Perspectives of Global Business

This report discusses the challenges and opportunities faced by Fonterra in doing business in China, including PESTLE and Porter five forces analysis. It also provides recommendations for Fonterra's Chinese operation.

Running head: PERSPECTIVES OF GLOBAL BUSINESS
Perspectives of global business
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Executive summary
The aim of this report is to discuss about the challenges and opportunities being faced by
Fonterra in doing business in China. The major motives and the business relationships being
maintained by them with the stakeholders in China are being discussed. In addition, PESTLE and
Porter five forces analysis are being done to identify the key external factors that are having
impact on the business operation. Moreover, it is also identified that Fonterra is seeking market
and resource driven benefits as per the OLI framework. This is due to the reason that Chinese
operation will help them to tap the lower cost of resources available in the country as well as the
huge population and opportunities waiting. SWOT analysis is also being done to identify the
internal effectiveness of Fonterra. Based on the SWOT analysis, there are numbers of positive
and negative factors being identified. This includes access to larger financial resources by
Fonterra will help them to initiate extensive investment in China and facing the ethical issues in
China will create barriers in maintaining their brand image and recall value. It is concluded that
there are number of internal and external challenges being faced by Fonterra and these
challenges will have serious concerns in the long term. Accordingly, a few recommendations are
being discussed in this report for Fonterra. These recommendations include initiation of product
development and cost leadership strategy. Initiation of the product development strategy will
help Fonterra in having market adaptable products for China and this will ensure higher market
penetration in the long term. On the other hand, initiation of the cost leadership strategy can
help Fonterra in gaining competitive advantages by means of attracting major customer bases
over their prime competitors.

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Table of Contents
Introduction......................................................................................................................................4
Motive for investment of Fonterra in China....................................................................................5
PESTLE analysis.............................................................................................................................6
Political factors............................................................................................................................6
Economical factors......................................................................................................................9
Social factors.............................................................................................................................11
Technological factors.................................................................................................................11
Environmental factors................................................................................................................12
Legal factors..............................................................................................................................13
Determination of the OLI factors..................................................................................................13
Porter five forces analysis..............................................................................................................14
Bargaining power of the buyers.................................................................................................14
Bargaining power of the suppliers.............................................................................................14
Threat of new entrants...............................................................................................................15
Threats of substitutes.................................................................................................................15
Competitive rivalry....................................................................................................................15
SWOT analysis..............................................................................................................................16
Strengths....................................................................................................................................16
Weaknesses................................................................................................................................16

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Opportunities.............................................................................................................................17
Threats.......................................................................................................................................17
Recommendations..........................................................................................................................17
Conclusion.....................................................................................................................................18
Reference.......................................................................................................................................19

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Introduction
In the current business scenario, entering in the foreign market for business expansion is
a much common sight with the phenomenon of globalization has engulfed the entire business
world. However, the recent trend of entering in the foreign market is different to what it was a
few years ago. At one of point of time, more business organizations from the developed
economies were entering in other developed markets in order to expand their business. This is
due to the reason that developed economies were having the highest economy growth rate and
posed the maximum returns for the businesses (Laufs & Schwens, 2014). However, this trend got
changed in the recent years with the major developing countries are taking the podium place in
terms of growth of national economy. Developing and emerging economies such as China and
India are the top two nations in terms of the economy growth.
One of the major examples of this concept is Fonterra doing business in the Chinese
market. Fonterra is the leading company in New Zealand and they are also one of the leading
milk exporters and producers in the world. Currently, Fonterra is having their operations in
Chile, Australia and China outside of their home country (fonterra.com, 2019). Among these,
China is an emerging country and constitutes one of major revenue portion for Fonterra. It is also
reported that China is the largest market for Fonterra in terms of sales and business operation.
However, apart from the successes being achieved by Fonterra in doing business in China, there
are number of probable challenges also to be faced by them.
This report will discuss about the business approaches being followed by Fonterra in their
Chinese operation. In addition, PESTLE analysis will be done to identify the major external
factors to be faced by Fonterra in operating in China along with the initiation of SWOT analysis

