Economies Of Scale And Scope

Published Date: 02 Nov 2017

Dole (2013) Food Company, Inc which is founded in Hawaii in 1851 is the world's largest producer and marketer of various high-quality fresh fruit and fresh vegetables. It also produces a great variety of packaged and frozen foods. Furthermore, it is a produce industry leader in nutrition education and research. The company runs its business in more than 90 countries and has about 36,000 full-time and regular employees and 23,000 full-time seasonal or temporary employees in the world.

In the beginning, James Dole who is the founder of the company started growing pineapples in Wahiawa, on Oahu Island, Hawaii. He found the Hawaiian Pineapple Company and started to make the name of "Hawaii" synonymous with "pineapple". Dole moved his pineapple cannery to Honolulu and put advertisements in U.S. magazines to promote pineapple - one of the first nationwide consumer advertising campaigns in America. Since then, the company had achieved a very successful demand for its pineapple. In 1911, A Dole engineer, Henry Ginaca, invented a machine that peels, cores and cuts pineapple at the speed of up to 100 pineapples per minute. Before the invention, the company hired slow paced hundreds of workers to peel and core each pineapple by hand. After the application of the fully mechanized outfit, Dole's business became more flourished. Its rival pineapple companies slowly began to use the Ginaca machine. The introduction of Ginaca paved the road for Dole’s future mechanized production. Surprisingly, Ginaca now is still an industry standard. To further develop the company, Dole managed to convince his families’ contacts to arrange a fairly large amount of capital investment fund, with which he purchased the island of Lānaʻi and developed it as a vast pineapple plantation. At that time, it became the largest plantation in the world with over 20,000 acres which was only for growing pineapple. Lānaʻi produced over seventy-five percent of the world's pineapple crops; therefore, it dominated the market and achieved a big success which made the company become widely known in the world (Dole 2013).

Economies of Scale and Scope

To meet an increasing demand and maximize profits, Dole managed to purchase more land to grow fruit and mechanize its production line. Mechanization help the company achieve economies of scale through increased production. Since the mechanized production line works more effectively than human beings, the company slowly started to replace a number of expensive labors by machines. When a company spend millions to reconfigure machines or purchase new machines to increase capacity, the fixed cost in the beginning will be so huge which lead to higher average cost. However, it will spread over as production volume goes up which lowers down its average cost dramatically. Here is a simple example below:

Method

Product

Cost

Speed

Efficiency

Labor

Pineapple

$0.5

2 Minutes/unit

Low

Machine

Pineapple

$0.001

5 Seconds/unit

High

After its production line is set up, how can company get more raw materials (fruit and vegetable) to meet its production line capacity? Dole purchased lands from Philippines and Hawaii to grow more pineapple and banana. In a word, through production line, the more capacity does the company produce, the lower average cost would be. In addition to the fruits that are grown by the company itself, Dole also works with thousands of independent growers from around the world, whose plantations vary greatly in size. Some of Dole’s products are bought from large independent growers, but others come from family farmers (Dole CRS 2013). In this case, the more does Dole purchase from its supplier, the less unit price of products will be lower. Eventually, it drives down its average cost. Moreover, transportation fees and packaging fee also follow the same principle.

To take fully advantage of its own resources, meet consumer expectations and expand business scope, the company widened its product varieties. Gradually, the company started to grow and sell other types of fresh fruits and vegetables, and engage in producing packaged frozen food. As of now, the company produces over 170 fresh and packaged food products. Fresh fruits have apples, cranberries, blackberries, coconut and grapes, etc. Fresh vegetables have baby spinach, lettuce, carrot and coleslaw, etc. Frozen foods have banana dippers, pineapple chucks and mongo shaker, etc. Packaged foods have different types of canned fruits. Based on its product line, it is very clear that Dole is producing similar products. For example, use fresh banana to make frozen banana dippers and canned banana, and fresh pineapple to pineapple chucks and canned pineapple. These multiple products require the same raw materials and share the same mechanized production line, which allow Dole to acquire the materials at a smaller per unit cost by purchasing in larger volume and maximize the utilization of its production and service line (Dole 2013)

Key Input Factors

Farms and suppliers are the most significant assets for Dole. Without them, the company has nothing to sell. Both of two elements are closely related to production capacity. One day, if several suppliers break contract with Dole to stop supplying fruits and vegetables, however it is not likely to happen, Dole will be the only one who bears enormous losses. Another case is when farms and suppliers do not have adequate harvest in a certain year due to extreme weather, as a result, the price of fruits and vegetables will jump. Dole whose butter and bread are these products will suffer in higher cost of raw materials and lower sales. During this period, the efficiency rate of production line, labor and ocean cargo express will drop dramatically, which also lead to higher cost.

