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A Sample Strategic Sample Strategic Management Paper On Company A
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TABLE OF CONTENTS Executive Summary
4
1. Introduction
6
2. Research Design and Methodology
7
2.1. Research Design
7
2.2. Scope and Limitations
8
3. External Analysis 3.1. Economic Performance and Forecasts
8 8
3.2. Socio-Cultural, Demographic Trends
12
3.3. Political and Governmental Aspects
15
4. Industry and Competitor Analysis
17
4.1. The Industry and Market Segments
17
4.2. Porter’s Five Forces of Competitive Analysis
30
4.3. The Competitive Profile Matrix (CPM)
41
4.4. External Factor Evaluation (EFE) Matrix
52
4.5. Strategic Issues based on External Factors
57
5. Company Analysis
58
5.1. Vision and Mission of the Company
58
5.2. Internal Audit
60
5.3. McKinsey’s 7S Framework
72
5.4. Internal Factor Evaluation (IFE) Matrix
78
5.5. Strategic Issues based on Internal Factors
82
6. Strategy Formulation
82
6.1. SWOT Matrix
83
6.2. SPACE Matrix
85
6.3. Internal- External (IE) Matrix
89
6.4. Grand Strategy
89
6.5. BCG Matrix
91
6.6. Summary of Strategies
93
6.7. Quantitative Strategic Planning Matrix (QSPM)
94
7. Strategic Objectives and Recommended Strategies
98
7.1. Strategic Objectives
98
7.2. Recommended Business Strategies
99
7.3. Recommended Organizational Strategies
102
7.4. Financial Projections 8. Departmental Programs
104 108
8.1. Strategy Map Implementation
108
8.2. Departmental Actions and Functional Strategies
110
9. Strategy Evaluation and Performance Metrics
117
9.1. Balanced Scorecard for Year 2009
117
9.2. Contingency Planning
120
X. References XI. Appendices
EXECUTIVE SUMMARY Company A is competing in a growing industry of milk formula providing nutritional products to infants and children in the Philippines. The company is in a very good position of competition as it is in the no.2 position in terms of market share. The company garnered a rating of 3.4 out of 4.0 in the competitive profile matrix, 0.25 points away from the market leader. This demonstrates the company’s strong position where marketing capability, product availability, quality, alliance with Health Care Professionals (HCP), innovation, and price competitiveness are considered to be critical success factors in the industry. The company is also responding to its external environment in an above average manner with a rating of 2.78 out of 4.0. The main opportunities of the company are higher consumer spending, increasing births, consumer’s health awareness on health beneficial ingredients & food safety, and the declining milk powder prices in the world market. As for the threats, the issues on high inflation rates, government’s tightening regulations & capacity upgrade, the depreciating Philippine peso, and key competitors’ anticipated strategies were identified. Internally, the company is in an above average position with an IFE rating of 2.85 out of 4.0. Its strengths include strong brands in the children’s milk formula business, strong revenue growth, highly motivated employees and a strong efficient use of its assets. The challenges of the organization are the frequent out of stock in the trade, an operational micro organism concern, lack of compelling innovative products, loosing value proposition on an important brand, high cost profile of products, and high inventory levels. The main strategic issues of the company include coping up with the increasing economic pressures like the high inflation rates and peso depreciation. Though opportunities are present in the industry for company growth from the perspective of the customers, the competitors would take advantage of such opportunities also. To put the company in a more competitive position in the future, some internal issues need to be addressed like supply capability, innovation concerns, high inventories, coupled with decreasing market share on key segments, and slow growth for some brands.
Based on the strategy formulation tools and the inputs on the internal and external analysis, the company will need to focus on market penetration strategies, integrated with product development strategies to address its strategic issues. These strategies will to be supported by operational strategies to fully attain its growth potential. The marketing penetration strategies include (a) Intensifying marketing activities through the media by using celebrity endorsement coupled with scientific communities’ endorsement, (b) Reinforcing marketing activities such as bundling, in store sampling/promotions (c) Enhancing HCP communication models through widening of coverage to HCPs and Barangay Health Workers (d) Reviving an important Company A Brand and (e) Investing on plant capability to supply the demand needed to produce quality and safe products. Included to this will be the product development strategies of (a) Increasing R&D budget allocation to provide superior innovation in the Infant Formula Premium Segments and (b) Strengthening of Infant Formula Brand portfolio by using a strong Company A brand. These strategies project a cumulative 58% increase of revenues to Php 11.6 B, with an income of Php 2.09 B, a 62 % increase in three years time. With this position, it will be aligned in the company’s vision to be the no.1 market leading provider of science based nutritional products to infants and children.
1. INTRODUCTION
Company A is a company in the field of nutritional products. With more than 80 products in over 50 countries, the company is trusted by parents and health care professionals around the world to provide early nourishment for their infants and children. Company A experienced a landmark turning point in 1970, when it became a whollyowned subsidiary of the Parent Company AA. Company A contributes to the international presence of its parent company, while focusing on research and staying true to its heritage as a leader in nutrition. Parent Company AA, a global pharmaceutical and related health care products company, operates in segments – Pharmaceuticals, Milk Formulas and other health care businesses – with total Net Revenues of $15 billion in 2007. Company A worldwide contributes to about 10% of the revenues of AA globally. Company A started to operate in the Philippines by the mid-1960’s with a small office and a few headcount of salesmen and general administration officers. A milk powder plant is currently operational to produce milk formula. The same location is the office of AA, where the pharmaceutical side of the business remains. The pharmaceutical products for AA are either toll manufactured or imported. Company A competes in the Philippine market with known nutritional milk formula products such as Brand A, Brand B, and Brand C brands to name a few. Company A currently employs 520 employees. While Company A and Parent Company AA remain to be one legal entity in the Philippines, the two businesses are governed by two executive committees. They execute different strategies as they compete in two separate industries. Company A is in the milk formula industry, while AA competes in the pharmaceutical industry. Company A Philippines has reached the P 6.5 billion peso revenue in 2007, contributing to about 80% of the total business of AA here in the Philippines. Revenues for the whole of AA Philippines for both the pharmaceutical and nutritional businesses in 2007 were reported to be Php 9 B.
2. RESEARCH DESIGN AND METHODOLOGY
2.1 Research Design In order to complete the requirements of this strategic management paper, data and information from various sources were gathered, evaluated and analyzed. Research journals, periodicals, news, industry updates, economic analysis from different experts, and government publications were used in the external analysis. Examples of which are data coming from the Central Bank of the Philippines, The Economist, Asian Development Bank, Business World, , Philippine National Statistics Office, National Statistical Coordination Board, Bloomberg.com, Philippine Daily Inquirer, National Dairy Authority, and ABS-CBN. Pertinent websites like competitors’, suppliers’, and industry websites were referenced in the paper. Published journals found in ebsco.com (a business source online database) and hoovers.com (electronic database on company profiles) to determine key information and industry trends about pertinent issues were also obtained. Market research data was also used to determine the market sizes, different market shares of the key competitors, and key trends in the trade. Much of the data gathered was from market research companies such as The Market Research Company. Real time information in the trade, such as pricing of products was also gathered. Interviews were also conducted among key personnel of the company to get information and insights on relevant items especially for the internal analysis of the company. Studies done on some internal issues would be referenced appropriately. Document reviews on company systems, policies, and management principles were also conducted. SEC (Securities and Exchange Commission) audited financial statements of AA and key competitors for the past three years were also used to gather and analyze information regarding the financial status of the companies.
Fred David’s, Introduction to Strategic Management 11th edition 2007 was used extensively to provide the theoretical framework to this strategic management paper. The frameworks in the text have provided the structure in determining the external and internal concerns on the company. The different strategy formulation tools to be used such as the SWOT matrix, IE matrix, Grand Strategy Matrix, BCG Matrix, QSPM were referenced from the text. 2.2. Scope and Limitations The scope of the paper will only be about the business of Company A Philippines, the Nutritional Milk Formula division of AA Philippines. The pharmaceutical part of the AA operations is not included in the scope of the pape r, and will only be referenced as necessary. As Company A is also operating at a global and regional (Asia Pacific) level, the global and regional businesses will not be included in this paper.
3. EXTERNAL ANALYSIS
3.1. Economic Performance and Forecasts
3.1.1. Philippine Economy and Consumer Spending Consumer spending to grow 7.5% during 2007 to 2011 Gross Domestic Product (GDP) is the most widely accepted indicator of economic growth. GDP measures the annual or quarterly change in the production of goods and services in the economy. The GDP of the Philippines has displayed steady growth in the past years with its highest growth last year with 7.3% growth last year. Table 3-1 Philippine GDP from 2001 to 2007 Year GDP (constant prices 1985) in Php Billion % change
2001
2002
2003
2004
2005
2006
2007
990 1.8
1034.1 4.5
1085.1 4.9
1154.3 6.4
1210.5 4.9
1276.4 5.4
1370 7.3
Source: Central Bank of the Philippines On-line Statistics
Figure 3-1 GDP percent change from 2001 to 2007 % Change GDP 8 7 6 5 4 3 2 1 0
% Change GDP
2001
2002
2003
2004
2005
2006
2007
Philippines’ GDP rate of change has been on an upward moving trend in the past years. 2007 performance has been the best in the past three decades. On the demand side, higher consumer spending (grew to 6.3% in 2007 from 5.8% in 2006)1. Food expenditure, accounted for 56.1 percent of the Personal Consumption Expenditure (PCE). The growth rate for food consumption expenditure in 2007 was 10.0%. Economic growth is expected to be a bit sluggish from an expected 4.5% in 2008 to around 3.9% in 2009. This would be due to a weaker external demand brought about by a global financial slowdown. Growth will recover in 2010, when the economy is expected to grow by 4.8%2. The World Bank, in a report has said that the Philippine economy is in a better position to weather the global financial slowdown due to strong performance in private investments, better crop harvests, higher manufacturing output, and high remittances of the overseas Filipinos working abroad.3 Consumption being a component of GDP is seen to grow. A research report “Philippines Food, Beverages and Tobacco Market Forecast till 2011” from RNCOS (a leading market research and information analysis global company), expects consumer expenditure on food, beverage & tobacco to increase still at a CAGR of 7.5% during 2007 to 2011 in the Philippines4. Rising income, a growing middle class 1
Higher consumer spending boosts Personal Consumption Expenditure, www.ncsb.com.ph, Fourth Quarter 2007 report 2 http://www.economist.com/countries/philippines/ October 22, 2008 3 www.worldbank.org.ph , November 2008 update 4
population, rise in the number of working women, longer working hours, and more diverse eating habits are further bringing changes in the consumption pattern of Filipinos. A large number of people are opting for imported or processed food in place of conventional food. From 2001 to 2007, an increase at a CAGR of 5.37% was recorded in the per head disposable income of Filipinos. The continuous rise in remittances from abroad is significantly contributing to the rise in disposable income of many dual-earning families and this leads to higher consumer expenditure, especially on retail food and commodities. Relevance: Though economic indicators show a slight sluggish growth for the Philippines, this will then increase by 2010, and local consumption is expected to push for economic growth. Consumption growth poses good opportunity for producers in the country. Milk producers are faced with an opportunity of growth since industry sectors have gained momentum and local consumer spending for food, especially processed food is high in the next three years. This gives retail food producing companies such as Company A a foresight of the increase of consumer spending allocation on food. 3.1.2. Inflation Rate Inflation to hit a high of 9.7% in 2008 and a slow down to around 7% by 2009, and 4.8% by 2010. Inflation rates are the rate of change of prices (as indicated by a price index) calculated on a monthly or annual basis. In the past seven years, the average inflation rate was around 5.15%, with last year (2007) having the lowest rate of 2.9%5. For food, tobacco and beverage inflation rates, their behaviours were similar to the average inflation rate. It is though careful to note that the values have been lower than the average. But in the years 2004 and 2007, the inflation rates of these sectors were higher than the average. For this year the monthly trend of inflation rate has been upward. (Jan 08 -4.9%, June 08 -11.4%), For food the year started with 6.2 % inflation rate and June’s food inflation rate was 16.5 %, the highest in the commodity category. 5
Falling global food and oil prices, will allow inflation to slow from 9.7% in 2008 to 7% in 2009.6 However despite the softening of the inflation rates, these remain to be high compared to the past seven years. Relevance: Inflation rates affect the purchasing power of the middle income customers to cope up financially with rising expenses. The customers of Company A belong to the broad middle income bracket of people. Thus, customers would have to adjust their budget allocation to their different consumption needs. 3.1.3 Foreign Exchange Rate Philippine Peso slow down to US dollar: Php 52 in 2008-09 Foreign exchange is the buying or selling of one currency against the sale or purchase of another currency. The peso has continued to appreciate against the US dollar since 2004 to 2007. (Average - Php to USD 2004- 56.04, 2007-46.15)7. While 2004 was the year of its lowest value to the peso years after that it has been a declining trend until 2007. On the contrary, in 2008, the foreign exchange of the Philippines peso to the US dollar showed a depreciation of the peso slumping to as high as 47 Php to a dollar last October. Economists have affirmed that the peso will continue to slide. The Philippine Institute for Development Studies (PIDS)8, said the latest round of financial market turmoil in the United States could further drag down the peso. Foreign investment banks suffering from liquidity problems are expected to consolidate their balance sheets, thus these banks would pull out their investments in emerging market economies like the Philippines. This will then lead to major restructuring in the international financial systems, and this will lead to the depreciation of the currency. This was affirmed by some forecasts in the private sector. According to HSBC’s currency strategists, this may hit to Php 529. Based on their study, the Philippine Peso against the dollar would declare to a three-year low by June 2009 as the 6 7 8
http://www.economist.com/countries/philippines/ October 22, 2008 Central Bank of the Philippines - online statistics on foreign exchange Economists see further peso slide, Philippine Dail y Inquirer, September 17, 2008
nation's trade deficit widens and foreign investors divest away local assets. According to the report, locals also would have a prefe rence for holding dollars. Relevance: 80% of the costs for Company A are paid in foreign currencies. The costs of the materials are in foreign currency (including the cost of transportation and logistics abroad using foreign currency). Consumer spending uses local currency to generate revenues. Further decline in the Philippine Peso value means higher costs thus resulting to narrower margins.
3.2 Socio-Cultural, Demographic Trends
3.2.1. Population and birth rates Number of births to grow by 2.64% year on year In the Philippines, population increase moves at a steady rate of 2%. This has been a steady rate in the past five years. The annual average annual growth rate is projected to grow at an average annual population growth for the period 2005-2010 projected at 1.95 percent10. Some highlights in the population trend include: a. CALABARZON (Cavite Area A Batangas Rizal Zone) is projected to have the largest population by 2010, surpassing the NCR, and b. MIMAROPA (Occidental Mindoro, Oriental Mindoro, Marinduque, Romblon and Palawan) remain as the fastest growing region with an annual growth rate of 2.6 % in 2005-2010. Birth rate gives the average annual number of births during a year per 1,000 persons in the population at midyear; also known as crude birth rate. The birth rate is expected to be at 26.4 births/1000 population11 in year 2008 or to grow at 2.64%. The Philippines ranks 67th in the world, the first rank having the highest birth rate.
10
Philippine population would reach over 140 M by the year 2040, National Statisti cs Office, Apr 2006
China and India which are considered highly emerging countries are at 154th and 88th place respectively. Relevance: Target direct consumers of milk formula products are infant and young children. Therefore, an increase of national population and new births each year signify growth in the number of potential consumers of the milk formula products. 3.2.2 Increasing Health Awareness in Food In-take Increasing health awareness of consumers with the use of health beneficial ingredients in food products Consumers are starting to embrace the concept of balance in their food and beverage choices, much like they are trying to achieve harmony in their day-to-day lives. With the growing middle class population, increasing urbanization, and changing lifestyle, the demand for functional and organic food has increased considerably over the past few years and the annual growth rate is estimated at 1020%. This is referenced to the report above on “Philippines Food, Beverages and Tobacco Market Forecast till 2011” from RNCOS. There are trends and key areas of development such as in the use of ingredients such as pro-biotic cultures, omega-3 fatty acids, fiber and plant sterols. This is due to the greater consumer awareness and interest on the benefits of functional foods12. The concept of functional foods is becoming more widespread. Consumers are getting the message that some food components and ingredients promote health. Dairy foods are viewed as a leading vehicle for delivering these functional components. There’s a big future of high value ingredients that can be used in infant formula. Research into these ingredients has become intensified during the last decade. Nowadays extensive research is being done to ingredients such as a-lactalbumin, Nucleotides, and cGMP (Casein Glycomacropeptide)13. Particularly, consumers want the best for their children so as to reinforce their immune system and/or reinforce their brain and eye development through these ingredients. Intensified researches
12
Functional Ingredient Forecast, Dairy Foods, Berry, May 2006
are being done in the field of these ingredients. These are innovation drivers in the infant formula sector so as to proximate the human breast milk and provide enhanced nutrition. Relevance: In a highly competitive environment among food industry leaders and to ensure long term competitiveness and growth, innovation leaders have the edge to compete in their environments. With regulations and standards tightening in the entire world, companies need to have investments on state of the art equipment, laboratories and facilities. Investments in research to cater to customer demands and changing lifestyle ensure the foundation for nutrition in the future. 3.2.3 Increased consumer awareness on food safety Increased consumer awareness on food safety concerns due to China Milk Melamine Contamination The recent Chinese milk scandal is a food safety incident involving milk and other milk protein containing food that had been adulterated with the chemical “melamine” in China has affected other countries. By the end of September, an estimated 94,000 victims14 have been suffering from the incident; four infants have died from kidney stones and kidney damages. Different milk brands have been already recalled by the different authorities both in and outside of China. The chemical appeared to have been added to milk in order to cause it to appear to have higher protein content. This makes buyers and consumers of the milk believe they are getting high quality milk despite being diluted. Companies and consumers have reacted to the situation. The internationally popular chocolate and milk tea brands Cadbury and Lipton have recalled their products that were manufactured from China in order to address their clients’ fears. Cadbury announced the recall as a precautionary measure while Lipton declared that their internal quality tests found traces of the banned substance in their milk tea products from China. Chinese health authorities later found Cadbury chocolate to be safe as their analysis found the level of melamine in these products legally acceptable. 14
Due to this the BFAD (Bureau of Food and Drugs) was prompted to temporarily ban milk containing food coming from China. The agency tested for the presence of the hazardous chemical of different milk products from China. High melamine content on some Chinese milk products has been determined already. After completing the tests on the last batch of products, BFAD would revert to the regular quality tests they conduct on the thousands of food, drug, cosmetic and medical devices that are registered with them.15 Relevance: Consumers are now keener on determining the contents of the food they take particularly for milk-containing food and the manufacturer of the products they consume. Consumers want and need re-assurance that the food and milk they take and give to their children are safe and hazard free. Increased value is seen on companies who have reassured their consumers that their milk and protein containing ingredients are not sourced from China, and companies having adequate food safety and quality checks.
3.3 Political and Governmental Aspects
3.3.1 Government’s Tightening Regulations on Milk Formula and Capacity Upgrade of Regulators 3.3.1.1 Executive Order 51, “The Milk Code” of the Department of Health In terms of marketing of infant formula, an existing law, Executive Order 51 has been in effect since 1986 which is more commonly known as the milk code. This government policy aims to provide guidelines on promotion and protection of breast feeding by ensuring the proper use of breast milk substitute when these are necessary based on adequate information and appropriate marketing and distribution. The code prohibits infant formula advertising, promotion or distribution of other marketing materials whether written, audio, visual, printed, published, distributed, exhibited and broadcasted unless such materials are duly authorized and approved by an inter-agency committee. Manufacturers and distributors are also not permitted
15
to give, samples and supplies of products or gifts of any sort to any member of the general public, including members of their families, to hospitals and other health institutions, women or with mother of infants. Advertising of infant formulas through media or other pro motional activities such as bundling, discounting, and retail marketing are strictly prohibited by the government. Thus, for infant formulas, communication, endorsements, and education of infant formula products to the consumers can be done only though the alliance and support of healthcare professionals within the health care system. There are prohibitions on point-of-sale advertising, giving of samples or any other promotion devices to induce sales directly to the consumers at the retail level, such as special displays, discount coupons, premiums, special sales, bonus and tie-in sales for the products. Marketing personnel are prohibited from advertising or promoting to pregnant women. Manufacturers and distributors are also not allowed to distribute to pregnant women or mothers of infants any gifts or articles or utensils which may promote the use of breast milk substitutes or bottle feeding. The new implementing rules and regulations (IRR) on the Milk code was implemented last October 2007. New labeling requirements for milk formula products targeting 2 years old and below, infants and children are in effect. These labeling requirements mandate milk formula companies to include warning labels that milk if not handled properly may contain pathogenic (disease) causing microorganisms in Filipino and English. Additionally, the new IRR (1) forbids milk companies to sponsor or be involved in breastfeeding education and campaigns (2) prohibits the giving of financial or material inducements or gifts to promote products to health care workers (3) mandates all advertising and promotion of all milk products regardless of target age of consumers to be approved by an inter agency committee and shall not contain terms that idealize infant and milk formula. 3.3.1.2. House Bill 3293 Strengthening the Regulatory Capacity of the Bureau of Food and Drugs (BFAD) It mandates the strengthening of the FDA's regulatory capacity by establishing adequate testing laboratories and field offices, upgrades the agency's equipment,
augments its human resources component, and authorizes it to retain its income in order to carry out its vital mandate16. In alignment with the recent China milk scandal in the above section, the approval of this bill will intensify and widen BFAD’s coverage to determine and test “melamine” and other food safety hazards concern. Relevance: This bill will shape the food and specifically milk industry’s monitoring of quality& food safety, and marketing activities. With the upgrade, the agency will have a stronger arm in challenging the innovation claims and robustness of the processes of the industry players. This could also mean higher compliance costs for the company and slower processes of new products as more tests and scrutiny will be done by the authorities on new product launches. Thus drivers for growth and competitiveness may be hampered. However, a more even playing field for industry players in terms of compliance to standards of quality and food safety compliance is foreseen.
