Pany Analysis and Risk Management Strategies - A Case Study Collection Ebook

COMPANY ANALYSIS
COMPANY ANALYSIS AND RISK MANAGEMENT STRATEGIES IN THE GLOBAL BUSINESS ENVIRONMENT – A CASE STUDY COLLECTION
AND RISK MANAGEMENT STRATEGIES IN
THE GLOBAL BUSINESS ENVIRONMENT
– A CASE STUDY COLLECTION
Editor
Danijela Miloš Sprčić
Authors
Julija Puškar, Ana Grgica Knežević, Ivona Koprivica, Lucija Marija Kriste,
Darjan Božić, Lucija Buchberger, Antonela Bakotić, Marijana Andrešić,
Marija Ančić, Ivana Šendulović, Marko Šoštarić, Nora Tomljanović, Jerko Zadro,
Vid Zavalić, Adrian Zvizdić, Bruno Huljić, Filip Jagar, Manda Klanjčić, Janko Rešetar,
Marko Seljan, Ena Ćosić, Mihael Hibler, Danijela Miloš Sprčić
ISBN 978-953-346-165-6
9 789533 461663
Contents I
COMPANY ANALYSIS
Editor
Authors
Zagreb, 2021
II Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
Publisher:
Faculty of Economics and Business, University of Zagreb
For the Publisher:

Tenured Professor Jurica Pavičić, PhD
Editor:
Tenured Professor Danijela Miloš Sprčić. PhD
Language Editor:
Professor Vera Krnajski Hršak
Prepress and print:

Sveučilišna tiskara d.o.o., Zagreb
ISBN 978-953-346-166-3
Contents
SADRŽAJ
FOREWORD...................................................................................................................... XI
APPLICATION OF CASH-FLOW-AT-RISK METHOD IN RISK ANALYSIS

– CASE OF ARENA HOSPITALITY GROUP
Julija Puškar, Danijela Miloš Sprčić............................................................................... 1
1. INTRODUCTION....................................................................................................... 1
2. INTRODUCTION TO THE COMPANY AND BUSINESS ENVIRONMENT........ 2
2.1. About Arena Hospitality Group..................................................................... 2
2.2. Market Overview............................................................................................. 2
2.3. Overview of business segments.................................................................... 4
2.4. Destination business overview...................................................................... 7
3. ANALYSIS OF WIDER EXTERNAL ENVIRONMENT – PESTLE ANALYSIS...... 8
3.1. Political factors................................................................................................. 9
3.2. Economic factors............................................................................................. 10
3.3. Social factors.................................................................................................... 12
3.4. Technological factors...................................................................................... 14
3.5. Legal factors..................................................................................................... 15
3.6. Environmental factors.................................................................................... 16
4. INDUSTRY ANALYSIS............................................................................................. 17
4.1. Industry life cycle analysis.............................................................................. 17
4.2. Market concentration and competitor analysis........................................... 19
4.3. Porter’s model of five forces.......................................................................... 23
4.3.1. Threat of new entrants........................................................................ 23
4.3.2. Threat of substitute products............................................................ 24
4.3.3. Bargaining power of customers . ...................................................... 24
4.3.4. Bargaining power of suppliers .......................................................... 24
4.3.5. Competitive rivalry within industry................................................... 25
5. INTERNAL COMPANY ANALYSIS......................................................................... 25
5.1. Company’s competitive strategy analysis.................................................... 25
5.1.1. Strategic business units analysis....................................................... 25
5.1.2. Value chain analysis............................................................................. 27
5.1.3. Generic strategies analysis................................................................. 29
5.2. Analysis of fundamental value factors from past financial statements... 30
5.2.1. Statement of financial position analysis........................................... 31
5.2.2. Profit and loss account analysis......................................................... 34
5.3. Analysis of financial indicators ..................................................................... 36
5.3.1. SWOT analysis...................................................................................... 40
IV Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
6. FREE CASH FLOW METHOD ON THE EXAMPLE OF ARENA

HOSPITALITY GROUP............................................................................................. 41
6.1. Pro forma financial statements..................................................................... 42
6.2. Calculated weighted average cost of capital (WACC).................................. 44
6.3. Assessment of free cash flow to firm .......................................................... 46
7. IDENTIFICATION, QUANTIFICATION AND RISK MANAGEMENT
ON EXAMPLE OF ARENA HOSPITALITY GROUP............................................... 48
7.1. Identification of strategic, financial and operational risks......................... 48
7.2. Risk quantification using the risk cash flow method.................................. 55
7.3. Risk Mapping.................................................................................................... 59
7.4. Comprehensive Risk Management Strategy................................................ 60
8. CONCLUSION........................................................................................................... 64
LITERATURE................................................................................................................ 66
THE CASE STUDY OF THE COCA-COLA COMPANY

Ana Grgica Knežević, Ivona Koprivica, Lucija Marija Kriste...................................... 71
1. ABOUT THE COCA-COLA COMPANY................................................................... 71
2. PESTLE ANALYSIS.................................................................................................... 72
2.1. Political factors ............................................................................................... 72
2.3. Socio-cultural and demographic factors...................................................... 76
2.5. Legislative factors ........................................................................................... 79
3. PORTER’S FIVE FORCES MODEL............................................................................ 81
3.1. Rivalry among existing competitors............................................................. 81
3.2. Threat of new entrants................................................................................... 84
3.3. Threat of substitutes....................................................................................... 85
3.4. Bargaining power of suppliers....................................................................... 87
3.5. Bargaining power of customers.................................................................... 88
3.6. Analysis of the company’s competitive strategy......................................... 89
4. FINANCIAL INDICATORS ANALYSIS .................................................................. 90
4.1. Leverage indicators......................................................................................... 90
4.2. Liquidity indicators.......................................................................................... 91
4.3. Activity indicators............................................................................................ 92
4.4. Profitability indicators..................................................................................... 93
4.5. Investment indicators .................................................................................... 94
4.6. Comparison with the main competitor........................................................ 95
5. SWOT AND TOWS ANALYSIS................................................................................ 96
5.1. Strengths ......................................................................................................... 97
5.2. Weaknesses...................................................................................................... 99
5.3. Opportunities................................................................................................... 100
5.4. Threats ............................................................................................................. 101
5.5. TOWS analysis ................................................................................................. 103
Contents V
6. IDENTIFICATION, ASSESSMENT AND PROPOSAL OF RISK

MANAGEMENT MEASURES . ................................................................................ 103
6.1. Health risk......................................................................................................... 106
6.2. Reputational risk.............................................................................................. 107
6.3. Risk of shortage of raw materials.................................................................. 108
6.4. Risk of poorly placed products...................................................................... 109
6.5. Competition risk.............................................................................................. 110
6.6. Currency risk.................................................................................................... 111
6.7. Interest rate risk.............................................................................................. 112
6.8. Risk of revealing a secret formula................................................................. 113
6.9. Cybersecurity risk............................................................................................ 114
6.10. Environmental risk.......................................................................................... 115
6.11. Tax risk.............................................................................................................. 117
7. CONCLUSION........................................................................................................... 118
REFERENCES............................................................................................................... 119
THE CASE STUDY OF INTEL CORPORATION (INTC)

Marija Ančić...................................................................................................................... 127
1. INTRODUCTION....................................................................................................... 127
2. PESTLE ANALYSIS.................................................................................................... 128
2.2. Economic factors ............................................................................................ 129
2.3. Social factors.................................................................................................... 131
2.4. Legal factors .................................................................................................... 132
3. INDUSTRY ANALYSIS BY PORTER’S FIVE FORCES MODEL............................. 135
3.1. Industry rivalry................................................................................................ 135
3.3. Threat of substitutes....................................................................................... 136
3.4. Bargaining power of buyers........................................................................... 137
4. ANALYSIS OF FINANCIAL INDICATORS............................................................. 138
4.1. Financial indicators.......................................................................................... 138
4.2. Methodology and sources used in the calculation of indicators.............. 139
4.4. Liquidity ratios................................................................................................. 141
4.7. Investment indicators..................................................................................... 145
4.8. External analysis of financial indicators....................................................... 147
5. SWOT ANALYSIS...................................................................................................... 148
5.1. Strengths.......................................................................................................... 149
5.2. Weaknesses...................................................................................................... 150
VI Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
5.3. Opportunities . ................................................................................................ 152

5.4. Threats ............................................................................................................. 153
6. TOWS ANALYSIS...................................................................................................... 154
6.1. O-S strategy (maxi maxi)................................................................................ 156
6.2. W-O Strategy (mini maxi)................................................................................ 156
6.3. S-T strategy (maxi mini).................................................................................. 156
6.4. W-T Strategy (mini mini).................................................................................. 157
7. INTEGRATED RISK MANAGEMENT...................................................................... 157
7.1. Introduction..................................................................................................... 157
7.2. Strategy and business goals (horizon five years)........................................ 158
7.3. Appetite and risk tolerance............................................................................ 158
7.4. Risk identification, evaluation and management ....................................... 159
7.4.1. Research and development risk........................................................ 159
7.4.2. Innovation risk..................................................................................... 160
7.4.3. Aggressive expansion risk caused by M&A..................................... 161
7.4.4. Intellectual risk.................................................................................... 163
7.4.5. Customer loss risk............................................................................... 164
7.4.6. Reputational risk................................................................................. 165
7.4.7. Price risk............................................................................................... 166
7.4.8. Aggressive IT system risk and cyber security risk.......................... 167
7.4.9. Liquidity risk......................................................................................... 169
7.4.10. Potential risk of inadequate internal processes.............................. 170
7.4.11. Risk Maping.......................................................................................... 171
8. CONCLUSION........................................................................................................... 172
REFERENCES............................................................................................................... 173
THE CASE STUDY OF MATCH GROUP

Ivana Šendulović, Marko Šoštarić, Nora Tomljanović, Jerko Zadro, Vid Zavalić,
Adrian Zvizdić................................................................................................................... 177
1. INTRODUCTION....................................................................................................... 177
1.1. The topic and the aim od the paper.............................................................. 177
1.2. About Match Group......................................................................................... 177
2. ANALYSIS OF MATCH GROUP’S ENVIROMENT AND BUSINESS
OPERATIONS............................................................................................................ 178
2.1. PESTLE analysis................................................................................................ 178
2.1.1. Political factors.................................................................................... 178
2.1.2. Economic factors................................................................................. 179
2.1.3. Demografic factors............................................................................. 182
2.1.4. Technological factors.......................................................................... 184
2.1.5. Legal factors......................................................................................... 185
2.1.6. Ecological factors................................................................................. 185
2.2. Porter’s five forces........................................................................................... 186
2.2.1. Competition......................................................................................... 186
2.2.2. Threat of New Entrants...................................................................... 188
Contents VII
2.2.3. Threat of Substitute Products............................................................ 188

2.2.4. Bargaining Power of Customers........................................................ 189
2.2.5. Bargaining Power of Suppliers........................................................... 189
2.3. The analysis company competitive strategy and competitive
advantage ........................................................................................................ 190
2.4. Company analysis . ......................................................................................... 193
2.4.1. Separation of Match Group from IAC................................................ 193
2.4.2. Analysis of financial positions............................................................ 194
2.4.3. SWOT analysis...................................................................................... 199
2.4.4. TOWS analysis...................................................................................... 203
3. IDENTIFICATION, QUANTIFICATION AND RISK MANAGEMENT................. 204
3.1. Risk appetite and risk tolerance.................................................................... 204
3.2. Business goals and strategy . ........................................................................ 205
3.3. Risk identification, evaluation and management........................................ 206
3.3.1. Risk associated with the COVID-19 pandemic.................................. 206
3.3.2. Exchange rate risk................................................................................ 207
3.3.3. Reputational risk.................................................................................. 208
3.3.4. Competition risk................................................................................... 209
3.3.5. Customer loss risk............................................................................... 210
3.3.6. Interest rate risk................................................................................... 211
3.3.7. Cybersecurity risk ............................................................................... 212
3.3.8. Risk of financial difficulties................................................................. 213
3.3.9. Legislative risk...................................................................................... 215
3.3.10. Employee departure risk.................................................................... 216
3.4. Risk assesment and risk mapping................................................................. 216
4. CONCLUSION........................................................................................................... 219
REFERENCES............................................................................................................... 220
THE CASE STUDY OF NESTLÉ S.A.

Bruno Huljić, Filip Jagar, Manda Klanjčić..................................................................... 223
1. INTRODUCTION....................................................................................................... 223
2. PESTLE ANALYSIS.................................................................................................... 224
2.3. Socio-cultural and demographic factors...................................................... 228
2.5. Legal factors..................................................................................................... 232
3. ANALYSIS OF PORTER’S 5 FORCES...................................................................... 235
3.1. Competition between existing competitors................................................ 235
3.2. Threat of new businesses entering the market........................................... 237
3.3. Threat of substitute products........................................................................ 239
3.5. Bargaining power of customers.................................................................... 241
3.6. Analysis of the company’s competitive strategy......................................... 242
VIII Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
4. ANALYSIS OF FINANCIAL INDICATORS ............................................................ 243

4.1. Liquidity indicators ......................................................................................... 243
4.4. Investment indicators..................................................................................... 245
5. SWOT ANALYSIS...................................................................................................... 247
6. TOWS ANALYSIS...................................................................................................... 250
7. BUSINESS PLANS AND OBJECTIVES.................................................................... 251
7.1. Introduction..................................................................................................... 251
7.2. Optimization of product and market portfolios with continuous
development of innovative products............................................................ 251
7.3. Continuous increase in efficiency and release of funds for
reinvestment.................................................................................................... 252
7.4. Efficient allocation of capital.......................................................................... 253
7.5. Creating a common value............................................................................... 253
7.6. Risk appetite..................................................................................................... 254
8. RISK IDENTIFICATION............................................................................................ 254
8.1. Political risk....................................................................................................... 254
8.2. Reputational risk.............................................................................................. 255
8.3. Liquidity risk..................................................................................................... 257
8.4. Currency risk.................................................................................................... 259
8.5. Price risk............................................................................................................ 262
8.6. Credit risk.......................................................................................................... 263
8.7. Risk of errors in internal procedures............................................................ 264
8.8. Cyber security risk .......................................................................................... 265
8.9. Environmental risk.......................................................................................... 267
8.10. Legal risk........................................................................................................... 268
8.11. Risk Mapping ................................................................................................... 269
9. CONCLUSION........................................................................................................... 271
REFERENCES............................................................................................................... 272
THE CASE STUDY OF NETFLIX

Janko Rešetar, Marko Seljan........................................................................................... 279
1. INTRODUCTION....................................................................................................... 279
2. PESTLE ANALYSIS.................................................................................................... 280
2.3. Social factors.................................................................................................... 283
2.5. Ecological factors............................................................................................. 285
2.6. Legal factors..................................................................................................... 285
3. PORTER’S FIVE FORCES.......................................................................................... 286
3.1. Competitive rivalry.......................................................................................... 286
Contents IX

3.4. Threat of substitute products and services................................................. 289
3.5. Bargaining power of consumers.................................................................... 290
4. COMPETITIVE STRATEGY ANALYSIS................................................................... 290
5. ANALYSIS OF FINANCIAL POSITION.................................................................. 293
7. ENTERPRISE RISK MANAGEMENT....................................................................... 299
7.1. Business goals, risk appetite and risk tolerance.......................................... 299
7.2. Risk identification, evaluation and management........................................ 300
7.2.1. Political risk........................................................................................... 301
7.2.2. COVID-19 impact risk........................................................................... 302
7.2.3. Cybersecurity risk................................................................................ 303
7.2.4. Controversial content risk................................................................... 304
7.2.5. New competitor entry risk.................................................................. 307
7.2.6. Intellectual risk..................................................................................... 308
7.2.7. Supplier contract termination risk..................................................... 309
7.2.8. Legal risk............................................................................................... 310
7.2.9. Technology risk..................................................................................... 311
8. CONCLUSION........................................................................................................... 312
REFERENCES............................................................................................................... 313
THE CASE STUDY OF STARBUCKS

Ena Ćosić, Mihael Hibler................................................................................................. 319
1. INTRODUCTION....................................................................................................... 319
2. PESTLE ANALYSIS.................................................................................................... 320
2.2. ECONOMIC FACTORS...................................................................................... 322
2.3. Social factors.................................................................................................... 323
2.5. Legal factors..................................................................................................... 326
3. PORTER’S 5 COMPETITIVE FORCES MODEL....................................................... 328
3.1. Competitive rivalry.......................................................................................... 328
3.3. Threat of substitution..................................................................................... 330
3.5. Bargaining power of buyers........................................................................... 331
4. ANALYSIS OF THE COMPANY’S COMPETITIVE STRATEGY............................. 331
5. FINANCIAL ANALYSIS............................................................................................ 333
5.1. Efficiency indicators........................................................................................ 333
5.2. Liquidity indicators.......................................................................................... 334
5.5. Market Value indicators.................................................................................. 338
X Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection

6.1. SWOT analysis.................................................................................................. 338
6.1.1. Strengths............................................................................................... 340
6.1.2. Weaknesses.......................................................................................... 340
6.1.3. Opportunities....................................................................................... 341
6.1.4. Threats.................................................................................................. 343
6.2. TOWS analysis.................................................................................................. 344
7. BUSINESS OBJECTIVES OF STARBUCKS.............................................................. 345
8. RISK IDENTIFICATION, EVALUATION AND MANAGEMENT.......................... 345
8.1. STRATEGIC RISKS............................................................................................. 347
8.1.1. Reputational risk.................................................................................. 347
8.1.2. Risk of losing customers..................................................................... 349
8.1.3. Expansion risk...................................................................................... 350
8.1.4. Competition risk................................................................................... 351
8.2. FINANCIAL RISKS............................................................................................. 352
8.2.1. Leverage risk......................................................................................... 352
8.2.2. Foreign exchange risk.......................................................................... 353
8.2.3. Commodity price risk.......................................................................... 355
8.3. OPERATIONAL RISKS....................................................................................... 357
8.3.1. Legal risk............................................................................................... 357
8.3.2. Risk of employing inadequate labour force...................................... 358
8.3.3. Environmental risk . ............................................................................ 360
8.3.4. Cyber security risk .............................................................................. 361
9. CONCLUSION........................................................................................................... 364
REFERENCES . ............................................................................................................ 366
Contents XI
FOREWORD
During my doctoral studies at the University of Greenwich Business School, I came

across an interesting book published by Harvard University Press in 2004. The book
was authored by Professor Ken Bain and was just beginning to attract the attention
of the audience. At the time, I was working as a research and teaching assistant at the
Faculty of Economics and Business, University of Zagreb (FEB Zagreb) with a temporary
address in London and a huge desire to bring back as much knowledge and as many
skills as possible to give back at least a small contribution to the development of my
alma mater. Therefore, I could not forego the opportunity to read the book titled What
the Best College Teachers Do. The author of the book describes teaching as a serious,
intellectually demanding, and above all creative job that can always be improved. Pro-
fessor Bain believes that teachers should help students and encourage them to learn
for their own good, while cultivating a sense of the value of education that does not
stem from a particular scientific discipline but from a broader educational tradition
that values and inspires critical thinking, creativity, problem solving, curiosity, concern
for ethical issues and faith in students’ abilities. The teachers described in the book are
often excellent experts, academics and methodologists in their field of research, but
they consider quality teaching and knowledge dissemination to students as important
as their scientific research. They do not impose their authority in the classroom, but
guide the students by their professional knowledge and personal values and highlight
the importance of achieving the planned learning outcomes – thus creating a secure
learning environment that allows the students to try, fail, and try again. Such teachers
touch the lives of their students and help them develop, in addition to the content
knowledge, the numerous skills and attitudes that will help them build a successful
professional and personal life.
The basic pedagogical approach advocated in the book What the Best College Teach-
ers Do is the so called student-centred teaching. This pedagogy is characterized by
interactive teaching style, active student participation, the course content that is rele-
vant to the development of knowledge, skills and future careers of the students, while
transferring a certain level of responsibility for the learning outcomes over to them
through assigned project tasks, and encouraging their attendance and participation in
the course as well as the teachers’ availability in open communication. The book What
the Best College Teachers Do had such a great impact on me that still today, after 22
years of having taught at FEB Zagreb, I am eager to implement its teaching postulates.
Consequently, my courses Risk Management, Corporate Risk Management, and Stra-
tegic Risk Management are dominated by student-centred pedagogy in which the stu-
dents are very actively involved in the process of acquiring knowledge and skills. Stu-
XII Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
dent-centred teaching is also accepted as one of the official pedagogies implemented

at the Faculty of Economics and Business, University of Zagreb. The rationale behind
it is to improve the quality of the teaching process and to enhance the achievement of
the planned learning outcomes – to which this pedagogy significantly contributes. Giv-
en that FEB Zagreb is the holder of two reputable international accreditations, AACSB
and EPAS, it is necessary to continuously improve the quality of teaching. In doing so,
new and creative ways should be sought after in order to involve the students in the
learning process through project assignments and other educational experiences, and
to offer them the opportunities for showing success in the achieved results.
This edited book Company Analysis and Risk Management Strategies in the Global Busi-
ness Environment – A Case Study Collection is the result of many years of student-cen-
tred pedagogy practiced in the Risk Management courses taught at FEB Zagreb as it
strengthens the students’ engagement, develops their self-confidence and motivation,
and fosters interactive and interesting teaching dynamics. In the first part of the se-
mester, the students study intensively to acquire the knowledge in the field of risk
management and gain the relevant state-of-the-art information in line with the recent
international research and best corporate practices. The global economic and financial
crisis, as well as the recent one caused by the COVID-19 pandemic, have had a signifi-
cant impact on the changes in the corporate governance systems. In this context, the
identification, analysis, and management of the key business risks have become an
indispensable part of effective corporate governance in the post-crisis years. In condi-
tions of increased complexity and uncertainty, the need for a comprehensive strategic
approach to risk management has emerged as a departure from traditional risk man-
agement that tackles different types of business risks individually within the corporate
silos without assessing risks interrelations.
The most important students’ obligation in the Risk Management courses, which are
taught at FEB Zagreb and where student-centred pedagogy is most pronounced, is to
participate in the development of business case studies from the Croatian and interna-
tional markets to enable them to apply the knowledge acquired in the first part of the
semester. The research-based methodology of Enterprise Risk Management, which
is the result of many years of my academic and corporate practice, was applied in all
business case studies. Enterprise Risk Management (ERM) is defined as a process that
systematically and comprehensively identifies and quantifies different types of busi-
ness risks – financial, operational and strategic – at all levels of the organization and
manages them effectively in order to increase the value of the company and achieve
short-term and long-term business goals. Business case studies of seven multination-
al companies – Arena Hospitality Group, Coca-Cola, IntelCorp, Nestle, Netflix, Match
Group and Starbucks – are presented in this book. They have all been prepared on
the basis of the publicly available data and represent personal views of the authors,
and not of FEB Zagreb. The readers should regard them as a platform for learning and
gaining practical experience for the students of business economics, which is key to
their future career development. The students analysed the macroeconomic environ-
ments and markets in which the selected companies operate, their positions within
the industry, business models, financial situations and competitive strategies of the
company which allowed them to create SWOT and TOWS analyses, identify the key
Contents
Foreword XIII
business risks, evaluate their impact on company’s objectives and determine a com-
prehensive risk management strategy. This year, the impact of the COVID-19 pandemic
on the operations of the analysed companies was particularly emphasized, and hence
the students considered the strategies for dealing with the resulting economic crisis.
The students conducted the case study analyses during eight weeks of classes while
their progress was monitored continuously, and corrections were suggested timely in
cases of any omissions. The approach we used in developing the business case studies
originates from the Yale University and is known as The Yale Raw Case Approach. Un-
like the traditional business case studies, which are prepared in advance in the form
of several pages of analyses accompanied by student assignments, the raw business
case is based on the information provided from sources in various forms. The students
analyse the companies’ financial and business reports and those of independent ana-
lysts, as well as the articles, interviews, videos, search the websites of numerous orga-
nizations and institutions, while learning how to search for the relevant information. In
this way, unlike the pre-prepared business cases that often result in similar solutions,
the raw case studies mimic the real world where information is scattered and some-
times contradictory. The raw business case study by design contains more information
than the students can analyse individually and therefore they work in teams where
they learn to organize work tasks, manage time, set goals, build a joint analysis and
a solution proposal. The approach is compatible with interdisciplinary research that
integrates knowledge from different disciplines in order to solve complex problems.
Additionally, a culture of collaboration and support is built whereby students learn
from each other by expressing opinions and views based on data analysis. In doing so,
they acquire the skills of exchanging information, accepting divergent thinking, reach-
ing group consensus and finding common solutions. Thus, the students can achieve
more easily and effectively the planned learning outcomes related to the acquisition
of knowledge and improvement of analytical and communication skills, and teamwork
and decision-making skills.
Twenty-one students and one young professional (a FEB alumna) are co-authors of
the book Company Analysis and Risk Management Strategies in the Global Business Envi-
ronment – A Case Study Collection. As their mentor, book editor and co-author, I would
like to point out that they have shown perseverance, responsibility, ability to apply in-
terdisciplinary knowledge and teamwork, as well as a high level of analytical skills and
motivation. These qualities enabled them to overcome the difficulties they encoun-
tered during the intensive period of writing the business case studies and to improve
their knowledge, skills and self-confidence. The book will be used in the practical part
of the Risk Management courses, in order to improve the business cases that students
will be tasked to develop in the coming academic years.
I thank the students who participated in the development of this book. I hope that
you will maintain your curiosity, motivation, the desire to learn and perseverance in
everything you do. Students like you give the work of a teacher a special meaning and
purpose. I would like to thank my former student assistant and young professional
working at KPMG Julia Puškar, who is the leading author of the Arena Hospitality Group
business case, for the successful long-term cooperation that I believe will continue
XIV Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
in the future. Special thanks go to the book’s proof-reader, Vera Krnajski Hršak, who
polished our texts in terms of style and grammar. Finally, on behalf of all students and
on my own behalf, I thank the Faculty of Economics & Business, University of Zagreb,
especially the Dean Professor Jurica Pavičić, for their support in publishing this book.
We are proud that it has been published under the auspices of the FEB Zagreb, and
that it will be used by future generations of students.
Professor Danijela Miloš Sprčić, PhD

Book Editor
Application of Cash-Flow-at-Risk Method in Risk Analysis – Case of Arena Hospitality Group 1
APPLICATION OF CASH-FLOW-AT-RISK METHOD IN

RISK ANALYSIS – CASE OF ARENA HOSPITALITY GROUP
Julija Puškar1, Danijela Miloš Sprčić2
1. INTRODUCTION
Due to the increased dynamics of the business world and business environment in
recent years, there is a growing awareness of the importance of risk management, as
evidenced by the growing number of organisations seeking to integrate enterprise risk
management into their organisational cultures and management systems. The subject
of this paper is the analysis of business and business risks of Arena Hospitality Group
through simulating the company’s cash flows to assess the likelihood of financial diffi-
culties over time by the Cash-flow-at-Risk (CFaR) method.
The aim of this paper is to identify and quantify strategic, financial and operational
risks related to business and determine which risks have a significant impact on the
value of the company and how to protect the company from these risks. The process
of data collection and analysis refers to the five-year period ending in 2019, and the
forecast includes the period from 2020 to 2024. The process itself begins with a top-
down analysis of the external environment, or PESTLE analysis, and builds on the anal-
ysis of industry life expectancy, strategic group analysis, and Porter’s model of five
forces as part of the industry analysis. The elements of the internal business analysis
are competitive strategies, financial statements, and SWOT analysis and the ultimate
goal is to apply the Cash-flow-at-Risk method. The last part of the paper deals with the
exposure of Arena Hospitality Group to business risks which are quantified by the sce-
nario method and the sensitivity analysis method. The scenario method is used to as-
sess the probability of occurrence of the observed risks, while the sensitivity analysis
method is used to assess the significance of risk occurrence and the impact on value
of the company. The ultimate goal of the risk analysis process, and hence of this paper,
is to establish a comprehensive strategy and effective enterprise risk management
measures to eliminate the identified risks and reduce them from the company’s oper-
ations. The analysis will also show the purposefulness and topicality in the fragility of
the observed industry which by its nature is crucial for the economy of the Republic of
Croatia due to the COVID-19 pandemic.
1
Senior Auditor, KPMG Croatia d.o.o.
2
Full Professor, Faculty of Economics & Business, University of Zagreb
2 Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
2. INTRODUCTION TO THE COMPANY AND BUSINESS ENVIRONMENT
2.1. About Arena Hospitality Group

Arena Hospitality Group is a joint stock company founded in 1974 (under the name
Arenaturist d.d.) by integrating the then Pula companies Veruda, Riviera and Turist
biro with the Medulin Riviera. 3 It received its current name in 2017 due to the suc-
cessful consolidation of the Croatian part of the business and the transition to the
Official Market of the Zagreb Stock Exchange in November 2016. The biggest mile-
stone in 2019 was the acquisition of an 88 % stake in the business of the PPHE Hotel
Group in Germany and Hungary, which consists of eight Park Plaza® and art’otel®
branded hotels.
Arena Hospitality Group currently offers a portfolio of 26 facilities owned, co-owned,
leased and managed, covering over 10,000 accommodation units in Pula and Medulin
(Croatia) and major cities in the CEE region such as Berlin, Cologne, Nuremberg (Ger-
many) and Budapest (Hungary). It generates revenue through various market seg-
ments: mostly holiday tourism in Croatia and a diverse business mix for business trips,
or congress and fair tourism, and spa tourism in Germany and Hungary.
The share capital of the Group amounts to HRK 102,574,420 and is divided into 5,128,721
ordinary shares under the name ARNT without a nominal amount. The Group is con-
trolled by the company Dvadeset Osam d.o.o., Zagreb, which owns 52.93 % of the
shares. The ultimate owner is PPHE Hotel Group Limited through its wholly owned
subsidiaries: Park Plaza Hotels (UK) Ltd., PPHE Coop B.V., Euro Sea Hotels N.V., Bora B.V.
and Dvadeset Osam d.o.o. The remaining significant shareholders are OTP banka d.d.
/ AZ OMF with 10.66 %, Addiko Bank d.d. / PBZ CO OMF with 9.13 %, OTP banka d.d. /
Erste Plavi OMF with 6.47 %, and PBZ d.d. / Client Custody Aggregate Account with 2.89
% of the shares.
2.2. Market Overview

Arena Hospitality Group bases its business on three markets: Croatia, Germany and
Hungary. According to the latest edition of the Sectoral Analysis – Tourism by the In-
stitute of Economics in Zagreb, revenues from tourism in the Republic of Croatia in
2018 amounted to EUR 9.5 billion, which is EUR 541.6 million more than in the previous
year. Tourist services account for 36.4 % of the total Croatian exports, which reflects
the very high share of foreign tourists (92.8 %) in the total structure of overnight stays
and indicates a great dependence of Croatia’s tourism on inbound visitors. Thus, in
2018 tourists from Germany accounted for the highest number of arrivals and over-
night stays with 2.8 million arrivals (16.7 % of the total realized foreign arrivals) and 20
million overnight stays (24 % of the total realized overnight stays of foreign tourists).
According to the numbers of overnight stays, they are followed by tourists from Slove-
3
Arenaturist d.d. (2012). Annual Report for Year 2011 [EPub]. Retrieved from https://www.arenahospi-
talitygroup.com/datastore/filestore/30/2011_Godisnje_izvjesce_1.pdf
nia (8.8 %), Austria (8.5 %), Poland (7.3 %), the Czech Republic (6.2 %), Italy (6 %) and the
United Kingdom (5 %).4
Approximately 70 % of the Group’s revenues were generated in the third quarter, which
indicates a pronounced seasonality of tourism in Croatia.5 According to the Central
Bureau of Statistics, a record number of tourist arrivals in the Republic of Croatia was
recorded in 2019, as many as 19.6 million (Figure 1). eVisitor estimates that the number
of guests in Istria accounts for about a third of all tourist visits to Croatia.
Figure 1. Arrivals of foreign and domestic tourists in Croatia, monthly for 2018 and 2019
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
January February March April May June July August September October November December
2018 2019
FigureAuthors’
Source: 1. Arrivals of foreign
elaboration andtodomestic
according tourists
Central Bureau in Croatia, monthly for 2018 and 2019
of Statistics.
Source: Authors’ elaboration according to Central Bureau of Statistics.

