DANONE: CASE DISCUSSION AND ANALYSIS Danone’s development How has Danone changed changed und er the leadership leadership of t he Riboud father-and-son t eam? eam? DIVERSIFICACION
Under Antoine Antoine Riboud (1966-96), Danone Danone was transformed from a French glassmaking company into a diversified food and beverage company with substantial interests in other European countries. Under Franck Franck Riboud (1996 to the present), present), Danone has consolidated around 4 businesses lines: Fresh Consolidacion dairy products, Waters, Baby nutrition and Medical nutrition and in the process has divested a nu mber of major businesses (e.g., Kronenbourg beer and the biscuits division). It has also internationalized considerably—especially beyond Western Europe into Russia and other Eastern European countries, Asia, the US and Latin America.
At each of these stages of development is useful to consider the underlying logic of the strategic initiatives. Why the diversification by Antoine Riboud? Was this simply a case of opportunism and empire building? (In retrospect, it seems difficult to see any clear logic in diversifying from glass into beer and a variety of food products other than the fact that glass containers have been a slow growing industry). In the case of Franck Riboud, the logic behind the transformation of the business is clearer. He has focused Danone on fewer businesses selling off those which either had poor growth prospects (biscuits) or where Danone lacked critical mass (beer). In terms of the basic strategic questions W here? and How? Danone’s strategy can be described as: WHERE? 4 businesses: fresh dairy (especially yogurt), bottled water, baby food, and medical nutrition (“functional foods”). Broad international spread but particular strength in particular countries notably: France, Russia, Spain, Mexico, Germany, Indonesia, UK, China and Argentina that together account for 67% of Danone’s total sales. VISION
HOW? A key linkage between Danone’s busin esses and its source of competitive advantage is its mission of “bringing health through foo d to as many people as possible.” T his mission has taken Danone out of beer and biscuits and into baby food and medical nutrition and encouraged its increasing focus on populous emerging markets in Asia and America. It has been underpinned by Danone’s values— notably its emphasis on social and environmental responsibility and is reflected in Danone’s emphasis on R&D and innovation. The world market market f or foo d and dri nk: globalization globalization pot ential ential Having established key features of Danone’s development, its strategy and its current performance, the next stage is to evaluate Danone’s strategy. It is useful to turn attention from Danone to the markets in which it competes. The central theme of Danone’s strategy has been international expansion. Does this make sense in the industry in which Danone plays? Variacion del precio en concepto de la oferta y demanda
Given that food and beverages tend to lack economies of scale either in R&D or in production and transportation costs tend to be high (especially for fresh products), then the benefits of an internationalization problemas culturales strategy might be expected to be small. At the same time, because of culinary preferences and traditions tend to be a central feature of national culture, markets tend to be differentiated both nationally and even at much more local levels. It is not obvious that global firms would have an advantage over national players in this sector. To explore the benefits of global integration versus the need for national differentiation we need to examine the forces driving globalization and localization. The generic sources of globalization and localization benefits are:
Figure 2 The Drivers of Globalization and Localization
Forces for g lobalization MARKET DRIVERS --Common cus tomer needs --Global cu stomers --Cross-border network effects COST DRIVERS --Global scale economies --Differences in national resource availability --Learning
Forces for localization / national differentiation MARKET DRIVERS --Different languages --Different customer preferences --Cultural differences COST DRIVERS --Transportation costs --Transaction costs --Economic & po litical risk --Speed of respons e
COMPETITIVE DRIVERS --Potential for strategic competition (e.g. crosssubsidization)
GOVERNMENT DRIVERS --Barriers to trade & inward inv. --Regulations
At the same time the positioning is very different for different products. For example, in relation to Danone’s products, water is fairly global product: it is not differentiated by country and the leading brands are exported worldwide from a single source. Conversely, dairy products are highly localized: preferences for cheese, yoghurt and other products is highly differentiated by location and production also needs to be undertaken of the local market. (See Figure). Figure 3 Danone’s Businesses: Globalization Potential vs. Need for Localization
Waters Benefits of global integration
Medical nutrition
Baby foods Dairy products
Benefits of national differentiation
The rationale behind Danone’s internationalization
To explore the underling logic to Danone’s strategy of international expansion we need to look more carefully at the basis of Danone’s competitive advantage in the markets in which it competes —and at the resources and capabilities which underlie this competitive advantage. Hence, it is useful to ask: What are the resources and capabilities that offer Danone a competitive advantage in the markets in which it competes and to what extent can these competitive advantages be transferred across borders? The resulting suggestions can be organized into a table that may look something like Table 1 below.
