Jane Bryson, VUW Urs Daellenbach, VUW Sally Davenport, VUW

Shirley Leitch, Swinburne University Geoff Mason, National Institute of Economic and Social Research

Judy Motion, University of New South Wales Michelle Renton, VUW

Charles Campbell, VUW Simon Scott, VUW Philip Best, VUW

Matene Love, VUW

Building ‘our’ Productivity Exploring sustainable firm level productivity in the New

Zealand food and beverage sector

April 2010

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Productivity The word "productivity" trips nicely off the tongue and sounds great in economic speeches. Economists will always press for more of it (as they have been doing for decades). But if they were reasonably honest, they would say they have difficulty measuring it ­ and if they were thoroughly candid, they would say they have only rudimentary ideas.

Bob Edlin, Economist, NZ Management, September, 2009

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Project Overview What is the Building ‘our’ Productivity Project ?

• A research project which uses a resource based view of the firm to increase knowledge about productivity levels within New Zealand firms.

- Funded by a Foundation for Research Science and Technology grant of $1.6m.

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Research Question

What is ‘our’ collective productivity and how does it differ between firms within and

between sectors?

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Resource-based View of the Firm • Distinctive and higher value is created through the combination of strategy and resources – but while strategies themselves may be imitable, the bundles of resources and capabilities underlying these strategies may not be I’m quite worried about [that] – yes, because I think the industry

structure right now is set up such that we’ve got a nice big dominant player who’s behaving responsibly, developing a good high quality image for its produce and leading that. We’ve got people coat­tailing it and we’ve now got some of those coat­

tailers saying, ‘actually we can do a lot more’. And I think when they start to do that, that there’s a reasonable chance they’ll

screw up. (GM f&b 11)

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Research Objectives

• To identify the collective strategies and processes organisations use to sustainably improve firm productivity

• To understand the attributes and value brought to collective productivity by tangible and intangible capitals, such as intellectual (explicit and tacit knowledge), symbolic (identity and brands), social (relationships and networks) and cultural (individual) capital.

• To compare firm-level productivity in two sectors, biotechnology and the food and beverage sector

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Assumptions about the sectors

• Food and Beverage – ‘Backbone’ industry – Low growth – Value vs. Volume – Labour Intensive

• Biotechnology – New industry – Fast growing – Innovative, Skilled – Alliance intensive

Why look at Firm Level Productivity?

Approaches to improving firm­level productivity

Quick Fix

‘My’ productivity

Long term (sustainable) solutions

‘Our’ productivity

Cost cutting via labour layoffs

Cost cutting via Cheaper inputs, off­shore

manufacturing etc

Skill development ?

Methodology: Food & Beverage Export values by product segment

Other dairy4%

WMP, 11%

SMP, 5%

Butter, 6%

Cheese, 7% Other, 13%

Other hort, 3%

Wine, 2%

Kiwi, 5%

Apples, 3%

Seafood, 8%

Other meat, 3%

Lamb, 16% Beef, 14%

Dairy

Hort

Meat

Corolis Research (2005)

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Methodology • Primarily qualitative approach

• Secondary and Archival data Collected for 45 companies

• In-depth interviews 15 CEO or senior managers

• Case studies 10-15 firms in each sector

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Overview of Food & Beverage Firms

• Firm ownership type includes entirely family/privately owned, public companies listed on the NZ stock exchange, and part owned by off­ shore organizations.

• Size of firms ranges from 3 to 500 employees (not including seasonal labour), with a median size of 77 employees.

• Revenue ranges from $250,000 to 600,000,000, with a median value of $26,500,000.

• Percentage of sales derived from export ranges from 0­99%, and averages at 46%

Productivity is… • In a low margin commoditised industry if you’re not productive you’re not going to be in business anyway. We’re constantly looking at other ways to be productive.

(SM f&b 4)

• Productivity means sustainable growth and improvements in performance. It underpins our ability to meet our customers’ needs. (CEO f&b 11)

• Increasing productivity is about understanding where the bottlenecks are. We scale up the production line to take out the bottlenecks, we either put more people, more time, or more speed in.

(SM f&b 13)

Productivity is about… • Productive communication • Waste not want not • In­sourcing & out­sourcing • Smoothing Supply • Intelligent innovation • Investments in Equipment • Branding/positioning strategies • Growing value • Connecting with customers • Information & flexibility • ‘Our’ skills • Resilience

Productive Communication • Every day I send out the daily report which talks about the previous

day’s sales and how we’re progressing during the month. And to me that’s productivity because it’s part of the communications, people are informed and there’s not necessarily any surprises.

