Outline
A number of economic aspects that affect the operations and productivity of a business have been covered in the assignment. The overall structure of the Australian dairy industry has been analysed and the various processes involved in different stages of raw milk processing into other dairy products has been identified. The structure of different intermediate markets which are involved in the production and distribution process of final dairy product has been evaluated for better understanding of the reader. The implication of market structure on market power in the dairy industry has been covered. Finally the strategy of Inglenook Dairy has been assessed to understand whether vertically integration strategy helps a dairy firm to generate more profits. The different opportunities and threats that come in the way in the long-run profits of the firm have been identified.
Structure of the Australian Dairy Industry
The sector of the Australian Dairy Industry is much diversified and will include cooperatives that are owned by farmers, along with private, public and the multinational companies. The cooperatives that are owned by the farmer are no longer at the stage of dominating the industry and is now accounting for less than 40 percent of the total milk production in Australia. The largest milk cooperative is Murray Goulburn and is considered to be the single milk processes which are largest and is accounting for about 37 percent of the total milk that is produced in Australia (ABC Rural, 2013).
In Australia half of the milk production is consumed by the domestic market while prices of about 70 percent of production in Australia are connected to the international prices. The milk prices in Australia are actually based on the fat in the milk and the protein solids in the milk that is produced (Anderson, 2013). The dairy industry in Australia is characterized by fairly by the small level producers. However, large herds are increasing in number and a few of these operations are in the stage of milking above 1000 cows.
Source: (Dairy Australia, 2012)
The demand and supply together are constricted with the increased level of volatility in the international market. It has encouraged numerous dairy companies internationally for examining the industry of Australia (Blok, 2013). It has been determined by increasing the concerns of the food security and the asset availability in Australia. The sector of processing is also found to be influenced by the discounting in the price that is offered by the key retailer’s private labels.
Source: (Dairy Australia, 2012)
The dairy industry in Australia is known to be the research and the development corporation which will service the dairy industry. It is actually focused on assigning the research which improves the dairy industry (Čančer, 2014). Eventually, its focus is on the development of the market, maintaining and the opening of the new markets and hence promoting the daily industry of Australia.
Structure of any intermediate markets (i.e. vertically-related markets)
The dairy sector is found to be established well in Australia across the temperate and some of the subtropical areas of Australia. However, most of the milk production in the country is in the seaboard states of the southeast, all of the states are having the dairy industries which will supply the fresh drinking milk to the surrounding towns and cities that are nearby. The products are manufactured in such a way that it has a longer shelf life along with cheese, and the milk products that are specialized (Dairy Australia, 2012).
In the southeast region of Australia, this kind of manufacturing is gradually becoming highly concentrated. In most of the Australian states the consumer products of high quality, in addition to fresh milk, yogurts, custards, and a wide range of types of cheese are in production. By understanding the structure of the dairy industry in Australia it is estimated that the production and distribution of the final dairy products are single-handedly carried out by Australian states.
The feeding is becoming common increasingly with grains and supplements. The dairy industry in Australia principally remains pasture based. Australia is the major regional employer, the value-adds are done by industry with the processing of the milk for producing the fresh stock of cream, cheese, butter, and yogurt (Dascălu & Ungureanu, 2015). It is significant in the production of bulk milk and the specialized powdered milk. The following are some of the major statistics for the dairy industry in Australia:
Figure: Major Statistics for the Australia Dairy Industry
Source: Source: (Dairy Australia, 2012)
In the world’s milk production Australia accounts for an estimated level of around 2 percent. Apart from which it is the substantial exporter of the dairy products. The volume of the milk that is produced by Australia is more than the threshold level which is required for the domestic consumption so larger amount of proportion is distributed in the export markets which is occurring from the past two decades. The share in the dairy export globally is 10 percent. Australia is in the third position with respect to the dairy trade globally (de Bruin & Dolfsma, 2013).
Implications of the market structures
In the year 2004 in June, it has been surveyed among the farmers who has planned for the increase production of milk for the year 2005 provided if that is worth seasons and allows for the improved pasture growth and the supply of the supplementary seeds in abundance like the grains. Approximately around 15 to 25 percent of the farmers have been expected for leaving this industry in the next three year including the year 2004 (Fourcade & Khurana, 2013).
