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A Sample Strategic Management Paper

On
Company A

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Course Name

Submitted by:
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MBA Candidate
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TABLE OF CONTENTS
Executive Summary

1. Introduction

2. Research Design and Methodology

2.1. Research Design

2.2. Scope and Limitations

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. Porters 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. McKinseys 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 companys 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, consumers 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, governments
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 childrens 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 companys 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-1960s 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 Davids, 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 paper, 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
2

expected to grow by 4.8% . 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

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
Consumer Expenditure on FBT to Shoot 7.5% in Philippines , www.prlog.org June 2008,

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 Junes food
inflation rate was 16.5 %, the highest in the commodity category.
5

Central Bank of the Philippines - online statistics on inflation

10

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 HSBCs
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

http://www.economist.com/countries/philippines/ October 22, 2008

Central Bank of the Philippines - online statistics on foreign exchange
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
7

11

nation's trade deficit widens and foreign investors divest away local assets.
According to the report, locals also would have a preference 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
11

Philippine population would reach over 140 M by the year 2040, National Statistics Office, Apr 2006
https://www.cia.gov/library/publications/the-world-factbook/geos/rp.html updated as of Oct 23, 2008

12

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.
Theres 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
13

Functional Ingredient Forecast, Dairy Foods, Berry, May 2006

Ingredients for the World Infant Formula Market, www.ubic-consulting.com, Jun 2008

13

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

Yu Le (8 October 2008). "China milk victims may have reached 94,000", Reuters.

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 Governments 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

Milk Crisis Special Feature, Philippine Daily Inquirer Section Oct 28, 2008.

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 promotional 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,

16

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 BFADs coverage to determine and test melamine
and other food safety hazards concern.
Relevance: This bill will shape the food and specifically milk industrys 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

www.congress.gov

17

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 Childrens

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)

18

Fig 4-1 Market Growth of Milk Formulas in Value and Volume

Market Overview -Value (Php)

Market Overview - Volume (kg)

25,000,000

60,000,000

50,000,000

20,000,000

40,000,000

Total Children
Total Infant

kg

Php ('000)

15,000,000
Total Children

30,000,000

Total Infant

10,000,000
20,000,000

5,000,000
10,000,000

0
2005 2006 2007

YTD
June
07

YTD
June
08

0
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 Childrens
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
theres a substantial decline of total market volume by -6.3% compared to last years
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

19

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 childrens 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, Childrens 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) Childrens 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) Childrens 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 childrens 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 childrens 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 childs diet. As the infant
or child is younger, the influence of the mother or family is higher, and the same way

20

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 Professional, Big

Household
Businessman,
Head
Big Farm-owner,
Senior
Executive
Total
Household
Monthly
Income

A - More than
P50,001 and
up
B - P30,001 50,000

C (Middle Class)

D (Lower Class)

E (Extremely Low Class)

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

C1- P15,001 P30,000

C2- P8,001 P15,000

P3,001-P8,000

P3,000 or less

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. Childrens Milk (In Volume and Market Value)
The market segment of the Childrens 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

21

comparing it with Childrens 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. Childrens 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%

Infant Formula (S1 and

S2)
Children's Milk Formula
(S3 and S4)

4.1.4.2. Growth trends of the Main Segments

22

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 Childrens 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 childrens milk. Childrens
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 years market behaviour is the volume consumption of the
premium products for both infant and children segments with a negative value of -

23

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 Childrens Economy and Premium Sectors in terms of value despite a
shrinking volume. Premium category for Childrens 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

24

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 2008 to more spend in
stage 4 milk. Company Bs 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.

25

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

S3

Jan-May 2008

2007

Jan-May 2007

2006

Jan-May 2008

2007

Jan-May 2007

2006

Jan-May 2008

2007

Jan-May 2007

2006

Jan-May 2008

2007

Jan-May 2007

2006

Jan-May 2008

2007

Jan-May 2007

2006

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 though 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

26

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 customers 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

27

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.
Econom
y Infants
by Channel
Fig 4-5 Infant
Formula
by Channel
(source: The Market
Research Company)
100%

9%

8%

9%

14%

13%

12%

14%

14%

17%

18%

17%

46%

48%

48%

2006

2007

Y TD 07

90%
80%
70%

14%

60%

7%
11%
12%
17%

50%
40%
30%
20%

53%

10%
0%

Supermarket

Grocery/ CV

Drugst ore/ Dept

Sari-Sari St ore

YTD 08
M arket St all

28

Fig 4-6 Childrens

Milk by
S3 Economy
by Channel
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 childrens 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 childrens 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 childrens 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.