4. INDUSTRY AND COMPETITOR ANALYSIS
4.1. The Industry and Market Segments
4.1.1. Milk Formulas 4.1.1.1 Infant Formula The definition of infant formula based on Codex Alimentarius is that Infant formula means a breast-milk substitute specially manufactured to satisfy, by itself, the nutritional requirements of infants during the initial months of life up to the introduction of appropriate complementary feeding. Infant formula is a product based on milk of cows or other animals or a mixture thereof and/or other ingredients which
16
have been proven to be suitable for infant feeding. The term “infant” here means infants up to 12 months of age. The product is so processed by physical means only and so packaged as to prevent spoilage and contamination under all normal conditions of handling, storage and distribution in the country where the product is sold.
4.1.1.2. Follow-up and Growing Up Milk Formula (Often referred to as Children’s Milk) Follow-up formula means a food intended for use as a liquid part of the weaning diet for the infant from the 6th month on and for young children. It is a food prepared from the milk of cows or other animals and/or other constituents of animal and/or plant origin, which have been proved to be suitable for infants from the 6th month onwards for young children. It is a food processed by physical means only so as to prevent spoilage and contamination under all normal conditions of handling, storage and distribution. When in liquid form, is suitable for use either directly or diluted with water before feeding, as appropriate. In powdered form it requires water for preparation. The product shall be nutritionally adequate to contribute to normal growth and development when used in accordance with its directions for use. The term “young children” means persons from the age of more than 12 months up to the age of three years (36 months). The definitions above are referenced to the definitions of the international standards of Codex Alimentarius. The Codex Alimentarius (Latin for "food code" or "food book") is a collection of internationally recognized standards, codes of practice, guidelines and other recommendations relating to foods, food production and food safety. The standards are developed and maintained by a joint commission of the Food and Agriculture Organization (FAO) of the United Nations and the World Health Organization (WHO). 4.1.2. Market Growth (Value and Volume)
Fig 4-1 Market Growth of Milk Formulas in Value and Volume Market Ove rview -Value (Php)
Market Ove rview - Volume (kg) 60,000,000
25,000,000
50,000,000
20,000,000
40,000,000 ) 0 0 0 ' ( p h P
15,000,000 Total Children Total Infant
g k
Total Children
30,000,000
Total Infant
10,000,000 20,000,000
5,000,000 10,000,000
0
0
2005 2006 2007
YTD June 07
YTD June 08
2005
2006
Year
2007
YTD June 07
YTD June 08
Year
The total market value of the Philippines milk formula industry has surpassed the Php 23 B mark in 2007. The industry market value for milk formulas both for Children’s Milk and Total Infant Formula is still increasing. However it can be noted that volume or consumption is slightly declining for 2008 based on June YTD data. Total market value is still increasing in the past three years from 2005 to 2007 with a CAGR of 7.03% The size based on volume has been growing at a slower rate of CAGR 1.05%. For the year to date volume of June 2008, it could be seen that there’s a substantial decline of total market volume by -6.3% compared to last year’s volume. However, market value compared to the prior year is still high and positive with a market value rate of 4.7% due to increase in pricing. 4.1.3. Market Segments 4.1.3.1. Segmentation through development stage The international definitions above are further segmented into further divisions by the industry in the Philippines. The way the industry segments it is through different milk
formula stages which is highly dependent on the development stage of the infant or the child. They are often called “staged milks”. Table 4-1 summarizes the different stage milk formulas, age group consumption, and consumption characteristics. Typically companies classify them through a stage number. Stage 1 and Stage 2 milks are infant formulas, while Stage 3 and 4 are children’s milk formulas or sometimes known as growing-up milk. In this kind of classification, we could see that stages 1 and 2 are the same as the infant formula definition based on Codex Alimentarius. Follow-up formula based on Codex Alimentarius is stage 3 formulation. For some companies, they have created their own segments, such as stage 4 milk, and a Stage 3 milk starting at 10 months old instead of 12 months old. For purposes of discussion for the whole of the paper, Infant formula shall always be referred to and are the same as Stage 1 and Stage 2 formulas, Children’s milk formula shall be Stage 3 and Stage 4. Table 4-1 – Different Kinds of Milk Formulas in the Philippines - By age group Age Group
Milk Formula
0 to 6 months
Stage 1 (S1) Infant Formula
6 to 12 months
Stage 2 (S2) Infant Formula (also called Follow-on Formula). As per Codex Alimentarius, this is the first stage of the follow-up formula ) Stage 3 (S3) Children’s Milk (Belongs to the definition of Follow-up formula still. Sometimes called as growing-up milk)
1 to 3 years old
3 years above ( until 5 or 6 years of age for some companies)
Stage 4 (S4) Children’s Milk (Part of the growing up milk segment)
Characteristics of Consumer Milk Consumption (Source: 1997 influence model, 1995 kiddie mart study) Baby is on breast milk or infant formula and milk is the only source of nutrition. Either stays with infant formula or shifts to follow-on formula; milk is not the sole source but remains to be the major source of nutrition Moves to children’s milk, as growing up milk formula with flavours such as chocolate flavour to aid in the development of his nutrition. Milk is seen as a supplement. Moves to children’s milk as growing up milk, full cream milk, or filled milk. Milk consumption decreases at this stage.
4.1.3.2. Segmentation through economic classification. The market segmentation of the industry also involves the customer influencing the purchase. The mothers (household and families), has a big influence on the purchase of milk formulas since they have a control over the child’s diet. As the infant or child is younger, the influence of the mother or family is higher, and the same way
goes the other way around. As the child grows up, the influence of the child on the purchase increases, thereby taking part in the purchasing decision of the mother. Table 4-2 shows the eco classification of the Philippine households on the basis of nature of work and average monthly incomes. This classification is widely used in the use of market segmentation for consumer goods advertising and market researches.
Table 4-2 Eco-classification of Philippine Households AB (Upper Class)
Occupation of Household Head
Total Household Monthly Income
C (Middle Class)
D (Lower Class)
E (Extremely Low Class)
Professional, Big Businessman, Big Farm-owner, Senior Executive
Professional, Small Businessman, Small farm-owner, Junior Executive, White-collar worker, skilled worker
Farmer-tenant, unskilled worker, White-collar worker, skilled worker, Foremen
Farm-hand, unskilled worker, Vendor, Unemployed
A - More t han P50,001 and up B - P30,001 –50,000
C1- P15,001 P30,000 C2- P8,001 P15,000
P3,001-P8,000
P3,000 or l ess
Source: The Market Research Company Philippines, Inc.
For the milk formula business, the market is also segmented on the basis of this economic classification. These are the (A) premium markets and (B) economy markets. The premium and economy markets are thus segmented into the different development stages of the infant and children. The premium market caters to the upper class and upper middle class, which can be defined as the market ABC+. The economy market on the other hand caters to the broad C market (both C1 and C2). 4.1.4 Market Segments and Trends 4.1.4.1. Infant Formula vs. Children’s Milk (In Volume and Market Value) The market segment of the Children’s segment is about 60% of the milk formula business, while the infant formula segment is about 40%. But considering the population percentage to which the infant formula caters to ( 0 to 1 year old), and
comparing it with Children’s milk with a higher population of consumers ( 1 year old to 6 years old), six times the population of infant formula consumers, it indicates the importance of infant formula in the milk formula industry. 40% of the business caters to approximately 1/6th (0 to 1 year old over 0 to 6 years old) of the total target market. Plus, it could be noted that the market value of the Infant Formula posts a higher percentage (41.9%) rather than its volume percentage (37.7%) signifying in terms of value per volume, infant formula is higher. Fig 4-2 Infant Formula vs. Children’s Milk Formula in Volume and Value Volume - 46,843 MT Yr 2007
37.7%
Infant Formula (S1 and S2) Children's Milk Formula (S3 and S4)
62.3%
Market Value - Php 21.45 B - Yr 2007
41.9%
58.1%
4.1.4.2. Growth trends of the Main Segments
Infant Formula (S1 and S2) Children's Milk Formula (S3 and S4)
The next set of tables below show the different trends of the different segments in the past three years (2005 to 2007) and the May YTD comparison for this year with last year. Table 4-3 Segment Growth trends Volume Growth ’05-‘06 -0.59% -3.06% 2.09% -2.57% Value Growth ’05-‘06 7.98% 2.75% 3.96% 2.79%
Segment Market
Infant Premium Infant Economy Children Premium Children Economy Segment Market Infant Premium Infant Economy Children Premium Children Economy
Volume Growth ’06-‘07 4.85% -2.76% 5.24% 7.19% Value Growth ’06-‘07 9.95% 0.60% 11.4% 14.93%
Significant trends in the past three years market data versus last year have shown that: a. Biggest leap of growth in terms of value is in the Children’s economy market segment. b. All segments have been in an increasing trend in terms of market value (Php). But in terms of volume of consumption, the infant economy has been declining, small growth in consumption of premium brands of infant and children’s milk. Children’s milk consumption though decreased by 2006, has seen consumption growth in 2007. In terms of year to date comparisons to show recent behaviour of the market, for May YTD 2008 and 2007, the following have been the growth rates of the segments. Table 4-4 Growth Rates of Segments
Segment Market Infant Premium Infant Economy Children Premium Children Economy
Volume June YTD 07 -08 Value June YTD 07 -08 Growth Rate vs YAGO Growth Rate vs YAGO -9.8% -1.5% -4.1% -0.35% -8.0% 10.1% -7.1% 7.5%
Hardest hit in terms of this year’s market behaviour is the volume consumption of the premium products for both infant and children segments with a negative value of -
9.8%, and -8.0%. Economy volume consumptions declined too with a more modest decline of -4.1% for infant and -7.1% for children. In terms of market value, the infant segment has a slower growth. Promising are the growth rates of Children’s Economy and Premium Sectors in terms of value despite a shrinking volume. Premium category for Children’s milk is the most promising with a 10% value growth despite a sharp volume decline of -8.0% 4.1.4.3. Premium vs. Economy Markets Table 4-4 Premium vs. Economy Volume Percentage Volume (Premium vs. Economy Markets)
Premium Economy
2005 48.1% 51.9%
2006 48.9% 51.1%
2007 49.3% 50.7%
In terms of volume of consumption of the whole economy and premium markets, the consumption is almost the same with an almost 1:1 ratio between economy and premium users. A slight decreasing trend in terms of percentage of the whole pie is seen towards the economy market. 4.1.5 Promotion and Marketing Activities To stimulate demand in this industry, there are two mediums used in the industry (1) involvement of healthcare professionals (Pediatricians, Nurses, General Practitioner, Midwives, and Gynaecologists) as liaisons for milk formulas and (2) advertising and marketing capability which includes print, radio and TV marketing. 4.1.5.1 Health Care Professionals The health care system acts as a very influential body in purchasing decisions of mothers and parents for milk formulas. Physicians (in particular pediatricians), nurses, and midwives are opinion leaders for the customers and consumers of the product. The users’ decision makers or the mothers of milk formula products are sensitive to the “scientific” basis and quality of the products. Thus the opinion of health care professionals is deemed to be important basis for purchasing decisions. In hospitals and health centers, as they become increasingly the site of child births, newly born infants are fed in these centers in their first days. The decision of a new
mother to use brand A infant formula before child birth, could be different if the hospital or healthcare professional recommends brand B. With this, the medical community becomes a focal point of decision makers on the buying motivation of milk formulas whether, in an infant stage or early childhood. The process of creating alliance with HCPs can be done in various ways. Among the top common practices are: Partnership with Medical Societies, Continuing medical education, Brand Lectures, and Hospital Programs to assist in training programs. From a survey (Survey: PBL 2008), it can be noted that 52% of the consumers do not always go to health centers to consult HCPs nowadays. The people not going to health centers typically uses the brands used most often (47%) by word of mouth and the brand they have trusted and which they feel is the more “hiyang” (fit) to their child (18%). Another point of decision is whether the brand will make their child healthier (13%). 4.1.5.2. Advertising For growing-up milk (1 year old and above), the main promotion and advertising means of their products is through advertisements. Media campaign through television advertisements are still the main driver of the promotion activities for stage 3 and stage 4 milk. Company C continues to be the main dominant player with most of its TV commercial spending. Second is Company A, which used to spend more in stage 3 milk but has shifted in 20 08 to more spend in stage 4 milk. Company B’s spending in TV advertisement is less compared to the other two companies, yet on the contrary Company B remains to be dominant through its market shares on a total formula milk basis.
Figure 4-3 – TV Advertising Costs (Source: MV, July 08) 1,500,000
Company C 1,250,000
Company A
1,000,000
Company E 750,000
Company F
500,000
Company B
250,000
0 6 7 7 8 0 0 0 0 0 0 0 0 2 2 2 2 y y a a M M - n n a a J J
6 7 7 8 0 0 0 0 0 0 0 0 2 2 2 2 y y a a M M n n a a J J
S3
6 7 7 8 0 0 0 0 0 0 0 0 2 2 2 2 y y a a M M - n n a a J J
6 7 7 8 0 0 0 0 0 0 0 0 2 2 2 2 y y a a M M n n a a J J
6 7 7 8 0 0 0 0 0 0 0 0 2 2 2 2 y y a a M M - n n a a J J
S4
4.1.5.3 Product Marketing Differentiation Some of the milk powder when reconstituted tastes creamier than the other, sweeter than the other and more vanilla flavored than the other. Another way by which competitors differentiate their product is tho ugh the innovations they bring to their products. For the case of Brand A, it is composed of special ingredients 7 and 8. Brand N 1+ formulation are claming levels of ingredient 9. Company B which has capitalized in Nucleotides has recently introduced a new ingredient that helps in sight development called "LT". Their innovations and breakthroughs coincide on the different nutrient levels of the milk products they offer. Some have higher levels of protein, while others are high on carbohydrates. Some contain more minerals, while some products have increased levels of some vitamins. 4.1.6. Distribution Channels 4.1.6.1 Channels of distribution
From the manufacturing plant, the products are typically distributed from a main warehouse to different levels of channels. The milk formula products are available in retail outlets. Retail outlets are defined to be those that sell 75% of their goods to end consumers. The different retail channels and its characteristics are as follows: a. Supermarkets– A large retail store which sells various commodities, including food, household wares and personal items, arranged in sections. It has at least three check-out-counters (C.O.C) with cash registers, self-service/push carts/ baskets are provided, at least 50% of the display area is grocery items, there are numerous gondolas and mass displays in the area which is usually air-conditioned and may have restaurants, refreshment parlors or food stalls. b. Grocery Stores - Sells more food items relative to other product lines, presence of 1 or 2 cash registers, smaller than supermarkets, sells generally the same line of products sold in supermarkets, may or may not have check-out counters. c. Drug stores - Establishments that primarily sell pharmaceutical and other health care products d. Sari-Sari Stores - Small neighborhood stores selling a wide variety of food and non-food items. Goods are sold by the piece and often by the lowest possible quantity (“tingi”). It does not issue receipts to customers and does not allow customers to pick things they want to buy - goods in display or in open shelves are beyond customer’s reach. e. Market Stalls - A sari-sari store inside and at periphery of a market building. Typically, small buyers like small sized supermarkets and pharmaceutical boutiques, grocery stores, sari-sari stores get their supply from regional distributors. These regional distributors are located in the different regional parts of the country and their areas of responsibility are divided geographically. Big sized accounts such as National Supermarkets, and National Drugstores, are linked directly to the main distribution centers of the companies, and do not pass
through regional distributors. Because of their size, wide range of reach, and prominence in the retail industry they can command volume discounts and negotiate arrangements such as consignment for select products (on a case to case basis per product per retail outlet). Examples of these key accounts in the supermarket category are Shoe Mart (SM), Robinsons, and Makro. For main drugstores, Mercury Drugstores, Rose Pharmacy (Visayas Region), are the established and prominent drug outlets. 4.1.6.2. Trends in Distribution The following graphs show how the different channels have evolved. Economy Infants by Channel Fig 4-5 Infant Formula by Channel (source: The Market Research Company) 100%
9%
8%
9%
14 %
13%
12%
14 %
14%
14%
17%
18%
17%
46 %
4 8%
48 %
2006
200 7
Y TD 0 7
90 % 80 % 70% 60 %
7% 11% 12% 17%
50% 40 % 30 % 20 %
53%
10% 0%
Sup er mar ket
Gr ocer y/ CV
Dr ug st o re/ Dep t
Sar i- Sar i St o re
YTD 08 M ar ket St all
Fig 4-6 Children ’s Milk by S3 Economy byChannel Channel (source: The Market Research Company)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
5% 7% 10%
4% 6% 10%
4% 6% 10%
3% 5% 9%
16%
15%
15%
14%
62%
66%
65%
68%
2006
2007
YTD 07
YTD 08
Supermarket
Grocery/CV
Drugstore/Dept
Sari-Sari Store
Market Stall
From the data above, the supermarket is the most dominant channel of distribution for infant formula (about half of the total volume) and children’s milk formula (about two thirds of the total volume). In this data, the supermarket is the fastest growing channel with a growth of 10% for infant formula and 15% for children’s milk formulas. These can be attributed to the growth and increasing number of supermarkets and increasing urbanization lifestyle in some areas of the Philippines. With their high volume intake of milk formulas, it has been noted that prices in the supermarkets are less compared to the other retail outlets. 4.1.7 Pricing The price of milk formulas is dependent on the stage of the milk, household economy segment, the type of packaging, and net weight. The higher the stage of milk, the lower the prices are. Infant formulas are priced higher than children’s milk for the basic reason of higher cost of materials. Infants being a more sensitive population than young children would have a more specialized formulation, more nutritional ingredients, more fat and protein raw materials especially that it is the only source of nutrition for them. As the child grows older, his/her dependency of milk decreases.
Price of premium and economy market segments are also different. The higher price of the premium is attributed to the higher cost and grade of materials used as the positioning of the brand in the market. Essentially, the margins for premium items are better than the economy segments. In terms of packaging the milk formulas are packaged in tin can type and foil pouch type. Generally, can type of packaging has net weights predominantly in about 1 kilo with a range from 400 g to 2 kg. Typical users are local brand users, the weight of purchase being dependent on the budget of the customer. Using economies of scale, the higher the net weight purchase the higher value one gets on a peso per gram basis. For pouch type of packaging net weights are predominantly about 400 grams with a range of 150 grams to 800 grams. Typical users are constrained by budget, or at the trial stage of the products when switching from one brand to another. 4.2. Porter’s Five Forces of Competitive Analysis
The milk formula industry which includes the infant formula and children’s milk formula has six players that comprise 99% of the whole industry. The scope of the Industry and Competitive Analysis does not include the other powdered milk industry segments of filled milk and full cream milk. The following are the different players, their industry orientation, and value market share as of June 2008: Table 4-6 Competitors in the Milk Formula Market COMPANY Company A Company B Company C Company D Company E Company F
INDUSTRY ORIENTATION Pharmaceutical Pharmaceutical Food Processor Pharmaceutical Food Processor Pharmaceutical
MARKET SHARE as of June 2008
27.1% 29.4% 26% 13% 3.4% 1.4%
Among the six players of the industry, four come from a Pharmaceutical industry orientation while two come from Food Processing Orientation. About 83% of the whole market is controlled by the top three players: Company B, Company A, and Company C.
Fig 4-6 Market Value Share of the Companies 40 Market Share
e r a h S e u l a V t e k r a M %
35 30
A
25
B
20
C D
15 10
E F
5 0
5 5 0 5 0 5 0 5 0 6 0 6 0 6 0 6 0 6 0 6 0 7 7 0 7 7 0 8 8 0 8 7 - 7 0 0 - 0 - l - p - v - n - r - y - l - p - v - n - r 0 - y - l 0 - - r 0 - p - v 0 n u u a r a y J u a a a a o a o a o a a a y M M S e N J M M J S e N J M M J S e N J M M
Company B has been the consistent no.1 market leader for the past three years with an average of 33.5% of the market share in the past three years. No.2 is Company A with an average of 25.9%, and no.3 is Company C with a very close 23.9%. This has been approximately the scenario in terms of market share in the past three years. Company D takes the far fourth with an average of 11% value share. Company E and Company F have 3.4% and 1.5% market share respectively. 4.2.1 Rivalry of Competition – Moderately Intense The intensity of the rivalry among competitors increase as the number of competitors increases, as competitors become more equal in size and capability, and demand for the products decline. Consistent small number of players with only three dominant players having 83% of the market. As discussed above the milk formula market in the Philippines has a small number of players of about 6 having 99 % of the market and the top 3 players’ control 83% of the market. This has been consistent for more than the past three years. Market leaders are also becoming more equal in market size and marketing & supply capability.
The nutritional milk industry data market (for children’s milk and infant formula) is composed of five multinational firms and one local firm with around 99% of the total market. Though the market has been dominated by three market leaders comprising 82 percent of the market, market shares of each of the three companies are becoming equal. Company B has been decreasing its market shares while Company C and Company A have increased its market shares in the past 2 to 3 years. Company B has always dominated this category however in the 4th quarter of 2007, Company A has inched its market shares nearing Company B to a difference of 2.3 points. It can be noted that while Company B continues to lead the market, there has been a tight race with the number two spot between Company A and Company C. Company C took the second spot in the first quarter of the year, but Company A took back the position by April of 2008. In terms of operations capability, all three dominant players have supply centers or plants in the Philippines (Area A and Area B Area). All have wide distribution networks through main warehouses and distributorship, and retailing at drugstores, supermarket, and groceries. Increasing market value though volume consumption is decreasing. While industry market value is still increasing, consumption is slightly declining. As discussed in the market growth section above, the market value in Peso has experienced growth in the past. The size based on volume has been growing at a slower rate of -1.76% and 3.76% for 2006 and 2007 respectively compared to the value growth. For the year to date volume of May 2008, it could be seen that there’s a decline of total market volume by -7.46% compared to last year’s volume. Segmenting the market for the moving annual rate of May 2008, premium products have the biggest decline hit, of -9.56% for infant formula and -8.11% for children’s milk formula in terms of volume. 4.2.2. Potential for new entrants – Weak Barriers to entry in the industry usually are capital requirements, technology expertise, strong brand loyalty and marketing resources, and government regulatory policies.
