Strategic Management 1

STRATEGIC MANAGEMENT

School of Business Enterprise

Masters of Business AdministrationHospitality Management

(HM 117)


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Lecturer Dr. Kumaran RajaramModule Coordinator Stuart GrahamSubmitted By Amrita ShenoyMatriculation No 09008482Submitted on 13-05-2011Word Count 4075

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Table of Contents

STRATEGIC MANAGEMENT.........................................................................................4EXECUTIVE SUMMARY.................................................................................................51) INTRODUCTION.........................................................................................................6

1.1 INDIAN DARIY INDUSTRY..................................................................................61.2 INTERNAL FACTORS..........................................................................................71.3 EXTERNAL FACTORS.........................................................................................9

2) THE CURRENT MARKET POSITIONING OF AMUL.........................................133) PROBLEM ANALYSIS..............................................................................................15

3.1 STRATEGY...........................................................................................................163.2) AMUL’S PLANS TO GO GLOBAL.................................................................22

4) PRODUCTION OUTCOME.....................................................................................235) CONCLUSION...........................................................................................................24References.....................................................................................................................25

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EXECUTIVE SUMMARY

In this assignment the main highlight is about a Dairy Cooperative AMUL, in western India that has developed a successful model for doing business in large emerging economy. It has been primarily responsible, through its innovative practices, for India to become world’s largest producer of milk. This draws various lessons from the experiences of AMUL that would be useful to cooperatives globally as well as firms that are interested in doing business in large emerging markets like India and China.

Many of these economies have underdeveloped markets and fragmented supply bases. Market failures for many of these small producers are high. On the other hand, the size of both, markets and the suppliers is large. As a result, firms that identify appropriate business strategies that take into account these characteristics are more likely to succeed in these markets. The following are some key message from AMUL’s success: firms in these environments need to simultaneously develop markets and suppliers to match demand and supply planning, develop or become a part of network of producers (i.e., cooperatives in this case) to obtain scale economies, focus on operational effectiveness to achieve cost leadership to enable low price strategy. In addition, a central focus to bring the diverse element together and a long-term approach are required.

This report contains how Amul was formed , its measures of success in terms of sales turnover and identifying the problems faced by Amul and the strategies used, the reason for such a success after implementing the strategies , the weaknesses and threats associated. This report has also highlighted Amul’s foreign ventures.

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1) INTRODUCTION

Strategic Management may be defined as the tool which is been used by a company to define their operation, image, values, goals, objectives, roles and responsibilities, timelines etc. Strategic Management involves integrating activates of the various functional sectors of a business such as marketing, sales, production etc to achieve organizational goals. ( Hint, et.al.2009).

1.1 INDIAN DARIY INDUSTRY

The Dairy industry in India has quadrupled its milk output of 84.6 million tons in2001. It has achieved the strength of a producer-owned and professionally managed cooperative system, despite the fact that a majority of dairy farmers are illiterate or semi-literate and run small marginal operations, for many dairy farmers, selling milk is their sole source of income. More than ten million dairy farmer belong to 96000 local dairy cooperative,.Which sell their product to one of 170 milk producers cooperative unions which, in turn, are supported by fifteen state cooperative milk marketing federations.(Sharma and Yadav,2003)

Amul was setup in the year 1946, is a dairy co-operative in India .It is a brand which is managed by an cooperative society which is Gujarat Co-operative Milk Marketing Federation Ltd.(GCMMF).Which is been jointly owned by 2.8 million milk producer in Gujarat. Amul has established itself as a uniquely appropriate model for rural development. Amul has spurred the White Revolution of India, which has made India the largest producer of milk and milk products in the world It is also the worlds biggest vegetarian cheese brand

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Amul deal with a wide range of milk products like Amul milk, Amul butter, Amul milk powder, Amul Ghee, Amul Spray, Amul Cheese ,Amul Chocolates, Amul Srikand, Amul Ice Cream, Nutramul and Amulya which make it a leading food brands in India.(Amul, 2010)

(Source: created for the assignment)

1.2 INTERNAL FACTORS

Marketing decisions are guided by the overall objectives of the company for now it is important to understand that all marketing decisions, including price, work to help achieve company objectives. We have to understand our business internal strength and weaknesses. For example the main advantage of Amul is its wide range of product. Were as its weakness is Amul deals with highly perishable products. Since Amul has a lot of competition in the market

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the most effective tool which can be used is SWOT (Strength, Weakness, Opportunities, and Threats) analysis which will help us to know the companies strength and weaknesses over its competitors. The main competition for Amul is Mother Dairy, Nestle, Britannia and other Private Dairies.

