1. EBRO PULEVA GLOBAL LEADER IN VALUE ADDED MEAL SOLUTIONS strategic management case study V.Belcastro, U.deFeo, V.Ferratini, P.Martella, E.Sighinolfi

2. worldwide

3. key strengths Consumer Understanding Brand Acquisition & Development Innovation Global Localization Strategy

4. financials EP EVA vs. INDEXES 2008

7. Fresh pasta

8. Frozen+Microwavablepasta (pre-cooked)

9. Sauce

11. dairy Buyers: HIGH Number of buyers relative to sellers: MEDIUM/HIGH Product differentiation: MEDIUM Switching costs: LOW Buyers threat of backward integration: LOW Threats of new entrants: LOW Rivalry: HIGH Substitutes: HIGH Concentration: VERY HIGH Diversity of competitors: HIGH Exit Barriers: HIGH (capital intensive industry) Products differentiation : HIGH (both on product breadth and on segments) Cost conditions: HIGH (low possibility to reach competitor’s cost efficiency, high difference in volumes) Industry growth: LOW (in existing market) Buyers propensity to substitute: HIGH Switching Costs: VERYLOW Potential substitutes: Milk, Tea, Infusions, Soft drinks, Dietary Supplement, Smoothies, Ice Cream, Yogurt, Food Supplements (DanoneActivia, Innéov, Alixir) Barriers to entry: HIGH - Capital requirements: HIGH - Eco of scale: HIGH - Product differentiation: HIGH - Cost advantage: HIGH -Access to distribution channels: HIGH Expected retaliation by incumbents: HIGH Competitors Private Labels Suppliers: LOW Sensitivity to price variation: HIGH Availability of substitute inputs: LOW Suppliers’ product differentiation: LOW Suppliers’ threat of forward integration: LOW Importance of industry to suppliers: VERY HIGH

13. Danone € 15bn salesThreat caused by of the 2003 Luxemburg Agreement about milk price’s liberalization. As a consequence: European milk production expected increase12%, expected decrease of prices 40% were signals of decline in profitability

14. dairy’s sales Pricing the business Given the previous motivations, we consider the hypothesis of selling the business. Evaluation Bloomberg T-bill 10y Hist.Geom.Avg. Mkt Premium According to our analysis the most credible value of EP’s dairy business is € 500mn. On march 2010 the dairy business was sold to Lactalis for € 630 mn.

15. pasta Buyers: HIGH Number of buyers relative to sellers: MEDIUM/HIGH Product differentiation: MEDIUM Switching costs: LOW Buyers threat of backward integration: LOW Threats of new entrants: LOW Substitutes: HIGH Rivalry: HIGH Buyers propensity to substitute: HIGH Switching Costs:LOW Potential substitutes: Rice, Side dishes (potatoes, bread...) Pasta as main course: - Eating at home: meat, vegetables, pizza... -Eating outside Barriers to entry: HIGH - Capital requirements: HIGH - Eco of scale: HIGH - Product differentiation: HIGH - Cost advantage: HIGH - Access to distribution channels: HIGH Expected retaliation by incumbents: HIGH Concentration: MEDIUM/HIGH Diversity of competitors: HIGH (EP far from tradition) Exit Barriers: HIGH (capital intensive industry) Products differentiation : HIGH Cost conditions: HIGH Economies of scale Industry growth: LOW (in existing markets) Competitors Fresh Pasta Frozen Pasta Dry Pasta Private labels Suppliers: MEDIUM/HIGH Sensitivity to price variation: HIGH (high durum wheat price volatility) Availability of substitute inputs: LOW Suppliers’ pdt differentiation: LOW (commodity) Suppliers’ threat of forward integration: LOW Importance of ind to suppliers: HIGH

16. pasta Is pasta business attractive? YES It is the business in which EP needs to invest more in order to keep and improve its position as 2nd world pasta manufacturer, the first not Italian. EP shall keep on investing in its globally recognized brands, in product differentiation and shall exploit its resources and capabilities to seize the opportunity from emergent markets.

