Friday, August 28, 2015

Living with Giants - Lessons from Industry Organisation

Bigger is not Necessarily Better

Management consultants McKinseys were the advisors behind the creation in 2002 of the mega-cooperative, Fonterra.  Owned by dairy farmers, the new organisation was intended to consolidate New Zealand's dairy processing, exploit its export strength, diversify its output, and move it up the value chain.  This all looked good while increasing demand in China in particular sustained increasing output and prices, especially given that  Fonterra accounts for around one third of global dairy trade.   

But price escalation was never going to be sustained in what is essentially a commodity market.  Consequently,  over-production and cyclical pressure on consumer demand have seen a rapid collapse in prices, and increasing questions over Fonterra's performance.

Commodity Trading Still

There are no surprises here. We have seen a series of collapses in New Zealand's commodity sectors over the years. Where are industry giants New Zealand Forest Products and, in the meat sector, Waitaki New Zealand Refrigerating today? Where are those former behemoths of the pastoral sector, Borthwicks and Fletchers? Dominance of a sector all too often carries the seeds of its own destruction. Even that giant of the IT sector, Google, has reset itself as a cluster of smaller, more focused entities.

Fonterra was meant to drive the innovation that would increase the value of dairy exports, to reduce its dependence on commodity sales.

Its biggest innovation appears to have been the Global Dairy Trade an auction platform it established in 2008 that has become the benchmark for world dairy prices. It is no more than an instrument of the commodity trade, though. It simply confirms the cyclical nature of the market - and leads the race to the bottom. 

In fact, dairy prices have gone nowhere over the past decade. Those that have sunk capital into the sector on the back of the promise of "white gold" have seen poor returns, insufficient in many cases to cover the costs of their capital. This is especially the case for those that purchased or extended farms in the boom years.

Global Dairy Trade Price Index

What Went Wrong?

Industry commentator, Tony Baldwin, identifies five factors behind this indifferent performance.  These are detailed in his NZ Herald piece today. In summary:
  • The organisation remains producer-driven rather than consumer-focused;
  • It misunderstands its own strengths and weaknesses and therefore where it needs to address its role (and value) in the supply chain,;
  • It has confused roles and objectives;
  • As a cooperative it is capital constrained;
  • It has effectively misdirected capital into lower value volume production capacity rather than into higher value product development.
Not everyone will agree with this diagnosis, but the outcomes speak for themselves.  Whatever the vision was for Fonterra, the architects surely were not looking for more of the same - volatile commodity trading writ large?

The Lessons for City Organisation

So what's this got to do with city matters?  Everything.  Fonterra is another example of the fallacy of thinking big when it comes to reforming organisations. 

When Auckland municipalities were amalgamated in 2010 I suggested that large organisations are slow moving and resist change as internal relationships and established ways of doing things dictate their responses to changing external conditions.  Consolidation was the wrong response to whatever was wrong with Auckland.

Nothing I have seen since leads me to change my mind. And the comparison with large industrial organisations holds.

Think about it: 

Producer Driven
The new Auckland City remains focused on shaping the city according to a particular brand of planning. No room for innovation there as  the architects of Auckland draw on precedent from elsewhere to fulfil a vision of more people in less space. Intensification was a keyword in dairying as larger herds became established but that did nothing for the consumers of dairy products or, really, for the sustainability of the New Zealand economy. Citizens in Auckland are now faced with a future closer to the crowded cities of the past than the open city that could define our future.

Role Confusion
The role of Auckland Council has become one of dictating rather than  enabling, of shaping rather than servicing, and of participating in an unwinnable auction based on contrived city indices rather than facilitating and supporting a competitive private sector or housing the community in a sustainable manner.

Capital Constrained
Ultimately councils are constrained by their population and population expectations. Whatever form city taxes take, there is a limit to the capacity of citizens to fund current and future development.

Increasing the indebtedness of future generations to fund assets through debt is an option - an option that sours if the underlying population expectations fail to materialise. On that score, it is probably worth reviewing the volatility of the global dairy trade index when thinking about just how much debt it is sensible for the Auckland Council to take on. We need to acknowledge the uncertainty around our population projections - an uncertainty exacerbated in the short-term by unsustainable increases in housing costs.

Misdirected Capital
Time will tell - but intensification of the population requires highly expensive investments in public transport if the city is to continue to function without extreme congestion.

In due course this will constrain the investment that might be made in making Auckland as a whole (and not just as a CBD-centric conurbation) a more attractive place to live in. What will define a successful city must include reliable and quality services, green spaces, and ready access to community and recreational amenities across the board. 

Where to From Here?
Can Auckland get away with its mantra-based path to intensification as a means of creating a liveable and competitive city?  I think not.

Can the current structure deliver?   Not, I don't think, without a radical overhaul. 

And if there are any immediate lessons we might take from the Fonterra and Auckland City examples - bigger is not necessarily better. Oh, and choose your advisors carefully.

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