Term Paper on "Yak Milk Niche or Nightmare"

Quoted Instructions for "Yak Milk Niche or Nightmare" Assignment:

Paper should be typed in font size 12 and Times New Roman, double-spaced. The limit is 4 pages. *****Outside Sources, Internet Sources Only. The Maximum for Internet Sources is 2 to 3 Only."

**You should take the perspective of either being the person who has to make the key decisions in the case, or of a consultant who has been hired by this person to provide expert recommendations. Either way, you should identify the key issues (problems), list relevant alternative actions that can be used to deal with these issues, analyze them, and finally select the best one as your recommendation.**

Start your report by writing the case title. *****Then, follow the pattern of the following example below:*****

Key Issues:

1. Sales have declined by 10 percent over the last 12 months

List of alternatives:

1. Increase advertising by $5 million annually

2. Drop the brand

3. Redesign the brand by increasing R&D expenses by $3 million over the next 18 months

Analysis of the alternatives:

1. (here you will list the advantages and disadvantages of alternative #1, i.e. the increase in advertising)

2. Advantages and disadvantages of alternative #2, i.e. dropping the brand

3. Advantages and disadvantages of alternative #3

Recommendations

Recommend alternative #1, because*****¦ (You need to explain why you think that based on your previous analysis alternative #1 is superior to the others due to its more favorable ratio of advantages to disadvantages.

Keep in mind that sometimes you may decide to combine more than one alternative in your recommendations, as long as they are not mutually incompatible. In the above example, one cannot combine alternatives #1 and #2, but one could combine alternatives #1 and #3. In case you decide to combine more than one alternative in your recommendation, you will still need to prioritize them, i.e. explain which alternative should be implemented first, and which one should be implemented second.

Keep in mind that when you list your alternatives, they should be specific actions. Avoid generalities such as *****improve quality*****, *****rethink strategy*****, etc. You need to explain exactly what to do to achieve the objective. Do not confuse the goal with the means to achieve it. The goal is dealing with the issue, and the means are the alternatives.

Case Study

Yak Milk: Niche or Nightmare?

Toto, I don*****t think we*****re in Kansas anymore, mutters Dave Peters, the Strategic Director for ABCI, as he hedges closer to one of his colleagues. Okay, so it's not the most original line, but chalk it up to jet lag, long, busy days, and a heavy dose of cultural shock. It is mid-July 2002 and Dave and his colleagues from ABCI, an agricultural and dairy food consulting company headquartered in Minneapolis, are standing at the top of a cold and windy Chinese mountain pass of Tibetan Buddhist priests. First the priests present Dave and his team with a traditional fringed kata, or prayer shawl. A kata is made of white silk and is about 12 feet long and 12-18 inches wide. It is worn like a scarf over the shoulders, so it hangs down well below the knees. The priests then proceeded to bless their rest of their journey and their upcoming project by throwing hundreds of rainbow-hued prayer papers to the winds. I know, replies to Doug Leeward, the equipment consultant, as he climbs back into the minibus. This has been some trip already, and we are not even there yet. So far, the team has traveled 16 hours by air from Minneapolis, Minnesota, in the United States to Beijing, capital of the People*****s Republic of China. After a recovery case and squeezing in the Great Wall of China, and the Tiananmen Square and the Forbidden City, they have taken another three-hour flight to Chengdu, the capital of Sichuan Province. From there, it has been another 500 km (about 300 miles) to their final destination at Hongyuan, which is still in Sichuan Province, but lies high on the Tibetan plateau in those last 500 km, many of which they have already covered, are a harrowing 12 hour drive on roads perched perilously along the sides of the mountains.