17. rice Buyers: HIGH Number of buyers relative to sellers: MEDIUM/HIGH Product differentiation: MEDIUM Switching costs: LOW Buyers threat of backward integration: LOW Threats of new entrants: LOW Rivalry: HIGH Substitutes: LOW Buyers propensity to substitute: LOW Switching Costs:HIGH Potential substitutes: Potatoes and bread Low threat of substitutes because it’s the main component of feeding for 1/3 of the world population Barriers to entry: HIGH - Capital requirements: MEDIUM - Eco of scale: HIGH - Product differentiation: HIGH - Cost advantage: HIGH -Access to distribution channels: HIGH Expected retaliation by incumbents: MEDIUM/HIGH Concentration: MEDIUM Diversity of competitors: HIGH Exit Barriers: HIGH (capital intensive industry) Products differentiation : HIGH Cost conditions: HIGH Economies of scale Industry growth: LOW (in existing markets) Competitors Frozen Meal Private Labels Suppliers: MEDIUM/HIGH Sensitivity to price variation: HIGH (high rice price volatility) Availability of substitute inputs: LOW Suppliers’ pdt differentiation: LOW (commodity) Suppliers’ threat of forward integration: LOW Importance of industry to suppliers: HIGH

18. rice Is rice business still attractive? YES Despite high rivalry, EP is global leader in the rice business, with high brands awareness and recognition, wide differentiated product range with instant rice, parboiled rice, used in soup and frozen meals. Rice is the primary food staple for more than half of the world population: EP needs to keep on investing in its successful rice business Rice is the EP’s cash cow business

19. structure Herba-SevilleRice Panzani-Lyon Pasta Puleva-Granada Dairy BIOTECH PASTA SPAIN RICE SPAIN DAIRY SPAIN CEO Spain IT, Legal, HR RICE US PASTA US 2 CEOs US RICE FRA CEO France PASTA FRA RICE GER CEO Germany PASTA GER CEO RepCzech RICE CZECH PASTA CZECH ……

22. In each country the only combined function for rice and pasta is Sales & Distribution (source of economies of scope).DECENTRATED ORGANIZATIONAL STRUCTURE WITH INDEPENDENT DIVISIONS (they collaborate only on projects)

24. How to obtain a superior position?a) Improving efficiency: - Cost efficiency - Reducing time to market b) EXPLOITING DIFFERENTIATION: Investing in R&D for innovative new products development Acquisition of new brands in unexploited markets

26. Well defined organizational culture

27. Skills/Know-how: mgmt of acquisition and management of integration

28. Communication, coordination and motivation

29. Strong financial performance:

30. Plants equipmentsOnly brands reputationand mgmt of acquisition and integrationare sources of organizational capabilities. The other resources are necessary to compete, but not sufficient to win.

31. capabilities Acquisition management, International management, Multidivisional coordination, Financial control, Management development Corporate functions Source of CA Efficiency in volume manufacturing, Continuous improvements in operations, Flexibility Operations Mktg and customers understanding Brand management, Responsiveness to local market trends, Separate mktg and P&L for pasta and rice Source of CA Sales and distribution Economy of scope from unique sale force both for rice and pasta and from dedicated sale force for big retailers Source of CA Research, Innovative new product development R&D

32. competitive advantage Sources of core competences Reputational assets: brands Culture: mgmt of acquisition and integration process Organizational capabilities Corporate functions: Acquisition mgmt, International mgmt, Multidivisional coordination Marketing and customers understanding: Brand mgmt, Responsiveness to local market trends R&D: Research, Innovative new pdt development DIFFERENTIATION ADVANTAGE Global Localization Strategy Standardized pdtfeatures and company’s activities where scale economies are substantial and differentiating adapting pdts to national preferences

34. Branded-food company and leader brands in all the countries served: Panzani in France, NPW in US...

35. Acquisition expertise (low integration process)

36. Flexibility in organizational management

37. Value-added pdts = Differentiation Advantage

38. Leader in innovation: i.g. functional nutrition; microwavable and frozen products

39. R&D, PulevaBioTech

40. Rice and pasta synergies (i.g. unique sales force)

41. Convenient products

42. Serving both B2B and B2C (Horeca)

44. High threat of substitutes for all pdts(but EP’s solution is differentiation)

45. Operating in mature markets

47. financial crisis Data on pasta and rice consumption during the financial crisis and the positive effect on results show that EP produce goods that cope during periods of crisis (Giffen goods). Because of that we decided to arrange a meeting with Mr.PaoloAntinori Operations Manager of the Associations of Pasta Manufacturers of the European Union (UN.A.F.P.A).