29

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. Porters Five Forces of Competitive Analysis
The milk formula industry which includes the infant formula and childrens 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.

30

Fig 4-6 Market Value Share of the Companies

40
% Market Value Share

Market Share

35
30
25
20
15
10

A
B
C
D
E
F

ar
M 05
ay
-0
Ju 5
l-0
Se 5
p0
N 5
ov
-0
Ja 5
nM 06
ar
M 06
ay
-0
Ju 6
l-0
Se 6
p0
N 6
ov
-0
Ja 6
n0
M 7
ar
M 07
ay
-0
Ju 7
l-0
Se 7
p0
N 7
ov
-0
Ja 7
nM 08
ar
M 08
ay
-0
8

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.

31

The nutritional milk industry data market (for childrens 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 theres
a decline of total market volume by -7.46% compared to last years 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 childrens
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.

32

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 Cs 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 facilitys 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
President in groundbreaking of Company Bs $ 80 M expansion plant, www.news.ops.gov.ph, Feb 2007.

33

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 Asias 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

Asias Top 1000 Brands, Media: Asia's Media & Marketing Newspaper; 9/22/2006

34

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 As 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
23
Outlook for dairy growth www.nab.com.au, Sep 2008 and June 2008 reports
22

35

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%)

2007-08
4175
4562

2008-09
3650
4275

%
change
(12.6%)
(6.3%)

Forecast last June 2008

World Price (US$)
Skim Milk Powder
Whole Milk Powder

The main driver of the downward trend of milk powder prices in the world market is
New Zealands milk production growth. The major source of dairy product exports is

36

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 dont 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 childrens 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

Supplier A Sees Future(s) In Milk Powder, Forbes.com July 2008

37

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

Infant Formula: Second Best but Good Enough, www.fda.gov, June 1996.

38

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 childrens
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
www.nda.gov.ph, National Dairy Authority website Oct 2008

39

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
companys 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 Poor29 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

Guthrie, et al 1985

40

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 firms major key players critical
success factors and its particular strengths and weaknesses in relation to each
companys 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 companys 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 Porters 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 worlds largest nutritional manufacturing
facilities. This is expected to be fully operational by late 2010 and will primarily supply
local market.

30

Websites of Company B USA and Company B Philippines www.Company B.com, www.Company B.com.ph

41

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 childrens 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

Websites of Company C HQ and Company C Philippines www.Company C.com, www.Company C.com.ph

42

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 companys 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 its operating in.

43

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)

44

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 CSFs 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.

45

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 As CSF Ratings

a. Company As 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 As 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 companys 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

46

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 As 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 As 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 As 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 companys 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 As Price Competitiveness (2)

47

Rationale: Among the three companies, Company A has the most number (6 out 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 Bs CSF Ratings
a. Company Bs 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 Bs 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 Bs 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

Source:http://www.bfad.gov.ph/Advisory/BA%202007-004.pdf

48

to dip down its shares from 34.7 points to 31 points (-3.7 points) from June 2007 to
November 2007.
d. Company Bs 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 Bs 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 Bs 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 Cs CSF Ratings
a. Company Cs Marketing and Promotion Capability (3)

49

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 Cs 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 Cs investments in the Philippines totaled almost Php 10 B as what was
discussed in the Porters 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 Cs Product Quality and Safety (4)
Rationale: No product recall in the Philippines for milk formula.
d. Company Cs 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.

50

d. Company Cs 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 Childrens 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 Cs 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 appendix 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 As ratings are as follows:

34

Company C-nutrition.com/media releases

35

Company B lowers price, Businessworld, May 2008

51

Company A
CRITICAL SUCCESS
FACTORS
Marketing and Promotion
Capability

Company C

RATING

SCORE

RATING

SCORE

RATING

SCORE

30%

1.2

1.2

0.9

Product Availability

20%

0.6

0.6

0.8

Product Quality and Safety

Health Care Professional
(HCP) Support

15%

0.6

0.45

0.6

15%

0.6

0.6

0.45

Product Innovation

10%

0.2

0.4

0.3

Price Competitiveness

10%

0.2

0.4

0.3

TOTAL

WT.

Company B

100%

3.4

3.65

3.35

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

52

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 Cs 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 Governments
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 As 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

53

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.

54

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 requirements
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 companys 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 Childrens 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 As childrens milk continues to dominate over Company Cs.
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
doesnt have a developed innovation to counter this move by Company C.

