Academy of Economic Studies

Faculty of Business Administration

Strategic and Operational Performance Assessment at Danone Romania

Coordinating Professor:

Irina Purcarea Students:

Ion Adriana

November 27, 2009

Contents

Introduction: About Danone Romania

Process Management

Strategic Level Assessment

Operational Level Assessment

Future Predictions

Analysis and Conclusions

Project based on Danone inside information.

Introduction: About Danone Romania

Danone is a multinational company which is a part of the Fast Moving Consumer Goods industry.

Basically the FMCG industry “alternatively called as CPG (Consumer packaged goods) industry primarily deals with the production, distribution and marketing of consumer packaged goods. The Fast Moving Consumer Goods (FMCG) are those consumables which are normally consumed by the consumers at a regular interval. Some of the prime activities of FMCG industry are selling, marketing, financing, purchasing, etc. The industry also engages in operations, supply chain, production and general management.” Danone’s products are based on 4 main production lines: fresh dairy products, baby nutrition, medical nutrition and waters.Danone entered the Romanian market only with Fresh Dairy Products (DANONE ROMANIA) and with Baby Food (Numico, sister company of DANONE ROMANIA), and did not launch in the other two fields where it has a leading position in the rest of the world: mineral water and medical nutrition.

Before Danone entered the market, the market was rather fragmented, made up mainly by local vendors, with limited financial power and limited distribution and importers with limited interests and involvement.

Danone enlarged the market in two ways:

- by educating the market, communicating the values accepted in Romania: naturalness, health and good tasting;- by diversifying the product range and taking over of some traditional markets, by replacing some products that represented the Romanian’s diet: sour milk, cream, fruit.

We chose to present this company’s strategy because we believe that some of the processes implemented in multinationals should be set as an example for Romanian companies that haven’t reached that level of developing and organizing when it comes to implementing and processing strategic and operational performance.

The following information we gathered are inside information that we found out by interviewing several representatives of the company.

We will try during the presentation of this research to combine the theoretical aspects with the practical ones, putting a highlight on the last ones so that at the end we will be able to present an objective and conclusive analysis of this company.

Current image of Danone in Romania

There are several things contributing to built up the image of a company, such as: the company’s logo (a child looking to a star), the pack shots, the outline drawings, the atmosphere pictures (almost all images Danone presents include friendly, opened, smiling people), standard advertising (focusing on client satisfaction and health, in the family environment, with lovely children and careful mothers). Through all its communication strategies, Danone avoids to over estimate the advantages related to the consumption of its products, to determine an excessive consumption, to encourage the lack of exercise, to minimize the authority of the parents in terms of food consumption. All marketing projects are validated by a scientific committee. (You may say that the product health claims are scientifically proven, there is a strong medical file with scientific backup (e.g. clinical studies, etc.) for each product offering health benefits; “we don’t mislead our consumers”, declares an employee of Danone Romania, providing a speaking proof of social responsibility.

Main Competitors

1. Friesland: (with Napolact, Mili, Oke products) has introduced on the market Omega 3 products attacking the Health Brands Products (the Omega 3 are presented as products that help preventing numerous diseases).

o MILI• Dominant position in milk purchasing (quality and quantity)• Factories located in the centre of the area of activity where we are market leader (East HU +

Transylvania)• Strong brands (Mili and Napolact), market leader in some segments• Present in all segments including cheese, fresh cheese, deserts• Strong regional distribution • People experience and exchange• Adapted to trade commercial policy,But

• Too many factories (7 in the Hungarian-Transylvania area) & not all at EU standards• Consolidation and upgrade to EU standard needs investment• Outsourced deliveries (cool chain problem)• Weak numeric distribution in other regions than Transylvania• Big complexity in product portfolio and no differentiation

2. Tnuva: strong Israeli company; producer of fruit yoghurt has open a dairy factory closed to Bucharest;

3. Muller & Zott: German producer of fruit yoghurts; the product quality is high and the prices are low (only Industrial cost, no advertisement investments).

