Company analysis of NUMICO

3510 words (14 pages) Essay

1st Jan 1970 Marketing Reference this

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NUMICO came into existence in the year 1896 when Mr Martinus van der Hagen secured all rights of a formula for infant milk from cow’s milk. His operation was based in The Hague in The Netherlands. In 20th century company changed the named to Nutricia but in the year 1997 when company received the designation ‘Royal’ then its name changed to NUMICO NV.

Recent Past of NUMICO:

Strategic Corporate Development History

For nearly 5 decades NUMICO worked with corporate strategy of trying to build themselves on only one baby product with limited exports. In 1946 company introduced another product but in the local market only. NUMICO for a long time tried to develop the new strategy after their first initial success in 19th century. Launching new product was not a brilliant idea though it was a sustainable decision. Usually companies spend millions of dollar developing the product and this would take some years to recover.

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As product development was not enough to grow in multiple folds so company made many acquisitions in different geographies. The result at the end of year 2006 was NUMICO’s presence in more than 100 countries with plethora of products to sell. Products were bifurcated among different divisions like clinical nutritional products went under brands such as Nutrison, peptisorb etc. Revenue and profit margin both increased because of acquisition.

Acquisitions can get a limited and desired level of success and to keep growing even NUMICO invested heavily in research & development. Strategic alliance with industry giants, universities and government helped NUMICO’s cause. Research & development wing of NUMICO attracted the best and on a regular basis filed for the patents.

NUMICO Acquisition strategy in 1998, 1999 & 2000

To exploit linkages between the organisation and its environment NUMICO adopted ‘Medical Platform Marketing’. NUMICO moved from supermarket shelves to practitioner’s clinics. Now, products for vulnerable people were prescribed by doctors. Expenses on research and development were forcing NUMICO to reach new places to recover the cost. In 1998 annual report NUMICO was a multinational company focusing on the development, production and sales of nutritional medical concepts with a great value addition.

Strategy of NUMICO as per annual report of 1998 mentioned in the case study* by Eppink was as follows:

“The strategy of NUMICO is focused on specialisation, continuing internationalisation and profitable growth, partly by acquisitions as wll as by strategic alliances, and safeguarding the highest quality in all stages of production and services.”

As per the turnover in 1998, NUMICO’s major revenue generating business still was infant food which was sold maximum in Western Europe which was experiencing the major falling birth rates and an ageing population. After analysing the market NUMICO bought few European companies to expand in profitable areas.

In 1999, NUMICO acquired a company bigger than them in terms of production & revenue. When NUMICO bought General Nutrition Companies (GNC) of Pittsburgh (USA) it was the largest manufacturer of nutritional product in the world with a stronghold in sports-nutrition market. It was a win-win situation for both the organisations where GNC was gaining from NUMICO’s research to enhance their product range & NUMICO could gain from the distribution network of GNC. Press release explained the reason of this acquisition which was to achieve the global market dominance.1

Acquisition was on the cards for the third year as well when NUMICO snapped Enrich International & Rexall Sundown in 2000. Unlike GNC Enrich was in the business of nutritional supplements & personal care products with an in house R&D department for product development. Again unlike GMC, Enrich was in 10 more countries with a global distribution system.

Rexall Sundown another US based organisation was acquired by NUMICo. Rexall like Enrich was a producer of nutritional supplements as well as consumer health products. NUMICO acquired another business which has got nothing to do with their main business interest like GMC.

A press release describes the reason of acquisition which was again to get the pole position in the market.2

Acquisition of new businesses far from NUMICO’s main business made NUMICO its own rival because NUMICO already had the presence in the market. However, Rexall could exploit the European market because of NUMICO’s distribution network present in Europe.

At this point in time, NUMICO was confused in their approach because two competitors (Enrich & Rexall) were working under one roof and serving the same market. Strategist might have analysed the more competition & less co-operation among the two brands. To make operation smoother and to serve their customers better NUMICO merged the Enrich & Rexall in one new separate entity by the name Unicity.

Strategy evaluation:

From day one and for a long period of time NUMICO operated with one product because of which they never realised their potential as a standalone entity to grow.

After not getting desired success till the end of 20th century NUMICO realised alone they cannot get the global position in market. At this position, they might have done PEST analysis to judge the environment affecting them. Even SWOT could be used as a tool to know the strong areas where they can build the future empire.

PEST might have shown them that they are not functional in future markets where they can grow faster than their current strong hold markets like Western Europe. PEST can cover issues from demography to social & technological changes like declining birth rates to e-commerce. By applying SWOT, one can know that NUMICO always regarded the R&D as an important activity which they won’t give up at any cost. Thus, they identified R&D was their strength where they can build their future.

Michael Porters 5 forces theory could have also applied in this case study to know why NUMICO only adopted the acquisition route. As the case study explains NUMICO was operating in such an environment where the small players could have changed the entire game. The threat from existing players and new comers was massive moreover small players were taking the competition to all geographies. Hence to enhance the global position in the market NUMICO adopted the acquisition route.

