Executive Summary

Founded in 1919, Danone is one of the oldest multinational food-products

corporations that aims to bring health through food to as many people as possible by
providing water, fresh dairy products, baby nutrition and medical nutrition to the world
markets. Based in Paris, France, Danones sales are mainly produced through dairy sales
around the world. Much of Danones growth is attributed to joint ventures, and it
specifically targets emerging markets for quick expansion. Danone employs over 100,000
people and had income of 1.6B Euro in 2013.
Danone faces threats and opportunities by utilizing its strengths while trying to
learn from its weaknesses. Danone needs to compete with others rivals such as Kraft,
Nestle and store brand in price and product space in store. Consumers nowadays pursue a
healthier lifestyle and they prefer to choose healthy, fresh food instead of packaged food.
With the growth of economies of scales and increased size of production, Danone will be
able to achieve a lower cost of production. Danone could also choose to produce healthier
food to cater current consumers eating habits and, therefore, attract more customers. As
one of the oldest packaged food brands, Danone has strengths in its economies of scope,
well-founded brand recognition, strategic alliances, and research and development. The
long history of its brand also creates social complexities, which makes it difficult for rival
firms to imitate its current corporate strategy. We seek to analyze Danones competitive
environment and corporate strategy in the following sections.
External Analysis
To analyze the threats and opportunities of Danones markets, Danone must begin
with an understanding of the general external environment. The general external

environment consists of 6 components and they are listed in Appendix 1 with applicable
details.
Technological change through digitization has reshaped both consumers demand
and competitive dynamics in the consumer packaged goods (CPG) marketplace. The
online market has enabled customer interaction with companies by providing product
reviews and increased demand. Technological advancements in retail and other sectors
have raised consumers expectations by demonstrating new ways in which companies can
deliver convenience, choice, and value (Hadlock). Demographic trends in CPG markets
have helped the rise of the digital consumer. Due to the advanced technology such as
websites, social media, and applications, consumer demand is dramatically increasing. In
addition, there are around a billion new middle-class consumers in emerging markets
around the world, creating a huge opportunity for CPG growth (Chatterjee).
Currently, consumers are willing to pay a premium price for health-conscious
products. Since Danone sells high-quality products such as yogurt for diet or nutrition,
growing middle-class and green consumers will create a huge value for Danone. A few
external factors that Danone and the CPG industry faces are milk price inflation and
exchange rates across borders. Even though the nutrition business of Danone is growing,
yogurt is the most popular product and its main ingredient is milk. Fluctuation of milk
prices can either increase or decrease production costs. Exchange rates are an important
financial factor for global businesses, especially Danone, which operates in over 140
countries (Chatterjee).
External factors for legal and political conditions are rising trade protectionism
and changing tax regimes. Because of the poor economic situation across the world,

governments are encouraging people to buy products manufactured in their own countries
to help domestic companies. Changing tax regimes also impact multinational companies
like Danone in terms of profits (Chatterjee). A specific international event that impacts
Danone is the abolition of milk quotas in the EU. Now, milk suppliers in European
countries can compete with international farmers (Cook). This event enables Danone
double its capacity in infant-formula manufacturing (Coveney).
Porters Five Forces helps to evaluate whether Danone has a competitive
advantage over competitors in the CPG industry or not. The threat of entry is low. The
industry that Danone is operating has low barriers to enter. The threat of rivalry is high
because there are large numbers of competitors and the markets often have low product
differentiation. The threat of substitutes is medium since other drinks can substitute
water, but nutrition products and yogurts do not have substitutes. The threat of suppliers
is low because the abolition of milk quota enables double capacity of milk and there are a
lot of milk suppliers around the world (Conveney). The threat of buyers is low because
Danones target demographic increased from a rise of middle-class consumers
(Chatterjee). Also, Danones products are viewed as being healthy and convenient.
Internal Analysis
Research and development is vital to Danones international business. It supports
the product development and also drives the sales growth of its various products. Its
Fresh Dairy Products Division conducted the research on the impact of yogurt
consumption as an essential food category in terms of diet and health and it also financed
independent studies performed by academic researchers (2014 annual report). These
studies are used to improve current products and develop new products. Waters

