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The a2 Milk Company Case Solution
The dairy industry of Australia comprises of one of the largest agricultural industries of the country producing 13.7 Billion Dollars across the wide supply chain. The industry holds a prominent position in providing employment opportunities and currently employs around 38,000 individuals in various capacities on farms and manufacturing. The Australian government has invested heavily in the past few decades to enhance infrastructure, employment and income to capture the growth opportunities the segment has to offer (Dairy Australia, 2019b). Globally, the industry ranks on number four in respect of trade volumes and gives a 7% share. The exports are also significant and value of approximately 2.7 Billion Dollars each year. The country has also been exporting more than 40% of the total milk produced. The primary export dairy market of Australia includes China, Japan, the Middle East and South East Asia (PWC, 2018).
Following questions are answered in this case study solution
Factors which make the Australian Milk Market Attractive
A2 Milk Company Competitive Advantage in Australian Dairy Processing Industry
Fonterra Failure to Respond to A2 Milk Company’s Entry in the Dairy
Nestle Entry into A1- Free Market
Integrated Strategic Option for A2 Milk Company
Case Analysis for The a2 Milk Company
The capital investment in the dairy industry of Australia has enhanced the productive capacity and efficiency of the farms and manufacturing sites which has, in turn, resulted in additional income, employment and better infrastructure. What makes the Australian dairy industry attractive is the strict focus on sustainability which pushes the farmers and manufacturers to grow the supply of dairy products profitably domestically and into the international markets. Further to this, the farming systems are quite flexible owing to variable climate because of which farmers can function over pasture systems producing higher feed which ensure delivery of good quality milk (Agriculture Australia, 2019).
In addition to this, Australian dairy markets have maintained an exceptional safety record and compliance with food regulations which have attracted massive volumes of international interest and foreign direct investments seeking definite returns. The Australian dairy industry is also known for building innovative processes and product delivery options for farmers, retailers, consumers and manufacturers as well as advanced technology which help in implementing sophisticated rearing, milking, storage and processing systems for the farmers to optimize volume and quality. The industry operated on three core foundations of capable workers, profitable farms and trusted manufacturers to reach amongst the best industries operating worldwide (Dairy Australia, 2019a).
2. A2 Milk Company Competitive Advantage in Australian Dairy Processing Industry
A2 Milk Company is foreseeing burgeoning trade relationships with Asian countries through the revised free trade agreements with South Korea, Japan and China. These markets are looking for opportunities to grow in agricultural goodies such as fruit, dairy, fish, nuts, vitamins and honey. Companies like A2 Milk Company are visioning their good fortune owing to the strategic global position it holds (Deans, 2017). The company exhibits a number of differences in the model which set it apart from the competitors. The dairy output is usually marketed to be nutritional with no problem for lactose intolerant consumers and other health issues often not solved by traditional milk supply (Grant, 2015).
The business model of A2 Milk Company differs in the way that it is only involved in dairy products which are A2 beta-casein protein in nature which is a key distinction from the competitors. Further to this, like other Australian dairy companies who offer commodity products in addition to value0added products, A2 Milk Company only extends value-added products to the consumers. Additionally, the company has retained a minimum number of fixed assets which churns attractive return on assets each year. The company has also diverted the focus from traditional dairy products to wholly nutritional products especially in the segment of infant formula (Etsy, 2019).
Quality is a factor which places A2 Milk Company on a competitive edge. The cows are DNA tested to determine if they are A2 producing and then they are separated from the herd. The milk is purchased at a premium price to maintain the quality and nutrition and to ensure the product is A1 protein free. The company is having built a state-of-the-art facility in Sydney with packing agreements made with a third party to seamlessly integrate the supply chain (Bloomberg, 2018). The value-addition is primarily undertaken by developing and investing in the science, marketing and distribution and sales. The strategic geographical position of the company also extends another competitive advantage for being closer to China. Since Chinese customers are particularly focused towards digestive well-being, the demand for nutritious, A2 based products is high due to the higher number of people who are intolerant to lactose (Scully, 2019).
3. Fonterra Failure to Respond to A2 Milk Company’s Entry in the Dairy
In 2018, Fonterra and A2 Milk Company decided to join hands in the effort to work together in the Australian Dairy Company. For A2 Milk Company this was a winning situation as it was able to achieve a smooth supply of milk void of A1 beta-casein. However, this merger for Fonterra was only due to the complex challenges it had been facing since the entry of A2 Milk Company. Lately, the company had been unsuccessful in impressing the farmers of Australia (Parker, 2018).
The company represented 13,000 farmers who were dissatisfied with the organization due to significant corporate overheads, incompetent management information systems, weak balance sheet, high fixed costs and low return on invested funds. As a result of this, the company was reporting losses for several years by paying for milk and milk solids. In addition to this, the inventory was too high which created issues having bells and whistles in factories across the country. Further to this, financial information was not being adequately reported because of which timely annual reports could not be published (Bladwin, 2018). The rating agencies had established that the company's interest-bearing debt had significantly exceeded from what was forecasted in the business plan along with the alarming increase in capital employed. Despite the milk supply was increasing, Fonterra was experiencing loss of sales revenue and declining margins (Stringleman, 2018).
Due to these accumulating operational challenges, Fonterra struggled to remain profitable despite operating in a dairy-rich economy. What was missing n Fonterra was the lack of focus and direction which A2 Milk Company had in providing dairy products to the consumers. The company was heavily burdened in costs and other strategic loopholes which were necessary to rectify. Lastly, the company direly needed to offer A2 supply to the farmers or else the company would have lost most of its supply to competitors (Smyth, 2018).
4. Nestle Entry into A1- Free Market
A2 Milk Company has been experiencing a drop in the share price owing to the entry of international giant company called Nestle. The entry has been strategically planned to capture the widening Chinese infant formula market especially. Since A2 milk is perceived to offer numerous health benefits as compared to the usual milk which contains A1 protein, A2 Milk Company shareholders fear that the company will soon lose its competitive position as the competitors have started penetrating the market to create their A2 herds and provide dairy products to domestic and international Asian markets (SBS News, 2018).
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