Doug continues in wild-eyed fascination, did you notice that when the road came dangerously close to the edge of the cliff, there was a barrier; sort of a broken curb that would not stop much of anything from plunging hundreds of feet into the river below? Most of the time rule the road seemed too close to the edge for even that. It did not help much when the driver told us a minibus going Hongyuan had plunged over the edge last week with only the driver surviving. Yeah, and then there is the food. Duck tongues, chicken combs, yak tendons, and chicken feet are not terribly popular in Minneapolis, squeals ***** Green, the marketing representative. Some of it*****s been good, but others, well, I guess it's an acquired taste. If I had known there were not any forks or knives here, I would have brought my own. At this rate, I will get rid of all those extra pounds I have been meaning to lose. And do not get me started on the toilet facilities! Squatting over a hole in the floor and watching a river roar several hundred yards below sure gives a whole new meaning to the work picturesque. Later that evening at the Hotel in Hongyuan, the team holds a short debriefing on the impressions so far. Then it sets tomorrow's agenda. Dave and his team are just beginning an exploratory trip to determine if a feasible project exists or not. They know a lot more of the background, and nothing seems particularly appealing so far. As Ms. Zhong, the groups***** translator and assistant, passes out to portable oxygen bottles to combat altitude sickness, Dave sums up the group*****s initial reaction, what the heck are we doing here?

Company And Individual Background

Dave has worked over 20 years in the agricultural and dairy industry, the last 10 years of them in the international field. For nearly 5 years, he managed a joint venture cheese operation in Poland and then traveled extensively (50 countries in five years) for ABCI. This time his team is exploring the possibility of a yak milk dairy venture on the Tibetan plateau. The team consists of other ABCI employees, including *****, and several subcontracted consultants, including Doug. The group*****s various members have expertise in marketing, technical assistance, corporate development, product quality, and engineering. The last member of the team is there translator/assistant Zhong Yan, a nutrition Ph.D. student at a local university. Land O*****Lakes has exported products for many years and has department that works closely with the US government to provide technical assistance primarily in agricultural and dairy production in emerging economies and lesser developed countries (LDC*****s) throughout the world. They have worked extensively in Africa, Latin America and parts of South East Asia. With the opening of the former Soviet Union and Central and Eastern Europe, much of their more recent assistance work has been the focus there. It was the rapid growth of the Central European countries that inspired Land O*****Lakes to open their first international cheese production facility which Dave had run. The two major local figures in this project could hardly be more different. Dr. Wu Jinyi, a medical doctor, in a short, soft-spoken, frail gentleman in his mid-60s. Discredited as a young physician by the government as a divisive element, Dr. Wu was sent to the Tibetan plateau to work. He stayed there until the political situation changed. Unfortunately, his health had deteriorated. Since then he has held a position at the University in Chengdu, and he has traveled extensively, living for several years in the United States. Mr. Dongzhou Gongbu, a Tibetan by birth, was arranged in a family that was relatively affluent by Chinese standards. Originally from the Hongyuan area, he was raised in Chengdu and in the United States. He received a modest education, including some college, and was extremely active in the Communist Party and government. Now approaching his late 40s, this ruddy, robust and large (by Chinese standards) man has become connected with a younger Chinese entrepreneur and has passionately adopted capitalism, but only in the business sense, as he is still a staunch Communist. Dr. Dongzhou has government support; he has access to money, and has Tibetan ancestry and a desire to help his people.

