Case study 8: an award-winning milk processing business

Business and entrepreneur characteristics

Case study 8 is a family-owned micro-business located in the small municipality of Pyhäjärvi in the Nivala-Haapajärvi sub-region, which is in the southern part of Northern Ostrobothnia. The sub-region has 33,000 inhabitants, of whom 6,000 live in Pyhäjärvi.

The sub-region is currently receiving development assistance as part of the European Objective 1 programme, and experiences high unemployment and out-migration. Strong development efforts have been made in mechanical wood processing and the metal industry. Since the mid-1990s, large investments have also been directed towards the development of small-scale food processing.

Before starting the business in 1997 the owner worked for a local dairy, and his own food processing business began gradually. The business started with a few products and gradually developed others, even though the total is still less than ten. The current product range is concentrated in two categories: unripened cheese (70% of production volume) and mushrooms (30%). Both include high quality niche products, some of which have won national awards. In 2002, one of the business’s cheeses won fi rst prize in the category of small cheese processors, in a competition organised by the Finnish Small Cheese Dairy Association.The business employs family members and three hired staff, of whom one is full-time and two are seasonal, mainly during the Easter and Christmas periods. The turnover of the business is approximately 0.4 million euros, which could be doubled by expanding operations. During high seasons, the business is not able to satisfy the demand for certain products with its present capacity. The business has access to good, spacious production facilities that used to belong to a local dairy, and therefore future expansion will not require large capital investment.

The owner has taken various short courses and the business has been involved in regional and local development projects, which had to do with marketing, logistics and other as-pects of business operation. The business has, therefore, clearly undertaken a signifi cant investment in human capital. Approximately 80% of production is marketed by another business, which is a medium-sized processing business. To access certain market areas, the case study business has contracts with other marketing businesses. The business itself takes care of the local marketing of its products.

In the early stages of operations, the business undertook small-scale market research. For example, before marketing its mushroom salad, two blindfold consumer-testing panels were organised in different parts of Finland. Both consumer panels selected the case study business product as the best and most authentic.

The business supply chain

The upstream and downstream linkages for case study 8 are shown in Figure 9.15. The business fully recognises the importance of both upstream and downstream nodes in the supply chain. Relationships have to be taken care of, and long-term and established business relationships are valued. The business mainly utilises long chains due to its use of marketing fi rms.

Upstream

The main raw material of the business is milk, which is sourced locally from a national supplier. The milk lots are delivered to the business up to four times a week, depending on seasonal fl uctuations in production. Another important raw material is eggs or egg mass.

Approximately 60% of the egg mass is sourced locally and 40% comes from Southwest Finland. The selection of a main supplier for raw material has been simple, as there are limited possibilities for milk supplies. In the case of egg mass, fl exibility of service and price has infl uenced supplier selection, as well as the supplier’s location near the

busi-ness. The business is able to use a label of Finnish origin, the swan fl ag, on its products.

The label is used because the business thinks that “…it’s a good label. It’s most likely to promote sales” (Interview, January 25^th 2002).

The quality requirements for the raw material are extremely strict. The business has not experienced any problems with liquid milk or milk powder, but some problems have existed with egg mass. The business tightened the quality requirements for egg mass suppliers, and since then the quality has been good. The origin of raw materials can be traced all the way back to farms, but it is not regarded as an important quality feature as it is not requested by consumers. It is usually enough for the consumers to know that the cheese is Finnish.

Downstream

Most of the fi nished products, approximately 80%, are marketed by a medium-sized processing business. Co-operation between the processor and the case study business started with the initiation of the processing business in the late 1990s. At the beginning there were no written contracts, although the businesses were committed to building a long-term relationship; currently the business relationship is more formal. In order to access certain market areas in southern Finland the business has contracts with other marketing businesses. The business takes care of the local marketing of its products, and uses its own transportation when delivering to the local markets. Although it uses other businesses to market and distribute its products, these products are still sold under the brand name, with the name of the marketer visible on some product labels. External partners mainly undertake transportation of fi nished products, on the national level, along with a specialised carrier. In addition, one of the raw material suppliers distributes the fi nished products at a regional level.

The business sometimes gets new ideas or hints for new product development from its downstream partners. However, the owner would appreciate more active feedback from customers and the marketing businesses it uses. Both positive and negative feedback are expected in order to further improve the products.

The future target concerning customer segments is clear to the owner: the food service sector interests the business as an untested segment. It is thought that profi t margins could be higher in the food service sector, compared to the retail sector, and that co-op-eration with downstream customers would be more open, for example in new product development.

The role of ICT

The adoption of ICT is on a relatively low level. The business uses on a daily basis, the telephone, mobile phone and fax machine. Personal computer, email, the internet and professional software are used less often, maybe once or twice a week. The business does not have a website, as it does not market the products itself. According to the owner, the

use of ICT means savings in time and money for the business. As well, there is the matter of creating an image for the products and the business, which whould probably necessitate the business having its own website. ICT is generally used for normal communication, marketing and sales, ordering and invoicing, and as a tool for decision-making and quality control. The owner acknowledges that ICT will be more important in the future, if the turnover of the business increases as planned.

The role of institutions

The business has received external assistance for new product development from various institutions. For example, the business has received both advice and fi nancial aid for prod-uct development from the National Technology Agency. The business has also received grants for capital investment from the regional Employment and Economic Development Centre. It has a contract with MTT Agrifood Research, in a relationship connected to

Input Suppliers

Figure 9.15 Supply chain diagram for case study

business 8.

new product development proc-esses. The owner considers that the regional and local organisa-tions are providing sufficient support for small food business owners, for example in personal development or ICT, although its relevance is not always instantly obvious. According to the owner, it is not diffi cult to fi nd external assistance.

Rural development

The rural location of the busi-ness is considered to have both advantages and disadvantages for operations. The owner thinks that for a micro-business in the food processing industry, the main advantages include lower production costs compared to urban areas, lower labour costs and production facilities that are highly appreciated by the owner. On the other hand, the main disadvantage of a periph-eral location is the long physical distance from major markets. As the business’s products are per-ishable, logistics is a key issue.

The owners have considered relocating the production plant nearer to the main markets in southern Finland, but as the name of the business is attached to the region, they would probably have to change that also and redesign the packaging; such adaptation would be costly. However, the owner is certain that the peripheral location of the business has not prevented any marketing transactions, although it may have caused some diffi culties.

Strengths Weaknesses

• Reliable supply of raw materials

• Investments in human capital

• Investments in the development of business operations

• New product development in co-operation with other businesses

• Innovative, quality niche products, with clear Finnish identity

• Long-term marketing strategy

• Well-functioning co-operation with a marketing business

• Exploitation of external assistance

• Links to the region

• Weak connection with the fi nal customer/consumer

• Website not developed

• Location means high transportation costs

• Production of some items is not always able to satisfy demand

Opportunities Threats

• Food service sector targeted as a new market segment

• Enhanced consumer-orientation

• Wider product range to build business image

• Production facilities offer possibilities to extend operations

• Website to help create market image

• Exploitation of awards won

• Successor not identifi ed for the business

Figure 9.16 SWOT Analysis – Case study business 8.

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