Strategies Used by Yili Groups

The Yili Group—-how it functions and strategizes in the Chinese Dairy Marketplace 5. 0 Introduction This chapter critically reviews the findings and analyses of the data collected from the company’ report, secondary data and interviewer opinions towards the strategy adopted by the company. Unstructured telephone interviews and face-to-face interviews with the company’s marketing director – Mr. Wang, revealed what the company implements and the problems faced by the company. 5. 1 Findings and Analysis From the data collected, the Yili has implemented a number of strategies to improve their market share and profitability.

The Yili’s marketing strategy is based on the innovation. Innovation is the successful exploitation of new ideas. In China’s dairy industry, innovation is an important issue that considered a major driver of the company towards success. It linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share and so on. For the moment, China dairy’s companies are mostly aiming in the first line of market; targeted markets are still putting towards the well-developed cities, for instances, Beijing, Shanghai, Guangzhou.

Sadly, companies have left out the wider market in the outskirt of China. The main reason for it is the cities sales points are not centered; investment of exploitation for new market and promotion is higher. Besides, one of the risky of the investment is the effect of the responses and return is slow compare in the well-developed cities. A creative marketing strategy is needed to enter into a new market. The Yili has realized that being a leader in the industry, they need to be creative in thinking in order to survive in the competitive market.

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The opportunity that gained by the Yili was the first company who entered to less developed cities, which provide wider market and profit return to the company. For instance, in 2005, the company has targeted the north side of ‘Zhejiang’ as their sample of targeting market. Through the franchise way of marketing, the company has gained a good effect of return in between two months time. The new marketing strategies in less developed cities have provided a good result to the company with the improved 20% of sales.

Koh (2005) stated that China biggest suppliers are lending money to farmers and building dairies to meet demand for cheese, yoghurt and other foods growing at 14 percent a year. In China’s Inner Mongolia region, where the two companies are based – Yili and Mengniu, plans to import heifers from Australia to increase dairy cattle numbers by 14 percent to 2. 5 million in the next six months. Dairy farming is the main way for farmers to get rich. Selling heifer calves from imported cows to other farmers is as lucrative as producing the milk.

In past several years, China dairy industry has developed very fast. However, there are many companies facing management problem due to the reasons of the companies are not paying attention to their production line, sales and supply areas. Undoubtedly, the growth of company is depends on the speed of development, but the stability of the management should be taken in to consideration too. Based on the data collected, total quality management has adapted in the Yili. Total quality management is a management style based upon producing quality service as defined by the customer.

It defined as a quality-centred, customer-focused, fact-based, team-driven, senior-management-led process to achieve an organization’s strategic imperative through continuous process improvement. The new distribution network flow adopted in the company is Five Fix Points: fix starting point, fix ending point, fix time consume, fix routine of the work and fix product volume. This has enabled the distribution of the Yili’s product to Guangzhou, Shanghai, and other places smoothly. Thus, the deliver time is faster and the company can able to control the mistake of deliver flow too.

Market Segmentation, Targeting and Positioning Based on the information, this can be concluded that the Yili has implemented the market segmentation, targeting and positioning strategy very well in the company. Since buyers today are numerous, widely scatted and varied in their needs and buying practices thus companies need to choose what type of the customers they wish to be connected. Through the interviewed, the author has realized that the company has segmented their market based on the geographical segmentation.

Based on Mr Wang, the Yili has targeted the well-developed cities like other company, for instances, Beijing, Shanghai and Guangzhou. In addition, the Yili has covered some developed cities that other companies do not enter in which provide wider market and profit return to the company. There are not many companies enter to the less developed cities because of the sales points are not centred and thus, company need to spend huge amount of money in promotion and investment of exploitation for new market.

When choosing a market-coverage strategy, Mr Wang has mentioned that the company has targeted the customers from all level of buyers. From the information provided, it showed that the company used undifferentiated marketing that approached market as a whole with one market. Dairy product is a grocery thing; therefore, the Yili using undifferentiated marketing strategy to focuses on common buyer needs rather than what is different and designed to appeal to the largest number of buyers. As mentioned earlier, positioning is an executive’s most important strategic responsibility because it will make or break a company or product.