Acquiring GMC was a sensible move it was reducing the competition and on the other hand it was enhancing the performance but acquiring Rexall & Enrich was not at all a brilliant move. Reason being, it stretches the operational efficiency because NUMICO was not in the same domain with them.

*case study (Do the Harvard referencing because I am not aware of the source)

1) Just the last line need referencing from the case study.

2) Press release in the case study

Current Strategic Situation:

Acquisitions in a field which was not related with their main business interest left them in a position between the pharmaceutical market and the food market. To avoid the stuck in the middle situation usually organisations adopts the Michael Porters (1998), generic strategies which is as follow:

Figure: Competitive advantage

Source: tutor2u.net

(Accessed on: 20/03/2011)

Cost Leadership: In this strategy, organisation aims to be the lowest cost producer to gain the maximum share in the market. To achieve this position organisation drive the cost down through sourcing the cheapest raw material & labour cost. NUMICO was not trying to achieve the cost leadership because case study shows that they were aiming for high margin business. Hence, cost leadership is not NUMICO’s domain.

Differentiation: As the name suggests, in this strategy, organisations aim to be different from their competitors. Differentiation provides a competitive advantage to organisations which helped them to charge a premium price for their products & services. If we look at NUMICO case study we will find that they started with one product & due to patents they held the ground for long time. One product was sufficient with a patent to create the differentiation but later they acquired so many organisations which could provide them distribution network & penetration in the foreign market.

Acquisition which they made was not only in their own domain and at this point they started losing the gained differentiation. From super stores shelves to general practitioner prescription, move was certainly adopted to make a differentiation but due to diversified businesses it confused the distribution points. Differentiation did not pay off well because by 1998 their major revenue generator was still infant formula.

Niche strategies: Here the organisation function in one specific segment and try their best to become the best provider of products & services. To work in this kind of strategy organisations need to be either cost efficient or different from other players like Rolls Royce in the car market.

NUMICO’s acquisition exercise took them into various domains but still they tried to call themselves a ‘Medical Platform Marketing’. One platform for medical assistance to those who are vulnerable didn’t work well because of plethora of products. However, from NUMICO’s perspective they focused on specialisation with profitable growth.

STUCK IN THE MIDDLE:

NUMICO got involved in series of acquisition related & unrelated to their main business interest because of which they are facing the stuck in the middle situation. To simplify the situation they tried to bring all the diversified business interests under one roof. Things are still confusing because they wanted to build on nutritional field but due to acquisitions they are working in nutritional supplements fields as well.

Moreover, they acquired two competitors (Enrich & Rexall) and left them in the field to compete with each other. It took some time to bring both of them under one brand name and by that time both of them did enough damage to each other.

Now, NUMICO is stuck between the pharmaceutical market & the food market because of their confused approach. Lot of unwise decision made which resulted in head on collusion with giants of pharmacy & food business like Novartis & Nestle. NUMICO always wanted to sell clinical & diet foods but because of their acquisitions they are not focusing on their main stream business. NUMICO bought the US operations not to sell what they were doing before acquisition e.g. vitamins. Rather than turning them into NUMICO’s regular business NUMICO started looking after their operations.

First an industry expert noticed that NUMICO is facing challenges because they are not performing only in their traditional markets. Company was stuck in the middle because it was facing challenges from giants & minnows at the same time. New markets where they were operative due to acquisitions were full of small players. In addition to that threat from new entrants was massive. NUMICO’s strategy needed a review before they lose the global position.

Strategy review:

In the year 2000, NUMICO’s board of directors recognised the risks from existing strategy. NUMICO due to acquisition was not paying enough attention to their cash cow i.e. infant products and now strength of NUMICO is making them vulnerable. NUMICO is a European organisation they maintain balance sheet in euro and any PEST affect in USA operation can cause serious problem to their business figures.

Operation overseas involves exchange risk as well. Last but not the least even NUMICO’s board realised that they are confused in approach.

NUMICO was not all stuck in the middle because organisations who face this kind of situation usually subject to a takeover or merger. Finally when NUMICO’s board realised the drawback associated with the strategy they should take this opportunity to reduce or eliminate the risk.

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Strategy review due to certain events:

In the year 2001, after 1 year of realisation, company saw themselves in hot waters due to economic slowdown in the USA. In addition to slowdown, demand for nutrition & herbs were plummeting too with an increased competition from low price manufacturers. It’s not only NUMICO which was facing the heat but the whole sector was losing the effectiveness.

If NUMICO would have done the PESTEL analysis then they could have avoided this slowdown and competition because they never saw this slowdown coming into the picture. It is necessary to explore the competitive environment to develop sustainable competitive advantage.

NUMICO response to events:

NUMICO’s response to the situation was not at all proactive. NUMICO response was reactive that to after negative growth. CEO was asked to mind the traditional & new business but not to take any other big projects. US operations gave back to back management problems to CEO which resulted in his resignation in May 2002.

New CEO bifurcated the operations in three divisions and for the first time they adopted a specific approach to tackle each brand. In other words, NUMICO changed the corporate strategy to unit level strategy to take care of each business. In the year 2002, NUMICO got bad news from all the quarters of business and to make the situation worse exchange rate of US dollar was changing frequently against euro.

