Competitive Strategy Analysis of NZ Pastoral Dairy Farming Systems

The purpose of this paper is to examine the financial performance of five pastoral dairy farming systems through the use of financial ratio analysis in the form of the Du Pont model and to determine any differences in the drivers of financial success between systems. The differing level and allocation of resources, or organisational structure, that each farm system adopts was the basis for a test to determine superior competitive advantage. This test was on the premise that if a farm system has a competitive advantage it would exhibit above average performance. While the on-farm competitive strategy is the same for all systems, cost leadership, the organisational design, and the resource configuration differ between farms. There are low-input farms which achieve low cost production through cost control (the numerator effect) and high-input farms which achieve it through improved outputs (the denominator effect). There has been significant debate in New Zealand as to which system is better with discussion focusing often on misleading metrics. The focus on competitive advantage and the rigour provided by the Du Pont model analysis enables a more balanced assessment of the benefits, or not, of intensification on New Zealand farms. The results highlight how misleading commonly used metrics can be. Despite differences in production and operating profit per hectare there is very little difference between return on assets and return on equity between the systems. Of particular interest is the consistency in operating profit margin between systems indicating no loss in operating efficiency as systems intensify. The only exception to this was the more intensive systems in 08/09 when input and output market price relativity was extremely unfavourable. Further research is required to determine if farms switch between systems as input and output market prices change and to explore those farms that are more resilient to such changes.