As many as 84 % of overnight stays were recorded during the summer months of June, July,
August and September. A comparison of the numbers of tourist overnight stays in 2018 and
As many as 84 % of overnight stays were recorded during the summer months of June,
2019, a slight decline
July, August was recorded
and September. only in May,of
A comparison July
theand September.
numbers The strongest
of tourist year-on-
overnight stays
in 2018 and 2019, a slight decline was recorded only in May, July and September.
year increase was recorded in August and June with 343 and 294 thousand more overnight The
strongest year-on-year increase was recorded in August and June with 343 and 294
stays respectively.
thousand more overnight stays respectively.
Figure 2. Overnight stays of foreign and domestic tourists in Croatia by months in 2018 and 2019
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
Ekonomski institut Zagreb. (2019). Sektorske analize – Turizam, studeni 2019 [EPub]. Retrieved from
41,000,000
https://www.eizg.hr/userdocsimages/publikacije/wserijske-publikacije/sektorske-analize/sa_turi-
500,000
zam_2019.pdf
0
5 January February
Arena Hospitality March
Group April Annual
d.d. (2020). May Report
June for Year
July 2019
August September
[EPub]. October
Retrieved November
from December
https://www.
2018 2019
arenahospitalitygroup.com/datastore/filestore/30/Godisnje-izvjesce-2019.ispravak-kons.pdf
In order to reduce its dependence on seasonality, Arena Hospitality Group has been
2019, a slight decline was recorded only in May, July and September. The strongest year-on-
year increase was recorded in August and June with 343 and 294 thousand more overnight
stays respectively.
Figure 2. Overnight stays of foreign and domestic tourists in Croatia by months in 2018 and 2019
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
January February March April May June July August September October November December
2018 2019
Figure 2. Overnight stays of foreign and domestic tourists in Croatia by months in 2018 and
Source: Authors’
2019 elaboration according to Central Bureau of Statistics.

In order to reduce its dependence on seasonality, Arena Hospitality Group has been
developing
In order toand managing
reduce hotels, tourist
its dependence on resorts and campsites
seasonality, in Croatia,Group
Arena Hospitality Germany
has and
been
developing and managing hotels, tourist resorts and campsites in Croatia, Germany
Hungary since 2017. Tourism is growing worldwide from year to year, and the same trend is
and Hungary since 2017. Tourism is growing worldwide from year to year, and the
followed in business and leisure tourism in Germany by attracting international and domestic
same trend is followed in business and leisure tourism in Germany by attracting in-
ternational and domestic guests equally. According to the latest World Travel Monitor
and IPK International Market Research Institute reports from 2016, Germany ranks
4
second among Europe’s most popular destinations with 53.7 million trips from Europe
(3 % more than in the previous year). Conferences and fairs play a significant role, and
given the country’s geographical location (central Europe), the growth trend is expect-
ed to continue. Hungary is also recording growth, with another record year. Its capital,
which hosts annual music festivals, the Hungarian Grand Prix and the always popular
Advent programmes, is expected to grow in the coming years, which will be helped by
the delayed UEFA Euro 2020. The construction of a new airport terminal scheduled for
2024 and organisation of international events has positioned the Hungarian tourism
industry favourably in the context of future long-term growth and development.6
2.3. Overview of business segments

Arena Hospitality Group, through its own and rented capacities in Croatia and branch-
es in Germany and Hungary, manages 26 accommodation facilities of high and higher
category, including lifestyle hotels, tourist resorts and campsites. The brand portfolio
consists of Arena Hotels & Apartments® and Arena Campsites® in the Republic of
Croatia, and Park Plaza® and art’otel® in Germany and Hungary. The Group has the
exclusive right of the PPHE hotel group to manage and develop the Park Plaza® Hotels
and Resorts brand in 18 countries in the CEE region. Moreover, in June 2018, the Group
6
Arena Hospitality Group d.d. (2020). Annual Report for Year 2019 [EPub]. Retrieved from https://www.
repurposed the former camp in Pomer near Pula and created the first Croatian luxury
glamping resort.7
Arena Hospitality Group consists of three strategic units: Hotels, Tourist Resorts and
Campsites. Under the Hotels segment, the Group operates in Croatia, Germany and
Hungary, while under the Tourist Resorts and Campsites segments it is present exclu-
sively on the Croatian market. Within them, the Group develops 4 core brands that are
differently positioned in the market, two of which were created before integration with
the PPHE Group, Arena Hotels & Apartments® and Arena Campsites®, and two after,
Park Plaza®, and art’otel®.
Arena Hotels & Apartments®

In Croatia, four Group’s hotels and four apartment complexes operate under the name
Arena Hotels & Apartments®. All facilities are located in Istria, in the near vicinity of
Pula and Medulin and offer 1,407 accommodation units. Arena offers comfortable and
affordable middle category accommodation of contemporary design with an empha-
sis on the local experience.
Arena Campsites®
Arena Campsites® is a brand of eight authentic and premium campsites located in the
south of Istria, near the towns of Pula and Medulin, stretching from the Brijuni Nation-
al Park the Medulin Bay in the west and Cape Kamenjak in the south. It has the largest
number of accommodation units of all other brands in the Group, as many as 5,903.
With more than two-thirds of sunny days a year, the camping season begins in April
and lasts until November – thus extending the season.
Park Plaza®
Park Plaza® is a brand of high and higher category hotels, which offers individually
designed hotels in Pula and Medulin (Croatia) and Berlin and Nuremberg (Germany).
The portfolio includes 1,845 accommodation units in the form of hotels and tourist re-
sorts, featuring stylish guest rooms and multifunctional meeting rooms accompanied
by restaurants and bars.
art’otel®
art’otel® represents a contemporary group of hotels that combine exceptional ar-
chitectural style with art-inspired interiors and are situated in cosmopolitan centres
across Europe. Each hotel exhibits a collection of original works designed or especially
selected for each individual art’otel®. In this way, art’otel® has created its own niche
market for guests who seek different accommodation from that in traditional hotels.
Five of the Group’s hotels operate under the name art’otel®, offering a total of 808
accommodation units.8
7
arenahospitalitygroup.com/datastore/filestore/49/Godisnje-izvjesce-PDF-kons.pdf
8
Arena Hospitality Group. (n.d.). Brands. Retrieved 10 July 2020, from https://www.arenahospitali-
tygroup.com/en/portfolio/brands
Table 1. Operating results of the Group’s segments in 2019
Hotels
Tourist
GROUP’S SEGMENTS Germany Campsites
Croatia Resorts
and Hungary
Total revenues (mHRK) 243.8 250.1 105.4 170.4
EBITDA (mHRK) 56.3 50.1 29.3 68.8
Number of available rooms9 372,319 320,835 188,065 1,027,652
Occupancy (%) 64 81.3 61,5 42.6
Avg. accommodation price
788.3 786.8 730.7 366.2
(ADR)10
Revenues per room – RevPAR
504.5 639.7 449.2 155.9
(HRK)
Source: Authors’ calculation based on data from AHG Group’s annual reports and online sources.
Under the Hotels segment, Arena Hospitality Group operates within the following
brands: Arena Hotels & Apartments® (4), offering mid-range accommodation; Park
Plaza® (6), targeting consumers of higher purchasing power; and art’otel® (5) with its
distinctive artistic design. Through this, AHG Group established its business by tar-
geting three different markets, thus managing to adapt to wider tourist demand. Ac-
cording to the total revenues, the largest part of the Group is generated by the hotel
business of around HRK 500 million, offering 693,154 available rooms with an average
price of HRK 788.3 in Croatia, and HRK 786.8 on the foreign market. The greatest differ-
ence is visible in the occupancy rate of 64 %, which is caused by low levels of Croatian
seasonality, and whose deficiency is covered by the Group’s operations in Germany
and Hungary where occupancy reaches as high as 81.3 %.
The Tourist Resorts segment is located exclusively in Croatia, and operates under the
names Park Plaza® with one accommodation facility and Arena Hotels & Apartments®
with four. Resorts account for only 13.7 % of total revenues, generating HRK 105.4 mil-
lion, which is not surprising given the fact that they provide only 188,065 available
rooms, which is the least looking at the entire Group. Their EBITDA is lower than other
segments and amounts to HRK 29.3 million, which is partly caused by the need to ac-
commodate seasonal employees residing outside the Istria County.
The Campsites segment operates under the Arena Campsites® brand with eight
campsites and with total revenues of HRK 170.4 million accounts for only 22.1 % of the
Group’s revenues. However, it is in this segment that they achieve the highest EBITDA
– as much as HRK 68.8 million. According to the Group’s report, these results were
achieved with new investments which, by increasing profitability, reduced the increase
in waste management costs, utility fees and commissions of online agencies.
9
According to the number of working days.
10
Total income from rooms divided by the total number of paid and filled accommodation units.
2.4. Destination business overview

The key characteristic of Arena Hospitality Group is reflected in its international busi-
ness and presence in three different markets, which reduces the dependence on sea-
sonality that characterizes Croatia’s tourism. As a tourist destination with its value and
high prices, Croatia has managed to enable both large corporations and individuals
who invest in tourism to achieve that the income of three summer months meets their
annual needs, and make a profit. However, closed facilities throughout the winter and
employee instability call into question the viability of such business.
In the Republic of Croatia, Arena Hospitality Group operates with a diverse offer in the
most prominent tourist region of Croatia, Istria. In 2019, its total revenues with accom-
modation facilities in the Republic of Croatia increased by 3.1 % to HRK 519.6 million
compared to the previous period. The most significant contribution to revenue growth
was made by the campsites Arena One 99 Glamping and Arena Kažela Campsite. The
rest of the portfolio recorded stable results, except for tourist resorts, which recorded
a minor decline in revenue partly due to the cost of accommodation for seasonal em-
ployees. The revenues from accommodation increased by 3.1 % to HRK 432.5 million,
driven by the growth of RevPAR of 7.5 % to HRK 272.3. The growth of RevPAR was influ-
enced by the growth of the average price of accommodation from 4.9 % to HRK 546.6
and the growth of occupancy by 49.8 %.
In 2019 the revenues increased by 2.8 % to HRK 250.1 million compared to HRK 243.2
million in 2018. The key drivers of this growth were art’otel cologne and Park Plaza
Nuremberg. The former hotel profited from numerous fairs and events in the city,
while the latter reaped the fruits of yet another year of additional positioning and suc-
cessful business. EBITDA grew by 46.1 % to HRK 72.2 million due to the application of
IFRS 16. However, based on comparable results, EBITDA increased by 1.4 % to HRK 50.1
million. The positive operations of most hotels with art’otel cologne hotel as the leader
have been reduced by increased operating costs, rental costs and online agency fees,
in addition to certain one-off costs relating to writing off some receivables.
In Berlin, higher category hotels boosted RevPAR’s growth of 1.6 % to € 81.2 as a result
of an increase in the average prices of accommodation of 0.5 % to EUR 98.7 nd in occu-
pancy from 1.1 % to 82.3 %. In Cologne, high- and upper-middle-class in RevPAR hotels
recorded an 8.9 % increase to € 89.6 as a result of the higher average price of accom-
modation 9.2 % to EUR 116.3 and a drop in occupancy of 0.2 % to 77.0 %. In Nurem-
berg, high- and upper-middle-class hotels saw a decline in RevPAR of 3.4 % to EUR 77.3.
This decrease is the result of a decrease in the average price of accommodation by 4.0
% to EUR 105.0 and an increase in occupancy from 0.6 % to 73.6 %. In Hungary, the
growth trend of the high-end hotel market business results continued and RevPAR’s
performance grew by 5.6 % to EUR 64.0. This growth is the result of an increase in the
average room price of 8.9 % to EUR 80.6 despite a decrease in occupancy from 3.0 %
to 79.5 %.11
11
Source: Authors’ elaboration based on AHG’s official website.

Figure 3. Destination business overview
Source: Authors’ elaboration based on AHG’s official website.

3. ANALYSIS OF WIDER EXTERNAL ENVIRONMENT – PESTLE ANALYSIS
3. ANALYSIS OF WIDER EXTERNAL ENVIRONMENT – PESTLE

The business environment of a company consists of all external factors that influence its
ANALYSIS
decisions and results. As a rule, these factors are impossible to influence, but they need to be
The business environment of a company consists of all external factors that influence
analysed
its andand
decisions monitored. PESTLE
results. As a rule, analysis, i.e. the
these factors areanalysis of the
impossible external environment
to influence, but they is the
need to be analysed and monitored. PESTLE analysis, i.e. the analysis of the external
basis of the top-down fundamental analysis and is an acronym for political, economic, social,
environment is the basis of the top-down fundamental analysis and is an acronym for
technological,
political, legal social,
economic, and environmental
technological,(factors).
legal andThe analysis itself
environmental facilitates
(factors). The understanding
anal-
ysis itself facilitates understanding the tremendous changes in the macroeconomic
the tremendous
factors to whichchanges
companies in thearemacroeconomic
exposed, and takingfactors to which of
advantage companies are exposed, and
the opportunities
that
takingthey present of
advantage to the
them. Companiesthat
opportunities thatthey
successfully
present tomonitor and respond
them. Companies to successfully
that the
changes in the macro-environment can visibly differ from the competition and create
monitor
a and respond
competitive advantage.to 12the changes in the macro-environment can visibly differ from the
competition and create a competitive advantage.12
12
Grant, R. M. (2016). Contemporary Strategy Analysis: Text and cases edition, 9th edition. Chichester, West
Sussex, United Kingdom: John Wiley & Sons Inc.
3.1.Political factors
12
3.1. Political factors

Government stability
Several elections were held in the Republic of Croatia in 2019 and 2020; first elec-
tions for the European Parliament took place in May 2019 which were followed by the
presidential elections in December, and finally the parliamentary elections in July 2020
during the COVID-19 pandemic. Since the President’s function in the Republic of Cro-
atia is extremely small, the fact that a new president was elected does not play a sig-
nificant role in decision-making for the Croatian economy. As the early parliamentary
elections confirmed and secured a new mandate for the former government without
having to form a coalition. Thus, they could benefit from the positive exit polls result-
ing from efficient due to smooth leadership during the COVID-19 pandemic. In addi-
tion, Croatia’s chairing the Council of the European Union from 1 January to 30 June
2020 should have positioned the country high among the members of the European
Union, but the COVID-19 pandemic overshadowed this potential. As a safe and orderly
country with developed infrastructure, Croatia attracts tourists providing them with
basic security. Similarly, Hungary and particularly Germany are considered among
the most developed and well-organized countries in the European Union with a higher
living standard than Croatia, which also has a positive impact on mobility and, in this
context, on attracting tourists.
Role of government in economy

The Croatian Government has established and directs the Crisis Headquarters which
is in charge of all decisions regarding the measures for dealing with the COVID-19 pan-
demic, such as closing borders, banning public gatherings and festivals, and other re-
strictions that directly affect the business in the tourism sector. The COVID-19 crisis
has contributed to the significant impact of the state interventions and involvement in
the economy in most countries. Thus, the most important generating markets, such as
Germany, Slovenia and Austria as well as Hungary, were directed by their governments
that placed additional restrictions on mobility within the EU to protect their citizens,
but also to hedge their own losses in the tourism sector.
Membership in European Union

With the accession of the Republic of Croatia to the European Union on 1 July 2013, laws
and regulations had to be harmonized with European Union’s. The expected entry into
the Schengen area will significantly facilitate the arrival of tourists from EU member
states. The Istria County, where most of the accommodation capacities of Arena Hos-
pitality Group are located, is at the very top in terms of competitiveness among the
Croatian counties.13 Germany and Hungary have been members of the Schengen area
13
National Competitiveness Council. (2013). Regionalni indeks konkurentnosti Hrvatske 2013 [EPub]. Re-
trieved from http://konkurentnost.hr/wp-content/uploads/2018/01/RIK2013_finalno_07072014.pdf
Germany and Hungary have been members of the Schengen area since 199514 and 200715,
respectively, while their geographical location in the centre of Europe further facilitates the
flow
10 of people andAnalysis
Company capitaland
within member Strategies
Risk Management states. in the Global Business Environment – A Case Study Collection
3.2.Economic
since 199514 factors
and 200715, respectively, while their geographical location in the centre of
Europe further facilitates the flow of people and capital within member states.
Economic growth
3.2. Economic factors
The gross domestic product of the Republic of Croatia in 2019 amounts to HRK 400 billion,
Economic
and accordinggrowth
to the latest data from the World Bank from 2018, Croatia was the 75th
The gross
economy domestic
in the world.16product of the Republic
The compound of Croatia
annual GDP growthinrate
2019 amounts
(CAGR) to HRK
for the last 400
10
billion, and according to the latest data from the World Bank from 2018, Croatia was
years
the is 2.14
75th %, and according
economy to IMF
in the world.16
Thedata, real GDPannual
compound growthGDP
in 2019 wasrate
growth %.17 The
2.9 (CAGR) for
the last
annual 10 years
tourism is 2.14
growth %, andhas
in Croatia according to and
been 10 % IMF currently
data, realaccounts
GDP growth in 2019 was24
for approximately 2.9
%.17 The annual tourism growth in Croatia has been 10 % and currently accounts for
18
%approximately
of the country’s24
GDP.
% of the country’s GDP. 18
Figure 4. GDP per capita in Republic of Croatia 2000-2019 (in EUR)
14,000
13,270
12,000
10,000
8,000
6,000
4,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Figure 4. GDP per capita in Republic of Croatia 2000-2019 (in EUR)

13
National Competitiveness Council. (2013). Regionalni indeks konkurentnosti Hrvatske 2013 [EPub]. Retrieved
Source:
from Authors’ elaboration according to Central Bureau of Statistics
http://konkurentnost.hr/wp-content/uploads/2018/01/RIK2013_finalno_07072014.pdf
14
European Union. (n.d.). Germany - Overview. Retrieved July 13, 2020, from https://europa.eu/european-
union/about-eu/countries/member-countries/germany_en]
15
European
GDP perUnion. (n.d.).
capita in Hungary
Croatia- in
Overview. Retrieved
2019 was EURJuly 13, 2020,
13,270 from https://europa.eu/european-
placing it the 74th in the world, ac-
union/about-eu/countries/member-countries/hungary_en
16 cording to the World Bank. Continued GDP growth per capita is visible after the crisis
The World Bank. (n.d.). GDP – Croatia. Retrieved July 20, 2020, from
in 2014, and is a confirmation of the overall economic growth and recovery of the
https://data.worldbank.org/indicator/NY.GDP.M
KTP.CD?locations=HR
17
IMF. (n.d.). World Economic Outlook (April 2020) – Real GDP Growth. Retrieved July 20, 2020, from
https://www.imf
14
European Union. (n.d.). Germany - Overview. Retrieved July 13, 2020, from https://europa.eu/euro-
.org/external/datamapper/NGDP_RPCH@WEO/HRV
pean-union/about-eu/countries/member-countries/germany_en]
18
Arena Hospitality Group d.d. (2020). Annual Report for Year 2019 [EPub]. Retrieved from
15
European Union. (n.d.). Hungary - Overview. Retrieved July 13, 2020, from https://europa.eu/europe-
https://www.arenahospitali
an-union/about-eu/countries/member-countries/hungary_en
tygroup.com/datastore/filestore/30/Godisnje-izvjesce-2019.ispravak-kons.pdf
16
The World Bank. (n.d.). GDP – Croatia. Retrieved July 20, 2020, from https://data.worldbank.org/indi-
cator/NY.GDP.MKTP.CD?locations=HR
17
IMF. (n.d.). World Economic Outlook (April 2020) – Real GDP Growth. Retrieved July 20, 2020, from
12
https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/HRV
18
https://www.arenahospitalitygroup.com/datastore/filestore/30/Godisnje-izvjesce-2019.ispravak-kons.pdf
country.19 According to the above criteria, Germany and Hungary are rated better, and
with GDPs per capita of EUR 46,259 and EUR 16,475, respectively, they rank 26th and
66th. Gross domestic product per capita is the basis for a comparable standard of liv-
ing between countries, which directly affects disposable income as a key component
in tourism.20
As a tourism-oriented country, Croatia depends on the economic condition of the lead-
ing generating markets: Germany, Slovenia, Austria, Italy and the Czech Republic that
have a positive consumer climate, GDP growth and declining unemployment. Germa-
ny is characterized by high employment rates, stable incomes, a high propensity to
spend and a strong currency.21 Croatia is the sixth favourite destination of the Ger-
man population, and is the number one favourite destination in Italy and the Czech
Republic. The Czech Republic is the country with the lowest unemployment rate in
the European Union, and constant economic growth since joining the Union in 2004.22
Austria recorded the highest GDP growth within the European Union and its citizens
rate Croatia as the third favourite destination.23 Of Croatian destinations, the residents
of Italy24 and Slovenia25 most often choose the Istria County due to its close vicinity.
Fiscal and monetary policy

The public debt of the Republic of Croatia peaked in 2015 when it amounted to HRK
280,761 million, or 84.4 % of GDP. Since then, the public debt in absolute terms has not
decreased significantly, but due to the growth of GDP, the share of the public debt in
GDP fell and in 2019 amounted to 71.3 % of GDP. As the holder of the monetary policy
of the Republic of Croatia, the Croatian National Bank has the goal to maintain price
stability as a prerequisite for economic growth, which means maintaining inflation at
a slightly positive level over a longer period of time.26 In 2018, the average annual con-
sumer price inflation rate in Croatia was 1.5 %.27 The nominal anchor of the Croatian
19
The World Bank. (n.d.). GDP per capita – Croatia. Retrieved July 21, 2020, from https://data.world-
bank.org/indicator/NY.GDP.PCAP.CD?locations=HR
20
The World Bank. (n.d.). GDP per capita. Retrieved July 21, 2020 from https://data.worldbank.org/
indicator/NY.GDP.PCAP.CD
21
Hrvatska turistička zajednica. (2019). Njemačka - Profil emitivnog tržišta - izdanje 2018. [EPub]. Re-
trieved from https://www.htz.hr/sites/default/files/2019-01/Njemacka.pdf
22
Hrvatska turistička zajednica. (2019). Češka - Profil emitivnog tržišta - izdanje 2018. [EPub]. Retrieved
from https://www.htz.hr/sites/default/files/2019-01/%C4%8Ceska.pdf
23
Hrvatska turistička zajednica. (2019). Austrija - Profil emitivnog tržišta - izdanje 2018. [EPub]. Retrieved
from https://www.htz.hr/sites/default/files/2019-01/Austrija_0.pdf
24
Hrvatska turistička zajednica. (2019). Italija - Profil emitivnog tržišta - izdanje 2018. [EPub]. Retrieved
from https://www.htz.hr/sites/default/files/2019-01/Italija.pdf
25
Hrvatska turistička zajednica. (2019). Slovenija - Profil emitivnog tržišta - izdanje 2018. [EPub]. Retrieved
from https://www.htz.hr/sites/default/files/2019-01/Slovenija.pdf
26
HNB. (January 31, 2015). Monetary policy – Objectives. Retrieved July 22, 2020, from https://www.
hnb.hr/temeljne-funkcije/monetarna-politika/ciljevi
27
HNB. (July 7, 2019). Makroekonomska kretanja i prognoze. Retrieved July 22, 2020, from https://
www.hnb.hr/documents/20182/2846539/hMKP_06.pdf
National Bank is a stable exchange rate of the Croatian kuna against the euro.28 Given
the high euroization of the Croatian banking system, by maintaining the stability of
the kuna against the euro, the CNB indirectly achieves price stability as well as the
country’s financial and macroeconomic stability. The Croatian National Bank imple-
ments a managed floating exchange rate regime, which means that currency move-
ments reflect movements in the foreign exchange market with occasional CNB foreign
exchange interventions in the nominal exchange rate of the kuna against the euro.29
In the last 10 years, the exchange rate of the kuna against the euro has fluctuated
very little; the lowest level was HRK 7.12900 per EUR and the highest HRK 7.72687 per
EUR which implies currency stability.30 The entry of the Republic of Croatia into the
European Exchange Rate Mechanism – ERM II in July 2020 is a key step in the process
of introducing the euro as the official currency. It will neutralise the currency risk and
eliminate the existence of positive and negative exchange rate differences that may
affect business results whose majority income is stated in euros.31
Interest rates
Interest rates in the European Union have been at historically low levels for years,
which benefits the tourism sector due to the intense need for investment. Hence, Are-
na Hospitality Group was able to benefit from this opportunity by refinancing its two
loans in 2019 which enabled a more favourable fixed interest rate.32
3.3. Social factors

Decrease in the unemployment rate caused by emigration
Unemployment in Croatia has been rising since the 2008 crisis, after which it began to fall
on the eve of its recovery in 2014. This trend is favourable for the Croatian economy, but
can also be an illusion if the migration balance of the Croatian population is taken into ac-
count. The negative balance of population in Croatia has been present for the last 10 years,
and it accelerated until 2017 when it amounted to 31,799 emigrants. Later it fell by over 50
% and amounted to only 13,486 emigrants more than immigrants. This confirms that the
country is becoming an attractive place to live and work, which enables the tourism indus-
try to have enough labour force to maintain further business operations.33
28
HNB. (January 31, 2015). Monetary policy – Monetary policy framework. Retrieved July 22, 2020,
from https://www.hnb.hr/en/web/guest/core-functions/monetary-policy/monetary-policy-framework
29
HNB. (January 31, 2015). Monetary policy – Exchange rate regime. Retrieved July 22, 2020, from
https://www.hnb.hr/en/web/guest/core-functions/monetary-policy/exchange-rate-regime
30
XE. (n.d.). Euro to Croatian Kuna Exchange Rate Chart. Retrieved July 22, 2020, from https://www.
xe.com/currencycharts/?from=EUR&to=HRK&view=10Y
31
Lider. (July 10, 2020). Hrvatska ušla u ERM II, uvodimo euro za najmanje dvije godine po tečaju 7,53!
Retrieved July 22, 2020, from https://lider.media/poslovna-scena/hrvatska/hrvatska-usla-u-erm-ii-uvod-
imo-euro-za-najmanje-dvije-godine-po-tecaju-7-53-132350
32
arenahospitalitygroup.com/datastore/filestore/49/Godisnje-izvjesce-PDF-kons.pdf
33
Državni zavod za statistiku. (2020). Migration of Population of Republic of Croatia, 2018 [Data file].
Retrieved from https://www.dzs.hr/Hrv_Eng/publication/2019/07-01-02_01_2019.htm
Figure 5. Migration balance of population in Republic of Croatia 2009-2018
Source: Authors’ elaboration according to Central Bureau of Statistics
The decline in unemployment in the Republic of Croatia can also be observed through
its notable seasonality; namely, the number of unemployed persons rose from
112,16934 in June 2019 to 121,59735 in October of the same year. Such differences are
particularly visible in the counties where tourism is the primary economic activity, as
for example in the Istria County where Arena Hospitality Group operates and where
unemployment in 2019 fell from 4,983 persons36 in January to 3,043 persons at the
beginning of the tourism season in June. On the other hand, Germany and Hungary
recorded one of the lowest unemployment rates among the EU members – 3.1 % and
3.3 %, respectively, which once again confirms the prosperity and economic stability
of the two countries.
Demographic factors
Lower birth rates and longer life expectancy are changing the shape of the age pyramid
in the EU-27. The share of the elderly in the total population will increase significantly
in the coming decades as more people from the post-war generation will be eligible
for retirement. This in turn will lead to a greater burden on the working age population
in order to guarantee funds for the social expenditures of the elderly population.37
All three markets in which AHG operates share the problem of the aging population.
Compared to the EU average of 43.7 years, the average ages of the population in Cro-
34
Hrvatski zavod za zapošljavanje. (2019). Mjesečni statistički bilten, lipanj 2019 [EPub]. Retrieved from
https://www.hzz.hr/content/stats/0619/HZZ_stat_bilten_06_2019.pdf
35
Hrvatski zavod za zapošljavanje. (2019). Mjesečni statistički bilten, listopad 2019 [EPub]. Retrieved
from https://www.hzz.hr/content/stats/1019/HZZ_stat_bilten_10_2019.pdf
36
Hrvatski zavod za zapošljavanje. (2019). Mjesečni statistički bilten, listopad 2019 [EPub]. Retrieved
from https://www.hzz.hr/content/stats/1019/HZZ_stat_bilten_10_2019.pdf
37
Eurostat. (n.d.). Population structure and ageing. Retrieved July 22, 2020 from https://ec.europa.eu/
eurostat/statistics-explained/index.php?title=Population_structure_and_ageing
atia, Germany and Hungary are 44, 46 and 43 respectively, and this trend is expected
to increase further. 38
These factors affect the shrinking AHG’s market and the change in the structure of
guests. Namely, the population of Croatia and the entire European Union are marked
by an aging trend, and the tourist offer is accommodating accordingly and third age
tourism is being developed. This segment is characterized by “traveling more often,
often choosing destinations away from the place of residence, staying longer on vaca-
tions, combining two or more destinations in one trip, desire to participate in different
activities and tending to spend more on traveling.”39
The Human Development Index (HDI) was introduced at the beginning of the last cen-
tury by the UN to rank countries by giving them scores of 0.001 to 1.0 based on life
expectancy, income and education. Out of a total of 189 countries, Croatia was 46th in
2018, Hungary 43rd, while Germany scored a high 4th place.40
Seasonality
The previously mentioned seasonality of employment of the Croatian population is
the result of an extremely short season, which is the main feature of Croatian tourism.
The most developed is summer tourism, which lasts from June to September. Accord-
ing to the Basic Data on Tourism in the World and Croatia, a total of 83.7 % overnight
stays were realized in the summer of 2018.41 Apart from the summer months and the
famous Advent in Zagreb, the rest of the year is poor with tourist arrivals to Croatia.
In order to prolong the season as much as possible and increase the attractiveness of
the continental destinations, the Croatian National Tourist Board launched the pro-
gramme entitled Croatia 365 which aims to develop year-round tourism in Croatia by
destination development, creating new products other than sun and sea and creating
experiences with authentic stories of destinations and localities.42
3.4. Technological factors

