Harvard Case - Fomento Lechero - Supporting Small Dairy Farmers
"Fomento Lechero - Supporting Small Dairy Farmers" Harvard business case study is written by Francisco Layrisse, Gerardo Lozano. It deals with the challenges in the field of Social Enterprise. The case study is 18 page(s) long and it was first published on : Jun 17, 2016
At Fern Fort University, we recommend that Fomento Lechero (FL) adopt a hybrid organizational model that leverages the strengths of both for-profit and nonprofit structures to achieve its social mission of supporting small dairy farmers while ensuring financial sustainability. This approach will involve creating a social enterprise subsidiary that focuses on shared value creation by developing and implementing sustainable business models that benefit both farmers and the company.
2. Background
Fomento Lechero is a Colombian organization dedicated to improving the lives of small dairy farmers. FL faces challenges in achieving its social mission due to the fragmented nature of the dairy industry, low milk prices, and limited access to resources for farmers. The case study highlights the need for FL to develop a sustainable business model that can both support farmers and generate revenue.
The key protagonists are:
- Fomento Lechero (FL): A non-profit organization dedicated to improving the lives of small dairy farmers in Colombia.
- Small Dairy Farmers: The primary beneficiaries of FL's efforts, facing challenges like low milk prices, limited access to resources, and fragmented markets.
- Dairy Industry: The broader context in which FL operates, characterized by competition, price fluctuations, and evolving consumer demands.
3. Analysis of the Case Study
This case study can be analyzed through the lens of social entrepreneurship and sustainable business models. FL's mission aligns with the principles of triple bottom line, focusing on social, environmental, and economic impact.
Key Considerations:
- Social Impact: FL's core mission is to improve the livelihoods of small dairy farmers. This involves addressing issues like poverty, access to resources, and fair market prices.
- Financial Sustainability: FL needs to generate revenue to sustain its operations and achieve long-term impact. This requires developing a business model that is both profitable and socially responsible.
- Market Dynamics: The Colombian dairy industry presents both challenges and opportunities. FL needs to understand market trends, consumer preferences, and competitive dynamics to develop a successful strategy.
- Organizational Structure: FL needs to determine the most suitable organizational structure to achieve its goals. A hybrid model combining for-profit and non-profit elements could provide the necessary flexibility and resources.
4. Recommendations
1. Establish a Social Enterprise Subsidiary:
- Purpose: Create a for-profit subsidiary that focuses on developing and implementing sustainable business models that benefit both farmers and FL.
- Operations: The subsidiary will engage in activities like:
- Milk Processing and Distribution: Develop value-added dairy products and establish efficient distribution channels.
- Farmer Training and Capacity Building: Provide technical support, financial literacy programs, and access to new technologies.
- Market Access and Fair Pricing: Negotiate fair milk prices and secure market access for farmers.
- Governance: The subsidiary will operate independently, with a board of directors responsible for financial performance and social impact.
2. Implement Sustainable Business Models:
- Focus on Value-Added Products: Develop high-quality, differentiated dairy products that cater to specific market segments, including organic, specialty, and value-added products.
- Direct-to-Consumer Sales: Establish online and physical retail channels to connect farmers directly with consumers, ensuring fair prices and reducing reliance on intermediaries.
- Partnerships with Retailers and Distributors: Collaborate with existing retailers and distributors to expand market reach and ensure efficient distribution.
- Circular Economy Principles: Implement sustainable practices throughout the supply chain, minimizing waste, reducing environmental impact, and promoting resource efficiency.
3. Leverage Technology and Innovation:
- Digital Platforms: Develop mobile applications and online platforms to connect farmers with buyers, provide market information, and facilitate transactions.
- Data Analytics: Utilize data analytics to optimize production, improve efficiency, and identify market opportunities.
- Blockchain Technology: Explore blockchain technology to enhance transparency and traceability throughout the supply chain, building trust with consumers and ensuring fair compensation for farmers.
4. Foster Partnerships and Collaboration:
- Government Agencies: Partner with government agencies to access funding, grants, and policy support for sustainable agriculture practices.
- Non-Governmental Organizations (NGOs): Collaborate with NGOs to provide social services, health care, and educational programs for farmers and their families.
- International Organizations: Seek partnerships with international organizations to access expertise, funding, and global market opportunities.
5. Implement a Robust Social Impact Measurement Framework:
- Social Return on Investment (SROI): Develop a comprehensive SROI framework to measure the social and economic impact of FL's activities.
