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Essay: PESTEL and Porter’s Five Forces (A2 Milk)

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MACRO-ENVIRONMENT ANALYSIS (PESTEL)

The macro-environment is analysed by using PESTEL Analysis. It is a framework used to analyze and monitor the macro-environmental factor that has insightful impact on an organization’s performance, particularly in the future to determine opportunities and threats.

PESTEL

Above: Business to You

Political

Political factor is all about how and to what extend a government intervenes in the economy or a particular industry and how it affects business profitability (B2U – Business-to-you.com, 2019).

In this case, in order to stay competitive A2 Milk need to consider factors such as government policies and contract law. Government policies will affect the supply of milk. If government wants to decrease the supply of milk, farmers needs to decrease the extraction of milk. This will affect the profitability of the business. Another factor would be contract law. Contract law is enforced by the government to ensure that companies know what they should do and what they should not. For example, some countries will prohibit milk that are not natural or some criteria needs to be fulfilled. This will discourage business and affect their profitability. However, to increase the profitability of business, China-Australia Free Trade Agreement (ChAFTA) was introduced in December 2015, aim to support economic growth, job creation and higher living standards. So this creates an opportunity for the company to grow and prosper (Austrade.gov.au, 2019).

Economic

Economic factor are determinants of a certain economy’s performance. This factor will have impact on how profitable the company is due to its purchasing power on consumers and demand/supply in the economy as well as how company price their product and services (B2U – Business-to-you.com, 2019).

The Australia milk industry economic can be affect by some of the following factors such as growth rate, purchasing power of consumers and demand for milk. There are research that shows the demand for A2 Milk is gaining traction among consumers due to the health benefits (A2 Milk Market: Global Industry Trends, 2019). In addition, since consumers are adjusting their lifestyle, company such as Fonterra Co-operative Group Limited formed partnership with A2 Milk to further provide growth opportunities to benefit both players. The demand for milk gives the industry an opportunity to be more profitable (Ibisworld.com, 2019). Another factor is purchasing power of consumer. Increase in purchasing power means consumers have more income to purchase more milk to adjust to their healthy lifestyle. This will create an opportunity for A2 to earn more. However, Australia economy is experiencing a slow growth, this will cause the profitability to decrease. In addition, some parents prefers to breastfeed their child therefore, this creates a threat to the demand of infant milk.

Social

Social factors are general environment that represents the demographic characteristics, norms, customs and values of the population within which the organization operates (B2U – Business-to-you.com, 2019). Infant milk industry, the targeted audience would be babies, however some parents prefer to breastfeed their child.

Technological

Technological factors are revolution in technology that may affect the operations of the industry and the market favourably or unfavourably. It also affects the decision of the company whether to enter certain industries or to launch a product (B2U – Business-to-you.com, 2019). Factors that affects the operations could be one of the few followings impact on cost production, impact on product offer and technological development. If all the technology implemented by A2 Milk benefits the company, other competitors will try to copy their ideas. All the mentioned factors are all interconnected in technology because if the innovation is popular and it affects competitors revenue, others wills try to copy the idea. These are factors that needs to be monitored at all times, causing it to be a threat. However, with technology, it will still help to generate great profit to the company and the earning can be used for research and development to enhance their profitability.

Environment

Environment factors has surfaced due to increasing scarcity of raw materials, pollution targets and carbon footprint targets set by governments (B2U – Business-to-you.com, 2019). In the milk industry, it is heavily dependent on the health and availability of livestock. There are several factors that could affect the livestock, such as diseases or climate change. Diseases will have impact on the cows and this will cause a decline in quality of the milk and supply if cows are being slaughtered. In addition, climate change will affect the quality of the milk cause manufacture needs to find ways to preserve the milk under the weather conditions without the milk turning bad. Also, climate will cause the production and delivery to delay.

Legal

Legal Factor may often be overlap with political, however it involves more specifics laws such as health and safety law or consumer protection law. Organizations should know what is legal and what is not in order to run businesses ethically (B2U – Business-to-you.com, 2019). Health and safety law is needed so that the company will hold responsibility for the workers. It is the company’s responsibility to ensure that the workers are treated ethically. In addition, consumer protection law is to protect consumers from buying milk that are of low quality or other aspects that A2 Milk guaranteed but not fulfilled. Furthermore, Food standard codes is required for to comply with the laws of standard in operation.