Divisions R&D department developed innovative solutions to promote healthier

hydration for consumers, continuing its efforts in the aquadrinks and packaging areas
(2014 annual report). In the Early Life Nutrition R&D department, scientists conducted
researches and studies in order to understand the first 1000 days of life and how to
develop products that are best for infants (2014 annual report). The R&D team under
Medical Nutrition focuses its effort on human body health in order to help people to have
longer and healthier lives (2014 annual report).
One of the most important and valuable physical resources of Danone is its
manufacturing plant and location. Danone chose Minster as its major manufacturing
location because it was close to a reliable, high-quality milk supply, as well as good
access to transportation, good road access. (Knochelman). This unique historical
condition set up in 1977, enabled Danone to achieve the first mover advantage in the
dairy product industry. In June 2011, Danone invested around 89 million dollars into
improvement of its largest plant, aiming at catching increasing market demand of Greek
Yogurts. (Englehart) The $89 million improvement changed the storage system, heating
system, transformation system, etc. All these changes increased the flexibility of yogurt
production, enabling the plant to produce Greek Yogurt as well as different types of
yogurt products. (Rutz)
Danone established the Danone Institute international, which has around 250
experts and is located in 16 countries, in 1991 with the purpose of providing the company
with research and the necessary human capital for continued growth. The institution
undertakes specific activities in the field of nutrition research, education and training
(Danone Institute). The existence of this institute gives Danone a temporary competitive

advantage. First of all, the institute is devoted to bringing in skilled professionals and
advanced nutrition formulas to Danone. This creates a valuable resource for the company
due to the huge firm specific investment. Danones initiative to invest in itself and its
employees to constantly create better products and people is a rare quality in the industry.
The Danone Institute International is not hard to imitate in terms of form. Danones major
competitor, Nestle, has already established a similar education institution for itself.
However, the research done by the institution is very hard to imitate due the path
dependence and causal ambiguity. Danone trains its professionals specifically for the
company. The knowledge these employees attain is special but not limited to Danone
Companys daily operation routine and organizational culture. Therefore, human
resources create a competitive advantage for Danone.
According to Danones 2014 Annual Report, Danones Net sales dropped from
$21,298 in 2013 to $21,144 in 2014. The reason is to be believe that the insufficient and
diminish skills or talents in the emerging countries. Other reasons may contribute to this
consequence includes regulatory risk, environmental risks, financial risk, and many more.
Strategic Choices
Danone pursues a corporate level strategy of product-market diversification. It has
businesses in dairy, baby nutrition, water, and medical nutrition, and it operates in over
140 countries (Danone). Danones diversification is classified as related-constrained,
as its four business are related on many dimensions. It is through this diversification that
Danone creates operational and anticompetitive economies of scope.
Danones operational economies of scope come in the form of sharing activities
and core competencies. It is able to share activities around the world for its various

businesses. For example, yogurt and water can share the same distribution channel. Also,
Danone has citizens in Bangladesh that sell its products door to door, and has street
vendors in Mexico and other countries (Danone). Secondly, Danone shares its core
competencies in research to help develop all of its businesses. Danone heavily researches
medical nutrition and is able to share discoveries across prebiotics, probiotics, nutrition,
and others. It also uses its partnerships to make discoveries for other departments.
Danones anticompetitive economy of scope comes through its market power.
Being number one in the world for dairy products, number two in baby nutrition and
water, and number one in Europe for medical nutrition creates a strong brand presence.
Therefore, Danone is able to use its extensive power to succeed in new projects or
separate businesses that can use the support from one of Danones other businesses.
Danone creates cost advantages through its economies of scope by increasing the
value of its firm when these businesses come together. However, it is important that
Danones differentiation strategy is also rare, costly to imitate, and organized correctly.
Its rarity comes through the existing relationships between business units, not simply the
combination of them. Danones core competencies in research and development, as well
as its shared activities, are intangible and therefore costly for other firms to identify and
imitate. Finally, Danones company culture centers around creating new, innovative, and
healthy food products and Danone organizes itself in order to fulfill this mission.
Danone also pursues many strategic alliances. Due to its relatively small size and
lack of deep management (as compared to Kraft, Nestle, etc.), Danone utilizes these
alliances to facilitate entry into emerging markets, to improve its current operations, and
to shape the future competitive environment. In China, Danone entered an equity alliance

