary restraint agreement quota of automobile sales in the United States with upmarket cars.

Why did the NZDB select these strategies? The reasons relate to risk manage­ment and revenue increasing objectives. Farmers have supported the core strat­egy believing that throughout the world it is the marketers, not the producers, of a product who make money. 10 An executive of the NZDB explained the strategies In these terms:

Supplying bulk natural cheddar cheese to a processor in Australia is not secure

business-we can be dropped at a moment's notice. But having an equivalent quan­

tity marketed under the Mainland brand in Australia not only returns to the industry a

higher price for the cheese, but we have more security of selling that volume of cheese in the years to cornell

Whether, as some New Zealand firms suggest, the NZDB uses Nestle (a major competitor in consumer product markets) as a model for its strategies is unclear. However, like Nestle, the NZDB has balanced sales in low risk countries of the

548 DOBSON

developed world and high risk and potentially high growth countries of Latin America , Asia, and Africa, as shown below. 2

Region

North America , Europe, Japan,

Australia, and South Korea

Latin America, Africa, and

Middle East

Asia (excluding Japan and South Korea)

USSR

TOlal

Percentage of

NZDB Sales, 1989

47

26

22

5

100%

Channel control considerations also appear to be important. 15 The NZDB's extensive use of offshore marketing companies suggests management believes the closer a firm gets to consumers the more power and profi t it will secure. The ownership of offshore facilities also enables the Dairy Board to sell more products under the Anchor and Mainland brands.

SCENARIO ANALYSIS

Important assumptions made by directors and senior managers of the NZDB about the environment the firm will face between 1990 and the mid-1990s were used for analyzing Scenario 1. Although certain assumptions apply specifically to the period ending with the mid-1990s, others apply to less precisely defined periods typically descri bed by the officials as "for the next few years." These assumptions, appearing in Table II, were used to assess how well the firm's strategies will work if developments unfold approximately as assumed by NZDB officials.

NZDB directors and managers are optimistic (Table II). In particular, they don't expect the "mountains" of surplus EC dairy products to reappear. And they expect to reap early mover advantages relating to market intelligence. But prob­lems with declining butter consumption, managing foreign exchange risks, keeping ahead of competitors who achieve low processing costs, and meeting competition from those who duplicate the Dairy Board 's marketing structure are acknowledged by the officials.

Scenario 1

Competitive forces shaping industry profits and sources of competitive advantage for the NZDB appear in Table III for Scenario 1. While their strategies will not necessarily parallel those of the NZDB, European and Australian firms which now sell mostly bulk dairy products indicate that they too will increase sales of value-added dairy products. 16 Thus, the industry environment will reflect this development (Table III). Secondly, as the NZDB takes on more characteristics of a multinational food company, it will encounter the competitive problems that go

STRATEGIES

Table II. Assumptions Made about the Future Industry Environment by Directors and Senior Managers of the New Zealand Dairy I3oard.

Assumption and Year Specified

The massive subsidized milk surpluses of the mid-1980s in

the EC will not be repeated, 1989"

Production curbs applied in the EC and the United States are likely to remain, and the recent agreements within the

GAIT which limit (and promise to reduce) agricultural support foster optimism, 1989b

International milk prices probably will rise loward the cost

of producing milk in the United Stales at which point additional supplies from the Uniled States can be allracted

into the international market without subsidy. Although the

development may be temporary, that point was reache-d in

1989 for skim milk powder, 1989c

BUller is a long-term problem. Consumption of bulle!· is sliding alarmingly in most developed countries, 1989d

The NZDB's network of dairy product marketing and trading companies will give the firm a unique position in terms of market intelligence ·regarding availability of products, prices and consumer demand, 1989c

The substantial advantage of New Zealand is the very low

cost of milk production. Other factors, like economies of

scale in dairy product processing, are being replicated overseas and foreign competitors also are copying the marketing structures of the NZDB, 1989"

The New Zealand dollar can move by 15% or 20% in a mailer of a month or less, and, that sorl of movement makes the NZDB hundreds of millions of dollars poorer or richer, 1986"

