Strength in numbers

Companies find it hard to co-operate. They should try harder. A strategy of working together can help national competitors to sell internationally by increasing the potential markets and taking advantage of shared economies of scale, say Damien McLoughlin, Mary Shelman and David E Bell

The roll-call of food and agribusiness firms of global scale is noteworthy but short. ‘Co-opetition’ is a strategy that invites competitors to compete in some areas and co-operate in others. The advantage, from an indigenous firm’s perspective, is that scale can be relatively cheaply and quickly assembled. The authors use two Harvard Business School case studies1 to demonstrate the strategy’s potential.

international business 2020 and ‘Co-oPetition’

Few crystal-ball gazers in 2000 could have predicted both the mayhem and the opportunities that exist in the global business environment today. Looking ahead from 2011, what is more predictable is that global food markets in the next ten years will have a number of qualities in which scale will be a very useful asset. Primary among these is the location of growth. While most Western economies appear to be returning to their somewhat normal economic pattern, the location of higher economic growth has undoubtedly shifted to Asian, South American and African economies.

The first principle of a growth strategy is to be in the markets of highest growth. These economies offer the greatest potential but working there requires a level of time commitment, resource investment and risk that is challenging for all but the largest firms.

Second, the so-called ‘hell’ curve of the market is likely to continue to punish those who are neither the lowest-cost producer nor recognised as producers of the highest quality. Achieving the former is very difficult for food companies outside those with scaled national production, while the latter requires a brand that provides the opportunity to secure a price premium, cope with the power of the retail trade and drive consumer demand.

Third, the understanding and appreciation of risk has changed since the financial crisis. Firms expect higher levels of volatility and a greater frequency of so-called ‘Black Swan Events’ – those that happen with little warning but which are capable of rapidly changing the rules of the game. While risk management and environmental-scanning techniques are developing to meet the revised concern for volatility, a certain level of scale is required to buffer organisations from these shocks.

Food and agribusiness firms face two options before putting new growth plans in place: wait until their scale allows them to meet the challenges outlined above, or find a way to get around them. In our opinion, ‘co-opetition’ is the best way to do this; it offers a speedier option than organic growth and a cheaper option than acquisition.

Put some zespri into your strategy

Following a second catastrophic collapse in prices for New Zealand kiwifruit in 1992, a government-sponsored review pointed to the need for the kiwifruit industry to adopt a greater customer focus and place less emphasis on commodity trading. This ultimately led to the establishment of Zespri, a ‘corporatised co-operative’ with three aims: produce kiwifruit with consistent quality and taste; increase the size of the global kiwifruit market; and improve the returns for the large and small kiwifruit growers who owned the organisation. One important factor in Zespri was that while growers and packers competed for sales in Australia and New Zealand, they decided that international markets had to be tackled as one.

New Zealand is not the largest producer of kiwifruit in the world (China and Italy are larger and Chile is also a significant producer) nor the cheapest (its production costs are estimated to be 50% more expensive than Chile due to expensive land, labour and transportation). It was therefore forced into a strategy that would allow premium pricing.

The Zespri brand name was launched in 1997 as a response to consumer research which found that consumers saw kiwifruit as ‘ugly as sin and tasty as hell’ and the desire to capture this uniqueness.

To fuel its brand, Zespri ‘virtually’ operates an integrated supply chain linking New Zealand growers to consumers around the world.

Every year, Zespri delivers the world’s best kiwifruit by enforcing a common set of standards in areas such as quality, traceability and sustainability. It also invests in product innovation. In 1998 it launched Zespri ‘Gold’, which is an intellectual-property protected yellow fleshed (rather than green) kiwifruit with excellent taste and superior farm productivity. The premiums that this and other new products (eg organic versions of Zespri Green and Zespri Gold) produce are essential to support the brand story, fund additional research and maintain the premium price paid to growers.

Genuine customer focus is important for Zespri because it enables the brand to be sold at different price points and have different positions in the international markets in which they work. For example, in Japan, consumers are willing to pay a 30% premium for Zespri Gold because of its sweeter taste and perceived health benefits.

