Requirements
Read the Case Study and address the following requirements:
1. Construct an Industry Value Chain. Identify the most lucrative part of that value chain. Justify your selection.
2. Conduct an Analysis of theMilk Processing segmentof the Industry using a Five Forces analysis and comment on each of the following:
a. Barriers to Entry and the threat of new entrants
b. Identify the key customers and determine their relative power.
c. Identify key substitutes for the industry and determine the impact of these substitutes on the industry.
d. Identify key suppliers to the industry and determine their relative power.
e. Discuss the rivalry between the key competitors.
3. Conclude on whether this is an attractive industry based on your analysis.
Note:
• Present your full analysis in a report format in no more than 4 pages (excluding front page. There is no need for an Executive Summary or an introduction).
• Align your report structure with the requirements above.
• You have limited space for which to address the requirements. Do not waste this by excessive restatement of facts from the case.
• Utilise subject readings on value chains and Porter's Five Forces to perform your analysis. Value chain are covered in week 5 Readings; Readings for Porter's Five Forces are included in the week 3 materials.
• Ensure that your conclusions are supported by your analysis and flow from your analysis.
someTitle Since being deregulated in 2001, the Australian dairy industry, the third largest export agricultural industry in Australia, had been in a state of major change. Farmer exits from the industry, international dairy producers entering, mergers and acquisitions abounding, volatile milk prices and changing consumer preferences meant the industry bore little relationship to its small-scale local farming origins. In 2017, industry observers wondered whether the industry faced an exciting future or a continued decline. The ‘industry’ Defining the Australian ‘dairy’ industry is rather complex. While its main product is milk, the milk can be subsequently converted to milk powder, butter, cheese and yoghurt while a by-product— whey, from cheese making—has also become a marketable product itself. Because the base product (fresh milk) has a limited shelf life, it has almost exclusively been used for local consumption, meaning that competition occurs at the local level. Yet increasingly over recent years, the growing market for milk has been in export, which is essentially a global market, as is also the case for other downstream products. Conversion of milk to subsequent products is a significant production CASE 1 The Australian dairy industry: an industry in transition1 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2019— 9781488617348 — Hubbard/Strategic Management 6e Hubbard, G, Rice, J, & Galvin, P 2018, Strategic Management EBook, Pearson Education Australia, Melbourne. Available from: ProQuest Ebook Central. [26 August 2020]. Created from swin on 2020-08-26 02:26:39. C op yr ig ht © 2 01 8. P ea rs on E du ca tio n A us tra lia . A ll rig ht s re se rv ed . C A S E 1 The Australian dairy industry: an industry in transition 437 decision requiring specific capital equipment and different technical expertise, and understanding international markets is complex so that most producers specialise in some part of the product range. Consequently, there are several segments of the Australian dairy industry, each of which has a different history, competitors and futures. Table 1 shows the production and value of the main products in the Australian dairy industry in 2017. Product Production volume Estimated sales value Comment Fresh milk 9.5 b. litres 26% Increasing with domestic population Milk powder 320 000 tonnes 12% Variable with international market prices Butter 119 000 tonnes 25% Static Cheese 344 000 tonnes 30% Static, with soft cheese replacing hard cheese Yoghurt 48 000 tonnes 8% Increasing due to specialty segments Source: Based on data from ‘The Australian Dairy Industry in Focus 2016’, pp. ii, accessed 30 April 2018 at https://www. dairyaustralia.com.au/publications/australian-dairy-industry-in-focus-2016?id54801EB12663D4FDF93150963BE85B614 TABLE 1 The value chain of Australian dairy products Industry development over time Dairy farming in Australia began as a small-scale, family-based industry serving very local markets. The advent of refrigeration enabled dairy products to be transported, increasing competition. Local farmer cooperatives developed to put capital together to enable bulk milk processing and transporting, with farmers sharing the returns from the larger scale processing. Government regulation of the industry began in the 1920s to assist farmers to develop export markets. In the 1980s, the Federal Government regulated to control fresh milk pricing to provide certainty to both producers and consumers. States also established dairy corporations to regulate milk standards and quality and to control production levels to ensure the right level of supplies. These measures effectively enabled small dairy farms to survive and thrive, even though international practice demonstrated that larger farms and herds of cattle produced milk much more cheaply. In 2000, well after most other industries in Australia, the industry was largely deregulated, so that domestic milk prices and volumes were no longer controlled. As expected, domestic milk prices to farmers immediately fell by more than 30 per cent to the same level as export milk prices, since the milk came from the same sources. Since around 50 per cent of milk production was for domestic consumption, this had an immediate and significant impact on many farmers’ incomes. The Federal Government established the Dairy Structural Adjustment Program Scheme, funded by a levy of 11 cents/litre of milk for eight years, to provide $2 billion of funding to assist farmers to transition to the new situation. Many farmers took a package to exit the industry. Deregulation also unleashed some other effects on the industry. Since a large and increasing proportion of fresh milk was being sold through supermarkets, in 2011 the ‘milk wars’ developed as supermarkets offered their own brand of milk at $1 per litre as a loss leader to encourage consumers to shop there, when milk prices of branded milk had cost $2 per litre or more. This led to enormous pressure on suppliers to supermarkets, with their prices also being slashed. In 2017, supermarket own brand milk was still available at $1 per litre. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2019— 9781488617348 — Hubbard/Strategic Management 6e Hubbard, G, Rice, J, & Galvin, P 2018, Strategic Management EBook, Pearson Education Australia, Melbourne. Available from: ProQuest Ebook Central. [26 August 2020]. Created from swin on 2020-08-26 02:26:39. C op yr ig ht © 2 01 8. P ea rs on E du ca tio n A us tra lia . A ll rig ht s re se rv ed . C A S E S438 Another impact was the emergence of international producers, often with an export orientation, wishing to gain access to Australian dairy processor production, seeing the Australian production as just a part of their total international milk supply chain. The production process Milk is the conversion of pasture via a female cow that has had a calf and whose body wants to create milk for the calf. Cows are artificially inseminated at times determined by the location of the farm and the aims of the farmer. In areas where pasture is seasonal, all cows are inseminated at around the same time so that they calve at the time of peak pasture availability and milk production is accordingly seasonal. In areas where pasture is year-round, such as irrigated areas, calving is spread through the year so that production is relatively even year-round. After calving, a cow’s milk comes in. The calves are taken away and the cows became milking cows. Cows are milked twice daily when they are producing milk, which lasts for around 9 months after calving. Calves increase the supply of cows or can be used to replace cows whose milk production has fallen below standards. Automated milking machines have largely replaced labour. Milk is collected by tanker daily and taken to a centralised processor for testing, pasteurisation, homogenisation and possibly for further processing into UHT, flavoured milk, milk powder, butter, cheese or yoghurt. Some processors specialise and buy milk from either farmers direct or from a major processor to process into cheese or yoghurt. Table 2 shows the location of farms and total herd size over time. Herd size is a major driver of costs for individual farmers. Farms with 1000 head have significantly lower costs. Year NSW Vic Qld SA WA Tas Total farms Total herd (000) Average herd size Milk production/ cow (litres pa) 1980 3 601 11 467 3 052 1 730 622 1 522 21 994 1 880 85 2 848 1990 2 220 8 840 1 970 969 496 901 15 396 1 654 107 3 781 2000 1 725 7 806 1 545 667 419 734 12 896 2 171 168 4 996 2010 820 5 159 621 306 165 440 7 511 1 596 212 5 448 2015 704 4 127 448 252 157 440 6 128 1 683 275 5 669 Source: Based on data from ‘The Australian Dairy Industry in Focus 2016’, pp. 6–8 accessed 30 April 2018 at https://www. dairyaustralia.com.au/publications/australian-dairy-industry-in-focus-2016?id54801EB12663D4FDF93150963BE85B614 TABLE 2 Farms by location, herd size and milk production over time In 2016, each cow produced an average of 5700 litres of milk. Around 25 per cent of that was used for drinking milk, 12 per cent for milk powder, 25 per cent for butter, 30 per cent for cheese and 10 per cent for yoghurt.2 Virtually all drinking milk production was consumed domestically. However, over 60 per cent of milk manufactured into a downstream product was exported. In 2016, the major markets were China (178k tonnes), Japan (103k tonnes), Singapore (83k tonnes), Indonesia (61k tonnes) and Malaysia (58k tonnes).3 Asia accounted for 80 per cent of total export value, partly due to Australia being excluded from other major markets (e.g. EU) or limited by Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2019— 9781488617348 — Hubbard/Strategic Management 6e Hubbard, G, Rice, J, & Galvin, P 2018, Strategic Management EBook, Pearson Education Australia, Melbourne. Available from: ProQuest Ebook Central. [26 August 2020]. Created from swin on 2020-08-26 02:26:39. C op yr ig ht © 2 01 8. P ea rs on E du ca tio n A us tra lia . A ll rig ht s re se rv ed . C A S E 1 The Australian dairy industry: an industry in transition 439 subsidy programs by other competitor countries. New Zealand, the EU and the USA were the main exporters (83% combined of the international export market), with Australia next (6%). As the Australian population slowly increases, the total volume of milk consumed domestically also increases, but slowly. As the volume of milk produced was falling slowly, this meant that the percentage of product available for export was declining slowly. In the industry, exporting was seen as opportunistic, since the same revenue was received for domestic and export milk. So exporting became a way to use surplus milk that was not required for the local market. Export had declined from 60 per cent of milk production in 2000 to 34 per cent by 2016. Milk prices paid by processors to farmers varies over time according to both local and international supply and demand for milk. For export, fresh milk is heat treated to form UHT milk, which has a long shelf life. However, the main