(CEO f&b 11)

• [We use] a graphical representation of “this is how much product we would expect you to make today”, when we are talking about the factory floor. “Productivity” is used with team leaders and shift leaders because they have an understanding of what it means, more time is spent explaining why we need to do it, what the results are and how it benefits the business. But for the guy on the floor really all that he or she wants to know is “what are your expectations of me for today”. (CEO f&b 9)

Waste Not Want Not • Wastage, the amount of ingredients that goes in at one end, versus

what actually comes out in a volume and pack at the other end. The rest is counted as spillage and we track that and try to reduce it.

(SM f&b 4)

• The thing about [our product] is that it can be re­processed for something else. There is not a lot of waste because the staff are very aware of how things will be; its not really recycled, but used again if there is an error in the formulation or something like that.

(CEO f&b 6)

• We can, but we don’t re­work, because of traceability. It’s important for our overseas markets. (CEO f&b12)

Waste Not Want Not • We started doing some tests on the composition of [the waste] and

found it high in NPK’s, nitrogen, potassium and phosphates and so now we are looking at it as creating fertilizer. The initial tests have been very good. (CEO f&b 7)

• We try not to use the word ‘waste’. Now we say RRM – remaining raw materials! Again that is part of our culture change to suggest a positive ‘everything has value’ rather than the negative that comes from the word ‘waste’. (CEO f&b 11)

Out-Sourcing – How Far To Go?

• Because we are vertical: we grow it, harvest it, pack it, ship it, we think about the whole chain all the time… Generally, we don’t get involved in anything that we can’t put some scale into. That means having a position with a product that [enables] us to become a key player. If you can’t scale it up…you’re going to be forever competing against the one­man bands. (SM f&b 13)

Out-Sourcing – How Far To Go? We’re almost a virtual company in some respects, a lot of our expertise has been around brand development and brand ownership, being able to bring products to the shelf without actually investing in infrastructure such as manufacturing capability. What you find is that most manufacturers have down time in their manufacturing week and they’re screaming out to get efficiencies of scale in their plants to keep their overall costs down. We pick up on other people’s downtime to create a productivity upside for us, which in a roundabout way increases the productivity of other players within the industry. [We’re] quite vulnerable in [some] respects because whilst your manufacturer has a relationship with you he can also be your competitor, he’s got his own products. So it is rather a special type of relationship and it does take some different thinking to be able to cut through into that space.

(CEO f&b 3)

In-sourcing • We could work [the plant] harder. It’s one of the things that we’re

looking at, it’s like who can we contract pack for? The majority of people that turn up on our doorstep and want us to contract pack would be just more of a hassle than it’s worth. But if the right person, the right brand or company came to us…then we would definitely look at it. (SM f&b 4)

• About five years ago I recognised, that the world was changing. You know how business [cycles], and I suppose it’s unusual in this industry, but I went to our opposition and said, what are you guys doing? How about we produce for you under your brand? and that process took about three years until we got [100%] of their business in New Zealand and Australia.

(CEO f&b 12)

Smoothing Supply

• Our costs could all of a sudden spike through the roof because the one place where they grow the majority of [a main ingredient] has a bad summer…We’re constantly refining our product formulations to ensure that our costs aren’t blowing out, that’s a big part of productivity for us.

(SM f&b 4)

• Even [our main ingredient], if we tried to source all of our [main ingredient] in New Zealand and we had our plant here, there’s no way we could get it all, there’s a lot of forward planning in terms of where the product comes from. [but having the Australian company gives us more flexibility.]

(SM f&b 4)

Smoothing Supply • Our cost structure is based around a peak, and that peak is only about six

weeks long, so the first thing we do is reward [our producers] significantly for producing more at the shoulders, extending their season, and in doing so we get to use [plant] that would have been sitting idle otherwise.

