EXECUTIVE SUMMARY

Fonterra Co-operative Group Limited (Fonterra) is New Zealand largest

company. The shareholders are the country's two principal dairy co-operatives, New
Zealand Dairy Group and Kiwi Cooperative Dairies, and the New Zealand Dairy
Board. The company is responsible for approximately 30% of the world's dairy
export.
In 2015, Fonterra acquired an 18.8 stake in Beignmate, the largest infant dairy
company in China. Fonterra viewed this joint venture as a “game changer” which
would provide an undeviating advantage and straighten the infant-formula brand
presence in the Chinese market. However, the minority stake gave Fonterra
inadequate control in Beignmate, resulted in a superfluous dependence on the Chinese
partner. Beignmate was losing both its profit and market shares and was at a risk of
being delisted in the Stock Exchange. The Fonterra Board and key shareholders
started to question and challenge the wisdom of the joint venture. On top of these, the
Chinese authorities were tightening regulations. Fonterra was now in a crisis.
In the premise of contingency, Fonterra discarded its planned organizational
dimensions and interacted with contingency elements. Fonterra approached the
emergent change by reevaluating and restructuring its organizational design. In the
home ground, the CEO was replaced and the board was slimmed down from 12
members to nine members, making the Board more manageable and cohesive. At the
China front, Fonterra immediately elevated two of its senior executives to exert better
control and influence over the operations. Meanwhile the Beignmate founder who was
the key player behind the scene in influencing the management of the company had
been given directions to step down. Simultaneously the Beignmate internal control
systems, performance forecasting and financial management were revised for their
effectiveness.
Fonterra capitalized on its good relationship with the Chinese government
ministers, heads of authorities and local powerful business leaders in liaising with the
regulatory authorities. The Chinese government was convinced that Fonterra should
do more for the Chinese infant-formula and dairy market.
Fonterra turned this crisis episode into business diversification opportunities.
The company started to explore ecommerce venture with Alibaba and Starbucks in the

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 1

supply of fresh milks and related products. Such collaboration would enable Fonterra
to make a bigger foot print in the Chinese dairy market.

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 2

Table of Contents

EXECUTIVE SUMMARY............................................................................................1

1.0 Introduction.........................................................................................................4

2.0 The Fonterra and Beignmate Partnership............................................................4

2.1 The Fonterra and Beignmate Organization Design.........................................4

3.0 The Strains and Roadblocks................................................................................5

3.1 The Roadblocks Negotiation...........................................................................6
3.2 The Interacting Structure Dimensions of Organization Design...................6
3.21 The Formalization Element.........................................................................6
3.22 The Restructuring of Hierarchy Of Authority..............................................7
3.3 The Interacting Contextual Dimensions of Organization Design...................7
3.31 The Retorting of Environment Elements....................................................7
3.32 Realigning The Organization’s Goals and Strategy.....................................8
3.4 The Effects on the Stakeholders......................................................................8

4.0 Conclusion...........................................................................................................9

Reference List..............................................................................................................10

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 3

1.0 Introduction
Fonterra is a New Zealand conglomerate, which supplies fresh milk
and dairy products, both for local and oversea markets. Fonterra has a unique
shareholder structure in that it holds a strategic partnership with the New
Zealand’s Dairy Farmers Co-operative. In 2015, to enter and capture the
Chinese infant dairy products market Fonterra joint venture with China’s
largest infant dairy products company, Beignmate. However down the road,
the joint venture relationship became stale, as the shareholders were finger
pointing at each other over the business loses; on top of these, the Chinese
government imposed further hefty trade conditions. In this essay the writer
would attempt to examine how Fonterra traverse its crisis in its venture into
the Chinese dairy market.