48. financial crisis What Mr. Antinori pointed out is that durum wheat prices went up in 2008 and manufacturers raised prices of pasta. Then durum wheat prices decreased in early 2009, but manufacturers could decrease the price of pasta only later because of long-term supply contracts. Despite this, dry pasta consumption increasedduring the crisis because there had been a change in consumers behavior: from 2000s low-carbohydrates product demand (Atkins diet) to inexpensive meal demand. Greater price sensitivity and “eat at home” attitude boosted the dry pasta consumption.

49. vertical integration Rice Two reasons why Ebro shall vertically integrate in the rice business: Strategic Reason: increase differentiation advantage entering into the inbound logistics Efficiency and access to factor mkt reason: we believe there will be high instability in financial mkts on rice prices Evidences on Future Rice Price Instability: FAO studies on the “Global climate changes and rice food security” show that, because of global warming, floods, increasing weather variability and sea level rising, the productivity of rice and other tropical crops will decrease as global temperature increases. International Rice Research Institute 2010 data: Rice production will decrease by 10% for every 1 degree increase in growing season minimum temperature International Food Policy Research Institute 2010 data: Expected fall of rice production and expected rise in rice price

50. vertical integration Rice there is no need to acquire additional capabilities and skills: we just need to acquire established rice fields (we assume to do not have to sustain a too high price for this) Possibility to obtain an advantagefrom certain access to factor mkt Pasta No vertical integration in pasta business because this would require to acquire or replicate capabilities that Ebro does not have now and it shall integrate in too many phases of the vertical chain: grain field management and production of durum wheat semolina. EP can cope with grain price instability improving the management of long term contracts with producers, like Italian competitors did (ex. Barilla’s regional agricultural food chain agreements – “accordifilieraregionale”)

51. Challenges Both rice and pasta are mature sectors How to re-launch the EP business? Internationalization: Italy, Asia (China and India), South America Innovation: Health&Nutrition – BioTech through Open Innovation strategy

53. cultural barriers (no Italian would buy a not Italian pasta)

57. China National Cereals, Oils and Foodstuffs Corporation – COFCO (brand Fulinmen)Rice mkt in China is saturated, strong presence of private labels most of the pdt are sold unbranded in very large packages EP is moving instead from big to small and is selling value-added pdts high barriers to the entry no chances to enter China mkt with rice business Pasta potential increasing mkt because of expected drop in rice production From UN.A.F.P.A.: with Shanghai EXPO Chinese people are coming across western culture, strong opportunity to promote pasta as a complete and convenient substitute of rice. Better to introduce fast pasta: shorter time to get into the habit of Chinese people

60. South America Rice too low consumption of rice in South America to invest in Main Latin American consumer is Brazil with 2% of rice global consumption Pasta South American countries are the second pasta consumers after Italy From UN.A.F.P.A.: in 5 countries of Latin America (Brazil, Uruguay, Paraguay, Venezuela, Chile) there is a special legislation that provides for the introduction of vitamins and folic acid inside pasta. This is the main reason why Italian producers are not so focused on the South American mkt that, because of the Italian “purity law” that provides for Italian pasta to be made only with durum wheat and water, would need for special ministerial authorization to produce pasta in a different way. (l. 580/1967 and D.P.R. 187/2001 known also as “leggedipurezza”) EP strategy for pasta business in South America: deliver pasta enriched with vitamins and folic acid in the whole pasta pdt breadth (dry, fresh, pre-cooked microwavable and frozen pasta) thanks to Puleva Biotech R&D team

62. Innovation The food market is characterized by: · Slow growth rate · Presence of numerous low-budget and white-label products · A concentrated group of buyers with power to negotiate · Highly-similar products · The brand is in most cases the principal differentiation Trends in our society: · Growing healthcare costs · Increasing lifespan · Aging of the population · Desire for better quality of life · Increasing scientific knowledge about nutrition and health

65. infection prevention

66. osteoporosis

67. cardiovascular disease prevention

68. obesity

69. diabetes…

70. Future challenges Open Innovation Puleva Biotech is already orienting its efforts to work closely with and for the customers to define their needs and provide solutions. Future challenge is to transfer Puleva Biotech capability on new pdt development to all EP businesses: HOW? through the collaboration between a connect and development department (like an external R&D) with the internal R&D In this way customers can express their preferences and needs, they can give advices on new desired pdts in order to avoid dissatisfaction and to deliver much more suitable value added pdts: full consumers understanding

71. EP positioning Consumer oriented BasicProducts Value-addedproducts Tradition oriented

72. Video Spot

73. THANK YOU strategic management case study V.Belcastro, U.deFeo, V.Ferratini, P.Martella, E.Sighinolfi