with Mengniu, another dairy products company, to facilitate its growth in China. The
partnerships scope grew as Danone and Mengniu announced an expansion of its alliance
into infant milk formula. Emmanuel Faber, Danone CEO, said "We are today
strengthening the winning team formed by Danone and Mengniu by acquiring an equity
stake in Yashili - combining Mengniu's wide-reaching network in China with Danone's
international expertise in infant milk products (Pasternak). This is a prime example of
how Danone utilizes alliances, by partnering with firms already in the target market,
Danone can gain from the partners local buyer and supplier knowledge, sway in the
government, and their distribution channels.
There are other ways Danone utilizes partnerships. One such avenue is through
research & development. Danones R&D division partners with researchers and
international teams at universities and institutes to share new findings. Danone can
improve operations with new insights into probiotic bacteria, obesity, and hydration.
Danone can also help shape the future of its competitive environment by setting standards
in food safety, sensory sciences, and production technologies (Danone Parters).
Danones alliances must also be rare, costly to imitate, and organized properly. To
be rare, the combination of Danones product expertise and its partners market and
distribution expertise must be rare. About 60% of Danones sales come from outside its
home in Europe (Alexandra). This goes to show that the joint venture expansion model
has worked well, and it is rare for a firm to have continued success with them. What
makes strategic alliances costly for other firms to imitate are the socially complex
relationships and trust that is needed to sustain value. Operating in a sort of niche,
compared to other CPG giants, Danone relies on these relationships with suppliers,

distributors, and other partner firms to spread its products and grow. However, Danone
knew it lacked the expertise, distribution, and capital to start fresh in every country. For
this reason, Danone opted for a quicker entry and chose strategic alliances. Lastly,
Danone chooses to organize itself in a multidivisional (M-form) structure with each
division containing functional roles within its corporation. This allows for sharing
activities and core competencies, which allow Danone to gain value from these alliances.
Danones strategy is working well and allows them to have a competitive
advantage in many markets around the world. In addition to Danones many strategic
alliances, we recommend more merger and acquisition to take place within the company.
Danone already makes these transactions, but furthering these deals in the markets they
are a part of would add value to the company. Danone uses alliances to enter new
markets, but it could create much more sustainable growth through acquisitions in
countries it is not heavily involved in. This additional risk will allow Danone to realize a
greater return in the long-term. M&A will be rare and costly to imitate for Danone
through the intangible relationships created by the two companies.
Strategy Implementation
In order to implement the product-market diversification strategy successfully, our
team believes Danone should keep its current multi-divisional organization structure.
Each division of Danone should be in charge of different geographic areas. In this way,
Danone will have more precise strategies and solutions designed for different cultures
and ethnicities. Meanwhile, each division should be able to collaborate and cooperate
with divisions in other geographic areas. Since Danone is considered an international

corporation, it is important that Danone uses all the resources it possesses, including raw
materials, transportation facilities and many more.
Danones competitive advantages result from a successful management control
system. Since Danone operates its businesses all over the world, it is essential that
Danone has a visionary board committee to ensure the directions of those strategies are
on the right track. A visionary board committee will provide oversight strategies and
fulfill this requirement. Further, Danone also needs to focus on its budget control system.
While separating the budgets for different divisions and operations, it is important for
Danone to ensure that each division is not competing budgets against each other, which is
fairly common among large corporations.
Another part of the competitive advantages of Danone mainly comes from the
employees. A well-designed compensation policy will attract and retain skilled
professionals and, therefore, help Danone stay competitive in the industry. The existence
of the Nomination and Compensation Committee in the company focuses on rewarding
excellent employees with higher salaries, stock options and other benefits. With these
rewards, current employees who possess excellent abilities will be willing to stay in
Danone longer. Also, other knowledgeable professionals will be attracted by its
compensation policy and become more interested in joining Danone. Danone should keep
this committee in order to fully expand its employees potential and benefit its daily
operations.

Appendix 1

Appendix 2
Types of
Resources

Value

Rarity

Imitability

Organization

Physical
(Minster
Manufacturing
Plant)

Convenient
location
enables
Dannon to
have a low cost
while high
quality supply,
therefore,
lowering cost
and increasing
revenue.

First mover
advantage over
competitors.
Daily supply
from suppliers
within 100
miles.
Location is
rare.

Not costly for

competitors to
imitate but it
will take them
3-4 years to
catch up the
current Greek
Yogurt
production of
Dannon.

Not Related?

Types of
Resources

Value

Rarity

Imitability

Organization

Physical/Human
R&D

Develop
products that
meet the
demand of
customers and
improve
current
products based
on scientific
researches.

The research
equipment and
special human
capital are rare.

The form is not

hard to imitate.
Hard to imitate
in terms of the
investment of
human
resources and
research
results.

R&D facilities
are organized
to exploit the
potential
opportunity
for the firm.

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