In the year 2005 around 60 percent of the farmers have come out of the dairying because of the lack of profitability which is the key reason. Most of the movements that took place are because of the nature of the sale of the enterprise of dairy to the other dairy farmers. From the industry, the net migration of the dairy farms and cows has been expected to be over 5 percent annually in the coming years including 2004 (Spencer 2004).
However, the prices of the sale of the dairy products are possible to come under the pressure, but the stance of the retail stage is found to be on the positive side. Both the value of the category and the growth of the market are still healthy in addition to which the market is in the steady growth of 1-2 percent. In the inflationary pressure, there has been the reduction, which is found to be benefiting the selling of the products of diary further (Grammenos, 2013).
There are two issues which are of major concern, such as consumption of the decisions that are the subject to the change as these are the decisions that are influenced by the ethical and the environmental traits. In addition to this if the brands of the supermarket are on the rise than it might limit the ability of innovation.
The following figure shows the differences in the pricing structure that have been received by farmers:
Source: (Dairy Australia, 2012)
Evaluation of Inglenook Dairy’s current strategy
Australia is a small producer of milk but the world’s third largest exporter of dairy products. Its exports account for 10% of the global milk market which mainly includes milk, milk powder, yoghurt, cheese, butter, etc. Even though the Australian dairy market is small in size but there is immense level of competition among the existing dairy players.
Inglenook Dairy is a family-owned dairy business which operated in the Australian dairy industry. The prevailing market conditions were pretty unfavourable for major dairy farms as there were a number of participants involved in different stages like milk processing, retail distribution, etc. The Inglenook Dairy adopted the vertical integration strategy of combining the downstream milk processing operation and distribution function within its business activities. This strategy was made with the intention to capture more of the industry’s potential profit and give less power to its suppliers and distribution partners (Harzing & Mijnhardt, 2015). The firm’s plan to control major segments of its operations starting from processing to distribution was a daring step but it helped them to have better control on the quality of their dairy products. It also reduced other suppliers and distribution networks from the picture so their profit only belonged to their business. This business tactics helped the dairy firm to have a competitive advantage in the dairy industry and increase their profitability.
The strategy which has a significant impact on the processes of a dairy business can give rise to various kinds of business conditions both favourable and unfavourable in the long-run operations of the concern. In case of Inglenook Dairy, the vertical integration strategy adopted by the dairy farm helped it to remove a number of participants who were taking its share of profit in the industry (Mazzarol, 2014).
When a dairy concern integrates the downstream production process and distribution process with its original operations, in the long-run it helps it to have an end to end control over all aspects of the product starting from its production until it is delivered to the end consumer. Along with the vertical integration model, Inglenook Dairy adopted a smart method of distribution (Lee, 2012). It started to differentiate and distribute its dairy products in the market by focusing on the specific needs of the particular target audience. The overall control on business process helps firms to explore new opportunities in the market and gain more profit in the industry in the long-run (Malaska, 2016).
There might be a few threats which might come along the way by adopting this strategy. If a firm with more resources adopts this model, the initiator of the strategy might face stiff competition which might hamper its long term profitability in the market. Thus firms need to carefully analyse various aspects before making any strategic move since it is vital to consider the long-term implications of the strategy (Ling & Jiang-wei, 2014).
Recommendations
The current strategy adopted by Inglenook Dairy was the vertical integration strategy. This model helped the dairy farm have a complete control over its diary business and its operations. The process eliminated the number of participants in the diary business process who were taking some portion of the profit in the industry. The dairy firm removed the suppliers and distribution members and decided to integrate these functions in its business process.
Some recommendations to further enhance the current strategy of vertical integration could be the introduction of more technological aspects in the operations so that it can enhance the dairy process. Since generally the milk yields of most dairy systems is towards the lower side, the firm can focus on the untapped potential area so that it can boost its production efficiency in the dairy industry.
The firm can also try to improve its farming system by emphasising on its research and development tactics which can further simplify its vertical integration strategy and make it more effective. It can think of incorporating a risk management system into its dairy development strategy so that it can check various aspects which impact his production and overall business.
Since the global dairy demand is increasing with passage of time, the dairy firm can focus on creating greater value for different segments of the target audience so that its customer base in the market can further expand in size.
References
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Dairy Australia., 2012. Dairy 2012 Situation and Outlook Summary Report.
Dairyaustralia.com.au. 2017. Dairy information for Australian Dairy Farmers and the industry – Dairy Australia. [online] Available at: http://www.dairyaustralia.com.au/ [Accessed 7 May 2017].
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