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COVER PAGE

Title : Environmental Analysis and evaluation

of vegetable oil industry attractiveness

in India.

Subject : Strategic Management

Level / Semester : II / Jun 2010

Programme : MBA - FULL TIME

Subject Tutor : Mr. L. Surendra

Name of Student : Vivekanandan M

Student’s Registration Number : GPBL-B/F10/15

Date of Submission : Jul 26, 2010

Word Count : 1829 words

Word Limit : 2000 words

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Checklist

Students Name Vivekanandan M

Registration Number GPBL-B/F10/15

Date of submission of the Assignment 26/07/2010

Is the cover page in the correct format as indicated in the “Guidelines to writing Assignments”?

Yes

Have I done a complete spell-check of the Assignment? Yes

Have I done a complete word count for the Assignment? Yes

Does the table of contents include numbers? Yes

Are the pages numbered correctly? Yes

Are the figures numbered correctly? NA

Are the tables/charts numbered correctly? Yes

Are the captions for the tables and charts proper? Yes

Are the references/bibliography listed in the Assignment? Yes

Are the references cited correctly in the text? NA

All references material has been cited from the books & the University of Wales online library. Any other internet source

quoted is with the permission of the module tutor.

NA

Are the references in the text in the proper format as indicated in the “Guidelines to Writing Assignments”

Yes

Has the soft copy of the Assignment been enclosed? Yes

Declaration:

All material written in this assignment is my own and I have not used any material, content or information of others claiming them to be mine. Wherever materials have been used, proper citation has been done in the text. I am fully aware of the rules and regulations governing plagiarism. Should at any point of time my work be suspected/investigated and established to have been plagiarized, I am aware of the consequences. I have read the Student’s Handbook in detail. ___________________ Signature of the student Date: 26/07/2010

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TABLE OF CONTENTS PAGE No.

List of Figures 1

Introduction 2

Introduction to Environment Analysis 2

Environment Analysis for Vegetable oil industry in India 4

Introduction to Porter’s Five Force Model 6

Porter’s Five Force Analysis for Vegetable oil Industry in India 7

Conclusion 9

Bibliography 10

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LIST OF FIGURES PAGE No.

Figure 1 - External forces affecting business 2

Figure 2 - Porter’s Five Force Model – Industry Structure and

Competitive Strategy 6

Figure 3 - Market share of Solvent extrating companies in India 7

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Introduction

The purpose of this report is to analyse the industry attractiveness and industry dynamics of

Vegetable Oil Industry in India. Political, Economic, Social (demographic, cultural and

sociological) and Technological (PEST) analysis and Porter’s Five Force Analysis are done

for Vegetable Oil Industry in India.

Introduction to Environmental Analysis

Environment analysis helps business to understand the external forces that can affect the

business. External environment includes economy, society, technology, competition,

customers, supplier and competition. PEST analysis is an analysis of the external macro-

environment that affects all firms in the given industry. PEST analysis is one of the strategic

tools for understanding the impact of external environment factors like political, economic,

social and technology on the business. PEST analysis is used for strategic planning,

marketing planning and new product development. PEST analysis is specific for each

country.

Figure 1: External forces affecting business

Economic Factor:

Following are some of the economic factors, which can act as opportunity or threat for the

business.

1. Interest rates

2. Tax rates 3. Economic growth

4. Inflation 5. Exchange rates 6. Labor cost

7. Type of economy

Business

Political Factors

Economic Factors

Social Factors

Technological Factors

Customers

Suppliers

Competition

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8. Demand supply 9. Stage of industry development – emerging, growing, mature, declining

Social Factor:

Following are some of the social factors, which can act as opportunity or threat for the

business. 1. Culture

2. Population growth rate 3. Division of wealth in the society 4. Health

5. Demographics 6. Education

7. Leisure interest

Technological Factor:

Following are some of the technological factors, which can act as opportunity or threat for the business.

1. Recent technological developments 2. Rate of technological diffusion

3. Innovation

Political Factor:

Following are some of the political factors, which can act as opportunity or threat for the

business.

