Discuss about the Achievements and Challenges of Innovation.
The aim of this report is to analyze on the structure of dairy industry in Australia and the stages of production to distribution of dairy products to the consumers. Australia’s dairy industry has continued to be one of the most vital agricultural industries that generates near about $13 billion across the supply chain (Regulations 2013). This industry employs for more than 39000 people and hence improves the employment level in the nation. Australia’s dairy sector enhance in contribution to overall income and growth of this nation (Zhao et al. 2012). Globally, the dairy sector in Australia ranks fourth in terms of trade volumes and exports for over 40% of nations milk production. In this study, intermediate market structure involved in manufacture and distribution of dairy products is also highlighted in this paper. Furthermore, market structure implication in this industry is also assessed in this study. The report also elucidates on the present strategy adopted by Inglenook dairy farm and focuses on their opportunities or threats to their long run profits. The recommendation on amendment of Inglenooks current strategy for long run profit is also analyzed in this report.
It has been noted from recent study that there has been substantial change in structure of Australia’s dairy industry for over the last 20 years. Reforms have occurred in size as well as product mix of this nation’s dairy farms in this industry. In addition , mergers as well as takeover have attributed in its structural adjustments, which in turn resulted in higher ownership concentration in this industry. Moreover, huge reform in product mix of this industry has also taken place over the past few years. Australian Dairy Farmers (ADF) is a huge network that supports the dairy industry of this nation. They offer support to this industry through additional research or information for helping the farms in achieving their mission.
The stages involved in the production of dairy products from raw milk and marketed to final consumers in this nation involves:
Collecting raw milk- The dairy farms in this nation uses antibiotics in order to control bacterial infections in cows. However, this helps the farms in attaining good quality of raw milk.
Storing milk- The milk is then stored in hygienic container at 4 degree centigrade and then is tested for fat content.
Standardization- This process involves filtration and separation of fat from milk.
Pasteurization as well as homogenization- In this process, heating of milk is done at temperature of 72 degree centigrade and is then kept for at least 15 seconds. The heat used in this process helps in killing microorganisms or harmful bacteria.
Chilling the pasteurized milk- This stage involves chilling the milk at 4 degree centigrade. This treatment is necessary in order to kill microorganisms that have not been destroyed.
Packaging- The packaging of milk is done through laminated pouch, tin cans and plastic containers in order to store the product for longer period.
Storing- The dairy farms stores the product at 4-7 degree centigrade by using chemical inputs namely sanitizing agents before distribution.
Marketing activities- The dairy farms promotes the product by advertising it in traditional mediums that includes television, radio or other social media.
Intermediate market structure involved in production and distribution of dairy products
Oligopoly market structure is basically involved in manufacture and distribution of dairy products. In this type of market structure, fewer numbers of entities has huge majority of share in the market. The industry in this nation has fewer farms and has huge interdependence among them. In addition, the dairy farms in these industry manufacturers’ slightly homogeneous or differentiated products for attaining competitive advantage. Each farm focuses on the action of its competitors before setting the price of dairy product (Nettle et al. 2013). Non-price competition prevails in this type of intermediate market structure as the price of the dairy product is influenced by the farms. As few farms exist in this type of market structure, new entrants faces huge competition in terms of product pricing and quality. In addition, the behavior of the dairy farms changes according to the prevailing market condition (Wilson 2013). The kinked demand curve model helps in illustrating the farms behavior in production and distribution of products, which is shown below:
The above figure shows that at P, if the leader farm increases the price of dairy product, the customers purchases the product from other dairy farms existing in the market. As a result, the leading farm loses its market share value that in turn reflects elastic demand curve. Hence, it can be assumed that the leader farm incurs huge loss by increasing the product price but this benefits other farms as their profitability level increases due to this pricing strategy (Nettle et al. 2012). This framework also explains that if the leader farms does not achieve any incentive for lowering its product price, then its price set will be rigid for long time period.
It has been noted from recent cases that pricing arrangements and advancement of new technology helps the farms in increasing productivity and gain competitive advantage in oligopoly market structure. The competitive environment prevailing within this dairy industry is slightly concentrated. Additionally, some leading players (farms) operate in this market and the action taken by this leading farm is followed by other farms. Hence, the competition within the farms becomes fierce as the dominant farm influences the pricing strategy of other farms. Alternatively, barriers in entry is relatively weak for new entrants those who are selling products in the local market.
The oligopolistic market form in the dairy farms of Australia has high implications for market power distribution in this industry basically over the product pricing strategy and profit accumulation at various stages of production chain. As leading farms affects the pricing strategy of small farms, price leadership exists in this intermediate market structure (Kilelu et al. 2013). This means that if one farm lowers the price of the dairy products, smaller farms tries to follows it by declining their product prices in order to attract more customers and retain existing ones. On the other hand, if one dairy farm increases the price of products, other farms do not stick to this price or follow it. Therefore, the pricing strategy of the leading farm affects the profitability level of other farms and this leads to decline in value of market share.