55

4.4.2 EFE Rating

Table 4-10 EFE Matrix

Opportunity

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%

0.39

Number of births to grow by 2.64% year on year

121,089

7%

0.13

110,088

6%

0.12

272,288

15%

0.59

111,200

6%

0.24

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 Cs increase in advertising campaigns,
media coverage & launch of Brand N1.
Total
Opportunities
Threats
Total

152,122

8%

0.17

103,874

6%

0.23

236,361

13%

0.26

311,361

17%

0.51

244,641

13%

0.40

1,840,945

57%
100%

1.55
2.78

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

56

market volume share compared to competitions 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 theres 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 milks 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 Cs 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

57

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

Yes

Is it aspirational?

Yes

Does it give clear

indication as to
when it should be
attained?

No

Why?
It states To be the leading provider of pediatric nutrition
products.

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.

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.

58

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 specificproviding 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..

59

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 the 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

60

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 Cs current proposition is not
compelling enough to build trial of new users versus the latest set of innovation from

61

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
Porters Five Forces) market share with slight increases. Key notes on the market
segments are: For childrens 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

62

In the aspect of childrens milk market, the marketing investments (strong media
presence and advertising campaigns) have been proven to be effective. Brand A
which is a Childrens 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 childrens 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 Cs 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

63

& 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, companys 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

64

Return on Assets (net income/assets)

0.50
Company B

ROA

0.40

Company C

0.30

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
Company C
Company A
Average

Year

1.00
0.80
0.60
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.

65

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

Days

80.00

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 Bs), 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

http://www.lib.washington.edu/BUSINESS/RATIOS/ratios_formulae.html

66

DAYS Receivables
100.00
90.00

Days

80.00
70.00

Company B

60.00

Company C

50.00

Company A

40.00

Average

30.00
20.00
10.00
2005

2006

2007

Year

With the data above on days receivable, Company As 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
R a ti o

Company C

2.00

Company A

1.50

Average

1.00
2005

2006

2007

Year

Company As 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

67

Fig 5-8 Liquidity Ratios (Current and Quick ratio)

Quick Ratio

Current Ratio
1.60

3.00

1.40
1.20

Company B

2.00

Company C
Company A

1.50

Average

Ratio

Ratio

2.50

Company B

1.00

Company C

0.80

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 Cs liquidity ratios are weaker than
the two pharmaceutical companies thus pulling the average down.
Nevertheless, Company As 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 companys
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

Company C

4.79

4.79

3.81

4.46

Company B

0.62

0.45

0.47

0.51

Average

68

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

69

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 competitors
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

70

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 McKinseys 7S Framework

71

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 companys 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

72

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

73

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 objectives 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.

74

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 McKinseys 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 companys 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 companys
strategy.
Examples of Values and Behaviors are Integrity, Being a Team Player, Developing
Human Potential, and Drive Results.
Evaluation: Helpful with Recommendations

75

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.

76

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 worlds 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

77

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 companys 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 worlds 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 firms 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.

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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.

79

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 companys 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 companys 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 peoples
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

80

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

81

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 companys 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 plants 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 and
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 companys 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 information 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).

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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)

OPPORTUNITIES - O

SO 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)

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)

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%).
WO STRATEGIES
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)
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)

83

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 Cs 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)

84

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)

85

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 governments
tightening regulations rate as +3 would somehow dent the industrys 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
Childrens 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

86

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 companys
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
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
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

Ratings
6
6
3
15
5

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
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.

-5
-5
-13
-3.25

-1
-1
-5
-5
-4
-6

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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

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

An Introduction to Strategic Management, Fred David, 11th ed 2007

88

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

II

III

Medium
2.0 to 2.99

IV

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 companys 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

89

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

90

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
1.
2.
3.
4.
5.
6.

Quadrant III
Retrenchment
Concentric diversification
Horizontal diversification
Conglomerate diversification
Divestiture
Liquidation

1.
2.
3.
4.

Quadrant IV
Concentric diversification
Horizontal diversification
Conglomerate diversification
Joint ventures

STRONG
COMPETITIVE
POSITION

SLOW MARKET 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
childrens milk formula business.

