Porter's Five Force Model Analysis

This assignment provides an analysis of the milk industry in the UK using Porter's five force model. It involves reviewing relevant literature and data on the import of UHT milk in the UK. The analysis includes identifying the competitive forces that shape the market, such as rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers.

Assessment

EXECUTIVE SUMMARY
This project report is based upon the internationalisation of Milupa which is planning to
expand its business in Chinese Market. While trying to expand business in a location it is very
important to analyse the industry and for this purpose Porter's five force model is used in this
report. There are various trade barriers such as import tariffs, import regulations, slow economy
growth, labelling and packaging requirements that may affect the business of the company while
internationalisation. Different types of social and ethical issues such as piracy of intellectual
property rights, ignorance of CSR and inappropriate compensation to workers are required to be
considered by Milupa in order to successfully execute business in China. While expanding
business in China the company is required to identify best method from different alternatives
such as licensing, franchising and joint venture etc. From all these modes it has been
recommended to Milupa to choose joint venture as lower risk and higher profits are concerned
with this option.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Business drivers behind company's expansion into China..........................................................1
Trade barriers for the company....................................................................................................4
Ethical and social issues that are required to be considered........................................................5
Cultural preferences to be considered by the company...............................................................6
Expansion method that can be chosen by the organisation..........................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Internationalisation can be defined as the process of expanding business in international
market for the purpose of acquiring growth. The organisations which are getting developed plan
to become international and serve their product to the market so that higher profits can be
achieved by them. For the purpose of diversity it is very important for the business entities
because it helps to increase financial strength and competitive advantage. UHT milk is ultra high
temperature pasteurized milk which is heated on 280 degrees for 2 seconds in order to kill
bacteria. Such type of milk is m ore safe as compare to tradition pasteurised milk because it has a
much longer shelf life before it spoils. In 2015 UHT milk is being imported from different
countries. From Belgium 50 million litres, Netherlands 31 million litres, Germany 17 million
litres, Denmark 11 million. In total 130 million litres milk was imported by UK from different
countries (Import of UHT milk in UK, 2019). UK is the third largest milk producer in European
Union. In year 2014, 14.6 billion litre milk was produced in UK. From year 1995 to 2015 the
door step delivery of UHT milk has been decreased up to 3% from 45% (Milk industry in UK,
2016). In China demand and supply of UHT milk in growing continuously. It has been
forecasted by the country that its demand and supply of UHT milk will be in 2020 around 590
million tonnes. Currently it is imported by China from European countries.
The organisation which is selected for this report is Milupa which was founded in year
1921 by Emil Pauly. This assignment covers various topics such as business drivers for
expansion, trade barriers, ethical and social issues that are required to be considered by Milupa.
Cultural preferences and different methods of internationalisation are also discussed under this
report.
MAIN BODY
Business drivers behind company's expansion into China
An international business consultant for Milupa is being appointed recently for the
purpose of business expansion in China in which the organisation is planning to capture Chinese
market for its UHT milk. It is mainly of the children who aged between 3 to 11 years. Currently
the business is operated successfully by the enterprise. In order to introduce milk in entity is
required to analyse business drivers with the help of appropriate model or theories. Porter's five
force model is being used for the same purpose which is described below in detail:
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Porter's five force model: It is considered as an essential tool for such companies which
are planning to become international in order to analyse market conditions. This model was
introduced by Michael Porter in year 1979 for for business entities in order to help them to
identify attractiveness and competitiveness of the industry. Five force model is going to be used
by the internal business consultant of Milupa so that market conditions of China can be
determined. All the strategies of this method are described below:
 Rivalry among existing competitors: This factor is associated with the extent of
competition amongst players in the the industry. Milupa will face an intense rivalry in the
milk industry. Government of china plays huge role in controlling the competition in the
markets. Under Chinese anti monopoly law states various rules to protect existing firms
by restraining monopolies and ensures fair competition and healthy development of
socialist market economy. As companies takes drastic steps such as cutting down prices,
this has led to reduction in the overall profitability of the business. In this situation
identifying business drivers for internationalisations becomes necessity. Many
international firms have raised there concerns about the treatment and discrimination that
they faced in Chinese industry. Milupa has to take effective measures to survive. Creating
distinctive milk products of high quality along with setting up mergers with existing
competitors to gain large market share (Porter's five force model, 2018).