FIGURE 1 SWOT ANALYSIS CHART

Mother Dairy: Strength Technical Manpower Demand is high Margin of profit is very

minute

Strong Brand Image. Quality Cultural Preference.

Mother Dairy: Weaknesses Problem in

Distribution Perish ability Competition

Nestlé: Strength Growing Sales and Profit Aggressive Marketing Quality Product Strong Supply chain system.

Nestlé: Weakness Target Market is Upper

Middle class and high class Competitors Economic slow down has

slow down demand

Private Diary: Strength Absolutely Optimistic

Demand Profile Potential Target market size

Private Diary: Weakness Perish ability Lack of control over the

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is larger. More than 80%milk is

produced in unorganized sector.

yield Problem in Distribution

Amul has always ensured that the product mix and the sequence in which Amul introduces its product is consistent with the core philosophy of providing milk and its milk products at an affordable price.(Bhushan,2010). Amul have a brand position which is the perceived fit between a product and the needs of the target market , relative to competitive product offering.(Peter,2007).

1.3 EXTERNAL FACTORS

External Factors which are those factors which help to identify a companies opportunities and threats a company has to face in the international environment. According to( Kotler et al. 2004)it is understood that there is a broad classification of the external environments, which it refers to as the macro-environment, as listed below:

demographic environment economic environment natural environment technological environment political environment

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cultural environment

POTERS FIVE FORCES will help us in a better understanding of the external situations which will helps to understand the market for Amul

Figure 2: Porter’s five for

Source: Porters Five Force Modle.2010. [Online]. Available at: http://www.google.com.sg/imglanding?imgurl=http://www.themarketers.in [Accessed on December 11 2010].

With the identification of the limitations of the products, it is necessary to analyze competitive forcers in the environment in order to identify opportunities and threats. Porter’s five forces help to do the above mention analysis.

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1. The risk of entry by potential competitors Potential Competitors is those companies, which are not in the market at present but can make entry if they require. In the current situation Amul have lot of existing competitors like Mother Dairy, Nestle, Private Sector Dairies. Amul will have to take steps for preventing the entry of potential Competitors which are private dairies and other companies which are already popular and are planning to launch milk and milk products. Amul should take steps in order to safeguard its market share and to generate profit. The prevention of potential company will help the existing company to have economies of sale as they will have to increase the production and at the same time it would help in maintaining the brand loyalty as the choices available would be less.

2. The Intensity of Rivalry among established Companies within an Industry

Intense Competition in today’s fast-paced domestic markets has caused massive reconstruction of the industries and business Dairy industry is one such industry in India which is growing rapidly and there are a number of dairies Co-operatives and private company’s competiting to get market threshold (Kerin et al. 2009).

The competitive struggle between Amul and Mother Dair in the Dairy industry is to gain market share from each other. The Competition is on the bases of Price, Product Design, Advertising and Promotion spending, Direct Selling effort and support. Since there has been intense rivalry between Mother Dairy, Amul, Nestle and Britannia etc…

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this has caused lowering of prices and in result hike in cost of production. Intense Competition is treat to profitability.

3. The Bargaining Power of Buyers

The power of buyer is the impact that customers have on a product. In market were there are lot of suppliers and one buyer the buyer sets the price .The importance of each individual buyer to your business, the cost to them of switching from your product to those of someone else, and so on. The customers who are loyal to the brand will stick to the same brand and they will be major contributors to the price. (Adam and Armstrong 2008)

4. The Bargaining power of suppliers

The Bargaining Power of suppliers refers to their ability to raise price and/or reduce the quality of good and services. (Peng 2009). Supplier focus relative to buyers is large. There are many companies competing for the supply of milk products and few buyers. Supplier products are not differentiated. In general supplier products do not have high switching costs and therefore buyers are free to choose between many suppliers. Power of suppliers in this industry is low.