Conclusion on PESTEL Analysis

In conclusion, PESTEL seeks to address opportunities and threat which A2 milk may face from external environment. It is crucial to note that all factor from this analysis would have a huge impact to A2 milk. This will allow A2 Milk to make better choices for the company in the future.

INDUSTRY ANALYSIS (PORTER’S FIVE FORCES FRAMEWORK)

The industry analysis is a framework that helps to determine the attractiveness of an industry that highlights five competitive forcers including threat of entry, threat of substitutes, bargaining power of buyers, bargaining power of suppliers and the extend of rivalry between competitors. Furthermore, it can help organizations to build sustainable competitive advantage in the milk industry.

The threat of entry

This determines how easy it is for new companies to enter a particular industry. When the barriers of entry into an industry is high, there are lesser businesses entering the market due to strong competition and vice versa (My Accounting Course, 2019). In this industry, it is hard to enter because the threat of entry is low, hence causing the barrier to entry is high. The following factors are some reason that justify the low threat of entry.

The economies of scale is hard to achieve therefore, causing the production to be more expensive for new companies. Production differentiation is strong as in this industry all company sells differentiated products. Customers also look for differentiated products. Therefore, the threat of entry is low. Capital requirements are high in this industry and its hard for new companies to set up businesses with the same expenditures incurred by existing companies. Government policies also ensure that many regulations need to be followed before companies can start selling their product in the market. This enforcement makes it hard for new companies to enter. Therefore, the threat of entry is low. However, access to distribution channels is high threat of entry as it is easier to ensure that the product is out in the market by franchising. To tackle this problem, A2 milk can take focus on creating more differentiated products from the new entrant. This can help build a strong brand identification.

Then threat of substitutes

This factor determines to what consumers can choose between the products and services as businesses are price taker (My Accounting Course, 2019).

There are actually very few substitutes that are available because many milk industry have A1 and A2 milk together whereas A2 company only cater A2 milk contents. This means that the threat of substitute is low. Furthermore, A2 milk pricing is much cheaper than milk of high quality. This shows that consumers are not likely to change brands, causing the threat of substitute to be low. To sustain competitive advantage in this industry, A2 milk can further promote their products with more distinct products. Differentiating its products from other products by providing unique benefits to meet consumers needs.

The bargaining power of buyers

This factor determines to what extend which buyers can influence the pricing of goods and services. When there are many buyers in the market, the competition low because consumers can go with the business that meets their needs at the lowest price and vice versa (My Accounting Course, 2019).

The number of suppliers that supplies A2 milk contents in Australia is actually very little. This means that consumer have few choices to choose form. Furthermore, as mentioned in the substitute section, consumers are unable to find substitutes in the market. This makes the bargaining power of consumers low. To sustain competitive advantage in this industry, A2 Milk can ensure that their products are differentiated as well as quality, this will ensure that the company continues to attract them. A2 Milk can also continue to create more new products.

The bargaining power of suppliers

This factor determines the extent to which suppliers can influence the price on organization. When there are a lot suppliers in the industry, organizations can switch from one supplier to another as long as the price is the lowest in the market and vice versa (My Accounting Course, 2019).

The number of suppliers in the milk industry is a lot. This means that A2 Milk has a lot of choices when it comes to who to get supplies from. This makes the bargaining power of supplier low. However, despite high number of suppliers, the suppliers do no compete within the industry for products, which means that A2 company can only purchase what the suppliers provide. This gives the supplier a high bargaining power. To sustain in this competitive industry, A2 milk can get supplies from multiple suppliers, more flexibility within its supply chain. Or they can encourage better relationship with the supplier can benefit on both sides.

The extend of rivalry between competitors

This factor determines competitive level in the industry, whether does the firms have control over the prices of goods and services (My Accounting Course, 2019).

If the rivalry among the existing companies in this industry is intense it will result to decrease in prices and profitability. A2 Milk operates in a very competitive industry. This competition does take toll on the overall long term profitability of the organization. To stay in such a competitive market, A2 Milk needs to focus on differentiating its products so that competitors will have less effect on its customers that seek its unique products. As the industry is growing, A2 Milk can focus on new customers rather than winning the ones from existing companies. The A2 Milk can conduct market research to understand the supply-demand situation within the industry and prevent overproduction.

Conclusion on Industry Analysis

In conclusion, by analysing all the five competitive forces of A2 Milk strategists can gain a complete picture of what impacts the profitability of the industry. They can identify trends early on and can quickly respond to exploit the emerging opportunity and shape forces in their favour.

17.2.2019

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