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(Source: Porter's five force model, 2018)
 Threat of new entrants: Entry barriers are high in Chinese milk industry. But there is
ongoing demand for higher requirements of dairy products amongst customers hence it
creates more chances of new entries in the markets. The country faces week distribution
system networks. Such drawbacks can be identified as potential opportunities and used
them for business advantage. China dairy corporation limited raised it's standards
regularly and spends huge money on research and development sector. Milupa has to
build economies of scale which will lower the fixed cost. This can only be done only if
the company has advanced technology that can affects milk industry. New innovations by
the respective organisation will give reason to customer to discard old products and
initiates an interest to buy new one (Baena, 2019). These factors can act as business
drivers for internationalisations.
 Threat of substitutes: These are the secondary products which serves the same purpose
that original one does. The threat of substitute is high as there are various types of milk
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Illustration 1: Porter's five force model, 2018

available in Chinese markets in distinctive prices such as oat milk, almond milk, coconut
milk, rice milk etc. These milks are more preferred by parents for strengthening child
health. As Milupa being kids milk brand has possibility of facing this threats therefore it
should creates strong loyal base by effectively managing customer relationship. They
should become service oriented instead of just product oriented. Understanding their
needs and wants closely is an appropriate business driver in internationalisation.
 Bargaining power of suppliers: It is concerned with the force that suppliers posses over
businesses. If this factor is high then profitability of business becomes low. Bargaining
power of suppliers in Chinese milk markets are moderate due to the presence of large
number of suppliers. Lower switching cost and large substitutes impacts this industry in
positive manner. Supply unit is main factor of business driver for internationalisation
under this. Milupa has to build efficient and sustainable supply chain. Loyal suppliers in
international markets provides good base to the business (Bridges, 2014). It should also
consider creating multiple designs with different raw materials so that hike in prices can
be adjusted accordingly.
 Bargaining power of buyers: This is in relation to the power that buyers possess over
business. Consumers demand high quality of products in low prices. Consumers in china
have high purchasing power their improved standard of living and change in preferences
will affects the Milupa in positively (Dachs, Stehrer and Zahradnik, 2014). There is
significant expansion in the middle class that are demanding new products and are
becoming more aware about the trends ongoing. Milupa should offer interesting
discounts focus on building large customer base. Increase in the quality of milk products
along with effective pricing strategy are business drivers for internationalisation in this
case.
International trade theories:
Comparative advantage: It can be defined as the situation when a country produces a
good or services for a lower opportunity cost as compare to other regions. This theory can be
implemented by Milupa as it is planning to expand its business in China in order to capture
Chinese market by launching its UHT milk there. Milupa has comparative advantage because
opportunity cost of its milk is very low as compare to other countries which can help it to
establish business in China appropriately.
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Absolute advantage: This theory was developed by Adam Smith in which it was stated
by this person that if an organisation is able to produce goods at lower cost as compare to other
organisations then it can help to execute business more specifically. This theory can be adopted
by Milupa Dairy because its cost of manufacturing UHT milk is very low as is a dairy. It can
expand its business in China and generate higher profits by exporting its milk there.
Trade barriers for the company
As Milupa is planning to expand its business in China for the purpose of achieving
growth. The organisation may have to face different types of challenges and barriers while
establishing the business in another country. All the barriers that could be faced by Milupa are
described below:
Import tariffs: In China Tariffs are charged on import which includes fright, insurance
premium, packaging and other service charges. These are assessed on the transaction value of
items that are imported from other countries. As Milupa is planning to launch its milk products
in the Chinese market so it is very important for the organisation to gather information of such
tariffs so that business can be established in China successfully. If the managers and other
executives are not having idea of this then they have to face issues such as rejection of goods to
be launched in the marketplace (Doloreux and Laperrière, 2014).
Import regulations: The government of China have classified the goods in three parts
these are prohibited, restricted and permitted. Some items such as toxics are banned in China.
When products meet the criteria of restricted then they are required to have license or quotas to
enter in the Chinese market. While expanding business in this country Milupa is required to
focus on its product's quality so that it can met the criteria of permitted goods. If company fails
to do the same then it will become a huge problem to enter in Chinese Market (Fülbier and
Klein, 2015).
