Strategic Management AssignmentSection A, Group 7 - Ishani , Prateek, Rosalini, Rupika, Sayantan, Shriram, Somya, Surbhi

Porter’s 5-Forces Analysis of the FMC G Industry

Threat of New Entrants - Low: The high amount of capital investment needed to enter the industry makes its prohibitively expensive for smaller players to enter the markets. The deeper pockets, extensive brand campaigns and well entrenched distribution channels of the FMCG majors like HUL, P&G, Nestle, Kraft etc. ensure that they enjoy significant economies of scale and cost advantages which the small manufacturers find very difficult to replicate. Even if they happen to develop a superior product, it is very difficult for them to get their product to the shelves of major retailers. In the Indian context, the government’s decision to allow 51% FDI in multi-brand retail will possibly lead to more global entering into the market. Licensing rules is India might also be a hindrance for certain companies. But relatively cheaper raw material availability and low labour costs are opportunities which a potential entrant might want to consider.

Bargaining Power of Suppliers - Limited: The bargaining power stems from the fact that FMCG companies face high costs while switching suppliers. FMCG companies are considered price takers as the Prices are generally governed by international commodity markets. Additionally they enter into long term relationships with suppliers and are able to negotiate better rates during times of high input cost inflation.

Bargaining Power of Customers - Strong from retailers, weak from consumers: In the FMCG sector, consumers are always looking for value for money deals. The switching costs are low and aggressive marketing strategies of FMCG major constantly trying to woo customers and intense competition may be successful in inducing customers to switch. But because of the large number of buyers who are fragmented and limited number of FMCG product companies, the bargaining power of an individual customer is pretty low. But if we consider the buyers of these products to be organized retailers like Walmart rather than individuals, then these firms face very strong buyer power because of the fact that these big retailers make bulk purchases and sell a significant percentage of FMCG products. Therefore they are in a position to negotiate better and more competitive prices.

Threat of Substitutes - High: This generally depends on 3 factors - whether there are substitutes available at attractive prices, whether available substitutes are viewed as satisfactory in terms of their quality and how easily buyers can switch to these substitutes. The demand for consumer products is relatively elastic. There are a number of brands which are positioned with narrow product differentiation. Companies who are trying to enter a product category try to gain market share by competing on price which increases products substitutability. The FMCG majors are unable to price product arbitrarily in the presence of substitute products and this lowers industry attractiveness and profitability.

Competitive Rivalry - High: Consumers have a multitude of choices at their disposal. Even though there are effect of brand loyalty, the switching costs are low. Moreover the products are easily substitutable. This sector has become highly fragmented. The spending on advertisements have continued to grow and the marketing budgets have swelled as well as the strategies are becoming more aggressive. Private labels are offered by retailers at a discount to main brands which also act as competition to undifferentiated and weak brands. The decision to allow 51% FDI in multi-brand retail, the move towards Goods and Services Tax are making it easier for more players to enter into the market and increase the competitiveness.

Strategic Management AssignmentSection A, Group 7 - Ishani , Prateek, Rosalini, Rupika, Sayantan, Shriram, Somya, Surbhi

PESTEL Analysis of the FMCG Industry

Political / Legal - The past political condition of the India was not so pleasing enough to keep the confidence among domestic and international investors as well. FMCG companies benefit from the decision to allow 51% FDI in multi-brand retail since it brings enduring capital because these foreign retailers have an experience of how much time it takes to break even. It also brings in best practices, technology, and experience of operating in other markets along with the learning of what has not worked in other markets. Government spending on agricultural and transport infrastructure also affect the FMCG sector to a large extent.In many countries around the world, there have been call for local equity participation in foreign FMCG firms. Steps were take like prices were regulated, imports and exports were restricted. Companies were additionally worried over the fact that their product formulations might be leaked, their trademarks won’t be given adequate protection and there would be duplicates flooding the market which will eat into their share. Regulatory constraints like multiplicity of licenses across states, labour laws, subsidy availing procedures are also a cause of worry for the FMCG majors.

Economic - As far as the GDP growth of the industry is concerned, it is consistent with the Indian economy. The RBI is taking measures are being taken to curb the inflation which alters the PPP of consumers. Also, the increase in incomes is largely an outcome of economic growth across sectors. Over the past few years, India has seen increased economic growth, with a continuing and substantial impact on consumer disposable incomes enabling good growth for the FMCG sector. With rising urbanization, more people will have exposure to modern products and brands and thus shift to branded and packaged goods and products.

Social - In India, the major population is mainly accounted by the rural population, rural population accounts for more than 740 Million consumers or 62% of the Indian population and accounts for 50% of the total FMCG market. In which, working rural population is approximately 400 Million and an average citizen in rural India has less than half of the purchasing power as compared to his urban counterpart. So FMCG Companies have the scope to capture this untapped market and most of the FMCG Companies are taking different steps to garner rural market share. The market for FMCG products in rural India is estimated about 52% and is projected to touch about 60% within a year.

Technological - Rapid technological advances in many businesses have had a profound impact on the economy, households and the society at large. To an extent, FMCG companies have remained immune to this trend because of the fact that the products have low contribution margins, high stock turnover and a short shelf life. However the major companies operating in this space are spending on technological upgradation, social media and digital marketing. P&G is connecting with retailers using technologies like Global Data Synchronization Network system and retail-specific mobile apps using which orders can be placed. HUL is spending heavily on finding ways to reduce water consumption during washing clothes. ITC has been using E-choupal as a means of connecting with rural farmers for procurement of agricultural and aquaculture products.

Environmental - FMCG giants like Unilever and P&G have kept consumer health and safety at the topmost of their priorities. They have policies in place to ensure all subsidiaries across the world establish a formal environmental management system. This is partly as an effect of pressure of local legislation and partly as an effect of its corporate responsibility toward the environment. They have also coordinated with governments in different countries with regards to waste management and reducing their carbon footprint. HUL is trying to create market value for discarded sachets and lighter plastic packaging so that ragpickers find incentive to collect them from the streets. Recycling these wastes is also high on their agenda.