Name and Position

of Offic ial

P. Jensen, Deputy

Chairman , NZDB

J. Graham, Former Chairman, NZDB

]. Graham, Former

Chairman, NZDB

D. Spring,

Chairman, NZDI3

J. Graham, Former Chairman, NZDB

P . Jensen, Deputy

Chairman, NZDB

P. Lough, Deputy CEO, NZDB

-P. Jensen, Statement to Waikalo Federated Farmers Annual Conference appear­ing in Dominion article entitled "Producer Board Expects Rivals," Wellington, New

Zealand, May 4, 1989. b]. Graham, "Chairman's Foreword," New Zealand Dairy Board Annual Report,

Wellington, New Zealand, 1989. c]. Graham, Address to 1989 New Zealand Dairy Conference, Wellington, New

Zealand, June 28, 1989. dO. Spring, "Outlook for NZ Dairying-1991-92 before Real Growth Apparent ,"

Dairy Exporter, October 1989. cp. Lough, "Plans for the N.Z. Dairy Industry in the 1990s," 1986 Dairy Farming

Annual, Massey University, New Zealand, 1986.

549

550 DOBSON

with such status. For example, high advertising costs may act as an entry barrier. Nestle spends over NZ$1.25 billion (US$O.8 billion) per year for advertising worldwide. IS , I7 Efforts by the NZDB to engage in head-to-head competition with such an advertiser face obvious difficulties.

The sources of competitive advantage listed in Table III are those important to a multinational food company. Against new entrants into the differentiated dairy product business, the NZDB is likely to be a formidable competitor. Against Nes tle (Switzerland), Kraft (USA) or Snow Brands (Japan), its advantages­especially those relating to R&D and access to capital-will be appreciably less. NZDB officials acknowledged that additional and more focused R&D will be needed to produce the new consumer and specialized products desired. Presently, the New Zealand Dairy Research Institute is proficient at research relating to the NZDB's traditional bulk products, for example, cheese starters and other cheese technologies. It also has done innovative work on new protein products. But problems are evident. A NZDB director conceded that Kraft and General Foods wouldn't do research through a semiautonomous organization because of the coordination problems involved. A NZDB manager suggested the Institute cannot change in needed ways overnight and additional research on value-added products will be done offshore in the organization's subsidiary or affiliated companies, especially in the United States, West Germany, and Sin­gapore, to supplement research provided by the Institute. Th e NZDB also will be challenged to obtain additional R&D output from dairy companies. To date, these companies have focused most of their R&D efforts on improving plant efficiencies and have put fewer resources into developing new products. The latter area will assume more importance under the NZDB's core strategy.

On balance the firm's strategies should work effectively in the environment expected by the firm . First, increasing product differentiation while being sup­plied by the world's lowest-cost milk producers is advantageous because the benefits of the two strategies are additive. Secondly, relatively high prices for bulk dairy commodities during the next few years should permit the dairy com­panies and the NZDB to do the cross-subsidizing necessary to develop additional consumer and s pecialized dairy products. Thirdly, locating the marketing activity offshore close to the customer enables the firm to better assess market needs, obtain ideas for product innovations, and deal with quality problems. The NZDB also can process and sell more foreign dairy products through joint-venture companies in markets which exclude New Zealand dairy products . Finally, the firm will gain additional experience with its marketing system and intelligence gathering during the next few years. Advantages that have been gained through superior market intelligence by Louis Dreyfus , Cargill, Continental Grain, Bunge, and the Japanese trading houses , such as Mitsui and Mitsubishi, are well known to the NZDB. Thus, it appears that risks to the NZDB under its current strategies will be fairly low and industry attractiveness high until the mid-1990s if the future unfolds about as Dairy Board officials assume.

Scenario 2

What could sour this favorable scenario? Loss of the NZDB's statutory authority to serve as monopoly exporter of New Zealand dairy products (Scenario 2) could substantially lessen the effectiveness of the firm's strategies. While Scenario 2

STRATEGIES 55l

appears unlikely as of this writing (mid-1990), removal of the NZDB's monopoly exporting privileges has been proposed by New Zealand Treasury officials who advise government ministers. Their objective is to promote efficiency. The Treas­ury officials claim that it is presently difficult to determine how effectively the NZDB is pedorming because it is not required to meet the same market tests (e.g., those relating to return on investment) as private corporations. If they had their choice, the Treasury officials apparently would transform the NZDB into an organization that would be subject to such market tests.