Research and development
According to investments in science and technology, Croatia is at the very bottom,
investing only 0.97 % of GDP in 2018. On the other hand, Germany has recognized the
importance of investing in new technologies and, according to Eurostat, invests as
38
Eurostat. (n.d.). Population structure indicators at national level. Retrieved July 22, 2020, from
https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=demo_pjanind&lang=en
39
Bartoluci, M., Čavlek, N., Kesar, O. (2011). Turizam – Ekonomske osnove i organizacijski sustav. Zagreb:
Školska knjiga.
40
United Nations Development Program. (n.d.) Human Development Index (HDI) Ranking. Retrieved
July 22, 2020, from http://hdr.undp.org/en/data
41
Hendija, Z., Kesar, O., Bučar, J. (2020). Osnovni podaci o turizmu u svijetu i Hrvatskoj u 2018. godini. Za-
greb: Sveučilište u Zagrebu, Ekonomski fakultet.
42
Turizam 365. (n.d.). Može li hrvatski turizam 365? Retrieved July 22, 2020, from http://www.turi-
zam365.com/
much as 3.13 % of its GDP. Hungary invests 1.53 % of its GDP in research and develop-
ment, which is still much more than Croatia. A high level of investment also represents
a high level of readiness to implement new technologies, which is the key assumption
for successful operation of any company today. In addition, it plays a significant role in
reducing development disparities between individual countries, which has a positive
impact on attracting foreign investments, especially in tourism.
New technologies
The existence of a website and the possibility of online booking are no longer just an
option, but a necessity for the tourism companies in modern society. Both, in the world
and in Croatia, there are more and more platforms for online booking and payment
of tourist accommodation, such as Booking.com and Airbnb. The Croatian National
Tourist Board introduced a national tourist information system eVisitor on 1 January
2016 which is used for registration of tourists by types of accommodation facilities,
destinations, and other parameters. As a final output it is also used for the analysis of
movements of tourists. The success of this innovation is evidenced by the fact that in
2018 it won the third prize of the World Tourism Organization – UNWTO in the category
of tourism innovation and technology.
3.5. Legal factors

According to the World Economic Forum Global Competitiveness Report, the Republic
of Croatia ranks 63rd out of 141 countries, and 140th out of 141 countries in terms of
the efficiency of the legal framework for resolving disputes. According to the costs of
starting a business, Croatia ranks 69th while according to the time required to start
a business at 106th.43 These are the discouraging factors that deter investors from
investing in the Republic of Croatia. Moreover, the General Tax Law has changed eight
times in the Republic of Croatia since 2011 and the VAT rate for preparing and serving
meals and sweets in restaurants has changed again since 1 January 2020. The frequent
changes in tax laws represent additional aggravating circumstances for business, and
planning tourism business.44
Germany is known for the oldest and most developed legal system in continental Eu-
rope with a tradition that instils security in all existing and potential investors and part-
ners. The German system is considered to be highly transparent while legal freedom
is at the highest level in the European Union. In contrast, in 2019 Germany came under
sharp criticism from the European Network for Indebtedness and Development in its
new report on tax frameworks within the EU. In their report, they state that several
members, including Germany, continue to offer a wide range of options in their legis-
43
World Economic Forum. (2019). The Global Competitiveness Report 2019 [EPub]. Retrieved from
http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf
44
Zakon o izmjenama i dopunama Općeg poreznog zakona, Nar. nov. No. 115/16. i 106/18 (2019). Re-
trieved from https://narodne-novine.nn.hr/search.aspx?upit=izmjene+i+dopune+op%c4%87eg+porezn
og+zakona&naslovi=da&sortiraj=1&kategorija=1&rpp=10&qtype=3&pretraga=da
lation to allow multinational companies to conceal ownership and money laundering.45

On the other hand, by joining the European Union, Hungary has effectively harmo-
nized its legal system with the legislation of the Union, which has simplified business
with member states and reduced the costs of imports and exports. Hungary’s greatest
problem remains the presence of corruption at all levels, as evidenced by the fact that
it is at the very bottom of the scale of EU members according to the Corruption Per-
ceptions Index for 2019.46
As of 1 January 2020, two new laws related to the tourism industry came into force, the
Law on Tourist Boards and the Promotion of Croatian Tourism, and the Law on Mem-
bership Fees in Tourist Boards. The changes brought by the laws imply a reduction in
the number of taxpayers and a simpler procedure for calculating and paying mem-
bership fees and tourist taxes. In addition, a flat-rate tourist tax for extra beds and a
flat-rate tourist membership fee for private renters have been introduced to simplify
payments.47
3.6. Environmental factors

Outbreak of COVID-19
Perhaps one of the most important, and certainly the most current, is the outbreak
of the COVID-19 pandemic. The virus first appeared in December 2019 in the Chinese
city of Wuhan, in the Hubei Province. In January 2020 it spread through China after
which it turned into a pandemic and spread around the world. By early August, over
18 million cases were reported worldwide while more than 700,000 people lost their
lives.48 Almost all economies in the world imposed strict measures to preserve their
citizens’ health at the expense of great economic losses. Inevitably the GDP of all coun-
tries declined due to the closure of borders, and the ban on business and migrations
of people. One of the most vulnerable industries is tourism, where losses have been
felt most significantly in the countries that rely heavily on tourism revenues such as
Croatia. To protect the economy, many countries have been forced to open borders at
the risk of further increasing the numbers of the infected. The world economy is slow-
ing down, while the burden is on the states on how to lead their states through this
continued state of emergency.
45
Treasurers. (n.d.). Germany and Luxembourg ‘havens for corporate tax dodging’. Retrieved
August 5, 2020, from https://www.treasurers.org/hub/treasurer-magazine/germany-and-luxem-
bourg-%E2%80%98havens-corporate-tax-dodging%E2%80%99
46
Transparency International. (2020). Corruption Perceptions Index [EPub]. Retrieved from https://www.
transparency.org/files/content/pages/2019_CPI_Report_EN.pdf
47
Republika Hrvatska: Ministarstvo turizma i sporta. (n.d.). Usvojen paket turističkih zakona. Retrieved
August 5, 2020, from https://mint.gov.hr/vijesti/usvojen-paket-turistickih-zakona/19115
48
Worldometer. (n.d.). COVID-19 Coronavirus Pandemic. Retrieved August 5, 2020, from https://www.
worldometers.info/coronavirus/?utm_campaign=homeAdvegas1
Environmental protection management

The International Organization for Standardization (ISO), among other things, pre-
scribes and certifies the Environmental Management System that each company can
implement in order to establish or improve its own environmental management sys-
tem. In addition, there is a growing demand for accommodation facilities that com-
ply with the environmental requirements. For example, TripAdvisor has launched a
GreenLeaders programme that highlights eco-friendly accommodation facilities that
have been given this status by meeting certain conditions: energy savings, recycling,
energy-saving household appliances, wastewater, procurement of home-grown food
and the like.
Air quality index

High quality of air, along with natural beauties, is another important factor in attract-
ing tourists. With its air quality, Croatia has confirmed its high ranking on the list of the
desirable destinations for travelling as well as for living. Like all highly industrialized
countries, Germany has major problems with air pollution, whose trend is growing.
Nevertheless, the country is one of the leading forces in the struggle to reduce CO2
emissions and supporters of renewable energy sources. Hungary, has a generally low
public awareness of environmental problems, and thus seems to be slow in imple-
menting the solution.49 The quality of air seems to be one of the environmental factors
that gives Croatia comparative advantage in view of tourism development.
4. INDUSTRY ANALYSIS
Industry analysis is a tool for identifying the current business environment and serves
as a basis for assessing the competitive position and performance of a company. Iden-
tifying the industry in which the company operates, precedes a good analysis of the
industry, and is even more important for developing a business strategy and setting
company goals.
4.1. Industry life cycle analysis

Industry life cycle analysis seeks to determine the stage of a particular industry. Ac-
cording to Robert Grant, the life cycle of an industry consists of four phases: introduc-
tion, growth, maturity, and decline. The two fundamental forces that accompany the
development of an industry are the growth of demand, and knowledge production
and expansion. Based on the analysis of the industry life cycle, it is possible to es-
timate the position of the industry within it and its possibilities, i.e., the dangers for
entering or leaving it.50
49
World Air Quality Index. (n.d.). Svjetsko onečišćenje zraka: Indeks kvalitete zraka u stvarnom vre-
menu. Retrieved August 5, 2020, from https://waqi.info/hr/#/c/42.029/10.593/4.5z
50
Sussex, United Kingdom: John Wiley & Sons Inc.
Applying the lifecycle model to the tourism industry, it is possible to place it in the
phase of slow growth rate. Considering the positive trends of tourist arrivals in the
Republic of Croatia as a relevant factor and their growth rate, it is evident that the
25,000,000 14%
demand is constantly increasing, but at a declining rate. According to Grant, this force
is characteristic of the growth phase, and is further confirmed by the slowing growth
20,000,000
12%
rates of tourism revenues. 10%
15,000,000
25,000,000 8%
14%
6%
12%
10,000,000
20,000,000
4%
10%
5,000,000
15,000,000 2%
8%
0 0%
6%
10,000,000
2012 2013 2014 2015 2016 2017 2018 2019
Tourist arrivals in Croatia Growth rate of tourist arrivals in Croatia 4%
5,000,000
2%
Source: prepared by the authors according to the Central Bureau of Statistics.
0 0%
2012 2013 2014 2015 2016 2017 2018 2019
In the last few years there has been
Tourist a strong
arrivals in Croatiaincrease in the Growth
arrivals and
rate of revenues
tourist of Croatian
arrivals in Croatia
tourism,
Figureaccompanied byforeign
6. Arrivals of an evenand
more significant
domestic number
tourists of overnight
in Croatia stays. However, from
2012-2019
2016 / 2017 this growth is realized at a declining rate in both categories, which further shows
that it islast
In the gradually slowing
few years down.
there has beenIt acan be attributed
strong increase intothe
thearrivals
recoveryandofrevenues
the mostofimportant
Croatian
competitive
tourism,
In the last markets
accompanied andbymajor
few years an sporting
even
there eventsathat
morebeen
has significant took increase
number
strong over
of part ofintourist
overnight travel
stays.
the in and
However,
arrivals Europe.
from
revenues
of
This Croatian
2016trend
/ 2017 tourism,
followed several
this growth accompanied by
years of ataccelerated
is realized an even
a declininggrowth more
rate inof significant
Croatian
both tourism,
categories, number
whichas shown of
further by overnight
the
shows
stays. However, from 2016 / 2017 this growth is realized at a declining rate in both
data
thatprior
it is to 2013. slowing down. It can be attributed to the recovery of the most important
gradually
categories, which further shows that it is gradually slowing down. It can be attributed
competitive
to the recoverymarketsofand
themajor
mostsporting
importanteventscompetitive
that took over part of tourist
markets travel sporting
and major in Europe.events
that took over part of tourist travel in Europe. This trend followed
This trend followed several years of accelerated growth of Croatian tourism, as shown by several years
the of ac-
celerated
Figure growth
7. Revenues of Croatian
from tourism tourism,
in the period as(inshown
2013-2019 mEUR) by the data prior to 2013.
data prior to 2013.
18,000 14%
16,000
12%
14,000
Figure 7. Revenues from tourism in the period 2013-2019 (in mEUR) 10%
12,000
18,000
10,000 8%
14%
16,000
8,000 6%
12%
14,000
6,000
10%
4%
12,000
4,000
10,000 8%
2%
2,000
8,000
0 6%
0%
6,000 2013 2014 2015 2016 2017 2018 2019
4%
Revenues from tourism Tourism revenue growth rate
4,000
Source: prepared by the authors according to the 2%
Figure
2,000 7. Revenues from tourism inCroatian National
the period Bank.
2013-2019 (in mEUR)
0 0%
Source: prepared
2013 by the authors
2014 according
2015 to the Croatian
2016 National
2017 Bank. 2018 2019
4.2.Market concentration and competitor analysis
Revenues from tourism Tourism revenue growth rate
Source: prepared by the authors according to the Croatian National Bank.
4.2.Market concentration and competitor analysis

23
4.2. Market concentration and competitor analysis

In the industry analysis, the company needs to be viewed in a narrower sense, placing
it in a seemingly inconspicuous, strategic group in which the most profitable, location-
ally and essentially most similar companies represent direct competitors. Information
on market concentration and competitors will be key to understanding the industrial
environment and, taking everything into account, will be key to identifying and analys-
ing company risk.
Strategic group identification

Measured by total revenues, within the ten leading companies in the tourism sector
in 2018 are Valamar Riviera d.d., Maistra d.d., two companies owned by the Lukšić
Group (Plava laguna d.d. and Jadranski lukusni hoteli d.d. or Adriatic Luxury Hotels),
Arena Hospitality Group d.d., Solaris d.d. and Liburnia Riviera Hotels d.d. Among the
ten leading companies in 2018 there were also Jadranka hoteli d.o.o., HUP-Zagreb d.d.,
and Sunčani Hvar d.d.
Table 2. Selected indicators of largest companies according to revenues in 2018
Gross Producti
Total reve- Indebted- Current Gross
profit vity
nues (mHRK) ness ratio ratio margin
(mHRK) (tHRK)
Valamar Riviera d.d. 1,848.2 260.2 0.48 0.61 0.14 476.1
Maistra d.d. 1,187.9 186 0.42 0.09 0.15 650.5
Plava laguna d.d. 1,171.8 308.4 0.27 1.04 0.26 581
Jadranski luksuzni
535.2 106.9 0.43 1.03 0.20 644.8
hoteli d.d.
Arena Hospitality
517.3 81.4 0.23 9.05 0.16 637
Group d.d.
Solaris d.d. 351 -39 0.47 0.79 -0.11 497.9
Liburnia Riviera Ho-
322.7 -16.7 0.18 0.89 -0.05 530.7
teli d.d.
Jadranka hoteli d.o.o. 313 -20.2 0.42 0.24 -0.06 445.8
HUP-Zagreb d.d. 307.3 95.2 0.10 2.23 0.31 520
Sunčani Hvar d.d. 292.8 99 0.06 0.41 0.34 822.5
Source: Authors’ elaboration based on data from Sectoral Analyses of Zagreb Institute of Economics and
companies’ financial statements
The data from Table 2. has been obtained from the Sectoral Analysis – Tourism of the
Zagreb Institute of Economics and refers to 2018 as such extensive indicators are not
available for 2019. On the other hand, the data of the first five leading tourist compa-
nies in Croatia for 2019 on Graph 7. below shows that Arena Hospitality Group has
moved to the fourth from the fifth place, replacing Jadranski luksuzni hoteli.
3,000
Valamar Riviera d.d.
2,500
Total revenues (mHRK)
2,000
Maistra d.d.
1,500
Arena Hospitality Group d.d.

1,000
Plava Laguna d.d.
500
Jadranski luksuzni hoteli d.d.
0
0 100 200 300 400 500 600 700 800 900
EBITDA (mHRK)
Source:
FigureAuthors’ elaboration
8. Business according
results of fivetolargest
data from companies'
tourist officialaccording
companies websites. to revenues in 2019
Source: Authors’ elaboration according to data from companies’ official websites.

Industry concentration
Industry
Tourism concentration
in the Republic of Croatia has been recording progressive growth rates and tourist
Tourism
arrivals forinyears.
the Republic
In 2018,ofthe
Croatia
total has been of
revenues recording progressive
ten largest growth rates
tourist companies and
in Croatia
tourist arrivals for years. In 2018, the total revenues of ten largest tourist companies in
amounted to HRK 6,847.2
Croatia amounted to HRKmillion,
6,847.2which accounted
million, for about for
which accounted 50 about
% of the
50 total revenues
% of the total in
revenues
tourism in tourism
in the in of
Republic theCroatia.
RepublicTourism
of Croatia. Tourism
as an as an
industry industry encompasses
encompasses a wide rangea of
wide range of services and a large part of it are private individualized accommodation
services and asmall
and private large entrepreneurs.
part of it are private
Becauseindividualized accommodation
of that, companies operatingand private
in the small
‘Hotels
and similar accommodation’
entrepreneurs. Because category
of that, will be the
companies only onesin
operating considered for market
the ‘Hotels and con-
similar
centration analysis.
51
According to the market shares within the ten largest Croatian
accommodation’ category
companies operating willcategory,
in this be the Valamar
only ones considered
owns for market,
27 % of the market while
concentration
Mais-
tra and51 Plava laguna have 17 % each. Thus, their concentration ratio C3 in relation to
analysis. According to the market shares within the ten largest Croatian companies
the 10 largest companies in 2019 in the Republic of Croatia is 61 % (Figure 9.), and 30
operating in thistocategory,
% in relation Valamar
the entire owns
industry. 27 %
If we of theinmarket,
include while Maistra
the analysis the nextand
twoPlava laguna
compa-
nies, Arena Hospitality Group and Adriatic Luxury Hotels, the C5 concentration ratio
have 17 % each. Thus, their concentration ratio C3 in relation to the 10 largest companies in
increases to 77 %, which is 40 % compared to the industry as a whole. If we include the
2019
nextinthree
the Republic
companies ofinCroatia is 61 % the
the calculation, (Figure 9.), and 30 %
C8 concentration in grows
ratio relationtotoabout
the entire
91
% and 45 % respectively in relation to the industry as a whole. Although this percent-
industry. If we include in the analysis the next two companies, Arena Hospitality Group and
age seems large compared to other industries and their market leaders, it should be
Adriatic
borne inLuxury Hotels,
mind that the C5
tourism concentration
is one of the most ratio increases
important to 77 in%,thewhich
industries is 40
Republic of %
Croatia which involves a large number of participants and every one of them seeks to
compared to the industry as a whole. If we include the next three companies in the
make a profit.
calculation, the C8 concentration ratio grows to about 91 % and 45 % respectively in relation
to the industry as a whole. Although this percentage seems large compared to other industries
and
51 their market leaders, it should be borne in mind that tourism is one of the most important
Ekonomski institut Zagreb. (2019). Sektorske analize – Turizam, studeni 2019 [EPub]. Retrieved
from https://www.eizg.hr/userdocsimages/publikacije/wserijske-publikacije/sektorske-analize/sa_turi-
zam_2019.pdf
51
Ekonomski institut Zagreb. (2019). Sektorske analize – Turizam, studeni 2019 [EPub]. Retrieved from
https://www.eizg.
hr/userdocsimages/publikacije/wserijske-publikacije/sektorske-analize/sa_turizam_2019.pdf
one of them seeks to make a profit.
Figure 9. Movement
Application of market Method
of Cash-Flow-at-Risk concentration (right) and
in Risk Analysis revenue
– Case (left)
of Arena of ten Group
Hospitality leading companies in tourism 21
sector 2013-2018
7,000 100%
90%
6,000
80%
5,000 70%
60%
4,000
50%
3,000 40%
2013 2014 2015 2016 2017 2018
Total revenues (MEUR) C3 C5 C8
Source: prepared by the authors based on data from the Sectoral Analyses of the Zagreb Institute of Economics.
Figure 9. Movement of market concentration (right) and revenue (left) of ten leading compa-
nies in tourism sector 2013-2018
Strategic group analysis
Source: prepared by the authors based on data from the Sectoral Analyses of the Zagreb Institute of
Four leaders were selected to identify the company in the strategic group, Valamar Riviera,
Economics.
Maistra, Plava laguna, and Arena Hospitality Group. Figure 9. shows the concentration of
accommodation facilities
Strategic group of the selected strategic group in the Republic of Croatia. As the
analysis
industry leader, were
Four leaders Valamar has theto
selected largest share,
identify thebutcompany
it extendsinbeyond Istria. Apart
the strategic from
group, its
Valamar
Riviera, Maistra,
accommodation Plava laguna,
capacities in Poreč,andPulaArena Hospitality
and Rabac, Group.
its hotels, Figure
resorts, 9. showsresorts
and camping the con-
centration of accommodation facilities of the selected strategic group in the Republic
are located in Dubrovnik, and on the islands of Rab and Krk in Croatia, and in Obertauern in
of Croatia. As the industry leader, Valamar has the largest share, but it extends beyond
Istria. 52
Austria. By taking
Apart overaccommodation
from its the Istraturist Umag company
capacities in in 2017,Pula
Poreč, Plava
andlaguna confirmed
Rabac, its re-
its hotels,
sorts, and
position amongcamping resorts
the three leadingare locatedin
companies inthe
Dubrovnik,
industry.53and on the islands facilities
Its accommodation of Rab andare Krk
in Croatia, and in Obertauern in Austria.52 By taking over the Istraturist Umag company
located
in 2017,inPlava
Umaglagunaand Poreč (Istria) its
confirmed andposition
in Rijeka,
amongwhich themakes
threeitleading
a directcompanies
geographical in the
competitor of Arena Hospitality Group. Maistra's facilities are located in the immediate in
industry. 53
Its accommodation facilities are located in Umag and Poreč (Istria) and
Rijeka, which makes it a direct geographical competitor of Arena Hospitality Group.
vicinity of AHG in Rovinj and Vrsar, however, with the recent acquisitions they have opened
Maistra’s facilities are located in the immediate vicinity of AHG in Rovinj and Vrsar,
additional
however,hotels
with the in Zagreb,
recentSplit and Dubrovnik
acquisitions and thus
they have openeddiversified their hotels
additional own portfolio.
in Zagreb,
Adriatic Luxury Hotels, although the closest to the total revenue, are not direct competitorsHotels,
Split and Dubrovnik and thus diversified their own portfolio. Adriatic Luxury to
although the closest to the total revenue, are not direct competitors to Arena Hospi-
tality Group, given that its accommodation facilities are mostly located in Dubrovnik
52and on Mljet.
Valamar Riviera. (n.d.). Brands and Portfolio. Retrieved August 5, 2020, from https://valamar-
riviera.com/en/brands-and-portfolio/
53
Plava laguna. (n.d.). O nama – Opći podaci. Retrieved August 5, 2020, from http://biz.plavalaguna.hr/hr/o-
nama
26
52
Valamar Riviera. (n.d.). Brands and Portfolio. Retrieved August 5, 2020, from https://valamar-riviera.
com/en/brands-and-portfolio/
53
Plava laguna. (n.d.). O nama – Opći podaci. Retrieved August 5, 2020, from http://biz.plavalaguna.hr/
hr/o-nama
Dubrovnik and on Mljet.
Figure 22
10. Geographic position
Company Analysisofand
four leading
Risk companies
Management in tourism
Strategies industry
in the Global in Environment
Business Republic of– Croatia
A Case Study Collection
Valamar Riviera d.d.
Maistra d.d.
Plava laguna d.d.
Arena Hospitality Group d.d.
Source:Figure 10.elaboration
Authors’ Geographic position
according of four
to data from leading companies
company's in tourism industry in Republic of
official website.
Croatia
The structure of tourist

Source: Authors’ accommodation
elaboration capacities
according to data amongofficial
from company’s the website.
four leading companies is
characterized by the dominance of hotels. They are followed by resorts, campsites, and
The structure
apartments. of tourist accommodation
The apartments capacities
are mostly owned among
by private the four leading
accommodation andcompanies
are very
is characterized by the dominance of hotels. They are followed by resorts, campsites,
popular
andasapartments.
such. In other
Thewords, a recent
apartments aretrend shows
mostly thatbya private
owned large number of Croats and
accommodation are
are very
increasingly popular
turning ashomes
their such. into
In other words, a recent
accommodation trend
facilities showsadditional
seeking that a large number
income.
of Croats are increasingly turning their homes into accommodation facilities seeking
additional income.
Table 3. Accommodation facility types of three leading companies
Hotels Resorts Campsites Apartments

Valamar Riviera d.d. 25 13 15
Maistra d.d. 18 8 6 3
Plava laguna d.d. 25 4 13 13
Arena Hospitality Group 7 + 7 foreign 4 8
Source: Authors’ elaboration according to data from company’s official website
Since Valamar’s revenues are more than half as high as the second and third in the
strategic group, it can be seen as a leader. With its diversification of accommodation
facilities and a diverse offer intended for guests of different demand and purchasing
power, it has increased the possibilities of generating capital. Maistra has been firmly
holding its second position for years. With total revenues of HRK 1.188 billion, it can be
seen that the company maintains a stable balance taking into account the revenues
and the number of employees. Plava laguna d.d. has been in third place for years,
27
however, with the purchase of Istraturist it became a threat. Thus, from HRK 0.586
billion in revenue, it approached Maistra at HRK 1.172 billion. Plava laguna portfolio
is also diversified in terms of its offer, similarly to Valamar, which makes them serious
competitors to AHG, while Maistra has profiled exclusively in the upscale and premium
segments.
4.3. Porter’s model of five forces

Porter’s model of five forces is used as the best known and most common approach
for industry analysis. According to Michael Porter, there are five competing forces:
Competitive rivalry within industry; Threat of new entrants; Threat of substitute prod-
ucts; Bargaining power of customers; Bargaining power of suppliers. The joint action
of all five forces determines the profit-risk potential of the industry.
4.3.1. Threat of new entrants

Since most of AHG’s capacity is located in the County of Istria, the emphasis of the
analysis is placed on the potential entry of new competitors in the area. The largest
number of Croatian tourist beds, and beds in hotel accommodation are located in
Istria, which enforces the danger of new competitors, especially considering the large
increase in capacity in private accommodation on an annual basis.54
However, the risk of entry of large competitors, i.e., those who can compete with their
size, comprehensive offer, luxury services, and emphasis on the high-end segment of
consumers is much less. The first entry barrier that companies face is granting conces-
sions on tourist land owned or co-owned by the Republic of Croatia. It is important to
note that for most attractive locations by the sea, long-term concessions have already
been granted to the existing competitors, especially Maistra, Plava laguna and Vala-
mar. Furthermore, the construction of new hotel buildings is limited by the spatial and
urban plans of the cities. Namely, all cities have at least one-year, and most of them up
to five-year plans, due to which there is usually no possibility of very fast construction
and implementation of such large investment projects. If these two obstacles were
ignored, the construction of hotels and resorts requires extremely large capital invest-
ments, which is why entering the industry is not so easy. In spite of the possibilities
of building smaller high-end hotels, such as boutique hotels and resorts that would
attract the same target segment, the lack of their reception capacity of 10 to 50 rooms
does not pose a significant threat to the business. Considering all the above, the risk of
new competitors is relatively low.
54
Hrvatska turistička zajednica. (2018). Turizam u brojkama 2018. [EPub]. Retrieved from https://www.
htz.hr/sites/default/files/2019-09/HTZ%20TUB%20HR_%202018.pdf
4.3.2. Threat of substitute products

Although it is difficult to find substitutes for traditional tourist services and accommo-
dation, in recent years there have been visible changes in world tourism trends, such as
an emphasis on more frequent and shorter trips, and trips related to sporting events
and special consumer interests. Related to this, consumers often use new services like
Airbnb or couchsurfing that are emerging as an alternative to hotel services. In most
cases, however, they cannot be considered as total substitutes because they do not
offer a comprehensive service (accommodation, food, drink, entertainment) and most
often do not belong to the luxury segment. However, today the offer on Airbnb varies
from modern penthouses in the city centres to premium apartment accommodation
with 4 or 5 stars which may include other mentioned services as organized by the
host. Another similar substitute could be cruises, which also attract wealthy tourists,
although the same type of consumers probably may not choose a two-week cruise
over a two-week stay in one destination / hotel. In conclusion, although these services
have been present for several years in the Republic of Croatia, hotel and premium
accommodation have not suffered any negative consequences in terms of capacity
utilisation. This is probably the result of Croatia’s strong position in the European tour-
ism market, favourable geographic position, and a strong offer of the largest tourism
companies. Therefore, the risk of entry of substitutes is relatively low.
4.3.3. Bargaining power of customers

When it comes to customers, on the one hand, there are end customers who act individ-
ually and, on the other hand, tour operators and travel agencies that rent a certain part of
accommodation facilities within travel companies. Observing the typical accommodation
offer service, individual buyers do not have special bargaining power because the price
is predetermined. There is not much room for manoeuvre for its changes as individuals
and their families are extremely diversified. This is especially true in the high season when
the demand is usually higher than the supply. In the off season the bargaining power is
slightly higher as companies respond quickly to bookings by granting additional discounts
to customers or special prices to encourage them to purchase the service.
However, in the case of the sale of accommodation facilities to tour operators and
travel agencies with which fixed prices are agreed in advance, businesses on the other
hand, due to their size and recognizability, have a greater bargaining power. This is
especially true when companies want to position themselves in the markets where
they are not yet present (e.g., the UK market) or where it is easier to reach customers
through intermediary channels. Therefore, it is possible to conclude that there is a
certain bargaining power of large customers, while it is low for individual consumers.
4.3.4. Bargaining power of suppliers

Suppliers in tourism supply companies with food, beverages, small inventory, main-
tenance services, consumables and other basic supplies. These are usually smaller
local suppliers who aim to improve the quality and freshness of food products while
reducing transport costs. In addition, the aim is to achieve good relations with the local
community and create synergies in the local area. Companies like Arena Hospitality
Group are very attractive to suppliers due to high liquidity, secure pay status, and high
demand for products and services. All this leads to the conclusion that AHG has an ex-
tremely strong bargaining power and, due to its size, can negotiate favourable prices
and conditions with the suppliers.
4.3.5. Competitive rivalry within industry

The most important competitors for the Group are Maistra, which stands out with its
high quality of service, luxury hotel accommodation and premium segment; Plava lagu-
na, which in 2014 took over Istraturist Umag thus further strengthening its position in
the tourism market; and Valamar Riviera as the competitor with the highest revenues
(HRK 1.85 billion) among all tourist companies in Croatia in 2018. The last two compa-
nies are characterized by a high diversity of offer and a differentiated portfolio from
hotel capacities of different categorisations, campsites, tourist resorts to apartments,
which make their offer most similar to the products of Arena Hospitality Group. These
are the four largest tourist companies in the country with most of their capacities in
the County of Istria. Although the number of competitors is large, the rising industry
rates ensure corporate growth. Apart from Croatia, it is important to mention other
highly segmented competitors in Germany and Hungary, which represent direct com-
petitors to the Park® and Art’otel® Group brands, namely Hilton Hotels & Resorts,
Hyatt Hotels Corporation, Marriott International, InterContinental Hotels and others.
Therefore, the degree of intensity of competition among the established competitors
is medium level and moving towards a higher level, which is why in the future it will be
necessary to differentiate the product more strongly. Fortunately, Arena Hospitality
Group has already adapted its investment activities to these prospects.
5. INTERNAL COMPANY ANALYSIS
5.1. Company’s competitive strategy analysis
5.1.1. Strategic business units analysis

One of the possible methods for the strategic business unit analysis is the BCG matrix,
which seeks to assess the cost-effectiveness and sustainability of various business
units and / or various products or services. Its goal is to find strategies that will relocate
businesses positioned in unstable and under-profitable areas to areas that allow for
stable operations.55 The matrix is divided into four quadrants represented by unique
symbols of certain levels of profitability: question marks, stars, dogs and cash cows.
55
Fučkan, Š. & Sabol, A. (2015). Planiranje poslovnih dometa. Zagreb: Hum naklada d.o.o.
profitability: question marks, stars, dogs and cash cows.
Figure
26 11. Comparison of business
Company Analysis and Risksegments according
Management to inoccupancy
Strategies the Global and average
Business price in –2019
Environment A Case Study Collection
100%
Hotels - Germany and Hungary
*Size of the circle = segment revenue
90%
80%
Annual occupancy
70%
Resorts
60%
50%
Hotels - Croatia
40%
Campsites
30%
20%
200 300 400 500 600 700 800 900
Average price per night - ADR (in HRK)
Source:
FigureAuthors’ elaboration based
11. Comparison on AHG’s
of business financial statements5of
segments according to theoccupancy
Group by 2019
and average price in
2019
Given
Source:that competitors
Authors’ do not
elaboration report
based on their
on AHG’s segments
financial in a comparable
statements5of the Groupway, it is still possible
by 2019
to conclude that hotels are the true example of ‘stars’. Hotel data in all markets show high
occupancy,
Given thatparticularly
competitors thedo
hotels in Hungary
not report and Germany
on their segmentswith
in aa comparable
high occupancy
way,rate of
it is
still possible to conclude that hotels are the true example of ‘stars’. Hotel data in
81.3 %. Hotels in these markets predominantly target consumers of high and higher
all markets show high occupancy, particularly the hotels in Hungary and Germany
purchasing
with a high power, and thisrate
occupancy category
of 81.3generates
%. Hotelshugeinrevenues at well-known
these markets high margins.
predominantly On
target
consumers of high and higher purchasing power, and this category generates huge
revenues at well-known high margins. On the other hand, hotel occupancy in the
55
Croatian market, where AHG operates in the high and middle segment, is slightly
lower. Therefore, it is possible to conclude that the existing middle segment of the
hotel and tourist resorts of medium categorisation represent ‘cash cows’. Although
the occupancy rates of ‘campsites’ are low, 32 the nature of their business must not be
neglected as they offer a very large number of available units (per person), i.e., more
than one million.
BCG matrix
Tourist companies from the observed strategic group distribute their business reve-
nues mainly to ‘hotels and resorts’, ‘campsites’, and ‘other’, which most likely include
the revenues from laundries, central services, agencies, kitchens and the like. There-
fore, the BCG matrix of the four major competitors of Arena Hospitality Group was
created below: Valamar, Plava laguna and Maistra. Although the AHG Group publishes
hotel and resort revenues separately, this is not available for the other companies
shown together in the matrix.
and Maistra. Although the AHG Group publishes hotel and resort revenues separately, this is
not available for the other companies shown together in the matrix.