Slow economy growth: Growth of China's economy is very slow since past few years.
This could be the biggest barrier for Milupa while expanding business in China because when
the economy is not able to grow then it will be more difficult for the organisation to survive in
Chinese market.
Labelling and packaging requirements: The government of China has set some of the
regulations that are related to labelling and packaging of products and the companies which are
operating business there have to follow them. Milupa is also required to consider all the
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requirements. If these are not met by the organisation then there is a high possibility of that the
goods could be refused to introduce in market (Duréndez and Wach, 2014).
Every year different types of trade policies are formulated by the government in order to
facilitate the organisations to execute operational activities appropriately. Uncertainties as well
as opportunities are created by them. If legal parties modifies or changes them during a year then
it will be an uncertainty for the existing businesses because the companies are required to change
their strategies according to the new policies. It will also leave negative impact on profitability
because sudden change may lead towards losses and decrement in market share. It is not possible
to forecast them but managers of Milupa should always be prepare for any type of uncertainty so
that its negative impact can be declined (Fletcher and Herrmann, 2016).
Trade policies also create opportunities for the organisations because sometimes
government decreases custom duty, tariffs, quotas etc. to grow the economy. As China's
economy growth is slow since past few years so the legal parties may step forward to support the
import for the betterment of the country.
Ethical and social issues that are required to be considered
Ethical and social issues are related to the factors that are related to social environment
and required to be considered by the companies (Warwick, 2014). As Milupa is willing to
expand its business in China so it is very important for the managers of the organisation to focus
on such type of issues so that future consequences like government interference can be ignored.
Some of the major issues are as follows:
 Piracy of intellectual property rights: It is one of the main ethical issue which is taking
place in China. Most of the organisations that are not able to get import certificate from
the country are making frauds by pirating the intellectual property rights (Ghauri,
Tasavori and Zaefarian, 2014). It has resulted in the strictness of the government towards
such enterprises which are trying to expand their business in China. For Milupa it is big
issue which is required to be resolved by following proper procedure for expansion which
is set by the legal parties of the nation.
 Ignorance of CSR: It is the major ethical and social issue which is affecting Chinese
milk industry because organisation try to avoid to fulfil their corporate social
responsibility. For all the companies it is very important to focus on CSR and try to
improve society. As Milupa is planning to expand its business in China so it is vital for
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the entity to focus on it so that trust of legal parties of the country can be gained (Haigh,
2014). Under the norms of CSR all the companies are required to spent at least 2
percentage of its total profits for the betterment of the society. While operating business
on international level it is very important to focus on CSR so that global communities can
be improved with the help of the entity. If Milupa is also spending a fixed percentage of
its net profits for society of China then it will be beneficial for the company because it
will have a good market image which may results in higher profits and larger market
share (Harrison, 2015).
 Inappropriate compensation to workers: Most of the companies that operates business
in more then one country provide inappropriate compensation to the employees. It is a
huge ethical challenge which is also affecting the economy of China. Organisations that
are expanding their business in other nations hire local staff and offer them low wages. It
is also an ethical issue which is required to be focused by Milupa while expanding its
business in China.
It is very important for Milupa to focus on all the above described ethical and social
challenges so that its business can be expanded in China successfully. This step will be beneficial
for the company as it may help to establish a good market image by following the culture of the
country and fulfilling corporate social responsibility (Harrison, 2017).
Cultural preferences to be considered by the company
China is complete opposite in it's ideologies compared to west which makes it difficult
for international firms to analyse market structure. Cultural preferences needs to be considered
while doing business in china. It plays huge role in the acceptance of international players
entering in the market. Some of them such as manager of company should be obedient and loyal.
He is admired for the interest that he takes during his course of running the organisation.
Collectivism is considered worthy, they prefer working in groups and believe in making
decisions mutually (Ilieva, Beck and Waterstone, 2014). Cross social differences can pose a
threat for new entrances thus they should be dealt with in order to maximise organisation growth.
Highlighting the significance of culture within various activities of business are.