Project History

Over 15 years ago, Dr. Wu conceived the idea of industrializing the Tibetan dairy industry as a method to improve the standard of living for these impoverished people. He investigated several multinational firms and selected Land O*****Lakes, mostly due to its cooperative structure, which he perceived as being not too dissimilar to communism, since it is owned by the farmer who supplies raw ingredients for most of Land O*****Lakes products. He approached Land O*****Lakes at the time, but the company was doing limited international work in, and it certainly was not interested in pursuing a project in China. Back then, United States-Chinese relationship was one of mutual caution, at best. During the intervening years, Dr. Wu continue to write, call, and visit Land O*****Lakes until he finally succeeding in getting one of his upper-level international managers to visit China and the Hongyuan area. During those years Land O*****Lakes had been concentrating its efforts on the Latin America and Eastern Europe, as United States-Chinese relations were somewhat problematic and the Hongyuan area suffered from woefully underdeveloped infrastructure, including a few mostly dirt or gravel roads and no electricity or phones. Dr. Wu remained persistent and in February of 2002 was once more at Land O*****Lakes. The timing of his visit coincided with its annual meeting, and Dr. Wu, who had by this time hooked up with Mr. Dongzhou, was invited to attend several of the sessions. Unfortunately, during the past few years, there had been some international changes at Land O*****Lakes. Some of the new personnel in the international area gave Dr. Wu a new audience, one that was more receptive to his proposal. The timing of the investigating a potential project in Tibet was right. Land O*****Lakes had gained much more international experience, including how to create a pleased all the types of problems found in a such a unique part of the world as Tibet. ABC I, a wholly-owned subsidiary of Land O*****Lakes, had informed about five years earlier with a sole purpose of providing consulting services internationally. Its intent was to get paid for the services rendered, and also to investigate possible investments, partnerships, joint ventures and potential market opportunities. Now, with Dr. Dongzhou*****s contacts and experience, and opportunity was present for some sort of a partnership, rather than a jazz being solely a Land O*****Lakes project. The changes were not all just in Land O*****Lakes. The relationship between United States and China had been continually improving, and a recent Chinese accession into the World Trade Organization was facilitating international business ventures. The Chinese government had also spent some time and effort improving regional infrastructure, including electrification of the Hongyuan area due to be in effect a summer of 2002. More roads were paved, and new ones were scheduled for construction. Another in-progress project was a tunnel that would reduce the 12 hour trip from Chengdu by two hours and remained open year round.(Most mountain passes are closed most of the six coldest months of the year). An airport is also planned for the area, eliminating the minibus thrill ride. Furthermore, the region had been receiving attention from the Chinese government. The proposed dairy project was part of an overall Chinese government Yak Industrialization Project, encompassing 12 counties of the Tibetan Plateau. The goals of his government-support project were to develop yak industrialization in order to meet the food needs of greater China and to provide financial assistance to the subsistence-level traditional Tibetan herdsmen. In addition, priority was given to preserving the ecological purity and traditional culture of the region. In future phases, the project would include 13 Tibetan countries in the three-province area to be called the Yellow River First Curve Organic Ecological Livestock Zone. Once completed, the entire project would require over $100 million US and would create thousands of family farms organize into cooperatives for marketing homemade products and milk, as well as the industrialization of the yak and other traditional Tibetan businesses. The zone would be capable of providing 100,000 tons of yak meat and 200,000 tons of yak milk annually.

Traditional Yak Dairy Industry

The Quinghai-Tibet Plateau (Tibet) is a major pastoral region in China and is populated mainly by ethnic Tibetans. It is also home to about 13 million semi-nomadic yak and 30 million Tibetan sheep. In the Aba Prefecture of the Sichuan province, the location of Hongyuan there is almost 2 million yaks that can produce 400,000 calves and 72,000 tons of milk per year. The Tibetan people on the plateau derived from 75% of their income from milk, meat, and wool production from their yak herds. The yak is a semi-wild animal well-suited for the harsh conditions of the Tibetan Plateau. It stands about 6 feet tall at the shoulders and weighs 1100 to 1200 pounds. It is covered with long, silky black or brownish hair and tends to resemble the American Buffalo(to which it is a close relative) more than a dairy cow. Where as a dairy cow typically gives 20 to 30 liters of milk a day, a yak can give only two to three liters a day. Attempts have been made to cross breed yaks with dairy cows in an effort to increase milk supply, but the cross breed animals are sterile. Throughout Tibet, yak herd management still follows traditional patterns established over centuries. In the warmer months, the yaks are kept fairly close to the herdsmen*****s tents located in the grassy valley area of the plateau. As grass is depleted, the herdsmen simply move their tents and yaks to a new area. Around Hongyuan, the situation has been modified. The Sichuan government, with aid from the national government, has built roads and providing electricity in an effort to industrialize that area and raise the standard of living. The herdsmen are now semi-nomadic, moving with tents to summer grazing areas, but remaining close to the roads. Once the summer is over, the herdsmen moved to more permanent homes and villages dotting the plateau. The yak are corralled near these homes and turned loose to forge for food during days. The yaks are well suited for the lights now and are able to survive the harsh winters, albeit at a fairly high loss of body fat. These severe winters on the plateau also explained the seasonality of milk production. With the normal dairy cattle in temperate climates, the births of calves are staggered to keep a fairly level production rate throughout the year.(A dairy cow gives only after producing young.) A young yak calf is unable to withstand the severe winters, even if its mother is able to find enough fee to sustain her milk supply, therefore yak calves are usually born only in the late spring. Over 60 percent of China's landmass is made up of deserts, mountains, and other land unsuitable for agriculture. Most available agricultural areas are also the most heavily populated, and this means taking valuable farmland for housing. The nutritional return for dairy farming compared to standard crops is much lower, making the use such valuable land for animal husbandry less cost effective. (That is, it is more productive to grow vegetables or grain, than raise animals.) The Tibetan plateau, however, has the opposite problem. The area is thinly populated and unsuitable for most crops and traditional dairy farming. It is highly suitable for the yak. In addition, the region is pristine, rich in natural grassland, and has abundant water. Yak meat and milk are highly nutritional and the pollution-free Tibetan plateau makes this a truly green food. Additionally, various yaks***** products have high value in traditional, homeopathic, Tibetan, and Chinese medicines.

