Using The Macro External Environment Analysis

Macro external environment here includes the factors such as issues related to politics, economical reforms and achievements, social behaviour, technological enhancements and inventions, environmental changes and environmental concerns and legislation and legislative changes. All these factors bear a significant effect on any industry and business. A business has take into consideration all such effects and then formulate its strategies and policies to work along with them and prosper.

PESTEL analysis tool helps in determining the effect of all such factors on an industry and businesses. With the help of PESTEL analysis we will be seeing the affects of such factors on Indian Bakery and Dairy Industry.

“PESTEL analysis is a technique for identifying and listing the political, economic, social, technological, environmental and legal factors in the general environment most relevant to an organisation.” (Boddy, D (2005). Management An Intoduction. 3rd ed. UK: Pearson Education. 88.)

Type of Factors

Effecting Factors

Political

Economical

Social

Technological

Environmental

Legal

Exemption on Customs on Sugar Raw Material Import

Shortage of Milk

Need for Healthy Eating Habits

Cloning of Livestock

Change in the Climatic Conditions

Raising the Norms for the Probiotic Food

VAT on Biscuits

Rise in Sugar Production and Duty Free Sugar Imports

Problems with Cloned Livestock

New Age Packaging

Removal of Import Duty on Dairy Products

Globalization

Incentives to Build Cold Storage Facilities

Requirement for Logistics

Political

Exemption on Customs Duty on Sugar Raw Material Import

Due to the shortage in the production of sugar the deadline for the exemption on customs duty on raw sugar imports has been extended by the government to April 1, 2011 (Dey, A & Jha, Dilip K (2010) Duty-free sugar imports extended till April 2011, Business Standard). Since sugar is a major input in the bakery, the price of sugar highly influences the price of inputs of the bakery industry. Exemption on customs duty will help in purchasing sugar at lower cost, which in turn will control the cost of production.

VAT on Biscuits

The VAT of 12.5% on Biscuits, being the only processed food item to attract such high VAT rates, will affect the pricing of the product (Bhushan, R (2009) Biscuit prices to rise by 10%, The Economic Times). Price of the biscuits might need to be increased due to the high VAT rates which may result in switch of brands due to the highly competitive market.

Removal of Import Duty on Dairy Products

The whole-sale price based inflation indicates that the milk prices have moved up by 14.73% over the last year. Worried about the rising prices government announced the removal of duty on Skimmed Milk Powder (SMP) and other dairy products (Govt removes import duty on dairy products (2010), Business Standard). The imports at cheaper rate would help in reduce the cost factor for dairy products.

Incentives to Build Cold Storage Facilities

Wastage of food items due to lack of cold storage facilities lead to a loss of Rs. 500 billion every year. The government announces schemes and incentives to attract investments in cold storage warehousing (Union Budget 2010: Cold-storage incentives to attract fresh funds (2010), The Economic Times). Increase in the number of cold storage facilities would help in preserving products better and reduce the wastage cost.

Economical

Shortage of Milk

Even though the milk production has risen by 4.6% compound annual average growth rate, it still cannot match up with the increasing demand. The demand for milk has been growing at a faster rate than the growth rate of milk production resulting in the shortage of milk supply (Milk output would stagnate (2010) The Economic Times). India cannot meet its expected demand if the demand and supply rise at the same rate. For the same the reason, the milk prices are on a constant rise. Price of milk increased by 12.6% to 13.6% (Goyal, K (2010) India’s Food-Price Inflation Holds Near 11-Year High- Business Week). This can cause an increase in the input cost for the dairy products and which in turn can lead to hike in price or lower profit margins. If the company increases the price of its products, it may affect the sales as it might lose on consumers.

Rise in Sugar Production and Duty Free Sugar Imports

The total sugar production in the first six months ending September 2010 is expected to be 22% more than the output in the unchanged phase last season, the total production expected is at 16.7 million (Press Trust India (PTI) (2010) Sugar output rises 22% in first half of 2009-10, Business Standard). Due to the shortage in the production of sugar the deadline for the exemption on customs duty on raw sugar imports has been extended by the government to April 1, 2011 (Dey, A & Jha, Dilip K (2010) Duty-free sugar imports extended till April 2011, Business Standard). The increase in sugar production and the duty exemption on raw sugar can help in purchasing sugar at lower prices and this in turn can help in producing goods at lower prices.