The developments associated with Scenario 2 (Table III) relate primarily to

Table III.

Industry

Variables

Analysis of Scenarios.

Characteristics Exhibited

by Variables"

Scenario 1. Future Unfolds Approximately as Assumed by NZDB

Structural Variables and Competitive

Forces Determining Industry Profits

Sources of Competitive Advantage for

NZDB

Rivalry from other value-added

exporters increases in international

markets for dairy products.

Advertising entry barriers increase in

importance in markets for NZDB's

products.

Expenditures for R&D by firms

emphasizing sale of value-added

products increase.

Market coordination problems fa ced

by firms emphasizing increased sa les

of value-added products multiply.

Ability to keep New Zealand milk

production costs the lowest in the

world.

Excellence in managing exchange

rate risks, financial management, and

market intelligence.

Experience in marketing consumer

products and food ingredients .

Experience and excellence in R&D.

(continued)

-Source of information on characteristics exhibited by variables: Interviews, refer­

ences identified in text of article, and ].M. Connor, R.T. Rogers, B.W. Marion, and

W.F. Mueller, The Food Manufacturing Industries, Lexington Books, D.C. Heath &

Company, Lexington, KY, 1985.

552 DOBSON

Industry Variables

Industry Attractiveness

Table III. (Continued)

Characteristics Exhibited by Variables"

Access to capital needed to capitalize on marketing expertise.

Relatively high until the mid-1990s.

Scenario 2. Single-Desk (Monopoly) Exporting Authority is Lost by NZDB

Structural Variables and Competitive Forces Determining Industry Profits

Sources of Competitive Advantage for NZDB and Dairy Companies

Industry Attractiveness

Barriers to entry by foreign dairy

processing firms into New Zealand become lower.

Activities of New Zealand dairy companies become more diverse.

Dairy product export marketing efforts

become mOre splintered in New Zealand.

Overall coordination of economic

activity in the New Zealand dairy

industry declines.

Rate of increase in sales of value­added dairy products from New Zealand slows.

Development of new coordinating

mechanism for dairy exports, e. g.,

marketing agency in common.

Additional mergers of New Zealand

dairy companies.

Export marketing, intelligence gathering and exchange rate risk management skills acquired by individual dairy companies.

Joint ventures by New Zealand dairy companies and foreign food

companies .

Ability to erect new barriers to entry of foreign dairy processors.

Substnatially lower, at least during adjustment period.

(continued)

STRATEGIES

Table III. (Continued)

Industry Characteristics Exhibited

Variables by Variablesa

Scenario 3. EC Milk Production Quotas are Scrapped or Become Substantially

Less Restrictive on Milk Production

Structural Variables and Competitive

Forces Determining Industry Profits

Sources of Competitive Advantage

for NZDB

Industry Auractiveness

Uncertainty pelvades trade issues.

NZDB faces stronger competition

from foreign firms for sales of bulk

and value-added dairy products.

Prices of bulk dairy products sold in

international markets by the NZDB

decline.

Prices received by New Zealand dairy

farmers for milk decline.

Financial staying power of farmer

suppliers.

Scale economies possessed by dairy

companies in production of bulk dairy

products.

Ability to accelerate conversion to

value-added dairy products.

Same sources of competitive advantage listed under Scenario 1.

Low until afte.· new EC policies to

reduce subsidIzed exports of dairy

products are put in place.

Scenario 4. More Large Firms Adopt the NZDB's 'core Strategy

Structural Variables and Forces

Determining Industry Profits

NZDB faces stronger competition in

major markets from firnis emphasizing

value-added products.

Competing firms defend existing sales

of value-added dairy pl'oducts

aggressively.

Entry and exit of dairy and food firms

destabilizes markets in which NZDB

operates.

Competition for joint venture partners

Increases.

(continued)

553

554 DOBSON

Table III. (Continued)

Indus try Characteris tics Exhibited

Vari ables by Variables"

Sources of Competitive Advantages for Low production cos ts for all products.

NZDB

Indus try Attractiveness

Ability to avoid head-on competition

with firms emphasizing sales of value­

added products.

Proficiency in R&D.

Prox imity to Pacific Rim growth

markets.

