Reference no: EM13937931

In the early 1950s, the Chan family pooled together $20,000 and set up a small dairy business in northern Hong Kong. Bauhinia Dairy initially produced only fresh milk and sold it through limited distribution channels. It has subsequently extended its business scope and now employs about 400 people. It remains a family-owned enterprise that values its traditions and relies mostly on verbal communications. Face-to-face meetings are still more common than memos, e-mails or other written forms of communication. Bauhinia has gradually adopted a more formal management structure, but has remarkably few written policies, procedures or job descriptions given its size. At the operational level, many work processes are being documented and standardized as part of a effort to establish an ISO quality assurance system.

Industry Characteristics and Business Performance

Food suppliers in Greater China have traditionally had modest profit margins and limited consumer loyalty. However, the region's economic development since the 1980s has increased the demand for healthier foods and exotic items from all over the world. Recent market research found significant increases in both the demand for and the willingness to pay premiums for food items that are perceived to be nutritional, sophisticated and/or exceptional. Bauhinia was one of the first locally-owned dairy processing firms in Hong Kong. A few large grocery retailers are now the major revenue sources for the local dairy industry, which includes both liquid and powdered milk, yogurt, and dairy desserts. While many other small rivals in the industry are struggling to survive, Bauhinia has remained competitive by limiting its activities and distribution channels to safeguard its reputation for quality. Bauhinia is renowned for distributing dairy products that require special care and was a local pioneer with nutritious beverages such as high-calcium and low-fat milk. It now also sources frozen meats, including antelope, ostrich and kangaroo, from countries such as Australia and South Africa for resale to dozens of gourmet retailers and hundreds of higher-end restaurants. To reflect this diversification, the firm shortened its name from Bauhinia Dairy to Bauhinia.

Bauhinia has been consistently profitable since 1985. Its operating margins have grown gradually as it has migrated to higher-value products. Its cash on hand and other liquid assets together exceed its annual revenues. Most of its revenue is still derived from Hong Kong, but neighbouring markets have become increasingly important. For example, Bauhinia is serving restaurants, hotels and spas on both sides of the Macau-Zhuhai border.

Strategic Management and Decision Making

Victor Chan is the oldest son of the company founder. He has a modest office that is cluttered with momentos from his days as an engineering and MBA student at the University of Toronto. Victor took over as Bauhinia's chief executive from his father a few years ago.

Before that, he had a series of increasingly important management roles within the company. Victor has one younger brother, Richard, and one younger sister, May. Bauhinia currently has three operating divisions: Hong Kong Dairy, Macau Dairy, and Specialty Foods. In addition to serving as the CEO, Victor oversees the dairy operations in Hong Kong. Richard is responsible for Bauhinia's dairy businesses in Macau and Zhuhai while May and her husband are developing the specialty meats business. Victor Chan aggressively seeks out new ideas and timely information. He reads a lot, keeps in touch with former classmates (many of whom are in related industries), and constantly scans the Internet. He demands concise but frequent reports from his deputies and has little tolerance for those who fail not deliver. Victor has followed his father in using an informal approach to formulating and implementing strategy. When strategic issues arise, Victor almost always consults his brother and sister, but he usually dominates the decision making process.

Victor claims that he has delegated some decision making and encouraged his existing managers to be proactive and innovative. However, his intimidating manner seems to have discouraged such behaviour. Bauhinia's managers often appear to wait for and follow Victor's orders, not wanting to aggravate or argue with him. Some feel that Victor deliberately tries to catch them off guard. For example, the assistant marketing manager stated that "I'm not really sure if Victor is helping me to monitor the outside world or simply checking up on my work."

Competitive Positioning in a Dynamic Environment

Victor is aware of major changes occurring in both the general business environment and consumer preferences. Advances in technology are changing how food is produced and distributed. UHT technology has significantly increased the shelf life of some dairy products. Meanwhile, powdered milk takes up less space, is easier to transport, and tends to be preferred by parents for their babies. These types of innovations along with globalization are increasing competition between food providers from adjacent markets, and even different parts of the world. In the Hong Kong market, Bauhinia already competes against giants such as Nestlé from Switzerland, Fonterra from New Zealand, and Mengniu from China. Victor wonders if his family firm can continue to succeed with only gradual organizational change. However, he does not want to create a bureaucracy by adopting overly formal systems or put the whole company at risk by making changes that are too radical.

Victor is eager to maintain Bauhinia's reputation for quality. He has repeatedly stated that we "must be the best at whatever we do. Being big or first is not important". Victor feels that Bauhinia has succeeded financially largely because it has a nice work environment. This helped it to recruit many talented managers and employees in the past. Rewards for both performance and loyalty have kept down the turnover rate, but Bauhinia now has an aging workforce. Most of its workers are over 50 years old. Meanwhile, talented young people seem to prefer jobs in finance, high-tech or consulting rather than in more traditional industries.