Customer focus is also important because grower-led organisations are most often focused on supply concerns (returning the highest price to the farmer) rather than demand builders (investing in innovation and branding), which inevitably limits their ability to drive profitable growth in geographically diverse markets.

Aligning its economic interests with those of distributors and retailers, Zespri’s ambition is to maximise retailer returns on shelf-space through higher prices (and correspondingly higher margins), more frequent inventory turns and lower waste. In return, it seeks partners who will support the product at the store level.

Zespri’s support for retailers comes in a variety of forms including strong local TV advertising campaigns, driving the benefits of kiwifruit which are most prominent in the market, and an active programme of in-store sales promotions and product demonstrations.

In 2010 Zespri held 30% global market share for kiwifruit by volume, but 70% by value with exports to 60 countries. It enjoyed strong growth in Asia, helped greatly by its Gold variety, and had a number of new technology-based initiatives in the pipeline to support the global brand. Its ambition is to double sales by 2025.

Putting muscle onto the irish beef industry

The challenge facing the Irish food and agribusiness sector is similar to New Zealand’s (both have very small domestic markets), but with an added twist. The post-2008 bursting of a property bubble in Ireland led the country to the brink of economic collapse and a bailout from the EU/IMF. The Irish government looked to the indigenous food industry and its potential to expand exports into a rising global food market as one route to economic recovery.

To meet this objective, the Irish Food Board (An Bord Bia) commissioned a study by two Harvard Business School agribusiness specialists. Their report, Pathways for Growth2, identified ‘coopetition’ as one of four strategic actions that the industry could take to increase its share of global food markets.

Taking beef as our focus (perhaps surprisingly, Ireland is the world’s fourthlargest exporter), the greatest potential for ‘co-opetition’ lies, inevitably, in the areas of most difficulty. Like many traditional agricultural nations, Irish pasture-based beef farming lacks scale (the average herd size is 18) and has been late in adopting new technology. Beyond the farm, the processing industry is overbuilt, with overcapacity as high as 50% in off-peak production times. There is also a strong enmity between the beef processors and farming organisations that makes it difficult to work together to achieve consistently higher quality.

While the industry with the support of the Irish Food Board has been successful in introducing a (voluntary) national quality mark and an innovative programme to measure the environmental impact of beef production, it lacks a differentiating feature beyond being grass-fed and coming from an island known for its green and clean environment.

These latter advantages have strong potential, but exploiting them internationally would require a unified approach including mandatory quality standards and investment in a brand identity that can be leveraged to drive demand for Irish beef.

While the advantages of working together seem clear, the landscape for ‘co-opetition’ in the Irish beef industry is very different from that faced by Zespri. Most notable is that most of the larger Irish beef processors are profitable and have been in recent years. It is also unlikely that a collapse of the kind the New Zealand kiwifruit industry faced on a number of occasions could prevail in the EU.

Rather than coming together to secure survival, the Irish beef industry’s task is to work together to take advantage of global opportunities. Many obstacles stand in the way. Besides those mentioned above, historical rivalries among Irish beef processors are especially damaging. All of the major firms are privately owned, so family history plays a big role in decision-making and disagreements and defeats tend to be remembered for longer. While the industry has been very successful in building a base of customers among the leading European supermarket chains, these retailers are generally quick to use the intensity of this rivalry to bid down Irish beef prices.

However, in the six months after the publication of Pathways to Growth, two of the largest players in the beef industry adopted a strategy of ‘co-opetition’ in response to a situation that threatened not only individual players but the industry as a whole. During the past few years, Irish farmers have found it more profitable to sell calves abroad to be raised in other countries rather than feeding them to maturity. Increasing exports of live calves has two effects on Irish beef processors.

First, it reduces the actual volume of beef available for processing – exacerbating existing overcapacity problems and putting at risk their ability to supply European retailers and restaurant chains who require a guaranteed supply of beef. Second, it can lead to a reduction in product quality as there are fewer beef cattle in the supply chain and older dairy cows become a greater proportion of input.