Thus, the Yili has using product attributes and benefits of the product as positioning strategy to attract customers. Strengths, Weaknesses, Opportunities and Threats analysis SWOT analysis has evaluating the strategies position of a business for the Yili by identifying its strengths, weaknesses, opportunities and threats. SWOT analysis helps the business to carve a sustainable niche in the market. It helps to develop the career in a way that takes best advantage of the company’s talents, abilities and opportunities.

According to Mr Wang, it provides the company a simple method of synthesizing the results of the marketing audit. Strengths There are several strengths can be found in the company. Yili has gained around 20 percent in dairy industry, which can be known as one of the strength for their company as a leader in the market. Furthermore, using of the high-tech machine that some others companies cannot afford has lead the company further step forward and quality raw material to maintain the quality of the food is hard to follow by the other competitors.

Furthermore, experience of running of the company is one of the strength. Mr. Pan Gang, the director of the Yili Group, who is 36 years old but has more than 10 years experience in dairy industry that is familiar with the current situation of market. He is a propellent of innovation in the Yili. Last year, Mr Pan was chosen China Top 10 Businessmen. His influence has attracted the global investors to pay attention to the Yili. Besides, the strength of the suppliers – milk stations, was one of the issues considered in the Yili to reduce expenses. Supply of the raw milk has affected the development of the industry.

The problem of the industry is that the demand exceeded the supply of raw milk, which caused inefficiency of production and low quality of raw milk. The company who can be the leader in the dairy market should first control the raw milk of supply. The Yili obtained the most perfect and high quality of raw milk in China. They have around 200 high quality rangelands and over 1 million milk cows. Further than that, the raw milk has expanded from North to South. Moreover, the YiLi was declared to become the one and only dairy sponsor of Olympic Games 2008, Beijing.

Since the Yili is the only one Chinese food sponsor in the history of Olympic Games so it is also a milestone in the Yili strategic process of development. Being a sponsor to Olympic Games is the best way of promotion strategies for the Yili to boots their products and building their brand globally. Weaknesses There are a few weaknesses faced by the company. The major problem facing by the company is losing out some of the key employers to their main competitor – Mengniu. Due to the reason of Niu Geng Sheng (Mengniu’s Director), a former manager from the Yili is now a key player for the Mengniu.

Thus, the tactic of management using by both companies are similar. Besides, the Yili is facing internal management problem. The company is using old management style – lower level of employees is not allowed to make any decision. Suggestions of the lower employees do not accepted by the high level management. Opportunities Spaces to growth in the market are one of the opportunities to the Yili. For the dairy industry, China currently has the lowest per capital of consumption of milk in the world – an estimated 2 litres in 2004—that leaves room for significant growth in the market.

Education on the health benefits of milk consumption and companies’ deeper retail penetration will continue to be key drivers of drivers of growth. New product development is also expected to boost sales, as milk with varying fat contents and fortified milk are introduced to the market. Threats There are few threats to the Yili to take in consideration when making decision or strategy. Based on the data collected, the author has realized that the industry consolidation and profit erosion are the key investment risks in the highly competitive dairy product industry.

Other risks include natural disasters, bad debt from loans to dairy farmers and counterfeiting. Any major outbreak of illness or disease relating to cows, such as the “mad cow” disease (bovine spongiform encephalopathy) or bovine tuberculosis (“bovine TB”), could significantly affect raw milk supply. This also causes a drastic fall in consumer demand in dairy products, resulting in a substantial decline in sales and profits. Limited cases of bovine TB were reported in several Chinese provinces earlier but did not draw much attention.

In addition, in line with China’s World Trade Organization (WTO) commitments, the Chinese government has undertaken to reduce tariffs in respect of various dairy products from current levels of between 15% and 45%, to between levels of 10% and 19% by the end of 2005. As part of the Yili’s strategy to secure a reliable supply of raw milk from dairy farmers, the company provides guarantees to banks on loans taken to by these diary farmers for their purchase of dairy cows. Although the Yili holds various forms of security from the farmers and counter guarantees from other thirds parties, it is still exposed to default risk.