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to identify the internal effectiveness of Fonterra in dealing with the challenges. This report will
also involve the Porter five forces to identify the major competitive factors, which will have
impact on the business operation of Fonterra. In view to the challenges identified, a few
recommendations will also be stated.
Motive for investment of Fonterra in China
The major motive for Fonterra in doing business in China is market seeking and resource
seeking. This is due to the reason that China is the biggest country in the world in terms of
population and thus the major motive of Fonterra in entering the Chinese market is to cater the
enormous market opportunities. Moreover, the average cost of operation in China is lower as
compared to some other countries due to the lower cost of human resources and some other
resources. Thus, with having their operation in China, Fonterra is being able to enhance their
profitability by regulating the cost of operation. Prior to the entrance in the Chinese market,
Fonterra was not having presence in the Asian market and thus with the entry in the Chinese
market, they have being able to tap the opportunities remained in the Asian region (Pavlovich,
Sinha & Rodrigues, 2016). Fonterra is having their own subsidiary in the Chinese market with
having direct investments in the country. It is helping them to have larger presence in the country
and offer their products in accordance to the local taste and preference pattern of the customers.
Moreover, it is also reported that Fonterra is working on the basis of cooperative in China with
having 2 hubs as of now. Each of these hubs is sourcing milk from the dairy farmers along with
having the accommodation for more than 30000 cows. Thus, the local dairy farmers are the
major stakeholders for Fonterra in their Chinese operation. However, on the other hand, risks of
financial loss are more for Fonterra due to the huge investments involved with having

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subsidiaries in the countries (kuever, 2014). The following sections will discuss about the major
positive and negative factors being involved in the Chinese operation of Fonterra.
Fig: 1 (major risks involved in doing business in China)
Source: (weforum.org, 2019)
PESTLE analysis
PESTLE analysis will be done in order to identify the external factors that will have both
positive and negative impacts on the business of Fonterra. There are number of market risks of
failures will be identified through PESTLE analysis.
Political factors
China is having communist and socialistic type of political system in the country. It is
having both advantages and disadvantages for Fonterra. The major advantage for them is the
lower risks of change in the political scenario. This is due to the reason that in the case of
democratic system, changes in the political regimes will cause changes in the political factors

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also, which will be challenging for the business organizations to align with. On the other hand,
interference of the government in the business operation is more in China, which is a major
challenge for Fonterra (Nathan, 2017). As per the global economy, China is having lower level
of political risk with having their score of 2. This is denoting the favorable political environment
for Fonterra due to the reason that they are not facing any political turmoil in the country.
However, it should also be noted that political stability of China is not favorable due to the fact
that it is reported that China scored at -0.55 as of 2015 in terms of political stability
(theglobaleconomy.com, 2019). As per the Global competitiveness index, it is identified that
China is scored at 49 in terms of intellectual property protection. This denotes that moderate
risks will be involved for Fonterra in doing their business in China in terms of protecting their
intellectual rights.
This denotes that the country is not a politically stable, which will have potential long
term issue for Fonterra in terms of their future investments. Corruption is another major issue
being faced by Fonterra in doing business in China. This is due to the cause that China is
standing at 37th position as of 2015 in the corruption perception index, which denotes that high
intensity of corruption is evident in the Chinese business scenario. The latest trade war between
China and the United States is leading to the increase in import tariffs. This is also affecting the
trading of Fonterra between their home country and Chinese operation.

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Fig: 2 (Political risk in China)
Source: (theglobaleconomy.com, 2019)

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Fig: 3 (Corruption in China)
Source: (theglobaleconomy.com, 2019)
Economical factors
China is the one of the topmost countries in the world in terms of economical growth
with average economical growth rate trending over 6 percent. This is denoting the favorable
market condition in doing business in China. In the case of Fonterra, this is having favorable
impact due to the reason that purchasing power and standard of living for the customers is
increasing, which will increase the demand for the consumer products (Lin, 2013). However, on
the other hand, it should also be noted that taxation policy is one of the major issues or
challenges for the business organizations doing business in China. This involves the high rate of
corporate tax and the complexities involved in it. Thus, even though the cost of resources will be

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lower in China but involvement of the higher tax level will increase the average operational cost.
It is also reported that ranking of China in terms of trade openness is reducing with having the
score of 39 as of 2015 (theglobaleconomy.com, 2019). This denotes that difficulties and barriers
in terms of open trade are increasing in the country. This will cause challenge for Fonterra in
sourcing their milk based materials from New Zealand. Moreover, the Chinese operation of
Fonterra is also being treated as an export hub and difficulties in the trade openness will further
reduce the effectiveness of the Chinese operation of Fonterra as export hub.
Fig: 4 (Trade openness in China)
Source: (theglobaleconomy.com, 2019)