2.0 The Fonterra and Beignmate Partnership

In March 2105, Fonterra entered a partnership and acquired 18.8 per
cent stake of Beignmate, which gave Fonterra two seats in the Beignmate
Board. According to Gray (2010, p. 12), such a global venture is an enabler for
Fonterra to attain its global impact. Fonterra described the partnership as
revolutionary and an avant-garde that would create the titanic growth in dairy
products in the world. Meanwhile Beignmate Chairman claimed that such a
partnership was an answer to the call of the Chinese government’s aspiration
to improvise the quality and consumer wellbeing in the local dairy industry
(Kloeten & Read 2014). A co-operation committee was established to ensure
the partnership operation would be in line with the strategic intent.

2.1 The Fonterra and Beignmate Organization Design

Daft (1992, p.282) advocated that an organization could define its

organization design into two major categories, namely structural dimensions
and contextual dimensions. On joint–venturing with Beignmate, under
structural dimension, Fonterra has focused on the elements of specialization

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 4

 and hierarchy. In the specialization structural dimension, Fonterra is
piggybacking on the well-defined networks and relationship that Beignmate
has established. This was to enable Fonterra to enhance margin over its dairy
products. Meanwhile, on hierarchy structural dimensions, Fonterra holding an
18.8 per cent stake established a strategic alliance with the Beignmate founder
who held a 34.2 per cent stake and effectively they had control of Beignmate
(O’Sullivan 2018). On the contextual dimensions, Fonterra focused on the
culture and goals aspects. In the culture aspects, Fonterra is capitalizing on the
mindset of the affluent Chinese on premium brands and products. These
wealthy people are ready to pay more for Fonterra dairy products. Fonterra
has set its goal to strengthen its high–quality dairy products brand presence in
China. With these, Fonterra officially ventured into the China dairy products
market, endeavoring to make its footprint.

3.0 The Strains and Roadblocks

Beignmate was having a good book record when Fonterra first
acquired the 18.8 per cent stake of the company. However, at the end of that
fiscal year, the operating income of Beignmate has fallen 10 per cent. Within
the next three years, Beignmate has lost 70 per cent of its market value.
Beignmate revenue for the year ending 2017 has dropped by 4.2 per cent and
its market share has fallen from 9 per cent to 2.5 per cent. In 2018, Fonterra
announced its interim financial announced that the book value of its book
value of its investment in Beignmate has been reduced by 52 per cent. At this
juncture, both Fonterra and Beignmate had been fault-finding of each other;
and Fonterra’s major stakeholders, the New Zealand’s Dairy Farmers Co-
operative has been contemplating to pull out. Other shareholders were
querying Fonterra’s endeavor on the due diligence before the acquisition of
Beignmate. The relationship between Fonterra and Beignmate has been
strained and turned sour.
Further, the Chinese government has been querying Fonterra on the
Board composition and its Chinese operations and partnership. Fonterra

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 5

 ascertained that these situations were compelling and impeding but
nonetheless, need to be addressed.

3.1 The Roadblocks Negotiation

Fonterra was now in a dilemma and must manage the crisis

appropriately. Siddiqui & Ahmed (2016) stated that organizational changes
lied between the planned and emergent change. Fonterra had many options to
address the episode. The first obvious option was to sell its Baignmate stake
and write off the investment. The other obvious option was by acquiring
majority stakes in order to have total control of Baignmate. However, the
Fonterra Head of Sales and Marketing had reassured that exiting or back-
tracking the Chinese market was never the options for Fonterra (Smyth &
Hancock 2018).

3.2 The Interacting Structure Dimensions of Organization

Design

Fonterra reacted to the crisis immediately by evaluating and

redesigning the organization structure, and the contextual and structural
dimensions were interacted effectively.

3.21 The Formalization Element

The fundamental of Contingency Theory construed that the structure

an effective organization is dependent on the environment in which the
organization is related to (Betts 2016, p. 123-130). Henceforth, Fonterra had
reconsidered and changed its organization design and structure. Siddiqui &
Ahmed (2016) stipulated that change is dynamic in the core of an
organization. On the alignment of structural dimensions, Fonterra restructured
its group governance by reducing the board size from 13 to 11. The slim down
of the Board had made the Board more manageable and cohesive and Board
discussions were kept strictly at Board level.