As at end-2003, its aggregate farmers’ loan guarantees totalled RMB83m, representing 37% of net profit. Political, Economic, Social and Technologic factors Political Despite more than a century of upheaval, the political system in China is continuous to undergo radical change. While the economic reforms introduced over the past two decades have general improved living standards across the country – thus reducing lessened the likelihood of social upheaval – the government has been obliged at times to slow the pace of economic liberalisation for fear of loosing overall political control.

Today’s communist China is a world away from that of the newly formed People’s Republic in 1949. The extraordinary changes, which have taken place in China since former paramount leader Deng Xiao Ping launched his open-door economic reform policy, have radically affected the lives of ordinary people, particularly in major cities. Many people have been forced to question traditional values and attitudes as new ideas and concepts have emerged. The influence of foreign culture is now much more apparent in everyday life than in any other previous generation.

Political stability is an important issue to consider by the Yili when they decide to enter to a new market. The most recent government legislation of relevance to the dairy market relates to packaging, hygiene and product labelling. The government introduced new hygiene regulation in 1995, which mean that product lines are now inspected, and those products that have passed the inspection can place a hologram label on their product, to show consumer that their product is hygienically manufactured.

The government has also brought out strict codes on the labelling of product ingredients, and has tightened up laws concerning marketing claims for products, in order to clamp down on companies making false claims about the benefits of their product. Packaging legislation relates more to hygiene issues, but the government has also been keen to encourage local companies to improve packaging used, and the presentation of the products, in order that Chinese products can compete more strongly against foreign ones. Economic China economy is growing fast lately.

For the dairy industry, China currently has the lowest per capital of consumption of milk in the world – an estimated 2 litres in 2004–that leaves room for significant growth in the market. Between 2000 and 2003, the Yili’s revenue grew at an astonishing pace of a CAGR of 137%. On the back of higher milk demand and capacity growth, the company is expect revenue to grow by an average annual rate of 67% in the next three years while net profit is predicted to escalate at a three-year CAGR of 63%, making it one of the fastest growing Chinese company.

While the company is believe that management’s profit forecast for this year of not less the RMB300m is to conservative, they expect the bottom line to climb by 67% to RMB378m. According to Mr Wang, he stated that the economic factors have a deep influence for the company to gain for the profitability. During the “one off” incidents such as Iraq War, 911, SARS and bird flu have given the impact to the company in terms of sales. In facts, the economy slow down has lead to purchasing power less, customers are more concern what they are spend.

China is already among the world’s biggest economies, and it’s growing fast. It’s a leader in technology and innovation – not just manufacturing. It’s one of the world’s biggest exporters and, potentially, the world’s biggest market. But it also has serious problems, with human rights, workers rights, political expression, inequality, environmental issues and more. There is no doubt that awakening China will be a major player in the 21st century. Social Social analysis is important for the Yili to identify the preferences of the customer towards their products.

Besides, social also influence the company in term of demographic: age, region, income and taste preferable. Different people will have different expectation of taste, thus, company has trying hard to create variety of taste in their product to fulfil the customer need. Milk sales are growing at an unprecedented rate in China due to increased consumer awareness and improved distribution networks. Social life is changing recently; people are more concern to health life and so, the Yili has to use quality material to produce healthy life.

Due to the reason of the consumers begin to own refrigerators and distribution networks are improved, fresh milk is starting to gain market share which has provide opportunity. Technology Technology can be defined as the material entities created by the application of mental and physical effort to change nature in order to achieve some value. Technology is one of the important resources to the Yili. Tough competition, plus massive and rapid changes in media and communications technology, guided the business in offering a wider range of products through better-designed communications and distributions network.

In addition, Internet has been implemented in the Yili, who uses Internet to communicate among their employees and suppliers as well. Homepage has been created to boast the sale from delivering the information. The author has observed both leading companies’ web sites in market – comparison between the Yili and the Mengniu and came out with the conclusion that both web sites are designed at least for promotion purpose and provides the communication to the customers. Thus, companies’ web sites are shown to function as communication, transaction and distribution.