Relativel y low while condition exists ,

especially during shakeout period.

industry conditions within New Zealand. It is not clear what coordinating mecha­nism would emerge if the NZDB lost its authority to serve as single exporter. The dairy companies probably would exerc ise greater autonomy. Consequently, sales of consumer and specialized dairy products probably would increase more slowly since the NZDB's core strategy would not govern the operations of the companies. Foreign dairy processing firms also might enter New Zealand seeking low cosl milk and the important competitive advantage this would produce. Presently little incentive exists for foreign firms to integrate into processing in New Zealand since their exports would be channeled through the Dairy Board, reducing their flexibility and lessening advantages associated with obtaining milk there. Absent monopoly exporting authori ty for the NZDB, these constraints on foreign firms would disappear.

The above situations might exist only during a transitional period or might not occur at all, depending on how quickly adjustments were made in New Zealand 's dairy industry. If the NZDB transformed itself into a marketing agency in com­mon (similar to Sun-Diamond Growers in California, which markets raisins, prunes, figs , and nuts produced by different grower organizations) then the Dairy Board could operate as a single exporter much as it does now. 18 The NZDB would have to overcome problems relating to organization and control if it was to operate successfully under a marketing agency in common. Moreover, all major dairy companies would have to voluntarily affiliate with the marketing agency in com­mon. A NZDB director predicted that such voluntary affilialion would occur. The dairy companies could of course merge into organization(s) thal perform func lions of the NZDB. Failing that, the individual dairy companies could share exporting with the NZDB. This would require the dairy companies to acquire export mar­keting expertise, inlelligence gathering capabilities, and the ability to manage foreign exchange risk, perhaps through joint ventures. Whatever the adjustment plan, it likely would include efforts to prevenl foreign firms from purchasing low cost milk in New Zealand.

In view of the risks and problems associated with loss of monopoly exporting authority, expect the NZDB to fight hard to retai n this authority.

STRATEGIES 555

Scenario 3

Under Scenario 3, EC milk quotas would be eliminated or made substantially less restrictive. A "substantially less restrictive" milk quota is defined as one which would allow EC milk production to increase by 2 to 3% or more from 1989 levels.

Milk quotas introduced in the EC in 1984 reduced annual milk production in EC member countries by about 8% from 1985 to 1988/1989. 19 The lower milk production made it easier for the EC to dispose of surplus dairy stocks and helped to bring about 65 to 90% increases in international prices of manufac­tured dairy products during 1987 to late 1988. 20 While the quotas created a more favorable trading environment for the NZDB, risks remain for the firm in interna­tional markets partly because the EC quotas are scheduled to end in 1992. EC Agriculture Commissioner, MacSharry, said in 1989,

The various options (for a post-1992 regime) are at present under examination and it

re ma ins to be seen what emerges . I can say, however, that I have difficulty in

imagining a system where a significant level of control would be absent and as far as I

am personally concerned there will be a quota and it will be linked to the land. 2 1

This pronouncement provides one of the firmest indications of the EC Commis­sion's plans for the post-1992 quota regime. Milk quotas seem likely to remain in place after 1992 in the EC because the budget pressures which created them still exist, the quotas have worked better than some EC officials expected, and they have acquired a value to farmers. 22

The immediate risk for the NZDB is that the EC milk quotas might become substantially less restric tive . Even with quotas , EC farmers produce about 19% more milk than is consumed in member countries, most of which is exp0I1ed in the form of subsidized product. 19 Pressures have arisen for additional increases in milk quotas of 1 % or more to be allocated to beginning farmers and hardship cases (farmers who may have received a less than suitable share of the quota initially) and to limit increases in dairy product prices. The impact of such a development was suggested by D. Spring, Chairman of the NZDB: " ... the international market for milk is finely balanced. An extra million tons of milk­about 1 % of EC production-flowing into export markets could destabilize the position and prices could fa11."23 The result suggested by Spring might arise since international markets for dairy products are thin, representing only about 5% of world production.

The effects of eliminating the quotas (unlikely) or allowing increased milk production under the quotas (more likely) need little discussion. However, as suggested in Table III, the problems this would create for the NZDB are difficult to assess since they could be exacerbated by changes elsewhere, for example, increased milk production in the United States and lower demand for butter in the Soviet Union. Sources of comparative advantage for the NZDB under Sce­nario 3 would include an ability to weather tougher times by keeping dairy company processing costs low and accelerating the conversion to value-added products. The NZDB's strategies are probably as good as any if this scenario occurs.