Large Capital and Technological Manufacturing Requirements All suppliers have established their supply capacity through plant investments here in the Philippines. Unlike the other companies, Company D and company E, their processing of their milk powders are done outside of the country. The production of whole powder involves huge, high capacity, and microbial sensitive plants. This is so to maximize the costs and investments need to be made to produce milk powder and also preserve a high quality working environment and product since milk is highly susceptible to microbial hazards. Furthermore, as infants are very sensitive consumers as their immune system are still to be developed, special manufacturing controls need to be in place. Contamination of powdered formula with Micro organism A can cause illness in infants, including severe disease, and can lead to death.17 High investments in the control of this pathogen are needed by manufacturing sites. From 2003 to 2007, Company C’s investments in the Philippines totaled almost P10 B. Last year, they said they would continue to add P 1.3B for plant expansion to increase capacity by 15%-25% as their demand continues to grow 18. Company B, the market leader among the three, has recently embarked on an $80 M plant expansion last year. A third dryer is the latest investment to improve the manufacturing facility’s capacity by 70% to 44.6 million kgs per annum19. This is expected to be in full operation by Q1 2009. Strong brands and customer loyalty The consumer target market of these companies are very much inclined to the brands produced by these companies as can be seen by the market shares the top three companies have consistently achieved in the past three years. According to the survey of the Philippine Health Association of the Philippines the Top 10 OTC (Over the counter) Brands in the Philippines Moving Annual Total September ‘07 17
Micro organism A and other microorganisms in powdered infant formula Food and Agriculture Organization World Report , 2004 18 Company C Philippines allocates P1.28 B for plant expansion, Business World, Alave, March 2, 2007 19
Counting Units billion have 7 of the top ten brands being milk formula brands namely from Company B ( 5 brands), Company A (1 brand) and Company D (1 brand). Meanwhile the market leader companies are also in the top 1000 brands in Asia. The Company C brand is ranked no.5 in Asia’s top 1000 brands20. Company B brand is ranked 120th while Company A is at 212th place. Company G, one of the top pharmaceutical leaders globally also tried to penetrate the infant formula market. In June 2007, the company had a 0.5% market share in the infant formula business. However this has continued to decline as it reached 0% market share by April 2008. This proves that despite pharmaceutical company leadership, penetration to the infant formula market is difficult. Strong Marketing Resources The three companies are aggressive in their marketing capabilities. The Market Research Company Media Research says that the total advertising expenditures for powdered milk products in the Philippines was around P2.3 billion in the first half of 2008 alone. Milk-product advertising ranked sixth in The Market Research Company's top ten ad big spenders. All three producers are included in the top 40 company advertisers based on their advertising spending June 2007 to June 2008. Company C ranks 6th Company A ranks 10th and Company B ranks 39th. Tightening government regulatory policies As discussed in the government section of the external analysis, the industry is highly regulated in terms of manufacturing and marketing the products especially on infant formula (refer to section 3.3 Political and Governmental Aspects) 4.2.3 Bargaining Power of Suppliers – Strong The bargaining power of suppliers is strong when there are only a few suppliers or when the switching cost of the material is too costly. Materials comprise about 90% of the cost of goods. There are a lot of materials being used for the manufacture of nutritional milk powders. Major raw materials involve whole milk powder, corn syrup solids, Docosahexanoic acid (DHA), vitamins and minerals, sucrose, protein 20
concentrates and other food ingredients to name a few. 80% of the total material costs are attributed to milk powders. Milk powder supplier giant – Supplier A’s limited supply to a rising demand The domestic industry mainly functions as a reprocessing and repackaging industry especially for whole milk powders. 99% of the dairy industry are supplied as imports and have been consistently dominated by whole milk powders, mainly from New Zealand and Australia which already comprises 60% of the milk powder imports (New Zealand - A single source – 47%, Australia, 13%)21 Supplier A with a US$ 10 B 2007 revenue (20 times the size of the milk formula industry in the Philippines), controls nearly 40% of the dairy products in the world and is the leading producer of bulk products such as milk powders. Milk powder suppliers such as Supplier A have dictated the price of such commodity. Prices soared from $2,000 per tonne to $4,800 per tonne in 2007.22 Globally milk demand is increasing faster than milk supply. Since a few years the per capita consumption is increasing especially in the emerging markets like China and India. Poor seasonal (adverse climatic) conditions were evident in countries like New Zealand and Australia that led to limited growth in production in 2007. Yet prices for the major dairy products declined in the first half of 2008, but remain at relatively high levels -compared to pre 2007 levels.23 Figure 4-9 shows how prices have escalated in the past 8 years, the sudden increase in 2007 and the decline in 2008. Table 4-8 presents the forecast of milk powder prices until 2009.
21
National Dairy Authority Website, 2007 data Business.timesonline.co.uk, June 2007
22
Fig 4-9 Prices of Milk Powder
Source: www.agridata.co.nz/news7.asp
Source: www.maf.govt.nz
Source :www.agridata.co.nz
However based on forecasts for the year 2009, the following world price markets22 are: Table 4-8 Milk Powder Price Forecasts Forecast last September 2008 World Price (US$) Skim Milk Powder Whole Milk Powder
2007-08 4204 4562
2008-09 3500 3825
% change (16.7%) (16.2%)
2008-09 3650 4275
% change (12.6%) (6.3%)
Forecast last June 2008 World Price (US$) Skim Milk Powder Whole Milk Powder
2007-08 4175 4562
The main driver of the downward trend of milk powder prices in the world market is New Zealand’s milk production growth. The major source of dairy product exports is
expected to have milk production growth of around 8 per cent in 2008-09, after falling by 4 per cent as a result of drought in 2007-08. Supplier A also started its trading its online milk powder exchange platform last May 2008. This is considered to be an important step in the development of an international market for milk futures or derivatives.24 Specialized and other agricultural materials Since milk formula is highly specialized, other high value materials such as DHA, Vitamins & Minerals, Prebiotics, and Protein Concentrates are specialized and propriety owned by their producers. They have a few select suppliers in the world and are located sourced globally with a very few suppliers. The suppliers have the bargaining power in this because of supply limitations and their specialization in the manufacture of these materials. 4.2.4 Bargaining Power of Buyers – Weak Buyers have a weak bargaining power if the product is very important to the buyer, they don’t have the discretion on whether and when they purchase the product, and that products are differentiated. Direct Customers - A necessity with a limited number of providers. The nature of the Filipinos has a family oriented culture. Feeding their child and giving them the proper nutrition they need for development remains a top priority among their expenditures. The product is a necessity. The market structure of the milk formulas (infant formula and children’s nutritional milk formula) industry is an Oligopoly. Oligopoly is a market structure in which only a few sellers offer identical products, with high market barriers. Each competitor in the nutritional milk powder industry provides the basic components of what powdered milk should have such as providing the basic and fundamental nutrition needs especially at an infant stage. Milk taste follows for 24
toddlers. The formula being powdered increases its shelf life also. All powdered milk has the same basic characteristics. For infant formulas, nutritional attributes of the formulations are dictated by regulatory and international standards. With the limitation in number of milk providers, and the products being a necessity, customers can choose among a short listed number of companies to supply their needs. Especially with infant formula, this is a basic nutritional need for infants to survive. Today, while breastfeeding is still the best source of nourishment for infants, infant formula is a close enough second25. With this the bargaining power is retained with the company. Another important thing to note is that despite a decrease in demand, total market value is still on a positive growth. While volume consumption has been growing at a slower rate, and even at a negative rate for 2005 to 2006 ( -1.76% and 3.76% for 2006 and 2007 respectively), market value growth rates for the same two years have positive growths of 4.2% and 9.5 %. The same trend applies for the MAT May 08 volume and value data. Volume has decreased substantially by -7.08%, however market value is still at a positive growth of 4.82%. Despite a contraction of the total market volume, market value is still increasing. Increase in price affects the total demand, but not that substantial to see a decline in market value growth. Customers still tend to buy the products even at a higher price Health Care Professional (HCP) Workers – Bargaining power is considered to be moderate.* HCPs exert an influence on what products the customer would buy due to their high level of expertise, and scientific influence. However, the final decision of which to buy or what brand lies in the consumer due to preference of taste, brand perception, and budget constraints in some cases. In totality the bargaining power of buyers remain to be weak. 4.2.5 Potential for Substitutes – Moderate
25
The potential for substitutes increases when their market share increases and their cost is competitively much lower to the products of the industry. The potential substitutes for the milk formulas identified are; a. Breast Milk b. Filled Milk and Full Cream Milk Powder. Breast Milk For infant milk formula the potential substitutes are obviously breast milk. It relatively has no cost, safe, substantial, and highly endorsed by different institutions such as healthcare professionals, NGOs, and the government. The breast milk advocates have continued to accuse that infant formula makers, spurred by high profits have disregarded international codes on infant formula marketing. Particularly they have accused infant formula producers have means of convincing new mothers to use breast milk substitutes. They have said that infant formula makers have targeted to influence healthcare professionals by using sophisticated misleading marketing practices of baby food companies such as making strident functional claims in advertisement and on labels.26 Other forms of milk such as filled milk and condensed milk In the national dairy data for milk consumption from 2004 to 2007, the range of volume growth rate has been a steady positive 1.4 to 1.9 % 27 based on the Philippine National Dairy Industry. Yet despite this positive increase, a negative and slower volume growth rate was noted on milk formulas. Another note to be considered that despite milk formulas being the next best source of nutrition, filled milk is a potential substitute for both infant formula and children’s nutritional milk. Filled milk is skimmed milk with vegetable oils added to increase the fat content Removing milk fat and replacing it with other fats such as coconut oil or palm oil became a cost saving measure used by industry in the early 20th century. It is relatively cheaper than the economy milk formula by almost half. 26
27
The youngest market: Baby Food Peddlers Undermine Breastfeeding, Allein and Yeong, July 2008
Company C, a competitor in the milk formula industry is also the filled milk industry leader with a controlling market share of powdered milk of 58.5%28. Brand O Filled milk, volume consumption was 28,291 tons (compared to the milk formula industry size of 46,843 tons). This single brand is already 60% of the whole milk formula volume size industry. Currently it has posted a 4% MAT volume of growth from June 2007 to June 2008. In terms of growth it has experienced a surging 23.4%in market value increase from 2006 to 2007. This is definitely a higher growth compared to the average growth of milk formulas of the same period 9.5%. As for the MAT May 2008 it has also experienced a contraction of volume consumption compared to the same period a year ago. But it can be noted that the rate is only -0.9%, compared to the milk formula average of -6.94%. Company H, has been growing its revenues and net incomes. They produce filled milk and liquid milk products such as evaporated and condensed milk. They have around 18% of the market share with 8% growth based on MAT June 2008 from June 2007. Based on their fourth quarter updates to their stock holders, net income of Company H Milk Corporation jumped 65% to P663 million from P402 million in 2006 on the back of strong volume growth. Revenues for year 2007 surged 53% to P9.08 billion from P5.92 billion a year ago buoyed by the strong performance of the company’s core milk products. Their president Mr. U, also expressed that they would likely stick with capital expenditures of between P200 million and P400 million this year. A study also on the use of infant formula samples and breast feeding among Philippine Urban Poor 29 showed that a practice of using diluted condensed milk as a supplement and/or substitute for their milk when babies reached the age of 2-3 months. Yet due to strong nutritional and scientific claims and basis of milk formulas, and in spite of government warnings on misuse of milk substitutes, the milk formulas are still strongly recommended by healthcare professionals and are brands trusted by 28 29
Source of Market Data: The Market Research Company Retail Audit
majority of its customers. The substitutes are only rated as moderate potential for substitutes. 4.3. The Competitive Profile Matrix (CPM)
The Competitive Profile Matrix (CPM) identifies a firm’s major key players’ critical success factors and its particular strengths and weaknesses in relation to each company’s strategic position. The choice of competitors has been limited to two, Company B and Company C, as these two companies together with Company A controls over 80% of the market already. Other companies like Company D, Company E and Company F have been excluded in the competitor study. They are in the far fourth to sixth places in market shares. 4.3.1. Key Competitors of Company A in the Philippines a. Company B Company B , is engaged in the manufacture and marketing of pharmaceutical and nutritional products. Its immediate primary parent company Company B USA, owns 96.2% of the company’s shares. Parent company was founded in 1926 under the name of Corporation A which is headquartered in Country A. It is now a global leader in prescription chemicals, over the counter pharmaceuticals, consumer healthcare, and animal healthcare and now operates in more than 100 countries. 30 It has currently a manufacturing facility. The company is embarking on an $80M (P4B) plant expansion at the Area A Plant as earlier mentioned in Porter’s Five forces. This will increase powdered milk formula production by as much as 70% or 44.6 million kg per annum and is expected to be operational by the first quarter of 2009. On an Asian Pacific perspective, Company B has another plan of investing $280M for a manufacturing facility in China. This will primarily produce infant formula milk. When completed, this will be one of the world’s largest nutritional manufacturing facilities. This is expected to be fully operational by late 2010 and will primarily supply local market.
30
Company B Philippines is consistently the no.1 in market value and volume shares since 2005. The company reached its highest market shares in March 2007 with more than a third (37.1%) of the total market. The company dominates the infant formula business with a strong 43.1% market share. For children’s milk formula market, it is in the number two spot with 22.1% share. The company has a pharmaceutical industry orientation same as Company A. As a total pharmaceutical company it is considered as one of the largest pharmaceutical companies in the world with its global headquarters reporting an amount of US$ 25.4 B revenues in 2007. In the Philippines its revenues for the total company, reported for 2007 based on their Financial Statements was Php 12.0 B. This is 23% bigger than AA Philippines, the parent company of Company A. b. Company C Company C Philippines, is a leading nutrition, health and wellness company through its food product lines. Its headquarters is located in Area B. This is a company with a very well established name not only in the milk industry but generally in the food industry both locally and globally. It has a strong portfolio of fast moving food consumer goods which range from Milk, Cereals, Ice Cream, Bottled water, RTD Milk to name a few. Its revenues amount to US$ 95.4 B.31 The Company's strategy is guided by several fundamental principles. Company C's existing products grow through innovation and renovation while maintaining a balance in geographic activities and product lines. It always plans its activities and strategies on a long-term potential and is never sacrificed for short-term performance. The Company's priority is to bring the best and most relevant products to people, wherever they are, whatever their needs, throughout their lives. In the Philippines, they reported a sales revenue on their financial statement for 2007 of Php 69 B. (six times the size of AA Philippines, considering they have a wider portfolio of products). The company has had a tight race in the number two spot with Company A, exchanging the no.2 and 3 position since 2005. As of last June, Company A only 31
edged out by 1.1 points over Company C. Currently, it ranks no. 2 in Infant Formula Market Shares from June 2007 to May 2008 (28.2% Market Share as of May 08). Company is the strong and dominant market leader for filled and full cream milk market (identified as a potential substitute for milk formulas). 4.3.2 Critical Success Factors (CSF) Critical success factors in a CPM include both internal and external issues therefore the ratings refer to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 = major weakness. The following are the identified CSFs for the industry wherein all key competitor players in the industry will be rated with the ratings above. 4.3.2.1 Marketing and Promotion Capability (30%) “The ability of the company to put value in the product, reach out to the customers, drive demand of the product through promotions, advertising, brand awareness, and the right way to respond to customer needs.” A product demand or need is needed first and foremost, for a business operation, thus the marketing capability of the company to drive demand of the product is critical. Rationale: In an environment where competing companies are reaching out to the consuming public, the ability to have your product known, tried, and consistently supported is vital to the sustainability and growth of the business. The company’s ability to sustain the name recall of the products is essential for survival in a marketing driven industry. Without adequate marketing capabilities, market shares may not be sustainable. This is given the highest percentage of 30% as driving the market demand is the most important factor in business operations. Market share data show which company is the leader in terms of value in the industry it’s operating in.
4.3.2.2. Product Availability (20%) “The product is available at the right place (where the customer is) and at the right time (within shelf period and product is needed by the customer)” Rationale: Constraint on product availability at the right place and time, due to supply constraints issues of materials, is considered critical to make the sale and deliver the commitment to the customer when they need the product. With volatile prices, supply constraints due to climate changes, and growing demands of emerging markets such as China, product availability is vital to deliver the commitment to the customers (both consumers, and HCPs) in promoting the product. (5 forces – Bargaining Power of Suppliers). Furthermore the operations capability to manufacture the optimum amount (not too much to have high inventories, not to less to lose sales opportunity) of products is critical to generate revenues and keep the cost at a minimum. If product is not available, potential sale is lost, and even potential customer loyalty will be shifted to a competitor product. This is given the next highest percentage of 20% as support to supply the demand driven by the company and realize the sale. 4.3.2.3. Product Quality and Safety (15%) “The ability for the product to perform its desired function, as expected or even higher than customers’ expectations.” Rationale: Infants and young children, having a less developed immune system rely a lot on the food safety and product quality of the products. Government regulations have been tightening due to the new pathogens proliferating such as Micro organism A (5 forces – Barriers to entry). With this the pressure to put milk at superior quality and comply with new rules and regulations of the government, the company should be able to respond to the regulatory changes in the environment. (5 forces - Barriers to entry)
An issue in product quality can lead to a bad public perception or image of milk formula manufacturers, thus could impact the business and lead to loss of sales, market share, and trust. This critical success factor is equally important as the next CSF’s characterized by the milk formula industry to sustain demand (Need for Product Quality and HCP Support). They are given equal 15% of weight. 4.3.2.4 HCPs (Health Care Professionals) Support (15%) “The endorsement of experts in choosing the right formula.” Rationale: The health care system acts as a very influential body in purchasing decisions of mothers and parents for milk formulas. Physicians (in particular pediatrics), nurses, and midwives are opinion leaders for the customers and consumers of the product. The users’ decision makers or the mothers are sensitive to the “scientific” basis and quality of the products. Thus the opinion of health care professionals is deemed to be an important basis in purchasing decisions. (5 forces – bargaining power of buyers). 4.3.2.5. Product Innovation (10%) “The ability to differentiate the product to gain new customers, increase market share, and price the products at a more superior value.” Rationale: In an intense competitive environment and to preserve good product and profitable margins, the ability to use innovation is key for market leadership and attaining business growth. As companies and competition continue to innovate and differentiate their products, this provides the products’ competitive edge. This success factor is specifically important to premium segment users. 4.3.2.6. Price Competitiveness (10%) “The ability to put the right price to the right product.”
Rationale: Filipinos, in general the economy users (50% of the total market) are price sensitive users. As seen by the industry trends in the market analysis, the latest market segment data have shown that economy users’ consumption has decreased. With the presence of substitutes, like filled milk, economy users are shifting to identified substitutes (5 forces – Potential Substitutes) Thus it is important for the company to level well with the price of its products and value it properly especially if products are differentiated. Also to protect the margins of the companies, the company should be able to manage its costs (5 forces – Bargaining power of suppliers). Though this has the lowest importance of weighing of 10%, this success factor is still very important in a market like the Philippines which is a developing economy.