As the report discussed early, Dole is competing in international market. So getting an approval or license to sell its products in other countries is essential to its success. Up to date, its business is in more than 90 countries. It is very clear that none of companies can guarantee their products 100% quality. Assuming one day Dole’s packaged products have a severe food safety and quality due to mismanagement or machine breakdown, and then they sell these products to some countries and these products cause food poisoning. Afterward, these countries cancel its permit and stop Dole from selling these products (Import & Export 2013). There are other factors that could lead to loss of permit, such as relationship between countries and violation of local laws, etc.

In addition to permit, another effort that Dole Food Company made to walk away from financial difficulty is to sell its packaged foods and Asian fresh fruit businesses to the Japanese trading house Itochu Corporation for $1.7 billion in cash. The reason is it would put the cash proceeds toward paring down its debt and the costs of reorganizing its struggling business, for the company has been hit by volatile demand and lower earnings from bananas, its mainstay fruit (Dealback 2013).

General Industry and Particular Market

The Dole Food Company, Inc, mainly completes in agribusiness industry. This industry involves in agriculturally related activities, such as producing, purchasing, processing and distributing agricultural products, selling agricultural production systems, farming, supplying seed, agrichemicals and farm machinery. However, Dole is only participating in selected markets within agribusiness industry. Specifically, the company has its big farms around world in which different types of fruits and vegetables are growing. Also, it purchases these fruits and vegetables from its suppliers, and then processes and distributes them as a wholesaler. But Dole is not a major farming company and does not process and distribute agrichemicals, farm machinery and agricultural production systems. The major players are Cargill Inc and Archer Daniels Midland Company (IBIS World 2004).

Not only Dole is in agriculture industry, but it is also in part of logistics industry because it has its own ocean express department to distribute its products. Likewise, since Dole is limited to ocean cargo service, it is not a major player in this industry. Its major players are CHEP and UPS who engage in land, air and ocean express. The major activities of Logistics industry are packing goods for transportation, trade document preparation, goods prior to and after freight wrapping goods for transportation, physical distribution consulting, freight consolidation and Logistics consulting (IBIS World 2013).

Core Competency and Leader Role In The Selective Market

Chiquita and Fresh Del Monte who are the major food producer and seller can be merely comparable with Dole. Three of them own more than 70 percent of banana market in the U.S. Based on it, they the leader who guide the action of other small companies in terms of product price, hygiene standard, technology application and salary level, etc. In order to be competitive against the other two companies, Dole’s valuable asset base enables it to be a low cost producer in many of its major product lines, including bananas, North American fresh vegetables and packaged fruit products. In the last few years, company has undertaken various initiatives to achieve and maintain this low-cost position, including investing in automation within manufacturing facilities as well as on farms, and leveraging its global logistics infrastructure more efficiently. As for its ocean express service, Dole tries its best to maximize backhauling services, transporting third-party cargo primarily from North America and Europe to Latin America. It considerably reduces Dole’s transportation costs. Another way that Dole is using to keep its cost low is having biggest business scale, that it owns 117,000 acres of farms and other land holdings, including 25,000 acres of farmland in Oahu, Hawaii and approximately 2,600 acres of peach orchards in California (Dole Annual Report 2011).

One of Dole’s strongest core competencies is its ability to produce, transport and deliver high quality perishable products around the world. Other companies around world are not able to manage such a big supply chain. Dole has the largest refrigerated containerized fleet in the world, with eleven owned and thirteen chartered vessels, as well as 14,800 refrigerated containers. Most of the vessels are equipped with controlled atmosphere technology to ensure product quality. In the world market, in order to compete with local suppliers, Dole currently sources its fresh fruits and vegetables from over 20 countries and then distributes products in more than 90 countries. This avoids expensive and unnecessary transportation cost. On the other side, the company is not dependent on any country for the sourcing of products. The diversity of sourcing raw materials reduces risk from exposure to natural disasters and political disruptions in any country (Dole Annual Report 2011).