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Scenario 4

What would happen if additional large firms decided to emphasize a strategy paralleling the NZDB's core strategy? This development could occur if the Uru­guay round of GATT negotiations produced lower government price supports for milk, less restric tive quotas, less restrictive nontariff barriers , and lower tariffs in North America and the Ee. Such changes might prod additional dairy firms into emphasizing a product differentiation strategy similar to that employed by the NZDB. It also could happen if larger dairy firms decided government dairy price supports are in an inevitable downtrend destined to make production of bulk dairy products unprofitable in a few years.

Whatever the cause, such a scenario involving as few as three or four large new sellers of differentiated dairy products could generate sharply increased competition for the NZDB in international markets that would be reflected in lower margins for products, a greater variety in competing products, increased advertising by competitors, and instability as firms entered and exited markets. The NZDB also might encounter increased competition for joint venture partners in overseas markets.

In this environment, the sources of competitive advantage for the NZDB include low production costs for most products, proximity to Pacific rim growth markets, and the flexibility in milk manufacturing operations needed to serve niche markets and limit the need for head-to-head competition with new rivals. In addition, the NZDB has the advantage of being an early mover into value­added products; the marketing expertise gained by the NZDB during the past decade will not be quickly duplicated by new competitors. However, some firms, for example, Borden and Land-O-Lakes in the United States with their well established brands, could quickly increase sales of value-added products in overseas markets against strong competitors such as the NZDB.

Industry attractiveness would be lower under this scenario than under Sce­nario 1. While the tough new competition likely to be part of Scenario 4. may not emerge for several years, industry sources indicate that it may eventually occur. In a worst-case situation, this scenario could produce problems for the NZDB more severe than those associated with loss of monopoly expolting authority.

SUMMARY AND IMPLICATIONS

New Zealand's manufacturing milk producers face a bright future if develop­ments unfold approximately as expected by directors and senior managers of the NZDB (Scenario 1). The benefits of the NZDB's core strategy of increasing product differentiation and obtaining most milk supplies from the world 's lowest­cost milk producers are additive. The firm also has diversified across products and countries to reduce risks. Research is perhaps the weakest link in the firm's operations. Additional coordination, restructuring, and sourcing from offshore probably will be needed to obtain the research needed by the NZDB. New Zealand's larger dairy companies are logical sources for additional R&D.

Scenarios 2 and 3, respectively, describe developments which might occur if the NZDB's monopoly exporting status was removed and EC milk quotas were eliminated or modified to permit greater milk production in EC member coun­tries. Both could damage the New Zealand dairy industry and reduce producer

STRATEGIES 557

returns in that country by substantial amounts. Loss of monopoly exporting privileges could invite foreign firms to integrate into New Zealand to obtain low­cost milk, stripping the NZDB of an important competitive advantage. In view of the value of monopoly exporting to the NZDB, expect the firm to make strong efforts to retain this privilege. The most probable effect of a change in EC quotas is some reduction in world dairy product prices from 1988/1989 levels.

Scenario 4-additional large firms copy the NZDB's core strategy-has po­tential pluses and minuses for the NZDB . The negative effects include increased competition for the NZDB in markets for differentiated dairy products. But, since the scenario might emerge as a by-product of liberalization of North American and EC dairy industries, it could calTY with it higher world prices for bulk dairy products.

The strategies and experiences of the NZDB have implications for cooperatives and food companies elsewhere in the world. The NZDB was forced to become an innovative exporter by the small size of New Zealand's domestic market (3.3 million people), the entry of Great Britain into the EC in 1973, and actions of the Labour government which stripped the firm of government subsidies. The NZDB has strategies in place which will allow the firm to perform well under several scenarios. It has partially insulated itself from risks caused by trade barriers and dairy price support programs of other countries, while positioning the organiza­tion to take advantage of any economic liberation which occurs. Depending on their individual situations, farmer cooperatives and food companies in other countries mayor may not find the strategies of the NZDB useful. But note that the NZDB is successful partly because it was an early mover. Other firms might note this point as they assess the implications of trends toward lower government support for agriculture and freer trade.