5. The closeness of substitutes to the Product

The treat that Amul competitors like Mother Dairy, Nestle, Britannia act provides in relation to the price has an impact on the sales of Milk

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and milk products. , as customers can easily switch to substitute products which are being available in the market causes a great threat. In above the context the company has to pay the price of switching such as redesigning the product and evaluating the strategies that can help to attract the customer. The greater the switching cost the lower the chances of the customers to change its brand.

2) THE CURRENT MARKET POSITIONING OF AMUL

Amul has a very strong brand appeal, wide product portfolio, Amul is Asia number one dairy brand which has well-spread distribution network, and aggressive marketing strategy. Amul has always been proactive in maintaining its leadership position in the dairy products segment by launching new products, research and development initiatives, and innovative sales strategies to enhance customer satisfaction (Kotler, Armstrong, Wong and Saunders. 2008). .Amul has been the leading market leader for products like ghee and butter and been owing a market share of 85% .

Amul’s turnover has increased at a healthy compound annual growth rate of 23 % over the past four years, on the back of its superior market position. Amul, being a co-operative, has strong control over its procurement costs; it has the flexibility to fix procurement costs based on the profits earned at the end of the year. Moreover, GCMMF has a tough financial risk profile, supported by steady growth in the dairy market. The main advantage of Amul is that it maintains its quality at the same time make it affordable. ( Karmakar and Banerjee,2006).

Over the years, Amul has come up with many products. There has been product line extension as well as product category extension with

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which Amul has been successful in satisfying its customers with various needs.

With the help of BCG analysis we will be able to place Amuls product.

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Source: Created for the assignment.

With the use of BCG analysis we can know which product is the most importance to the brand Amul.

Star Product are the one that generates money Question mark is a product with small market share in a growing

market therefore referred as problem child. Dog a unit with no future growth as its market is matured. Cash Cow is a premium product as it has high market share in a

fast growing market.

3) PROBLEM ANALYSIS

From beginning with the formation of its first milk cooperative, AMUL network has sustained an impressive growth rate for more than 50 years establishing in the growing of Indian dairy industry as the world’s leading milk producer. However, it is uncertain whether AMUL’s strategy and practices that have worked well for long can maintain this growth route in a changing environment with globalization and increased competition. This part of the assignment describes some of AMUL’s challenges that need to be overcome. However, in the new rising environment, several challenges have become evident and AMUL’S network needs to evolve positive approach to respond to these threats. First, competitors are cutting into milk supply by offering marginally higher procurement prices thereby challenging the practice of provision of services for long-term growth in lieu of higher prices in the short-term. Second, for a section of its membership, dairy activity is a stepping-stone for upward mobility in the society. Typically, such members move on to other occupations after raising their economic position through milk production. As a result, AMUL

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is unable to realize the full benefits of its long-term strategy, and finds new members (mostly marginal farmers) to replace those who have higher potential and capacity.(Chandra and Tirupati,2003)

AMUL is facing problem on establishing a network of firms in order to overcome the complexities of a large yet fragmented market like those in emerging economies by creating value for suppliers as well as the customers. AMUL has led the milk dairy revolution in India that has now emerged as one of the largest milk producers in the world.

3.1 STRATEGY

In order to determine which strategy is best suited for the problem faced Amul the Grand Strategy Matrix is being used ,which helps to decided which is the most appropriate or which strategy should be selected in order to solve the problem. This is done by evaluating internal and external success factors .The following are the problems faced by Amul.Figure 3: Grand Strategy Matrix

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Source: Grand Strategy Matix.2010. [online].Available at: http://mba-lectures.com/management/strategic-management/1129/grand-strategy-matrix.html. [Accessed on December 11 2010].

AMUL’s business strategy is driven by its twin objectives of over coming the challenges faced by the organization like (i) long-term, sustainable growth to its member farmers, (ii) value proposition to a large customer base by providing milk and other dairy products a low price (iii) to make proper use of its funds.Its strategy, which evolved over time, comprises of elements described below.