4. Albalact: small but dynamic company. It has 3 brands:1. Albalact – traditional market2. Fulga UHT milk3. Zuzu fresh dairy range

o Zuzu - a crazy but innovative brand; its range consists of: -Fresh milk a volume builder (maybe sacrificing the profitability) -Yoghourt range

Zuzu brand Positioning: for high income adults, Zuzu represents the range of dairy products that helps you escape for a moment from your busy life in your careless childhood – it makes you do crazy childish things.

Campina, La Dorna, Brenac

Multinational competition: foreign investment strengthened position.As a result of government policies towards foreign investment, many multinational producers established joint ventures with domestic manufacturers during the review period or bought shares in local players. This was the case with Kraft Foods, Nestlé, Unilever, Orkla, Danone, Hochland and Friesland. Benefiting from high-quality products at affordable prices, these companies also created strong distribution networks that allowed them to also compete on price with small local producers.

Operations planningOperations planning

Sales forecasts Sales & Operations planning Stock management Production planning and suppliesDistribution planning

LogisticsLogistics

WarehousingTransportOrder preparationInventory counting

Customer ServiceCustomer Service

Order taking / follow-up Sales administrationBillingCustomer accountsCustomer relations regarding

Supply Chain

Master Data ManagementKPIs, managing performanceReduction in complexity

Master data / continuous

improvement / projects

Master data / continuous

improvement / projects

Content of the Supply Chain Function at Danone Romania

Some of them entered by acquisitions (Friesland acquiring Napolact, but maintaining the local brand); others have only import activity (Zott).

Process Management

“Process Management is the application of knowledge, skills, tools, techniques and systems to define, visualize, measure, control, report and improve processes with the goal to meet customer requirements profitably.”The most important processes used in the company are clearly delimited, but also strongly interconnected in order to ensure a sustainable growth on a competitive market.

Production:

The company produces in the Bucharest plant 95% of the products sold in Romania. The other products are imported from France, Germany, Spain, Poland, Hungary and Bulgaria. They also export in Bulgaria, Greece, Moldavian Republic and in the Adriatic countries.

Sales:As mentioned before, the Danone Sales Market is split in: 53% Modern Trade, 47% Proximity.

Supply Chain:

Supply Chain function at Danone = Managing information and physical flows within this area

SUPPLIER FACTORYPRIMARY

WAREHOUSE

DISTRIBUTION

CENTER

CUSTOMERTRANSPORT

Purchasing:

Purchasing mission: To cover the needs of the company in terms of raw materials, goods and services and to make sure that the business benefits of the best commercial conditions.Purchasing is involved in every cost field and defines with the Business its relevant level of involvement (ICAR).Every supplier relationship is supported by a formalized commitment & secured by a legal framework.The purchasing organization is responsible for creating, maintaining and closing contracts.Purchasing owns the management of the supplier database (creation, modification, deletion) with the exception of the financial data.Purchasing leads the supplier performance analysis in accordance with other functions and global business objectives.

Cultural challengesLocal brands are perceived as healthier and more adapted to the Romanian taste particularly in the Transylvanian market. There are also differences between rural (more traditional and with a high degree of resistance to change) and urban areas, with a much lower consumption of Danone products in the rural zones versus a high consumption of self-production.A reliable and extended milk collection system was created by Danone since 2001 in order to adapt, to value this cultural dimensions in a winning way, giving the chance of the local farmers to sell their products and integrate them in the Danone’ s value chain. It was the output of a project whose main objective was to start a profitable business, by means of the production of first class milk in Romania. The set-up of commercial farms was the best way to supply the required quality and quantity of Danone’s Bucharest factory.

Strategic Level Assessment

Danone Double Strategic Objective:

• Business = Develop sales• Social = Positive impact on the society

(environment, obesity, malnutrition etc.)

Main projects: Zoom Project – business intelligence reportingDNN People Survey – investigating the satisfaction of employees engagement

Danone yogurts may be found in over 14500 stores in Romania.This is a proof of trust from their customers, motivating Danone to reward their trust by constantly renewing and extending their offer and keeping high standards of quality for the products. Danone has developed some programs in order to meet its goals:

HEALTH AND SAFETY: Danone has chosen as a first priority the quality and the safety of their products. Consequently, during the 9 years of local production, they managed to achieve important certifications of these successful priorities:

o ISO 9001:2000 certification of our quality management system (in 2003)o HACCP certification of our food safety management system (in 2003)o Veterinary agreement for export in EU member states (in 2004)

o ISO 14001:1996 certification of our environment management system (in 2006)

They also have 15 specialists working in shifts in the plant laboratories, seven days a week, performing daily 2550 various analyses for all products sent on the market.95% of the products are manufactured in Romania. Their clearly stated objective is “to help people around the world grow, live better and get more out of life through tastier, more varied and healthier food products - every day”.