Both web sties are designed to deliver similar message to the customers. For instance, the range of products and services the companies offer. Through the observation, the Mengniu’s web site is more attractive and the information delivered is more details than the Yili. However, both the English versions of the homepages do not function. (Refer to appendix B) The technology using in the Yili – project management, process planning, engineering, automation (MES level) and commissioning will be ‘Tuchenhagen Diary Systems’ responsibility.

Part of the engineering, mechanical assembly, process automation (operator level), electrical engineering and installation as well as commissioning. The scope of supply includes the complete processing line from raw milk reception to tank storage for UHT milk, including pre-processing and standardisation of milk, mixing storage and powder handling (GPCN supply) and integration of UHT into the processing system. Furthermore four CIP plants will be delivered. Thus, very low running cost will be achieved by highly efficient heat exchangers and energy recovery. Porter ‘s Five Forces Rivalry among Existing Competitors

China dairy industry is growing in well expectation and it is a differentiation market. There are many competitors competing in term of price, product offer, and services, not only local competitors but as well as foreigner investors. For instance, Sanyuan, Mengniu, Guangming are local competitors and Nestle (Switzerland), Parmalet Finanziaria SpA, PRF from Italy and Danone from French. However, foreign competitors have chucked out from the Chinese market due to the main reason of price war. Chinese Dairy Industry is playing with the cheap costs and price war that the foreign companies do not afford.

Thus, the entire top foreign companies have finally stopped the business in China where they thought China’s market provides them a huge opportunity. Beside, the reason for the foreign companies facing loss in running business is due to the fact that investors are over estimated the China market development. Most of the foreign companies are using high costs with good quality products to attract customers, however, consumers do not accept it as spending power are low with the fact of low income. Lose of control in milk station – raw material is one of the problems to foreign companies.

According to Mr Wang, the company still in well expanding situation – leader in the industry, although there are many competitors in dairy industry. The main competitor for the Yili is the Mengniu. Threat of New Entrant Based on the research, the threat of new entrant for the industry is low. The dairy industry is easy to enter since it s not a capital-intensive business, and does not required a huge amount of money like airline industry to operate. Besides, there was no limited gate pace market for others to enter. In facts, dairy manufacturers can set up the factories in small-, medium- or arge sized of business. More than 1500 of dairy product manufacturers can be found here and most of the manufacturers is operating from home and utilizing largely on labour-intensive methods. It showed that operating a dairy product manufacturer does not require a huge amount of money. However, the brand loyalty is low for the industry and the customers switching cost is high depends on their taste preferences, attractiveness of the promotion and the purchasing power as well. Threat of Substitute Threat of substitute in dairy product industry is high.

Based on the China Dairy report there are more than 2000 dairy manufacturers operating in the industry such as Mengniu, Guangming and Sanyuan. The companies are available almost the same products. Aside from that, the competitors in this industry are not only in the local but also from the outsider such as Cadbury and Nestle. Apart from importing dairy products into China, foreign players are also permitted to engage in the full range of distribution services relating to dairy products. China’s accession to the WTO, therefore, will lead to fiercer competition, even though a large number of players have entered the market by now.

Some foreign competitors have built their own factories in China. All the manufacturers are implementing the batch production strategy in order to reduce the production cost, thus, there are loads of products can be found in market. Bargaining Power of Buyers The bargaining power of buyers is high since there are many brands for the buyer to choose. The switching cost is very low. In fact, the retailers are lowering their prices to cater to market demand, which seemed to have chance as customers rather go for cheaper product.

Customers tend to be very prudent in their spending and are on the look out for bargains. However, there is still a certain amount of brand loyalty customers too. For instance, buyers may go for the brand, which is satisfied them most always. Based on the China Dairy Market Report, the decision to purchase dairy products can be influenced by a number of environmental factors, including recommendations form authoritative figures such as health care providers, exposure through travel, and advertisements. Advertisements for dairy products are mostly on television, radio, billboards, or other media.