Table 1. Danone’s resources and capabilities and potential to create value from internationalization
Source of advantage
Potential for cross-border transfer of competitive advantage
Brands
Danone has a portfolio of established brands, most of which are established in multiple national markets—thereby offering economies from spillover from advertising and promotion. Global brands particularly important in water: Evian, Volvic. In other business areas, Danone has a m ixture of national and international brand: in dairy products, Danone and Gervais are international brands, as are Nutricia and Milupa in baby foods. Danone’s ability to exploit its reputation across national borders extends beyond the appeal of its individual brands.
Research, innovation, new product development
R&D is an important source of global scale econom y in the food sector —especially in research intensive business such as medical nutrition. Also the potential to economize on new product develop costs by global rollout of new products.
Social and environmental responsibility
Danone’s system of values and its initiatives in terms of social and environmental responsibility may be regarded as a distinct capabi lity that provides Danone with a reputation and basis for engagement with distributors, consumers, governments and suppliers that is transferable from country to country.
Responsiveness and entrepreneurship
A key component of Danone’s management system is decentra lized decision making intended to foster a high degree of initiative and responsiveness among business unit executives. This might be expected to offer Danone a competitive advantage in terms of adaptability to local requirements and the ability to show initiative and speed in business development.
Operational capability
With some 160 plants throughout the world, Danone has considerable potential for improving efficiency through the transfer of best practices and implementing process innovation
Learning and knowledgebased advantages
The potential to create outstanding operational capability is just one dimension of Danone’s key advantage from its international scope: the ability to learn in multiple locations, then disseminate that learning globally. One example: Danone's a bility to tailor its products to local needs a nd preferences. Danonino, a dairy product for children has been introduced into 14 countries, its formulation is adapted to the nutritional needs of children in different locales. Danone’s knowledge management processes facilitated such cross-border learning.
Human resource management
From its earliest days, Danone has committed itself both to caring for i ts employees and developing their potential. As the case outlines, Danone makes a major commitment to training and leadership development with a particular emphasis on team-based skills.
How Danone manages its i nternational busi ness empire?
Probably the most interesting feature of Danone is its management system which is certainly h ighly distinctive and offers an interesting basis for discussion about the nature and role of corp orate systems for coordination and control. Compared to other large, highly complex companies (i.e. ones that are both diversified and multinational); Danone is distinguished by its unusually decentralized structure and management style. This is reflected in the autonomy granted to its large number of country business units and is revealed in the differences in strategy being pursued in different countries. Thus, Danone’s entry and development strategy in different
countries has been very different. In emerging markets in particular it has focused upon the acquisition of local companies in some countries, joint-ventures in others, and “greenfield” expansion in others. This decentralization and adaptability have allowed Danone to adjust to the requirements of individual markets, the key issue that arises is: How does Danone achieve the integration needed to exploit t he advantages of international scope? The case suggests that the key to Danone’s ability to manage its dispersed global n etwork and exploit the benefits of cross-border collaboration and integration is its informal rather than its formal management structure. The “glue” that holds Danone together appears to be much more its common values, its business principles, and the other factors that feed into the unique “Danone culture”.
This is supported by some specific tools and systems —most notably Danone’s knowledge management system which ensures that product ideas, best practices, and know how is transferred across national and divisional boundaries. In creation and maintaining the Danone culture and the Danone “way of m anagement”, 44 years of leadership by the Ribouds has been the vital component. A Nivel global, danone utiliza estrategias en cada pais que incursa
Recommendations
nuevos negocios y diferencia las estrategias manteniendo los mismos principios y valores
1.