Regarding the financial performance of the company, the numbers seem to recommend the company in discussion as a successful player on the Romanian market:

DANONE Revenues 2008

  Danone Romania Danone Group

Revenues  422 mil. RON 15 220 mil. EUR

No. of employees 718 persons 76.000 persons

The primary financial objectives they have accomplished are: Profitability Liquidity Efficiency Stability

Market shares

Although the main competitors on the Romanian market are performing successfully, Danone seems to be the leader of the industry.

VOLUMES per SEGMENT & Danone share 2005 2006 2007 2008

Yogurt market (plain + fruit + active health) 68.579 75.957 83.360 89.894

Danone share 60,7% 62,9% 64,9% 59,0%

Sour milk market 9021,41 6860,75 8796,05 8381,94

Danone share 15,7% 13,7% 2,8% 0,0%

Sour cream market 19887,51 24618,45 26603,91 29843,67

Danone share 26,3% 27,1% 24,1% 18,5%

Sana & kefir market 6082,54 8460,72 13771,94 18245,54

Danone share 0,0% 3,5% 4,2% 2,8%

Desserts market 2639,15 3543,45 6076,10 5920,82

Danone share 79,7% 67,9% 58,4% 54,5%

Danone volume shares across segments 2006 2007 2008

Plain yoghurt 49,70% 51,50% 45,10%

Fruit yoghurt 78,40% 75,40% 67,10%

Active health 94,60% 87,20% 82,30%

Desserts 58,40% 55,20% 54,50%

sour cream 27,00% 23,70% 18,50%

BRAND

PRODUCT

PRICE PROMOTION

PLACE

The strategy for reaching these high market shares is strongly related to the Marketing Activity in

the

company:

Brands

Some of the parameters they effectively use concerning this matter are:

Distribution Supermarkets/hypermarkets accounted for the most dynamic distribution, with multinational and local chains expanding their operations in Bucharest and other large cities.

Price The secret of success for the company is that they are aware that especially in this period of time, price will continue be the most important issue in the buying decision for consumers. Customer ComplaintsAlthough there are many aspects that are transmitted from its corporate image correctly (the openness, the close relationship with children), the brand is not perceived now friendly and caring enough. The association (particularly in Transylvania) with technology and not with natural products creates a major disadvantage for Danone comparing to other dairy products.

The health attribute is a little bit ambiguous: on the one hand almost all agree that it helps children grow but on the other hand only half consider it part of the daily healthy habits.

Locally, the company had to increase its efforts to consolidate its corporate citizen image. As previously mentioned, the products were perceived as healthy to a high extent, but there were many voices stating that:

- Many preservative components were added to make the products last longer- The artificial flavors were ruining part of the product qualities

- The technology makes the product more artificial

Sales1. Modern Trade:

ACTIVE HEALTHLIFE ENJOYMENT

Natural defense

naturala

Solid foundation

solida

Digestion

Value for money

dairy)Quality in all

Balanced nutrition

Dessert daily pleasure

CORE

Fruits’ mania

The cream of the yoghurts

o Cash & carry (Metro, Selgros) o Hypermarkets -> estimated a growth of 45% in 2009o Discounters (Penny market, Plus stores, Mini Max, XXL) -> estimated a growth of 20% in 2009o Supermarkets (Billa, Mega Image) In the last 3 years, the Modern Trade channel has had a great expansion, especially for cash & carry and hypermarkets.2009 was expected to be the hypermarkets’ year, due to the estimated growth of 45%. Modern Trade growth each year is expected to be of 25%.

2. Proximity: The Danone proximity stores count for: 11000 stores delivered by Danone sales force and 2500 delivered by distribution agenciesThe Proximity channel has national distribution and constant deliveries, a dedicated sales force all over the country, a consistent commercial policy and merchandising support. The company placed in the clients’ stores more than 5283 fridges.On the other hand the competition is compensating the expired products (compared to Danone who does not take returns).