Figure 12. BCG matrix by business segments
12
10
QUESTION MARKS STARS
8
Market attractiveness
4
DOGS CASH COWS
2
0
0 0.5 1 1.5 2 2.5 3
Relative market share
Hotels & resorts Campsites Other
Source:
Figure Authors’
12. BCGelaboration
matrix by according
business to financial statements of AHG, Valamar, Plava laguna and Maistra by
segments
2018 / 2019
Source: Authors’ elaboration according to financial statements of AHG, Valamar, Plava laguna and Mai-
stra by 2018 / 2019
The y-axis in Figure 12. shows market attractiveness, i.e., market growth, while the x-axis
represents
The y-axis the relative
in Figure 12.market
shows share.
marketThe BCG matrixi.e.,was
attractiveness, calculated
market according
growth, while theto the
x-axis represents the relative market share. The BCG matrix was calculated according
revenues of four leading tourism companies divided into three segments: ‘hotels and resorts’,
to the revenues of four leading tourism companies divided into three segments: ‘hotels
and resorts’,and
‘campsites’, ‘campsites’, and ‘other’.
‘other’. Since Since segment
the ‘other’ the ‘other’
wassegment was to
used only used
takeonly
intotoaccount
take all
into account all other revenues of the companies, it is probably not precise and will
other
not berevenues of the
interpreted companies,
separately. it is probably
The remaining not precisebelong
two segments and will notstars
to the be while
interpreted
the campsites record a higher growth rate in the observed period. Although some of
the assumptions in composing the matrix, such as revenue segmentation, probably
33
affected its position, the matrix still seems plausible due to the intensive investments
in the hotel and resort segment in the last five years, which also generated the most
revenue. In case of reversal of growth of this segment, it will gradually pass into cash
cows. A similar situation is present in the campsites whose categorisation was raised
to a higher level owing to Arena Hospitality Group’s investments that turned them into
luxury accommodation facilities.
5.1.2. Value chain analysis

A significant element of the strategic context analysis of the company is the value chain
which defines the process of creating value of observed organisation. The company is
understood as a dynamic unit of related functions and their mutually separate units
in which each activity has its own special, individual role in the overall business of the
company. In its basic model of the enterprise value chain, Porter divides activities into
primary and secondary, i.e. supporting activities. Primary activities directly participate
in the creation of value, while secondary activities are necessary for the quality of the
basic, i.e., primary activities.56
Primary activities
1. Inbound logistics in the tourism industry takes a slightly different form, given that
the main input for the provision of services is the employee who serves the guests
and the facility in which they are located. However, other important inputs include
groceries, beverages, printed materials, spare parts and maintenance materials.
Since the company cooperates with both business partners at the operational level
and business partners involved in investment projects, adequate input logistics is
an important factor in creating the final tourism product. Given that accommoda-
tion units in Croatia are located in the Istrian area, and in Germany and Hungary in
large urban centres, this does not pose significant logistical obstacles.
2. Production and output logistics are key links in the value chain in tourism becau-
se the complete service consists of a series of separate parts and activities that are
interconnected. In the case of Arena Hospitality Group, they are observed together
because processes, such as food preparation and accommodation units, environ-
mental maintenance, water and sea quality monitoring and numerous activities on
offer, take place simultaneously and continuously during the stay of guests.
3. Marketing and sales form one of the divisions within the organisational structure
of Arena Hospitality Group, which centrally organizes and plans important marke-
ting activities for all accommodation facilities. In addition to conventional adverti-
sing, which is primarily concentrated near the destination, guests are mostly attra-
cted by direct sales through their own portals, online ads, promotion in magazines
and many other activities.
4. Services can be described through measuring the quality of products and servi-
ces that are monitored primarily through AHG’s annual questionnaire entitled ‘Em-
ployee Engagement Index’, on complaints and requests of guests, employee sugge-
stions and proposals of internal and external audits. The obtained results are used
as guidelines in planning business activities. Complaints and requests are immedia-
tely considered and mostly resolved on the spot to the satisfaction of guests, which
is another special feature of this industry.
Secondary activities
1. The infrastructure that supports the functioning of the entire company includes
the Management Board at the highest level, followed by the Supervisory Board, the
Audit Committee, the Nomination and Remuneration Committee, and a number of
divisions tasked with the operation of the tourism company. AHG’s reports do not
state the organisational structure of the company, and therefore it will be omitted
in this context.
56
2. Human resource management is a key activity because the Group believes that
employees are the ‘authors’ in their business. In 2019 Arena Hospitality Group em-
ployed 1,482 persons of whom 480 were full-time employees (53 % women and
47 % men). The Group annually offers four scholarships to high school students
from the School of Tourism, Hospitality and Trade Pula and works closely with the
Faculty of Economics and Tourism in Pula, in order to attract more young people as
potential employees. In addition, it invests heavily in its employees through a range
of educational trainings and programmes.57
3. Technological development is the foundation of the future business of Arena
Hospitality Group through the strategy of innovation and digitalisation of business.
The most important elements that improve the existing service are: the opening
of new websites arenacampsites.com and arenahotels.com, together with a web op-
timisation programme that serves to improve the ranking in online search results,
accompanied by media activities with the aim of raising brand awareness.58
4. Purchase is one of the strategic functions in a company that aims to work closely
with the local community. The aim is to provide quality products and food pur-
chased from local producers which directly promotes and encourages economic
growth and development of the local community.
5.1.3. Generic strategies analysis

In order to achieve competitive advantage, a company must decide on the advantage
it wants to achieve and the market segment it wants to target. Competitive advantage
is achieved when a company is more efficient than its competitors in business; more
successful in attracting customers and creating belief in the superior value of their
own products; and more able to offer good products at lower prices or higher quali-
ty products at same prices. Analysing the underlying competitive advantages, Porter
identified three generic competitive strategies: Cost Leadership, Differentiation, and
Focus with its two versions: Focused Cost Leadership and Focused Differentiation.59
Arena Hospitality Group has profiled itself through the competitive differentiation
strategy by its offer to the intended guests with different purchasing powers. However,
a major turnaround in the implementation of this strategy has been present only in the
recent years. Namely, since 2011 AHG has started repositioning its portfolio towards
high value-added offers and services by refurbishing its accommodation facilities un-
der the new Park Plaza brand. It began to expand intensively in 2016 after the PPHE
Hotel Group took over an 88 % stake in the Sugarhill Group in exchange for a share
listing. The Group points out that their product and content development strategy
57
58
59
Tipurić, D. (2010). Alternativne strategije: Generičke poslovne strategije. In: Buble, M., (Eds.), Strateški
menadžment. Zagreb: Sinergija.
includes expanding its portfolio within the markets of Central and Eastern Europe by
offering a high quality product at attractive prices. Arena Hospitality Group made an
additional step forward compared to the major competitors by taking over facilities
in a wider geographical area. In 2019 they signed a contract to purchase a 4-star hotel
88 Rooms for HRK 47 million located not far from the old town of Belgrade, Serbia’s
capital. This indicates the company’s reorientation to a higher segment of the tourist
offer, with efforts to be present in all important destinations while remaining as one
of the leading Croatian hotel companies. As part of an investment plan of around
HRK 500 million, in 2019 the Group began developing the Arena Kažela Campsite into
a 4-star product and then repositioning the Brioni Hotel into a luxury hotel with 227
rooms, which began in 2020. In addition, a long-term lease agreement (45 years) has
been signed for a building in the centre of Zagreb that is intended to be converted
into a hotel. Hotels in Zagreb and Belgrade will contribute to the portfolio of city ho-
tels, which is in line with the strategy of creating a more balanced portfolio enabling
year-round business. With its high and higher segment, it certainly competes with
Maistra, which builds its portfolio mainly on luxury offerings and targets tourists of
extremely high purchasing power, and Valamar, whose investments in the past few
years focus exclusively on upscale and premium portfolio, in hotel and resort, and
campsites segments. On the other hand, the third competitor Plava laguna is mainly
concentrated on tourists of lower and medium purchasing power has only one 5-star
facility whose ownership was acquired recently through the acquisition of Istraturist
Umag, and hence represents competition to the Arena Hospitality Group branding
the medium category of Arena Hotels & Apartments. In line with the differentiation
strategy, Arena Hospitality Group should probably examine the cost-effectiveness of
raising the quality of this accommodation to a higher level, or perhaps its sale. If the
status quo remains, the company may still choose a type of hybrid strategy for its dif-
ferent segments, which could lead to the risk of unclear business strategy in the long
run.
5.2. Analysis of fundamental value factors from past financial

statements
Publicly disclosed financial statements are the foundation for external financial analy-
sis. The basis of the analysis is comparison because the conclusions on the quality of
published quantities from the financial statements can be made only when compared
with other figures. The comparative analysis of financial statements makes it possi-
ble to assess the financial situation and financial performance that the company has
realized and published in the reporting period. With regard to comparative analysis,
the paper uses the analysis of historical series (horizontal analysis) and the analysis of
comparable quantities (vertical analysis). The horizontal analysis enables the obser-
vation of a company’s tendencies of changes in the financial situation and business
performance, while the vertical analysis calculates the positions of the financial state-
ments to the percentages of the statement of financial position and the profit and loss
account. It is also possible to analyse them by observing individual relationships be-
tween parts of financial statements, i.e. using financial indicators. Most often, indica-
tors are classified into leverage ratios, liquidity ratios, efficiency indicators, profitability
ratios and market value ratios.60
The analysis of the statement of financial position and profit and loss account of Arena
Hospitality Group is based on the financial statements of the last five years, i.e. in the
period between 2015 and 2019.
5.2.1. Statement of financial position analysis

Vertical statement of financial position analysis
Regarding the assets, non-current assets account for the largest share (80 %) in all five
years, particularly in 2015 when non-current assets reached as much as 90 % of the
total assets. The share of non-current assets decreased during the observed period
due to a series of acquisitions by which AHG gained the right to manage and devel-
op several branded hotels. Within the non-current assets, the most significant share
comprises tangible assets that fluctuate between 92 % and 99 %, especially due to
investment cycles and the general increase in this statement of financial position item,
which will be shown later in the horizontal analysis. A large share of tangible fixed
assets is very typical of companies that operate in the tourism industry given their
core business is in hotels, resorts, campsites and other facilities belonging to the men-
tioned category. In 2016, the share of financial assets accounted for an above-average
6 % of non-current assets as a result of the acquisition of shares and loans of the re-
cently merged Sugarhill Group. Other items, such as intangible assets and receivables
within non-current assets, account for only about 1- % or less of total assets. Current
assets range from 10 % in 2015 with an exception of 30 % in 2017 when it remained at
the same level. The share and movement of current assets are driven by their most
significant item, cash and cash equivalents, which at the level of about 90 % in the
observed period shows another characteristic of business in the tourism sector. Given
that the company’s business is seasonal and revenues are mostly generated during
the summer months, most tourist companies, including Arena Hospitality Group, keep
a significant amount of the cash in bank accounts to be easily available for various fi-
nancing purposes during the year. The largest share in the structure of liabilities refers
to capital and reserves, which make up about 56 % of total assets. Looking at non-cur-
rent liabilities, they fluctuate in the range of 32-3 6% over the observed period. Most of
the non-current liabilities are accounted for by banks and other financial institutions,
which indicates that banks and other financial institutions are the main creditors of the
Group. Current liabilities in all years are around 5 %, except in 2016 when they reached
16 % due to the realisation of loans from Zagrebačka banka d.d. in the total amount
of HRK 149.8 million. This figure primarily refers to liabilities towards banks and other
financial institutions, liabilities towards the related parties, account payables, liabilities
for advances received, liabilities to the employees and the state through taxes, and
contributions and similar expenses.
60
Orsag, S. (2015). Poslovne financije. Zagreb: LDK tiskara.
Horizontal statement of financial position analysis

In order to gain a better insight into the movements of the statement of financial posi-
tion items, a horizontal analysis was conducted. During the observed period, total as-
sets recorded a stable growth and in the five-year period grew by as much as 110.10 %,
driven by an increase in its most significant item, fixed assets, from 1.314 to HRK 2.349
billion, an increase of 78.81 %. Within the property, plant and equipment, the most
significant growth was recorded in buildings, plant and equipment, land, and tangible
assets in preparation, which confirms AHG’s active investment cycle, but also promises
further growth of assets. The increase in long-term financial assets in the second year
is the result of a given loan of EUR 4.0 million with an interest rate of LIBOR + 2.5 % per
annum, maturing on 7 June 2023. Current assets fluctuate over the observed period,
achieving a five-year growth from HRK 159 million to HRK 746 million, which is directly
attributed to the growth of the cash and cash equivalents of 386.4 %. Due to the larg-
er volume of business, raw materials increased at a 60.85 % rate over the five-year
period, as did the receivables – 151.51 % in the same period – mostly from customers
and the government. Looking at capital and liabilities, capital and reserves increased
over the years, particularly in 2017 after issuing 1,091,250 new ordinary shares of the
Group at a unit share price of HRK 421.54 and all as a fee for acquiring an 88 % stake
in Sugarhill group.61 Among other items, it is important to mention the growth of profit
from HRK 17.9 million in 2015 to HRK 149 million in 2019, which was also contributed
by the value adjustment of fixed assets. Long-term liabilities increased by 118.58 % in
the observed period to HRK 1.129 billion. Within them, the most significant item were
the liabilities towards banks and other financial institutions, which include all long-
term liabilities of AHG. Short-term liabilities strongly fluctuated and overall increased
by 147.18 % in the five-year period. They primarily relate to liabilities toward banks and
other financial institutions and towards suppliers which increased by 231 % in the ob-
served period. The growth in observed five-year period is primarily reflected through
investment projects in fixed assets and generated by long-term borrowing and by the
capital resulting from constant increase in profits that was accumulated in the compa-
ny through retained earnings.
61
Arenaturist d.d. (2017). Annual Report for Year 2016 [EPub]. Retrieved from https://www.arenahospi-
talitygroup.com/datastore/filestore/30/Godisnje_izvjesce_PDF_1.pdf
Table 4. Abbreviated statement of financial position for 2015 - 2019
mHRK 2015 2016 2017 2018 2019

NON-CURRENT ASSETS 1,314 1,469 1,852 1,934 2,349
Intangible assets 4 1 1 1 1
Tangible assets 1,302 1,353 1,785 1,858 2,236
Non-current financial assets 62
1 85 37 51 53
Non-current receivables 0 0 0 0 0
Deferred tax asset 6 30 28 24 59
CURRENT ASSETS 159 178 824 827 746
Inventories 63
2 4 4 3 3
Current receivables 9 43 20 21 24
Trade receivables 4 21 13 14 14
Other receivables 5 22 7 7 10
Current financial assets 0 0 0 0 0
Cash and cash equivalents 148 130 800 803 719
TOTAL ASSETS 1,473 1,647 2,676 2,761 3,095
CAPITAL AND RESERVES 838 804 1,566 1,648 1,756
Share capital 44 44 103 103 103
Capital reserves 0 460 1.143 1.143 1.143
Reserves from retained earnings 774 372 330 329 317
Fair value reserves 0 0 -3 -5 -9
Retained earnings or accumulated loss 2 20 -94 -9 54
Profit or loss for year 18 -114 88 89 149
Non-controlling interests 0 23 0 0 0
PROVISIONS 64
51 57 63 69 43
NON-CURRENT LIABILITIES 516 528 882 894 1,129
Non-current liabilities towards banks and
369 521 807 892 1,122
other financial institutions
Other non-current liabilities 147 8 75 2 6
CURRENT LIABILITIES 68 257 166 149 167
Current liabilities towards banks and other
24 135 38 46 78
financial institutions
Trade payables 11 43 24 20 29
Other current liabilities 33 78 104 83 60
TOTAL LIABILITIES 1,473 1,647 2,676 2,761 3,095
Source: Authors’ calculation based on AHG’s financial statements
62
Refers to loans given to third party.
63
Refers to raw materials.
64
Refers to provisions arising from possible litigation losses and concession rights.
5.2.2. Profit and loss account analysis

Vertical profit and loss account analysis
According to the profit and loss account, the most significant revenue for Arena Hos-
pitality Group is operating income. Operating income refers to sales revenues which
account for about 99 % of total revenues over a five-year period, while in the last ob-
served year (2019) they reached a total of HRK 778 million. Operating expenses follow
the growth of revenues and in 2019 amounted to HRK 650 billion. Within the category
of operating expenses, the most significant are material costs, which make up about
26.9 %, staff costs of about 34.5 %, and depreciation 13.7 %. Compared to operating in-
come, financial income generates an extremely small source of income with less than
1 % of total revenues. Financial expenses over the years are higher than revenues and
amount to 6.5 % of total expenses on average. It is important to note that the most
important item in the financial expenses are interest expenses for the existing bank
loans. According to the structure of total revenues and total expenses, the Group op-
erated with a profit in the observed period, except in 2016 due to the value adjustment
of assets. Its total expenses in 2015 accounted for 94.1 % of the total revenues, while
in the last analysed year they fell to 86.2 %, which increased the profit in the five-year
period from HRK 18 million to HRK 149 million.
Horizontal profit and loss account analysis

Arena Hospitality Group achieved exceptional corporate growth in the observed period
from 2015 to 2019. Its operating income driven by sales revenues increased from HRK
403 million in 2015 to HRK 778 million in 2019, which represents a 93.2 % growth. The
most significant increase is visible in 2017 with the acquisition of the already mentioned
88 % stake in the Sugarhill Group and the takeover of the right to manage the Park Plaza
brand. Although the Group acquired the shares in December 2016, the results of the
newly acquired hotels in Germany and Hungary were consolidated in the profit and loss
account in the next year’s financial reports. The increase in revenue in 2019, compared
to the previous year, is the result of a 55.1 % increase in the occupancy rate and higher
than the average accommodation price of 5.2 %, which increased to HRK 606.2. 65 Com-
pared to the higher business volume, there was an increase in the operating expenses of
88.05 % in the observed period, which amounted to HRK 650 billion in 2019. The highest
growth is seen in the operational items, such as the costs of staff in the form of salaries
and wages and material costs for raw materials. During 2019, the Group reduced rental
costs by HRK 22.8 million, increased depreciation costs by HRK 20.3 million and raised
interest expenses by HRK 4.6 million. It thus recognized HRK 215.0 million in assets with
the right of use and HRK 222.0 millions of lease liabilities as at 31 December 2019.66
The main reasons for this overall upsurge can be attributed to the consolidation of the
companies in Germany and Hungary, the rise of material costs due to the increased unit
price of energy, higher business volume, and an increase in costs related to employees.
65
66
Although financial revenues of HRK 849 thousand in 2019 are insignificant, at the start
of the Group’s operations on the international market in 2017 were HRK 6 million due
to the realisation of positive exchange rate differences. On the other hand, financial ex-
penses are a significant item which fluctuated slightly in the five-year period and in 2019
had the value of HRK 30 million. They primarily relate to interest and financial costs on
long-term bank loans due to the financing of intensive capital investments. Compared
to the previous year, the Group’s profit after tax increased by 68 % in 2019 to HKR 149
million, which was the result of tax relief for their investment programme in Croatia.67
The cumulative growth of net profit in the five-year period reached a high of 730.52 %,
which once again confirms high performance of AHG’s operations.
Table 5. Abbreviated profit and loss account for 2015-2019
mHRK 2015 2016 2017 2018 2019

OPERATING INCOME 403 436 717 758 778
Sales revenue 403 436 703 745 774
Other income 0 0 14 13 4
OPERATING EXPENSES 345 533 567 615 650
Material costs 25 29 239 258 245
Labour costs 117 126 217 233 251
Depreciation 60 74 62 69 99
Other costs 135 141 0 0 0
Value adjustments 0 149 0 0 0
Provisions 0 0 0 1 0
Other operating expenses 9 15 48 54 54
FINANCIAL REVENUES 0 0 6 1 1
FINANCIAL EXPENSES 68
34 41 44 31 30
SHARE IN PROFIT IN COMPANIES IN
WHICH THEY HAVE PARTICIPATING 0 0 0 1 2
INTEREST
SHARE IN LOSS OF ASSOCIATES 0 0 1 0 0
TOTAL REVENUES 403 436 723 760 789
TOTAL EXPENSES 379 574 612 646 680
EARNINGS BEFORE TAX 24 -138 112 114 109
INCOME TAX 6 -24 23 25 -40
NET PROFIT / LOSS 18 -114 88 89 149
Source: Authors’ based on AHG’s financial statements
67
68
They relate mostly to interest-based expenses.
5.3.Analysis of financial indicators
To assess the financial position and stability of Arena Hospitality Group, an analysis of
5.3. Analysis
standard of financial
financial indicators indicators
is performed. Figure 13. shows the dynamics of the main values
Tothe
of assess thebusiness
Group's financialactivities
positioninand stability
the last of Arena Hospitality Group, an analysis of
5 years.
standard financial indicators is performed. Figure 13. shows the dynamics of the main
values of the Group’s business activities in the last 5 years.
Figure 13. Dynamics of main figures (part I)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2015 2016 2017 2018 2019
Total assets Non-current assets Equity Total liabilities
Source: Authors’ elaboration based on AHG’s financial statements

Figure 13. Dynamics of main figures (part I)
In the observed
Source: period, the based
Authors’ elaboration company significantly
on AHG’s invested in the expansion of operations and
financial statements
existing facilities, which is primarily evident from the increase in total assets. Furthermore, it
should be noted that
In the observed as much
period, as 80 %significantly
the company of assets are tangible
invested fixedexpansion
in the assets, which will
of opera-
tions and existing facilities, which is primarily evident from the increase in total assets.
significantly affect certain financial indicators and indicates intensive use of operating
Furthermore, it should be noted that as much as 80 % of assets are tangible fixed as-
leverage in business.
sets, which A large part
will significantly of the
affect Group's
certain activities
financial is financed
indicators andbyindicates
borrowing, which
intensive
usebe
can ofseen
operating leverage
in the increase in in
thebusiness. A large part of the Group’s activities is financed
total liabilities.
by borrowing, which can be seen in the increase in the total liabilities.
Stable revenue growth is noticeable averaging 6 % per year, except for 2017 which was
Stable
marked revenue
by thegrowth is mentioned
already noticeable averaging 6 %This
acquisition. per consolidation,
year, except foraffected
2017 which was
all items
of the Group
marked by the in 2017 in
already the opposite
mentioned direction,
acquisition. Thiswhich is why its
consolidation, explanation
affected willofmost
all items the
often be omitted in further analyses. With the exception of 2017, Figure 14. shows a
Group in 2017 in the opposite direction, which is why its explanation will most often be
decline in gross and net profit in 2016 as a result of the value adjustment of tangible as-
sets. Compared
omitted in further to 2018, profit
analyses. With before tax in of
the exception 2019 wasFigure
2017, reduced
14. by HRKa5decline
shows millionintogross
HRK
109 million, primarily due to strong pressure from increased labour costs, utility costs
and net profit in 2016 as a result of the value adjustment of tangible assets. Compared to
and commissions from online agencies. In addition, the reduction was influenced by
2018, profit
certain beforecosts
one-off tax inrelated
2019 was reduced bybenefits,
to employee HRK 5 million to HRK
severance pay109
andmillion,
related primarily
costs.69
Despite
due the decline
to strong pressure in profit
from beforelabour
increased tax, profit
costs,after
utilitytax in 2019
costs compared to
and commissions the online
from previ-
ous year increased by 68 % to HRK 149.0 million, which was the result of tax relief for
agencies.
the Group’sIn investment
addition, theprogramme
reduction was influenced by certain one-off costs related to
in Croatia.
69
44
employee benefits, severance pay and related costs.69 Despite the decline in profit before tax,
profit after tax in 2019 compared to the previous year increased by 68 % to HRK 149.0
million, which was the result of tax relief for the Group's investment programme in Croatia.
Figure 14. Dynamics of the main figures (part II)

1,000
800
600
400
200
-200
2015 2016 2017 2018 2019

Operating revenue Profit before tax Profit after tax
Source: Authors’ elaboration based on AHG’s financial statements

Figure 14. Dynamics of the main figures (part II)
Source: Authors’
Leverage elaboration based on AHG’s financial statements
indicators
Table 6. shows the analysis of the company's leverage by relevant indicators. Indicators of the
Leverage indicators
internal and external financing (self-financing ratio and degree of indebtedness) are around 60
Table 6. shows the analysis of the company’s leverage by relevant indicators. Indicators
%of and 40 % respectively
the internal and external throughout
financing the(self-financing
observed period, which
ratio suggestsofthat
and degree Arena
indebtedness)
are around
Hospitality 60 %successfully
Group and 40 % respectively throughout
manages its sources the observed
of financing. In otherperiod,
words, which suggests
from 2019
that Arena Hospitality Group successfully manages its sources of financing. In other
the Group has been financing 57 % of its assets from its own or 43 % from other sources. The
words, from 2019 the Group has been financing 57 % of its assets from its own or 43 %
debt-to-equity ratio is inThe
from other sources. a somewhat less favourable
debt-to-equity ratio is inranging from 0.54
a somewhat lesstofavourable
0.66 over the
ranging
from 0.54
observed to 0.66
period. over the
According observed
to the period.
conservative According to
1:1 indebtedness the
rule, conservative
where 1:1 indebt-
company should
edness rule, where company should not borrow above the value of its principal, the
not borrow
Group abovehigh
shows the value of its principal,
inappropriate the Group shows
indebtedness highown
from its inappropriate
operations.indebtedness
Furthermore,
the Group’s
from earnings before
its own operations. interest
Furthermore, theand taxes
Group's in 2019before
earnings may interest
cover interest
and taxesexpenses
in 2019 8.09
times.
may coverOver the years
interest this8.09
expenses indicator fluctuated
times. Over while
the years in 2016 itfluctuated
this indicator scored awhile
negative 0.97.
in 2016
it scored a negative 0.97.
Table 6. Leverage indicators for 2015-2019
Table 6. Leverage indicators for 2015-2019 2015 2016 2017 2018 2019
Self-financing ratio 2015 0.57 2016 0.49 2017 0.59 2018 0.60 2019 0.57
Degree of indebtedness
Self-financing ratio 0.43
0.57 0.51
0.49 0.590.41 0.40
0.60 0.57 0.43
Debt-to-equity ratio 0.62 0.66 0.56 0.54 0.64
69Interest coverage 6.50 -0.97 5.86
7.69 8.09
Level of coverage I
https://www.arenahospitality 0.64 0.55 0.85 0.85 0.75
group.com/datastore/filestore/30/Godisnje-izvjesce-2019.ispravak-kons.pdf
Level of coverage II 1.03 0.91 1.32 1.31 1.23
45
According to the levels of coverage I and II, it is possible to conclude that the Group
respects the ‘golden rule of financing’ given that a total of 123 % of fixed assets were
financed by equity and long-term liabilities. This score is more favourable than the
desired 100 %, so it is indisputable that the company manages its sources of financing
correctly. It can be concluded that through several years of business growth Arena
Hospitality Group manages to maintain a balance in internal and external financing –
thus reducing the risk of non-investing in the company.
Liquidity ratios
According to the current and quick ratio, the Group is able to cover its short-term liabil-
ities by cash and liquid assets. Therefore, the liquidity is certainly managed adequately
with a sufficient amount of funds at all times.
Table 7. Liquidity ratios for 2015-2019
2015 2016 2017 2018 2019

Current ratio 2.36 0.69 4.98 5.55 4.46
Quick ratio 2.33 0.68 4.95 5.53 4.45
Cash ratio 2.19 0.51 4.83 5.38 4.30
*Net working capital (mHRK) 92 -79 659 678 579
According to the cash ratio, it can be concluded that the Group’s short-term liabilities
are sufficiently covered by with its most liquid asset – cash which doubled by 2019.
Negative net working capital in 2016 is the result of an increase in interest expenses on
long-term bank loans due to the financing of intensive capital investments. The same
loans provided sufficient amounts of money and cash for operations, especially for
the maintenance of the passive standby whose value is reflected in the high net work-
ing capital which amounted to HRK 579 million from 2019. Consequently, the analysis
shows that the current liquidity ratios are at a very favourable level considering that
such indicators in the tourism industry are extremely inauspicious, which is associated
with seasonal business, high share of fixed assets and operating leverage.
Activity indicators
Table 8. shows the activity indicators that calculate the speed of asset circulation in
the business. In the observed period, all calculated turnover ratios have visible fluc-
tuations. Therefore, it can be concluded that the turnover ratios of these forms of
assets are quite high due to the low level of use of current assets in business and low
inventories which mostly relate to the supplies in the form of food and beverages. The
decline in the turnover ratio of the receivables is the result of more than a proportional
increase in trade receivables, particularly in 2016. An increase in the turnover rate of
inventory in 2019 is due to growth in the operating income and in the level of invento-
ries that rose imperceptibly throughout the observed years. There is also a significant
fluctuation of the liabilities to the suppliers, probably due to higher liabilities resulting
from the intensified business and investment activity. Finally, the operating cycle in
2019 was 13 days, which is extremely short and indicates efficient business perfor-
mance together with other indicators.
Table 8. Activity indicators 2015-2019
2015 2016 2017 2018 2019