(CEO f&b 8)

• The next thing we did was we cracked year round supply. There’s normally a seasonality and you would have it much more compact, but we cracked that using a range of complex strategies. (CEO f&b 11)

Intelligent Innovation • We [are increasing] our automation. It’s a productivity issue, it’s

about packing as soon as you make [the product], not double handling. (CEO f&b 12)

• “We have got very good technical NPD people who come up with ideas that actually fit with the way our factory is…You give up a bit of flexibility and speed when you inject process, but what it does do is make people aware of what their decisions are impacting, we haven’t had any products that once we’ve looked at what it’s done or what margins it’s getting we’ve gone, why did we launch that product? (CEO f&b 9)

Investments in Equipment • We went for years not being able to keep up. And as the business

got bigger and our bottom line allowed us to, we would buy new gear instead of shit gear. So at about 199x I said “Right, that’s it, we are never buying any second­hand gear again”. (CEO f&b 15)

• Now that we’ve got our plant in Australia it enables us to sell [there]. We’ve already been there with [brand X] for sometime. So export led, but also innovation led, […] we’re constantly pushing the boundaries on packaging and product formulations and new product categories. (SM f&b 4)

Brand strategies • Diverse brand portfolios: We decided we needed a three tiered

branding approach: low end, medium and premium. (GM f&b 5) • Brand one: a little cheeky and cocky and gung ho and perhaps a little bit

of arrogance comes across with it … Brand two: caring for the planet … people love the brand because it’s got that New Zealand success story behind it. (f&b 4)

• House/private label brands: There’s a big drive for house brands which manufacturers typically just resist. Low margin – high volume. Doesn’t really turn me on. (f&b 12)

• The funniest thing was hearing people come in and say ‘oh, I don’t like that Signature range stuff but I love your product’. They’re one and the same – it’s just people’s perceptions. (f&b 5)

• Unbranded: Probably 30% of our business is unbranded. …comfortable there because it doesn’t really add value to your business. (f&b 12)

Positioning NZ? • Strong: We use New Zealand as a strong descriptive aspect of

positioning our product – doesn’t work in Australia because the Australians hate New Zealand but works in every other country’. (f&b 5)

• Transition: I don’t know. I’m undecided. It sounds weird. I’m at an in­between stage. I just sell the product on its merits. In terms of the brand, of course I want to push the brand but I don’t know whether it should be push the fact that it’s made in New Zealand or just try and look as local as possible. … We have our own labelling for Canada, for America we have our own package…in the UK we try and harmonise that with New Zealand. (f&b 12)

• Other: Fair­trade/organic, CSR, science/health/therapeutic.

Growing Value • […] we’ve concentrated on building the business here, building volume and

building value, to the stage where I would say that we’ve done reasonably well on volume. We can tweak around the edges a little bit and we can possibly get a bit more volume. I’d say we’ve got some challenges in front of us for value. (CEO f&b 14)

• [The founders] figured that there was no use just producing commodity products against a big competitor, so they had to go in there and figure out how to add value (GM f&b 1)

• If our disadvantage here in New Zealand [is remoteness], and we’re servicing the domestic market, and the domestic market is Auckland (although there’s other parts of New Zealand), we’ve got to actually put more value into the [product], don’t we? (CEO f&b 13)

• They [competitors] don’t because it’s too hard. Well, they do a little bit, but it’s generally too hard. So we’ve got to really turn that “it’s too hard” into a positive thing and that’s what we are trying to do and being reasonably success in it. (GM f&b 11)

Marketing models • Predominantly a transactional model at play:

the thing we’ve struggled most with … bringing in all aspects of the market four Ps to make sure what we’re putting forward meets all our criteria [value proposition] (GM f&b 5)

• Approaches to relationship marketing were diverse and variable ­ relationships with competitors, professional bodies, supermarkets, distributors.

Connecting with Customers • […] it takes some time to grow your way into that. […] But the way

we’re building our customer relationships, the way we are targeting customers and regions, the way we’re talking about the business, the people we’re employing – sort of everything about the business is aligned to our long­term value added strategy (CEO f&b1)

• […] we removed a number of layers of distribution from our own supply chain into the customers and we now sell direct (SM f&b 11)

• We can […] give customers more variety, which they seem to be moving more towards nowadays. But from a processing point of view, being more flexible and able to meet customers’ needs quickly means that we need to have more skilled people. (SM f&b 14)

• […] it’s as simple as this, if you have a fantastic work force or fantastic employees, they’ll look after your customers well, which will look after the financial results. (CEO f&b 3)

Information → Flexibility • … on the spot market, it’s nice to have that flexibility because the

season, the exchange rate, all these other variables that affect us, gives us a chance to jump between markets […] and all the other things that we process. (SM f&b 14)

• Yes, mostly it’s about being predictable and consistent. Like when I’m talking to my team about what’s our contribution to value adding, it’s all about that. We want to be like a Mars bar factory where out pops the [product] – always the same. (GM f&b 11)