4.3.3. Company A’s CSF Ratings a. Company A’s Marketing and Promotion Capability (4) Rationale: The company has strong marketing resources. Among the three companies (taking into account whole company perspective), the company has the second highest advertising expenses among the three competitors signifying a big allocation of advertising expenditures. Company has used its “A” campaign with celebrity mom endorsers. It has also used the Nutrition Philippine Association A for endorsement. The company is as well using bundling promotional items (i.e. CDs, tumblers). b. Company A’s Product Availability (3) Rationale: The company has continuously supplied products to the market with their plant capacity. However compared to competition, it is currently experiencing some difficulty in fulfilling the company’s strong demand. The company had some issues in the past with regards to a steady global supply of milk base and powder thus affecting stock availability in the shelves. Milk raw
materials are customized to Company A needs thus affecting economy of scales of suppliers, and not being prioritized. The company is also producing at its maximum capacity level (Operating at almost 24/7) with 90% capacity utilization. No additional lines have been added in the past 10 years. c. Company A’s Product Quality and Safety (4) Rationale: No product recall in the milk formula business. There is no history of association of a product quality and safety issue locally. d. Company A’s HCPs Support (4) Rationale: The company backed up by a pharmaceutical orientation has a strong affiliation with the medical community. The company supports the medical and HCP communities through creating brand awareness to HCPs via convention sponsorships, educational sponsorships, and medical visitation. e. Company A’s Product Innovation (2) Rationale: With the past 3 years, innovation initiatives of the company have been relatively not as aggressive as the other companies. Most of the product innovations involved elevated level of specialized ingredients such as ingredient 5 or use of a more standardized milk. No scientific breakthrough has been made by the company in the past three years. The company is also known to have a slower process of product innovation due to a constraint in the R&D organization resources. The company’s Rand D is organized at a regional level; catering to the three other Asian sites and a European site thus these markets’ share the R&D resources at an international level thus slowing the process. f. Company A’s Price Competitiveness (2)
Rationale: Among the three companies, Company A has the most number (6 ou t of 10) of high priced (Appendix 4) products. Milk formulas especially in the economy segments where users are price sensitive will be impacted. This has been seen in the market analysis, because of a trend of decreasing consumption of products due to price increases especially in the last two years. 4.3.4. Company B’s CSF Ratings a. Company B’s Marketing and Promotion Capability (4) Rationale: The company has capitalized on its Brand X brand equity with the highest awareness levels with a strong ability to convert this to trial, especially for its Stage1 (79%) and Stage2 (95%) brands. Brand X leads the industry in ad recall (71%) because of the strength of its equity32. It could also be noted that they have far less expenses in advertising costs (Php 670 M) yet continues to be no.1 in market shares. b. Company B’s Product Availability (3) Rationale: The company has a 12 year plant in the Philippines in Area A to serve its powerful product demand. Also, the company uses and has provided exclusivity rights to Distributor A pharmaceutical distribution company for its distribution services. In the first half of 2008, the company has experienced out of stock issues for their Brand X (Economy) line of products and can be explained by the recent dip of their market shares (from Feb 2008 35% market share to June 2008 of 29.4%). This is due also to a plant constraint. Nevertheless the company is expected to increase its output come first quarter 2009, with a new dryer (plant expansion capacity increase of 70% is seen). c. Company B’s Product Quality and Safety (2) Rationale: The product made the biggest government mandated recall of infant and milk formula last June 2007 due to can rusting 33. This has caused the market leader 32 33
Internal Light Bulb Study, 2007
to dip down its shares from 34.7 points to 31 points (-3.7 points) from June 2007 to November 2007. d. Company B’s HCPs Support (4) Rationale: The company backed up by a pharmaceutical orientation has a strong affiliation with the medical community. Company B is deduced to have strong HCP support as shown by their strong dominance in the Infant Formula category where marketing activities and promotions through the HCPs are the only means to promote their products. Furthermore, it could be seen how they were able to get HCPs help in regaining consumer confidence on their brands despite the recall last year June 2007 (Increasing market share from 31% to 35% -November 2007 to Feb 2008). e. Company B’s Product Innovation (4) Rationale: The company has recently launched a “LT” campaign (a new ingredient that is claimed to help eyesight development for children) last quarter of 2007. The company has pioneered a lot of firsts and innovations. Examples of which are: •
First to provide an infant formula with a protein that is Ingredient 1-dominant, similar to that of breast milk.
•
First to provide a ingredient 2 blend specifically patterned after that of breast milk.
•
First to add ingredient 3 an important antioxidant.
f. Company B’s Price Competitiveness (4) Rationale: The company has the most number of least expensive products in its market segments (7 out of the 10 market segments). This makes them the most affordable milk formula maker compared to its competitors. 4.3.5. Company C’s CSF Ratings a. Company C’s Marketing and Promotion Capability (3)
Rationale: The company is a household name especially when it comes to the food industry with a wide portfolio of food products. The company also has strong brand heritages, due to their brands such as Brand N. The following are some of its advertising campaigns: Maximize use of nutritional experts (establishing credibility); Brand N campaign for independence with Protection with a dual benefit of Mental Stimulation. d. Use of celebrity endorsers. b. Company C’s Product Availability (4) Rationale: The powdered milk plant in the Philippines (the newest among the three sites) in Area A was finished in 2001. Company C has continued to improve its plant capacity. From 2003 to 2007, Company C’s investments in the Philippines totaled almost Php 10 B as what was discussed in the Porter’s Five forces. Company C being a food processor and a food company with a number of different food products in the Philippines has a very large and wide reach of distribution, and retail network including the sari-sari and convenience stores. c. Company C’s Product Quality and Safety (4) Rationale: No product recall in the Philippines for milk formula. d. Company C’s HCPs Support (3) Rationale: The company has a nutrition sales/representation force to provide support and recommendation to HCPs. They have provided discounts to dispensing HCPs, sponsor medical conventions, and round table discussions with HCPs. Though a food company, and compared to the pharmaceutical experience of the other two companies, Company C is being perceived as a food company only. The other two companies with the backing of their pharmaceutical mother companies are seen more dominant by healthcare professionals.
d. Company C’s Product Innovation (3) Rationale: Their global company Company C has recently acquired Company I in 2007. This has enabled them to expand their research and development capabilities in the aspect of nutrition innovation activities. 34 Company has recently launched product innovation of “ingredient 4” which is a company pride innovation in the Children’s Milk Formula segment. (It provides all nutrients essential for optimal physical and mental development. It supports a healthy gut flora to strengthen natural defences). In other regions and countries, the "premiumization" of mainstream Company C products, as witnessed for instance by the recent launch of Brand N1 in Asia and Latin America. This is expected to pick up further speed over years to come locally. However in the aspect of Infant Formula, the company still has to come up with a superior innovation. There has been no innovation in the infant formula segment for the past 3 years. f. Company C’s Price Competitiveness (3) Rationale: The company used to be the highest priced among the three milk formula manufacturers. But in February 2008, Company C has adjusted and cut down its price last Feb 2008. Company C has lowered their prices of its milk products by up to 20%.35 Their price range now is in between the price indexes of Company B (Most Affordable) and Company A (Most Expensive). Refer to append ix for data. 4.3.5 Competitive Profile Matrix (CPM) Ratings Based on the identified CSFs and corresponding company ratings on each of the CSFs, the key competitors’ and Company A’s ratings are as follows:
34 35
Company C-nutrition.com/media releases
Company A CRITICAL SUCCESS FACTORS
WT.
Company B
Company C
RATING
SCORE
RATING
SCORE
RATING
SCORE
Marketing and Promotion Capability
30%
4
1.2
4
1.2
3
0.9
Product Availability
20%
3
0.6
3
0.6
4
0.8
Product Quality and Safety Health Care Professional (HCP) Support
15%
4
0.6
3
0.45
4
0.6
15%
4
0.6
4
0.6
3
0.45
Product Innovation
10%
2
0.2
4
0.4
3
0.3
Price Competitiveness
10%
2
0.2
4
0.4
3
0.3
TOTAL
100%
3.4
3.65
Table 4-9 CPM Matrix The overall ratings reflect that Company B (3.65) is indeed superior and the market leader among the top three competitors in this industry. Company B's strength over the two companies is in the areas of marketing and promotion capability, product innovation, and price competitiveness. If we would analyze it further, one of the major strengths of Company B is, with brands that are very strong, they have continually innovated their products, and still their prices are more affordable to the consuming public. The second and third places are taken by Company A (3.4) and Company C (3.35) respectively. In the market shares rating ranking, it has been a tight race with Company A and Company C on gaining the second spot at different points in time in the last three years. However it can be seen that in the ratings, Company C has more edge over Company A particularly because Company C is better off in terms of product availability, price competitiveness and product innovation factors. 4.4. External Factor Evaluation (EFE) Matrix
The EFE matrix serves as guide in the strategic management formulation process to summarize and evaluate external factors such as economical, governmental, social, cultural, technological, and competitive information. Though there are many factors in the environment of Company A that could affect its business, a set of priority factors were picked on the basis of potential impact to the bottom-line of the company. The importance weights of the identified external factors
3.35
are also based on approximate potential impact to the revenues, cost of goods sold, operational expenses and thus affecting the profits. The highest importance placed on the opportunities is on declining milk powder prices, followed by rise in consumer spending. The other opportunities identified with consumer preference and their growing numbers have almost equal weights of importance. In terms of threat, the highest would be the capacity increase of production of the no.1 market leader, followed by Company C’s anticipated aggressive campaigns. Then the impact of the Peso depreciation has the next important weight rating specifically impacting the cost of imported raw materials. The impact of high inflation rates has the next important weight impacting the economy segments of the company. Lastly the Government’s tightening regulations & capacity upgrade, have the least impact yet also an important threat to the company. Following are the opportunities and threats with the most impact to the company identified in the environmental and competitive scan with corresponding responsiveness factor.
4.4.1. Opportunities and Company A’s Current Responsiveness: O1. Consumers spending on food, beverage to grow by 7.5% CAGR from 2007-11 (Economic Factor) Rating 4 - Price increases were done in the past years (2006 and 2007) due to value pricing and raw material milk powder price increase. With extensive marketing, advertising and promotional activities, people are still buying the products despite increase in value as shown in increasing Net Revenues of the company, increasing operating margin (specially in 2006 where milk prices were still low), and increasing market share of the company. (Details are in Company Analysis section 5 -Internal Audit) O2. Number of births to grow by 2.64% year on year (Socio Cultural). Rating 2 - Increasing number of customers means increasing potential revenues output. Though Company A is leading the children's category, there has been a decline in Infant Formula market shares (will be discussed in detail in the Internal
Company Analysis). Therefore it may take some time still to reap the effects of this opportunity. Also, plant volume output for the company is at its peak already. O3. Increasing health awareness of consumers with the use of health beneficial ingredients in food products. (Socio Cultural and Technological) Rating 2 - Compared to other companies, Company A has less compelling innovations in terms of scientific breakthroughs and less product innovations. (Refer to CPM Analysis) O4. Declining milk powder (raw material) prices by 16.5% (Industry Analysis) Rating 4 - Company has retained its price despite an initial decline in raw material milk prices for the first half of 2008. The company maintained its prices despite reduction in raw material costs. O5. Increased consumer awareness on food safety concerns due to China Milk Melamine Contamination (Socio Cultural) Rating 4 - No melamine contamination. Perceived quality and food safety of products are intact. No dairy or protein based ingredient is sourced from China. Consumers currently using product substitutes and competitors’ products (even those still suspected to contain, and have international issues) are seen to shift to Company A milk formula products. 4.4.2. Threats T1. Inflation to hit a high of 9.7% in 2008 and a slow down to around 7% by 2009, and 4.8% by 2010 (Economic) Rating 2 - Inflation will hit hard not only the company but also the industry, and economy users may opt for lower substitutes or lessen milk consumption. Milk consumption for Filipinos is not that high compared to other nations. On the other hand with shrinking industry consumption, efficiency initiatives and strong support with HCPs are being executed. Company A has an allocated budget for productivity to reduce costs.
T2. Government Tightening Regulations on Milk Formula and Capacity Upgrade of Regulators. (Governmental Aspect) Rating 4 – Company A is continually upgrading facilities based on global QA (Quality Assurance) standards. Company has responded swiftly and on-time to req uirements of Government. Company A has always passed the regulations audit, and has not recalled their milk formula. T3. Depreciating Peso value to hit 52 Php to 1 $. (Economic) Rating 2 - In the current company budget for balance of 2008 and next year, projected exchange rate is at 47 Php. Though the company’s earning and revenues are reported to the US in US dollars, it is important to note that of the 40% of the total company revenues (Cost of Goods Sold in materials and imported) that are exposed to the currency fluctuation, only 10% is given to the stakeholders in the main headquarters. T4. Capacity increase of 70% by market leader Company B which has strong brand equities. (Competition and CPM Analysis) Rating 3 - Company A is currently capitalizing on the Out of Stock (OOS) issues of the competitor to gain new trial users, and eventually making them loyal consumers in the Children’s Milk market. T5. Company C's increase in advertising campaigns, media coverage & launch of Brand N1 . (Competition and CPM Analysis) Rating 3 - A campaign is in the process of development to counter this. However no price cut is included in the strategy. Despite, the use of an influential celebrity in the past two months and a heavy campaign and media spend, market shares of Company A’s children’s milk continues to dominate over Company C’s. However it can be noted that the Brand N1 Product Launch Innovation by Company C may take up some market share in the premium segment. Company A currently doesn’t have a developed innovation to counter this move by Company C.
4.4.2 EFE Rating Table 4-10 – EFE Matrix Potential Impact on Net Income (Php '000)
Importance Weight (0% to 100%)
Firm's Responsiveness Rating (1 to 4)
Wt. Score
Consumer spending on food to grow by 7.5% CAGR from 2007-11.
177,920
10%
4
0.39
Number of births to grow by 2.64% year on year
121,089
7%
2
0.13
110,088
6%
2
0.12
272,288
15%
4
0.59
111,200
6%
4
0.24
Opportunity
Increasing health awareness of consumers with the use of health beneficial ingredients in food products. Declining milk powder (raw material) prices by 16.5 % Increased consumer awareness on food safety concerns due to China Milk Melamine Contamination
43%
1.23
Threats Inflation to hit a high of 9.7% in 2008 and a slow down to around 7% by 2009, and 4.8% by 2010 Government Tightening Regulations on Milk Formula and Capacity Upgrade of Regulators Depreciating Peso value to hit 52 Php to 1 $ Capacity increase of 70% by market leader Company B which has strong brand equities. Company C’s increase in advertising campaigns, media coverage & launch of Brand N1. Total
Opportunities Threats Total
152,122
8%
2
0.17
103,874
6%
4
0.23
236,361
13%
2
0.26
311,361
17%
3
0.51
244,641
13%
3
0.40
1,840,945
57% 100% Weighted Score 1.23 1.55 2.78
On a total basis, the company is positioned relatively above average with an EFE rating of 2.78 in terms of responding to the external environment. Positive points include in the field of industry competition response. The company drives to get market shares from top and dominant competitors through head-on product promotion, marketing, advertising and alliances with HCPs. Despite value price increases, the company is doing well in terms of maintaining a strong market share being no.2 in total milk formula shares, and has not slashed their prices to increase
1.55 2.78
market volume share compared to competition’s moves. Thus this has helped them to have comfortable gross profit margins giving them better income and additional funds for investments plus the fact that there’s a projection of decline of milk powder prices in the world market. In terms of responding to food safety pressures from the government and the consumers, the company is positioned well as investments in quality and food safety have been realized. 4.5 Strategic Issues based on External Factors
In terms of the environmental factors, a foreseeable major threat to the company is the peso value depreciation. The impact would be on the margins of the company as a lower peso value may slash gross profit margins if not to push prices up. Market value is still on an increasing trend primarily due to value pricing and the price push due to raw material milk’s escalating prices in the past, but a slight decrease in volume consumption is seen due to high inflation rates. The high inflation rates will impact the consumption rates of milk formulas in the industry as a whole, especially on the economy segments of the industry as these consumers are price sensitive. Market value is still on an increasing trend, and growth for market value is still seen due to high consumer spending on necessities such as food like infant and milk formulas, increasing births, increasing urbanization & growing middle income class. Competitors also see the same market potential and opportunity. Based on the CPM, the company is currently positioned as a strong competitor with a rating of 3.4. As competitors are positioned for new product innovation launches (Company C’s Brand N1) and production capacity increase (New Plant Capacity of Company B), they will be aggressive in their marketing campaign to have a quick return on the investments they have made. A challenge for the Company A is to be able to supply their growing market and sustain them, as the plant is already operating at its full capacity. Furthermore, Company A does not have a compelling breakthrough or innovation compared to the innovation done and being developed of its key competitors.
5. COMPANY ANALYSIS
5.1. Vision and Mission of the Company
5.1.1. Vision Statement and Evaluation The Vision Statement of Company A is: “Our vision is to be the leading provider of pediatric nutrition products. We dedicate ourselves in providing infants and children with the best start in life.” Table 5-1 Vision Statement Evaluation Parameter Does it clearly answer the question: What do we want to become? Is it concise enough yet inspirational?
Yes / No Yes
Why?
Yes
It is only composed of two simple yet coherent and direct statements. Yet the statement “We dedicate ourselves in providing infants and children with the best start in life.” provides an inspirational message in motivating employees wherein they are a part of something that could help shape the future generation. It creates a common interest for all employees to have a take, in a common good for our children. Being a “leader” in its first statement describes the ambitious target stature of the company. No phrase or statement referring to the timeline to attain this vision.
Is it aspirational?
Yes
Does it give clear indication as to when it should be attained?
No
It states “To be the leading provider of pediatric nutrition products”.
5.1.2. Mission Statement and Analysis The Mission Statement of Company AA, the Parent company of Company A is:
•
Our mission is to enrich and improve human life by providing the highest-qualilty health care products to the world we serve.
•
TO OUR CUSTOMERS We pledge excellence in the products we make and market, providing the safest, most effective and highest-quality health care products.
•
TO OUR COLLEAGUES We pledge personal respect, fair compensation and honest and equitable treatment. To all who qualify for advancement, we will provide every effort to give the opportunity.
•
TO OUR SUPPLIERS AND PARTNERS We pledge to build and uphold the trust and goodwill that are the foundation of successful business relationships.
•
TO OUR SHAREHOLDERS We pledge our dedication to increase responsibly shareholder value based upon continued growth, strong finances, productive collaborations and innovation in research and development.
•
TO THE COMMUNITIES We pledge in helping worthwhile causes that supports a healthy environment. We pledge to the highest standard of ethical behavior and to maintain the confidence of our society.
Table 5-2 Mission Statement Evaluation Parameter
Yes / No
If yes, which part of the statement
1. Customers
Yes (but can be improved) Yes
“TO OUR CUSTOMERS We pledge excellence in the products we make and market , …” -Statement can be more specific“providing the safest, most effective and highest-quality health care products . “ “…to the world we serve”
2. Products & services 3. Markets
Yes
4. Technology
Yes
5. Concern for survival, growth, profitability
Yes
6. Philosophy
Yes
“…..productive collaborations and innovation in research and development. “ “….through innovation, diligent research and development” “We pledge our dedication to responsibly increasing the shareholder value of your company based upon continued growth, strong finances, productive collaborations and innovation in research and development. “ “…to enrich and improve human life by providing the highest-quality health care products to the world we serve ”
7. Selfconcept
Yes
“…. providing the safest, most effective and highestquality medicines and health care products.”
8. Concern for employees
Yes
9. Concern for nation building
Yes
“TO OUR COLLEAGUES We pledge personal respect, fair compensation and honest and equitable treatment.” We pledge in helping worthwhile causes and constructive action that supports a clean and healthy environment.
5.1.3. Recommendations For the Vision statement based on the evaluation, the timeline should be included on when to attain the vision. Recommended Vision Statement Changes: “Our vision is to be the leading provider of pediatric nutrition products by 2011. We dedicate ourselves in providing infants and children with the best start in life..”
For the Mission Statement based on the evaluation, all the necessary parameters have been included in the mission statement. However, a point of improvement can be made on the statement of the customers. From “We pledge -- to our patients and customers…” to “We pledge to our patients, healthcare professionals, children, parents, and to all using our products…” Recommended Mission Statement Changes: “We pledge -- to our patients, healthcare professionals, children, parents, to our employees and partners, to our shareholders and neighbors, and to the world we serve -- to act on our belief that the priceless ingredient of every product is the honor and integrity of its maker.” 5.2. Internal Audit
5.2.1. Management Audit a. Strategic Management Concept A business plan is done every year (end of the first half of th e year) where the external and competitive landscapes are scanned, business objectives and strategies are formulated. Company budget is aligned in the Business Plan. The plans are cascaded, executed and a quarterly business review is done to determine necessary corrective actions or adjustments in the business objectives or action plans. Numerical quantification such as sales, and gross profit margin, is translated into company objectives. A national sales convention is held annually to cascade the formulated business imperatives. These objectives are aligned with the Performance Appraisal (Called Performance Alignment) of management employees. Junior managers up to the senior managers are involved in the planning like operational & capitalized budgeting, and business planning. The planning used is a top down top approach. b. Motivational Factors
Based on a 2007 HR local survey of employee perception on company strategy alignment with employees, 91% of the employees feel they are energized to work for Company A. Merit increases and bonuses are integrated in the Performance appraisal system. If performance expectations are met, a plus two months is guaranteed as bonus. If it is exceeded, then a commensurate amount is given. The amounts of bonus and merit increase are highly dependent on the performance results based on objectives (expectations set during the planning stage of the year). 5.2.2. Marketing Audit a. Segmentation of Markets Markets are segmented per child development stage and socio economic stature of the family. This is coherent with the market segmentation of the market analysis section of this paper. The company franchises have their own niche of target consumers. The following table provides a description of how the different brands and franchises are segmented. Table 5-3 Brands and the Market Segments SBU Brands Brand D Brand A Brand B Brand C Brand E
Eco Class Economy Economy Premium Premium Premium
Stage 1
Stage 2
Stage 3
Stage 4
b. Positioning The company franchises are positioned among the different market segments. However it has been diagnosed that for the Brand C Franchise there have been some challenges, in determining the right market proposition. Brand C franchise is perceived as both economy (offering the same value as Brand N) and premium segments (premium priced) by consumers. Brand C’s current proposition is not compelling enough to build trial of new users versus the latest set of innovation from
competition. Market share has been declining from 5.2% in Feb 08 to 2.8% in July 2008. Also on a historical trend, the Brand C Franchise has poised the slowest growth of only 3.38% CAGR from 2005 – 2007. Table 5-4 Revenues growth CAGR past three years Franchise Brand D Brand B Brand A Brand C Brand E
Revenues CAGR (2005-2007) 6.99% 6.02% 13.78% 3.15% 5.23%
c. Market Shares In the past 3 years, the company achieved (Referenced to Rivalry of Competition in Porter’s Five Forces) market share with slight increases. Key notes on the market segments are: For children’s market, from 27.8 % of Feb 08, to 34.7% in May 08. For infant formula, market shares declined from 18.2 % in Jan 08 to a lowest point of 14.8 % in May 08(-3.2 basis points) Table 5-5 Market Share (Total) Year
Total Market Share
2005 2006 2007
25.715% 26.165% 26.509%
Marketing organization has a market research function. The company uses extensively The Market Research Company Retail Audit surveys for marketing metrics. d. Sales and Distribution Systems The sales team is composed of the Accounts Management Team and Nutrition sales Team. They are organized on the basis of areas covered. In terms of effectiveness of sales of these teams, the revenues and sales have had an increasing trend in terms of value. Sales target is on track with +11%vs YAGO as of July 2008. e. Promotion Capability
In the aspect of children’s milk market, the marketing investments (strong media presence and advertising campaigns) have been proven to be effective. Brand A which is a Children’s Milk product is promoted through the Media. The three year compound annual growth rate (CAGR) of this product has been the highest for the company with a 15.28% CAGR. Additionally as mentioned before, market shares for this year have been growing for children’s market, from 27.8 % of Feb 08, to 34.7% in May 08. 5.2.3. Financial Audit The financial audit and analysis of the company will be in reference to growth rates per time and comparison of certain financial ratios to key competitors. Due to the limitation of key competitors’ financial data on their milk formula segments, the key competitors’ and the AA audited financial statements will be used as an approximate to determine industry standards and how Company A is doing relative to the key competitors and average in terms of financial status. It is important to note in the analysis that the actual revenues of Company A in the Philippines is 80% of the total revenues of Parent Company AA . The same also applies to the market leader which has a pharmaceutical orientation. Company B Revenues from Milk formula comprises approximately 83% of the total Company B Revenues. The case of Company C would be different as they do not have a pharmaceutical orientation, and carries more product lines in the food industry. But nevertheless with Company C’s size and success as a global food company, Company C Philippines’ financial ratios will be included for benchmarking reasons, and averaging purposes as deemed appropriate. 5.2.3.1. Growth Ratios Table below shows the actual sales and income Growth of Company A. Table 5-6 Sales and Net Income and Growth Rates Year In ('000) Php Net Revenues EBIT (earnings before interest
2003
2004
2005
2006
2007
4,841,692 568,072
5,190,558 597,576
5,608,710 650,058
5,995,279 693,308
6,504,877 726,547
& tax) Sales Growth vs. YAGO Net Income Growth vs. YAGO
7.21% 5.19%
8.06% 8.78%
6.89% 6.65%
8.50% 4.79%
Based on the trend above for the past five years, Company A revenue has been growing at a CAGR of 7.66%. Net income on the other has been growing too with a 6.34% CAGR. In totality in terms of sales and income growth, company’s sales and net income is on a positive growing trend. 5.2.3.2. Profitability Ratios a. Gross and Operating Margin on a five year horizon for Company A Fig 5-1 Gross and Operating Profit Margin
Gross and Operating Profit Margin Yr 2003 to 2007 0.450
0.400
0.350
0.300 Gross Profit Margin Operating Profit Margin
0.250
0.200
0.150
0.100 2003
2004
2005
2006
2007
Gross profit margin ranges from 0.36 to 0.40 with operating profit margins of 0.11. This has been on a slight upward trend with a slight year on year average increase. However it could be seen that the impact of the milk powder price increases in 2007. c. Return on Total Assets (ROA) Fig 5-2 ROA of Key Competitors
Return on Assets (net income/assets) 0.50 Company B
0.40
Company C
A
0.30
O R
Company A
0.20
Average
0.10 2005
2006
2007
Year
Company A dominates this financial ratio compared to the two key competitors. The company is using its assets efficiently to generate net income. Year 2006 to 2007 showed also a substantial increase in ROA of about 18%, from 0.38 to 0.45. c. Return on Equities (ROE) Fig 5-3 ROE of Key Competitors Return on Equity (Net Income/Equity) 1.60 1.40 1.20 Company B
1.00
r a e 0.80 Y
Company C Company A
0.60
Average
0.40 0.20 0.00 2005
2006
2007
ROE
Return on equity for Company A has been comparable to the market leader in 2005 and 2006. Though it is below the average of the three companies, Company C dominates this ratio as Company C is highly leveraged (refer to leverage ratios), thus having a smaller equity value. In 2007, Company A has increased its ROE nearing the average of the three companies.