Catching up with new trend in agriculture, Dole launched its certified organic banana and pineapple program as a new selling point. This is at the forefront of organic agriculture and meeting the consumer demand for quality products. So far, consumers perceive DOLE as a strong international brand with high quality food products (Dole Annual Report 2011).

Horizontal and Vertical Integration

Since Dole Food Company was established, it experienced horizontal and vertical integration. Here are some examples. Castle & Cooke acquired dole’s ownership of 21% of Dole Food Company and then Dole merged with it few years later. Then Castle & Cooke becomes the major stockholder of Dole Food Company. Pineapple is the second most popular tropical fruit, next to banana and it is in the Philippines where the biggest pineapple plantation in the world is located, so Castle & Cooke continued to acquire another big food company Philipp Astheimer & Sohn to control the global main pineapple market under Dole Company. Few years later, Dole bought Coastal Berry Company LLC who was a leading producer of fresh California coastal strawberries and bush berries. This marks that Dole began expanding its product scope. Mrs. May’s Naturals, a company producing natural snacks, were also 100% acquired by Dole Food Company, mainly because May’s all-natural snacks fit perfectly with the Dole 'Nutrition Plus' product line which is designed to improve health and wellness through diet. May's products, which is added to Dole's packaged foods department, is still sold under the Mrs. May's label and run by their existing retailers.

In addition to successful horizontal integrations with other companies, Dole also vertically integrated with SABA Trading AB in Sweden who is helping Dole distribute its product in Europe. Moreover, Dole acquires berry grower and marketer Sunny Ridge which are upstream integration and downstream integration respectively.

In fact, almost all of conglomerates such as Dole expand their business quickly by integration. Integration serves an efficient tool to help company improve profitability, reduce cost and reduce risk. Specifically, after achieving the world biggest pineapple plantation in Philippine, its product capability and market power increase which result of higher profits. Additionally, acquiring Coastal Berry Company LLC and Mrs. May’s Naturals indeed saves cost that Dole establishes its own company to widen business scope. Clearly, it not only saves money on building up new product line, but it also save plenty of times to set up a company. Even though integrating with berry grower, marketer Sunny Ridge and SABA Trading AB seem unnecessary, it considerably reduces potential risks when Dole’s suppliers and distributors terminate contract with Dole suddenly. Most important benefit is the profit. Since they joined into same group which is tantamount to same family, these three former partners have to offer the lowest price exclusively to Dole than to any other business partners.

Dole’s Concentration in Its Major Market

Dole is playing an important leader role in some certain markets in the world. The most significant products, banana and pineapple, hold the number 1 or number 2 positions in their respective markets: Dole has an approximate 34% market share and 32% market share in the U.S. and Japan respectively, and it is also the number 2 provider in Europe with an approximate 9% market share. For fresh-packed vegetables, Dole is the largest supplier of iceberg lettuce and celery, and the third largest producer of cauliflower and strawberries in the U.S. (The packer 2011). Obviously, Dole is not a monopolist since there are many sellers in the respective market. The global market in which Dole is competing is very competitive because of a lot of competitors from different countries. However, Dole could be an oligopolist in a certain country such as the USA, because its concentration ratios, 34% for banana market and 32% for pineapple market, are quite high. As for its other products, Dole is not number 1 or number 2 market leaders so that other products’ concentration rates should not be high. In the Juice Market, PepsiCo Inc, Dr Pepper Snapple Group Inc and the Coca-Cola Company are the three major players. For canned fruits and vegetables, H.J. Heinz Company and Campbell Soup Company are the major players (IBIS Industry 2012). Every company has its own products to attract customers. Particularly, In U.S. banana market, Chiquita, a major supplier in North America with 39% of the US market share, Dole and Del Monte are three major players (Source Watch 2011). So this market is highly oligopolistic since three companies own more than 70 percent of total market share and their products are very similar. In a certain city in U.S. Dole could be the only one supplier of banana based on its high market share. Nevertheless, in all markets, there are a great variety of fruits and vegetables from different countries and different companies, so the more participator in the market, the higher competitive the market would be.

