The Analysis of the Numico Company - Report Example

Strategies management Table of Contents Table of Contents 2 Strategic group 3 Porter’s Five Forces Model 3 Rivalry among existing players 4 Treat of substitutes 4 Threat of new entrants 4 Bargaining Power of Buyers 5 Bargaining Power of Suppliers 5 Competitive Rivalry 5 PEST Analysis 5 Internal Environment Analysis 7 Stakeholders 8 Value Chain Analysis 9 SWOT Analysis 9 Conclusion 10 Introduction Numico was established in the year 1896 by Martinus van der Hagen. The company changed its name to NUMICO NV in the year 1997. It has three separate divisions catering to baby foods, Clinical Nutrition and Research and Development. The company was acquired by the Danone group in 2007 after a 12.3 billion pound deal. Strategic group Numico operated in a highly competitive environment. The company’s target market was placed between the food market and the pharmaceutical market. The company faced huge competition from big as well as small players. The major competitors in the food segment for toddlers were large corporations like Nestle and Danone. On the other hand Numico faced competition from players like Ross Abbott, Bristol Meyers and American Home. Nestle is the market leader in the baby foods industry. The other market players in the baby food segment are DANONE, Hero and Squibb. Porter’s Five Forces Model Michael Porter devised a five forces competitive framework to understand the competitive framework of any industry. The five forces are as follows, 1. Rivalry among existing players 2. Threat of substitutes 3. Threat of new entrants 4. Bargaining power of buyers 5. Bargaining power of suppliers Rivalry among existing players Numico operates in baby foods and clinical nutrition segments. The company faces competition from small as well as large players. The competition is even more intense in the developed countries. The largest player in the baby foods segment is Nestle. Numico also faces competition from players like Bristol Meyers, Ross Abott, American Home, Hero and Squibb. There is also some stiff competition from the private label brands that compete on the basis of low cost targeting the value for money based market segment. These companies often displayed wild behaviours regarding their products. Treat of substitutes The increasing awareness of the people regarding their health requirements has led to the bolstering of the baby food industry. This factor is largely responsible for the reduction in the use of substitutes which are considered an unhealthier option. The world market is dominated by the US which has a 37 percent market share. Hence, substitutes have a relatively low power in the industry framework. Threat of new entrants The setting up of this type of industry requires huge distribution costs. Moreover the industry being in the health related sector hence a strong brand name is also very important in order to restore customer confidence in the product. A company which aims to start business in this sector also requires a huge capital base for setting up production units. This industry also requires considerable research and development activities which involves a huge financial cost. Since the industry is based on a health related sector which implies that there are strict government regulations which have to be adhered by the companies. All these factors increases the entry cost for a new entrant. Since most of the players operating in this segment are big names in the industry that have been operating for a while, these companies have acquired economies of scale which is one of the toughest entry barriers. All these factors show that new entrants do not pose a serious threat to the existing market players. Bargaining Power of Buyers Since there is a huge competition from major and well established players hence the buyers have a significantly high bargaining power. The customers resort to occasional brand switching as there are a large number of well-established brands operating in this industry. Bargaining Power of Suppliers Suppliers also have considerable bargaining power in this industry. The presence of numerous low cost private labels magnifies this problem. Competitive Rivalry The competitive rivalry is quite large in this industry segment with big and established players as well as small players competing with each other to grab a market share. Numico acquired a number of other companies in an attempt to increase its market share. In the year 1999 the company acquired General nutrition companies (GNC) of USA to mark its footprint in the largest market of the world. The company again acquired Rexall Sundown and Enrich International in the year 2000 to enhance its spread across the US market. An established brand name is very important in this industry as the product belongs to the health related category. This makes entry rather difficult for new players. Economies of scale, distribution channel management and high exit costs make the entry of new players rather difficult. PEST Analysis PEST analysis is composed of an analysis of Political, Economic, Sociological and Technical environment of a company. Political Factors As the product is related to the healthcare sector hence quality standards are very important for this industry. The quality standards are fixed by the governments of the respective countries. Moreover as Numico operates in different countries across the globe hence exchange rate fluctuations also play an important role in determining the company’s