Victor knows that Bauhinia faces some major challenges, but he also believes that it has some great opportunities, especially in mainland China. The cumulative annual growth rate (CAGR) for sales of food and beverage products in China during the 21st century has been more than 10 percent. According to data released by Mengniu along with its financial reports, dairy industry revenues in China doubled from 120 billion RMB in 2008 to almost 250 billion RMB in 2013. Even so, per-capita consumption of both dairy products and specialty meats in China remains low compared to other countries with similar levels of economic development. Victor also thinks that the Closer Economic Partnership Agreement (CEPA) between Hong Kong and mainland China may provide a limited-time opportunity for Bauhinia.

The Melamine-in-Milk Scandal

In September 2008, the world learned about the widespread contamination of dairy products in China by an industrial chemical that is normally used to make plastics. Melamine was being added to raw milk in a ploy to boost the apparent amount of protein. About 100,000 people in China, mostly babies and young children, became sick after drinking adulterated milk. Over 10,000 of them were hospitalized. Dozens died from melamine-laced dairy products while thousands of others have suffered kidney problems and other ailments.

The scandal emerged after Fonterra, a New Zealand food producer, discovered that its joint venture partner in China, the Sanlu Group, was producing and distributing milk that was adulterated with melamine. Both the leaders of Sanlu, China's leading maker of infant milk
powder, and officials of the Shijiazhuang city government were clearly aware of the problem by July 2008, after 16 infants fed on milk powder were diagnosed with kidney stones. Instead of recalling the contaminated milk, the business leaders and local government officials tried to cover up the problem. The cover-up was successful for a while. The scandal was hushed up until after Beijing had successfully hosted the Summer Olympic Games.

People were outraged when they learned about the contaminated milk. Subsequent testing mandated by the State Council of China found that a large proportion of the dairy products in stores across the country were adulterated with melamine. The three biggest producers in China - Mengniu Dairy, Inner Mongolia Yili Industrial Group and the Bright Dairy Group - each lost their status as a "national brand" after tests of liquid milk batches revealed unacceptable levels of melamine in about 10 percent of their samples.

The melamine-in-milk scandal heightened pre-existing concerns about both food safety and political corruption in mainland China. It damaged the reputations of local dairy producers, and temporarily reduced the demand for their products. The dairy industry across China, which included more than 2 million farmers, experienced significant hardship. Many countries halted all imports of food and beverage products from China. Some still restrict or strictly control the import of Chinese dairy products. Meanwhile, domestic dairy consumption declined during the last months of 2008 and first half of 2009, temporarily reversing a lengthy upward trend.
Many people were criminally prosecuted in connection with the contaminated milk.

Two were executed, another was given a suspended death penalty, three more were sentenced to life imprisonment, and two received 15-year jail terms. The Director of the Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and 7 local government officials were fired or forced to resign.

The dairy industry in China is now undergoing rectification and reform. The Chinese government has increased its regulation of the industry and encouraged consolidation. In late 2013, it expressed a desire to drastically reduce the number of domestic milk powder producers while aiming to have about 10 large enterprises, each with annual revenues of more than 2 billion RMB, dominate the dairy market by 2018. One industry analyst suggested that "If you are in the top ten and have scale, you will survive. Otherwise, you may have to exit or merge with a larg er player to gain scale." Meanwhile, growing numbers of Chinese are purchasing foreign brands of dairy products, especially for consumption by infants and children.

The full impact of the melamine-in-milk scandal remains unclear. Chinese authorities continue to periodically seize contaminated dairy products. Since milk is also part of the supply chain for many other foods, it is likely that chocolate, eggs as well as various meats and beverages have also been contaminated. More generally, China has in recent years experienced many contaminated food scandals. These include toxic beans, aluminum dumplings, cadmiumlaced rice, glow-in-the-dark pork, recycled cooking oil, and ‘leather' milk.

Questions to Consider:

1. Identify the key trends and/or developments in the general environment that affect the two industries mentioned in the case. Explain how each is an opportunity and/or threat.

2. Evaluate the attractiveness of the dairy processing industry in both Hong Kong and mainland China by conducting a systematic analysis of the competitive forces. Specify the key changes that have occurred in this industry since the 2008 melamine-in-milk scandal.

3. Specify how the specialty meats industry differs strategically from dairy processing particularly in terms of competitive forces. Comment on the relative attractiveness of the two industries and the implications for Bauhinia (prospects, focus of transformation).

4. Comment on the specific need for change and the capability to change of this traditional family enterprise. Specify and justify mission and vision statements for Bauhinia.

5. Identify two objectives for each dimension of a balanced scorecard for Bauhinia. Explain the importance of each. Specify the key performance indicator(s) corresponding to each of your strategic objectives. Describe how you would measure each KPI.

6. Specify 3 different projects (or initiatives) that you would recommend to Victor for transforming and/or developing Bauhinia. Identify and apply appropriate criteria to evaluate, compare and rank the 3 projects (or initiatives).

7. Based on your vision for Bauhinia, outline a strategic transformation plan. Specify the nature and timing of key projects (or initiatives) that Bauhinia should undertake during the next 3-5 years based on its strategic objectives. Specify the key resources and capabilities needed to implement your plan and comment on their availability/scarcity.

8. Similar to David battling Goliath, small businesses often struggle to compete against industry giants. Identify the corporate-level strategic alternatives available to Bauhinia and recommend what it should do to remain successful. Discuss the pros and cons of adopting more formal systems and structures.