Human Resources ManagementToday, Danone Romania has a large team of over 730 employees, being one of the recognized best employer companies.Aside from the 4 guiding values, Danone Group, as well as of course, Danone Romania, has numerous ways of attracting and retaining the talent, in order to motivate the employees. Resource development systems and tools include:

The Odyssee program - aiming at improving managerial performance (focusing the groups’ managers around economic objectives by taking into account employees’ aspirations.

Personal development plans for all managers, related to the management performance system – a “real management training path, common to all functions”

Training programs and tools: the Danone University that can promote and implement the company values, learning actions (projects, missions for interdepartmental and/or transnational teams)

For juniors: the functional fundamentals For experienced managers: training programs to accompany professional development For executive directors: “excellence” seminars, aimed at refreshing professional and managerial

competencies by sharing best practices

All the management principles and the tools that create the management system of Danone are cascaded and adapted locally in a manner that aims at creating a “preferred employer” or “employer of choice” image for the company, both internationally and locally.

Operational Level Assessment

In what concerns the measuring of the production level, Danone uses indicators such as: products variety, the quality of the products, production logistics costs, waste rates etc.

DANONE ROMANIA has a 60 products portfolio:Health Brand Products, Traditional Products, Deserts.The biggest weight is represented by yoghurts: simple, with fruits, traditional and probiotics. Together with these, the sour cream, the fresh milk, the fresh cheese with fruits and the desserts

make the offer very diversified, adapting successfully to the preferences of the Romanian consumers.95% of the products sold in Romania are produced in the Bucharest plant. The other products are imported from France, Germany, Spain, Poland, Hungary and Bulgaria. They do exports in Bulgaria, Greece, Moldavian Republic and in the Adriatic countries.

The quality of products is certified witho ISO 9001:2000 o HACCP certification

Production Site + Other locations:

Bucharest: Plant + Warehouse + Head Office, Cluj: Warehouse, 17 other platforms in the main cities of the country: sales, distribution & customer service

force

Future Predictions

Danone Romania top managers have an optimistic view for the close future. They aim to: Increase salaries more than the inflation rate; Increased salaries more vs. other companies on the local market (some had decided even to

freeze or decrease salaries). They want to reinforce their willingness to grow the company and face the economic crisis with a positive attitude, and they expect this from all Danoners.

In order to implement a continuous growth strategy, Danone has several strategic objectives that aim to maintain the company’s dominant position on the Romanian market. Here are the main projects: Zoom Project – business intelligence reporting DNN People Survey – investigating the satisfaction of employees engagement DAMAWAY – making the industrial performance a more efficient one Telesales – starting the phone sales system with 2500 little clients Media Buying – creating an efficient mix in order to have the best TV appearance payback

DANONE WAY: building global efficiency with and through peopleIn 2001, the Group launched Danone Way, a management tool designed to enable staff to assess performance in their subsidiary in all of its various dimensions (quality, ethics, management, environment etc.), identify how improvements can be made and draw up relevant action plans. Over the last five years, 800 Danone Way plans have been initiated by Group subsidiaries throughout the world and they have enabled 98% of them to improve their dialogue with the community.Danone has recently introduced the DANONE Way program in Romania too, articulating guidelines for all group companies in the area of social responsibility.

Program’s features:

Use the information of the group level: networking, training, special intranet site in order to have access to information from other countries;

Invest in people: training and career development is an important advantage Danone has on the market. Recruiting and developing talents will contribute to the quick integration in Europe;

Quality of product: Danone is implementing a comprehensive quality control program in order to fulfill not only the local and European regulations, but to address its own superior quality standards. A permanent monitoring of performance and a continuous application of R&D are set up. Developing successful brands for the local market will continue.

Quality of distribution: Danone has a strong local distribution system and targets to develop it in order to maintain its nationwide position.

In Romania, Danone is trying and succeeds very well in being the 1st player on the market.