REFERENCES

1. New Zealand Dairy Board, Annual Report 1989, Wellington, New Zealand, 1989. 2 . New Zealand Dairy Board, Financial Report 1989, Wellington, New Zealand, 1989. 3. M. E. Porter, "Industry Scenarios and Competitive Strategy under Uncertainty," in Competitive

Advantage-Creating and Sustaining Superior Perfornwnce, Chap. 13, The Free Press, New York , 1985, p. 445.

4 . New Zealand Dairy Board, The New Zealand Dairy Industry-Structure of the Industry from Farm to Customer, Wellington, New Zealand , 1989.

5. Ministry of Agriculture and Fisheries, "Dairy-International Situation", in Situation and

OlLllookfor New Zealand Agriculture, Wellington, New Zealand, 1989, p. 37 . 6. National Commission on Dairy Policy, Review of Programs, Activities, and Policies Affecting

Overseas Marketing of U.s. Dairy Products, compiled for the Subcommittee on Livestock, Dairy, and Poultry of the Committee on Agriculture, U.S. House of Representatives, U.S.

Government Printing Office, Washington, 1988, p. 25. 7. P. W.J. Clough and F. Isermeyer, A Study of the Dairy Industries and Policies of West Germany

and New Zealand, Agricultural Policy Paper No. 10, Center for Agricultural Policy Studies, Massey University, Palmerston North, New Zealand , 1985.

8. P. G. Hobman, "Recent and Future Innovations in Dairy Products," in 1989 Dairy/arming Annual, Department of Animal Science, Massey University, Palmerston North, New Zealand , 1989.

9 . New Zealand Dairy Research Institute, Report 1989, Palmerston North, New Zealand, 1989.

10. M. Roberts, "Kiwi Co-op Dairy Company's Plans for the Future," 1989 Dairyfarmers Annual, Department of Animal Science, Massey University, Palmerston North, New Zealand, 1989.

558 DOBSON

11. P. V. Lough, "Plans for the N.Z. Dairy Industry in the 1990s," 1986 Dairyfarmers Annual, Department of Animal Science, Massey University, Palmerston North, New Zealand, 1986.

12. D. Spring, Statement made at Dairy Industry Towards 2000 Conference in Hamilton , New Zealand, August 1989, Agra Europe, September 1, 1989.

13. M. Gough, Statement appearing in Evening Standard, Palmerston North, New Zealand, Sep­tember 16, 1989.

14. New Zealand Dairy Board, Annual Report 1988, Wellington , New Zealand, 1988. 15. Department of Primary Industries and Energy, 1 nternational Agribusiness Trends and Their

I mplications for Australia, CanbelTa, Australia , 1989, p. 27. 16. 1. Majgaard, Comments appearing in "The Dairy Industry in the EC: From CAP to Quotas, to

Changes in the Years Ahead," The Cheese Reporter, Madison, WI, May 26, 1989. 17. G. Turner, "Inside Europe's Grant Companies: Nestle Finds a Beller Formula," Long Range

Planning 19, 12 (1986). 18. R. H. Vilstrup, D. W. Cobia, and R. Cropp, "Adjustments by Existing Cooperatives" , in

Cooperatives in Agriculture, Chap 22, D. Cobia, Ed., Prentice Hall, Englewood Cliffs, NJ, 1989, p. 389.

19 . Agra-Europe, "Dairy Stores Empty Because of Dumping," March 17, 1989. 20. B.L. StUalt, "The Changing U.S. Role in the International Dairy Market ," Paper presented at

Agricultural Outlook Conference, Washington DC, November 20, 1988, 21. Agra-Europe, " Non-Transferable Milk Quotas Here to Stay, says MacSharry," November 10,

1989. 22. M. Petit, M. De Benedictis, D. Brillon, M. De Groot, W. Henrichsmeyer, and F. Lechi,

Agricultural Policy Formation in the European Community: The Birth of Milk Quotas and CAP Reform, Elsevier Science Publishers, Amsterdam, 1987.

23. D. Spring, "Outlook for NZ Dairying-1991-92 Before Real Growth Apparent," Dairy Ex­porter, October 1989.