91

Fig 6-4 BCG Matrix

BCG Matrix
20.00%

Stars

Question Marks

Children's Milk
Formula , 1.000,
0.695

Infant Formula ,
0.344, 0.247
0.00%

Market Growth

10.00%

-10.00%

Cash Cows
1.000

0.800

Dogs
0.600

0.400

0.200

-20.00%
0.000

Relative Market Share

Name
Infant Formula
Childrens 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 childrens milk where direct advertising and promotion like the use of TV
commercials, and printed ads are permissible. Because of infant formulas higher
value, the gross profit margins and profitability of infant formula is higher than that of
childrens 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
Based on average CAGR of year from 2005 to 2007 value growth rates

92

leader, the companys 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 childrens milk formula business of the company is on the Stars quadrant. This
business represents the companys 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 the childrens 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 childrens 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

IE

GRAND

BCG

x
x
x

x
x
x

X
X
X

TOTAL
0
0
0
4
3
4
0
0
0
0
0
0

93

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
KEY FACTORS
WT.
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 Cs increase in advertising campaigns,
media coverage & launch of Brand N1 Brand N.
Total Weight
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

Market
Penetration
AS
TAS

Product
Development
AS
TAS

10%
7%

4
4

0.387
0.263

3
2

0.290
0.132

6%

0.179

0.239

15%

0.444

0.296

6%

0.181

0.121

8%

0.331

0.165

6%
13%

2
-

0.113
-

4
-

0.226
-

17%

0.677

0.507

13%

0.532

0.399

15%

0.600

0.450

15%

0.600

0.300

100%

94

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%

0.600

0.600

10%

0.300

0.400

10%

5%

0.100

0.200

10%

5%

0.150

0.100

10%

0.400

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.

95

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.

96

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 companys 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.

97

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

EBIT
Yearly Target
Incremental Increase (Year on Year)
Cumulative (Base 2008)
Income Projection (Php B)

2009
22%
22%
1.49

2010
14%
38%
1.69

2011
23%
71%
2.09

Given the growth rates, this is in line with the companys 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.

98

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.

99

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.

100

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 Cs 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

101

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

102

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.

103

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 competitors 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 childrens 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

104

+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

105

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
As 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

106

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

107

Cash generated from operations

Income taxes paid
Net Cash from operating activities

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

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

(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)

505,511
156,788
662,299

(366,170)
662,299
296,130

69,427
296,130
365,557

(62,638)
365,557
302,919

326,363

287,293

271,337

290,227

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
Cash, Beginning
Cash, End
Check and balance

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.

108

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

110

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 and 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

111

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.

112

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 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 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 penetration 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.

113

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 plant 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.

114

(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 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 been
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.

115

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.

116

9. Strategy Evaluation and Performance Metrics

A balanced scorecard is a process that allows a company to evaluate strategies 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

Increase in Revenues
vs. previous year

Total Revenues
>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

Responsibilities DACI
D Driver
A Accountable
C Consulted
I Informed
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

9.1.2. Customer Perspective

Objectives

Dashboard
Meets Expectation
Alert
Below expectation

Responsibilities DACI
D Driver
A Accountable
C Consulted
I Informed

117

Drive competitiveness
through strong
marketing activities
and restructuring of
value proposition of
select Brands
(SO1, ST2, ST1) in
Infant Formula and
Childrens 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

New capacity build up

through new powder
line in full operation by
December 2009

On Schedule per project timelines

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%

Responsibilities DACI
D Driver
A Accountable
C Consulted
I Informed
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
D Plant Team, QA Team,
and Engineering Teams
A Operations Director
C Finance and R&D
I Finance and Marketing

118

Business Plans
Improve Forecast
Accuracy through
process improvement

Compliance to
established systems
and enhance systems
improvement for
regulatory and
government
compliance.

Within Budget as per Business Plan

+ 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

Talent Retention of
Key and Critical
identified personnel.
Execute all talent
development
programs (Promotions,
Lateral Transfers,
Training Needs,
Expanded Job Roles)

Restructure and fill new positions

at Management Level completion
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
More than 95%
90 to 95%
< 90%
No. of actions executed per plan.
More than 95%
90 to 95%
< 90%

Responsibilities DACI
D Driver
A Accountable
C Consulted
I Informed
D Human Resources and
Key Senior Managers of
affected Functions
A General Management

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

119

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 As 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.

120

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 -

121

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 Bs $80 M expansion plant,
www.news.ops.gov.ph, Feb 2007.
20. Asias 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

XI. APPENDICES
Appendix 1 - Market Size 2005 to 2007 and June 2008
Appendix 2 - Market Shares 2005 to June 2008
Appendix 3 - Financial Statements of AA, and Key Competitors. (In 000 Php)
Appendix 4 Price Index Comparison of Key Competitors

ii