ThreatsAs a result of government policies towards foreign investment, many multinational producers established joint ventures with domestic manufacturers during the review period or bought shares in local players. This was the case with Kraft Foods, Nestlé, Unilever, Orkla, Danone, Hochland and Friesland. Benefiting from high-quality products at affordable prices, these companies also created strong distribution networks that allowed them to also compete on price with small local producers. Some of them entered by acquisitions (Friesland acquiring Napolact, but maintaining the local brand); others have only import activity (Zott).

Danone’s future objectives can be summarized as it follows:

• Developing consumer trust – Product differentiation – Build proximity;

• Attracting talented people through the company’s values and the quality of its management;

• Developing internal cohesion and involvement;

• Reassuring investors through good management of potential risks;

• Building durable relations and a progress approach with strategic suppliers;

• Being perceived as a partner who contributes to the development of the community.

Analysis and Conclusions

When assessing a company’s strategic and operational performances we have to keep in mind two questions throughout our analysis: “Are they doing the right thing?” and “Are they doing things right?”

If we are to make a strategic performance assessment, we need to focus on criteria such as profitability, productivity, sustainability and environmental impact. Referring to the first item, Danone Romania is the leader in its industry and has revenues of 422 mil RON, which represent almost 0.7% out of the global revenue recorded by the entire group; this is a high indication of profitability, which was recognized as one of the accomplished financial objective that was set out in 2007.

As mentioned throughout the project, Danone has a double strategic objective (business and social) that focuses on a positive impact for society with regards to health and environmental concerns making it a sustainable factor into developing a better life for its customers. This in achieved mainly because of the ongoing control and supervision over the safety and quality of all of their products. A more in-depth analysis has uncovered that Danone builds its company image through promoting the well-being of the individual and the family as well, this being documented thoroughly by scientific researches and promoted through complex advertising campaigns.

Having in mind the productivity of the company, Danone Romania has borrowed most of Danone group’s way of minimizing the level of inputs to generate effectively and efficiently quality products and it did that in a short-period of time; as a result, it had a high influence over the local market and rapidly imposed itself on multiple segments like fresh dairy products and baby food.

Values in action

Complying with the law

Safety and conditions at work

Fair remuneration

Caring for people

Proximity management

Encouraging expression

Encouraging responsibility

Teamwork

Profit sharing

However, due to the changes in the external environment, this being the case with our government that made stricter rules for multinational companies acting on the Romanian market, this company proved increased flexibility when they bought shares from Romanian FMCG related companies.

Switching to assessing the operational performance of this company, we are taking into account some basic operational procedures, budgeting and the plans that it strictly follows.

The company targets the Romanian suppliers of raw materials, mainly fresh milk providers, through their special department called Purchasing, which handles everything from the selection of the suppliers based on strict quality and legal criteria, to signing the contracts with them. After obtaining what they need, the company can start production in its plant located conveniently near Bucharest and by maintaining the right manufacturing levels. This is done because every pre-seller that takes the Danone products to the end customers are always studying the demand in the respective stores and know exactly how much they should supply in order to meet the client’s requests without producing waste, since these kind of products have a short life period. From the moment the production process is ended, it passes in an intermediary primary facility out of which products are distributed with the use of specialized transportation means to the customers. The plan presented above is a basic one that has as main components budgeting and just-in-time programming.

In my opinion, an area of improvement would be the selling of Danone products. It is very hard to implement this since self-production is cheaper and considered healthier that mass-production and preservative enhanced products. But, the breach might be the local farmers that are Danone’s suppliers. Since all of them come from rural areas, they can use them as a starting point, them being more close and similar to the end clients, for promoting their products, maybe creating a more affordable line.

Also, they should adapt their products to local demands and make slight changes in the production process with regards to conservatives, artificial flavor and adopt a more natural way, such as Napolact did recently.

As a recommendation for this company in Romania, I would suggest testing the market for the release of the other two product segments: medical nutrition and waters which, under my opinion may generate even more revenue and may position even more firmly this company on the market for FMCG.

To summarize the strategic and operational performance that we assessed in this project, I strongly believe that Danone Romania is on an upward trend when it comes to a well-built supply, production and distribution chain management and to fulfilling its strategic objectives. What is more is that they have managed to establish themselves as a role model in implementing a multinational’s perspective in a local area and they should continually adapt locally to meeting clients demands with focus on quality, healthy products, competitive prices accountability and transparency.