Turnover rate of receivables 42.83 10.07 36.64 36.31 33.24
Receivables days 8.52 36.25 9.96 10.05 10.98
Turnover rate of inventory 203.21 114.74 163.14 235.12 253.21
Inventory days 1.80 3.18 2.24 1.55 1.44
Turnover rate of payables 37.09 10.14 30.35 37.99 27.34
Payables days 9.84 36.01 12.03 9.61 13.35
Operating cycle 10.32 39.43 12.20 11.60 12.42
Profitability indicators
Profitability indicators are the most important group of indicators for business owners
since they provide information on the company’s performance. Gross and net profit
margins were positive in the analysed period except for the already mentioned 2016,
while the differences in the movements of individual years, 2017, 2018 and 2019 were
largely the result of deferred tax assets. Equally stable trends are evident from the cal-
culation of returns on assets and returns on equity. As a rule, the profitability of assets
were higher than the profitability of equity, however, the value of equity is lower than
expected, since Arena Hospitality Group is predominantly financed by external sourc-
es. At the EBITDA margin level, the Group achieves positive profitability that is slightly
below the industry average. Stable EBITDA margin in the observed period indicates a
favourable cost structure of the company. Therefore, the profitability prospects for
Arena Hospitality Group seem to be very optimistic as the company evidently operates
extremely successfully.
Table 9. Profitability indicators 2015-2019
2015 2016 2017 2018 2019

Contribution margin 14.24 % -22.28 % 20.97 % 18.79 % 17.38 %
Gross profit margin 29.03 % -5.32 % 29.68 % 27.93 % 29.30 %
Net profit margin 4.45 % -26.21 % 12.28 % 11.70 % 19.15 %
Return on assets – ROA 7.94 % -1.41 % 7.95 % 7.67 % 7.36 %
Return on equity – ROE 2.14 % -14.21 % 5.63 % 5.38 % 8.48 %
EBITDA margin 29.03 % -5.31 % 29.43 % 27.86 % 29.95 %
Investment ratios
The following table shows several investment indicators. The Group paid a dividend of
HRK 5.00 for the first time in 2019 and started the ‘buy-back’ programme of repurchas-
ing its own shares. Thus, a total of HRK 41.9 million was returned to the shareholders
through payments of dividends and repurchases shares, which reduced the number
of shares by 11,350. The book value per share (ordinary share and share premium) in
2019 was lower than the market value, HRK 343.24 compared to HRK 370.00, which
indicates overvaluation. The Group also saw an increase in net earnings per share over
a five-year period as a result of a rise in tax relief related to the Group’s investments.
Earnings growth was accompanied by an increase in the average share price on the
Zagreb Stock Exchange in the past 5 years, with exceptions in 2016 and 2017 due to
the already mentioned acquisition. Taking all the above into account, it is possible to
conclude that the company is financially successful and stable, but it is necessary to
monitor the indicators that show significant deviations from the desired values.
Table 10. Investment ratios 2015-2019
2015 2016 2017 2018 2019

Earnings per share (EPS) 8.22 -52.36 20.99 17.29 29.11
Price per share (PPS) 339.98 468.50 450.00 340.33 370.00
Dividend yield 0.01
Price-earnings ratio (P / E) 41.36 -8.95 21.44 19.69 12.71
Dividend pay-out ratio 0.17
Dividends per share (DPS) 5.00
Book value per share 383.87 368.53 373.16 321.39 343.24
Weighted average number of
2,182,331 2,182,331 4,195,990 5,128,721 5,117,371
ordinary shares
Source: Authors’ calculation based on AHG’s financial statements.
5.3.1. SWOT analysis

SWOT analysis is an acronym for strengths, weaknesses, opportunities and threats. The
strengths of a company are all the tangible and intangible things that a company pos-
sess, which leads to an increase in competitiveness. On the other hand, weaknesses
reflect all of its shortcomings that make a company vulnerable. Opportunities and
threats are the result of external factors that influence the company’s achievement of
the set goals, or that can jeopardise or slow down their implementation.70 Creating a
SWOT matrix provides an insight into the current competitive position of a company
and its capabilities to respond to environmental conditions and ensure a stable and
long-term competitive advantage.
70
Pfeifer, S. (2010). Metode i tehnike analize okoline: Povezivanje analize eksternih i internih faktora
(SWOT) . In: Buble, M., (Eds.), Strateški menadžment. Zagreb: Sinergija.
Table 11. SWOT analysis
STRENGHTS WEAKNESSES
- Market share - Seasonality
- Presence in foreign markets: Germany and - High out-of-season labour costs
Hungary - Lack of employable staff
- Brand - Centralised tourism in Croatia
- Implemented Enterprise Risk Management - Complexity of business management due
- Share liquidity to new acquisitions and expansion to new
- Financial stability destinations
- Successful recapitalisation - Indirect communication with guests
- Excellent geographic position - Highly concentrated industry
- Successful foreign and domestic - High value of litigation
acquisitions - High indebtedness
- High level of organisational knowledge
- Developed value chain with domestic
suppliers
- Investing in new technologies crucial to
achieving competitive advantages
- Low entry barriers to hotel industry
OPPORTUNITIES THREATS
- Investing in low competitive destinations - Slowing down of tourism industry growth
- Increase in number of arrivals and - Climate change
overnight stays worldwide - High tax levies and frequent regulatory
- Possibility to expand the business changes
- Modern and big data technology - Unresolved issue of legislative system -
- Development of congress and wellness concession permits
tourism - Strengthening of internet marketing
- Extension of tourist season due to the - Strengthening bargaining power of tour
creation of additional content with local operators and travel agencies
community - Weakening of world economy due to
- Interest rates at historically low levels COVID-19 pandemic
- Corporate social responsibility - Non-strategic growth of tourism in Croatia
- Social networking with arrival of new - Dominance of strongest competitor -
generations (generation Z) Valamar
- Strengthening intensity of rivalry in strategic
group
Source: Authors’ elaboration
6. FREE CASH FLOW METHOD ON THE EXAMPLE OF ARENA

HOSPITALITY GROUP
The object of enterprise risk management is to analyse the impact of risk on the esti-
mated value of the company. It strives to show how the value of the company can be
increased through risk management activities and achieve its fundamental goal – to
increase the wealth of the shareholders. In order for enterprise to be valued, it is im-
portant to choose the appropriate method to make the estimated value reliable. The
best known and most commonly used present value model is the discounted cash flow
method, which determines the value of a company as the value of its expected free
cash flows reduced to present value, which will be required for risk analysis of this case
study / paper. 71
The basic steps in estimating the value using the discounted cash flow method are: to
determine which model of free cash flows is most appropriate to use in the analysis:
one-period, two-period or multi-period model; to develop pro forma financial state-
ments on which the analysis will be based; to calculate free cash flows using pro forma
financial statements; to discount free cash flows at present value at an appropriate
discount rate; to determine the residual value and discount it to the present value; to
add up the discounted value of free cash flows and the residual value to determine the
value of the appraised entity.72
6.1. Pro forma financial statements

Pro forma of Profit and loss account
Arena Hospitality Group divides its revenues into three segments: Hotels, Resorts and
Campsites. Most of the business is based on Hotels and Campsites as the key seg-
ments of the Group’s intensive investments during the last three years. The segment
revenue estimates were made primarily in view of the COVID-19 pandemic, which
makes the tourism industry one of the most affected industries in the world. Although
the peaks of the season in 2020 achieved over 70 % of the previous year’s turnover,
according to the Ministry of Tourism and Transport, tourism from 1 January 1 to 31 July
yielded less than 15 %.73 The Group, like many others, closed its accommodation facili-
ties due to a large number of cancellations and closed borders in an effort to minimise
the costs. Part of the reservations were scheduled for 2021 and, given the nature of
the crisis situation and in comparison to the 2008 financial crisis, this trough does not
seem to be long term. In addition to the impact of the pandemic, a decline in revenue
growth is estimated in all segments based on the slowdown in Croatian tourism as a
conclusion derived from a fundamental analysis. The assumptions of growth, in addi-
tion to being derived from the expected trends, are also based on the movement of
segment revenues in the past. As a rule, companies enter the area of lower growth as
they mature, which is shown by the decrease in growth rates over a five-year period.
Considering the month of August, which unexpectedly achieved 50 % of the previous
year’s turnover, and on the other hand a drop in accommodation prices by 30 % and
the closure of a part of the capacity, the revenue decline in 2020 is projected at about
80 %. The Group’s income also includes income from cancellation of provisions, in-
surance, pre-invoicing and others. Since many of these revenues are related to sales
71
Miloš Sprčić, D. & Orešković Sulje, O. (2012). Procjena vrijednosti poduzeća: Vodič za primjenu u poslov-
noj praksi. Zagreb: Sveučilište u Zagrebu, Ekonomski fakultet.
72
Miloš Sprčić, D. & Orešković Sulje, O. (2012). Procjena vrijednosti poduzeća: Vodič za primjenu u poslov-
noj praksi. Zagreb: Sveučilište u Zagrebu, Ekonomski fakultet.
73
Republika Hrvatska: Ministarstvo turizma i sporta. (n.d.). Prvog kolovoza u Dubrovniku više od de-
vet tisuća turista. Retrieved August 7, 2020, from https://mint.gov.hr/vijesti/prvog-kolovoza-u-dubrovni-
ku-vise-od-devet-tisuca-turista/21558
revenues themselves, they are projected based on the percentage of sales, and each
item was significantly affected by the closure of the Group’s accommodation facilities
and operations, thus affecting a significant decline throughout the report. The expen-
diture items are projected as a percentage of sales assuming that the expenditure and
its movements are related to the company revenue. The percentages in the projec-
tions were taken either as an average of the historical data or as a continuation of the
trends visible in historical data. Given that the Group achieved significant integration
with internationally known hotel chains in 2016, which is clearly visible in the financial
statements as an exception, the average historical data of some of the items in the
income statement has been taken from the last three years.
Moreover, a part of the projections is based on expected movements or information
stated in the Group’s report. For example, the reason for the sharp decline in depreci-
ation is in extremely high levels as a consequence of the company’s investment cycle.
Since such a situation cannot be expected in the long run, depreciation has been grad-
ually reduced to the levels that are more appropriate in the long run, while the amount
itself is based on the data from multinational mature premium hotel groups abroad
from multinational mature premium hotel groups abroad (Hyatt, Marriott, Hilton, etc.). Only
(Hyatt, Marriott, Hilton, etc.). Only interest expenses are projected as a percentage of
interest
the expenses
total debt forarewhich
projected as a percentage
an average of the
weighted total debt
interest ratefor
onwhich an average
corporate debtweighted
of 2.5 %
is assumed.
interest rate on corporate debt of 2.5 % is assumed.
Table 12. Pro forma of Profit and loss account

Table 12. Pro forma of Profit and loss account
Source: Authors’
Source: Authors’elaboration
elaboration
Pro forma
Pro forma of
ofStatement
Statementof of
financial position
financial position
Due to
Due to the
the nature
natureofofthe
thebusiness,
business,very
veryimportant items
important of any
items company
of any that operates
company in the
that operates
in the tourism
tourism industryindustry are plant
are property, property, plant andasequipment
and equipment a significantaspart
a significant
of its assets.part of its
Changes
assets. Changes in property, plant and equipment are calculated as the balance from
in property,
the previousplant andincreased
period equipmentbyare
thecalculated
differenceasbetween
the balance from the and
depreciation previous period
investment
in property,
increased by plant and equipment
the difference between (CAPEX) adjusted
depreciation for discontinued
and investment investments
in property, plant andin
equipment (CAPEX) adjusted for discontinued investments in 2020. Other fixed assets are
projected in relation to the increase or decrease of operating revenues. Intangible assets, non-
current financial assets and deferred tax assets are projected as constants as they are difficult
2020. Other fixed assets are projected in relation to the increase or decrease of oper-
ating revenues. Intangible assets, non-current financial assets and deferred tax assets
are projected as constants as they are difficult to estimate. Liabilities are mostly cal-
culated as an average of the three-year period as they fluctuate at very similar levels.
Other items are related to those from the Statement of Financial Position (SOFP) since
assets and liabilities typically change in correlation with the business. Inventory, re-
ceivables and payables days are calculated as the product of the percentage of the
SOFP item and the number of days in the year. Part of the projections are taken as an
average of the projected values, while some are based on past trends. Assuming that
equity, reserves and non-controlling interests do not change, the total value of equity
is calculated as the opening balance plus net profit.
Table 13. Pro forma of Statement of financial position
Source: Authors’ calculation

6.2.Calculated weighted average cost of capital (WACC)

6.2. Calculated weighted average cost of capital (WACC)
In view of
of the
thefact
factthat
that thethe
ultimate goalgoal
ultimate of Arena Hospitality
of Arena GroupGroup
Hospitality valuation is to calculate
valuation is to cal-
culate thebased
the value valueonbased on the company’s
the company's free cash
free cash flows, this flows, this case
case study study
will use thewill use the
weighted
weighted average cost of capital, which will represent the discount rate when discount-
average
ing costcash
future of capital,
flows. which will represent
The weighted the cost
average discount rate when
of capital discounting
of 6.92 future cash as
% was calculated
a weighted
flows. averageaverage
The weighted of the cost
costof
ofcapital
ordinary capital
of 6.92 andcalculated
% was the costasofadebt, the average
weighted shares of
which depend on the market value of the principal and the debt of the Group.
of the cost of ordinary capital and the cost of debt, the shares of which depend on the market
The market value of the principal as well as the debt represent the market value, i.e.,
value of the principal and the debt of the Group.
the amount of debt of Arena Hospitality Group as of 17 July 2020. Due to the decline in
The market value of the principal as well as the debt represent the market value, i.e., the
amount of debt of Arena Hospitality Group as of 17 July 2020. Due to the decline in the share
price due to unfavourable conditions for the tourism sector, the ratio of the two items is
the share price due to unfavourable conditions for the tourism sector, the ratio of the
two items is around 1:1 bringing the principal weight to 0.5103 and the debt weight to
0.4897.
Table 14: Weighted Average Cost of Capital (WACC) calculation
Market value of the principal (mHRK) 1,395

Share price on 7/17/2020 272.00
Number of shares on 7/17/2020 (in millions) 5.13
Debt 1,339
Principal weight 0.5103
Debt weight 0.4897
Cost of equity 11.60 %
Risk-free rate of return 0.96 %
Beta coefficient 1.10326603
Market rate of return 9.64 %
Cost of debt after tax 2.05 %
Cost of debt before tax 2.50 %
Income tax rate 18 %
Weighted Average Cost of Capital 6.92 %
The capital asset pricing model (CAPM) was used to calculate the cost of equity what
resulted in 11.60 % required rate of return. According to the CAPM model, the required
rate of return is defined as the sum of the risk-free interest rate and the risk premium
calculated as a multiplication of beta coefficient as a measure of market risk and mar-
ket risk premium represented by the difference between the expected market return
and the risk-free interest rate. The risk-free interest rate represents the yield on the
last issued eleven-year government bond of the Republic of Croatia. The bond entitled
“RHMF-O-297A” was issued on 9 July 2018 in the amount of HRK 10 billion with an inter-
est coupon of 2.375 % and with a maturity date of 9 July 2029. The yield to maturity on
17 August 2020 is 0.96 %, which represents a risk-free interest rate in the calculation of
the cost of equity. Since calculating the market risk premium is demanding, the official
website of Professor Aswath Damodaran was consulted and it quotes the figure of
9.64 % for the Republic of Croatia on 1 July 1 2020.74
The historical data on the latest daily share prices of Arena Hospitality Group (ARNT)
and the CROBEX market index in the period from 20 August 2015 to 20 August 2020
were used to calculate the beta coefficient. The historical beta of 1.1651284 was ob-
tained by multiplying the ratio of the standard deviations of the ARNT share and
the CROBEX market index and their correlation coefficient. Given that such a beta is
74
New York University. (January 8, 2020). Country Default Spreads and Risk Premiums. Retrieved Au-
gust 20, 2020, from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
past-oriented and investors are interested in stock risk in the future, a customized
beta was created based on Marshall E. Blume’s research, which showed that the actual
beta tends to converge toward one over time. Given that the beta of Arena Hospitality
Group is higher than one, it shows that the Group’s market risk is higher than average,
which causes more significant stock price volatility than the market itself (table 15).
Table 15: Beta coefficient calculation
DATE ARNT CROBEX rARNT rCROBEX

08/20/2015 339.78 1,787.32
08/21/2015 346 1,783.55 0.018140426 -0.002111531
08/24/2015 324.99 1,731.51 -0.062644362 -0.0296119
08/25/2015 332.1 1,739.97 0.021641716 0.004874012
08/26/2015 330 1,736.51 -0.006343474 -0.00199052
08/27/2015 338.99 1,750.49 0.026877954 0.008018397
08/28/2015 328.01 1,750.7 -0.032926513 0.000119959
08/01/2015 337.77 1,737.21 0.029321095 -0.00773533
08/02/2015 334 1,734.87 -0.011224198 -0.001347895
08/04/2015 335.54 1,738.66 0.004600181 0.002182219
08/07/2015 331.1 1,733.71 -0.01332073 -0.002851081
• • • • •
• • • • •
• • • • •
ARNT CROBEX
Σ 0.018434656 0.008515841
σ2 0.000339837 0.000072520
cov (ARNT, CROBEX) 0.000083625
Ρ 0.533146599
Historical beta 1.15412840
Beta-adjusted 1.10326603
To calculate the weighted average cost of capital, it is also necessary to calculate the
weighted average cost of debt capital. The average weighted interest rate on corporate
debt is 2.5 %, and is estimated based on the historical data for the ratio of interest ex-
penses to the amount of debt. The corporate income tax rate in the Republic of Croatia
in 2019 was 18 %, which represents the cost of debt after tax of 2.05 %.
6.3. Assessment of free cash flow to firm

The calculation of a company’s free cash flows can be approached in several ways. We
used the free cash flow to firm approach based on profit before interest and taxes,
which after deduction of profit tax is increased by depreciation, and decreased by
changes in working capital and capital investments. Changes in working capital repre-
sent the difference in net working capital over two years, and are calculated as the sum
of inventory items and trade receivables less trade payables and employees’ salaries.
In this sense, the increase in net working capital represents an outflow of money, while
its decrease represents an inflow. Capital investments represent a two-year change in
the item of long-term operating assets that the company uses in its regular operations.
Table 16. Free cash flow calculation
mHRK 2020 2021 2022 2023 2024

Profit before interest and tax
(13.9) 55.8 154.7 228.2 245.2
* (1 – income tax rate)
Depreciation 25.8 43.0 55.0 56.9 61.2
Working capital changes 12.5 (2.0) (1.1) (1.6) (0.8)
Capital investments 157.3 2.3 51.7 138.6 223.1
Free cash flow of the
(157.9) 98.6 159.0 148.1 84.1
Group
To calculate the present value of the company’s free cash flows, a discount rate cal-
culated as a weighted average cost of capital of 6.92 % was applied. The total present
value of free cash flows for the projected five-year period is HRK 242.1 million.
Table 17. Discounted present value of free cash flows of the Group
2020 2021 2022 2023 2024

Number of period 1 2 3 4 5
Discount rate 0.935272 0.874733 0.818114 0.765159 0.715632
Discounted present value of
free cash flows of the Group -147.7 86.2 130.1 113.3 60.2
(mHRK)
Discounted present value of
free cash flows of the Group 242.1
(mHRK)
Finally, to estimate the value of the Group, it is necessary to calculate the residual
value. The long-term growth rate is assumed according to the long-term growth rate
of the European Union GDP of about 2.0 %. Although the pandemic is expected to fall
sharply in 2020, 2021 will bring a significant turnaround. A rapid recovery will result
in a return to an equally stable growth rate in the long run. The residual value is then
calculated as the ratio of free cash flow in 2024 multiplied by long-term growth factor,
and the difference between the cost of capital and the long term growth rate, following
the continuous growth model of free cash flows. The estimated value was obtained as
the sum of the discounted residual value of HRK 1,247.5 million and the total present
value of free cash flows of HRK 242.1 million expected in the period 2020-2024. The
value of Arena Hospitality Group, estimated on the basis of free cash flows, amounts
to HRK 1,489.6 million.
Table 18. Estimated value of company based on free cash flows
mHRK
Present value of residual value 1,247.5
Free cash flow at end of period (2024) 84.1
Long-term growth rate 2.0 %
Weighted Average Cost of Capital (WACC) 6.92 %
Residual value 1,743.2
Discounted present value of free cash flows of AHG (mHRK) 242.1
Estimated value of the company based on free cash flows 1,489.6

ON EXAMPLE OF ARENA HOSPITALITY GROUP
The information obtained in the comprehensive analysis of the macroeconomic en-
vironment, analysis of industry, competitive position and financial analysis, and the
assessment of the company’s value are the basis for risk identification, their subjective
and objective quantification, mapping and defining risk management measures. Data
and knowledge about the company collected in the top-down analysis are of key im-
portance for understanding the company’s business, and indicate the threats, i.e., the
presence of risks that Arena Hospitality Group encounters in its business.
Important components of quantification within the risk cash flow method are scenario
analysis and sensitivity analysis. Scenario analysis, as a qualitative method, tries to
identify the occurrence of possible risks by comparing them with the existing similar
scenarios, while sensitivity analysis, as a quantitative method, determines the sensi-
tivity of a variable to changes in certain parameters. The crown of the work analysis
is presented by cash-flow-at-risk, which will use the methods of the scenario analysis
and the sensitivity analysis to show the impact of the occurrence of individual risk
on the change in the value of free cash flows. The percentage change in the value of
such net generated cash flows will determine the level of significance and, in addition
to quantifying the level of probability, will serve for the process risk mapping as an
important tool for understanding the overall risk exposure and the need to manage it.
7.1. Identification of strategic, financial and operational risks

Risks are rated 1 to 5 according to their significance, i.e., the impact on the value of
cash flows, earnings and the value of the company, where 1 represents the risk with
the least impact on the company, and 5 with the highest. The probabilities of occur-
rence are evaluated from 1 to 5, where again the lowest rating assumes that the occur-
rence of a harmful event is almost impossible, and the rating of 5 is given to the risk
with the highest probability of realisation.
Customer loss risk

The risk of losing customers is omnipresent in the tourism industry, partly due to the
large number of competitors in the narrow coastal area of the Republic of Croatia and
partly due to the different values of services offered by individual hotel chains, indi-
viduals with private accommodation and other stakeholders in tourism. The industry
analysis identified not only the strategic competitors with which the Group connects
based on the size, revenue and strategy, as well as on the large number of individu-
als and smaller hotels that offer a more direct and authentic approach to providing
accommodation-related services. The strength of customers and tourists is reflected
in their great power when choosing a wide range of accommodation facilities, which
depends on the desire for specific products and services and security needs. This risk
in the tourism industry can be linked to a number of other risks, such as environmen-
tal risk, a number of market risks, and a reputational risk. Since the risk of losing cus-
tomers is influenced by the human and a number of other factors, which can equally
redirect customers / tourists from the competitors to AHG, the probability of one-way
relation is rated 1.
Risk of rapid changes in tourism trends

The hotel industry has changed significantly in the recent years, especially due to the
developments in the travel industry, i.e., the emergence of low-cost airlines and online
agencies, new technologies and changes in guests’ habits regarding the organisation
of trips and reservations. According to forecasts, such trends are expected to contin-
ue, as well as the influence of online agencies and other dominant intermediaries, such
as Internet search engines and social networks, will increase. According to its reports,
the Group cites a significant exposure to such risks in the form of one-party domi-
nance, loss of control over its own pricing, and challenges related to keeping pace with
market trends. Since these trends are already visible, the probability of occurrence of
this risk was rated 5.
Risk of continued COVID-19 pandemic

The emergence of the COVID-19 pandemic can be materialised in the form of the quar-
antine, which directly affects the stagnation of the entire economy. The adoption of
the measures to restrict movement, tourism has suffered the most economic damag-
es. The risk caused by the pandemic is already deeply rooted in the business of every
company today, and the key risk mentioned in this context is the risk of continued
COVID-19 pandemic, i.e., inadequacy of the vaccines and failure to combat the global
crisis. The development of medicine today has made it possible to accelerate the in-
vention of vaccines for certain diseases. However, unless the virus is controlled, the
continuation of the crisis will further affect the world economy and the tourism indus-
try, in particular. Despite the positive prognosis of finding the vaccine, it is not 100 % ef-
fective as even the vaccinated can become infected and transmit the virus to someone
else. Furthermore, because of the so-called anti-vaxxers, persons who oppose manda-
tory vaccination, complete vaccine coverage cannot be expected to be achieved, which
leads to the conclusion that the probability of the continuation of this risk is rated 2.
Environmental risk in the form of sustainable business

Given that tourism is an industry whose success depends on the quality of the en-
vironment in which it operates, the effects of high human turnover on the environ-
ment and the local population of a destination must not be neglected. Coming from
the main tourism generating market Europeans are among the most environmentally
conscious tourists75 and the ways in which the services, and not just the end services,
are provided increasingly sensitive in this respect. Hence, the expectations from the
tourism companies for sustainable resource management are growing. The United
Nations has set the Sustainable Development Goals, which should direct most indus-
tries including tourism to achieve sustainability by 2030. National and European leg-
islations, and more importantly consumers, will expect that certain targets are met,
such as more efficient use of energy and switching to renewable sources to reduce
greenhouse gas emissions and negative impacts on the climate change. Companies
will need to implement responsible consumption and production taking into account
energy, water consumption, waste management and circular economy. Tourist resorts
and economic entities that fail to implement sustainable measures will not only lose a
share of customers in the short term, but will also prevent the development of these
activities for many future generations. The ecological significance in tourism is large
and as such does not represent a potential risk, but the probability of the existing risk
was rated high, i.e., 4.
Technological risk
New technologies have been fully integrated into today’s way of life, which is reflected
in the constant contact of individuals with technology via the Internet, smartphones
and navigation systems. As most industries, the technological advancement has
strongly affected tourism by changing the principles on which tourists seek, discov-
er and experience travel.76 Therefore, tourism must adapt to change and reshape its
strategies appropriate to new technologies, e.g., in the increasing robotization of main-
tenance and customer relations. New technologies have improved the connections
between guests and tourist destinations, which has increased their satisfaction and
commitment. Although the technological revolution has so far had a strong impact
on tourism, this trend is expected to continue in the future, and hence the success of
all tourism stakeholders depends on the speed of adaptation to the changes that will
75
Horwath HTL. (2019). How to encourage sustainable tourism? A short guide for international donors
[EPub]. Retrieved from https://cdn.horwathhtl.com/wp-content/uploads/sites/2/2019/05/Industry-Re-
port_Sustainable-Tourism.pdf
76
Horwath HTL. (2015). Tourism Megatrends - 10 things you need to know about the future of Tour-
ism [EPub]. Retrieved from http://corporate.cms-horwathhtl.com/wp-content/uploads/sites/2/2015/12/
Tourism-Mega-Trends4.pdf
continue to occur. As such, it represents both a risk and a chance for Arena Hospitality
Group to use the benefits of new technologies more intensively, which will allow them
to reduce business costs, improve communication with the service users, and better
adapt to their needs. Due to its inevitability, the probability of this risk is rated 3.
Risk of expansion to new destinations

Incorrect assessment of the development opportunities could lead to poor investment
decisions and affect the Group’s ability to grow and create long-term value. In the last
few years, the group has expanded its business internationally, positioning itself in
major cities in Germany and Hungary (Cologne, Nuremberg, Berlin and Budapest). In
this way, the company has mitigated the problem of seasonality of business related
to Croatia’s tourism season. These acquisitions proved successful by increasing the
value of the Group and achieving positive EBITDA for the first time during the entire
business year. The Group’s long-term strategy is to expand into new markets, partic-
ularly to capitals of Croatia and Serbia, Zagreb and Belgrade. These new acquisitions
could be associated with a possible lack of transparency and misjudgement of financial
statements. Therefore, the probability of occurrence of the risk of expansions to new
destinations was rated 2.
Reputational risk
Reputational risk in the tourism industry is most often reflected in the dissatisfaction
of guests during their stay in one of the destinations and can seriously damage the
image of an organisation. It can be triggered by services provided below standard or
the guests’ expectations, omission or unprofessional behaviour of employees, or the
occurrence of an incident. It is important to note that reputational risk is most often
correlated with other risks, such as financial and operational, and through their inter-
action can create a negative synergy effect. For example, a company with a bad repu-
tation will have problems attracting investors and establishing business partnerships.
Since AHG conducts a large number of trainings for its employees and conducts annu-
al surveys on their engagement and satisfaction, a high level of company involvement
in the quality of staff is assumed, which reduces the likelihood of this risk. Therefore,
the risk is rated 2.
Currency risk
Due to the international business in the markets of Croatia, Germany and Hungary, the
Group is exposed to the exchange rate risk. Considering that each of these markets
has its own currency, the consequences of the emergence of currency risk become in-
creasingly significant. The exchange rates between the currencies of the Group’s sub-
sidiaries operating within the Eurozone, the euro, the Hungarian forint and the Cro-
atian kuna can fluctuate, thus affecting the Group’s financial results. In addition, the
Group may be exposed to foreign exchange transactions in the event that one of AHG’s
companies executes a transaction using a currency other than its own. Given the fact
that the main goal of the Croatian National Bank is exchange rate stability, and that the
analysis of the external environment highlighted Croatia’s forthcoming entry into the
European exchange rate mechanism, the probability of currency risk was rated 2 due
to frequent, but not excessive EUR / HRK fluctuations.
Interest rate risk

Interest rate risk arises from changes in market interest rates, and occurs when a
company has debt with variable interest rates. In that case, unfavourable interest rate
movements can lead to significant losses. Arena Hospitality Group is part of the tour-
ism industry which is characterized by intensive investment cycles financed by exter-
nal borrowing. The Group’s and Company’s policy is to manage its interest costs by
using fixed-rate debt. They also enter into interest rate swaps, in which the Group and
the Company agree to exchange the difference between fixed and variable rate inter-
est amounts at specified intervals calculated by reference to an agreed-upon notional
principal amount. Furthermore, the Group and the Company use fixed interest rate
debts. For this reason, the Group’s and the Company’s cash flow are not sensitive to
possible changes in the market interest rates. However, possible changes in interest
rates do affect the Group’s and Company’s equity as the fair value of the swap agree-
ments changes with interest rate changes,77 which evaluates its probability of the oc-
currence with 2.
Price risk
Price risk is the risk of loss due to a negative price change and prior to its quantification
it is essential to identify the events that caused its occurrence. The emergence of a
pandemic and the closure of borders caused a crisis imbalance in the market in which
reduced demand did not meet the strong supply, and therefore the service providers
drastically reduced their accommodation prices. The struggle for every guest has re-
sulted in more than a 50 % reduction in accommodation prices excluding the margins,
and seeking to cover the fixed costs. However, price risk is largely influenced by the
number of competitors identified through the industry analysis, and given the recent
events, the probability of its occurrence was rated 3.
Cyber security risk