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Social factors
China is having lower diversity in their total population and thus the taste and preference
pattern of the average customers in China are much similar. This is helping Fonterra in offering
standardized products across the country and less cost involved in developing different product
varieties for the same market. However, it should also be noted that impact and relevancy of
cultural factors is more for Fonterra in doing business in China. This is due to the reason that
Chinese cultures are different to that of New Zealand and thus the standardized business
approaches by Fonterra as followed in their home country will not get succeed in China (Ma,
2015). Moreover, middle class customer segment is the larger section of the total population in
China and in this case, mass market models are the key in gaining competitiveness. However, in
the case of the products being offered by Fonterra, majority of their products is premium in
nature, which is having limited opportunities in the market.
Technological factors
Technology is one of the major competing factors in gaining advantages in the market
and in the case of Fonterra; technological development is helping them in regulating the cost and
introduce new products. From the perspective of their operations in their home country, Fonterra
is the leading name in terms of technological advancements in the dairy industry. This is having
positive impacts on their business in China also. As per the global economy, innovation is
steadily increasing in China and this is quite evident in their product development trends. In
addition, expenditure in the research and development in China is also increasing and it is scored
at 2.07 as of 2015 (theglobaleconomy.com, 2019). This is denoting that Fonterra is having the
opportunity for extensive development of their existing technologies and improve their

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production process. However, it should also be noted that there are number of competitors
operating in the Chinese dairy industry and each one of them is rapidly developing their
technologies.
Fig: 5 (R&D expenditure in China)
Source: (theglobaleconomy.com, 2019)
Environmental factors
Environmental factors are also important for Fonterra to consider due to the reason that
introduction of the stringent environmental regulations and standards will have impact on the
business operation. It is reported that China is one of the largest emitter of pollutants in the world
and thus there are number of measures being initiated by the government to curb the emission. It
is important for Fonterra to regulate their emissions and becoming a carbon neutral organization.

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Business operation of Fonterra is directly related with that of the environment due to the reason
that rearing livestock can affect the environment. Thus, the major challenge for Fonterra in this
case is to manage their environmental impact by investing minimum capital in it.
Legal factors
Being a socialistic country, legal framework is stringent in China. As per the global
economy, it is reported that that China is having favorable position in terms of the rule of law
and quality of regulations. This denotes that Fonterra is facing higher intensity of legal factors in
doing business in China. Moreover, it is also important for Fonterra to ensure the proper
fulfillment of the requirements and expectations of the customers due to the reason that
customer’s voice is being given much consideration by the legal framework of China. In this
case, it is important for Fonterra to have customer centric approach in doing their business in
China.
Determination of the OLI factors
The copyrights and trademarks for Fonterra in terms of their branding and patents in
terms of production technology may witness the interference of government due to the socialistic
political approach of the Chinese government. For example, Google has to stop their business in
China due to the excessive interference of the government policies in their autonomous practices.
In terms of the location advantages, China itself will offer huge opportunities for Fonterra due to
the massive market size. In addition, the free trade agreements of China with some other
countries will help Fonterra to tap the larger Asian market as well. China is strategically located
in the north of the developing South Asian region and south of Russia. Thus, there are huge
location advantages being evident for Fonterra. In terms of the internalization strategy, keeping

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the work internal will be beneficial for Fonterra. This is due to the reason that China is having
one of the lowest costs of resources especially the human resources for production. Majority of
the jobs of the multinationals are being outsourced to China. In this case, Fonterra will get
benefited from their internalization approach in China.
Porter five forces analysis
In The above analysis, there are number of external factors being identified for Fonterra
in their Chinese operation. However, it is also important to have the understanding about the
competitive scenario of the industry where they are operating. Porter five forces will be used to
identify the major five competitive factors relevant in the business scenario Fonterra.
Bargaining power of the buyers
Bargaining power of the buyers is high for Fonterra due to the reason that there are
number of options being available with them. Chinese market is flooded with number of dairy
brands offering different product variants (Dobbs, 2014). Moreover, switching cost is also lower
for the customers, which is further reducing their loyalty. The distinctive branding and taste of
the products of Fonterra can be beneficial in regulating the bargaining power of the buyers.
Bargaining power of the suppliers
Bargaining power of the suppliers for Fonterra is moderate due to the reason that there
are number of supplies is available in the Chinese market. Thus, Fonterra is having the upper
hand in selecting the suppliers. In addition, cooperative model being followed by them is also
contributing in regulating the bargaining power of the suppliers with having larger number of

