Running head: THE A2 MILK COMPANY 1

The A2 Milk Company

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George Mason University

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Abstract

A2 is a dairy processing firm, that leveraged their discovery that the A1 protein contributes to

dairy digestion problems, by offering customers A1 free milk. They currently face a significant

threat in the industry from global competitors such as Nestle, who can leverage significant

resources towards competing globally on A1 free milk. This case examines A2's current strategic

positioning and strongly encourages A2 to compete against Nestle by continuing to expand while

backward integrating with their suppliers. The goal of this is to establish their brand further while

trying to create a cost-leadership position through operations that Nestle cannot overcome.

Keywords: Nestle, A2, Milk, A1 free milk, A1 protein, business strategy

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The A2 Milk Company

A2 is a dairy processing firm, that leveraged the discovery that A1 protein in dairy causes

digestion problems, to supply dairy primarily to customers in New Zealand and Australia (Esty

& Fisher, 2019). Currently, A2 is deciding how they should respond to the threat of imitation by

companies such as Nestle, who are now trying to enter this market. Part of their current response

is their ongoing expansion work aided by a partnership with Fonterra, a global distributor. This

case study goes further into this expansion by supporting their strategy and by adding a

suggestion to backward integrate, through analyzing the macro-environmental factors, business

strategy, corporate strategy, and innovation strategy of A2.

Analysis of macro-environmental factors

To analyze the macro-environmental factors behind the specialty milk processing

industry, I ran PESTEL and Five Forces Analysis (Rothaermel, 2017; Appendix A). My analysis

indicated that this industry is unattractive for A2. Significant PESTEL factors include legal

restrictions on food imports, the replicability of A2’s solution to milk digestion problems, a

growing but small milk import market in China with 90% of Asian adults potentially receptive to

easy to digest dairy, and the ability for consumers to avoid milk if they feel discomfort.

(Rothaermel, 2017).

Furthermore, Porter's five forces confirm industry unattractiveness through all forces in

high amounts but suppler power. Essential in this analysis is the requirement for a large company

such as Fonterra to compete on the world stage due to the deep pockets of competitors such as

Nestle (Appendix A). Here, A2 may not have deep enough pockets to compete globally.

Overall, this analysis suggests that a significant opportunity for A2 is in the Chinese market and

a substantial threat for A2 is Nestle and other competitors entering the market due to imitating
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A2's discovery. Finally, A2 benefits from the global distribution competency and financial

resources of Fonterra but must work to convince every customer that they should buy their

product instead of substitutes such as juice or water.

The significant elements of the A2 Milk Company’s strategy

I used the strategy diamond (Hambrick & Fredrickson, 2005) to look at A2’s business

strategy (Appendix B). What this analysis indicated is that A2 is a company starting from a

focused differentiation strategy with added value primarily driven by product features, their A1

free milk product, and a marketing approach focused on customer reviews (Esty & Fisher, 2019,

p.6). They are currently transitioning to a broad differentiation strategy based on cost advantages

found by economies of scope by increasing their product line and geographic arenas of

competition. Finally, indicated through this analysis, by focusing on vehicles, is that A2 takes a

more flexible stance with suppliers and distributors through contracting instead of attempting to

integrate areas of their supply chain vertically.

An excellent way to frame these results is to view A2’s strategy as located between the

early majority and late majority areas of innovation (Rothaermel, 2017). Here, A2 has already

satisfied the concerns of the early majority through their marketing approach focused on

customer reviews but is currently working to meet the interests of the late majority through

solidifying and expanding their brand. Unfortunately, their current focus on contracting out to

trusted suppliers and distributors may not facilitate this expansion in that it may make operating

more costly due to less control over these relationships.

A2’s corporate strategy

Because A2 is planning on entering markets such as yogurt and butter, they are practicing

related horizontal product diversification (Rothaermel, 2017). They are also practicing
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geographic diversification by expanding to different continents. However, A2 does not practice

any backward integration, preferring instead to outsource activities such as dairy creation and

distribution. Problematic with this strategy is that A2 faces no backward integration risks. For

example, losing supplier flexibility and learning effects will not happen because it does not seem

possible to identify other factors that contribute to dairy digestive problems or change how to

produce dairy in the first place. Instead, if A2 were to integrate backward with their suppliers,

their subsequent closeness to those suppliers would result in capturing the A1 free supply of

dairy from competitors while reducing costs (Rothaermel, 2017).

A2’s equity alliance with Fonterra is part of A2’s forward integration and is designed to

combine Fonterra’s distribution and sales strength globally with A2’s brand strength (Esty &

Fisher, 2019). I ran a build, borrow, or buy test on the Fonterra acquisition to look at whether it

will benefit the A2 milk company (Appendix C). I found that both A2 and Fonterra made the

right decision in that A2 has a demonstrable gap from companies such as Nestle in their ability to

leverage a global network that requires Fonterra’s sales and distribution help. For example, in

comparison, Nestle's A1 free brand Wyeth can leverage ten times more sales assistants and

almost 250 million NZ more dollars in marketing finances than A2. As such, A2 is unlikely to be

able to develop this advantage internally in that it cost too much to develop. Furthermore, in

analyzing this relationship, I found no explicit disadvantages to A2. Finally, I discovered that A2

does not necessarily need to be acquired by Fonterra in that extreme closeness to the A2 brand is

not necessary to get their product out into the world successfully. Thus, Fonterra can work with

A2 until they feel comfortable, eventually acquiring them fully.

Innovation Strategy
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A2’s innovation strategy starts with architectural innovation that allowed them to form a

differentiation strategy and continued through patent and trademark work to protect that

advantage (Rothaermel, 2017). The difficulty with any innovation strategy is when a firm enters

the shakeout phase, a phase when competitors can replicate the leading innovation and enter the

industry. We can see that A2's has entered this stage through Nestle beginning to compete on A1

free dairy products (Esty &Fisher, 2019). In the shakeout phase, sustaining your competitive

advantage depends on two factors, are further incremental innovations in product possible and

can you compete on price, marketing, manufacturing, or operations. In summary, firms that win

can develop cost leadership strategies that enable them to distribute their product globally. While

A2 may not be able to innovate their product further, their expansion efforts along with their

alliance with Fonterra suggests that their overall strategy is evolving to meet the needs of their

current state of innovation.

Conclusion

In conclusion, what this suggests is that to respond to Nestle’s entry in the market, A2

mainly must now win on operations, marketing, and global expansion. As such, they are making

many of the right moves, including the alliance with Fonterra which allows them to expand

globally. However, A2 should go further than e by trying to secure an additional competitive

advantage that is difficult to replicate. Possible solutions include the case study suggestions that

A2 might consider locking down the supply of A2 cows or monetizing their IP. After all, there is

little reason why they should not backward integrate to own the supply of cows. Mostly if they

make it so that big organizations that want to get into A2 milk must go through them for all their

supply, A2 can win as an organization.

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References

Esty, B.G., & Fisher, D. (2019). The a2 Milk Company. Harvard Business School. Retrieved

from www.hbsp.harvard.edu

Hambrick, D.C., & Fredrickson, J.W. (2005). Are you sure you have a strategy? Academy of

Management Executive 19 (4). Retrieved from

https://mymasonportal.gmu.edu/webapps/blackboard/content/listContent.jsp?course_id=_

3665011&content_id=_8994164_1

Rothaermel, F.T. (2017). Strategic Management (3rd ed.). New York, NY: McGraw Hill

Education.

Matthew Goldenberg did this project

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Appendix A
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Appendix B
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Appendix C