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Turning Around the Fonterra Disaster - Less is More and Back to Basics

December 16, 2019

 

A topic close to my heart.  In fact it should be close to all our hearts.  Whatever you may think New Zealand's future is, you can be sure it will be closely linked to those dastardly four legged beasts that continue to mess up our waterways and offend those lovely vegan extremists who suggest we should abstain from the sins of the flesh!  I jest, of course.  Dairy farmers continue to invest significant amounts of money into fencing off our waterways.  In a 2017 paper published in the American Journal of Environmental Quality, Ag Research's Professor Rich McDowell estimated 27,000 km of farm-based waterway fencing had been erected and 99% of 44,386 regular stock-crossing points now have bridges or culverts.  The numbers in 2019 will be significantly larger (but unavailable!)  In McDowell's paper it wasn't rural water quality that was the biggest issue, it was urban water quality.  The rural rump is doing its bit, is your Council?  (I know the answer - why does their continue to be pressure on decreasing Council rates when we all know that raw sewage continues to "splurge" out of stormwater outlets all over Auckland City - and other cities and towns - due to old, unmaintained and failing infrastructure?) 

However, I digress (and I wont say anything about those lovely vegan extremists - they don't deserve it!)  I spent a couple of hours last night listening to the Prof "Good to Great" himself - Jim Collins.  It was a salutary lesson in the way some things don't change.  What he was talking about 20 years ago is still relevant today.  The basics of building an enduring great company haven't changed.  The Principles of Greatness are just as relevant now as they have ever been.  

And then I thought of Fonterra!  Oh dear!  First a very brief history lesson.  Fonterra was formed in 2001 by the merger of the two largest Dairy Cooperatives, Kiwi and NZ Dairy Group,  with the NZ Dairy Board.  It was designed to show a united Export front to the World, stopping internal competition amongst NZ exporters (the Commerce Commission rejected it but the government of the day simply legislated for it) to maximise prices and values.  It allowed for the economies of scale that significant product investment required.  It would lead NZ into Nirvana!  (apologies for the cynicism)  So what happened?  The first CEO led the Operational transformation.  This was hugely challenging but probably successful.  The merged company got its act together, plants were rationalised, old ones closed and new ones were built.  Production soared during a mad scramble of dairy farm conversions.  The lake of milk was ready. 

What happened then?  Craig Norgate moved on, his job done.  And a search for a global leader began.  First mistake!  Collin's Level 5 Leadership principle - "all Great Companies have Level 5 Leaders" a person that has that scarce mix of indomitable professional will to do what is necessary,  and humility. And 85% of those Great companies' Level 5 Leaders came from within the company, that "got" its culture and knew how it worked.  Not a hired gun.  So what did Fonterra do?  Hired a Canadian Gun!

So Andrew Ferrier took his seat and immediately started preaching Global Domination.  The NZ milk lake wasn't enough.  We needed to develop farms all over the world, especially in developing countries in Asia and South America, so we could dominate the industry.  We were already the biggest exporter of dairy, but they wanted to be the biggest at everything.  Did Fonterra have strengths it could leverage into this strategic direction?  Easy question to answer!  Two more of Collin's principles come to mind here:  The Hedgehog Principle and Bullets versus Canon Balls.  Great companies are almost always hedgehogs - not quick and fast and really really clever, but a little slower, more considered.  And Hedgehog companies have one thing they can do incredibly well (roll up into a ball in the hedgehog's case), something they can be the best in the world at.  And they focus on that one thing and keep improving at it, again and again.  Fonterra went against this principle.  They got involved in investments and joint ventures that exceeded their levels of competence to successfully manage.  We have seen the cost of that.  The second principle here is a very simple one - fire bullets before you try to fire canon balls.  Try things in a small way before you go full on.  Perfect making a motor bike before you try to perfect a car (BMW), Get great at making tractors before you amaze the world of supercars (Lamborghini).  The examples are many.  Fonterra fired canon ball after canon ball, and most of them fell well short!

And then the nice Mr Spierings came along (another hired gun) and the strategic direction was accelerated.  But the problems also started.  Those joint venture companies began to "cough", some in serious ways (the Sanlu Milk melamine scandal in China), whilst the companies operations were found to be struggling during the 2013 Botulism scare.  The snowball grew, Spierings escaped (with a huge bonus - the Fonterra Board need their collective heads read) and now its out - the company has lost $800 million over the past 2 years.  In that time they have had to write down $1.5 Billion in assets (that is wealth coming out of our Dairy farmers) because of those disastrous investments.  Because they thought they could break the principles of Great Companies.  Because their arrogance ensured they were operating way outside their levels of competence.  Because their strategy was wrong, wrong, wrong!  Sorry, this really does wind me up!

We now have a new CEO - a kiwi who has been around the company for a while - 19 years to be exact.  They learnt that principle.  And they have a new strategy - back to basics, focus on NZ milk for the world.  Sounds like a hedgehog to me.  I wonder if they can be the best in the world at that?  Maybe they can now leverage those strengths and competencies properly.  Maybe they can focus more on value-added products rather than sell whole milk powder as a commodity?  Maybe, maybe?  I know one thing, it would have been much easier to do all those things if they hadn't destroyed $1.5 Billion of wealth.  But there is hope now.  I look forward to a few more bullets and no canon balls for a while.

I accept I have simplified things in this blog.  There are lots of details I have missed out.  But the general tenor will not be affected. The industry had a good idea, they ignored good principles, it cost them big time, but they have accepted accountability and now look to have a strategy that might just work.  But lots of hard work needs to be done.  Another Collin's principle comes to mind, the 20 miles a day principle.   The best way to walk across America is to do 20 miles a day, every day, hail or shine, snow or sun, every day.  Be consistent.  Work at it.  Every day.

Be well, stay focused and remember Jim Collins!

Cheers
Phil Pickford

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