5.2.3.2 Activity and Efficiency Ratios a. Days Inventory Fig 5-4 Days Inventory of Key Competitors
Days Inventory 120.00 100.00 Company B
80.00 s y a D
Company C
60.00
Company A
40.00
Average
20.00 0.00 2005
2006
2007
Year
Company A has the highest days of inventory in comparison with the other two companies. Though it has been on a declining trend (same as Company B’s), the gap between Company B and Company A is widening, with Company B having a better financial position in terms of inventory. b. Days Receivable An assumption is made on the calculation of Days Receivable since total credit sales of key competitors are not available. Total Sales is then used instead of total credit sales36. This assumption was applied consistently to the three companies for comparison purposes. Fig 5-5 Days Receivables of Key Competitors
36
DAYS Receivables 100.00 90.00 80.00 s y a D
70.00
Company B
60.00
Company C
50.00
Company A
40.00
Av erage
30.00 20.00 10.00 2005
2006
2007
Year
With the data above on days receivable, Company A’s days receivable is improving from 90 days to 67 days in the past three years. Although, this is still high as compared to the days receivable of Company C and Company B two years ago. But with the recent policies and continued execution of policies on collection, this is seen to improve. c. Total Assets Turnover Fig 5-6 Total Assets Turnover of Key Competitors Total Assets Turnover (Sales/Assets) 3.00 Company B
2.50
Company C
o i t a R
2.00
Company A
1.50
Average
1.00 2005
2006
2007
Year
Company A’s total assets turnover has been on an increasing trend and has surpassed the average of the top three competitors in 2006. This is a positive indicator on how Company A has been utilizing its assets to generate sales. 5.2.3.3. Liquidity ratios
Fig 5-8 Liquidity Ratios (Current and Quick ratio) Quick Ratio
Curre nt Ratio 1.60
3.00
1.40 2.50 Company B o i t a R
2.00
Company C Company A
1.50
Average
1.20
Company B
o 1.00 i t a R 0.80
Company C Company A Average
0.60
1.00
0.40 0.20
0.50 2005
2006
2005
2007
2006
2007
Year
Year
In terms of liquidity ratios, Company A has an above average current and liquidity ratios. However it could be noted that Company C’s liquidity ratios are weaker than the two pharmaceutical companies thus pulling the average down. Nevertheless, Company A’s liquidity ratios are comparable to the market leader, Company B especially with its quick ratio. Current ratios for Company A is about 2.0 indicating they would have no issues meeting short term obligations and having a sufficient working capital. No issues or concerns can be seen in terms of company’s liquidity. 5.2.3.4. Leverage Ratios Table 5-7 Leverage Ratios Debt to Total Assets
3 Yr
Ratio
2005
2006
2007 Average
Company C
0.83
0.83
0.79
0.82
Company B
0.35
0.29
0.30
0.31
Company A
0.46
0.36
0.47
0.43
Average
0.55
0.49
0.52
0.52 3 Yr
Debt to Equity Ratio
2005
2006
2007 Average
Company C
4.79
4.79
3.81
4.46
Company B
0.62
0.45
0.47
0.51
Company A
0.94
0.62
1.00
0.86
Average
2.12
1.95
1.76
1.94
Based on the leverage ratios, Company A stands on the average of the two competitors. Company C is a highly leveraged company, while Company B has about a third of its funds supplied by its creditors. 5.2.4. Production and Operations Audit a. Capacity An issue on capacity increase through additional lines is a constraint. In terms of delivery to consumer, there have been some issues on out of stock issues. The company needs improvement due to out of stock issues in the trade. Order fill rate which is simply put as value ordered in the trade vs. actual value supplied in the trade is at 87 %.( 1st half 2008). Company target is at 96%. Major issues contributing to the out of stock issues are: 1. Capacity issue of the plant 2.Quality issues especially on infant formula. Current line capacity utilization for 2007 was already 88%. This poses some issue on current plant flexibility and room for unavoidable inefficiencies in the line. b. Product Quality In terms of product quality, finished products, and materials go through extensive vendor audit, tests, and qualification based on service levels, price, and quality prior to being approved. Routine QA tests are done on the materials to ensure adequate quality. Capitalized investments are done every year to maintain and upgrade facilities and equipment. Furthermore, since the industry is highly regulated and audited by BFAD, facilities and equipment need to be in good condition 600 quality test methods and procedures to maintain and assure product quality are in place. However a room for improvement is seen to avoid the write off cost of in product rejection due to Micro organism A pathogen. Compared to the other Asian
Plants (Country A and Country B) the Philippine plant has more rejections compared to the other Asian plants. The write offs due to Micro organism A for year 2007 are for Philippines 18 batches , while for the Country B and Country C Plants are two and zero respectively. (Approximate Value of an Infant Formula batch is US$ 300,000). This poses a lot of room of improvement for the plant. The plunge in the market share of infant formula for the first half of 2008 is mostly caused by issues of Micro organism A contamination in the plant. 5.2.5. R&D Audit a. Structure A regional Rand D team catering to the market needs of the Asia Pacific is in-place. The team caters to the needs of different Asian markets. The research and development team has credible experience in terms of their length of experience and exposure in the industry. However only a select few among the top leaders of the R&D team have strong academic backgrounds and post graduate degrees. Frequent delays in product launching are often caused by issues in formulation and label claims. These have been recurring in the past three product launches for this year. Comparing to the competition, Company A is rated below competitor’s capability in terms of product innovation (See CPM analysis and ranking on product innovation) 5.2.6 Information Systems a. Structure The structure of the information systems is linked with the local Finance Department but has a direct reporting structure to the Asia Pacific Region of Parent Company AA. To support maintenance of computer systems, a third party contract has been awarded to Company I last 200737.
37
COMPANY I Awarded $715 Million Contract for Company AA Information Services www.reuters.com, Dec X 2007
b. Utilization of Information Systems Managers use information system tools available in the AA Company A environment for data entry, storage, manipulation, and extraction. They use these systems for planning, decision making and controlling purposes. SAP – Enterprise Resource Planning Control Systems (an enterprise resource control system) MAN-G System – It is a Distribution system model to determine inventory levels of the Finished products up to the retail level (i.e. Supermarkets) and determine how materials ordering will respond to inventory overruns and shortages. E-HRIS - Human Resource Information Systems is an information system for the application and approvals of employee benefits (i.e. medical reimbursement, VL, SL), monitoring of employees attendance and overtime, to name a few. Online-Learning System – It is an online training system with presentation materials, video audio and self test examinations. Global procedures and directives being cascaded to all employees around the world use the system for the appropriate training on latest procedures and directives. Other Intranet based database systems – Laboratory Information Systems, AA Corporate Websites, and Shared Drive Systems. c. Information Security A password management software web based tool is being used to enforce the use of strong passwords. Also, information systems are designed not to accept default weak passwords (i.e. passwords should contain at least eight characters with numeric and alphanumeric characters).
5.3 McKinsey’s 7S Framework
5.3.1. Strategy The current strategy of the company now poised for growth is to deliver financial commitments such as revenues of +10% vs. year ago. This will be achieved through improving the competitiveness of the products in the market by strengthening the brand position through market penetration like brand awareness activities. Improvement in the availability and visibility of the products in the trade will be key to meet the demands of the market. This will be done through improving operational effectiveness such as forecast accuracy, maintaining cost cases, SKU rationalization and hitting efficiency targets. To support all strategies, action plans are in place to be a high impact and constructive organization through the execution of training and developmental plans, people alignment with the strategy, and retention of key and critical talents in the organization. Evaluation: Effective All in all strategies are effective as company budget and the critical measurements based on current Business Plan are on target (e.g. +10% in revenues for July YTD). The company’s strategy is poised for market penetration and financial growth while improving operational and people effectiveness. In general, strategies are balanced in terms of Finance, Marketing, Operations, and Human Resources. Each of the strategy supplements the other to attain growth for the company. Based also on financial data and current market shares (based on internal audit framework), the company is doing above average, meaning this type of strategy is working for the company. 5.3.2. Structure The organization being a multinational company operating locally and globally has a matrix organization (dual reporting roles). Technical and corporate functions such as
Operations , IM, Finance and HR report to the regional and have dotted roles to the local market management. Commercial functions such as Sales and Marketing directly reports to general management. Fig 5-9 Organizational Structure Asia Regional Directors
R&D
FInance
General Manager
HR
Operations
Marketing
Accounts Sales Mgt
Nutrition Sales
The structure is highly dynamic adapting to the internal and external changes of the organization and strategies. Example is back in 2005; quality and regulatory offices were reporting to local operations but now it has a direct reporting role to the region. In 2006, the finance function managed both AA and Company A functions but in 2007, separate finance functions for the two companies evolved. Cross functional teams also such as Strategic Business Units are delegated to lead and operate the 4 company franchises. These are driven by marketing group supported by Operations , Finance, HR, and Accounts management. Evaluation: Good Structure combines the benchmarking and utilization of expertise of an international company, and the ability to inculcate itself to the local markets. This is due to the dual reporting roles of technical and corporate divisions as the single reporting role of the commercial functions. This is aligned, with strategy on constructing a high impact organization. This is part of the strategy of the company to have a high mobility rate among employees. 5.3.3. Systems a. Business Plan
As discussed in the internal audit, an annual business plan applying strategic management concepts is generated to determine the applicable set of actions for the organization to pursue its goals. Evaluation: Effective and Helpful The strategies above illustrate the high level imperatives of the company. As most of the objectives are being met YTD, and with a strong performance of the company in the last 3 years in terms of financial growth and market dominance, the Business Planning system is assessed to be effective and helpful. b. S&OP Planning Sales and operations planning (S&OP) is a managerial intranet initiated system. Its basic objective is to reconcile forecast of sales demand with production plans in terms of volume. This is also integrated with financial planning, operational planning, and provides a link of high level strategic plans with day-to-day operations To do so, the S&OP has to coordinate planning efforts among the various departments involved in the process. Sales data are uploaded in the system, Product managers input their forecast, and an analysis of trends, inventories is done. Forecasts are thus finalized and then agreed upon in the S&OP meeting and make the necessary adjustments. Evaluation: Needs improvement Company is increasing its fill-rate from a low 75%. August YTD value is at 91% order fill rate level to supply demand. End year target is at 95%. This is in alignment with the strategy to improve operational effectiveness. c. Performance management process. Performance Alignment (PA) is a business process that aligns employee performance, development, and compensation with business strategy. Performance Alignment helps achieve high performance by focusing effort on key o bjectives and by placing equal emphasis on results and behaviors. For senior managers, an on-line information systems tool is used to document, track and monitor PC progress.
This is also aligned in the rewards and merit bonus increases of the employees. Evaluation: Helpful and Good The performance management system, applying both strategy and style to its characteristics has been a very good tool to drive performance and company culture. This is a system and tool framed to align the strategy among employees and the Style Section of McKinsey’s framework with use of the AA Values and Behaviours and Shared Values. 5.3.4. Style a. Performance Driven Management behaves in a very performance driven style. With cross functional teams in the company, employees are delegated to make more decisions. People are developed to do so with leadership and functional roles and training. Evaluation: Helpful With a highly evolving environment, fast decisions need to be made. Therefore people should be empowered to make decisions. b. AA Values and Behaviors The AA Values and Behaviors as directed by management (corporate headquarters in AA USA) in support the company’s pledge and values of integrity, honesty and ethics in pursuit of our Mission to enrich and improve human life. The AA Values and Behaviors not only shape the culture, but they are key to achieving a high performance culture with the highest level of integrity to deliver on the company’s strategy. Examples of Values and Behaviors are “Integrity, Being a Team Player, Developing Human Potential, and Drive Results.” Evaluation: Helpful with Recommendations
The set of AA Values and Behaviours enables the employees not only to develop themselves professionally, but as persons also. This is in alignment with the performance management systems, used to evaluate and reward personnel performance. c. Rewards Program The Company A Recognition Program recognizes individuals, and teams whose outstanding contributions lead to the achievement of important business results aligned with the Company A business strategy and consistent with core AA behaviours. These are demonstrated through awards such as the spot award, excellence in action award and presidential award. Evaluation: Good This boosts morale of employees as company recognizes outstanding achievements. A set of model employees are recognized to exemplify the Core AA Behaviours. 5.3.5. Staff Managers are developed in a two way sense. One is through classroom type trainings and the other one is on-the-job hands on training. On the job hands on training are done by dual functions or roles, assignment of developmental projects, and widening of job responsibilities. In terms of class room training, training needs are assessed during the performance appraisal process or performance appraisal system. Evaluation: Good To drive a high impact organization, 95% attainment of developmental plans is needed to be attained.
This is in alignment with the strategy on having a high impact and constructive organization, and, system for performance appraisal. 5.3.6. Skills Entrepreneurial skills of the managers are dominant. Cross functional teams such as Strategic Business Units are delegated to lead and operate the four company franchises. These are driven by marketing group supported by Operations , Finance, Nutrition sales, and Accounts management. Fields of expertise skills are continually being developed as identified in the performance management system. These are honed in developmental assignments, job enrichment, lateral transfers and skills development training. Evaluation: Good This is in alignment with the structure (matrix organization), system (performance management) and staff (how managers are trained) part of this framework. As discussed these skills combined with the current structure set-up (matrix) enable employees to act and decide independently. In an intense competitive environment, delegation has helped to make faster decisions to cope up with a fast-paced moving environment from them. This has helped employees as identified in the performance management system to develop the needed skills (functional and leadership) to attain and exceed expectations. 5.3.7. Shared Values The vision of Company A is to be the world’s leading provider of science-based nutritional products. This is in support with AA mission and pledge to extend and enhance human life. The vision has just been recently updated in 2006 to focus more on the nutritional pediatric needs of infants and children rather than having a wider scope of market
that includes other healthcare products and services. This has enabled to give the business more focus on its customers and products. As discussed above and to support the AA Mission and Company A Vision, the AA values and behaviors are embedded to achieve the Mission and Vision of the company as defined in the “Style” section of this framework. Evaluation: Good This enables employees to appreciate their sense of work. Having infants and children as customers is something personal since they too are the ultimate beneficiaries of the employees’ hard work. This is in alignment with the company’s strategy for market growth and financial growth while maintaining an effective and efficient cost base, and a high impact organization. By doing so and having capital from growth, the vision of the company to be the world’s leading provider of science-based nutritional products may be achieved with the support of people demonstrating the Core AA Behaviours.
5.4 Internal Factor Evaluation (IFE) Matrix
5.4.1. Strengths, Weaknesses and Corresponding Ratings and Weight Importance Using the different frameworks of company analysis, the following are the identified strengths and weaknesses of the company with the corresponding firm’s rating. S1. Strong brands in Children's Milk Category such as Brand A (Total market share is 27.1% at no.2 position) Rating 4 - Increasing market share dominated by Children's Milk (+8%) YTD Aug 08. This brand is leading the company in increasing market share and dominance of Company A in the Milk Formula segment. S2. Sales growth (7.66%) and Operating Growth Income (7.65%) based on 5 year average due to strong sales and marketing capability.
Rating 3 - With extensive marketing, advertising and promotional activities, people are still buying the products despite increase in prices (due to value pricing and raw material high price) as shown in increasing Net Revenues of the company, increasing operating margin (specially in 2006 where milk prices were still low), and increasing market share of the company. However the no.1 position is still owned by Company B. S3. Employees, 91% of the employees are energized to work for AA. Rating 4 - This shows that the 91% of the people moving the company to its growth levels are satisfied and energized to act on their specific tasks. S4. Positive growth trends of asset utilization of assets to generate sales and income. Rating 4 - ROA, fixed asset and total asset turnover have been increasing at a significant rate as compared to competition. W1. Out of stock issues due to limited plant capacity. Rating 2- There is a loss of opportunity sales by the company due to out of stock concerns (Order fill rate 91% only YTD Q3, started at 75% Q1). In the first half of 2008, due to plant shutdown extension, and quality issues specially in the infant formula segment, the infant formula market share for Company A decreased by 3.6% from Q1 to Q3 2007. Additionally, plant capacity is peaking already peaking as discussed in the company analysis portion of manufacturing operations. W2. Innovation not propelling enough compared to competition Rating 2 - Compared to other companies, Company A has less compelling innovations in terms of scientific breakthroughs and less product innovations. (See CPM Analysis) W3. Decreasing market share in Infant Formula market (-3.6%) due to opportunistic microorganism.
Rating 2 - The product rejection rate of the company especially in infant formula have caused the decline in sales of the infant formula. The Micro organism A micro organism opportunistic characteristics hinders stock availability issues. Infant formula products have more profitable margins. The infant formula market share for Company A has decreased by -3.6% from Q1 to Q3 2008. The most affected brand, Brand Blac, the highest valued product and brand is a global brand known internationally and thus is identified with Company A on a global basis. W4. Highest cost of products profile compared to competition. Rating 2 - Impacts mostly on the economy segments of the company, especially now that there is a high inflation rate as discussed in the external analysis. W5. Loosing value proposition of Brand C - Market Share of (-2.4%) YTD July and slowest growth of 3.3% 3 year CAGR. Rating 1 – Brand C which has a strong brand heritage has experienced declines in market shares and slow brand growth compared to other Company A brands. W6. High days of inventory compared to the industry average (17%) and market leader (8%). Rating 2 - Cash flow issues and concerns impact on how the company is using its cash, and inventory. With this the company is, and may be in a position of not maximizing the use of its cash due to money being tied up to inventory. Among the internal strengths, the strong brands, and sales growth get the highest importance weight of 15% as based on the company’s capability to stimulate the demand of their major products and compel them to growth. This rating is also aligned with the CPM analysis where the company’s ability to market their products have the highest rating. A rating of 15% in strength is also given to the strong motivation that the company employees have for the reason that the people’s alignment and level of motivation pushes the company forward. The strong use of its assets has the next highest rating of 10%, though it also says that a high asset
utilization may be at its peak already so further investments are needed to reach new growth levels. Among the weaknesses, the highest ratings of 10% were given to the frequent out of stock issues, decrease in market share of infant formula due to operational issues, and slow growth with decreasing market share of the Brand C Brand which is losing its value proposition. These are the key weaknesses of the company that hamper its full potential growth. The other weaknesses such as non compelling innovative products, and a high cost profile have 5 % rating each. These are referenced to the CSFs (Critical Success Factors) in the discussion of the CPM matrix, and the degree of importance is aligned to the CSFs. Lastly, the identified weakness with the same importance weight is in the high inventory levels of the company. Though it is trending to be in a better state, the inventory levels are still high comparing it to the average of the key competitors and the market leader. 5.4.2. The IFE Matrix Table. Table 5-9 IFE Matrix for Company A Importance Weight ( 0% to 100%)
Firm's Score (1 to 4)
Strong brands in Children's Milk Category such as Brand A (Total market share is 27.1% at no.2 position)
15%
4.00
0.60
Sales growth (7.66%) and Operating Growth Income (6.34%) -4 year average- due to strong sales and marketing capability.