Operations: Chinese are considered to be relationship oriented. Building network and
interaction amongst consumers are vital for the international company. They choose to make
deals with trusted and reliable companies. Milupa has to maintain operations of business
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effective relationship with employees as well as consumers. Baby health is the most important
element for every parents with respect to China, this factor grows more profoundly due to their
cultural differences (Johanson and Mattsson, 2015).
Import/export: This activity is concerned with sales and purchase of goods and services
to another countries. Chinese are known for producing large quantity of products of good quality
at much cheaper prices. Milupa if manufacturing products in home country and selling them to
china to then has to make sure that it does not use any such material in it's production which can
hamper the growth of the brand in the concerned market. While dealing Chinese shows more
cooperation towards their own group than outside organisation. This factor can impact working
of Milupa (Liesch, Welch and Buckley, 2014).
Licensing: It is a process of gaining approval from the government with regards to doing
business. Chinese are known to be highly ethical in nature there it increase the responsibility on
part of businessman to be use fair practices when doing trade. Government in china take extra
measures to protect it's people from unethical procedures. Customers will reject the products
from those brand who have been associated with any such practices. Milupa has to make sure
that is capable of paying licensing fees and the license that it has acquired is legitimate (Wach,
2014).
Expansion method that can be chosen by the organisation
While planning for expansion business entities are required to focus on alternative
methods that could be selected by them to take their business on international level. As Milupa is
also planning to expand its business in China so it is very important for the managers to focus on
the methods of expansion and then choose best suitable alternative from them (Muzychenko and
Liesch, 2015). Different methods of internationalisation are as follows:
Licensing: It is one of the majorly chosen alternative of internationalisation in which a
business organisations takes license from the government of other countries to execute their
operations. The holders pay a specific amount to the licensor in which they get permission to
operate business in the nation for a particular time period. Milupa can choose this option to
expand its business in China by taking license from the legal party of the country (Puig,
González-Loureiro and Ghauri, 2014).
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Franchising: It is a process of granting permission in which one party allows another one
to operate business by using the name of it. In this process a specific amount is charged by the
franchiser from franchisee which is known as royalty. This option could be selected by Milupa to
internationalise its business by offering its franchise to the interested parties of China.
Joint venture: When two or more business organisations come together and start to
operate business for the purpose of achieving higher profits and growth is known as joint
venture. In this option the ownership, risks and profits are shared by the involved parties. This
alternative can be selected by Milupa to expand its business in China by operating business in the
form of joint venture with a well established company (Streitwieser, 2014).
From all the above described options the best suitable alternative for Milupa is joint
venture because of its lower risk. If this mode of internationalisation is being selected by the
company then it may result in successful establishment of the business in China. There are
various well established UHT milk providers in the country, Milupa can choose any of them and
offer a joint venture with an interesting scheme. As the company is new to Chinese customers
and mothers does not prefer to buy milk for their children from a new company but if the
products are offered with a well established brand then they can think to buy it. Joint venture will
be the best method on internationalisation for the enterprise as it may help to successfully expand
business in China. The main benefits of this option is that it helps to grow faster, increase
productivity and acquire higher profits so that an organisation can get developed (Svetlik and
Braček Lalić, 2016).
CONCLUSION
From the above project report it has been concluded that internationalisation is the
process of taking business to international level for the purpose of expansion, profit and sales
maximisation. While planning to expand a business organisations are required to analyse the
market of the country for this purpose Porter's five force model can be used by the companies.
Different types of trade barriers affect the expansion of business these are import tariffs,
regulations, economy growth etc. It is very important for the enterprises to consider social and
ethical issues such as piracy of intellectual property rights, ignorance of CSR etc. so that all the
products can be introduced in a new country appropriately. There are various types of methods of
internationalisation such as licensing, franchising and joint venture that could be selected by the
companies to expand business.
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Wach, K., 2014. The Role of Knowledge in the Internationalisation Process: An Empirical
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Online
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<https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN02721>
Porter's five force model. 2018. [Online]. Available through:
<https://www.visual-paradigm.com/guide/strategic-analysis/what-is-five-forces-
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Import of UHT milk in UK. 2019. [Online]. Available through:
<https://www.nfuonline.com/sectors/dairy/dairy-news/british-v-imported-uht-milk/>
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