Regulation of The industry

In the United States, every company from different countries is able to enter food market, mainly because of a relatively open domestic import regime and lower average import tariffs. The most leading suppliers with products enter the U.S. duty free or at preferential duty rates. Although government of the United States advocates free market, its regulations lead to serious market failure. The large food companies’ failure to internalize all the food production costs creates negative externalities and economic deficiencies in the food market. Government regulation is not sufficient to stop the externalization of costs. Poor eating habits instigate such market failures and are controlled by misinformation, advertisements, and unhealthy foods. Regulatory laws, such as the Hazard Analysis Critical Control Point Act (HACCP), the Poultry Products Inspection Act (PPIA), and the Humane Methods of Slaughter Act have so many loopholes and allow lots of exceptions. The externalities of the food production industry influence the economy, the public’s health and the environment. As a result, the American people are suffering from poor health and nutrition since agricultural, environmental, corporate, and tax laws force American farmers or company to adopt industrial food production practices. Large food corporations shift the "externalities" of cost from food corporations to the general populace. Although it increases profits, it eliminates healthy and ethical food choices for consumers. In order to be more effective, these regulations need to be executed with consistent penalties for any violation. Furthermore, as it might fail to report violation to HACCP, government needs to send inspectors to check companies frequently. Another restraint of these regulations is small companies are less likely to fully follow these regulations due to lack of knowledge, training and capitals. To solve this problem, government needs to provide either financial support in forms of incentives, tax reduction and loans, or technological support by means of sending experts and providing learning resources (Gabriela Steier 2011).

Except the largest food company such as Dole are adopting new technologies to improve environment, smaller companies either have no enough capitals to adopt new technology or have no awareness of sustainable development. Using agricultural technologies creates positive spillovers or externalities. But it always remains at low levels of adoption because some or all of the benefits from these technologies go to individuals other than the adopting farmer or company. For example, practices that reduce erosion, conserve water, or control pests may benefit the wider community, not just the individual farmer. Likewise, adopting a new technology by the first farmer or company in a village may generate positive externalities for other farmers. If individual farmers are not rewarded for the benefits that they generate for others, they will invest less in a new technology than is preferable from the point of view of society (ATAI 2013). At this point, government should give incentives or reduce taxes to encourage all farmers to use sustainable cultivation.

Successful Business

With the experience of 162 years operation, Dole Food Company, Inc. has already become a very successful and mature company. Dole is now ranked in Fortune 500 in the world (CNN Money 2012).The company was also honored to one of the world most ethical companies by Ethisphere Magazine, a national publication. Ethisphere is a think-tank dedicated to the research and promotion of profitable best practices in global governance, business ethics, compliance and corporate responsibility. The award was revealed at the Ethisphere and Forbes joint-conference, "Driving Profit through Ethical Leadership," held on June 3rd. (Proquest 2008).

Dole not only takes well care of itself but also makes a huge contribution to society. Dole launches the "Dole 5 a Day Program" to encourage young children and their families to eat five or more daily servings of fruits and vegetables. Also, the company establishes Dole Nutrition Institute to provide the world with knowledge about health, good eating habit and living style through research and education. In Philippines, Dole donates to Adopt-A-School program by building infrastructures, providing facilities support, teaching and skills support, computer and science laboratory equipment.

Nowadays, there are still number of companies that do not have high awareness of protecting environment which the business relies on. However, Dole is very responsible to environment. As far back as July of 1998, Dole's banana operations in Costa Rica had become the first banana exporter and agricultural producer in the world who is certified to the environmental management system requirements of ISO 14001. Dole's other divisions in Latin American and Asia began following in 1999. In addition to obey highest standard regulation, Dole also uses different types of plastic materials throughout the banana production process. One of the purposes of using plastic in the banana production is to protect banana stems from insects and mechanical damage and enhance fruit development as a field bag. Since the field bags have the greatest use of plastic, so Dole reuses and recycles them.

Carbon footprint and energy use are also seriously concerned by Dole, such as water management, soil conservation and packaging and waste management.

Being a company what business completely relies on natural resources (soil and water), Dole is dedicated to maintain healthy soil and clean water in its farm by implementing several programs such as minimum tillage and organic amendment. By doing so, material of plant or animal origin are added to the soil to improve soil physical properties, including water retention, permeability, water infiltration, drainage, aeration and structure; soil erosion and compaction are considerably reduced thus increasing water intake. The Company developed the "New Millennium Packing System," which optimizes water use, reduces energy consumption in the packing process. As a result, water usage decreases by 90%, energy usage drops by 50% compared to traditional packing plants. The New Millennium Packing Plant was received an "honorable mention" from the Scientific Committee of the World Water Week in Stockholm in September 2010 (Dole CRS 2013).