The Other Side of Business

New Zealand’s dairy giant, Fonterra, was in the news for the wrong reasons again recently regarding the withdrawal of a contaminated dairy product. When the New Zealand Government pressed for more information, Fonterra was slow to respond with information and this led to criticism in Parliament and John Key was quoted as complaining of “gaps” in the company’s account of events. Fonterra only announced the withdrawal of the product on 2^nd August after a delay of three days, the widespread public concern led to NZ Government officials to investigate the source of the contamination and on 6^th August the media reported them as “swooping into Fonterra offices” in Auckland, Hamilton  and Australia. The incident did a lot of damage to Fonterra’s reputation in China, its most important overseas market.

This case illustrates the importance of communication and the speed of response. Fonterra’s executives were slow to respond and slow to provide information. There was delay in announcing the withdrawal of the contaminated product (which had been produced in May) and there was delay in providing information about the source of the contamination. The subsequent media coverage led to questions about whether Fonterra was putting profit before safety and there is little doubt that Fonterra’s mismanagement of the incident has done major harm in the most important overseas market, China.

The recent incident has rather detracted attention away from a more important question, is Fonterra good for New Zealand? As a co-operative, Fonterra is sometimes held up as being one of New Zealand’s few large, world class organisations. Yet having such a large organisation in one of New Zealand’s most important sectors has not always been beneficial. It is arguable that Fonterra are lacking the characteristics and qualities that New Zealand needs in such an important key sector. The following three characteristics seem symptomatic of Fonterra’s current management approach.

1.     Fonterra is complacent about its competitive strategy

It has been argued that it takes a crisis to force a firm to change its corporate strategy. For example, McGrath (2013) argues that companies need to move away from a reliance on traditional competitive strategies which rely on companies continuing to do what they perceive they are good at. This can lead to “strategic drift” and can leave a company unprepared for a crisis. It may take a financial crisis or other form of crisis before strategic change occurs. Large corporations pursue incremental and evolutionary change, they establish “core competencies” that get taken for granted, with established routines, structures and assumptions. In such circumstances, it is not surprising that large companies, such as Fonterra, are unprepared for a crisis. Perhaps of more concern, Fonterra did not manage the recent crisis well and appear to be complacent on their competitive strategy, their reputation is very vulnerable to food scares that are mishandled..

2.     Fonterra relies on low value-added products

The reliance of Fonterra on low value-added products has not been good for New Zealand. We have a worryingly low participation in high value global value chains (GVCs). These GVCs are now receiving more attention as indicators of economic prosperity. To be successful in the modern global economy we need companies that are participating in supply chains that add high value. Unfortunately New Zealand ranks very poorly. A recent OECD paper, indicated that New Zealand was in 30^th place in list of OECD countries, with very little improvement in New Zealand’s participation from 1995 to 2011 (De Backer and Yamano, 2012).

3.     Fonterra lacks entrepreneurial capacity and dynamic capability

David Teece has demonstrated the importance of dynamic capabilities for larger organisations, pointing to the importance of the “entrepreneurial manager” for strategic planning and risk management (Teece, 2009). This adaptive, dynamic capability is crucial for all enterprises to improve innovation and be flexible and dynamic, meeting McGrath’s call for a move away from a reliance on a non-changing competitive strategy.

Conclusion

In such an important sector to New Zealand as dairy production, we need an organisation that is fast moving, innovative and entrepreneurial. Unfortunately Fonterra has failed to demonstrate any of these qualities.

Professor David Deakins

References:

De Backer, K. and N. Yamano (2012), “International Comparative Evidence on Global Value Chains”, OECD Science, Technology and Industry Working Papers, 2012/03, OECD Publishing.

McGrath, R.G. (2013 The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business, Boston, Harvard Business Review Press

Teece, D.J. (2009) Dynamic capabilities and strategic management, New York, OUP.