15%
3.00
0.45
Employees, 91% of the employees are energized to work for AA.
15%
4.00
0.60
Positive growth trends of asset turnover (utilization of assets to generate sales)
10%
4.00
0.40
Internal Factor Strengths
Weighted Score -
Weaknesses Out of stock issues due to limited plant capacity. 10%
2.00
0.20
Innovation not propelling enough compared to competition
5%
2.00
0.10
Decreasing market share in Infant Formula market (3.6%) due to opportunistic microorganism
10%
2.00
0.20
Highest cost of products profile compared to competition
5%
2.00
0.10
Loosing value proposition of Brand C - Market Share of (-2.4%) YTD July and slowest growth of 3.3% 3 year CAGR.
10%
1.00
0.10
5% 100%
2.00
0.10 2.85
High days of inventory and compared to the average(17%) and market leader (8%) . Total
The company has an IFE rating of 2.85 which means the company is in an above average position, having more significant strengths than weaknesses.
5.5 Strategic Issues based on Internal Factors
As discussed in the EFE rating, the above issues confirm the company’s strengths and weaknesses in responding to its environment. Identified strengths with respect to its environment are the strong marketing & sales capability, and strong brands. For the weaknesses, these are the plant’s capability to supply the increasing demand, highly priced products, and lack of innovation breakthroughs. Additionally and as identified in the company analysis, Company A has a strong a nd energized team which is a critical component in the execution of its strategies. Also, the high asset utilization, coupled with a strong sales growth shows that the company is using efficiently its resources. As for the company’s weaknesses, on a financial basis, the company compared to its competitors has high levels of inventory. It also has been examined that the infant formula segment of the business is suffering some losses. Lastly, the Brand C brand has not been growing as well compared to the other Company A brands, and has been losing market share.
6. STRATEGY FORMULATION
After developing the CPM, EFE and IFE matrix, the inputs and info rmation in these matrices will be used to develop the strategies for the company. Strategy formulation tools will be used to match the internal resources of Company A on how to respond to external and competitive environment. The tools are: SWOT Matrix, SPACE, Internal- External (IE) Matrix, Grand Strategy, BCG Matrix, Summary of Strategies and Quantitative Strategic Planning Matrix (QSPM).
6.1. SWOT Matrix
The Strengths-Weakness-Opportunities-Threat (SWOT) matrix is a significant formulation tool to develop four sets of strategies namely: Strength-Opportunity (SO) Strategies, Strength-Weakness (SW) Strategies, Weakness-Opportunities (WO) Strategies, and Weakness-Threats (WT) Strategies. Table 6-1 SWOT Matrix
SWOT MATRIX
STRENGTHS – S
WEAKNESSES - W
S1. Strong brands in Children's Milk Category such as Brand A (Total market share is 27.1% at no.2 position)
W1. Out of stock issues due to limited plant capacity.
S2. Sales growth (7.66%) and Operating Growth Income (6.34%) 4 year average- due to strong sales and marketing capability. S3. Employees, 91% of the employees are energized to work for AA. S4. Positive growth trends of asset turnover (utilization of assets to generate sales)
W2. Innovation not propelling enough compared to competition W3. Decreasing market share in Infant Formula market (3.6%) due to opportunistic microorganism. W4. Highest cost of products profile compared to competition W5. Loosing value proposition of Brand C - Market Share of (2.4%) YTD July and slowest growth of 3.3% 3 year CAGR. W6. High days of inventory compared to the industry average (17%) and market leader (8%).
OPPORTUNITIES - O
SO STRATEGIES
WO STRATEGIES
O1. Consumer spending on food to grow by 7.5% CAGR from 2007-11
SO1. Intensify marketing investments for ATL activities such as advertising activities through TVC, print ads, and media through the use of celebrity and scientific endorsers (S1,S2, O1, O2, O4)
WO1. Strengthen infant formula brand portfolio using Brand A franchise (S1) for Infant Formula by a new Brand A Infant Formula (W3, O1, O2, O4 Can use S1)
O2. Number of births to grow by 2.64% year on year O3.Increasing health awareness of consumers with the use of health beneficial ingredients in food products. O4. Declining milk powder (raw material) prices by 16.5 %
SO2 Invest in plant capability to produce quality and safe products via additional powder line, and quality investments, to decrease write off costs and increase plant capacity. (S4, O1, O2, O4, O5, Impacts W1, W3, T2, T4)
WO2 Enhance HCPs communication program through widening of coverage to increase presence by increasing network in medical societies, and tapping barangay health workers. (W3, O3,O2 Use S3 and S4 for development of people)
O5. Increased consumer awareness on food safety concerns due to China Milk Melamine Contamination
SO3 Increase budget allocation on R&D to provide superior innovation use of new ingredients with health benefits for Infant Formula specially on Premium Products (S4,S2,O1,O2,O3, O4 Impacts W2)
THREATS - T
ST STRATEGIES
T1. Inflation to hit a high
of 9.7% in 2008 and a slow down to around 7% by 2009, and 4.8% by 2010. T2. Government Tightening Regulations on Milk Formula and Capacity Upgrade of Regulators. T3. Depreciating Peso value to hit 52 Php to 1 $ T4. Capacity increase of 70% by market leader Company B which has strong brand equities. T5. Company C’s increase in advertising campaigns, media coverage & launch of Brand N1 Brand N.
ST1 Revive Brand C Brand through restructuring its value proposition and an integrated marketing campaign. S2, S4 T4,T5 Impacts also W5, Use O1 O2 ST2 Reinforce Below the Line (BTL) marketing activities such as Bundling of free items, Free Grammage, and in store promotional activities (S1, S2, T1, T4, T5) Use O4 as well.
WT STRATEGIES
WT1 Strengthen forecasting techniques (product mix) so that money is not tied up with inventory (and US dollars), and translate to sales; plant produces the right products at the right time. W1, W6, T3 WT2 Pursue efficiency projects to eliminate waste, and increase plant efficiency W1, W4, T1, T3,
ST3 Explore hedging techniques since asset turnover is high. Integrate Finance organization capabilities with Operations . (Supplier A recently opened milk trading). Invest in people training and capabilities (S3, S4,T3) Impacts O4 as well
Market Penetration Strategies are: SO1. Intensify marketing investments for Above the Line (ATL) activities such as advertising activities through TVC, print ads, and media through the use of celebrity and scientific endorsers. (S1, S2, O1, O2, O4) SO2 Invest in plant capability to produce quality and safe products via additional powder line, and quality investments, to decrease write off costs and increase plant capacity. (S4, O1, O2, O4, O5, Impacts W1, W3, T2, T4) ST1 Revive Brand C Brand through restructuring its value proposition and an integrated marketing campaign. (S2, S4, T4, T5) ST2 Reinforce BTL (Below the line) marketing activities such as Bundling of free items, Free Grammage, and in store promotional activities (S1, S2, T1, T4, T5)
WO2 Enhance HCPs communication program through widening of coverage to increase presence through increasing network in medical societies, and tapping barangay health workers. (W3, O3, O2 Use S3 and S4 for development of people) Product Development Strategies are: SO3 Increase budget allocation on R&D to provide superior innovation use of new ingredients with health benefits for Infant Formula especially on Premium Products S4, S2,O1,O2,O3, O4 WO1 Strengthen infant formula brand portfolio using Brand A franchise (S1) for Infant Formula by a new Brand A Infant Formula . (Currently Brand A starts with Growing up Milk) W3, O1, O2, O4 Can use S1 6.2. SPACE Matrix
The Strategic Position and Action Evaluation (SPACE) matrix uses the internal factors pertaining to financial strength (FS), with competitive advantage (CA) and external factors pertaining to environmental stability (ES) with industry strength (IS). These will serve as inputs to determine the overall strategic position of the company if it will pursue an aggressive, conservative, competitive, and defensive position. a. Financial Strength (FS) Ratings: For FS use: +1 (worst) to +6 (best) The strong sales and income growth of the company and positive trends of asset turnover are given the highest rating of +6 since these demonstrates a strong performance record of being able to grow yet being efficient with the use of its resources compared to the main competitors and even the no.1 market leader Company B. The concern on high days of inventory is given a rating of +3, since it is not of an alarming stature yet should be a cause of concern. Though it has been on an improving trend, it is still high as compared with the competitors and can cause a cash flow concern. b. Industry Strength (IS) Ratings: For IS use: +1 (worst) to +6 (best)
The increasing awareness of consumers with health benefits of functional ingredients and increased consumer awareness on food safety are given a best rating of +6, as these consumers’ need would very much be supported by the milk formula industry in the field of innovation, and high grade quality . These factors differentiate milk formula products from potential substitutes such as filled and full cream milk. The declining milk powder prices is given the +5 ratings as these present industry opportunities that would impact profitability (lower COGS) and sales potential growth. This factor affects the other dairy industries as well. Lastly, the government’s tightening regulations rate as +3 would somehow dent the industry’s growth and profitability, yet all competitors will be playing in an even field of regulated environment. c. Environmental Stability (ES): For ES use: -1 (best) to -6 (worst) Consumer spending growth would be the best environmental stability factor for the milk formula industry and the company as well, thus given a rating of -1. Compared to other industries such as filled milk or full cream milk, as customers prioritize maximization of health benefits by the milk formula products, people would opt to spend more on them. The number of potential consumers through the rising number of births is considered the next best rating of -2. It was rated as the next best because as opportunity is there for new potential customers, breastmilk advocates and the government would highly endorse breastmilk (as dictated by regulations). The high inflation rate and peso depreciation are given a rating of -5. Impact of higher inflation rates would be mostly on economy users, while the peso depreciation would impact an increase in COGS even if the multinational companies report their earnings in foreign currencies. d. Competitive Advantage (CA): For CA use: -1 (best) to -6 (worst) Among the different competitive advantages, the strong brands like Brand A in the Children’s milk category (currently the no.1 in its segment) and Employees’ strong motivation are given the best ratings of -1. The high products profile is given a -4 rating as this was already pointed out as a minor weakness in the IFE and CPM ratings. The out of stock issues of the company has limited its full potential of revenue (and so is Company B) due to plant constraints and world market supply constraints, giving it a rating of -5. Also, the declining infant formula market share
which has some supply issues is given a rating of -5. Yet it can be noted that Company A is in a strong no.3 position in the infant formula category. As aligned in the CPM rating of Product Innovation, a -5 rating is also given to the company’s ability to innovate their products. Lastly, a -6 rating is given to the very slow growth and declining market shares of the Brand C Brand. Table 6-2 SPACE Matrix Ratings Ratings
FINANCIAL STRENGTH (FS)
Sales growth (7.66%) and Operating Growth Income (6.34%) -4 year average- due to strong sales and marketing capability. Positive growth trends of asset turnover (utilization of assets to generate sales) High days of inventory and compared to the average(17%) and market leader (8%) . Total Average
6 6 3 15 5
INDUSTRY STRENGTH (IS)
Increasing health awareness of consumers with the use of health beneficial ingredients in food products. Declining milk powder (raw material) prices by 16.5 % Government Tightening Regulations on Milk Formula and Capacity Upgrade of Regulators Increased consumer awareness on food safety concerns due to China Milk Melamine Contamination Total Average
6 5 3 6 20 5
ENVIRONMENTAL STABILITY (ES)
Consumer spending on food to grow by 7.5% CAGR from 2007-11. Number of births to grow by 2.64% year on year
-1 -2
Inflation to hit a high of 9.7% in 2008 and a slow down to around 7% by 2009, and 4.8% by 2010 Depreciating Peso value to hit 52 Php to 1 $ Total Average
-5 -5 -13 -3.25
COMPETITIVE ADVANTAGE (CA)
Strong brands in Children's Milk Category such as Brand A (Total market share is 27.1% at no.2 position) Employees, 91% of the employees are energized to work for AA. Out of stock issues due to limited plant capacity. Innovation not propelling enough compared to competition Highest cost of products profile compared to competition Loosing value proposition of Brand C - Market Share of (-2.4%) YTD July and slowest growth of 3.3% 3 year CAGR.
-1 -1 -5 -5 -4 -6
Decreasing market share in Infant Formula market (-3.6%) due to opportunistic microorganism
-5 Total Average
-27 -4.5
X - Axis (CA average + IS average) Y- Axis (ES average + FS average)
0.5 1.75
CONCLUSION
Fig 6-1 SPACE Matrix Strategic Position Profile FS 9 8 7 6 5 4 3 2 1
Conservative
CA
-7
-6
-5
-4
-3
-2
-1
Defensive
0 -1 -2 -3 -4 -5 -6 -7 -8 -9 ES
Aggressive
x= 0.500 y= 1.75
1
2
3
4
5
6
7
IS
Competitive
Based on this strategy formulation tool, the company should pursue an aggressive strategic position. The aggressive profile also shows that the company has a good financial strength and has achieved competitive advantage in a growing and stable industry. The space matrix suggests taking advantage of the external opportunities, avoid external threats, and overcome its weaknesses38. The recommended strategies for an aggressive profile would be market penetration, market development, and product development.
6.3. Internal- External (IE) Matrix
38
th
The Internal-External Matrix positions the organization in a nine cell display relative to the two dimensions of the IFE and EFE rating. In each of the nine cells, corresponding strategies are recommended. Cells I, II and IV are grow and build strategies. Cells III, V, and VII are Hold and Maintain Strategies. Cells VI, IX, and VIII are Harvest or Divest Strategies.
Fig 6-2 IE Matrix TOTAL IFE RATING 2.85
TOTAL EFE RATING 2.78
Strong 3.0 to 4.0
Average 2.0 to 2.99
Weak 1.0 to 1.99
High 3.0 to 4.0
I
II
III
Medium 2.0 to 2.99
IV
V
VI
Low 1.0 to 1.99
VII
VIII
IX
Based on the IE Matrix, the company falls in cell V, meaning it should hold and maintain its strategies. Particularly, it recommends that the company does specialization and pursue investments selectively. The best way to manage the company is through market penetration, and product development.
6.4. Grand Strategy
The Grand Strategy is a formulation tool that will tell the company’s best strategic position on the basis of two dimensions: market growth rate and relative competitive position of the company. MARKET GROWTH RATE: Faster than GDP
It is projected that future market growth would be faster than GDP but slower than previous years' growth trend. Historically market size has been growing from 4.39% to 10.5% in the past three years. Relative to GDP, and on an average basis, market growth is higher than the GDP rate (7.41% 3 year CAGR of market vs. 6.38% 3 year CAGR of GDP). On the basis of historical trend, the market is growing faster than the GDP rate. High inflationary pressures (identified as a threat) will in a way hamper the fast growing market value of the milk formula industry. However due to the nature of the product which has an inelastic demand and the product considered as a necessity, the market would still grow but at a slightly slower pace as it used to be. Industry growth is projected to be slightly still above the GDP rate but below the previous historical growth trend. GDP for 2009 and 2010 are expected to be at an average of 3.9% and 4.8% respectively. With this, the industry market growth rate would be projected to be slightly above GDP outlook with a range of 4.0% to 5.8%. COMPETITIVE POSITION: High Company A is currently in a strong number two position inching its way near to the number 1 market Leader Company B. Company B has been decreasing its market shares while Company C and Company A have increased their market shares in the past 2 to 3 years. In the CPM analysis, this is concurred by Company A's current rating of 3.3 nearing the rating of Company B of 3.65 (Reference to the CPM analysis)
Fig 6-3 Grand Strategy Matrix
RAPID MARKET GROWTH 1. 2. 3. 4. 5. 6.
Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation
1. 2. 3. 4. 5. 6. 7.
Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification Company A
WEAK COMPETITIVE POSITION
Quadrant III 1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate divers ific at ion 5. Divestiture 6. Liquidation
1. 2. 3. 4.
Quadrant IV Concentric diversification Horiz ont al diversific ation Conglomerat e diversification Joint vent ures
STRONG COMPETITIVE POSITION
SLOW MA RKET GROWTH
Based on the grand strategy matrix, the recommended strategies would be the intensive strategies of market development, market penetration and product development. The rest of the integration and diversification strategies would not be recommended as the market growth is expected to be slightly slower than the trend of previous’ years. Yet market growth will remain at higher levels than the GDP rate. 6.5. BCG Matrix
The Boston Consulting Group (BCG) matrix is a formulation tool that is used for organizations with a portfolio of businesses. Though the industry is about milk formulas, it can be noted that the business can be divided into two main segments as discussed in the market segments. These are the infant formula business and children’s milk formula business.
Fig 6-4 BCG Matrix BCG Matrix 20.00%
Stars
Question Marks
Children's Milk Formula , 1.000, 0.695
10.00% Infant Formula , 0.344, 0.247 0.00%
h t w o r G t e k r a M
-10.00%
Cash Cows
Dogs -20.00%
1.000
0.800
0.600
0.400
0.200
0.000
Relative Market Share
Name Infant Formula Children’s Milk Formula
Brand Market Share39 0.155 0.347
Leader Market Share 0.450 0.347
Relative Market Share 0.344 1.000
Sales Value40 0.247 0.695
Profit Margin 40% 32%
Market Growth Rate41 5.78% 8.62%
The infant formula business is more highly regulated since the Milk Code controls this industry. Labelling requirements, laboratory testing, manufacturing conditions are more stringent as the customers and consumers are more sensitive (in a medical sense) and as required by the government. Infant formula marketing is more controlled as such it specifically targets the HCPs in terms of in-promotion activities unlike in the children’s milk where direct advertising and promotion like the use of TV commercials, and printed ads are permissible. Because of infant formula’s higher value, the gross profit margins and profitability of infant formula is higher than that of children’s milk formula. In figure 6-4, the infant formula business of the company is on the “Question Mark” quadrant. This signifies that the market is growing yet compared to the market 39
The Market Research Company Retail Data Jun08 (Market Leader for Infant Formula is Company B; Children's Milk Formula is Company A) 40 Average 2007 data based on Sales Data and P&L(Internal in percentage) 41
leader, the company’s infant formula segment is relatively low compared to the market leader. This quadrant is called question marks as the business should decide if it would pursue them by using intensive strategies (market development, market penetration, and product development) or sell them eventually. The children’s milk formula business of the company is on the “Stars” quadrant. This business represents the company’s best segment in terms of opportunity and growth. This business should receive substantial investments to maintain or strengthen their dominant position. The recommendations for this business include the intensive strategies, and integration strategies. As a whole business, the intensive strategies presented by th e children’s milk formula strategies are the best approach as a whole for the company as aligned with the option of using this in the infant formula business. This would mean that the infant formula business should be retained and pursued. The maintenance of the infant formula product portfolio is necessary to exploit this business’ more attractive profitability and gross profit margins and to act as a bridge for consumers who will eventually be children’s milk product users. 6.6. Summary of Strategies
The recommended strategies from the different strategy formulation tools are tallied on table 6-3. Based on the table, the most recommended strategies for the firm are intensive strategies which are market penetration and product development. Table 6-3 Summary of Strategies STRATEGY OPTIONS
Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Concentric Diversification Conglomerate Diversification Joint Venture Retrenchment Divestiture Liquidation
SPACE
x x x
IE
x x
GRAND
x x x
BCG
X X X
TOTAL
0 0 0 4 3 4 0 0 0 0 0 0
6.7. Quantitative Strategic Planning Matrix (QSPM)
The Quantitative Strategic Planning Matrix (QSPM) determines the relative attractiveness quantitatively of the different strategies identified above. The tool determines the appropriateness of the strategies via the extent of attractiveness to the internal and external factors identified earlier. The summary of strategies tells that the more appropriate strategies are market penetration and product development. These are the strategies that will be evaluated in terms of its attractiveness as governing strategies for the company. Table 6-4 QSPM for Company A Market Penetration
Product Development
WT.