The focus on emerging markets. Danone has done a remarkable job of taking products developed initially for its home market —one of the most sophisticated and discerning food markets in the world —and adapting and developing them for a wide range of national markets whose culinary traditions are vastly different from tho se of France. Danone’s success in countries as different as Mexico, Russia and Indonesia, suggest that Danone has developed a remarkable capability to develop, market and distribute products in emerging countries. Given that these markets show a high population growth, economic growth, and food sectors that are less developed than those of Europe, Danone’s emphasis on emerging markets is sound.
2.
Danone’s commitment to social and environmental responsibility. Given the product markets that Danone serves (dairy products, water, baby nutrition, and medical nutrition), Danone’s CSR and environmental sustainability programs are likely to play a key role in brand reputation, relationships with suppliers (dairy farmers), and relationships with governments. In emerging markets in particular, the controversy that has been associated with infant milk formula and pharmaceutical marketing and the active role p layed, means that social and environmental responsibility activities are likely to contribute both to Danone’s reputational advantages and to its capacity to find innovatory approaches to new product development, marketing and distribution.
3.
Danone’s structure and system. Achieving the right balance between decentralization and centralization, adaptability and standardization, entrepreneurial freedom and control is difficult. Given that Danone’s success depends critically on maintaining its standards of quality, hygiene, and reputation for social and environmental responsiveness—the imposition of company-wide standards is important. Also, to the extent that replicating and extending Danone’s competitive advantage depends upon exploiting its strengths in research and brand equity, and continually transferring know-how and experience, then keeping the network ties close is essential.
Where things have gone wrong for Danone in the past —most notably its problems in China with its jointventure partner Wahaha—is where Danone has had in sufficient control. Hence looking ahead:
Danone’s emphasis should be upon esta blishing subsidiaries where it has effective management control (i.e. a majority equity stake) if only to ensure the maintenance of its business principles and philosophy.
Achieving coordination while maintaining decentralized initiative and flexibility is likely to require informal mechanisms for coordination and control. Maintaining the cu lture and the business philosoph y must be the primary responsibility for tip management. To keep communication and collaboration flowing, Danone needs to achieve a global system for developing its managers and managing their global career paths, it must emphasize events where managers for different countries meet and share information and insights.
Changes in the business portfolio. Danone’s portfolio of businesses is mu ch more focused than when Franck Riboud took control of the company. Decisions to add or subtract businesses should be based upon (a) the long-term attractiveness of the business and (b) Danone’s potential for competitive advantage. One business that might be seen as a possible “misfit” is the drinks business. Despite the health connotations of water, it could be argued that selling French bottled water thr oughout the world conflicts with Danone’s environmental aspirations and its desire to service the “bottom of the pyramid”. Moreover, this is a slow -growth business where Danone is unable to use many of its core capabilities in product development and adaptation to local preferences and requirements. Water industry does not usually show high level of profitability, but it is even more difficult to manage for Danone, because it cannot provide any synergies with the other business lines, and because it has hig h costs of transportation (the case says, “ for most of its sales, Danone produces within its local markets. The exception is bottled water, especially the brands Evian and Volvic. Evian was exported to approximately 150 countries in 2009”). To be successful in this business, companies need to work on volume than on price. Also, a high price would be not aligned with Danone overall positioning and strategy. It could be that, like its biscuits businesses which was a more natural fit with Kraft’s Oreo cookies business, Danone’s water business might fit better with a major beverage company —e.g. Coca-Cola, PepsiCo or Nestlé. Do you agree?
Danone debe evaluar si le es rentable producir y embotellar agua a nivel regional para minimizar gastos de transporte. Puede embotellar en regiones donde obtenga una calidad de agua buena (Ejemplo, EEUU, Colombia, China, Sudafrica) y exportar a los paises de esa zona geografica. De no poder, danone debe desistir de esta linea de negocio y reforzar su precencia en el mercado de alimentos infantiles y saludables.