Television is the most common media for dairy product advertisements and follows by billboards. Bargaining Power for Supplier Raw materials (including raw milk, packaging and treatment materials), salaries and benefits, utilities, depreciation and other manufacturing costs make up the bulk of the costs of sales. Raw materials have historically accounted for 90% of such costs. Within this category, raw milk makes up the largest portion. This cost structure is expected to remain the same in the medium term. According to Mr Wang, the bargaining power of supplier is low.

This is due to the fact that company can choose from many suppliers or raw materials since the sources are not dominants by one or two large company. However, the Yili has a basis in one of the world’s largest pasturelands, the Inner Mongolian Steppe. It is this vast resource of dairy production that supplies the Yili with its basic product. This base is also very close to key northern markets such as Beijing and Tianjin, plus other rich provinces in the north, such as Liaoning and Hebei. Control on quality, quantity and cost of raw milk.

The Yili has cooperates with milk collection centres, individual dairy farmers and cattle farms in the purchase of raw milk and cattle farms in the purchase of raw milk – the primary raw material. Milk collection centres organize milk collection form individual dairy farmers at their automated milking facilities and deliver the raw milk by refrigerated truck to the Yili’s production facilities once or twice a day. The company does not own any milk collection centres. Under the milk supply contracts, it reserves the right to reject raw milk that is below standard.

The company normally agrees to pay a “guaranteed” minimum price for raw milk regardless of market fluctuations although it does not guarantee milk purchase volume. This gives the Yili a higher flexibility in raw material sourcing, while the provision of loan guarantees to diary farmers allow the company to better secure the supply of raw milk by entering into exclusive milk supply agreements. Marketing Mix Marketing mix play an important role for the Yili to achieve better sales turnover in the market. Information has clearly showed that the sales have increased annually with well planned of marketing mix.

Product The Yili manufactures six food product groups, including frozen food, dairy products, quick frozen foods, beverages, flour and starch, with dairy product being the core activity of the company. Besides, the Yili has also incorporated a locally established foreign ice cream company, Perfetti’s. Mr Wang has emphasized that the company is offering variety of products in dairy product category such as liquid milk, ice cream, yoghurt, milk powder, drinks and so on. Besides, the quality of the product is under their hygiene assessment standards since the first stage of raw material collection from pasturelands.

Place Mr Wang has stated that distribution plays an important role to success in business as to makes the product available where the consumers are easy and convenience to buy it. Select the stockiest, dealers, and intensive distribution must carefully and support them strongly. They must keep an inventory of the product, demonstrate the product to the consumers, close sales and fully provide after sale service. Thus, improvements in distribution networks are contributing to strong growth in the Milk Sector. The Yili has expanding geographically to set up local production bases in various regions.

Localized distribution helps the company to minimize transportation costs and maintain product freshness, making the distribution of milk across the country more efficient. The Yili has now access to more consumers, which has led to increased sales. The development of supermarket across China is also central to the success of milk and other dairy products. Economic development across China means that more consumers own refrigerators and as a result, demand for fresh dairy products is growing. Major supermarkets, such Carrefour, that carry fresh dairy products are springing up across China into regions that were ypically served by small, independent food stores. Dairy players are now able to penetrate lesser-developed regions, providing Chinese consumers with easier access to milk and other dairy products. Based on the information, the Yili sells over 90% of its product through several hundred distributors across the country, of which 90% are bound by exclusive 90% arrangements. A comprehensive distribution network enhances efficiency. The company thus has an unrivalled competitive advantage over its competitors. The Yili has so far more than 20 factories.

Dairy products have to be consumed fresh. Long distance transportation is not possible for the business. Therefore, the Yili has to build up their want their products to reach every corner of the country. Promotion The major driver behind milk’s growth is greater consumer awareness. In 2001, the Chinese government spearheaded a public awareness campaign to communicate the health benefits of dairy products (Tait, 2005). For example, the State School Milk Programme involved supplying milk to selected schools at discounted prices in order to encourage milk consumption.