Market power refers to the ability of the firm in increasing the price of the commodity above the competitive price level. It has been opined by Klerkx and Nettle (2013), assessment of market power involves modeling as well as evaluating the difference between prevailing market price and marginal output cost. Oligopoly market structure has huge implication for market power distribution in this industry. As less number of farms dominates in this market structure, the leader farm has the ability in raising the price above the equilibrium level. Hence, the leader farm in Australia’s dairy industry has market power and is illustrated as price makers as they establishes price of the dairy product without relinquishing its share in the market.
The current strategy of Inglenook dairy farm reflects that they adopt vertical integration method for processing milk and in the activities that are involved with the distribution of products to the consumers. The present strategy of this farm involves product differentiation according to the wants and preferences of consumers. Along with this strategy, this farm strategizes to implement new technology in order to enhance their productivity level. In addition, this farm makes revision on its set price by focusing on the present market conditions, target customers and its competitors (Eastwood et al. 2012). They also try to innovate new product by updating on their technique used for production. Moreover, in order to attain good brand value, they keep on changing their marketing strategy that includes advertising platforms. The farm also focuses on packaging and distributing the product in order to attract more customers and gain competitive advantage. The present strategy also aids in controlling huge share in the market and attain huge profitability level for longer period (Gourley et al. 2012). Hence, implementation of this strategy improves Inglenook’s financial performance and its position in the global market.
Adoption of proper strategy helps the firm in expanding their business and improves their business growth. Inglenook’s dairy farm highlights high potential in business growth owing to adoption of proper strategy that includes, technological advancement, marketing strategy etc. In addition, extension of new channels for customers increases their product demand in domestic as well as in international market (Douphrate et al. 2013). This in turn influences the producer’s abilities and offers huge opportunities in expanding their business in the global market. The current strategy of this farm adds value in some key areas that includes-
Competitors of Inglenook farms are their main potential threat that influences their product quality and pricing. Other potential threat of Inglenook includes-
Moreover, Australian government also plays crucial role in the dairy industry of this nation. Changes in new policies and tax influence the business growth of this dairy farm. Therefore, competitors as well as government of Australia affect their long run profit. Additionally, low investment in the dairy sector and improper development plan in business adversely affects the farms performance during a specific time period.
Inglenook dairy should focus on the value creation principle in every segment of the production chain in order to achieve success and attain highest position in this industry (Crawford et al. 2012). There are few suggestions on the amendment of Inglenook current strategy that will aid them in maximizing profit in the long run.
Conclusion
From the above report, it can be concluded that the manufacturers must focus on the intermediate market structure before producing any dairy product. As oligopolistic competition exists in Australia’s dairy industry, leader dairy farms dominate the smaller farms in terms of pricing, quality and other marketing strategy. The Inglenook dairy farm that has been highlighted in this case study adopts different business strategies for attaining competitive advantage and higher profitability level in longer time period.
Reference
Crawford, A., Nettle, R., Paine, M. and Kabore, C., 2012. Farms and learning partnerships in farming systems projects: a response to the challenges of complexity in agricultural innovation. Journal of Agricultural Education and Extension, 13(3), pp.191-207.
Dahl, A., Leith, R. and Gray, E., 2013. Productivity in the broadacre and dairy industries. Agricultural commodities, 3(1), p.200.
Douphrate, D.I., Hagevoort, G.R., Nonnenmann, M.W., Lunner Kolstrup, C., Reynolds, S.J., Jakob, M. and Kinsel, M., 2013. The dairy industry: a brief description of production practices, trends, and farm characteristics around the world. Journal of agromedicine, 18(3), pp.187-197.
Eastwood, C.R., Chapman, D.F. and Paine, M.S., 2012. Networks of practice for co-construction of agricultural decision support systems: case studies of precision dairy farms in Australia. Agricultural Systems, 108, pp.10-18.
Gourley, C.J., Dougherty, W.J., Weaver, D.M., Aarons, S.R., Awty, I.M., Gibson, D.M., Hannah, M.C., Smith, A.P. and Peverill, K.I., 2012. Farm-scale nitrogen, phosphorus, potassium and sulfur balances and use efficiencies on Australian dairy farms. Animal Production Science, 52(10), pp.929-944.
Kilelu, C.W., Klerkx, L. and Leeuwis, C., 2013. Unravelling the role of innovation platforms in supporting co-evolution of innovation: Contributions and tensions in a smallholder dairy development programme. Agricultural systems, 118, pp.65-77.
Klerkx, L. and Nettle, R., 2013. Achievements and challenges of innovation co-production support initiatives in the Australian and Dutch dairy sectors: a comparative study. Food Policy, 40, pp.74-89.
Nettle, R., Brightling, P. and Hope, A., 2013. How programme teams progress agricultural innovation in the Australian dairy industry. The Journal of Agricultural Education and Extension, 19(3), pp.271-290.
Nettle, R., Paine, M. and Penry, J., 2012. Aligning farm decision making and genetic information systems to improve animal production: methodology and findings from the Australian dairy industry. Animal Production Science, 50(6), pp.429-434.
Regulations, P., 2013. Australian Dairy Industry.
Wilson, N., 2013. The Dairy-Business Plan.
Zhao, S., Sheng, Y. and Gray, E.M., 2012. Measuring productivity of the Australian broadacre and dairy industries: concepts, methodology, and data. Productivity Growth in Agriculture: An International Perspective, pp.73-108.
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