The Next Morning

Over breakfast the next morning, the team notices Ms. Zhong in a lengthy discussion with Mr. Dongzhou and Dr. Wu. Expecting the meeting with local government officials, they are surprised when they are piled back into the minibus and headed out of town. They soon leave the road behind and bounced along a rutted path surrounded by nothing but green meadow dotted with black yak. Another 20 minutes and the bus stops outside the herdsmen*****s black tent. A traditionally dressed man with cloudy eyes appearing to be in his 60s emerges from the tent. After a brief conversation in Tibetan, the group is motioned inside. The tent covers an area approximately 12 x 14 feet with no floor. An odorous, yak dung fire is burning in the center to ward off the early June the morning chill. Within a few minutes, the teams eyes were watering from the smoke and odors. In one corner lay a pile of yak hides that Dr. Wu indicates is the family*****s bed. A few overturned crates serve as chairs and storage for their meager belongings. A woman, easily as old, is cooking over the fire. The group is offered tea laced with rancid butter, a typical beverage, yak yogurt and cheese. But somehow Dr. Wu politely declines, explaining that Americans are not used to this diet. Dr. Wu explains various utensils and tools in the tent that Tibetan herdsmen use and show the team for large number of items made from various parts of the yak, fur, intestines, bones, horns, milk, and meat. After a few minutes the group leaves. As they stand outside, gulping in the thin but fresh air, Dr. Wu looks Dave directly in the eye. There are very many reasons why you should not build a dairy plant here. You have already seen most of them and will likely learn of others before you leave. The man you just met has cataracts, and the rosy cheeks on him and his wife are due to an early form of skin cancer. They have no education cannot read or write. What you see is the total wealth, a tent, a few yak hides, some miscellaneous cooking utensils, and such. The hundred or so yak surrounding us he shares with his parents. Noting the surprised expressions, he explains further, oh, yes, the man and one man you just met are in the late 20s, and not nearly as old as you imagined. He scoped up a small child playing in the dirt. This is their daughter, Mr. Peters; you wanted to know what the heck you're doing here? You are changing her future so she won't have to live like those people in there. She will have the opportunity to go to school. She would have the opportunity to live a long and healthy life. She will have enough to eat. She will have opportunities for parents didn't have. We are doing this for her.

Marketing Data

Historically, dairy and milk based products are rare in China. A high incidence of lactose intolerance, low level of milk and dairy production, and limited cultural history of cheese and other dairy products are all contributing factors. Dairy products have not traditionally been a major part of the Chinese diets, although many minority populations do have a tradition of eating dairy products, namely the Uighurs, Mongols, and Manchu*****s. Now, the health benefits of dairy products are becoming well known, and a diet of dairy products from a young age is eliminating lactose intolerance. Increases in earnings and the opening of the Chinese economy have created a generation of consumers interested in western flows and the ability to pay for quality products. The advent of Western restaurants introduced cheeseburgers and pizza and is beginning to create an appreciation for these products. At the time of the case, per capita milk consumption is among the lowest in the world at around 7 kg per year, though consumption has grown in the recent years. This trend is expected to continue. The total market forecast is expected to by RMB 87 billion (about $10.5 billion US) by 2005, up 67.2% from 2000. The dairy market has also risen significantly within the total full market from 1.7% in 1995 to 2.8% in 2000. Yogurts, yogurt drinks, and ice cream have incredibly popular items, representing over 90% of all dairy expenditures. In addition, consumption patterns vary from city to city, showing regionalized taste.