1. Political stability 2. Intellectual property protection 3. Anti-trust laws

4. Pricing regulations 5. Tax rates and incentives

6. Wage legislation 7. Trade regulation 8. Mandatory employee benefits

9. Industrial safety regulations 10. Environment regulation

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Environmental Analysis for Vegetable Oil Industry in India

Political Factor:

a) Leading to industry growth

Indian Government imposed 20% import duty on crude soya bean oil on Nov 18, 2008 to

prevent dumping of cheap crude soya bean oil from foreign markets. This will help the

domestic vegetable oil producers to produce more soya bean oil to meet the local demands.

Solvent Extractor’s Association of India (SEAI) has requested the Indian Government on Apr

22, 2010 to impose 10% import duty on crude palm oil and to increase the import duty for

refined oil, to control imports and encourage the domestic vegetable oil producers.

In 2007, Indian Government imposed ban on future trading in oil and sugar. Rapeseed

production in 2007 was down by more than 5%, which has lead to increase in mustard oil

prices.

b) Threat to industry growth

Indian Government budget 2008-2009 reduced the import duty on vegetable oil by 10% to

tame the rising inflation. This will make the domestic vegetable oil producers to reduce the

oil prices to compete with the vegetable oil imported from foreign countries.

Economic Factor:

Bio diesel requires crude oil and vegetable oil for its production. Change in crude oil market

fundamentals will have an impact on the vegetable oil. According to LMC International Ltd,

high crude oil price is reducing the demand for petroleum products, which will have an

implication on palm oil.

a) Leading to industry growth

According to Solvent Extractor’s Association of India, the demand for vegetable oil is

expected to increase by 20% from 130 lakh tonne in 2008 to 156 lakh tonne in 2010.

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b) Threat to industry growth

With the reduction in the oil seed cultivation area, vegetable oil production has declined by

over 10% during the past 3 years. On the other hand, the vegetable oil consumption in India

has increased by 18.55% during the past 3 years.

Madhya Pradesh is one of the largest producing states for vegetable oil seed in India. Rainfall

recording below 30% in 2010, has lead to lower cultivation of vegetable oil seeds.

Social Factor:

a) Leading to industry growth

With the population growth of 1.8%, the demand for vegetable oil is set to increase by 7% in

India.

During festival seasons October-November, the demand for vegetable oil increases, but the

vegetable oil prices remains the same in 2010.

b) Threat to industry growth

Maoism is a threat to the industry.

Technological Factor:

a) Leading to industry growth

New oil seed crushing machines can be used to crush different oil seeds to extract oil. Earlier,

different crushing machines were used for crushing different oil seeds.

b) Threat to industry growth

AP Organics has successfully commercialised the production of refined rice bran oil. Rice bran oil is one of the substitutes for vegetable oil.

Coconut oil is another substitute for vegetable oil, which is mainly consumed in Kerala.

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Introduction to Porter’s Five Force Model

Porter’s Five Force model deals with factors outside an industry that influence the nature of competition within the industry.

a) Degree of rivalry – Rivalry is influenced by following industry characteristics,

1. Large number of companies

2. Slow market growth 3. High fixed costs

4. High storage cost/highly perishable products Rivalry is measured in terms of the percentage of market share held by the companies

within the industry.

b) Potential entrants – There are several barriers which make potential new entrants from entering into the industry. First high capital requirement, economies of scale, access to technology and access to raw materials.

c) Suppliers – The power of the supplier refers to the ability of the suppliers to supply

raw materials at higher cost or reduced service, affecting the profitability of the company.

d) Buyers – The power of buyers refers to the ability of the industry’s customers to force the industry to reduce the price.

e) Substitutes – A product’s price elasticity is affected by substitute products. More the

number of substitutes, the demand become more elastic, as customers have many

alternatives. A close substitute product limits the price raise of the original product by the companies within the industry. The threat of substitute products pose to an

industry’s profitability depends on price to performance ratio.

