Fonterra was formed in the October 2001 merger of the New Zealand Dairy Group (NZDG), Kiwi Cooperative Dairies, and the New Zealand Dairy Board (NZDB). It has become the world’s leading exporter of dairy products, responsible for over a third of international dairy trade. The Group is co-operatively owned by over 10,500 dairy farmers whose products make their way to customers in approximately 140 countries. Fonterra aims for global dairy leadership and its purpose is to sell their farmer shareholders’ milk (Fonterra Co-operative Group, 2011).
Analysis of the Dairy Industry using Porter’s Five Forces
Porter's first force describes the threat of potential entrants. Barriers to entry and economies of scale are significant for new entrants. However, New Zealand’s deregulated market structure and relatively low cost might attract entrants as a base of export oriented supply and processing. The threat of new entrant is medium (Vallyon, 2003).
Porter's second force is bargaining power of buyers. The New Zealand dairy industry exports 95% of the country’s dairy production. Continued consolidation of food manufacturing and retailers has the effect of reducing overall numbers of buyers in the industry and increasing their purchasing power (Vallyon, 2003). Faced with the fact that buyers face few switching costs, it is fair to say that buyers have high bargaining power in the industry.
Porter's next force is bargaining power of suppliers. The dairy industry is a seller’s market with global demand exceeding supply. This opens up opportunities for other uprising overseas markets to the industry with suppliers from India, China and Brazil. Fonterra supplies are secured through the co-operatives structure and a significant threat exists if Fonterra fail to make competitive milk payouts to its farmer shareholders (Vallyon, 2003). It is clear that Fonterra suppliers have some bargaining power in the industry.
Porter's fourth industry...