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 6

3.22 The Restructuring of Hierarchy Of Authority

This structural formalization has also created momentum for further

change in hierarchy dimension. The then Fonterra CEO, Theo Spierings, was
replaced. At the joint-venture front in China, Fonterra had deputized two
directors to assist in its management. Such a change in the hierarchy structure
aimed to have better control of Beignmate, and at the same time, to exercise its
right of influence and to hinder gratuitous dependence on the Chinese Board
members. The new hierarchy also revamped the effectiveness of the internal
controls, performance forecast and financial management. Siddiqui & Ahmed
(2016) emphasized that change encompassed discarding the old ways and

replacing them with new approach. The Beignmate founder was a non-
executive in the company but had a tremendous influence with the
management of the company. Fonterra had taken issue of this and had taken
steps to mitigate the influence and involvement of the Beignmate founder.
Meanwhile the founder had been made aware that the dairy market has
evolved and changes need to be embraced in order to the interest and value of
the company, and the founder had been steered to step down (Smyth &
Hancock 2018).

3.3 The Interacting Contextual Dimensions of Organization

Design

3.31 The Retorting of Environment Elements

Fonterra also began to realign the contextual dimensions in its

organization design for the Beignmate joint venture. Towards this end,
Fonterra primarily focused on the environment element, which encompassed
the nature of political, social and economic influences. In an effort to ensure
and improve the safety and quality of the dairy products, the Chinese
authorities had stiffened rules and policies, encouraged industry collaboration,

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 7

 and also cramped down on scrupulous dairy operators (Smyth & Hancock
2018).
The Chinese authorities were investigating the operations of
Beignmate especially on the composition of the Board. Fonterra was
responding tactfully and well to the Chinese authorities’ queries while
capitalizing on its good relationship with the government ministers and
influential commercial leaders. According to Fonterra CEO, the Chinese
Government told Fonterra to retain its current investment in China and to
revolutionize the state of affairs with Beignmate key shareholders (O’Sullivan
2018).

3.32 Realigning The Organization’s Goals and Strategy

The Chinese market was evolving in an expeditious pace and was

shifting away from normal retail sales. Fonterra now recognized that the
market structure, place and customer orientation were trending towards
ecommerce. The Fonterra global channel director of foodservice Geoff Meyer,
shared in the 2018 Asia Food and Hotel fair that the young and affluent
Chinese were attracted to Fonterra for its quality New Zealand products. This
group of potential customers was going online to search for product source
and information (Wan 2018). Fonterra has jumped onto this bandwagon,
which was a huge potential market to capture as the company had the right
products in the appropriate place and at the suitable time.
To capitalize on the right social and economic trends, Fonterra had
opened its option to work with Alibaba and Starbucks in China for the supply
of fresh milk and dairy products. Alibaba has the largest online distribution
network in China and Starbucks is a class status for the affluent Chinese.
Partnering with these two commercial giants in China would provide Fonterra
a vast leverage to diversify into other ventures and to shore up its business in
China.

3.4 The Effects on the Stakeholders

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 8

 Zaremba (2010, p.24-33) stated that stakeholder engagement involved
soliciting stakeholders’ views on their affiliation with the organization. In
handling of the joint venture crises with Beignmate, Fonterra was quick to
engage, identify and manage its internal and external stakeholder interest.
Harrison, Freeman & Abrue (2015, p.858) suggested that to manage
stakeholders was to attend to the interest and well- beings of these
stakeholders. Fonterra’s key internal stakeholders were the Board and the New
Zealand’s Dairy Farmers Co-operative while the key external stakeholders
were the Chinese government and authorities and customers. The stakeholders
were concerned on the investment, organizational goals, culture and ethics on
the joint venture with Beignmate. These concerns on the crisis were heard,
respected, managed and attended to effectively and at a timely manner.
Fonterra had excelled in the stakeholder engagement and management.
Towards the end, apart from those ditched directors the majority of the
stakeholders were satisfied and happy with the way Fonterra handled and
managed the crisis. Importantly, Fonterra had retained the confidence of its
customers.