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1. Simultaneous Development of Suppliers and Customer ROMs: When Amul was first formed, the cooperative should have realized that continued growth for the long-term was conditional on matching supply and demand. Further, given the primitive state of the market and the suppliers of milk, their development in a synchronous manner was significant for the continued growth of the industry. The organization also should recognize that in spite of the poor infrastructure in India, such development could not be left to market forces and realistic interventions were required. Accordingly, AMUL and GCMMF adopted a number of strategies to assure such growth. For example, at the time AMUL was formed, the vast majority of consumers had limited purchasing power and was value conscious with very low levels of consumption of milk and other dairy products. Thus, AMUL adopted a low price strategy to make their products affordable and guarantee value to the consumer. The success of this strategy is well recognized and remains the main plank of AMUL's strategy even today. The choice of product mix and the sequence in which AMUL introduced its products is consistent with this philosophy. Beginning with liquid milk, the product mix was enhanced slowly by progressive addition of higher value products while maintaining desired growth in existing products. Even today, while competing in the market for high value dairy products, GCMMF ensures that adequate supplies of low value products are maintained. The supply side, as mentioned earlier, the member-suppliers were typically small and marginal- farmers had severe liquidity problems, were illiterate and had no prior training in dairy farming. AMUL and other cooperative Unions adopted a number of strategies to develop the supply of milk and assure steady growth. First, for the short term, the procurement prices were set so as to provide fair and reasonable return. Second, aware of the liquidity problems, cash payments for milk supply was made with minimum of delay. For the long-term, the Unions followed a multi-pronged strategy of education and support. For example, only part of the surplus generated by the Unions is paid to the members in the form of dividends. A substantial part of this

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surplus is used for activities that promote growth of milk supply and improve yields. These include provision of veterinary services, support for cold storage facilities at the village societies etc. In parallel, the Unions have put in place a number of initiatives to help educate the members. (Bowonde et .al, 2011)

The dual strategy of immediate development of the market and member farmers has resulted in parallel growth of demand and supply at a steady pace and in turn assured the growth of the industry over an extended period of time. (Mehar,2007)

2. Cost Leadership: AMUL’s objective of providing a value proposition to a large customer base led naturally to a choice of cost leadership position. Given the low purchasing power of the Indian consumer and the marginal optional spending power, the only possible option for AMUL was to price its products as low as possible. This in turn led to a focus on costs and had significant implications for managing its operations and supply chain practices. For example the company has been very aggressively marketing its cheese product. When the low cost pizza was introduced , AMUL used this strategy were to increase sale of one product cheese they reduced the cost of another product pizza. (Shah,2009)

3. Focus on Core Activities: In spite of Amul having a small beginnings and limited resources, it became clear quite early that AMUL would not be in a position to be an integrated player from milk production to delivery to the consumer. Accordingly, it has to chose a strategy to focus on core dairy activities and depend on third parties for other complementary needs. This viewpoint is reflected in almost all phases of AMUL network spanning R&D, production, collection, processing, marketing, distribution, retailing etc. For example, AMUL focused on processing of liquid milk and conversion to variety of dairy products and associated research and

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development. On the other hand, logistics of milk collection and distribution of products to customers was managed through third parties.

However, it will play an important role in making support services available to its members wherever it found that markets for such services were not developed. For example, in the early stages, its small and marginal member farmers did not have access to finance, veterinary service, knowledge of basic animal husbandry etc. Thus to assure continued growth in milk production and supply, AMUL actively required and worked with partners to provide these required services. In cases where such partnerships could not be established, AMUL developed the necessary capabilities and provided the services.

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4. Managing Third Party Service Providers: Well before the ideas of core competence and the role of third parties in managing the supply chain were recognized and became fashionable, these concepts were practiced by GCMMF and AMUL. From the beginning, it was recognized that the core activity for the Unions lay in processing of milk and production of dairy products. Accordingly, the Unions focused efforts on these activities and related technology development. Marketing efforts (including brand development) were assumed by GCMMF. All other activities were entrusted to third party service providers. These include logistics of milk collection, distribution of dairy products, sale of products through dealers and retail stores, some veterinary services etc. It is worth noting that a number of these third parties are not in the organized sector, and many are not professionally managed. Hence, while third parties perform the activities, the Unions and GCMMF have developed a number of mechanisms to retain control and assure quality and timely deliveries . This is particularly critical for a perishable product such as liquid milk.