Globalization

Globalization a universal phenomenon is affecting each and every industry. The world is coming closer, the communication gap is closing and the businesses are going global. This can serve as an opportunity to expand the business to a global level but on the other hand there is a threat of new entrants from international market.

Requirements for Logistics

Logistics in India suffer due to the poor infrastructure and other limitations. There is a high demand for sophisticated third party logistics so the domestic logistics service providers are trying to improve their service. International participation is also expected in the logistics industry (Pandey, S & Basu, A (2010) Logistics cos ramp up supply chain to meet rising demand, The Economic Times). Sophiscticated logistics system will help in proper supply chain management and on time delivery of goods, which help in maintaining the shelf life of goods on meeting the demand on time.

Social

Need for Healthy Eating Habits

Studies say that Indians are more prone to Coronary Artery Disease (CAD), which is the major independent risk factor causing Cardiovascular diseases, due to the smaller calibred arteries found in Indians (Isalkar, U (2009) Indians more prone to heart disease, The Times of India). This suggests that Indians should move towards more healthy food and diet. This could be a new area to explore for Britannia with its new health associated products like Nuti-Choice biscuits and Actimind flavoured milk.

Problems with Cloned Livestock

Cloned animals are supposed to be suffering from large-offspring syndrome. The mother cows face a problem in giving birth to the cloned animals as they are larger than normal. Also these cloned animals suffer from health issues (Gogoi, P (2007) The case against cloning, BusinessWeek). It is morally wrong to clone animals as they cause problems to the mother during the birth and moreover the cloned livestock suffer from health issues which might make unsafe to consume the produce from them.

Technological

Cloning of Livestock

India, a late entrant in cloning research, is now moving with a great pace in cloning technology. ‘Hand guided cloning technique’, a technique very different from the conservative cloning practice has been a successful venture (Mahalakshmi, BV & Chowdhary, S (2009) Cloning Glory, The Financial Express).

New Age Packaging

The new packaging systems help in protecting food from micro-organisms by creating shelter layer. It uses new technologies like oxygen scavenging function, atmosphere control, biodegrability etc. and is low cost (Han, J Packaging Innovations, Bakers Journal). The packaging technology helps in preserving food for longer by protecting them from micro-organisms with the help of new technologies, thus resulting in longer shelf life of the food. The advantage of low cost packing and longer shelf life could be very beneficial for the company in increasing its profit margin.

Environmental

Change in the Climatic Conditions

Climate plays an important role in the agriculture process. The change in the rainfall pattern has been a matter of concern now in India. The agriculture sector in areas which are monsoon dependent suffered badly due to the change in the rainfall pattern. The sector suffered a huge loss in terms of total output (Bhosale, J (2009) Farmers worried over climate disturbances, The Economic Times). The loss in crop will affect the input supply and this might delay or cause problems in the production. So the industry might not be able to meet the demands resulting in the loss of customers.

Legal

Raising the Norms for the Probiotic Food

There is a need for setting the standards for probiotic food. Clinical tests should be conducted on the probiotic foods before they could reach the market for sale. The Indian Council of Medical and Research has submitted the proposal for the same to the government (Das, S (2009) Probiotic food likely to come under clinical trial ambit, The Financial Express). Strict norms will help in raising the quality standards but on the other hand the cost and time of production might subsequently increase.

Micro External Environment Analysis

Factors that influence the micro external environment are Competitor Rivalry, Threat of New Entrants, Threat of Substitutes, Buyer’s Power and Supplier’s Power. These factors play a vital role in determining the current situation of the business and to plan strategies accordingly.

With the help Porter’s Five Forces we will be analysing these factors and their immediate effect on the company.

“Five forces analysis is a technique for identifying and listing those aspects of the five forces most relevant to the profitability of an organisation at that time.” (Boddy, D (2005). Management An Intoduction. 3rd ed. UK: Pearson Education. 83.)

Competitor Rivalry:

BIL has a market share of 38% and has been growing at 27%, compared to the industry growth rate of 20% (Saxena, R (2007) Battle-scarred Britannia on expansion spree, Business Standard) and has many competitors based on the nature of product.

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Parle and ITC (Sunfeast) pose a great competition to BIL (Biscuit Industry: India (2010), Market Research India). BIL earning major of its income from the biscuits (Britannia Annual Report 2007-08 (2008)), and Parle and ITC are the other major players in biscuit market.