The Industry

Degree of Rivalry

No. of competitors

Product differentiation

Potential Entrants

Economies of Scale

Brand Identity

Switching costs

Government policies

Suppliers

Supplier concentration

Number of buyers

Switching costs

Substitute raw materials

Thread of forward

integration

Buyers

Buyer concentration

Number of suppliers

Switching costs

Substitute products

Threat of backward

integration

Substitutes

Functional similarity

Price performance trend

Product identity

Figure 2: Porter’s Five Force Model – Industry Structure and Competitive Strategy

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Porter’s five force model helps in understanding the dynamics of an industry, considering the following factors,

a. Competitors

b. New entrants c. Industry’s ability to raise capital d. Ease of entry into industry

e. Effect of forward and backward integration f. Trends in volume, cost and profit compared with other industry

Porter’s Five Force Analysis for Vegetable Oil Industry in India

Degree of Rivalry

Following are the major solvent extracting companies in India,

1. Ruchi Soya 2. KS Oils

3. Gokul Refoils 4. Sanwaria Agro 5. Agro Tech Foods

6. Murli 7. Guj Amb Exports

8. Anik Industries 9. Raj Oil Mills 10. AVT Natural

Figure 3: Market share of Solvent extrating companies in India

Ruchisoya products include soyabean oil and vanaspati. KS oils products include mustard oil

and de-oiled cakes. Gokul Refoils products include refined oil, de-oiled cakes and vanaspati.

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Sanwaria Agro products include refined oil and de-oild cakes. Agro Tech Foods product include refined oil.

Indian vegetable oil is growing at compounded annual growth rate (CARG) of 90%. Profit

margin of vegetable oil producing companies is less than 5%. Ruchi Soya acquired Palmtech India Ltd, a palm oil producer, Gemini Edibles and Fats India

KS Oils acquired oil refinery at Haldi Port for Rs: 125 crores. KS oils also acquired palm plantations in Indonesia and Malaysia.

Palm Tech was merged with Mac Oil Palm, a holding company of Ruchi Soya.

New Entrants

On Jul 2009, Jaiprakash Associates has entered the vegetable oil industry in India, with an investment of Rs: 80 crores and plans to make a turnover of Rs: 400 crores by FY2012.

On Feb 2010, Emami has entered vegetable oil industry by launching soyabean, sun flower, mustard, palmolein products and plans to make a turnover of Rs: 300 crores in the first year

of operation.

Substitutes

Following are some of the substitutes for vegetable oil,

1. Applesauce – Applesauce is one of the substitutes for vegetable oil. Applesauce is low fat. Applesauce is used for preparing cakes, breads and cookies.

2. Coconut Oil – Coconut oil is another substitute for vegetable oil, mainly used in

Kerala. Coconut oil is heat stable, so it can be used for cooking and frying. Coconut oil is used for preparing fried snacks like – chips.

3. Melted margarine / Melted butter – Melted margarine and melted butter act as good substitute for vegetable oil and gives rich taste to food. Melted margarine

and melted butter are used for preparing cookies.

4. Prune puree – Prune puree is also a good substitute for vegetable oil. Any fruit

puree can be used for baking food.

5. Mayonnaise – Mayonnaise is a substitute for vegetable oil. Mayonnaise is used for preparing French fries, potato wedges.

Buyers

The buyers of vegetable oil are institutions, house hold, industrial buyers, food processors, restaurants.

Ruchi Soya and KS Oils have done forward integration by creating a brand for the produced

oil and selling the same through retail distribution network.

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Suppliers

The raw materials required for vegetable oil industry are mustard seeds, soya bean seed, crude oil processed, oil cakes and sun flower seed.

Ruchi Soya and KS Oils has done backward integration by acquiring huge land for cultivating oil seeds to be used in the crushing units. This will ensure constant supply of raw

materials for their crushing units.

Summary of Porter’s Five Force Analysis

Force Effect on the Industry Reason

Degree of Rivalry Favourable Increasing demand for

vegetable oil

New Entrants No Effect Low profit margin and high capital cost

Substitutes No Effect -

Buyer Favourable Oil is essential for

human

Supplier Unfavourable Limited availability of seeds from farmers

Conclusion

Because of low profit margin, high capital investment and limited availability of seeds, it becomes not attractive for new entrants. Market for vegetable oil is growing at 90% (CARG), which will increase the competition among the companies within the vegetable oil industry to

retain and increase their market share.

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Bibliography

1. Philip Kotler, Kevin Lane Keller, Abraham Koshy and Mithileshwar Jha, Marketing

Management – A South Asian Perspective, 13th Edition

2. O.C. Ferrel, Michael D. Hartline, Strategic Marketing

3. Subhash C. Jain, Marketing : Planning and Strategy, 7th Edition

4. Vithala R Rao, Joel H Steckel, Analysis for Strategic Marketing

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(Jul 22, 2010)

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