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5. Financial Strategy: AMUL’s finance strategy is driven primarily by its desire to be self-reliant and thus depend on internally generated resources for funding its growth and development. This choice was motivated by the relatively underdeveloped financial markets with limited access to funds, and the reluctance to depend on Government support and thus be obliged to cede control to bureaucracy. AMUL’s financial strategy may thus be characterized by two elements: (a) retention of surplus to fund growth and development, and (b) limited/ no credit, i.e., all transactions are essentially cash only. For example, payment for milk procured by village societies is in cash and within 12 hours of procurement (most, however, pay at the same time as the receipt of milk). Similarly, no dispatches of finished products are made without advance payment from distributors etc. This was particularly important, given the limited liquidity position of farmer/suppliers and the absence of banking facilities in rural India. This strategy will strongly help AMUL implement its own vision of growth and development. It is important to mention that many of the above approaches were at disagreement with industry practices of both domestic and MNC competitors of AMUL.

3.2) AMUL’S PLANS TO GO GLOBAL

In spite of the wide market that Amul has in India it is been taking steps to its expand it market abroad. Were Amul has been quite successful in international market by achieving a 34%market growth (Mathur and Mathur,2009). Amul has already introduced its products to countries like U.S.A, Nepal South Africa, Kenya, Bhutan, Bangladesh, Thailand, Australia, Singapore and gulf countries etc.Amul is also planning to introduce its products to countries like Russia, UAE, Japan and Srilanka. Amul has made agreement with international retail chain Wal –Mart to sell Amul ‘s product

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through its outlets under the brand name Amul itself. Amul has also been planning to make tie ups with international company to introduce new products in the market .For example Amul has made an agreement with Glaxo were Amul will pair up with this company in order to produce and launch baby food which will be a add on to Amul product list..

4) PRODUCTION OUTCOME

Using the Delphi Method of forecasting that helps in evaluating the future trends based on a series of questioning repeatedly by experts for suitable information and decision making.(Thomas et al, 2010) Using the method of prediction the main advantage in setting up small distribution units with in each district helps in reducing the fuel cost which would be much higher when it is to be taken to a common place for processing.

The outcome is to save the profits by cutting minimal fuel costs. Also the initial costs which has to be incurred for setting up the distribution units would be high as each district will have one processing unit increasing the expenditure and other important costs.

Second evaluation is Amul has to see to it that the Member farmers are being provided with all the AMUL’s journey towards excellence is marked by some critical understanding of the business environment in large emerging economies like India where markets have to be developed by combining efficiency related initiatives with increasing the base of marginal suppliers and consumers. It combined market and social development in an emerging economy. It recognized the inter-linkages between various environments that governed the lives of marginal milk farmers and the unmet needs of consumers. It also

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changed the supply chain paradigm in order to reduce the cost to the consumer while increasing the return to the supplier.

5) CONCLUSION

The market for milk and milk product is more customers oriented than Supplier Centered as a result requires a close look at customer’s needs and quality .Due to the strong competition from its competitors there has been a variation on the sale of Amul’s Products.(India News , 2008) In this report various Parameters on which sale of Amul depends which were been discussed..

Environments with underdeveloped markets and suppliers as in the case of AMUL add one more aspect of difficulty relating to the relative pace of growth of these two areas. Through its pricing strategy, AMUL has been able balance the growth in markets and suppliers and has achieved some degree of management. Otherwise, gaps between demand and supply would require balancing strategies.

Development of suppliers likewise requires nurturing with a long-term perspective. It is interesting to note that this was achieved by AMUL through a process of education and social development activities - activities that are not usually considered to be standard business practices. This type of ‘out of the box’ vision is essential for developing innovative mechanism in new, unfamiliar environments where building of relationship with consumers goes much beyond marketing messages and useful product offerings.

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The example of Amul is the informative example for multinational companies and others contemplating operations in emerging markets by taking advantage of the local small and medium enterprises. In such cases large businesses are built by forging linkages with these enterprises thereby changing the boundaries of the entering firm. Such a partnership reduces the operational risk while providing a credible source of understanding the behavior of the consumer through the experience of partners. It also provides operational flexibility and makes the network responsive to changes within and outside. To be effective it is important that decision-making be decentralized to the extent possible, with appropriate coordination mechanisms to ensure consistency in the system. The leadership of such organizations have always been larger than life and have been seen to play an important role in the building of the society even today.

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Bhusan,R.2010.AmulCEO,MD Put in Papers .The Economic Times[online] .Available at :http://economictimes.indiatimes.com [accessed 04-03-11].

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