BIL is also into the production of dairy products, where the two major players in market are Amul and Nestle. Amul is the leader in the dairy industry.

There is also a high level of competition from the unorganised baking sector.

Overall rivalry is high.

Threat of New Entrants:

The entry on a small scale dairy industry and in the unorganised baking sector is easy.

But on the other hand to enter the large scale dairy industry and organised baking sector a huge amount of investment is required in terms acquiring assets and to establish supply and distribution chains.

Government regulations pertaining to food norms and others may also seem to be unattractive.

Looking at the latest trends, the bakery industry is expected to earn huge revenues which might attract new entrants (Vijay, N (2008) Indian Bakery sector foresees high growth and increasing interest in product offering, FnBNews.com).

So the threat of new entrants is moderate.

Threat of Substitutes:

Savoury snacks, crisps, cereals, fruits and other fast food can be substituted for biscuits.

Dairy products are dubious to be replacing with other products as they key ingredients of majority of people’s diet.

So the threat is a very moderate threat of substitutes.

Buyer’s Power:

The buyer’s of these products could be a retailer or the consumer.

Both the dairy and bakery industry are price sensitive, so a little increase in price might lead the consumer to shift other brand or product.

So the buyer’s power is calculated to be very strong.

Supplier’s Power:

The major supplies for a bakery industry include wheat, sugar and other agriculture products. And the major supplies for dairy product is milk.

It’s difficult to bargain with the suppliers of the above mentioned inputs as the price of these inputs is majorly influenced by the production of these inputs. The prices tend to be high as the demand for these products is rising at much faster rate than supply.

The secondary supplies include the packaging material.

The secondary supplies can be easily substituted with the low-cost ones to save on cost.

Overall the supplier’s power is assessed to be moderate.

Conclusion of Five Forces Analysis:

There is an existence of major players in the market with a moderate level of threat of new entrants and substitutes.

The supplier’s power is moderate but the buyer’s power is measured to be strong.

So the rivalry is suggested to be high.

Stakeholders and Corporate Social Responsibilities (CSR)

“Freedman (1984) defines a stakeholder as any individual or group who can affect, or is affected by, the achievement of the organisation’s objectives.” Further in addition to that, Clarkson (1995), stated that the government and the other communities that effect the working of the business and the market also form as a part of stakeholders. Stakeholders, except the employees, have a high power over the strategic change ideas (Hayes, J (2007). The Theory and Practice of Change Management. 2nd ed. UK: Palgrave Macmillan. 153).

Internal Stakeholders

The internal stakeholders are the ones associated with the company internally. For BIL its internal stakeholders would be:

The Shareholders

The Board of Directors, and

The Employees

Currently, nearly 51% of shares are held by Corporate Bodies and the rest 49% is held by the public (Statement showing shareholding pattern (2009), Britannia Industries Limited). The board consists of 11 members (Company Overview, Britannia Industries Limited) and employees nearly 2000 people (Britannia Industries Ltd. Overview, MarketLine).

External Stakeholders

The external stakeholders are the ones who are not immediately associated with company but influence the decision making of the company. To BIL the external stakeholders are as follows:

Customers

Suppliers

Contractors

Government

Regulatory Agenices (like Food Safety and Standards Authority of India, etc.), and

Society

Britannia being the leader in the baker industry of India has a huge amount of customers to cater. Britannia has to keep up the tastes and quality preferences of its customers. The government plays an important in influencing the market by creating and changing the policies. BIL has to adhere to the rules and regulations formulated by the regulatory agencies. The suppliers and contractors form an important part of a business. Britannia completely relies on its suppliers and contractors for its raw materials.

Corporate Social Responsibility (CSR)

For years corporate entities followed the practice of providing goods and services and maximizing wealth. But the trends have changed over the period of years. The companies are now expected to be more socially responsible. The company now has to be responsible to the stakeholders, society and environment. They are expected to pay back to the environment and society for all the affects that are caused due to its operations (Idowu, S & Filho, W (2009) Global Practices of Corporate Social Responsibility. Berlin: Springer. 1-2).

BIL believes in working with the society and the culture. It gives a premier importance to the nation and its policies. It believes in being a good corporate citizen by not just adhering to the rules and regulations but also by helping the community to improve the quality of life. BIL involves itself in initiating and providing support to community health and family welfare, water management, vocational training, educating people and encouraging the application of modern techniques and technologies. BIL believes in ethical behaviour.