To counter this downward spiral, Kepak and Irish Food Processors developed a ‘co-opetition’ programme in October 2010 that basically guarantees farmers a set price for their cattle in two years that covers their costs and awards a bonus if they meet certain quality standards. To make this work for the processors as well as the farmers, the two firms secured a contract from a leading food service firm to buy the beef at a set price reflecting the costs of both farmers and processors. With an initial programme for 30,000 head of beef cattle per year, this classic ‘co-opetition’ initiative puts in place a structure that ensures the sustainability of the Irish beef processing industry.

Lessons for marketing

Although the pathway followed by Zespri and the Irish beef industry was not an easy one, its history and that of other examples of successful ‘co-opetition’ in food and agribusiness suggest that there are several conditions present to enable competitors to work together.

A common enemy. The benefit of a common enemy is that it provides a way to ‘rally the troops’ and take the focus off perceived competition with the farmer or firm next door. For Zespri the common enemy was the rise of Chilean kiwifruit growers which threatened the existence of the high-cost New Zealand industry. The emergence of ‘co-opetition’ in the Irish beef sector was based on a less immediate threat to survival but one that all players saw as having great potential for disruption.

Vision. The creation of a common vision, which all of the parties can buy into, is vital. It helps if the vision leads to a ‘bigger pie’ that can be shared rather than a reallocation of existing business. The New Zealand kiwifruit industry was able to create and convey a vision of world leadership through superior quality, innovation and branding that would lead to category growth and higher prices. Zespri makes sure that every grower and every supply-chain partner understands the market opportunities that come from working together. In the Irish situation the initial vision of a differentiated Irish beef brand was an external one, which was sponsored by the Irish Food Board.

Measurable benefits. In the case of Zespri these benefits are accrued in financial form (through higher farm-gate prices and institutional ownership shares and dividends) and non-financial forms (research inputs that enable the development of new varieties of kiwifruit which themselves achieve higher premiums and create a virtuous cycle). In the Irish beef situation the initially small programme to support Irish supply had measurable benefits for farmers in price terms and processors in terms of their enhanced relationship with a food-service customer but the highly scalable nature of the programme meant that each party could also see a long-term future in the ‘co-opetition’.

Permission to act. The apparently spontaneous emergence of a joint buying programme in the Irish beef industry was observed by an industry leader as being a result of the ‘permission’ that the Irish Food Board gave to the industry to experiment with the practice of ‘co-opetition’. This permission was important in identifying a reason and a method to overcome historical enmity. It also removed a misunderstanding that working together with a competitor would be viewed legally as anticompetitive practice.

Find neutral ground. Both the New Zealand kiwifruit industry and the Irish beef industry came to ‘co-opetition’ on the back of a crisis, albeit of different natures and magnitudes. In both situations the ‘co-opetition’ strategy got a foothold by focusing on neutral ground. For the New Zealand industry it was an explicit focus on international markets; for the Irish beef industry, it was a new initiative.

Co-operation doesn’t come easily but the benefits are well worth the effort.

Damien McLoughlin is professor of marketing at UCD Michael Smurfit Graduate Business School

[email protected]

Mary Shelman is director of the Harvard Business School agribusiness programme

[email protected]

David E Bell is George M Moffett professor of agriculture and business at Harvard Business School

[email protected]

References:

1. Zespri, Jose Alvarez and Mary Shelman, Harvard Business School case 511-001, December 2010; Kepak and the Future of the Irish Beef Industry, David E. Bell, Damien McLoughlin and Mary Shelman, Harvard Business School case 511-070, December 2010.

2. Pathways for Growth, David E Bell and Mary Shelman, Bord Bia, May 2010,

www.bordbia.ie/industryservices/information/publications/corporatepublications/pages/pathwaysforgrowth.aspx

Food and agribusiness firms face two options before putting growth plans in place: wait until their scale allows them to meet new challenges, or find a way to get around them