Cyber security refers to a set of processes, measures and standards that guarantee
a certain level of reliability in the use of products and services, i.e., in the context of
tourism, in sharing of personal data and especially the bank account data. The risk of
cyber security is growing globally, counting an increasing number of attacks that have
become more sophisticated and complex over the years, and affecting the business in-
security of any technologically dependent company. For the same reason, it is import-
ant to be aware of its presence and protect oneselves in a timely manner. The Group
has noticed the growth of this trend and ensured its database that includes personal
data of clients in accordance with the law that is shared with the Group’s partners who
take it over, but also require a certain degree of protection. Namely, it is possible that
information may be misused by the Group’s employees, partners or third parties out-
77
side the business. Despite the rise of cyber-attacks, further development of informa-
tion technology has enabled advanced and more secure responses in the form of new
protection systems, reducing the likelihood of this risk. Therefore, it has been rated 3.
Risk of seasonality
The Group’s operations in Croatia are extremely seasonal and most guest arrivals take
place from June to September. As seasonality is an integral part of the tourism busi-
ness, it does not in itself pose a risk, however, the high level of seasonality of revenues
in the Croatian market increases the impact on the Group’s business results. This is
due to the fact that the arrival of guests in the Group’s accommodation facilities in
Croatia, especially in campsites and tourist resorts, is influenced by weather condi-
tions and the number of warm and rainy days during the summer season. In this way,
frequent changes in weather conditions lead to mismatches between the planned and
realized tourist seasons, affected by the arrivals of tourists, cancellations of stays and
reducing the days planned for holidays. The probability of such an event was assessed
at level 3, given that seasonality is the main feature of Croatian tourism.
Intellectual risk
Intellectual risk can arise if a company is unable to hire, develop and retain a suffi-
cient number of workers needed in the ordinary course of business. During the high
season in Croatia, there are often difficulties in employing a sufficient number of peo-
ple, which redirects efforts to search for workers from different regions. However, the
supply of experienced workers in the hotel industry and other skilled workers is rarely
sufficient to meet current or expected demand. The opening of new hotels may put
additional pressure on the Group’s demand and ability to attract and retain a suffi-
cient number of skilled workers, and if it fails to attract and retain workers with the
necessary knowledge and experience, the Group will have to bear additional training
costs. Lack of manpower or increased labour costs may impair the Group’s ability to
implement its business strategies and growth plans. If the Group finds itself in a situ-
ation where it does not have a sufficient number of employees in any of its markets,
this may have a negative impact on its business operations, financial position and per-
formance. Given the reduction in business volume due to the pandemic, the supply of
workers exceeded the demand, however in the medium term, the likelihood of this risk
will increase and it is rated 2 considering the human resource management in Arena
Hospitality Group.
Legal risk
Legal risk arises from inability to execute business contracts, failure to comply with the
law, errors in the interpretation of contracts, and failure to recognise legal threats.78 In
its operations, the Group faces a number of laws related to the tourism industry, and
more specifically, in its reports they cite unsettled concession agreements for tourist
land intended for campsites and tourist resorts. Since the enactment of the Law on
78
Miloš Sprčić, D., Puškar, J. & Zec, I. (2019). Primjena modela integriranog upravljanja rizicima – Zbirka
poslovnih slučajeva. Zagreb: Ekonomski fakultet u Zagrebu.
Tourist and Other Construction Land not Assessed in the Process of Conversion and Priva-
tisation in 2010, no concession agreement has been concluded in the Republic of Cro-
atia due to ambiguities in the wording of the Law and related regulations. In 2018, the
Government of the Republic of Croatia initiated and continued to work intensively on
a new law and the relevant bylaws that would replace the said Law, and the same is
expected by the end of 2020.79 In addition, the Group is exposed to the risk of several
years long litigation due to disagreements over the right to use the real estate and
land. Given the orderliness of the rule of law in which the Group operates, the proba-
bility of the occurrence of legislative risk is rated 2.
Risk of inadequate marketing communication

The impact of Generation Z, which currently ranges between the ages of 10 and 25, is
yet to escalate. Generation Z is considered to be completely different from the previ-
ous ones, insofar as they already have greater access to information, a more dynam-
ic lifestyle, a higher level of education, they quickly adopt changes and spend faster.
Generation Z expects real-time information, short but powerful messages mostly sent
through images, videos, and channels that allow them to interact, create, and share
information. Many tourism service providers will need to learn a new specific language
in order to be able to communicate with them. In order to market services to Gener-
ation Z, companies will need to tell their stories on multiple platforms, present their
values and create meaningful brands, be socially responsible, speak their languages,
treat them as adults, respect their opinions and enable them to communicate and
create. The probability of this risk is high, however, due to its duality which represents
both the risk and the chance of new consumers, it is rated 4.
Risk of unclear long-term strategy

An analysis of the Group’s operations and its competitive strategy revealed a vaguely
defined business policy which turned into the risk of an unclear long-term strategy.
By intensively investing in the high level segment, the Group states that it wants to
position itself among the guests of high and above average purchasing power. On the
other hand, a large number of campsites, tourist resorts and hotels under the brand
Arena Hotels & Apartments and Arena Campsites operate in the middle-range catego-
ry. These tourist resorts are experiencing a decline in revenues, and in the long-term
strategy of the Group there are no indications for additional investments or reposi-
tioning in more profitable business segments. Losses from the occurrence of such
risk are reflected in the reduction of the company’s earnings and uncontrollability of
operating costs due to segment fragmentation. The probability of this risk is rated 3
given that it is already partially present in the company.
79
7.2. Risk quantification using the risk cash flow method

Table 19. Quantification of occurrence of identified risks
Decrease in
No. Influence on
estimated value
1 Customer loss risk ∆ Sales revenue - 2.5 % - 0.43 %
2 Risk of rapid changes in
tourism trends ∆ Sales revenue - 10 % - 1.73 %
3 Risk of continued ∆ Sales revenue - 70 %
COVID-19 pandemic ∆ material and labour costs - 70 % - 4.86 %
4 Environmental risk in form
of CSR ∆ Sales revenue - 3.5 % - 28.79 %
5 Technological risk ∆ Sales revenue - 3.6 % - 29.79 %
6 Risk of expansion to new ∆ Sales revenue 3%
destinations ∆ Overhead expenses 8.448 % - 17.17 %
7 Reputational risk ∆ Sales revenue - 15 % - 3.39 %
8 Currency risk Implies an increase in financial costs
9 Interest risk ∆ Debt before tax costs 3% - 21.00 %
10 Price risk ∆ Sales revenue - 8.25 % - 1.42 %
11 Cyber security risk ∆ Sales revenue -5% - 0.86 %
12 Risk of seasonality
13 Intellectual risk ∆ Sales revenue - 10 % - 1.73 %
14 Legal risk Extraordinary expenses 66 mHRK - 3.48 %
15 Risk of inadequate ∆ Sales revenue -2%
marketing communication ∆ Operating expenses 0.825 % - 0.57 %
16 Risk of unclear long-term
strategy
Customer loss risk

The risk of losing customers is directly reflected in decreased revenues due to the
decline in the number of overnight stays as the Group’s primary operating income. A
one-off impact is assumed as risk can be affected in the short-term. Operating rev-
enues decreased by 2.5 % for the assumed so-called retention rate ranging between
2 % and 3 %. Based on three-year rates of change of tourists coming from different
emitting markets the projected impact on the decline in the value of the company is
0.43 %, which gives the significance of this risk a rating of 1.

The risk of rapidly changing tourist trends is manifested through the growing influence
of online agencies and other intermediaries in the form of Internet search engines
and social networks, which, due to their increasingly significant dominance, are taking
control of pricing. By demanding a commission for its services, which is impossible to
avoid due to strong market power in travel agency mediation, this risk materialises in
the reduction of prices. In calculating the significance of this risk, a one-off impact is
assumed given that trends change rapidly. If the company has not responded to the
trend, a new one may occur next year for which the company can be prepared. Since
online agencies require an average of 10% of earnings, operating revenues are re-
duced by the same percentage. The estimated value of the company has consequently
decreased by 1.73 %, which determines the significance at level 1.

This analysis observes the risk of the continuation of the COVID-19 pandemic through
the failure to combat the global pandemic, which consequently leads to a deeper decline
in the world economy. In that case, the 2020 scenario would be repeated in the coming
period hitting the tourism industry with an equal decline of approximately 70 %. As a
result, sales revenues were reduced by 70 %, and due to a decline in the need for sup-
plies and materials as well as for human resources, the operating costs were reduced by
the same percentage. Ultimately, it affects the value of the company by 5.10 %, which is
why the significance of the risk is set at level 1. Although this scenario is realistic, and it
materialised with the emergence of the COVID-19 pandemic, the possibility of a multi-
year pandemic will be considered as a low probability scenario in view of the previously
known viruses, including that of influenza, and their longevity as well as the progress of
medicine. This risk is assumed to be a one-off occurrence and was already running at the
time of writing this paper, but it is expected to continue in the next year.
Environmental risk in form of sustainable business

Ecological risk can be manifested through short-term loss of visitors as well as long-term
reduction of quality due to pollution of the sea, beaches and nature. The loss of part of
the visitors will affect the decline in overnight stays, i.e., the decline in operating income.
According to the OECD, the estimate of international tourist arrivals driven by eco-tourism
is 7 %. As this is a rough estimate, the stated percentage will be weighted at 0.5, which re-
sults in a projected decline in revenue by 3.5 %. This scenario will reflect a decrease in the
estimated value of the company by 28.79 %, which is why the significance of this risk is 5.
Ecological risk represents a long-term impact on the environment, given that it takes years
to restore an ecosystem. For this reason, this risk is defined as permanent.
Technological risk
Technological risk primarily affects the decline in income as the guests staying in ac-
commodation facilities seek accessibility and modern technology that meets their needs
and increases their satisfaction. The need for technology is higher among the younger
generation, which, at the age of 15 to 24, makes up approximately 12 % of Croatian tour-
ists. The scenario assumption is that this risk will not affect the entire generation, so the
same percentage is subjectively weighted with 0.3. The overall impact on the estimated
value of the company is a decrease of 29.79 %, which determines the significance of this
risk at level 5. Given that a technological risk is described as an investment in technology
that requires large capital expenditures, the risk is characterized as permanent.

The risk of expansion to new destinations directly impacts the high growth of oper-
ating costs due to the need for intensive investments related to expansion to new
destinations and to the accompanying fixed costs. Considering the number of accom-
modation facilities of the Group in relation to costs, the growth in DCF valuation model
is projected at the level of 8.5 %. Risk scenario has assumed that the growth of reve-
nues did not reach the projected level, but only a subjectively determined 3 %. Such
a decline is seen in relation to the entire projected period, taking into account the
long-term consequences that this risk leaves behind. In the event of the occurrence
of this risk, it will affect the decline in the estimated value of the company by 17.17 %
and significance at level 4. Expansion risk is a permanent strategic risk since it requires
large capital investments which are impossible to be changed in the short term.
Reputational risk
Reputational risk is manifested through a decline in sales caused by a decline in the
confidence of guests and business partners. Since this involves two-way interaction,
the decline in sales revenues is assumed to be 15 % compared to the events where
well-known global companies lost the same share of revenue due to a number of rep-
utational risk-related incidents. The decline in revenues affected the value of the com-
pany by 2.76 %, which gives it significance 1. The same scenario lasted only for a year,
which is why the risk was characterized as one-off.
Currency risk
Currency risk simply implies an increase in financial costs due to negative exchange
rate fluctuations. Financial expenses do not form an integral part of the formula for
calculating free cash flow to company. However, due to the natural hedging by which
the Group protects itself, but also by Croatia’s entry into the European exchange rate
mechanism, materiality is determined at level 2. It is similarly assessed in the Group’s
financial statements which further explains that this risk is reduced by the fact that
the great part of revenues is contracted in euros.80 Currency changes are not related
to changes in previous years, which implies a one-off risk.
Interest rate risk

Interest rate risk is directly manifested through an increase in interest rates compared
to the Group’s weighted average interest rate of 2.5 %. The Group has contracted the
loans partly at fixed and partly at variable interest rates, but in an assumed worst case
scenario both could be affected. The highest possible increase in the interest rates was
estimated at 3 percentage points by comparing interest rate movements in the recent
years. By increasing the interest rate to 5.5 %, the weighted average cost increased
from the 6.92 % to 8.13 %, which has a final impacts in the company’s declined value
of 21 %. Given that these are long-term loans, the permanence of the risk is assumed.
Lastly, according to annual reports, the Group’s policy is to use fixed interest rates.
In order to manage interest expenses, the Group enters into an interest rate swap in
which it agrees to replace, at certain intervals, the difference between the fixed and
variable interest rates calculated in relation to the nominal value of debt.81
80
81
Price risk
Price risk is explained through the influence of the number of competitors and of inter-
mediaries – both online agencies and tour operators. The assessment of the price risk
takes into account the number of competitors and their cost management strategies.
Except in the premium and high segment, Arena Hospitality Group owns hotels of me-
dium categorisation characterized by competitively lower prices. Competitors behave
mostly in the like manner, and hence the price fall is estimated at the usual 15 %. This
decrease in revenue was weighted at 0.55 given that medium categorisation accounts
for approximately 55 % of the Group’s capacity. Ultimately, a revenue decline of 8.25 %
resulted in a decrease in the value of 1.97 % and a significance rating of 1. Given that
this risk can be influenced for the next business year, it is considered a one-off.
Cyber security risk

Assuming that a cyber-attack on the Group occurs, it will directly cause a decline in rev-
enues, primarily due to the need for a short-term suspension of operations and then
partly through bad reputation and negative perception of the guests. Following the ex-
ample of the cyber-attack on the Croatian oil company INA, whose revenues in the first
quarter of 2020 fell by 7 % in the short term, excluding the beginning of the pandemic
and the adoption of the measures related to the ban on movement, a drop in revenue is
projected at 5 %. In the event of the occurrence of this risk, it would affect a decline in the
value of 0.86 % and significance at level 1. This example caused the decline in revenues
only in the observed year and hence it was calculated as a one-off in our case.
Risk of seasonality
The risk of seasonality as a one-off risk is related to the number of warm and rainy
days during the tourist season and affects the numbers of guests, and consequently
business income. The significance of the risk of seasonality is very difficult to assess,
but it is necessary to be mentioned because of the nature of tourism as an industry
and its strong impact. Subsequently, companies operating in the tourism industry, as
well as individuals with private capacities, earn 90 % of their income exclusively in the
summer months. Therefore, the calculation of risky cash flows in the form of seasonal-
ity risk will be replaced by a subjective assessment of materiality rated 4.
Intellectual risk
The Group has a total of 1,482 employees 480 of whom are full-time employees. As a
worst case scenario, the Group is projected to fail to employ 10 % of quality seasonal
workers, which can result in reduced revenues of the same percentage. Accordingly,
the value of the Group could decrease by 1.73 %, which determines the significance at
level 1. The loss of seasonal workers does not seem to have a long-term feature which
makes this risk one-off.
Legal risk
Legal risk is manifested primarily through the cost of provisions for litigation, and the
worst case scenario will consider the loss of all legal disputes in which the Group par-
ticipates. The loss of a legal dispute is a one-time event which makes the risk a one-off.
The maximum amount of the mentioned court disputes, which have been going on
since 1997, is HRK 66 million. This increase in costs can affect the decrease in the esti-
mated value by 3.48 %, and hence the significance of this risk is rated 1.

The risk of inadequate marketing communication leads to a decrease in sales revenues
due to the failure to connect supply and demand and increase the costs in the form of
subsequent marketing efforts. The decline in sales revenues is projected at 2 %, while
marketing costs are to increase by 15 %. Marketing activities are frequent and are ap-
plied daily, which is why this risk is characterized as a one-off. Given that marketing costs
make up approximately 5.5 % of the operating expenses, the same percentage is used as
a weight. A small drop in sales revenues or generous marketing costs, are the reaction to
the delays and a method of improving the results in the short term. The combined effect
on value is a decrease of 0.46 %, which determines the significance of this risk at level 1.

The risk of an unclear long-term strategy is manifested through the loss of possible
profit that the Group could have achieved by raising the categorisation of accommo-
dation facilities and the homogeneity of its own operations. Given the complexity of
the measurement, subjective quantification of the significance of this risk resulted in
a high score of 5, taking into account the worst case scenario as well as the long-term
consequences of this risk to the company’s value.
7.3. Risk Mapping

Table 20. Overview of identified risks with associated probability and significance
No. PROBABILITY SIGNIFICANCE

1 Customer loss risk 1 1
2 Risk of rapid changes in tourism trends 5 1
3 Risk of continued COVID-19 pandemic 2 1
4 Environmental risk in form of CSR 4 5
5 Technological risk 3 5
6 Risk of expansion to new destinations 2 4
7 Reputational risk 2 1
8 Currency risk 2 2
9 Interest rate risk 2 4
10 Price risk 3 1
11 Cyber security risk 3 1
12 Risk of seasonality 3 4
13 Intellectual risk 2 1
14 Legal risk 2 1
15 Risk of inadequate marketing communication 4 1
16 Risk of unclear long-term strategy 3 5
SIGNIFICANCE
5
ENVIRONMENTAL RISK IN
FORM OF CSR
RISK OF UNCLEAR LONG- TECHNOLOGICAL RISK
INTEREST RATE TERM STRATEGY
RISK
4
RISK OF
RISK OF EXPANSION TO SEASONALITY
NEW DESTINATIONS
RISK OF CONTINUED CURRENCY RISK

COVID-19 PANDEMIC
2 RISK OF INADEQUATE
MARKETING COMMUNICATION
INTELLECTUAL RISK
RISK OF RAPID CHANGES IN
TOURISM TRENDS
COSTUMER LOSS LEGAL RISK CYBER SECURITY RISK
RISK
PROBABILITY OF
1 OCCURENCE
REPUTATIONAL RISK
PRICE RISK
1 2 3 4 5
Figure 15. Risk map – Arena Hospitality Group
7.4. Comprehensive Risk Management Strategy

Customer loss risk
Before managing customer loss risk is approached, it is necessary to understand
the individual preferences of customers in terms of satisfying their desires for the
expected experience. The basic characteristic of tourism is precisely in its luxury
good or service that it provides. Buyers are not forced to go on a trip, nor can any-
one impose higher prices on them. Therefore, it is up to the company to provide a
quality service that will suit the market, and by creating the right service it is possible
to match the price and maintain a high level of customer satisfaction and loyalty.
Therefore, the Group’s goal is to continuously monitor trends, create appropriate
services, observe the satisfaction or dissatisfaction of its customers, and adjust its
business accordingly.

The greatest advantage of the risk of rapid changes in tourism trends is their obvi-
ousness and the possibility of timely identification and response to them. Such risks
need to be counteracted by creating quality business partnerships, investing in the
distribution and marketing of the company’s products, and e-commerce and tech-
nology. According to the Group, their advantage in managing such risks stems from
working closely with the PPHE Hotel Group, ensuring that global trends are identi-
fied in a timely manner and acted upon in a planned and coordinated manner while
benefiting from the importance, bargaining power, knowledge, and skills that such
partnerships bring.

The risk of continuation of the COVID-19 pandemic cannot be directly tackled due to its
external nature, but can be managed by various contractual clauses and risk diversi-
fication through business diversification, i.e., entering activities that are less sensitive
to crises. An additional risk management measure in case of continued COVID-19 pan-
demic could also be offering the guests opportunities of postponing the reservations
for later dates.
Environmental risk in form of CSR

To manage environmental risk from the position of a tourism company, it is crucial
to change the environmental management policy by using environmentally friendly
materials, by increasing energy efficiency, by waste management, water protection,
establishing and implementing environmental management systems and providing fi-
nancial, professional and organisational resources to preserve destinations in which
they operate. All these steps make a sound foundation for adapting to future trends,
and joint activities of Arena Hospitality Group, Valamar, Plava laguna and Maistra
would give a positive direction to impetus to building Istria as a sustainable tourist
destination since such efforts would provide both better results for the community
and greater benefits for these companies.
Technological risk
Successful technological risk management contributes to improving the quality of
business due to increased speed of information flow, the introduction of advanced
processes and improved productivity. It also refers to monitoring the development of
technological processes and aligning them with the company’s strategy. It most often
results in the implementation of innovations in their own businesses while its ultimate
goal is primarily not to allow the competitors to position themselves more favourably
in the market due to the introduction of new technologies, or at least maintain the
same level of competitiveness as the rivals. Accordingly, the Group must monitor and
implement new technologies related to tourism that directly reduce operating costs
while increasing customer satisfaction. This includes smart cards and electronic keys
cards to accommodation units, technological simplicity when booking capacity, imple-
mentation of IoT systems to connect guests outside the accommodation facilities, and
many others.

Integrated risk management plays a key role in managing the risk of expansion to new
destinations, which leads to the correct making of strategic decisions by assessing the
risk-profit characteristics of mergers or acquisitions. Integrated risk management is
based on financial projections, i.e., estimates of future cash flows, based on which
various scenarios are then developed. In addition, it is crucial to emphasise the trans-
parency of financial reporting and encourage communication, while the recruitment
of quality staff is necessary for an accurate assessment of assets and / or value of the
company due to possible acquisitions and mergers.
Reputational risk
Given the interaction of reputational risk with other potential risks of the company, the
implementation of integrated risk management is crucial in its management. The im-
portant task of the Group is to anticipate and analyse the possibility of various difficult
situations in the internal and external environment that may cause the emergence of
reputational risk. In this context, to avoid adverse events related to staff, the Group
should ensure a quality selection of the workforce and continue with staff training to
reach their full potential and reduce the risk of unwanted omissions and unprofes-
sional behaviour. In addition, to avoid the dissatisfaction of the guests caused by poor
services, the Group should continuously monitor their needs and desires and trans-
parently report on their compliance.
Currency risk
According to its reports, the Group eliminates the risk of foreign exchange transac-
tions by adjusting liabilities and assets in the same currency. However, for currency
risk management there is also the possibility of insurance in the form of numerous
operations in financial markets. They primarily relate to taking opposite positions from
those exposed to currency risk and the use of financial derivatives such as currency fu-
tures, swaps and options. By neutralizing this risk, the company reduces its exposure
to exchange rate fluctuations and reduces cash flow volatility.
Interest rate risk

Interest rate risk management can be approached in different ways: interest rate op-
tions, interest rate futures, interest rate caps and similar derivatives; and one of the
most common means of hedging are interest rate swaps that replace fluctuating in-
terest rates with fixed ones.82 To manage interest expenses, the Group enters into
interest rate swaps by which it agrees to replace, at certain intervals, the difference
between the fixed and variable interest rates calculated in relation to the nominal
amount of principal.83
82
Orsag, S. (2006). Izvedenice. Zagreb: HUFA.
83
Price risk
Conventional price risk management involves the use of futures contracts and com-
modity options. One of the types of forward contracts is the advance sale of capacity,
which seeks to protect hotels and other accommodation facilities from excessive can-
cellations, thus ensuring a satisfactory price of their services. However, given the spec-
ificity of the industry where goods are replaced by services, price risk can be protected
by further investment, increasing quality and ensuring a more appreciable price-qual-
ity ratio. To achieve targeted price levels, it is crucial to invest in marketing activities
that will convince customers of their quality and position them above or at least at the
same level as the competition.
Cyber security risk

Protection against cyber security risks requires investing in systems for protection
against such risks, training the staff on data security and continuous testing the imple-
mented control systems. The Group states in its reports that it invests in the appropri-
ate information technology and systems to ensure the greatest possible operational
flexibility. In addition, it applies various security measures to maintain high security
of the clients’ personal data and has successfully implemented a GDPR system that
further ensures data protection.
Risk of seasonality
The risk of seasonality in the context of changing weather conditions during the sea-
son can be managed by raising accommodation capacity to a higher level and provid-
ing tourists with added value during their stay at the facility. Tourism is most often
explained through the desire for sun, sea and beach, however, offering the guests
more than the basics or new experiences like entertainment, education / training and
ecology is in line with 21st-century trends and can offset the seasonality risks. In addi-
tion, by cooperating with the local community, it is possible to get involved in various
cultural and artistic projects, both gastronomic and socially responsible, which will
enable the Group to create added value for its guests.
Intellectual risk
Investing in employee development at all levels plays a key role in intellectual risk man-
agement because, due to the nature of the business, every link in the service supply
chain is crucial for creating a positive perception and satisfaction of tourists. Given
that tourism is a highly fluctuating industry with frequent employee changes due to
its seasonal nature, it is necessary to pay more attention to the employees’ needs. In
addition, by changing the general paradigm of employment resulting from the chang-
es in the behaviour of the younger generation, it is necessary to adapt to new trends
offering healthy work environment, work-life balance and job satisfaction. The issue
of the high share of seasonal workers can be resorted to by providing desirable and
unique working conditions that will create loyal seasonal employees, who will directly
affect the growth of the Group’s reputation and further attract new workers.
Legal risk
Legal risk management is primarily based on understanding legal regulations, timely
monitoring of the adoption of new laws, and identification of legal threats. The Group
responded to the unresolved issue of the concession in the Republic of Croatia peace-
fully and fairly, continuing to pay the agreed 50 % concession fees for its eight camp-
sites and make reservations for the remaining 50 % until the concession agreement is
resolved. In addition, AHG needs to monitor closely the developments of the new legis-
lative measures of the Government and assess their potential impact on the company.

To manage the risk of inappropriate marketing communication, the Group will need to
intensify its marketing efforts on identifying new trends and becoming communicatively
and technologically closer to the generations. An example of this is the emergence of
new social networks such as TikTok, Snapchat, and the already established and well-
known Instagram, that make up the future of tourist demand. Only in this way will they
eliminate the possible losses if the new generation group is not recognized as a mean-
ingful brand capable of interacting and exchanging information in their own language.

