Strategic Management Assignment 1 Final PDF

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1) Background information on The A2 Milk Company Limited The a2 Milk Company Limited produce and distribute dairy and infant milk formula (IMF) products. Founded in 2000 by Dr. Corran McLachlan, who discovered the effects of A1 protein free milk. Thus, their competitive advantage was born, putting them at the premium end of the market. A2M is run by Chairman David Hearn, CEO Jayne Hrdlicka and 180 employees with operations Australia, New Zealand, the United Kingdom, United States and Asia. (Ibisworld, 2018) A2M’s major product line includes fresh milk, milk powder and their highly successful A2M Platinum infant formula line, all sold through the 6 major Australian supermarkets. As of June 2018, A2M’s revenue stands at AU$843m, an increase of 68% from the previous year, and they hold a dominating 32% market share in the Australian IMF market (a2 milk annual report, 2018). Their IMF sales revenue was AU$695.9m for 2018, posting an increase of 84% from the previous year (a2 milk annual report, 2018). In comparison, Bellamys Organic, a competitor in the IMF market who supplies organic infant formulas had a revenue of AUD$ 328.7M, an increase of 13% from the previous year.

1) Macro-Environment Analysis PESTEL analysis, provides the rough idea about the conditions and situation of a company’s macro environment (Yuksel 2012)

Political Poor relations between Australia and Russia exists due to the sanction on Australian dairy. This sanction prevents the exportation of Australian dairy products to Russia (Agriculture.gov.au, 2019), causing an imbalance in the global milk price, therefore having an immense effect on Australian dairy farmers, causing 1 in 5 farms to consider shutting down (The Feed, 2019). This presents a medium threat for the IMF market as many players depend on local farms for raw milk. Producers may be pressured into paying farms more in order to ensure sustainability thereby increasing their cost of business. Manufacturers need to also address the possibility of a shortage of suppliers and make alternative arrangements of supply

Economic The Australian infant nutrition sector, worth $780m in annual sales, has been growing at a compound rate of 17.5 percent annually since 2008 (Belldirect.com.au, 2019). Global value of IMF is predicted to reach US$62.5 billion by 2020. The participation rate of women in the Australian workforce is 74 percent as of December 2018 (WGEA Data Explorer, 2019), which is a key driver for IMF sales, as majority of Australian woman are either employed or looking for employment. They would be less likely to breastfeed and more likely to purchase formula. These factors present a high opportunity for players in the IMF market for increased growth and sales. Manufacturers should keep this information in mind and devise strategic plans to invest in research and development, so as to give consumers better choices. Social Chinese nationals are buying large amounts of Australian IMF for resale in China (ABC News, 2019). Due to the milk scandal of 2008, Chinese parents have been increasingly wary of Chinese IMF’s (Zhou and Wang, 2011) and prefer to purchase more expensive but reliable products from Australia. This caused supermarkets to limit purchases to 2 tins per customer, due to shortage of supply for local Australian families (ABC News, 2019). This presents a high opportunity for IMF producers, as it is a sign of consumer confidence of their products overseas. They should strategically devise plans of expansion, while ensuring sufficient supply locally. Technological Technology is constantly improving, and as a result A2M exists. Abbott Limited has successfully included Human Milk Oligosaccharides (HMOs) in their Similac Pro-Advance IMF, thereby offering a product which is more consistent with breastmilk (Abbott Laboratories, 2019). Continued success in such research will prove beneficial for IMF producers as they will be able to gain a larger consumer base. Key players should invest heavily in research in order to stay relevant and competitive. Thus, it presents a high opportunity for the IMF market.