• We’ll be tactical, we’ll analyse markets, get data on the global flows of products, what countries, what volumes, product types, and we’ll look at the most valuable markets in the products with which we fit, or products that we can easily adapt to, and we’ll do that. This work is done quickly and decisively. (CEO f&b 8)

‘Our’ Skills

• We have staff that can run many of our product lines, so there is a lot more interest and challenge in their roles. They are probably at a more highly skilled level than some other factories. It does lead to complexities in managing labour and staff, but I would say on the whole it’s a positive thing […]. (CEO f&b 9)

• One thing that we are trying to look into at the moment is an issue when everyone is cross­functional, it is really hard to have that whole competitive rivalry which is good to have in a factory environment. (CEO f&b 9)

‘Our’ Skills • By [producing year round] it allows us to have a core staff that is

also year round and who really know the ropes. They can retain the culture when the seasonal staff come back. 80% of the seasonal workers come back every year and we can stack crews with a few key people who are permanents and [can pass on the culture] of how things are done here. We are team focused, very much so. (SM f&b 13)

• It’s a challenge to help people feel confident about learning & part of that for us was to participate in the governments literacy & numeracy initiatives and that made a huge difference….before we’d say, we need to measure 10cm and no one really knew what that looked like or what it was. (HR f&b 11)

‘Our’ Skills • So everything, all the job descriptions here are absolutely driven

by our quality systems food safety standards (HR f&b 14)

• [quality] needs to be taken into account whenever we put a new policy into place because there’s a close link between our quality requirements and learning & development, for example

(HR f&b 11)

Sharing Resilience • We’re the New Zealand distribution agent for [product x], produced in

Australia and sold around the world. From a marketing perspective it gets pretty interesting. You start thinking about yourself quite differently as the business evolves from what was a key focus, moulding and changing with other opportunities that exist or develop. (CEO f&b 13)

• Certainly, we have contingency supply arrangements with other companies, if anyone of us gets into trouble with an [excess supply of raw ingredients] we send [some] to each other. We did this in the past season, when another manufacturer had a big break­down. (CEO f&b 8))

• We’ve got a ‘gentlemen’s agreement’ with one of our competitors that if anything happened to our factory we could talk to them about use of spare capacity and the same thing for them...It’s good, you should be able to have those sorts of agreements and discussions with your competitors.

(CEO f&b 9)

Summary Our firms:

• Actively communicated with operational staff about productivity issues.

• Focused on measuring, reducing, reusing and re­looking at waste materials.

• Built sustainability through marketing, positioning and branding

• Focused on growing value, connecting with customers and gaining flexibility through information use

• Created efficiencies through capacity management, using strategies ranging from full vertical integration, to complete outsourcing of manufacturing and distribution. Some actively pursued in­sourcing.

Summary Our firms: • Smoothed supply issues through re­evaluating product formulations

and product lines, managing growing and production facilities in different climatic regions, incentivising suppliers, and using scientific research to achieve year round supply

• Innovated both process and products using automation, stage­gate processes and market intelligence

• Built skill levels by using production teams, reducing staff churn and skill loss, annualising salaries in seasonal industries and building culture by stacking seasonal teams.

• Built shared resilience through risk mitigation and capacity sharing strategies.

Concluding Comments • Our pre­conceptions of the F & B industry

• A ‘backbone’, labour intensive industry, with low growth, high volume over value

• Yes it is a backbone industry, yes it is labour intensive. • But there are medium and high growth organisations focused on innovation, value and volume.

• The role of major monopolies • Can drive the existence of innovative new players.

• New Zealand’s indigenous businesses in F&B • Moving from fishing, forestry and farming to include film, fashion and food. • The role of institutional cultural capital in Māori business.

Concluding Comments • Early results from biotech – similarities

• Biotech firms with products often derived from ag. inputs = very similar to food manufacturing but much higher value.

• Key decision is to give up ‘hand me downs’ and invest in/adapt latest technology.

• Role of key connectors into markets/market knowledge – consultants, distributors, govt. agents.

• Early results from biotech – differences • Biotech firms without products – struggling with capital requirements.

• Have to develop market skills while maintaining science. • Risks of ‘one product’ approach. • Key role of managers with overseas experience/contacts in sector.

Thank you • Project website: www.vuw.ac.nz/vms/buildingourproductivity/

• Outputs: – Seminars/workshops – Company/generic case studies – Reports – Conference papers/academic outputs

• Related Conferences: – Labour, Employment & Work (LEW) Conference, late November 2010.

– International Society for Professional Innovation Management Symposium, late November, 2011. Theme “Innovation for Resilient Productivity”