- Key Performance Indicators (KPIs): Define specific KPIs to track progress on key social and environmental objectives, including farmer income, milk quality, and environmental sustainability.
- Transparency and Reporting: Publish annual reports that document FL's social impact, financial performance, and sustainability initiatives.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Mission: FL's core competency lies in its deep understanding of the dairy industry and its commitment to supporting small dairy farmers. The recommended approach aligns with FL's mission by creating a sustainable business model that generates social impact while ensuring financial sustainability.
- External Customers and Internal Clients: The recommendations address the needs of both external customers (consumers) and internal clients (farmers). By offering high-quality, value-added products and ensuring fair prices, FL can attract consumers while empowering farmers.
- Competitors: The recommendations consider the competitive landscape by focusing on differentiation through value-added products, direct-to-consumer sales, and partnerships with key players in the dairy industry.
- Attractiveness: The proposed hybrid model offers a strong financial case, with the potential for significant revenue generation through sustainable business practices. The SROI framework will provide a clear measure of the social impact achieved.
Key Assumptions:
- Consumer Demand for Sustainable and Ethical Products: The recommendations assume that there is a growing demand for sustainable and ethically produced dairy products.
- Government Support for Sustainable Agriculture: The recommendations assume that the Colombian government will continue to support sustainable agriculture practices through policies, funding, and regulations.
- Availability of Technology and Innovation: The recommendations assume that FL will have access to the necessary technology and innovation to implement its proposed business models.
6. Conclusion
By adopting a hybrid organizational model and implementing sustainable business practices, Fomento Lechero can achieve its social mission of supporting small dairy farmers while ensuring financial sustainability. This approach will create a shared value creation model that benefits both farmers and the company, contributing to the development of a more equitable and sustainable dairy industry in Colombia.
7. Discussion
Alternative Options:
- Purely Non-Profit Model: This option would rely solely on donations and grants, potentially limiting FL's ability to scale its operations and achieve financial sustainability.
- Traditional For-Profit Business: This option could focus solely on maximizing profits, potentially compromising FL's social mission and ethical principles.
- Merging with a Larger Dairy Company: This option could provide access to resources and market reach, but it could also lead to a loss of control and potentially compromise FL's commitment to supporting small farmers.
Risks and Key Assumptions:
- Market Volatility: The dairy industry is subject to price fluctuations and changing consumer preferences. FL needs to develop a flexible and adaptable strategy to mitigate these risks.
- Competition: FL will face competition from larger dairy companies and other social enterprises. It needs to differentiate its offerings and build a strong brand identity.
- Technological Change: The rapid pace of technological change could disrupt the dairy industry. FL needs to stay abreast of new technologies and adapt its business models accordingly.
8. Next Steps
Timeline:
- Year 1: Develop a detailed business plan for the social enterprise subsidiary, including financial projections, market analysis, and social impact metrics.
- Year 2: Establish the social enterprise subsidiary, secure funding, and begin implementing sustainable business models.
- Year 3: Expand operations, build partnerships, and monitor social impact through the SROI framework.
Key Milestones:
- Develop a comprehensive social impact measurement framework.
- Secure funding for the social enterprise subsidiary.
- Launch value-added dairy products and establish direct-to-consumer sales channels.
- Develop and implement a robust technology strategy.
- Build strategic partnerships with government agencies, NGOs, and international organizations.
- Conduct regular monitoring and evaluation of social impact and financial performance.
By taking these steps, Fomento Lechero can become a leading example of social entrepreneurship in Colombia, demonstrating that businesses can be both profitable and socially responsible. This approach will create a positive impact on the lives of small dairy farmers, contributing to a more equitable and sustainable future for the Colombian dairy industry.
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Case Description
In 1980, the ALFA Group, a Mexican conglomerate, initiated a diversification process that led to the acquisition of a cold cuts company, thus creating Sigma Alimentos. Fourteen years later, seeking to make greater use of its refrigerated supply chain, Sigma Alimentos chose to make its way into the then very competitive dairy industry. Having found that large milk producers were already committed to large dairy processing companies, Sigma Alimentos decided to launch a development program for small dairy farmers in order to ensure sufficient supply of quality milk. This case study explores how Sigma Alimentos' Fomento Lechero Program helped small suppliers to grow alongside the company. A little over 15 years since the program's inception, the case recounts how small farmers managed to overcome various challenges to grow exponentially. In addition, at the time this case was written, imported powdered milk prices had dropped considerably below fluid milk prices, thus generating the case's core dilemma: letting go or retaining small farmers that have been working alongside Sigma Alimentos for a very long time.
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