AS
TAS
AS
TAS
10% 7%
4 4
0.387 0.263
3 2
0.290 0.132
6%
3
0.179
4
0.239
15%
3
0.444
2
0.296
6%
3
0.181
2
0.121
8%
4
0.331
2
0.165
6% 13%
2 -
0.113 -
4 -
0.226 -
17%
4
0.677
3
0.507
13%
4
0.532
3
0.399
15%
4
0.600
3
0.450
15%
4
0.600
2
0.300
KEY FACTORS Opportunities
Consumer spending on food to grow by 7.5% CAGR from 2007-11 while economy will still grows at 4.7%. Number of births to grow by 2.64% year on year Increasing health awareness of consumers with the use of health beneficial ingredients in food products. Declining milk powder (raw material) prices by 16.5 % Increased consumer awareness on food safety concerns due to China Milk Melamine Contamination Threats
Inflation to hit high 10% until Q1 08 and 7% in 2009 Government Tightening Regulations on Milk Formula and Capacity Upgrade of Regulators Depreciating Peso value to hit 52 Php to 1 $ Capacity increase of 70% by market leader Company B which has strong brand equities. Company C’s increase in advertising campaigns, media coverage & launch of Brand N1 Brand N. Total Weight
100%
Strengths
Strong brands in Children's Milk Category such as Brand A (Total market share is 27.1% at no.2 position) Sales growth (7.66%) and Operating Growth Income (6.34%) -4 year average- due to strong
sales and marketing capability. Employees, 91% of the employees are energized to work for AA. Positive growth trends of asset turnover (utilization of assets to generate sales)
15%
4
0.600
4
0.600
10%
3
0.300
4
0.400
10%
-
-
-
-
5%
2
0.100
4
0.200
10%
-
-
-
-
5%
3
0.150
2
0.100
10%
4
0.400
3
0.300
5%
-
-
-
-
Weaknesses
Out of stock issues due to limited plant capacity. Innovation not propelling enough compared to competition Decreasing market share in Infant Formula market (-3.6%) due to opportunistic microorganism Highest cost of products profile compared to competition Loosing value proposition of Brand C - Market Share of (-2.4%) YTD July and slowest growth of 3.3% 3 year CAGR. High days of inventory and compared to the average (17%) and market leader (8%). Total Weight
100%
Sum Total Attractiveness Score
5.855
4.724
6.6.1. Rationale of QSPM ratings On Opportunities: A rating of 4 is given on the use of market penetration for opportunities in higher consumer spending and potential new customers (due to the birth rates) because of a faster return on profit. With the same opportunities, a rating of 3 is given to product development as consumers especially in the premium market will be willing to spend a more premium priced product due to product innovations (new ingredients) thereby providing better health benefits. Attractiveness of product development may still have an impact on the high birth rate opportunity if there are significant innovations to attract new customers the reason for the rating of 2. The declining milk powder prices could be able to relate to market penetration, as it could be used to highlight price competitiveness and attractiveness. Furthermore the additional savings this will bring could provide more funds for market penetration activities. A lower rating is given to product development, as the declining milk powder price maybe a factor and maybe used to have better COGS during product development.
In terms of product food safety awareness, the market penetration with increased advertisement on product safety could help establish confidence of customers. Product development may be impacted also as this will be used to formulate safe and non risk innovative products. On Threats: In terms of the threat of inflation, market penetration specifically on economy segments will be more attractive as a strategy to address inflation as cost is not capitalized (not as much as high compared to R&D). Product development may still be attractive considering that one of the key operating parameters of product development is to develop products that are less costly but can be of higher value to the customer. Tightening government regulations such as restricted marketing activities, and constraints in labelling, limits the marketing penetration strategy (as confined to HCPs only) thus giving it only a rating of 2. A rating of 4 is given to product development since having a scientific breakthrough would be more appropriate to capture a highly regulated industry. In terms of the threat of the increasing competitiveness of key players of Company B and Company C, marketing penetration (with a rating of 4) is better and faster (in terms of investment) in a marketing driven competitive environment. Yet product development (rating of 3) is still a probable strategy considering the two key competitors are leaders in innovations and have used their innovations to grab market shares and gain market competitiveness. On Strengths: On the use of strong brands, the market penetration is given a high rating of 4 while product development is still given a rating of 3. A faster return on profit due to brand awareness and advertising/promoting is seen in penetrating further this brand in the market. In terms of product development, this can still increase the competitiveness of the brand, though it may take time to reap its benefits.
Increasing sales and operating growth income mean market penetration strategies from the past are effective. Thus this makes market penetration (with a rating of 4) as a more attractive strategy than Product Development (with a rating of 2) which is a current weakness of the company. On the high asset utilization, as product development entails higher investments which are capitalized (longer returns), the use of company's assets such as investments in research will provide additional allocation for Product Development Strategies thus giving at a high rating of 4. Market penetration may as well use this company strength thus giving it a rating of 3. On Weaknesses: The product development activities will significantly impact the lack of innovation breakthroughs of the company currently relative to the key competitors, thus giving it a rating of 4. Market penetration may be used together with the product development to maximize the potential of the innovation to communicate the message and “package” it well for the customers giving product development a rating of 2. On the other hand to revive the Brand C Brand, market penetration is better as it will yield faster results than investing on an innovation in Brand C Brand. This is the same case with the company’s weakness as the highest cost profile in the market. To increase the value of the product to correspond to the company's highly priced products, market penetration is more attractive. Product innovations can increase the value of the product but it would take capitalization and time to implement. 6.6.2. Summary of QSPM Results As a general strategy, Market Penetration with a score of 5.855 should relatively be given more focus than Product Development which has a score of 4.724. However due to the high score of Product Development, this should still be used as a strategy specifically to address the competitive strengths of competitors in R&D, increasing consumer awareness on health benefits due to product innovations, and limitations on marketing activities due to the Milk Code. Moreover the strategy should be used in an integrated manner to create synergy in attaining higher sales, income and market shares for the company.
7. Strategic Objectives and Recommended Strategies
7.1 Strategic Objectives
The strategic objective of Company A Philippines is to increase and achieve Php 11.6 B sales revenue and Php 2.09 B income in the year 2011, by being the Philippine Milk Formula market leader through aggressive market penetration, and product development. The projected increases and actual values of revenues and income are shown in Table 7-1. Table 7-1 Projected Revenues and Income REVENUE
Yearly Target Incremental Increase (Year on Year) Cumulative (Base 2008) Revenue Projection (Php B)
2009 14% 14% 8.29
2010 17% 33% 9.70
2011 20% 59% 11.60
2009 22% 22% 1.49
2010 14% 38% 1.69
2011 23% 71% 2.09
EBIT
Yearly Target Incremental Increase (Year on Year) Cumulative (Base 2008) Income Projection (Php B)
Given the growth rates, this is in line with the company’s proposed vision to be the leading provider of science-based nutrition in the country by 2011. Company A has a strong pool of resources and a strong dominant presence in the market today. These factors will be key in providing direction to catapult the company to new growth levels by 2011 while maintaining a strong competitive position in the market in the course of the three years and eventually achieve its vision to be the no.1. The milk formula industry will still be growing at a fast rate in terms of market value. Moreover, the company is in a good strategic position to respond to the external environment (EFE rating: 2.78), and in a very strong competitive position against the market leader (CPM rating of 3.3 vs. 3.65 – Market Leader). Additionally, given the fact that the company has an above average rating internally (IFE rating: 2.85) this will help them respond to the challenging and competitive environment, thus achieving the strategic objectives above.
7.2. Recommended Business Strategies
7.1.1 Market Penetration Drive competitiveness of the brands through market penetration activities through intensive promotions, brand recognition, enhancing communication programs, better value proposition of products, and building supply capacity to be the no.1 market leader in Milk Formula in the Philippines. a. SO1. Intensify marketing investments for above the line (ATL) activities such as advertising activities through TVC, print ads, and media using celebrity and scientific endorsers for brands.(S1,S2, O1, O2, O4) b. ST2 Reinforce below the line (BTL) marketing activities such as bundling of free items, free Grammage, and in store promotional activities (S1, S2, T1, T4, T5) (Use O4 as well) c. WO2 Enhance HCPs communication program through widening of coverage to increase presence by increase network in medical societies, and tapping barangay health workers. (W3, O3, O2 Use S3 and S4 for development of people) d. ST1 Revive Brand C Brand through restructuring its value proposition and an integrated marketing campaign .(S2, S4, T4,T5 Impacts also W5, Use O1 and O2) e. SO2 Invest in plant capability to produce safe products via additional powder line, and quality & compliance investments, to decrease write off costs and increase in plant capacity. (S4, O1, O2, O4, O5) a. Intensify marketing investments for above the line (ATL) activities such as advertising activities through TVC, print ads, through the use of celebrity and scientific endorsers. The Brand A has been on a streak of phenomenal growth in the last 4 years and is still growing. The promotion and advertising campaign used in the media such as TV commercials, guesting appearances of celebrity endorsers, Ads in prime time TV, for this growing up milk has been proven to be effective. Continuous advertising promotions such as the use of celebrities will continue. Certainly this has appealed to the economy segment of growing up milk customers and consumers.
Partnerships with Food and Nutrition Associations of the Philippines will be used as well to further strengthen the position of the product as a provider of 100% nutrition. Coupled with the celebrity endorsement of the product as their trusted brand and the use of scientific associations this integration will be proven to give extra push and awareness to gain new customers and maintain current customers. b. Reinforce below the line (BTL) marketing activities such as bundling of free items, free Grammage, and Promotional Activities (S1, S2, T1, T4, T5) Use O4 as well Bundling promotions such as free tumbler kits and tumblers will be also be used for promotional activities and could act as a defense tactic for attacks on the brand by the competition. This will be used primarily on economy milk segments such as Brand A and Brand D. Among other activities as well, and exploiting the positive trend of declining raw milk material prices, free grammage will be given out as free for consumers. This will be another defensive tactic if ever competitors will exploit on price cut backs in the future or introduce new product innovations. By adding monetary value to the consumer this move will coincide with an emotional value campaign on helping people cope up during economic slowdown times. c. Enhance HCPs communication program through widening of coverage by increasing network in medical societies, and tapping barangay health workers. It has been studied that most pregnant women already have a brand in mind for the infant formula that they will provide their children. By covering physicians such as Gynecologists, the communication of the infant formula alternatives to mothers through the HCPs will be done before the decision stage of purchase. This can be done by expanding coverage to this type of doctors. Some action points to consider are: a. Medical Societies of this group will be a channel of partnership. b. Hospital Programs c. Brand Lectures An emerging channel to potential infant formula users is through the Barangay Health Workers in Health Community Centers. Through this new emerging segment, the economy infant formula stage milk can be channelled to its potential customers.
Barangay health workers training enhancement program to instil community development programs focused on nutrition will be a channel for communication. d. Revive Brand C Brand through restructuring its value proposition and an integrated marketing campaign Brand C’s value proposition will be enhanced to regain its lost market shares and be a household name once more in the Premium Market. The development of a child through mind exercises and increased physical strength, so as he could develop his EQ through positive interaction with his environment around will be the new value proposition of the Brand C Brand. Brand C being a brand heritage which was taken by many children who are now fathers and mothers will be part of the message carrier and campaign. This will be coursed through endorsements of successful mothers and fathers in their respective career and family lives. The message will include how Brand C has helped them nourish their mind and body, and eventually how they trust the brand in the enrichment of the lives of their children. This will be coursed through a story telling manner of three successful tales (for each of the Brand C Staged Products). The story of the three families will be advertised on a six month to one year basis through TV commercials, ad campaign, and the use of internet (i.e. web streaming). e. Invest in plant capability to produce safe products via additional powder line, and quality & compliance investments, to decrease write off costs and increase plant capacity. With an expected volume growth of 35% in the next three years, a current plant capacity operating at its full capacity, and a very strong net return of assets, the increase in plant capacity is a necessity. Plant is currently operating with three lines (1 line and 2 pouch lines) with a total plant utilization of 88 to 93% (2007 and 2008 September YTD data). An additional “can” line can increase the capacity of the plant to operate at around 30 to 45%. With this additional investment, the company is poised to supply the needed cumulative volume increase of 35% in the next three years. 7.1.2. Product Development
Increase competitiveness of product in the market through the development and investment of innovative products and increased product portfolio for established brands. a. SO3 Increase budget allocation on R&D to provide superior innovation use of new ingredients with health benefits for Infant Formula specially on Premium Products S4,S2,O1,O2,O3, O4 Impacts W2 b. WO1 Strengthen infant formula brand portfolio using Brand A franchise (S1) for Infant Formula by a new Brand A Infant Formula W3, O1, O2, O4 Can use S1 a. Increase budget allocation on R&D to provide superior innovation use of new ingredients with health benefits for Infant Formula especially on Premium Products To increase the value of Premium Infant Formula such as the Brand B brand, coupled with the existing opportunity of increased health awareness on functional ingredients, a superior product innovation to deliver a more premium brand to a less price sensitive market is key to regain lost market shares. New ingredients available and extensive development and research for ingredients such as Lactoferrin, and alactalbumin, can be used for the premium infant formula market. b. Strengthen infant formula brand portfolio using Brand A franchise (S1) for Infant Formula by a new Brand A Infant Formula A new product innovation and formula will be developed that will carry the brand name of Brand A. This infant formula will be formulated on the direction of having the most efficient (competitive costing) yet effective (high perceived value) of formulation for infants in its target market, economy market. Part of the challenge is that it should be positioned still in the economy segment so the cost and pricing of this new addition to its product portfolio will be competitive in the market. The infant formula will be called “AAA”.
7.3. Recommended Organizational Strategies
The current dual role or matrix type of the organization is fit for its current role to pursue market penetration and product development. Market penetration strategies will be driven by the commercial functions like Marketing, Accounts management and Nutrition sales which are currently reporting directly to the Philippines General
Management or to Local Operations. Corporate and Technical functions such as Human Resources, Finance, and Operations will have a dotted reporting role to support local operations while maintaining a direct reporting role to the region to further enhance and create expertise in their functions. Part of the recommended organizational strategies to support the key strategies would also involve three components. These would mainly be: a. New Finance Management Personnel for Commodity (Milk) Hedging and Forex Swaps Maximization. This is in line with the strategy in the SWOT matrix in the Strength Threat quadrant – ST3 Explore hedging techniques since asset turnover is high. Integrate Finance organization capabilities with Operations . (Supplier A recently opened milk trading). Invest in people training and capabilities (S3, S4, T3) The function will have an indirect reporting to the region while maintaining a direct role reporting to the Finance Director in the Philippines and highly coordinating with Operations. The function will be highly specialized as it will involve developing plans on how to participate in the current Supplier A initiated Commodity Trading of Milk. The main objective of the function is to look for opportunities and threats in the milk commodity trading and hedge against risks on milk supply disruption and prices, and hedge against currency risks. b. Additional personnel on HCP coverage As support to the widening coverage of the health care personnel specifically those providing pre-natal care and barangay health care, new positions will be established and a projected investment on new headcounts will be necessary for this key business strategy. c. Additional personnel for plant additional line The additional line which is projected to give 35 to 45% increase in volume output will need new personnel to support the operations of the line. The recruitment, training and development of these new personnel will be critical in executing the strategy to provide capability of market penetration.
7.4 Financial Projections
Table 7-2 Projected 3 Year P&L Statement In ('000) Php Year
2008 (est)
2009
2010
2011
Net Sales Less; COGS Operating Margin Operating Expenses Logistics Ads Promotional Materials Sales Force Other Market Expenses R&D General Admin EBIT
7,285,463 4,393,009 2,892,453 1,669,517 81,994 482,227 310,789 393,674 101,869 97,618 201,346 1,222,936
8,287,214 4,730,392 3,556,821 2,086,163 86,094 747,451 372,947 413,358 106,962 146,428 212,923 1,470,658
9,649,424 5,510,316 4,139,109 2,482,538 89,813 1,029,988 410,242 433,199 112,096 183,034 224,166 1,656,570
11,546,984 6,596,675 4,950,309 2,903,312 92,957 1,338,984 451,266 454,859 117,701 210,490 237,055 2,046,998
7.4.1. Basis and Assumptions on Projections- P&L Statement from 2009-2011 The projected increase in revenue due to the strategies would be 8.8%, 12.1%, and 14.5%, in the next three years excluding the impact of price increase brought about by inflation. The assumption of price increase of finished products due to inflation is 5%, 4.8%, and 5%. The assumption of a lower inflation rate of 5% in year 2009 versus the expected inflation of 7% takes into account the competitor’s move to cut prices, and a slight decline in volume of consumption seen at the height of the rising inflation in the middle of 2008. Nevertheless the price increases would be done to absorb the potential increase of prices of some of the materials. On a totality the revenue increase is projected to increase at 13.8%, 16.9% and 19.5% on the next three years. Revenue increase due to increased media ATL marketing efforts and other BTL promotional activities which would impact the children’s formula business (70%) is projected to contribute +5.3% year on year. The restructuring of the Brand C brand is expected to give a +1% to +1.4% growth also in the next three years. Enhancement of the HCP communication model impacting the infant formula business is projected to give 2.5%, 3%, and 3.6% growth in the next three years. Coupled with this is the expected return on the product development strategies on the infant formula business both in the economy and premium segments of +1% still in 2010 (half implementation of the economy segment of infant formula new innovation) and
+1.89% (full implementation of all infant formula product development initiatives) in 2011. The main impact on the projected cost of goods sold is the decline of milk powder prices (16.5% decline) and the decline of the Philippine Peso in 2009 (around 8.3% impact). The introduction of the new line will increase overhead costs by an amount of 0.65% or a third of the current allocation of overhead costs (including the impact of the learning curve and transition). Efficiency and reduction of wastages projects are targeted as well to reduce COGS to around Php 31 to 55 or 0.6% in the next three years. On the operational expense, the marketing advertisement activities will be supported by budget increases of 50%, 33%, and 25% in the next three years. This is supported by increases in promotional budget of additional 20% for 2009 and 10% for the next two years. Research and Development budget allocation is also increased to +50%, +25%, and +15% in the next three years. Projected inflation and historical trends (based on weighted average, the highest being the nearest year) are taken into account in these projections and other types of expenses. 7.4.1. Basis and Assumptions Projections- Balance Sheet and Cash Flow Statement of AA from 2009-2011 Table 7-3 Projected Balance Sheet for AA ASSETS Current Assets Cash Receivables – net Inventories – net Prepayments and other current net assets Total Current Assets Non-current Assets Investments in associates Property and equipment -net Deferred tax assets - net Other non-current assets Total Non-current assets TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities Trade and other Payables Due to related parties
2008
2009
2010
2011
662,299 1,617,027 1,294,974
296,130 1,839,368 1,394,428
365,557 2,061,284 1,550,781
302,919 2,374,583 1,750,420
46,100 3,620,400
52,930 3,582,856
55,527 4,033,148
56,821 4,484,743
60,767 570,729 355,489 34,296 1,021,281 4,641,681
60,239 895,412 379,921 36,612 1,372,184 4,955,040
61,240 852,146 393,654 38,397 1,345,438 5,378,586
62,157 815,803 409,941 39,758 1,327,659 5,812,402
` 1,835,880 196 315
2,107,118 203 410
2,350,771 208 057
0.41 1,783,484 184,894
Income tax payable Other current liabilities Total Liabilities
167,841 60,161 2,196,381
155,967 67,193 2,255,355
156,028 70,985 2,537,540
165,667 71,436 2,795,931
Equity Capital Stock Reserves Retained Earnings Total Equity
139,750 51,669 2,253,881 2,445,300
139,750 64,047 2,495,888 2,699,686
139,750 72,144 2,629,152 2,841,046
139,750 86,486 2,790,235 3,016,471
TOTAL LIABILITIES and EQUITY
4,641,681
4,955,040
5,378,586
5,812,402
Since the balance sheets used in this study are those of AA as a whole, the same will be used in the projected financial statements for AA. Though this is a limitation, a good approximation can be projected for the AA balance sheet of which Company A’s revenue contribution is approximately 80% from the past. A major assumption of the balance sheet is that the contribution of the Company A business to the Parent Company AA will be at a faster rate than the pharmaceutical business by around CAGR of 1.8% as seen in the historical trend for the past three years. Therefore the contribution of Company A to the AA Philippines company in terms of revenue is assumed to be at 79%, 80.8% and 82.6% in the next three years. Linking the income statement to the balance sheet are the retained earnings of the three years. The projected retained earnings accounts for a 20% retained net income in the business (80% as dividends) in the year 2009, while 10% would be retained (90% as dividends) in 2010 and 2011. The difference lies primarily due to the need of an investment of a new additional line investment as part of the company strategy to increase supply. This investment of Php 416 M is accounted in the increase in property, plant and equipment in the assets portion of the 2009 balance sheet. Projected depreciation is also taken into account in the next three years of new and existing fixed assets based on historical trend and an assumption of 10 years depreciation. Additional investments in 2009 to 2010 of Php 100 M are projected for plant maintenance upgrade, information technology, laboratory, and offices investments. Days of inventory and receivables shall be important in the next three years to have a healthy cash flow since there is a relatively big investment in 2009. As pointed out in the IFE matrix and strategic issues, the process of improving the days of inventory, and forecasting improvement is key to these asset controls. The days of inventory
accounted in the projected balance sheet is at 85 days (key competitors’ average), while for receivables is at 64 days (same as the year 2007 data). Other liabilities and other asset entries are projected based on inflation rates and historical weighted average data. The increase in COGS is accounted and factored into accounts payable projection. Capital stock remains unchanged. Financial ratios such as liquidity ratios remain relatively healthy such as the current ration remaining at 1.88 to 2.00 in the next three years. Debt ratios are seen to decrease slightly both versus assets (projected is 0.4 in the next three years vs. 0.43 from the past) and equity (projected is 0.67 compared to the previous years’ 0.77). As for the profitability ratios the projected ratios are seen to be at an average of 0.57 on return of total assets, and 0.96 return on equity. This is an improvement versus the average of the past three years of 0.41 on return of total assets, and 0.72 return on equity. The projected cash flow statement (Table 7-4) below takes into account the changes brought about by the projected income statement and balance sheet. Table 7-4 Projected Cash Flow Statement Cash Flows from Operating Activities Income before Tax Adjustments for: Depreciation and amortization Gain on sale of property and equipment Provision for (reversal of) doubtful accounts Equity in net income associates Provision for (reversal of) inventory obsolocense Unrealized forex gain Retirement benefit expense Finance Cost Interest Income Operating Cash flows before working capital changes Decrease (Increase) in: Receivables Inventories Prepayments and other current assets Increase (Decrease) in: Trade and other payables Due to related parties Other Current Liabilities
1,548,020
1,861,593
2,050,211
2,472,219
126,120 0 241,194 (4,521)
91,317 0 422,880 (5,221)
148,125 0 394,188 (4,871)
180,067 0 385,568 (4,941)
29,169 (15,951) 11,426 175 (19,979)
35,717 (14,566) 11,730 184 (17,226)
42,294 (13,195) 11,102 179 (17,617)
48,023 (14,088) 11,370 180 (17,835)
1,915,653
2,386,407
2,610,415
3,060,564
412,444 84,764 22,014
(222,341) (99,454) (6,830)
(221,916) (156,352) (2,597)
(313,299) (199,639) (1,294)
5,355 (20,790) 88,704
52,396 11,421 (11,874)
271,238 7,094 62
243,653 4,647 9,639
Cash generated from operations Income taxes paid
2,508,145 (685,832) 1,822,313
2,109,724 (824,756) 1,284,968
2,507,944 (888,086) 1,619,857
2,804,272 (1,047,551) 1,756,721
(107,604) 0 (1,787) 4,740 19,979 (84,672)
(416,000) 0 (1,976) 5,118 17,226 (395,632)
(100,000) 0 (2,169) 5,010 17,617 (79,541)
(100,000) 0 (2,044) 5,007 17,835 (79,202)
(905,592)
(968,028)
(1,199,373)
(1,449,750)
0 (175) (905,767)
0 (184) (968,212)
0 (179) (1,199,552)
0 (180) (1,449,930)
Cash, Beginning Cash, End
505,511 156,788 662,299
(366,170) 662,299 296,130
69,427 296,130 365,557
(62,638) 365,557 302,919
Check and balance
326,363
287,293
271,337
290,227
Net Cash from operating activities
Cash Flows from Investing Activities Additions to property and equipment Proceeds from sale of Property and equipment Decrease(Increase) in other non-current assets Dividend Income from investment in associates Interest Income received Net Cash used in investing activities
Cash Flows from Financing Activities Payment of Dividends Dividend Income from investments in associates Interest paid Net Cash in financing activities
Effects of exchange rate as cash Net Decrease in Cash
8. Departmental Programs
The execution of the overall strategies will rely on the different departments and their functional programs and action plans.