4.0 Conclusion

Betts (2016, p. 123-130) candidly put it that there would never be a

best way and equally effective way in organizing an establishment. In final
analysis, Fonterra has done extremely well in responding to the management
of crisis, change, and stakeholder affairs. Fonterra had excelled in its change
management and had ridden above the crisis. It had come out of the situation
of pulling out from the Beignmate partnership and grasped other opportunities
to strengthen its footprint in China. Nonetheless, Fonterra had been aware that
there might be interactive effects and tradeoff in its effort in the management
of the Beignmate and the “roadblock” episodes. The then CEO accentuated
that there are associated risks with this business venture and Fonterra has to
continue to balance those risks (Harrison, Freeman & Abrue 2015, p. 863).

[Word count: 1560]

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 9

Reference List
Betts, S.C. 2016, ‘Contingency Theory: Science or Technology?’, Journal of Business
& Economics Research, vol. 1, no.8, pp. 123-130, viewed 16 March 2019,
<https://clutejournals.com/index.php/JBER/article/download/3044/3092>.

Daft, R 1992, Organizational Theory and Design, 2nd edn, West Publishing, St. Paul,
Minnesota.

Gray, S 2010, ‘Fonterra Co-operative Group, and shaping the future’, New Zealand
Geographer, vol. 66, no. 1, pp. 2-13, viewed 16 March 2019,
<https://onlinelibrary.wiley.com/doi/10.1111/j.1745-7939.2010.01173.x>.

Harrison, J.S. , Freeman, R.E. & Abrue, M.C.S. 2015, ‘Stakeholder Theory As an
Ethical Approach to effective Management: applying the theory to multiple contexts’,
Review of Business Management, vol. 17, no. 55, pp. 858- 869, viewed 16 March
2019, < http://www.scielo.br/pdf/rbgn/v17n55/1806-4892-rbgn-17-55-00858.pdf>.

Kloeten, N & Read, E 2014, ‘Fonterra plans China partnership’, Stuff, viewed 16
March 2019, <http://www.stuff.co.nz/ipad-editors-picks/10429800/Fonterra-plans-
China-partnership>.

O’Sullivan, F 2018, Fonterra has to face up to debacle at Beingmate, NZ Herald,

viewed 16 March 2019, <https://www.nzherald.co.nz/business/news/article.cfm?
c_id=3&objectid=11982903>.

Siddiqui, N & Ahmed, J.U. 2016, ‘Managing change for better New Zealand dairy
products bangladesh ltd’, Asia-Pacific Journal of Management Research and
Innovation, vol. 12, no.1, pp. 85- 94, viewed 16 March 2019,
<https://journals.sagepub.com/doi/full/10.1177/2319510X16647295>.

Smyth, J & Hancock, T 2018, ‘Fonterra’s second China foray comes under scrutiny’,
Financial Times, 7 March, viewed 16 March 2019,
<https://www.ft.com/content/c1df3b8a-1de6-11e8-956a-43db76e69936>.

Wan, L 2018, ‘Four major food trends driving growth in China: Fonterra’, Food
Navigator, viewed 16 March 2019, <https://www.foodnavigator-
asia.com/Article/2018/05/24/Four-major-food-trends-driving-growth-in-China-
Fonterra>.

Zaremba , J. A. 2010, ‘Crisis Communication: Theory and Practice’, Business and

Economics, vol. 73, no. 4, pp. 473- 477, viewed 16 March 2019, <
https://journals.sagepub.com/doi/abs/10.1177/1080569910385318>.

Darren Lim Eng Ping (4326733) ORG30003 Assessment 1 Page 10