financial health. Economic Factors Baby foods and other clinical food industry are more pronounced in countries which have shown a high rate of economic development. The market for Numico’s products is mostly based in the developed regions of the world. However, developing countries like India and China offer tremendous opportunities to the company. Sociological Factors Sociological factors like culture and traditions also play an important role in this industry. The food habits of people in a particular region are largely influenced by the existing culture and traditions of a particular geographical area. The company must keep in mind the local sentiments of the people while exploring various markets. It can adopt a think global and act local strategy to make a market share. Technological Factors Research and development play a very important role in this industry. The industry requires constant product development to cater to the rising competition. Numico has a dedicated division towards research and development. Internal Environment Analysis Physical Resources Numico has its production units in various parts of Europe. Its acquisition of companies in US also increased the company’s physical assets. The company also had its research and development centres in US, Europe and Australia. The net monetary value of the company’s assets amounted to 3536 pounds by the end of the year 2005. Human Resources Numico employed over 250 full-time scientists most of whom had a doctorate degree. In addition the company had 10,516 active employees on its payroll. Financial Resources Numico reported a net profit of 201 pounds in the year 2005. Its capital and reserves stood at 680 pounds and the share price in the end of 2005 was about 34.90 pounds a share. Intangible Resources Numico had a dedicated research and development cell which employed more than 250 scientists. The company also had numerous patents under its name. Moreover the brand name of the company which it had acquired over the years served as its intangible resources. (Eppink, n.d.) Stakeholders Stakeholders of a company are those who are directly affected by the company’s policies and decisions. The stakeholders of Numico are composed of Customer, Supplier and the Shareholders. Customer satisfaction is the most important part of a company’s strategy. The company needs to constantly add value to the product offering in order to retain its customer base. The company has a dedicated cell which is constantly working on research and development. Shareholders are the owners of the company. The basic aim of the top management of a company should be to maximize the shareholder’s value. The share prices of the company have increased to $29.31 in 2006 from $15.50 a year ago. This highlights the commitment of the management of the company towards maximising the shareholders value. (Eppink, n.d.) Value Chain Analysis Figure 1. Value chain analysis Source- Nestle, No date The value chain of the industry is highlighted in the figure above. The company must try to move up the value chain by entering into new markets and by adopting integration strategies. It should also try to reduce its manufacturing costs so as to increase its operating profits. SWOT Analysis Strengths The brand name of the company, its dedicated research and development cell, its qualified and skilled workforce and the number of patents under the company’s name serve as its biggest strengths. Weakness The company is affected by the exchange rate fluctuations as it operates in different geographies across the globe. Numico’s products are largely dependent on the macroeconomic variables. Lastly the company markets products which have huge risks as regards to the vulnerability of the target groups. Opportunities A study by Global Business Insights shows that the total market for clinical nutrition will expand by about 8.2% a year. The US would remain the most lucrative market with 9.2% growth followed by Europe with 7.5% annual growth. (Global Business Insight, 2009) Moreover developing countries like India and China also offer tremendous growth opportunities for the country. Threats Exchange rate risk continues to be the biggest threat to the company apart form the competition form big players like Nestle in some product segments. Conclusion The analysis of the strengths and weakness of the company shows that the company can utilize its strengths in research and development to consolidate its position and to enhance its market presence. The company can pursue effective hedging policies to reduce the effect of the currency exchange risk. The environment analysis reveals that the company must effectively utilize its resources to gain competitive edge over its rivals. Numico can follow a market penetration and market development strategy to expand its business. It must also tap the tremendous growth opportunities from markets like India and China by entering into joint ventures or strategic alliances in keeping with the ‘think global and act local’ strategy. References Eppink. DJ. No Date. Royal NUMICO NV: nutritional supplements- wrong entry or wrong/untimely exit? Global Business Insight. No date. [Online] Available at http://www.globalbusinessinsights.com/content/rbcn0001m.pdf. . [Accessed on October 13, 2009]. Nestle. No date. Nestle Key Facts. [Online] Available at http://www.fmi.org/docs/sustainability/ValueChain_4_Betsy.pdf. [Accessed on October 13, 2009]. Bibliography Skrzeszewski. S. 2006. The Knowledge entrepreneur. Scraecrow Press. Read More