8.1 Strategy Map Implementation
The strategy map provides a visual guide on how the different strategies and action plans are linked. It is the connection between the strategies and an operative implementation plan.
Fig. 8-1 Strategy Map
109
8.2 Departmental Actions and Functional Strategies
8.2.1 Marketing Team Marketing shall take the lead in almost all of the marketing penetration strategies. They will be responsible in all the marketing intensification activities and increase of market shares. The team shall also co-lead with R&D in all the key product innovation launches with the support of all cross functional teams. Action Plans: Drive competitiveness of products through marketing ads communication and promotions. a. Brand A (Economy Brand): Launch intensified brand awareness campaign with celebrity endorsers integrated with endorsements from the scientific community. Jan to Aug 2009 – Start of Launch through TV commercials and TV hot spot guestings May 2009 – Integration with scientific endorsers in the launch campaigns. Co-leading with the R&D group, the Brand A Infant Formula will be starting its development through early development of determining the innovation needs and new formulation. Feb 2009 – Start of Early Development of Increased Portfolio of Infant Formula using the Brand A. Completion is by the end of the year with commercialization to start on Q1 of 2010. b. Brand C (Premium Brand) – Revive the brand by enhancing its value proposition with an integrated marketing campaign. Jan 2009 – Prepare for a full robust integrated marketing campaign. Mar 2009 – Launch of new brand proposition of Brand C with TV commercials, Radio, Print and internet web based advertisements. c. Brand B (Premium brands) - The usual activities shall take place in key promotions. Meanwhile, the marketing group will be working hand in hand with the
other teams for the anticipated superior new innovation of Infant Formula. The enhancement of the HCP communication programs will be co-lead with the Nutrition sales team (See Nutrition sales Section) March – Nov 2009 – Start of launch through TV commercials, radio and print with the endorsement of the scientific community (medical field) on the use of Brand B Products. Jan 2009 – Start of Early Development of Innovation of Premium Infant Formula for the Brand B Lines (use of ingredients such as Lactoferrin, a-lactalbumin, Nucleotides, and cGMP). Target completion of Product Development is by the middle of 2010. d. Brand D (Economy Brands). Focus on the Brand D Brand will be given emphasis on the Nutrition sales Team Action Plans whose product portfolio is mostly in the infant formula section (67%). However for the stage 3 Brand Dgrow Milk Formulation, the free grammage promotional strategy to boost its sales will be used. Q2 –Q3 2009 – Full implementation of free grammage (10%) in the shelves for sale. All product managers shall be responsible for more detailed action plan a nd goal setting based on the high level plans above. The product managers will continue to work with the cross functional teams represented by the different sections. Pricing strategy to ensure competitiveness will also be done and will be influenced by the inflation rates and key competitors pricing specially on the economy segments. In the event new product launches will be done by key competitors, the marketing team will be responsible for anticipating such activities. In the event of a full blown launch by the competitors like the Brand N Brand N1, this will be countered by below the line activities, as they are not capital intensive and shall focus on in-store promotions. Projected at Q2 2009 (Full Swing of Company B in Marketing Activities) – In store promotions and wet sampling (of Brand A and Brand D Brands) Projected at Q2 2009 (Launch of Brand N1) – Bundling Promotional Activities (Free tumbler kits) 8.2.2 Accounts management and Nutrition sales
a. Accounts management The accounts management team will work with the marketing team in ensuring that the in-store promotions identified above will be implemented specially in Supermarkets as they are growing as identified in the market study of this paper. Proper key shelving strategies will be implemented also, Another action plan is to develop key areas and regions that need special attention as studies have shown growth in these regions. Specifically regions in the CALABARZON area and MIMAROPA areas will be given priority as identified in the external analysis of this paper. Out of stock issues in the trade and high inventory levels have also been identified as weaknesses. As such, forecast accuracy and more robust efficiency concerns are needed to be able to supply well to the trade. Accounts management shall be responsible in the overall monitoring of the order fill rates. Action Plans: Monthly Basis - Ensure sales target and finished foods inventory level (WO1) are maintained in all regions in the areas are met as per Business Plan. Monthly Basis – Monitor order fill rates supplied to the trade (to be co-lead in implementation by Operations ) Q1 2009 – Identify key programs to stimulate accounts management in the MIMAROPA and CALABARZON region together with the nutrition sales team. b. Nutrition sales Enhance and improve HCP communications model by tapping wider coverage of HCPs and Barangay Health Workers Continuing projects through sponsorships of medical societies, brand lectures, and continuing medical education of HCP partners will continue. Action Plans: Feb 2009 – Start implementation of widening the coverage of HCP.
Apr 2009 – Start of Barangay Health Workers Coverage . 8.2.3. Finance As earlier stated the strategy identified in the SWOT matrix, ST3 Explore hedging techniques since asset turnover is high. Integrate Finance organization capabilities with Operations . (Supplier A recently opened milk trading). Invest in people training and capabilities (S3, S4, T3). This will be lead by the Finance Team. Finance will be responsible on the budget adherence and monitoring of overall financial results as per the Business Plan. The Finance team shall also take the lead in the yearly budgeting of the company. Additionally the need for capital budgeting needed ne eded for the additional manpower and new powder line investment shall be addressed by pursuing proposals with Operations to get final approval from the regional and global global offices. Action Plans: Monthly Monitoring (Main Key Financial Results) and Quarterly Update (More detailed) of the Business Financial Deliverables. Adherence to Budget such as revenue, gross profit margins, net income and inventory levels Feb 2009 - Identification of key action points, systems for the milk on-line trading. Apr 2009 - Participation in on-line trading of Milk Powders 8.2.4. Operations (SC) Operations Aside from the operational support needed in market p enetration in terms of increasing plant capacity, another strategy identified in the SWOT analysis is the need to have efficient operations as well as strengthening of the forecasting system and inventory levels. The following are: WT2 Pursue efficiency projects to eliminate waste, and increase plant efficiency T1, T3, W1, W4. This will be covered in the b and c sections of 8.2.4.
WT1 Strengthen forecasting techniques (product mix) so that money is not tied up with inventory (and US dollars), and translate to sales; plant produces the right products at the right time. W1, W6, T3 Action Plans: a. Increase plant capability to increase plant capacity to produce quality and safe products consistently. As part of the market penetration strategy to increase p lant capacity and capability to produce safe and quality products, the SC operations will be tasked to have the new powder line operational by end of 2009. Action Plans: May 2009 – Full approval of the project budget and plan for the new line investment. Sep – Oct 2009 – Installation of the new upgraded line Dec 2009 – Full implementation of new powder line b. Increase plant efficiency To further utilize the key resources in its full potential, key areas and projects will be identified on an on-going basis as continuous improvement initiatives. Action Plans: Jan 2009 to Dec 2009 - Full implementation of identified key project line enhancements by manufacturing (e.g. staggered breaks). April 2009 - Full implementation of new Preventive Maintenance System model to increase plant reliability and ensure product safety. c. Reduction in wastes, returns, rejection, write-offs and implementation of Efficiency initiatives Action Plans: Bi monthly Reports - Execution of all identified mitigation programs to eliminate waste returns and write offs as per identified timeline to hit target efficiency targets.
(Reduction of Manufacturing Wastes and Product Rejections through Quality driven projects, Reduction in Wet Wash through enhanced dry cleaning, Efficiency Projects such as alternate vendors, materials, energy efficiency programs) d. Improve process of sales and operations planning to reduce inventory levels yet maintain high levels of order fill rates. To maintain high levels of order fill rates yet reducing the amount of inventory to support the trade, the Sales and Operation planning process shall be enhanced. The Operations team will lead the process and shall be co-lead with the Finance Finance team to balance the marketing forecasts with the projected sales of the accounts management team. The program shall include an exclusive training and level of benchmarking from other Company A sites around the world. Action Plans: Bimonthly updates - Improve product mix planning, and forecast accuracy to reduce inventory levels, set-up time costs, downtime in the line and improve service level to trade customers. Feb 2009 – Start of benchmarking and training. April 2009 – Enhanced Sales and Operations Planning Process has b een implemented e. Compliance to Regulated Systems Since the industry itself is highly regulated. Systems to ensure that company is operating inside its boundaries are necessary be it in the aspect of quality, marketing and finance. Action Plans: Quarterly Review of Systems to include internal self regulating auditing by Operations Quality Group. Q1 2009 - Develop plans to determine competitor possible violations and report to proper authorities as needed.
8.2.5. R&D Team The research and development team will be the ones responsible in the product development of the important new innovations that the company will be investing in to support its strategic objectives. This will be done on a cross functional basis, with marketing leading the team concurrently with the R&D team who will be the technical lead of the innovation development. Action Plans: Sep 2009 – Approval of BFAD on the new Brand A Infant Formula Jan 2010 – Commercialization of new Infant Formula innovation belonging to the Brand A. Mar 2009 – Approval of BFAD on the superior innovation in Premium Infant Formula of the Brand B series Jun 2010 - Commercialization of superior innovation in Premium Infant Formula of the Brand B Series. 8.2.6. Human Resources The Human Resources Team will be responsible for ensuring that the manpower support needed to execute the high level strategies are aligned. On a continuing basis, the performance management system will be aggressively led by the Human Resources Team Action Plans: Mar 2009 – New Finance Head Count and appropriate training of relevant personnel has been completed. (January – June - December 2009) On time execution of Performance Management Systems (Planning, Mid Year Feedback – Final Evaluation) On time execution of talent retention and talent development program of critical talents and positions as identified in the Performance Management System.
9. Strategy Evaluation and Performance Metrics
A balanced scorecard is a process that allows a company to evaluate strate gies from the perspectives of financial performance, customer perspective, internal business processes, and learning and growth. The balanced scorecard will be used to assess the strategy and determine corrective actions as necessary both for the strategy and key action points. A business review will be done on a quarterly basis. 9.1 Balanced Scorecard for Year 2009
9.1.1 Financial Perspective Objectives
Goals – Dashboard ● Meets Expectation ● Alert ● Below expectation
Responsibilities DACI D – Driver A – Accountable C– Consulted I – Informed
Increase in Revenues vs. previous year
Total Revenues
D – Marketing, and Accounts management Team A – General Management C – Finance Team I – Operations Team, and Nutrition sales team D – Marketing Team, and Operations A – General Management C- Finance Team I – Sales and Nutrition sales team D – Marketing Team, Finance Team and Operations A – General Management I – Sales and Nutrition sales team D – Finance Team, Accounts management Team and Operations Team A – General Management C – Nutrition sales Team I - Marketing Teams
>14% ● 11-14% ● <11% ●
Increase in Net Income vs. previous year
Net Income (Business Unit Contribution) ● >=22% ● 18-22 % ● < 18%
Maintain Gross profit margins of 55.4%
Gross profit margins ● >42.9 % ● 40-42.9 % ● <40%
Improved cash flow through days of 85 days inventory
Inventory ● <85 days ● 85-90 days ● > 90 days
9.1.2. Customer Perspective Objectives
Dashboard Meets Expectation ● Alert ● Below expectation ●
Responsibilities DACI D – Driver A – Accountable C– Consulted I – Informed
Drive competitiveness through strong marketing activities and restructuring of value proposition of select Brands (SO1, ST2, ST1) in Infant Formula and Children’s Milk Regain and Improve HCP partnership, alliance (WO2)
Increase in Market Share Levels >32% ● 28-32% ● <28% ●
Increase of market share of Infant Formula Shares >18% ● 16-18% ● <16% ●
Improving product value through product innovation.
No. of initiatives realized per Plan 80% of all innovation projects realized with the two main innovation on Infant Formula implemented and running as per planned date of launch ●
D – Product Managers and Channel Heads A – Marketing and Accounts management Director C – Finance and Regulatory Team I – Operations Team, and Nutrition sales team D – Nutrition sales Team A – General Management C – Accounts management, Regulatory and Marketing Team I – Operations Team, and Nutrition sales team D – R&D and Operations Team A – Marketing C – Nutrition sales and Regulatory Team I – Accounts management Team
50 to 80% realized and one main innovation realized as per plan. ●
<50% projects realized or main strategies off track of schedule ●
Achieve 95% Order fill rate (fulfilled orders vs. actual orders)
Maintain Order fill rate Levels >97% ● 92-97% ● <92% ●
D – Operations and Accounts management A – Marketing Team and General Management C – Nutrition sales Team
9.1.3 Operational Perspective Objectives
Dashboard ● Meets Expectation ● Alert ● Below expectation
Responsibilities DACI D – Driver A – Accountable C– Consulted I – Informed
New capacity build up through new powder line in full operation by December 2009
On Schedule per project timelines
D – Operations and R&D A – General Management C – R&D I – Accounts management and Marketing Teams D – Plant Team, QA Team and Engineering Teams A – Operations Director C – Finance and R&D
Improve Plant Efficiency through production rate improvements and initiatives Rejections, Returns, write-offs and Efficiency Projects (for COGS improvement) within Projected
Before Dec 09 Dec 09 – Mar 10 ● Beyond Mar 10 Percentage improvement of last year ● ●
+3% vs. YAGO 0 to 3% vs. YAGO ● No improvement Within Budget as per Business Plan ● ●
>98% ● 93 – 98% ● <93% ●
D – Plant Team, QA Team, and Engineering Teams A – Operations Director C – Finance and R&D I – Finance and Marketing
Business Plans Improve Forecast Accuracy through process improvement
Within Budget as per Business Plan ● ● ●
Compliance to established systems and enhance systems improvement for regulatory and government compliance.
+ 12.5% + 15% > + 15%
No Failed Audits (Regulatory, EHS, Financial) and Government Actions or Market Recalls Pass all audits and no market actions ● Failed one audit ● One or more market/government actions ●
Teams D – Marketing, Accounts management and Operations Team A – General Management C – Finance, and Nutrition sales I – Medical D – Operations , Regulatory, Nutrition sales, and Finance Team A – General Management C – Marketing I – Nutrition sales
9.1.4 Learning and Growth Perspective Objectives
Dashboard ● Meets Expectation ● Alert ● Below expectation
Execute structural organization with new key positions to support growth for the company (a) Finance Personnel for Commodity (Milk) Hedging and Forex Swaps (b) Additional Personnel on HCP coverage (c) Additional personnel for plant additional line Personnel Performance is meeting desired expectations
New structure as per timeline
D –Human Resources and Key Senior Managers of affected Functions ● Restructure and fill new positions at Management Level completion A – General Management by April 2008 and Ranks Personnel by June 2008. ● Plus two months based on target ● More than two months based on target
No. of Personnel with meeting expectations rating in their performance appraisal More than 95% ● 90 to 95% ● < 90% No. of Critical Personnel retained ●
Talent Retention of Key and Critical identified personnel. Execute all talent development programs (Promotions, Lateral Transfers, Training Needs, Expanded Job Roles)
Responsibilities DACI D – Driver A – Accountable C– Consulted I – Informed
D –All Managers A – Human Resources C – R&D I – All personnel through Performance Appraisal System
●
D – Human resources and all Managers A – General Management
●
D – Human resources and all Managers A – General Management
More than 95% ● 90 to 95% ● < 90% No. of actions executed per plan.
● ●
More than 95% 90 to 95% < 90%
9.2. Contingency Planning
9.2.1. Downside – Potential Events
Key Concerns
Action Plans
Current Global
Determine extent and impact on market and industry growth.
Credit and Financial Economic Crisis to
Identify plans to reduce impact if high capitalized investments
extend beyond the
need to be deferred. Prioritize based on 80/20 rule based on
12 to 18 month
product value and high probability of success.
period. The possibility of outsourcing some least priority products shall be explored as well. Accusation of
Launch media campaign of Company A’s thrust on product
unethical business
quality and safety, and the support of the company to breast
activities by Breast
feeding.
Milk Advocates to Infant Formula
Communicate scientific studies done by renowned outside
Producers
experts on the assurance of product quality and safety of infant formula. Continue to support and promote to the public that the company supports breast feeding. Form alliance with other competitors in the industry to negate and defend the industry of infant formula producers.
Sudden Increase of
Determine price strategy increase needed to absorb
Raw Material Prices
additional costs and possible downsizing of select SKUs to
(Milk Powder in the
soften the impact of high prices to the consumers.
Global Market) Execute plan relative as well to the pricing initiatives of the competitors. Major government
Ensure company is operating in boundaries and in
actions (regulations)
compliance with regulations and standards set by mother company in the field of finance, marketing and operations.
Creation of Crisis Management Team to handle media coverage and public relations communication. Executive Committee Training on handling Crisis Management.
9.2.2. Upside – Potential Events
Positive Turnout
Action Plans
Peso to appreciate
This would mean higher potential of operating margins due to
its value due to
less COGs would mean more fund allocation for various
strong remittance of
functions.
Filipinos and strong currency.
Increase investments in Promotion and Advertising, and R&D since the gains in the working capital can be used for immediate expenses of Promotion and Advertising.
- End of Paper -
X. REFERENCES 1. An Introduction to Strategic Management, Fred David, 11th ed 2007 2. Securities and Exchange Commission Audited Financial Statements for Company AA, Company B and Company C Philippines. 3. Higher consumer spending boosts Personal Consumption Expenditure, www.ncsb.com.ph, Fourth Quarter 2007 report 4. http://www.economist.com/countries/philippines/ October 22, 2008 5. www.worldbank.org.ph , November 2008 update 6. Consumer Expenditure on FBT to Shoot 7.5% in Philippines , www.prlog.org June 2008, 7. Central Bank of the Philippines - online statistics 8. Economists see further peso slide, Philippine Daily Inquirer, September 17, 2008 9. Philippine Peso to Slide 14 Percent Against Dollar, HSBC Says, www.bloomberg.com, Jun 2008 10. Philippine Population Would reach over 140 M by the year 2040, National Statistics Office, Apr 2006 11. www.cia.gov/library/publications/the-world-factbook/geos/rp.html updated as of Oct 23, 2008 12. Functional Ingredient Forecast, Dairy Foods, Berry, May 2006 13. Ingredients for the World Infant Formula Market, www.ubic-consulting.com, Jun 2008 14. Yu Le (8 October 2008). "China milk victims may have reached 94,000", Reuters. 15. Milk Crisis –Special Feature, Philippine Daily Inquirer Section Oct 28, 2008. 16. www.congress.gov 17. Micro organism A and other microorganisms in powdered infant formula Food and Agriculture Organization World Report , 2004 18. Company C Philippines earmarks P1.3 B for plant expansion, Business World, Alave, March 2, 2007 19. President leads groundbreaking of Company B’s $80 M expansion plant, www.news.ops.gov.ph, Feb 2007. 20. Asia’s Top 1000 Brands, Media: Asia's Media & Marketing Newspaper; 9/22/2006 21. National Dairy Authority Website, 2007 data 22. Business.timesonline.co.uk, June 2007 23. Outlook for dairy growth www.nab.com.au, Sep 2008 and June 2008 reports 24. Agricultural data website in New Zealand www.agridata.co.nz 25. Ministry of Agriculture and Forestry, New Zealand www.maf.govt.nz 26. Supplier A Sees Future(s) In Milk Powder, www.forbes.com July 2008 27. Infant Formula: Second Best but Good Enough, www.fda.gov, June 1996. 28. The youngest market: Baby Food Peddlers Undermine Breastfeeding, Allein and Yeong, July 2008 29. www.nda.gov.ph, National Dairy Authority website Oct 2008 30. The Market Research Company Retail Audit 31. Guthrie, et al, Use of infant formula samples and breast feeding among Philippine Urban Poor, 1985 32. Company B websites: www.Company B.com, www.Company B.com.ph 33. Company C Websites: www.Company C.com, www.Company C.com.ph 34. BFAD health advisories http://www.bfad.gov.ph/Advisory/BA%202007-004.pdf 35. Company C lowers price, Businessworld, May 2008 36. http://www.lib.washington.edu/BUSINESS/RATIOS/ratios_formulae.html 37. EDS Awarded $715 Million Contract for Parent Company AA- Information Services www.reuters.com December 10,2007
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