Risk management of unclear long-term strategy is very easy to approach. The need to
revise the adopted strategies precedes possible measures and changes that the Group
could potentially bring. In addition, it is important to review the profitability of individ-
ual segments and select the potentially most profitable ones. Possible alternatives are
raising the level of quality of facilities and their sale. In this way, the Group would neu-
tralise the risk and eliminate the possible increase in costs, i.e., reduction of earnings.
8. CONCLUSION
Due to the increasing dynamism of the business world and business environment, an
increasing number of organisations are seeking to integrate a risk management sys-
tem into their organisational culture and management systems. Risk management is
an important aspect of an effective corporate governance system, and its importance
is especially emphasized in times of economic crisis because it has been proven that
companies that manage risk are less likely to have financial problems and be liquidat-
ed. Such a scenario is particularly visible today at a time of the COVID-19 pandemic that
has significantly weakened the world economy and in particular affected the tourism
industry.
In the context of these trends, the aim of this paper was to identify and quantify the
strategic, financial and operational risks associated with the operations of Arena Hos-
pitality Group and determine which risks have a significant impact on the value of the
company and how to protect the company from these risks.
The analysis of the external environment of the company showed a significant sensi-
tivity of the tourism industry to legal, economic and environmental factors. Frequent
changes in the law, which are often related to the tourism industry, as well as unde-
fined regulations in the form of concessions, pose a threat to the Group, imposing
agility and compliance with the regulations. Since tourism is characterized as a luxury
product, the main drivers of tourism activity are economic factors, and if they are dis-
rupted they directly affect revenues. It is important to emphasise the attention that is
increasingly being paid to environmental factors, requiring companies to include CSR
through policymaking.
The tourism industry is mature and heterogeneous with a high intensity of rivalry. In
addition to a large number of competitors from leading tourism companies, an addi-
tional concern is given by the increase in capacity in private accommodation. However,
the risk of entry by large competitors, i.e., those who can compete by size, comprehen-
sive offer, luxury services and emphasis on the high-end consumer segment is much
smaller, making the Group’s market position secure.
Although the number of competitors is large in itself, the high rates of the industry en-
able the corporate growth of the company. Therefore, the degree of intensity of com-
petition is at a medium level and moving to a higher level, which is why in the future
Arena Hospitality Group will need to differentiate its product more strongly – which it
has already adapted to through its investment activities.
Financial analysis has shown one of the most economical operations among tourism
companies which can conclude that the company is financially successful and stable.
Nevertheless, it is necessary to monitor the indicators that show significant deviations
from the desired values. During the intensive investment activities that are character-
istic of tourism, the Group’s borrowings are at extremely low interest rates and show
the strength of long-term growth through successful foreign and domestic acquisi-
tions.
Despite all the promising business indicators, the Group has failed to defend itself
against the emergence of the proven most serious risk in the last ten years, the
COVID-19 virus. By forecasting the free cash flows of the company, 2020 will certainly
create large losses that have not been ignored even in the pro forma report assess-
ment.
The analysis of Arena Hospitality Group’s business operations has identified sixteen
business risks that the Group should control and manage to ensure its performance.
Although a larger number of these sixteen risks would suggest that the company op-
erates in a high-risk industry and does not manage its risks adequately, most risks are
in the third and fourth quadrants, i.e., require only minimal control and management.
In addition, the Group has implemented risk management in its operations by report-
ing on them in the annual reports, which is the basis for encouraging prospects. The
Group’s operations are promising and in line with the growth of the industry, but pos-
sible major disruptions could have a devastating effect on its operations. Such risks
are in the first and second quadrants and represent strategic risks, namely interest
rate risk, unclear long-term strategy risk, technological risk, seasonality risk, environ-
mental risk in the form of sustainable business, and risk of expansion to new destina-
tions. The Group should manage these risks strategically and give them a high priority
while continuously monitoring the risks whose probability of occurrence is not high.
In essence, the importance of integrated risk management is reflected in its continuity

by which the identification, quantification and analogy of their supervision is a contin-
uous loop. The variability of the environment, as well as the business of the compa-
ny itself, require the repetition of this process throughout the life of each company.
The analysis of the observed company contributes to the current business dilemma of
tourism companies due to the emergence of the COVID-19 virus associated with inte-
grated risk management, which could serve to better understand an find solutions to
the fragility of this industry in today’s dynamic environment.
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[EPub]. Retrieved from http://konkurentnost.hr/wp-content/uploads/2018/01/RIK2013_fi-
nalno_07072014.pdf
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36 Orsag, S. (2006). Izvedenice. Zagreb: HUFA.
37 Orsag, S. (2015). Poslovne financije. Zagreb: LDK tiskara.
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laguna.hr/hr/o-nama
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devet tisuća turista. Retrieved August 7, 2020, from https://mint.gov.hr/vijesti/prvog-kolovo-
za-u-dubrovniku-vise-od-devet-tisuca-turista/21558
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na/19115
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org/indicator/NY.GDP.MKTP.CD?locations=HR
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bank.org/indicator/NY.GDP.PCAP.CD
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ny-and-luxembourg-%E2%80%98havens-corporate-tax-dodging%E2%80%99
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turizam365.com/
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une+op%c4%87eg+poreznog+zakona&naslovi=da&sortiraj=1&kategorija=1&rpp=10&q-
type=3&pretraga=da
The Case Study of the Coca-Cola Company 71
THE CASE STUDY OF THE COCA-COLA COMPANY
Ana Grgica Knežević, Ivona Koprivica, Lucija Marija Kriste1
1. ABOUT THE COCA-COLA COMPANY

Coca-Cola is a non-alcoholic drink made from plant extracts. It is the most famous soft
drink in history, and also the second most famous word in the world right after “OK”.2
In its original form it was created on 8 May 1886 in Atlanta after a village doctor en-
tered the pharmacy of young John Pemberton and tried to sell him a copper pot and a
recipe for a drink with a ‘secret ingredient’. He offered 500 $ for a pot and a small piece
of paper, which John Pemberton agreed to, and invested his entire life savings for the
transaction. John began experimenting with the leaves of a plant native to South Amer-
ica called coca, added cocaine and some other aromatic plants, and created a drink he
called “French Wine Coca,” which was used for medicinal purposes. The first Coca-Cola
contained 8.46 mg of cocaine while the average ‘dose’ on the street varies between
15 and 35 mg. He later produced a non-alcoholic version of this drink, his accountant
suggested the name “Coca-Cola” and the marketing campaign was launched in which
this drink was presented as “The Temperance Drink” that also cures headache, relieves
from exhaustion and calms the nerves, as well as a drug against morphine and opium
addiction.3 The current headquarters are still in Atlanta and Coca-Cola has 90,000 em-
ployees worldwide.4 Today, Coca-Cola is worth $200 billion and has 225 brands under
its name.5
1
The authors of this case study are students of the Integrated University Program at the Faculty of
Economics and Business, University of Zagreb.
2
Wikipedia (2021), Coca-Cola, [online] Available at: https://hr.wikipedia.org/wiki/Coca-Cola, (accessed:
26.4.2021.)
3
Wikipedia (2021), John Pemberton, [online] Available at: https://hr.wikipedia.org/wiki/John_Pember-
ton, (accessed: 26.4.2021.)
4
Statista (2020), Number of employees of the Coca-Cola Company worldwide from 2007 to 2020, [on-
line] Available at: https://www.statista.com/statistics/254562/coca-colas-number-of-employees-world-
wide/, (accessed: 26.4.2021.)
5
MD Daily Record (2021), Coca-Cola Net Worth 2021, [online] Available at: https://mddailyrecord.
com/coca-cola-net-worth-2021-2022-2023, (accessed: 26.4.2021.)
Mission
“Our map begins with our mission, which is permanent. It declares our purpose as a
company and serves as the standard by which we make our actions and decisions. Re-
fresh the world, inspire moments of optimism and happiness, create value and make
a difference.”6
Vision
“Our vision is to craft the brands and choice of drinks that people love, to refresh them
in body and spirit. And done in ways that create a more sustainable business and
better shared future that makes a difference in people’s lives, communities and our
planet.” 7
2. PESTLE ANALYSIS

Political factors, as part of the analysis of the company’s environment, are important
because they indicate how state policies influence business operations. These factors
play an important role in determining factors that may affect Coca-Cola’s long-term
profitability in a given country or market. The most important political factors that
can directly influence Coca-Cola’s performance are laws and regulations and originate
from governments. In the USA The Food and Drug Administration (FDA) oversees the
safety and quality of medicinal products for humans and animals, medical devices,
human and animal food, cosmetics and radiation-emitting products. The Coca-Co-
la products have to be authorised by FDA, i.e. before placing products on shelves in
stores, it is necessary for products to meet its requirements and regulations8.
Coca-Cola and its products must be adapted to the relevant laws in the countries where
its markets are. The company is also subject to accounting and business regulations of
each country in which it operates. Various tax laws that vary from country to country
are also important for Coca-Cola’s operations, because any increase or decrease in
the tax rates affects the company’s profits. This explains the case in the UK when it im-
posed a two-tier sugar tax so that beverages with a total sugar level of 5 grams per 100
millilitres were taxed less than those with 8 grams or more. Coca-Cola has 10.6 grams
of sugar per 100 millilitres and has suffered significant losses in the UK, although they
were later corrected due to zero sugar beverages that have not borne such a tax.9
6
Comparably (2021), The Coca-Cola Company Mission, [online] Available at:: https://www.compara-
bly.com/companies/the-coca-cola-company/mission, (accessed: 26.4.2021.)
7
The Coca-Cola Company (2021), Purpose and Vision, [online] Available at: https://www.coca-cola-
company.com/company/purpose-and-vision, (accessed: 26.4.2021.)
8
WiseLancer (2021.), Pestle Analysis Coca-Cola,[online] Available at: https://wiselancer.net/pes-
tle-analysis-coca-cola-coca-cola-pestle/, (accessed: 8.5.2021.)
9
Beverage daily (2018), Sugar tax knock for Coca-Cola Classic in Great Britain: but Zero Sugar up 50%,
[online] Available at: https://www.beveragedaily.com/Article/2018/10/29/Sugar-tax-knock-for-Coca-Co-
la-Classic-in-Great-Britain-but-Zero-Sugar-up-50, (accessed: 20.4.2021.)
Political problems between the US and China, which resulted in a trade war, had a
major impact on the prices of Coca-Cola’s products causing the company to suffer an
increase in costs imposed by Chinese regulation in retaliation against increased US
tariffs on Chinese steel and aluminium10. Political reasons have also affected the sales
of Coca-Cola’s products Cuba and North Korea as these two countries are under the
US trade embargo.11

The economic environment includes the determinants of the economic performance
that directly affect the company with significant long-term effects. Some of the eco-
nomic factors are the inflation rate, interest rates, exchange rates, economic growth,
disposable income of consumers, unemployment rates. Since Coca-Cola is an inter-
national company that operates worldwide, the analysis of its economic environment
includes the most important economies such as the United States, the EU, China and
Mexico. The economic crisis caused by the SARS-CoV-2 virus has hit the whole world
and impacted almost all companies in the industry.
The US market is a good area for business given the economic strength and living
standard of its population. However, due to the onset of the pandemic, there was a
3.49% drop in GDP. The US population earns high incomes, the average annual income
in 2019 was 65,835.83 US$, which indicates that the US population had high purchas-
ing power until the crisis.12 Then the otherwise low unemployment rates in the United
States rose to 8%, and thus Coca-Cola could lose its unstable market share in the fu-
ture due to constant rivalry with Pepsi. The Fed is making efforts to alleviate the crisis
by keeping interest rates low and inflation stable at 2% in order to bring the labour
market conditions back to the level of the committee’s estimates.13
10
MBA Skool (2020.), Coca-Cola Pestle Analysis,[online] Available at: https://www.mbaskool.com/pes-
tle-analysis/companies/18043-coca-cola.html , (accessed: 8.5.2021.)
11
BBC News (2012), Who, What, Why: In which countries is Coca-Cola not sold?, [online] Available at:
:https://www.bbc.com/news/magazine-19550067#:~:text=After%20almost%2060%20years%2C%20Co-
ca,on%20sale%20again%20in%20Burma.&text=But%20for%20the%20last%20six,country%20from%-
201962%20to%202011., (accessed: 8.5.2021.)
12
Statista (2019) Average annual wages in major developed countries from 2008 to 2019 [online]. Avail-
able at: https://www.statista.com/statistics/1039216/average-wages-developed-countries/ (accessed
19.04.2021.)
13
Federal Reserve Bord (2021) Monetary Policy Report – February 2021 [online]. Available at: https://
www.federalreserve.gov/monetarypolicy/2021-02-mpr-summary.htm (accessed 20.04.2021.)
Table 1. Key macroeconomic indicators of US during 2019 and 2020
Macroeconomic indicator 2019 2020

Nominal GDP 2.16 % -3.49 %
Unemployment rate 3.7 % 8.1 %
Inflation rate 1.81 % 1.25 %
Interest rate 2.21 % 0.53 %
Source: Author’s elaboration based on data from OECD reports; https://www.oecd.org/ (accessed
19.04.2021.)
The following chart shows the movement of the US dollar against the euro in the pe-
riod from 2019 to 2020. During 2019, the trend of the dollar’s appreciation prevailed,
but with the onset of the pandemic the situation changed. In March 2020, the dollar
weakened and a similar depreciation trend against the euro continued for the rest
of the year, which had a positive impact on the European share of the Coca-Cola
market.
Figure 1. Movement of US dollar against euro 2019 – 2020
13
Source:1.European
Figure MovementCentral
of US Bank
dollar against euro 2019 – 2020
Source: European Central Bank14

The next significant market in which Coca-Cola operates is Europe. For the purposes of this text
we have
The analysed macroeconomic
next significant market in which variables
Coca-Colainoperates
the European Union.
is Europe. Unlike
For the the US market, the
purposes
of this text, we have analysed macroeconomic variables in the European Union. Un-
European Union experienced an even greater decline in GDP compared to 2019 by 6.60%
like the US market, the European Union experienced an even greater decline in GDP
compared
Inflation intothe
2019
EUbyis6.60%. Inflation
relatively stableinbecause
the EU isthe
relatively
main goalstable because
of the the main
European Central Bank is to
goal of the European Central Bank is to maintain price stability, i.e. an inflation rate of
maintain
around 2%.price stability,
The ECB i.e. an inflation
is implementing all therate of around
necessary 2%. The monetary
expansionary ECB is implementing
policy all the
measures to keep the current crisis to a minimum. Accordingly, historically low interest
necessary expansionary monetary policy measures to keep the current crisis to a minimum
rates are maintained to keep the cost of borrowing as low as possible.15
Accordingly, historically low interest rates are maintained to keep the cost of borrowing as low
14
as possible.
14
European Central Bank (2021) Euro foreign exchange reference rates [online]. Available at: https://
www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/eurofx-
ref-figure-US$.en.html (accessed 20.04.2021.)
Table
15
2. KeyCentral
European macroeconomic
Bank (2021)indicators of EU
Our response during
to the 2019 and
coronavirus 2020 [online]. Available at:
pandemic
https://www.ecb.europa.eu/home/search/coronavirus/html/index.en.html (accessed 20.04.2021.)
Nominal GDP 1.29 % -6.60 %
Table 2. Key macroeconomic indicators of EU during 2019 and 2020

Nominal GDP 1.29 % -6.60 %
Interest rate -0.46 % -0.43 %
19.04.2021.)
China as the second largest economy in the world continues its trend of rapid econom-
ic growth. It maintains low inflation and unemployment rates, while its interest rates
are slightly higher than the economies analysed so far.
Table 3. Key macroeconomic indicators of China during 2019 and 2020

Nominal GDP 6.0 % 2.3 %
Interest rate 4.20 % 3.85%
19.04.2021.)
The last and extremely important market for Coca-Cola is Mexico. This country’s GDP
experienced a fall 2019, the negative trend continued in 2020, and interest rates are
quite high in spite of a decline of almost 3%. Despite the fact that Mexico is an econom-
ically weaker country compared to the markets analysed so far, it also consumes the
most carbonated beverages.16 Therefore, the economic crisis is not expected to greatly
affect the deep-rooted habits of daily consumption of Coca-Cola.
Table 4. Key macroeconomic indicators of Mexico during 2019 and 2020

Nominal BDP -0.05 % -8.24 %
Inflation rate 3.64% 3.4%
Interest rate 8.27 % 5.67 %
19.04.2021.)
16
Statista (2020) Soft drink per capita consumption in the ten most populated countries worldwide
[online], Available at: https://www.statista.com/statistics/505794/cds-per-capita-consumption-in-
worlds-top-ten-population-countries/ (accessed 22.04.2021.)
2.3. Socio-cultural and demographic factors
Social factors
76 Companycan beand
Analysis divided into cultural
Risk Management Strategiesand
in thedemographic factors.– Demographic
Global Business Environment factors follow
A Case Study Collection
the trends of population growth or decline in a target market, while cultural factors describe the
2.3. Socio-cultural
culture of a country.16 and demographic factors
Social factors can be divided into cultural and demographic factors. Demographic fac-
tors follow the trends of population growth or decline in a target market, while cultural
Figure 2.describe
factors Global consumption of anon-alcoholic
the culture of country.17 carbonated beverages per capita in ten most populous
countries (2019)
Figure
Source:2.Authors’
Global consumption of non-alcoholic
elaboration according carbonated
to data on beverages
Statistic website; per capita in ten most (accessed
https://www.statista.com
populous countries (2019)
20.04.2021.)
Source: Authors’ elaboration according to data on Statistic website; https://www.statista.com (accessed
20.04.2021.)
Coca-Cola's market share in Mexico is almost 50% and Coca-Cola's consumption is the highest
there. One consumer
Coca-Cola’s drinks
market share an average
in Mexico of about
is almost 160Coca-Cola’s
50% and litres of Coca-Cola a year.
consumption If we consider
is the
highest there. One consumer drinks an average of about 160 litres of Coca-Cola17a year.
that
If weaccording to the
consider that last census
according in last
to the 2019, Mexico
census had Mexico
in 2019, 127.6 million people,
had 127.6 millionwhich
peo- means that
aboutwhich
ple,18
means
20 billion that
416 aboutlitres
million 20 billion 416 million
of Coca-Cola arelitres of Coca-Cola
consumed are consumed
in Mexico annually. The second
in Mexico annually. The second largest market of Coca-Cola is the United States with
slightly lower consumption than Mexico, while the third largest market is Brazil with a
half of Mexico’s consumption.19
17
16 Kolaković, M., Mikić, M. (2020.) Poduzetništvo u 21. stoljeću. Zagreb: Studentski poduzetnički inkuba-
Kolaković, M., Mikić, M. (2020.) Poduzetništvo u 21. stoljeću. Zagreb: Studentski poduzetnički inkubator Sveučilišta u
tor Sveučilišta u Zagrebu, p. 190.-191.
Zagrebu, p. 190.-191.
17
18
Mexico
Mexico Population
Population (2021),
(2021), Worldometer
Worldometer [online][online]
AvailableAvailable at: https://www.worldometers.info/
at: https://www.worldometers.info/world-population/mexico-
world-population/mexico-population/
population/ , (accessed: 20.04.2021.) , (accessed: 20.04.2021.)
19
Statista (2021), Per capita consumption of carbonated soft drinks in 2019 in the ten most populated
countries worldwide, [online] Available at: https://www.statista.com/statistics/505794/cds-per-capita- 7
consumption-in-worlds-top-ten-population-countries/ , (accessed: 20.04.2021.)
The most important social factors that can negatively impact Coca-Cola’s business are
increased health awareness and changes in consumer behaviour. People are becom-
ing aware of how consuming large amounts of carbonated drinks full of sugar can
affect health, so they look for healthier alternatives, such as natural juices, teas and
water. This is especially true for the Generation X, which has replaced the consumption
of carbonated beverages full of sugars by energy drinks after diseases like obesity and
type 2 diabetes have been linked to long-term consumption of Coca-Cola.
Coca-Cola successfully responds to the needs of consumers by changing the recipes of
thousands of types of drinks to reduce added sugars. They have reduced the amount
of sugar by 30% in leading brands of products, such as Coca-Cola, Fanta and Sprite.
They also offer small packages of 250 ml to make it easier for consumers to control
their sugar consumption. In Mexico, 45% of products have a low sugar content or are
sugar-free, and calories have been reduced by 21% in the last 10 years. In Singapore,
they launched new Sprite and Fanta Orange recipes that contain 40% less sugar with-
out changing the taste of the drink.20
In the United States, an average consumer takes at least one sugary drink a day. Almost
half of the amount of added sugar they consume and 10% of the total calories that
young people ingest come from sugary drinks. Although the consumption of sugary
juices has been declining for the last 5 years, sales of other sugary beverages such as
teas or energy drinks have more than doubled by the end of 2015.21 As for the Europe-
an Union market, the average consumer consumes about 94.7 litres of soft drinks per
year. The research is based on the consumption of carbonated and non-carbonated
juices, ice teas, coffee, energy drinks and flavoured water. On the other hand, the Unit-
ed Kingdom market shows much higher consumption of soft drinks than the European
Union average. In 2018, a UK citizen consumed an average of 211.1 litres of soft drinks.
Large markets such as this are most likely the drivers of the overall development of
consumption in Europe and further growth is projected.22
One of the most important factors that significantly affects the connection between
business and consumers is advertising and promotional campaigns. The strongest
promotional campaign was Share a Coke which started in 2011 in Australia and spread
around the world. They did this by printing names on labels and consumers could buy
Coca-Cola with their name on it. In 2016, a new campaign “Share a Coke and a Song”
was presented in which popular lyrics were printed on labels.23
20
The Coca-Cola Company (2021), In our products,[online] Available at: https://www.coca-colacompa-
ny.com/sustainable-business/in-our-products , (accessed: 20.04.2021.)
21
Healthy food America (2018), Sugary drinks in America who’s drinking what and how much [online]
Available at: https://www.healthyfoodamerica.org/sugary_drinks_in_america_who_s_drinking_what_
and_how_much , (accessed: 20.04.2021.)
22
Statista (2021), Per capita consumption of soft drinks in the European Union (EU) from 2010 to 2019
[online] Available at: https://www.statista.com/statistics/620186/soft-drink-consumption-in-the-euro-
pean-union-per-capita/ , (accessed: 20.04.2021.)
23
The Coca-Cola Company, What was the ‘’Share a Coke’’ campaign? [online] Available at: https://www.
coca-colacompany.com/au/faqs/what-was-the-share-a-coke-campaign (accessed 20.04.2021.)

The technological environment refers to innovations in technology that can affect the
business of the industry and the entire market. The pandemic caused by the SARS-
CoV-2 virus has further contributed to strengthening the need to use technological
tools in business. Social networks have also progressed and become a significant
marketing tool in the observed beverage industry. The most common trends in the
food and beverage industry from a technological point of view are: the use of cloud
technology, industry 4.0, new distribution channels, data-based strategies and greater
transparency in business.24 Without active use of the above, it is difficult to achieve
competitiveness among other companies and significant growth in the long run. Mar-
ket leaders are aware of this, so for example, Coca-Cola’s biggest competitor, PepsiCo,
invests annually over $700 million in R&D.25
Coca-Cola is known not only as a trend follower but as a trend setter as well. For the
most successful data analysis in market research, Coca-Cola uses Big Data tools,
machine learning and artificial intelligence. Given that Coca-Cola operates in over
200 countries, with the help of Big Data analytics it was able to separately identify
the patterns of consumer behaviour for each country and then, according to con-
sumer experience, launch new products. 26 Thanks to the use of machine learning,
Coca-Cola, through vending machines that offered personalized products, came
to significant conclusions about consumer preferences and then developed new
products such as “Diet Mango Coca-Cola” and “Cherry Sprite”. 27 Artificial intelli-
gence is used for targeted advertising, mostly for the area of social networks. All
larger companies actively use their social networks and make contacts with the
customers through them. Coca-Cola has recognized the importance of using social
networks and influencers for marketing purposes and has over 105 million follow-
ers on Facebook as well as over 80 million followers on the YouTube channel and
over 2.5 million on Instagram. 28
24
Infor (2021) Five 2021 technology trends for the food & beverage industry [online]. Available at:
https://www.infor.com/blog/five-2021-technology-trends-for-the-food-beverage-industry (accessed
20.04.2021.)
25
Statista (2020) Research and development (R&D) costs of PepsiCo worldwide from 2013 to 2020
[online]. Available at: https://www.statista.com/statistics/536965/pepsico-s-r-and-d-costs-worldwide/
(accessed 20.04.2021.)
26
Pathak R. (2020) How Coca-Cola uses technology to stay at the top? [online]. Available at: https://
www.analyticssteps.com/blogs/how-coca-cola-uses-technology-stay-top (accessed 20.04.2021.)
27
Marr B. (2017) The Amazing Ways Coca-Cola Uses Artificial Intelligence And Big Data To Drive Suc-
cess [online]. Available at: https://www.forbes.com/sites/bernardmarr/2017/09/18/the-amazing-ways-
coca-cola-uses-artificial-intelligence-ai-and-big-data-to-drive-success/?sh=2a75339378d2 (accessed
20.04.2021.)
28
Data collected by looking at the official profiles of Coca-Cola on these social networks (accessed:
20.04.2021.)
2.5. Legislative factors

Adapting to the law has become an important concern for companies around the
world, especially for those operating in an international environment. Failure to com-
ply with the law may cost billions and may result in loss of reputation. Legal compli-
ance with the local laws of the countries in which it operates is the primary legal term
that Coca-Cola must fulfil.
Different countries have different laws regarding levels of caffeine consumption and
sugar consumption and Coca-Cola must ensure that it complies with all such regula-
tions wherever its products are sold. The company faced problems because of addi-
tional quantities of caffeine in its products in different countries when it had to pay the
fines following charges brought against it.29.
Environmental laws are of great importance for Coca-Cola’s business operations be-
cause the company is the biggest polluter in plastic, which creates considerable prob-
lems for the company, such as loss of customers, dissatisfaction of environmental ac-
tivists and loss of reputation. Coca-Cola was ranked the number one plastic polluter
for three consecutive years after its bottles were most often disposed of on beaches,
rivers, parks.30 Thus, in 2021 an environmental organisation Earth Island Institute31
filed a suit against Coca Cola for misrepresenting its bottles as sustainable.
The company also has an important labour act that was created to protect the health,
safety and rights of employees. It establishes a legal framework within which work-
ers and employers can establish their own relations and regulates the creation and
termination of employment relations. It defines the rights and obligations regarding
different aspects of relationships such as minimum age for entering into employment,
protection of young workers, equality at work, working hours, paid holidays, pay sala-
ries, work safety and protection of mothers on maternity leave.32

Coca-Cola is the largest consumer of water in the world and is therefore targeted by en-
vironmental activists. Today, 1.42 billion people, including 450 million children, live in ar-
eas of high or extremely high risk of water scarcity. Nearly half of the world’s population
already live in potentially scarce water areas for at least a month a year, and that could
rise to about 4.8-5.7 billion by 2050. About 73% of affected people live in Asia.33
29
Marketing tutor (2019), Pestle analysis of Coca-Cola [online] Available at: https://www.marketingtu-
tor.net/pestle-analysis-of-coca-cola/#L-for-Legal-Factors (accessed: 8.5.2021.)
30
The Guardian (2020), Coca-Cola, Pepsi and Nestlé named top plastic polluters for third year in a row
[online] Available at: https://www.theguardian.com/environment/2020/dec/07/coca-cola-pepsi-and-
nestle-named-top-plastic-polluters-for-third-year-in-a-row (accessed: 8.5.2021.)
31
The Earth Island Institute is a non-profit environmental group, located in California, USA
32
International Labour Organization (2001.), Labour legislation in the contemporary world [online], Avail-
able at: https://www.ilo.org/legacy/english/dialogue/ifpdial/llg/noframes/ch1.htm, (accessed: 8.5.2021.)
33
UN Water (2021), Scarcity, [online] Available at: https://www.unwater.org/water-facts/scarcity/, (ac-
cessed: 21.04.2021.)
Hindustan Coca-Cola Beverages Private Limited has 54 plants in India34 and India is
affected by one of the worst water shortage crisis. More than 50% of the population
there do not have access to safe drinking water, while Coca-Cola is responsible for the
complete drainage of groundwater over large areas. If they want to stay in India, the
company needs to improve the water supply management.
Water is essential to the products, businesses and communities in which Coca-Cola
operates. 1.85 litres of water are needed to produce one litter of product.35 Given that
Coca-Cola has been at the forefront of water consumption in production for more
than a decade, they are responsible for protecting local water resources, promoting re-
sponsible consumption and helping to ensure clean water for the local population. Co-
ca-Cola has committed to return or replenish 100% of the amount of water it takes.36
The groundwater supply is supplemented or replenished by rain and snow that flows
into cracks and crevices below the land surface.
CARE is an international humanitarian organization that fights global poverty and hun-
ger in the world. Today, Coca-Cola and CARE are working to create effective and sustain-
able solutions to solve global water and sanitation problems. The partnership enables
CARE to support initiatives such as the Replenish Africa Initiative (RAIN) on water and
sanitation programming and the Water and Development Alliance (WADA) to bring safe
water to communities in Mozambique, Morocco and Tanzania.37 RAIN is the leading pro-
gram of the African Coca-Cola community that contributes to Africa in achieving the
United Nations sustainable development goals in terms of access to clean water and
sanitation. The initiative has reached over 6 million people in 41 countries in Africa with
safe and sustainable access to water and hygiene, affecting 3,000 communities.38
Land use and industry are the two biggest culprits of climate change. By burning fossil
fuels, industries are increasingly affecting the Earth’s climate and temperature. The cur-
rent average temperature has increased globally by 0.85ºC at the end of the 20th centu-
ry. Scientists believe that an increase of 2°C compared to pre-industrial temperatures is
the limit value, after which there is a much higher risk of dangerous and potentially cat-
astrophic environmental changes globally. Therefore, the international community has
recognized the need to keep global warming below 2 °C.39 In order to reduce greenhouse
34
Adapted to: https://inshorts.com/en/news/coca-cola-stops-manufacturing-in-3-indi-
an-plants-1455176977643
35
The Coca-Cola Company (2019), Business and Sustainability Report, [online] Available at: https://
www.coca-colacompany.com/content/dam/journey/us/en/reports/coca-cola-business-and-sustainabil-
ity-report-2019.pdf#page=32 , page 32 , (accessed: 21.04.2021.)
36
The Coca-Cola Company (2019), Business and Sustainability Report, [online] Available at: https://
www.coca-colacompany.com/content/dam/journey/us/en/reports/coca-cola-business-and-sustainabil-
ity-report-2019.pdf#page=33 , page 33 , (accessed: 21.04.2021.)
37
Care (2021), The Coca-Cola Company, [online] Available at: https://www.care.org/about-us/strategic-part-
ners/corporate-partnerships/leadership-partners/the-coca-cola-company/ , (accessed: 21.04.2021.)
38
The Coca-Cola Company (2021), Replenish Africa Initiative, [online] Available at: https://www.coca-cola-
company.com/sustainable-business/water-stewardship/replenish-africa-initiative , (accessed: 21.04.2021.)
39
European Commission (2021), Causes of climate change, [online] Available at: https://ec.europa.eu/
clima/change/causes_hr , (accessed: 21.04.2021.)
gases, Coca-Cola has succeeded in reaching its goal set in 2013 to reduce carbon dioxide
concentrations by 25% by the end of 2020 compared to the base year 2010.40
In 2020, for the third year in a row, Coca-Cola was ranked at the top of the list of
global pollutants published by Break Free From Plastic. Every year, over 15,000 volun-
teers carry out beach cleaning campaigns in more than 50 countries. The group found
that 13,834 pieces (compared to 11,732 pieces in 2019) of plastics collected during the
cleaning originated from Coca-Cola products, which is greater than the next three
leading pollutants combined. Nestle and PepsiCo are in second and third places after
Coca-Cola.41
The company has taken steps to combat environmental pollution. They launched the
World Without Waste42 project in 2018 with three main goals:
• by 2025, products must be packed in 100% recyclable materials and use at least
50% recycled packaging material by the end of 2030
• recycle a bottle or can for each one they sell by the end of 2030
• call on people to support a healthy, waste-free environment.
Coca-Cola claims that over 60% of packaging is refilled or collected for recycling, 90% of
packaging can be recycled worldwide, 22% of recycled material is used for packaging,
and that 30 markets today offer beverages packaged in 100% recycled plastic bottles.43
On the basis of all above information, it can be concluded that Coca-Cola has taken
great steps in efforts to reduce pollution and raise awareness among the consumers
to contribute to recycling plastics to the maximum extent possible.
3. PORTER’S FIVE FORCES MODEL
3.1. Rivalry among existing competitors
Market share
According to the Statista report, competition in the soft drinks industry can be reduced
to a few major rivals. Besides Coca-Cola, Pepsi, Keurig Dr. Pepper, Refresco and National
Beverage account for the largest competitive market share. Furthermore, according to
the Statista report, Coca-Cola and Pepsi together as dominant players hold 65% of the
40
The Coca-Cola Company (2021), Science based targets, [online] Available at: https://www.coca-cola-
company.com/sustainable-business/climate/science-based-targets , (accessed: 21.04.2021.)
41
Independent (2020), Coca-Cola named world’s worst plastic polluter for third straight year, [online]
Available at: https://www.independent.co.uk/climate-change/news/coca-cola-plastic-pollution-nes-
tle-pepsico-b1767370.html , (accessed: 21.04.2021.)
42
The Coca-Cola Company (2021), What is World Without Waste?, [online] Available at: https://www.
coca-colacompany.com/faqs/what-is-world-without-waste (accessed: 21.04.2021.)
43
The Coca-Cola Company (2021), Sustainable Packaging, [online] Available at: https://www.coca-cola-
company.com/sustainable-business/packaging-sustainability , (accessed: 25.04.2021.)
market, but Coca-Cola leads with an advantage of 40% of the market share, while Pepsi
holds 25%.44
In the context of the soft drink industry, the highest revenues are generated in Mexico
and the USA, where 634 million litres of this carbonated soft drink were consumed in
Mexico and 618 litres in the USA in 2019, which indicates Coca-Cola’s high performance
in these two markets. In the next 8 most populous countries of the world (including
Brazil, Japan, Russia, China, Nigeria, Pakistan, Indonesia and India) the consumption
of carbonated beverages amounted to 694 million litres in 2019.45 Such distinctive
consumption represents a profitable market for the carbonated soft drinks industry,
which will generate significant revenues in the long run due to the habits and prefer-
ences of consumers.
According to the Kalinax market research platform, Pepsi is the market leader in the US
and Canadian markets where the consumption Pepsi outperforms Coca-Cola 7 times.
Furthermore, markets prone to Pepsi are Finland, Uzbekistan, Kazakhstan, Saudi Ara-
bia, Oman and the Czech Republic. Despite this, Coca-Cola boasts market leadership
in the rest of the world with a 9 times higher demand. Ten largest Coca-Cola markets
are Brazil, Germany, France, Mexico, Argentina, the United Kingdom, the Netherlands,
Colombia, Spain and Turkey, where the company generates significant revenues.46
Diversified portfolio
The data indicates that a larger market share earns Coca-Cola a competitive advantage
over Pepsi, which is complemented by a well-diversified portfolio of 200 products, of-
fering consumers a wide range of soft drinks including recognizable brands with high
market shares, such as Sprite, Fanta, Schweppes, as well as coffee, non-carbonated
juices, teas and water.47 Compared to Pepsi, which bases its portfolio on 23 brands
by integrating soft drinks and food products,48 Coca-Cola has diversified its portfolio
in soft drinks exclusively, and has thus met all consumer needs for soft drinks that
include daily consumption of coffee, juices, tea, carbonated beverages and water. In
addition to a well-diversified product range, Coca-Cola gains a competitive advantage
through the loyalty of consumers who are committed to the brand and marketing
strategies by which the company positions itself in the minds of consumers and in-
fluences their purchasing decisions. Consumers want to connect with the names of
44
Statista (2019), Market share overview, [online] Available at: https://www.statista.com/sta-
tistics/225464/market-share-of-leading-soft-drink-companies-in-the-us-since-2004/ , (accessed:
23.04.2021.)
45
Statista (2019), Per capita consumption of carbonated soft drinks in 2019 in the ten most populated
countries worldwide , [online] Available at: https://www.statista.com/statistics/505794/cds-per-capita-
consumption-in-worlds-top-ten-population-countries/ (accessed: 23.04.2021.)
46
Kalinax (2020), Pepsi vs Coca-Cola, [online] Available at: https://www.kalinax.com/pepsi-coca-cola.
html , (accessed: 22.04.2021.)
47
Coca-Cola HBC (2021), A more sustainable future, [online] Available at: https://www.coca-colahellen-
ic.com/en/a-more-sustainable-future , (accessed: 22.04.2021.)
48
Pepsi Co. (2021), Product information, [online] Available at: https://www.pepsico.com/brands/prod-
uct-information , (accessed: 22.04.2021.)
brands they know, and especially with those that have gained a high reputation over a
period of time. Faced with the choice, the consumer will prefer the brand he knows to
be of the highest quality.49
Response to trends
Market trends are constantly changing, and, therefore, it is important to monitor the
changes in consumer preferences and implement the new decisions through sustain-
able strategies that will provide the company with a long-term competitive advantage,
prevent the entry of new competitors and prevent strengthening of the existing com-
petitors. Coca-Cola continuously develops products in line with changes in eating hab-
its to contribute to creating a healthier eating environment. Coca-Cola is adapting its
approach to the sales of carbonated soft drinks in response to the evolving consumer
trends, and thus in line with these changes, it has developed a strategy that will reduce
the share of sugar in 50% of its products by 2025.50
Sustainable policy
The main raw material for producing Coca-Cola is water, approximately 1.9 litres of wa-
ter are necessary to make a 500 ml bottle of this drink. By 2030, the impact of climate
change will further increase the risks of the availability and water quality of the local
bottling plants from which the company draws water for its business. As part of its
sustainable water use policy mission until 2025, the company is committed to reducing
the use of water by 20% in plants located in areas at risk of excessive water extraction
for production purposes.51 The company is committed to lowering the use of water in
the production to 1.2 litres, which will make Coca-Cola the world’s most efficient pro-
ducer of soft drinks.52
Coca-Cola achieves a competitive advantage in the soft drinks industry through a sus-
tainable World without waste policy, which plans to make its packaging 100% recyclable
by 2025, and to recycle every purchased consumer packaging by 2030.53
49
Business Case Studies (2019), Working with bottling franchisees around the world a Coca-Cola,
[online] Available at: https://businesscasestudies.co.uk/working-with-bottling-franchisees-around-the-
world-a-coca-col/ , (accessed: 22.04.2021.)
50
ic.com/en/a-more-sustainable-future , (accessed:
22.04.2021.)
51
52
Pumping solutions (2017), Coca-Colas Water Usage Policy Sustainability & Responsibility, [online]
Available at: https://www.pumpingsolutions.co.uk/blog/coca-colas-water-sustainability-responsibility/
, (accessed: 22.04.2021.)
53
Franchise
In 2020, The Coca-Cola Company generated 19% of its revenue from the ‘bottle invest-
ments’54 program, which includes the sale of franchises to local companies in various
countries, providing companies with a business under the name Coca-Cola. The model
consists of 275 smaller companies affiliated with the parent company.55 Coca-Cola, on
the other hand, provides financial support and the necessary resources for remaining
part of the company’s franchise network if they find themselves in financial difficulties.
Coca-Cola sends teams of experts and resources to boost growth and franchise profit-
ability.56 Thus, the company saves on distribution, production and storage costs, which
enables the transfer of funds in other activities such as R&D.
3.2. Threat of new entrants