Milk Powders and Fluid Milks

Powdered milk has traditionally been the most important dairy product. There has been fierce competition in the China milk powder business. Foreign brands are perceived as being higher quality, with domestic brands capturing the mid-and lower-end markets. About 50% of all raw milk is used for milk powder production (compared with 3 to 4 percent in countries with a devout dairy industry). The increased popularity of infant formula many of which include whole milk power as a base is a main contributor to this demand. The Chinese milk powder industry also produced a specially formulated and for seniors, nursing and pregnant mothers, and children of various ages. Consumption of what milk has been growing at an annual rate of 8.6% since 1994. Consumers are moving toward fresh products, and the higher disposable incomes means they can afford them. Urban residents of China's economically prosperous coastal province are the largest consumers of milk in other dairy products, not only because of higher incomes, but also because they have been educated on the health benefits of dairy products and because they have a greater willingness to try foreign products. In these urban areas, milk and milk powder are marketed primarily to parents of children and to the elderly for their health benefits, not as a dietary staple.

Cheese and Butter

Consumption of cheese and butter is very low compared to Westerner patterns and tend to remain the privilege of the wealth here, urban consumers, especially those younger ones interested in western styles. This demographic is not expected to change typically in the next five years, although an increase of wealth, in general, showed account for some growth. Cheese and butter are rich trick to primarily to the markets that are the most open to foreign products, Beijing, Shanghai, and Guangzhou and have a sizable expatriate population to complement local consumption and sales. Although not entirely all dairy products, the spreads, shown in the table below, constitute the normal substitute for butter. Although margarine outsells butter nearly 2 to one, the cost difference between the two is closing and butter prospects are improving. Chinese consumers are beginning to eat bread at home, particularly for breakfast, and butter and margarine sales have increased.

Cheese, Butters, and Spreads (RMB millions, 2000 prices)

1995 1996 1997 1998 1999 2000

cheese 88.2 106.6 150.8 180.0 201.8 234.0

Butter 62.4 76.4 88.6 106.4 124.0 139.2

Spreads 126.9 153.4 178.8 214.0 211.9 255.0

Ice Cream and Yogurt

Ice cream and yogurt represent 90% of the dairy market value. Ice cream was fast becoming a favorite as foreign Chinese joint-venture brands were penetrating the market, with ice cream freezers appearing in the city kiosks and supermarkets. Yogurt drinks were a relatively new on the market and little data was available at this point. In several shelf space in retail markets was devoted to this product indicating probable growing popularity. The ice cream sector was expected to continue to dominate the market and was forecasted to reach RMB 64 billion (about $7.7 billion US) by 2005, an increase of 70% over 2000. Continuing increases in wall and penetration of rural sectors were leading causes of his growth. Frozen yogurt had yet to become popular, but they had the potential to make inroads on the ice cream market, especially at a premium end. Yogurt was perceived as healthier than ice cream and aided in lactose intolerance, an important consideration in the Chinese market. Yak milk contains higher fat, protein, amino acids, and calcium content than cow*****s milk. This results in richer products with a distinctive flavor and some perceived, marketable health benefits. Yak milk and other yak products have a small but loyal following. The yak milk is also viewed as a natural or green product and is associated with the centuries old Tibetan traditional nomadic culture.

Chinese Consumers

Although Chinese consumers vary considerably from region to region, there are some general recognizable characteristics and trends, especially among consumers living in the cities. These include:

Chinese consumers tend to buy products they trust in brands that they now.

Brand names and prices are important factors in purchased decisions.

Famous brands, especially well-known foreign brands, as well as recommendations from friends and family, are important in brand switching decisions.

Older, more traditional consumers are likely to weigh opinions of family and friends over advertisements. Younger consumers are more influenced by advertising.

Chinese consumers are attracted to bright graphics and unique packages.

English wording on package labels tend to connote quality.

Western-style products and an implication of foreign manufacturer also connote quality over similar domestic products manufactured locally.

Chinese consumers are exposed to a wide range of advertising media, especially television. Overall, 80% of all Chinese watched on television daily; 86% in urban areas.

The advertising industry is relatively new in China, but it is sophisticated and produces high-quality ads.

Celebrity endorsements are well received.

The Chinese consumer is becoming more aware of the health benefits of dairy products.

Health is a very important priority with the Chinese consumers.