Milk also gained popularity following the outbreak of SARS in 2003. Numerous media releases and features on health-related issues ensuing the epidemic listed dairy products as an excellent source of vitamins and minerals, essential for building up the immune system. Brand recognition is the key success in consumer products, especially in such homogenous product as milk product. The Yili has relied on advertising and promotions to build and increase consumer awareness, therefore incurring huge advertising and promotion expenses. The Yili has built a strong brand name in China.

Its trademark won recognition as a “PRC Famous Trademark” in 2002, among other awards. Strong brand awareness is vital to expanding the business and preventing market share erosion. In addition, the company also won other certifications, such as being named the “Exclusive Diary Products for Chinese Cosmonauts”, and the “Exclusive Diary Products for National Sports Bureau Training Institute Athletes. ” The strong consumer awareness of its brand name is vital to its expansion strategy and the prevention of market share erosion. For instance, the Yili has successfully promoted its Bitter Coffee brand of flavoured ice ream in the Beijing and Tianjin areas, through strong TV advertising. Price Retail prices have increased greatly since 1995, but the rate of retail price inflation has been slowed down by controls brought in by the government, intended to slow down rampant internal market growth, and keep price inflation to manageable levels. The rise in product prices used to be one of the most worrying rends in the domestic economy for the government, especially as these rises were creating substantial difficulties for many lower-income households, and the threat of social unrest should these difficulties persist.

Price controls brought in for the sake of keeping basic food prices at a level to suit poorer households included the reintroduction of rationing on products. However, over the last few years, the rise in competition in most consumer product markets has forced consumer prices down. Indeed, the Chinese economy is now facing chronic deflation due to the decline in consumer prices. This deflation has become more acute due to the lack of upward movement in property prices in China, largely due to oversupply in sectors of property market.

The rising purchasing power of Chinese consumers has provided a stable pricing environment for milk products. Retail prices of liquid milk has been fairly stable but may drop 2% p. a. in the next two years, which is quite reasonable as industry expansion will yield more room for price cut. On the other hand, as Yili gradually shifted form the low- to the higher-end ice cream, the average ice cream sale price had increased 21% in 2003. The company is expecting to the upward trend to continue in the next few years.

This can overall conclude that the marketing mix implemented by the Yili is well successfully. This is due to the fact that the company’s product have met the customer expectations in terms of quality, types of raw material, taste and services that provide by the company. Price of the product is acceptable by customers and a well distribution place and promotion tools have been chosen to attractive the customer. Customer Satisfaction Customer satisfaction is the customer’s fulfilment responses to a consumption experience, or some part of it (Buttle, 2005).

Customer satisfaction is important to a company as customer satisfaction rises, so does customer repurchase intention. Customer satisfaction has been the subject of considerable discussion in the research. Customer satisfaction may increase based on the want and need, times, power of buying, and status. Today companies have moved from a product and sales philosophy to a new marketing philosophy. In order to achieve the company’s goal of capture 50 per cent of market share and profitability, the company first has to satisfy their customers.

According to Mr Wang, the company’s targeted customers are all levels of buyers including infants. Thus, the company will satisfy their customer by offer them with a good taste, acceptable and nice packaging products. Besides, the company has obtained their customer satisfaction by offering some services, such as customer suggestion corner, customer service department or customer complaint section to deal with all sorts of problems. Moreover, the design of the packaging will be changed according to the change of time for certain period between half years.

Porter’s Generic Strategies Through the interview, Mr Wang has indicated that the Yili is implementing the Cost Leadership Strategy in order to survive in the market. The industry is in the price war situation. The lowest price product the company can offer the more customers it can attract. Thus, the Yili is using batch production to reduce the cost of the product with the use of cheap but high quality materials. The machine that imported from western country that is not affordable by other small companies has helps them to lead in the cost reduction. . 3 Chapter Summary The findings show that the competition faced by the Yili is not only from local market but also foreigner such as companies from United Kingdom and America. Through the findings and analysis, it is known that the company-the Yili Group has adopted some effective strategies to cope with the environmental change and increase the demand of the sales by influencing of marketing segmentation, marketing targeting, marketing positioning, marketing mix, PEST factors and SWOT analysis.