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stakeholders as the suppliers (Yunna & Yisheng, 2014). Moreover, the brand value of Fonterra is
also helping them gain the bargaining power over their suppliers.
Threat of new entrants
Threat of new entrants moderate for Fonterra due to the reason that there are number of
small scale dairy brands operating in the local level but they are unable to match the extensive
business operation of Fonterra. Moreover, it should be noted that Fonterra is a global brand with
having their business operations in different countries along with maintaining the leadership
position in terms of revenues, investments and technological advancements (Zhao et al., 2016).
Thus, it is difficult for the new entrants to match this operational scale of Fonterra. On the other
hand, in the local level, new entrants can operate in small scale and pose challenge for Fonterra.
Threats of substitutes
Threats of substitutes are high for Fonterra due to the reason that same dairy products are
being offered by different brands in the Chinese market. Differences are insignificant between
the offerings of these brands other than their branding and variants. Thus, unique selling
proposition for Fonterra is low (Rajasekar & Al Raee, 2013). This force is also regulating the
pricing decisions of Fonterra due to the reason that changes in their price will affect the number
of inflow or outflow of the customers.
Competitive rivalry
Competitive rivalry is high for Fonterra due to the reason that number of competitors are
operating in the industry and in the same price points. This is leading to the emergence of the

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competitive rivalry between these brands. Different aggressive stints such as price discounts and
promotions are being done by the competitors in order to attract more customers.
SWOT analysis
Strengths
One of the major strengths for Fonterra is their brand value and identity. With having the
presence in different countries across the world, Fonterra is having well penetrated market
presence in China. This is helping them in catering to larger customer sections along with
pushing the sales of their new products. In addition, being a global brand, they are having the
access to huge financial resources, which is further helping them to invest more in business
expansion and development (Stojkov, Noy & Saglam, 2016). Diverse product variants are also
helping Fonterra to cater to different taste and preference pattern of the customers. Thus, it can
be concluded that Fonterra is effective enough in catering to huge market segment in China.
Weaknesses
One of the major weaknesses for Fonterra is the limited products in same price points.
This is due to the reason that majority of the products of Fonterra are being offered in premium
and thus mass segments are being ignored. This is creating limitations for Fonterra in their
Chinese market. In addition, the ethical issue being faced by Fonterra in China regarding their
food safety is also affecting the market prospects. Higher cost of operation of Fonterra is also
affecting their profitability and business viability in operating in China.
Opportunities

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Fonterra is having the opportunity for tapping the untapped market in China by targeting
the mass market with more affordable products. This can help them to increase the sales volume
and market share in China. In addition, exporting to different Asian countries from China will
also be beneficial for Fonterra due to the reason that lower cost of operation in China will help
Fonterra to increase their profitability in international business.
Threats
Fonterra is facing the threat of emergence of new competition in the market. The more
will be the intensity of competition; the lower will be the viability for Fonterra in operating in a
saturated market (Lee, 2013). Moreover, Fonterra is also facing the risks of recession in the
Chinese market. Emergence of recession will cause reduction in demand for the products and
this will affect the business of Fonterra.
Recommendations
 It is recommended that product development and market penetration strategy should be
initiated by Fonterra in their Chinese operation. This is due to the reason that with the
help of the product development strategy, more variants will be introduced in the market
of the existing products. This will help Fonterra to target newer customer segments and
increase the sales revenue and market share in China. On the other hand, initiation of the
market penetration strategy will enable Fonterra to have products across different price
levels and thus their presence in the market will be more penetrated. The customer
segments, which are still out of the target audience for Fonterra, can be included.
 It is also recommended that cost leadership and product differentiation strategy should be
initiated by Fonterra in gaining competitive advantages. With the help of the cost

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leadership strategy, the lower cost of resources in China can be optimally utilized and the
end products can be offered in more competitive prices. This will help Fonterra to
enhance their market share in China. On the other hand, initiation of the differentiation
strategy will help Fonterra fend off the threat of substitutes. They should have distinctive
products with higher level of unique selling propositions, which can help in attracting the
customers over their competitors.
Conclusion
This report concludes that there are number of opportunities and challenges to be faced
by Fonterra in doing business in China. With the help of the PESTLE analysis, it is identified
that Fonterra is facing a number of challenges in China along with a few favorable factors. In
addition, it is also identified that the competitive business scenario for Fonterra in China is
intense thus impact of the competitive forces is also more for them. From the perspective of the
internal effectiveness of Fonterra, it is seen that they are effective enough to enhance their
business in China but the ethical issues being faced by them and higher cost of operation is
creating barriers for Fonterra. On the bases of these challenges, a few recommended steps are
also being identified, which can help Fonterra in having effective business process in China.

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