Environmental Carbon tax is an initiative by the Australian government aimed to curb greenhouse gas emissions, thereby reducing the effects of climate change. The tax is implemented on the top 500 producers of carbon emissions, which do not include dairy farms, however increased cost of electricity and fertiliser does directly affect farmers. Thereby causing an increase expense vof about $7,000 yearly (Dailytelegraph.com.au, 2019). This is a medium threat as IMF producers need to be aware of this issue as it may cause supply disruptions, which would affect their output and cause loss in sales. Legal IMF manufacturers may voluntarily sign the Marketing in Australia of Infant Formulas (MAIF) agreement, which restricts marketing of IMF for infants up to 12 months old. Volunteers’ agree to inform consumers of the benefits of breastfeeding and risks of using IMF (Health.gov.au, 2019). Thus, preventing further decline of breastfeeding in Australia. 14 manufacturers have signed up. Recommendations for amendment to the agreement to account for new forms of marketing like social media have been given (Health.gov.au, 2019). This presents a low threat to the IMF manufacturers as they need to ensure all their future marketing campaigns follow specifications set out in the agreement as non-compliance may be damaging. Macro-environment analysis of the IMF industry shows potential growth in the future due to high opportunities available such as economic potential, social and technological benefits. However, threats such as environmental and legal risks need to be considered. IMF companies should strategize plans according to these threats and opportunities. 2) 5 Forces Analysis The five forces analysis by Michael Porter, first released in 1980, is used to define the structure that shapes the industry and identify the rules of competition and the main reasons of profitability (Porter, 2008) Rivalry (Medium) Competitors are not equally sized, with small market share holders such as Bellamys, and larger companies such as A2M holding market shares of 32 percent. (A2 Milk Annual Report, 2018). Cost of doing business is high, A2M cost of sales account for 49.6 percent of their revenue (A2 Milk Annual Report, 2018), Differentiation between products in the market is

low as companies such as Nestle and A2M both offer A1 protein free formulas, and Abbott and Bellamy both produce organic formulas. However, as technology progresses, companies such as Abbot Laboratories make advancements and introduce products such as Similac ProAdvance which contain HMOs (Abbott Laboratories, 2019), which closely mimics actual breastmilk and increases their chances of gaining higher market share. Therefore, a medium level of rivalry persists in the IMF market.

Threat of Entry (Low) As mentioned earlier, there are high costs in the IMF industry, due to the manufacturing process having strict regulations of safety (Australia New Zealand Food Standards Code, 2008). Also, regulations regarding the marketing of infant milk is strict on companies who choose to volunteer under the MAIF agreement, thereby making marketing of products challenging and potentially costly. Gaining trust of consumers for the IMF industry would prove challenging as after the 2008 Chinese melamine scandal, (WHO, cited in Zhou and Wang, 2011). Therefore, the threat of new entrants in the market is low. Threat of Substitutes (Medium) Breast milk is regarded as the best form of nutrition for an infant (Binns et. al., 2009), however due to the rise in the number of women working in Australia, breastfeeding rates have gone down by 6 percent (Belldirect 2019) and are down to only 15 percent (Ama.com.au, 2019). However, as breastmilk is being heavily promoted by WHO and the government, it may affect the publics sentiment and cause change, thus threat of substitutes is medium. Bargaining power of buyer (Low) Major buyers are retailers and supermarkets. A2M currently has 32 percent market share (Belldirect 2019), and their sales have seen growth of 68.1 percent from the preceding year (Ibisworld 2018). Therefore the 6 major grocery store chains who carry A2M’s products have a low bargaining power, due to A2M Platinum’s highly sought-after nature. There is a shortage of A2M Platinum formula in the local Australian supermarkets due to the social phenomenon of non-local Chinese buyers in Australia, therefore the supermarkets cannot afford to switch to other brands or negotiate on price with A2M, as they would risk losing customers in the scenario A2M does not provide them with formula.

Bargaining power of supplier (Low) Key suppliers for IMF producers are farmers. Farmers do not have capital to go against manufacturers and integrate forwards by selling directly to consumers, they are dependent on the purchases of the IMF producers for survival. As the Agriculture department of Australia have said, farmers do not have control on milk prices they receive and are forced to accept prices given to them (what influences milk prices n.d.), therefore their bargaining power is low. A2M currently has 28 farms supplying them with A1 protein free milk (The a2 Milk Company, 2019), therefore they have a wide variety of suppliers, and do not depend on just a few. Thus, the bargaining power of suppliers is low.

In conclusion, organisations in the IMF market need to wisely decide on the strategy adopted as it may provide opportunities for increased growth in the future. From the 5 forces analysis conducted, the IMF industry is not attractive for new entrants due to the high cost required, the government regulations on food safety and due to strong current players in the market. However, A2m should take advantage of opportunities such as the increased interest in their product from Chinese buyers and do more research and development to provide better solutions for mothers who are unable or unwilling to breastfeed, so the infants may receive nutrition that is similar to actual breastmilk, thus A2M will be able to increase their market share. They should also watch the situation with Russia closely and tread carefully in their marketing efforts. The market is attractive for A2M as they have weak buyers and weak suppliers, also they have a very high in demand product.

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