Finally, NUMICO announced the sale of Rexall Sundown & GNC to focus on high-growth/high-margin businesses of baby food and clinical nutrition. Both the brands increased the performance of its new owner.

Strategic Direction for the future:

After divestment, NUMICO should think about the future. Company can use BCG Matrix to determine what is to be done to remaining product portfolio. NUMICO already dumped the low-growth/low-margin products, so now; they can concentrate on long term value creations through developing high-growth/high margin products.

Stars of NUMICO:

NUMICO’s star was infant product but due to lot of exposure in low birth rate countries their business was declining at an alarming rate. NUMICO can utilise the some money which they received from divestment to expand in those countries where birth rate is much better than Western countries like India & China. For infant products, long ago NUMICO used to command premium price because of R&D & patents.

Cash Cow of NUMICO:

NUMICO should turn their infant product into cash cow by offering cost leadership. After gaining the cost leadership NUMICO can go back to their golden days. To achieve the cost leadership NUMICO doesn’t have to invest heavily on supply chain because they have everything which it takes to get the advantage.

Dogs of NUMICO:

NUMICO already sold the Dogs from their product portfolio now they should not repeat this mistake by taking over another non-business interest investment.

Question marks of NUMICO:

NUMICO should avoid this block by focusing on cash cows & star blocks. Imagine a scenario; if they don’t pay much attention now on finding new markets for infant products then they might end-up in this block because western market has declined in term of birth rate and they already sold the maximum distribution points of GMC & Rexall in USA. Hence, they should take actions on urgent basis to avoid question mark.

Figure: BCG Matrix

Source: www.tellingthestory.typepad.com

Accessed on: 20/03/2011

BCG matrix can help in understanding the mistakes done in past to fit an all approach strategy for future. BCG matrix is not free from flaws but it certainly explains what to do & what not to do.

To bring back the growth back into the books of NUMICO they should adopt Ansoff Growth Matrix. As per Lynch (2006), “the market options matrix examines the options available to the organisation from a broader strategic perspective than the simple market/product matrix (called in some texts the Ansoff Matrix)”.

Figure: Ansoff matrix

Source: www.cipher-sys.com

Accessed on: 20/03/2011

As per Ansoff matrix, NUMICO can go for market penetration. It will be like without disturbing the company’s existing range of products or services and perhaps it can attract current customers as well. Things can backfire if market penetration is planned for new customers only. For example, mobile companies offer brilliant price plans to retain the existing customer.

Market penetration is smooth when the market is growing. Existing organisations with low relative market share in a booming market have little to lose but NUMICO has high relative share and if they don’t attract their current as well as new customers then they might lose whatever they are holding till now.

Market development using existing products could be a strategic route but for this approach they should not disturb the existing customer focus. In NUMICO’s case, they should take infant products to those countries where birth rate is better than Western Europe and USA. NUMICO can slightly repackage the product & then can promote to a new market segment.

Product development for the existing market can be possible for NUMICO because they have their own R&D centres where they can develop new concepts. NUMICO should do optimum utilisation of their all resources to counter competitive entry. NUMICO’s R&D centres can help them to maintain the company’s stance as innovator.

Diversification is not needed according to case study because they have just finished the sale of GMC & Rexall.

Other Strategic Options:

Organic growth: NUMICO should start the change from with-in and build itself from scratch and this time they should stick to the core business.

Acquisitions & Mergers: NUMICO can acquire the rival business or merge with one of its rival from core business market to gain the lost momentum.

Strategic Alliances: NUMICO can make some strategic alliances with few government bodies in developing countries.

Licensing: NUMICO can sell their patent license or lease to its competitors to build a business from their intellectual properties.

Recommendations:

NUMICO needs to pursue a growth strategy in a structured way the methods by which the market opportunities associated with strategy options might be achieved. NUMICO should treat their R&D outputs as their assets which they can sell in market to claim a tag of future business. Investors like to associate themselves with future markets because they know their money can take them to new avenues with high returns.

NUMICO was a leader in R&D and infant products but all was lost because of acquisitions in foreign un-related markets & products. This time they should build themselves related to their core-strength. For R&D, they hired PHD passed-outs but they never presented themselves as a smart organisation which they should focus this time. Current generation would like to associate themselves with smart organisations like Google & Apple. NUMICO should aim for future parents who will buy their products & services.

Given the amount of analysis that can potentially be undertaken, merger with other competitors is highly recommended. Mergers are similar to acquisitions like combining two companies. However, merger can happen in one scenario where both the parties cannot take over each other. This can be a friendly hand but still a special care will be always required. Merger should be sone before identifying the strategic issues.

Mergers are never meant to lose the total control of the company but to gain new markets & new customers. None of the evidence suggests till date that merger is a value addition but neither has it suggested any failure when both partners are same in size. Merger might not a big value to NUMICO but it can enhance the performance.

Although NUMICO can still grow as a stand alone business but to take their research in right path they need a right partner. Partner especially with same business interest but with more distribution points in desired locations can do wonders for NUMICO.

NUMICO always had R&D centres but they never capitalised on that asset perhaps a partner can take that advantage or turn it into their competitive advantage.

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