The possibility of new entrants is high due to the fact that entry barriers in the bev-
erage industry are minimal, and new products are appearing on the market at lower
prices than Coca-Cola. However, Coca-Cola is not only a product but also a brand that
transfers its power to other products of the company, and its monopolistic position in
the soft drinks market is relatively hard to shake. It has concluded licensing agreements
for its best-selling product (Coca-Cola) with all fast-food chains and is so widespread
that it is visible on the shelves of markets, supermarkets, gas stations and in every cafe
(few will serve Pepsi instead of Coca-Cola, more often both products, or only Coca-Co-
la). Furthermore, Coca-Cola can influence the suppression of new entrants through
regular placement of new products because its customers are loyal, and will certainly
buy and try each of its products because they are already convinced of Coca Cola’s
quality and value. There is always the possibility of attracting new customers who are
not tempted by the classic taste of Coca Cola or are, for example, fans of Coca Cola’s
biggest rival Pepsi. Another way to protect companies’ position in the beverage market
is to build economies of scale that allow a lower fixed cost per unit of production. Al-
though the beverage market can be accessed by a large number of companies, these
companies cannot count on above-average profits in the market whose standards are
more or less defined by Coca Cola. They would have higher expenditures from various
types of marketing campaigns needed to make their product known (Coca Cola in-
vests about $4 billion in marketing campaigns annually),57 and they would still have no
guarantees of ever reaching the level of popularity and the status of the cult brand like
54
Statista (2020), Revenue distribution of the Coca-Cola Company worldwide by operating segment
2020, [online] Available at: https://www.statista.com/statistics/271136/coca-colas-revenue-distribu-
tion-worldwide-by-operating-segment/ ,(accessed: 22.04.2021.)
55
Business Insider (2015), Inside Coca-Cola franchise system, [online] Available at: https://www.busi-
nessinsider.com/inside-coca-cola-franchise-system-2015-6 , (accessed: 22.04.2021.)
56
Investopedia (2021), How Coca-Cola makes money?, [online] Available at: https://www.investopedia.
com/articles/markets/112515/how-does-cocacola-actually-make-money.asp , (accessed: 22.04.2021.)
57
Investopedia (2020), A Look at Coca-Cola’s Advertising Expenses, [online] Available at: https://
www.investopedia.com/articles/markets/081315/look-cocacolas-advertising-expenses.asp , (accessed:
20.04.2021.)
Coca Cola. For this reason, most companies that do not already have a well-known or
popular product in the soft drinks market will consider entering the market a bad and
unprofitable entrepreneurial venture.
3.3. Threat of substitutes

While the taste of Coca-Cola is world recognizable and for many years has enjoyed the
reputation of one of the best soft drinks, the threat of substitute products entering
the market is always present and companies must adapt to the wishes of customers.
The food and beverage industry largely depends on the subjective experience of cus-
tomers, which means that one of its main goals is to keep its quality and, if necessary,
to produce a new taste. The big advantage of Coca-Cola and the reasons why it is the
most famous soft drink in the world are the specific taste that many have tried to rep-
licate unsuccessfully, the huge amounts of money invested in marketing over the last
100 years, and the brand created by globalization.
Figure 3. Marketing expenses of The Coca-Cola Company in billions of dollars (2014 - 2020)
Source: Author's elaboration according to data on Statistic's website;

Figure 3. Marketing expenses of The Coca-Cola Company in billions of dollars (2014 - 2020)
https://www.statista.com/statistics/286526/coca-cola-advertising-spending-worldwide/ (accessed
Source: Author’s elaboration according to data on Statistic’s website; https://www.statista.com/statisti-
23.04.2021.)
cs/286526/coca-cola-advertising-spending-worldwide/ (accessed 23.04.2021.)
Figure 3. shows that Coca-Cola spends between $ 3.5 and 4 billion a year on marketing and
Figure 3. shows that Coca-Cola spends between $ 3.5 and 4 billion a year on marketing
promoting
and promoting its its productsand
products anditsitsbrand.
brand.InIn2020,
2020,that
thatnumber
number saw
saw an
an expected
expected decline
de- as did the
cline as did the data of all other companies. It is also visible that this level of marketing
data of all other companies. It is also visible that this level of marketing allocation will leave
allocation will leave Coca-Cola relevant forever. Every substitute product and compa-
ny that Coca-Cola
wants to win relevant
over forever.
Coca-ColaEvery substitutedoes
customers product
notand company
have, that
and will wantshave,
never to win over Coca-
enough funds to fight such a ‘promotional giant’. In addition, one of the most pro-
Cola customers does not have, and will never have, enough funds to fight such a ‘promotional
ductive periods of the year for Coca-Cola is Christmas and the winter holidays which
giant’. In addition, one of the most productive periods of the year for Coca-Cola is Christmas and
the winter holidays which account for a great deal of the company’s great financial investments
and marketing efforts. The first Coca-Cola Christmas commercials began back in 1931, and
account for a great deal of the company’s great financial investments and marketing
efforts. The first Coca-Cola Christmas commercials began back in 1931, and since then
a large part of the population are believed to associate Christmas with Coca-Cola and
vice versa. Moreover, it is interesting to notice that there are stories according to which
Coca-Cola invented the Santa Claus.58
Coca-Cola claims that their secret recipe is “the world’s biggest secret” and that
it is hidden in a multimillionaire safe at their headquarters in Atlanta. 59 The level
of mystery that Coca-Cola maintains will forever intrigue its customers and give a
psychological advantage over others by pointing out that they are special and irre-
placeable – thus, confirming their quality. Since Coca-Cola as a product has gained
its loyal customer and fan base, even if they completely minimize their product
promotion it will still be drunk in large quantities. Of course, this is not a realistic
situation as Coca-Cola expands its range of products and brands (it owns Fanta,
Sprite, Fuze-Tea, Smart Water, Powerade and Cappy) in order to adapt to as many
wishes and requirements as possible, and hence reduce the impact of substitute
products on the market.
Coca-Cola has 2 ingredients that can be addictive, sugar and caffeine. It contains 11
grams of sugar and 10 mg of caffeine per 100 ml (55 grams of sugar and 50 mg of
caffeine per one 0.5l bottle).60 For this reason, Coca-Cola fans will find it difficult to
stop consuming. However, one of the possible reasons why someone might replace
Coca-Cola with another drink is the saturation of taste, but also health reasons. It is in-
teresting to mention that stories are circulating on the Internet and in the media about
how Coca-Cola does not have an ingredient that could lead to taste saturation. People
obsessed with Coca-Cola will say they can drink it instead of water, but the taste will
never bore them.61 Given the amount of Coca-Cola consumption worldwide, this the-
ory seems to hold water. Certainly, it is difficult to find a replacement product that will
bring the same, or at least similar, level of satisfaction. But there is certainly a popular
trend in the world of a healthier diet with as little sugar, calories and preservatives as
possible, which is turning to an increasing number of people, which ultimately leads to
choosing drinks that fit these parameters. Coca-Cola is aware of this trend and offers a
wide range of healthier options in its assortment, such as Coca-Cola or Fanta without
sugar, teas, and even water alone.
58
Medium (2017), Holidays are coming: The Coca-Cola Christmas branding story, [online] Available
at: https://medium.com/@Stewart_Fabrik/holidays-are-coming-the-coca-cola-christmas-branding-sto-
ry-8f08e2be8def , (accessed: 21.4.2021.)
59
CNN (2014), Does formula mystery help keep Coke afloat?, [online] Available at: http://edition.cnn.
com/2014/02/18/business/coca-cola-secret-formula/index.html, (accessed: 21.4.2021.)
60
Wikipedia (2021), Coca-Cola, [online] Available at: https://hr.wikipedia.org/wiki/Coca-Cola, (accessed:
21.4.2021.)
61
The Motley fool (2013), The Secret to Warren Buffett’s Investment in Coca-Cola and Heinz, [online]
Available at: https://www.fool.com/investing/general/2013/12/03/the-secret-to-warren-buffetts-invest-
ment-in-coca-c.aspx, (accessed: 22.4.2021.)
After over a century of the company’s creative efforts in all directions, nearly 2 billion
Coca-Cola products are served in more than 200 countries daily.62 Such a trend will be
difficult to slow down, the impact of substitute products is moderately low. Therefore,
it can be concluded that the entry of substitute products is possible and present. How-
ever, this is not likely to affect extremely Coca-Cola, its unique taste, popularity, brand
and loyal customer base.
3.4. Bargaining power of suppliers

Coca-Cola’s strategy is based on the differentiation of a large number of suppliers who
create a wide portfolio of supply chain of production materials. Thus the company
does not depend on its suppliers and can easily replace them. The supply chain plays
the central role in Coca-Cola’s business and thus the proper management of the sup-
ply chain is responsible for the company’s purchase, production, planning and long-
term sustainability.
The bargaining power of the suppliers in the soft drink industry is small due to their
numbers. The raw materials needed for Coca-Cola’s business are produced annually in
large quantities by various manufacturers, which shows that the raw materials for the
soft drink industry are easily available and interchangeable. Furthermore, according
to a report by the Food and Agriculture Organization of the United Nations, 124 coun-
tries in the world produced sugar in 2021. The prices of the raw materials needed for
Coca-Cola’s business are low and the company is able to procure large quantities of
raw materials, which has reduced the price of these raw materials through economies
of scale.
The portfolio consists of 19,50063 suppliers and is divided into direct and indirect sup-
pliers. Direct suppliers include ingredient suppliers and are in charge of packaging,
while indirect suppliers include categories such as IT, production equipment, spare
parts, maintenance services, logistics providers, utilities, real estate, facility manage-
ment, professional and other consulting services, staff and temporary work.64
Encouraging supplier competitiveness:

Coca-Cola’s strategic plan is to invest in supplier diversification, so the company has
designed a program that invites new and financially solvent suppliers to come together
in teams each year to begin supplying the company with the necessary resources to
create new strategic partnerships and agreements. The goals of the program are to
build the abilities and capacity of different suppliers to improve their competitiveness
62
The Coca-Cola Company (2021), How many cans of Coca-Cola are sold worldwide in a day, [online]
Available at: https://www.coca-cola.co.uk/our-business/faqs/how-many-cans-of-coca-cola-are-sold-
worldwide-in-a-day, (accessed: 23.4.2021.)
63
Coca-Cola HBC (2021), Supply chain overview, [online] Available at:https://www.coca-colahellenic.
com/en/about-us/what-we-do/supply-chain , (accessed: 25.04.2021.)
64
and support growth in these local communities. The primary focus of this training
and development program is to improve the efficiency of different suppliers to meet
the needs of Coca-Cola and create the conditions for them to competitively seek con-
tracts and business opportunities in the global marketplace.65 In this way, the company
creates a portfolio of suppliers who depend on Coca-Cola’s business and, due to the
signed contracts, are not able to raise the prices of inputs for production, which reduc-
es their bargaining power. The ultimate goal is to keep the prices of raw materials such
as water, concentrated syrup and sugar low, and reduce the bargaining power of the
suppliers.
Coca-Cola operates locally, including both local bottling plants and production lines in
other states. The most important ingredients such as water and sugar are obtained
from the local sources. Due to the large number of suppliers on multiple continents
including different countries, the costs of switching suppliers are low. Suppliers from
various countries want to do business with Coca-Cola rather than with another compa-
ny because Coca-Cola pays them regularly, thus creating a secure business base and a
stable supplier income.
3.5. Bargaining power of customers

The bargaining power of consumers is moderate. This is explained by the fact that the
power of individual buyers is low as there is no direct sale to the final customer, but
rather through the intermediaries. On the other hand, the intermediaries or corporate
buyers have great negotiating power because Coca-Cola has to sell its products at
a sufficiently low price so that they can sell them to individual buyers at a competi-
tive price. Since customers regularly compare prices of the same or similar products
between sellers and the cost of switching to another product is minimal, Coca-Cola
often organises different campaigns. For example, a Coca-Cola application facilitates
collecting and analysing codes placed under the cap of products from the Coca-Cola’s
assortment, which increases the customers’ chances of winning various awards. This is
just one way to ensure the long-standing loyalty of its customers. Also, Coca-Cola pro-
motes family values and the first association among most people are the Christmas
campaigns that penetrate the hearts of people around the world. In 2020, it was pro-
claimed the most touching advertisement of the year. Since consumers highly value
companies that promote what is most important (family, love, community), Coca-Cola
does not have to worry too much about the buyers’ revolt to its prices because, apart
from keeping them in line with the market average, the background of the company
whose products they buy is very important to them. That is evident from the fact that
Coca-Cola’s profits amounted to $33.01 billion in 2020 despite the pandemic.66
65
66
Investopedia (2020), How Coca-Cola Stacks up Against New Entrants, [online] Available at: https://
www.investopedia.com/articles/markets/120915/analyzing-porters-5-forces-cocacola.asp (accessed
22.04.2021.)
3.6. Analysis of the company’s competitive strategy

Cost management strategy
Cost management focuses on the most rational spending of all resources while at the
same time maximising value for consumers. Coca-Cola has been introduced in order
to reduce the costs through all stages of operations, find the best price-quality ratio in
terms of distributors of their products, and prevent the release of harmful substances
into the environment during production. The second item of the cost management
strategy is the price competitiveness, and Coca-Cola kept its prices rather low com-
pared to the competitors without affecting the quality of its products from 1886 to
1959. Coca-Cola had a unique price of 5 cents, which was an excellent marketing strat-
egy aimed at winning the market share and creating a reputation that is at the highest
level even today.67 At the global level, Coca-Cola is somewhat more expensive than its
main competitor, Pepsi, but the price gap is compensated by brand popularity, loyal
customer base, and flavour that many people prefer. Coca-Cola makes great use of
economies of scale and already has low long-term business costs to create a competi-
tive advantage without lowering the prices.
Differentiation strategy
Differentiation is based on the way a company wants to present its product or ser-
vice differently from the competition, thus creating an advantage in the market. In
Coca-Cola’s case that is not possible since it is surrounded by competitors who want
to copy its products, but at a lower price. The greatest differentiation advantage that
Coca-Cola can take advantage of is its brand, long term business, faith in its products
worldwide, and the marketing efforts that others cannot imitate. Likewise, an indis-
pensable differentiation advantage is the specificity of its taste that comes from the
secret recipe and cannot be replicated. Because of these components, Coca-Cola is
differentiated enough without changing its production.
Focusing strategy
The enterprise implements a focusing strategy when trying to focus on specific target
groups, market segments or niches. Coca-Cola’s original drink does not implement
the strategy of focus, but focuses on the fact that all people regardless of gender, age,
race or nationality need it, as suggested by the company’s long-term marketing com-
mercials. Thus, it focuses on absolutely all market segments, keeping its products up
to quality regardless of the location. This kind of business gives it the opportunity to
approach as many people as possible, while achieving the highest level of popularity
in regard to competition. This does not mean that Coca-Cola is unaware of the advan-
tages that the focusing strategy brings, which is why no-calorie alternatives, tea and
water are offered to the market segments that seek difference.
67
Telegram (2015), 7 marketinških poteza zbog kojih je Coca-Cola postala ono što je danas, [online]
Available at: https://www.telegram.hr/biznis-tech/ovih-je-7-marketinskih-strategija-pomoglo-coca-co-
li-postati-ono-sto-je-danas/,(accessed: 27.4.2021.)
4. FINANCIAL INDICATORS ANALYSIS

Financial indicators analysis is one of the key analyses for getting insights into business
performances and discovering the strengths and weaknesses. These indicators are
divided into those showing the financial situation at a certain point in time and those
of financial performance within a given period. There are also several basic categories
of indicators:
1. Leverage indicators
2. Liquidity indicators
3. Activity indicators
4. Profitability indicators
5. Investment indicators
Although leverage and liquidity indicators are most important for business security,
the assessment of the financial situation and performance is based on all indicators
combined.68
4.1. Leverage indicators

Leveraging indicators or indebtedness indicators show the structure of the company’s
capital and the extent to which the enterprise is financed from other sources of funds.
In this way investors have the information on whether the enterprise is too indebted,
whether it can still borrow, or whether it is necessary to recapitalise the company.
The long-term debt relationship is an indicator of indebtedness that shows the ratio of
long-term debt and the sum of the long-term debt to principal. The bigger the indicator
is, the greater the risk of financial difficulties occurring if the company cannot meet its
obligations will be. During the observed period, from 2017 to 2020 this indicator did
not oscillate and was 0.60 on average. The debt to equity ratio is a financial indicator
that relates long-term debt to the company’s equity. It is preferable that the ratio be
1:1. In the first year of observation the ratio was 1.64. while it rose to 1.89 in 2020 indi-
cating an increase in long-term borrowing.
The ratio of total liabilities to principal is shown in the financial indicator called ‘relative
indebtedness’. This indicator shows the representation of total liabilities in the equity
capital. During the observed period there is a visible falling trend of this ratio starting
at 3.63 in 2017 and ending at the level of 3.10 in 2020. The total indebtedness also in-
cludes total liabilities, but puts them into proportion to the total assets. There were
not too many oscillations for Coca-Cola in the 2017-2020 period with an average ratio
of 0.77 indicating a greater share of funding from other sources of funds.
Interest coverage is a financial indicator showing how many times a company can cover
interest costs from earnings before interest and taxes. For Coca-Cola it changes over
68
Bolfek, B., Stanić, M., & Knežević, S. (2012). VERTICAL AND HORIZONTAL FINANCIAL ANALYSIS OF THE
COMPANY’S BUSINESS. Ekonomski vjesnik, 25(1), pg. 162.
the years of observation and is 9.03 on average, which shows that it is satisfactory.
The coverage of cash flow except earnings before interest and taxes includes amor-
tization which it puts into proportion with the paid interest and other expenditures.
As the previous indicator, this indicator is satisfactory too. It grew from 2017 to 2019,
reaching 12.10 in 2019, after which it fell to 7.33.
Table 5. Leverage indicators
Leverage indicators 2017 2018 2019 2020
Long-term debt relation 0.62 0.57 0.57 0.65
Debt to equity ratio 1.64 1.33 1.30 1.89
Relative indebtedness 3.63 3.37 3.09 3.10
Total indebtedness 0.78 0.77 0.76 0.76
Interest coverage 9.22 9.96 10.66 6.26
Coverage by cash flow 10.72 11.14 12.10 7.33

Source: Authors’ elaboration according to The Coca-Cola Company’s financial reports
4.2. Liquidity indicators

Liquidity indicators measure the ability of firms to settle their due short-term liabilities.
They indicate company solvency directly and the ability to circulate assets indirectly.
The most important indicators are current, quick and cash ratio.
The current ratio is the best measure for calculating the company’s short-term sol-
vency. It is preferable that this indicator be above 1 so that the enterprise can meet all
short-term liabilities from short-term assets. For Coca-Cola, this indicator amounts to
more than 1 in all years, except 2019 when it was 0.76. On average, this indicator for
the observed period was 1.12, which makes it satisfactory.
The quick ratio is a more conservative measure than the current ratio and should also
be at least 1 so that the company can meet all its short-term obligations. This indica-
tor changed over the period, the highest was in 2017 when it amounted to 1.25, after
which it fell to 0.63 in 2019. In 2020 the company improved its ratio to 1.09.
The cash ratio determines the ability to settle short-term liabilities by the most liquid
means – money. It is preferable that this indicator does not fall below 0.2. During the
observed period, Coca-Cola achieves a ratio greater than 0.2 which means that the
indicator is satisfactory. The highest level was achieved in the last year of observation
when it amounted to 0.47.
Table 6. Liquidity indicators
Liquidity indicators 2017 2018 2019 2020

Current ratio 1.34 1.05 0.76 1.32
Quick ratio 1.25 0.95 0.63 1.09
Cash ratio 0.22 0.31 0.24 0.47
4.3. Activity indicators

Activity indicators measure how efficiently the enterprise uses its resources. They re-
fer to the time of circulation of assets in the business process, which means the higher
the turnover ratio is the shorter the time of binding assets will be. Total assets turnover
ratio relates sales income to total company assets, and shows how many times total
company assets are turned over the period of one year. A good total assets turnover
ratio for conglomerates selling beverages is considered to be around 0.4. In 2017 total
assets turnover ratio was 0.40 and in 2020 it reached the level of 0.38. Thus, all total
assets turnover ratios were satisfactory except in 2020.
Fixed assets turnover ratio measures the proportions between the total sales revenue
and fixed assets of an enterprise and shows how successfully it uses fixed assets to
generate revenue. The fixed assets turnover ratio decreased every year which is not
good because it means that the management used the fixed assets less efficiently. Its
values kept falling from 4.32 in 2017, 3.57 in 2018, and 3.05 in 2019, to 2.68 in 2020.
Current assets turnover ratio compares the total sales revenue and current assets,
and shows how efficiently the enterprise uses short term assets to generate revenue.
As in the previous cases, it is preferable that this indicator’s value be greater. According
to the analysis, Coca-Cola’s current assets turnover ratio grew continuously over the
observed period, except in 2020.
Inventory turnover ratio compares total sales revenue with stocks and shows how
many times stocks are turned over a period of one year. The inventory turnover ratio
gradually decreased over the years, from 13.34 in 2017 to 10.11 in 2020, which is unfa-
vourable. As the reference data for inventory turnover ratio in this industry is 15, this
indicates that the company is slightly below average.
Receivables turnover ratio puts total sales revenue and receivables into relation. This
indicator can calculate the average receivables collection period. Low receivables turn-
over ratio implies a high level of borrowing with customers. With the ratios amounting
to 9.66, 10.01, 9.38 and 10.5 in 2017, 2018, 2019 and 2020 respectively, The Coca-Cola
Company matches the industry average of 10.
The average receivable collection period is expressed in days, and the number of days
per year is compared with the obtained receivables turnover ratio. In 2017 the average
receivable collection period was 37.8 days, in 2018 it amounted to 36.14 days, in 2019
and 2020 they were 38.9 and 34.76 days respectively.
Days inventory outstanding shows how much time it takes for a monetary unit spent
on the supply of inventories to be converted into a monetary unit of sales revenue.
For a longer period of investment in stocks greater investments in stocks are required,
i.e.it is desirable to lower the indicator’s value. In 2017 and 2018 this indicator was 73
and 86 days, and in 2019 and 2020 it was 84 and 89 days. Although slight, this increas-
ing trend is not desirable as it can indicate inefficient use of stocks.
Table 7. Activity indicators
Activity indicators 2017 2018 2019 2020

Total assets turnover ratio 0.40 0.41 0.43 0.38
Fixed assets turnover ratio 4.32 3.57 3.05 2.68
Current assets turnover ratio 0.97 1.38 1.83 1.72
Inventory turnover ratio 13.34 11.17 11.03 10.11
Receivables turnover ratio 9.66 10.10 9.38 10.50
Average receivable collection
37.80 36.14 38.89 34.76
period
Days inventory outstanding 73 days 86 days 84 days 89 days
4.4. Profitability indicators

Profitability indicators measure the returns on invested capital, i.e., show the impor-
tance of a profit in relation to the invested capital according to the volume of business
activity. They are divided into two groups: profitability of sales and profitability of as-
sets.
The net profit margin (NPM) relates earnings after interest and taxes, and total sales
income. It shows the achieved net profit in the total revenue. The average value of the
net profit margin in the industry is around 15.5 %, and Coca-Cola Inc. had better values
every year except for 2017. In that year it reported a net profit margin of 3.45 %, while
in 2018 the NPM was 18.76 %, 2019 23.94 % and 2020 it was 23.47 %.
The gross profit margin shows the relationship between pre-interest and tax earnings,
and the total sales income. A higher value is also better as it shows us how much rev-
enue remains in the company after a product is placed on the market. The industry
average is around 54,8 %, which was achieved by the company during every analysed
year.
Return on assets is an indicator of successful use of assets in profit making. Higher
profitability of total assets indicates that the company earns more with smaller invest-
ment. The Coca-Cola Company recorded a continuous growth of this indicator which
amounted to 8.82%, 10.98%, 11.68% and 10.31% in 2017, 2018, 2019 and 2020 respec-
tively. The average value in this industry ranges around 8%, which places Coca-Cola at
above average position.
Return on equity is one of the most important indicators and shows how much profit
the company achieves per unit of equity capital. Since The Coca-Cola Company’s val-
ues of this indicator were 5.79 %, 31.76 %, 43.58% and 38.44 % between 2017 and 2020,
it has clearly outperformed the industry average, which is around 31 %.
Table 8. Profitability indicators
Profitability indicators 2017 2018 2019 2020

Gross profit margin 62.11% 61.90% 60.77% 59.31%
Net profit margin 3.45% 18.76% 23.94% 23.47%
Return on assets (ROA) 8.82% 10.98% 11.68% 10.31%
Return on equity (ROE) 5.79% 31.76% 43.58% 38.44%
Source: Authors’ elaboration according to The Coca-Cola Company financial reports
4.5. Investment indicators

The investment indicators view shares of enterprises as an investment and serve as
measures of its performance. The most frequent are: price per share, price-earnings
ratio, earnings per share, dividend payments ratio, dividends per share.
The price per share refers to the price of one stock of a listed company. Coca-Cola’s
share price recorded a steady rise in the analysed period, except in 2020. In 2017 it
amounted to US $ 44.35, in 2018 to $ 45,41, in 2019 to $ 50.83, and in 2020 to $ 49.95.
The price-earnings ratio (P/E) shows relation between the price per share and in-
come per share, and is one of the most common indicators used by investors as it
shows whether a company is relatively overestimated or underestimated. The average
price-earnings ratio in the market was 15, while around 25 and up is considered as
good and very good. The price-profit ratio per share for Coca-Cola was 47.69 in 2017,
60.55 in 2018, 28.72 in 2019 and 24.49 in 2020.
Earnings per share shows net profit divided by the number of shares. It represents the
ability of companies to generate profits as well as the attractiveness of investing in enter-
prises. It is desirable that the profits per share be as high as possible, and for Coca-Cola
these earnings amounted to $0.93 in 2017, $ 0.75 in 2018, $ 1.77 in 2019, and $ 2.04 in 2020.
Dividend payment ratio compares the total dividend payment to shareholders and the
net profit of the company. It shows what percentage of earnings the company pays to
the shareholders and what percentage is reinvested in the company. Coca-Cola has a
very high dividend payments ratio which amounted to: 159.14 %, 208 %, 90.4 % and
80.39 %. in 2017, 2018, 2019 and 2020 respectively.
Dividends per share show the amounts that are paid directly by the enterprise to the
shareholders, i.e., the amount of income that is allocated to the shareholders. Co-
ca-Cola is known for increasing its dividends every year since 1954. Thus, in the anal-
ysed period the dividends per share were $1.48 in 2017, $ 1.56 in 2018, $ 1.60 in 2019,
and $ 1.64 in 2020.
Dividend yield compares the amount of dividend per share and the share price, i.e.,
how much the company pays to the shareholders in relation to the share price. Divi-
dend yield of Coca-Cola was 3,2% in 2017, 3.5% in 2018, 3.5% in 2019, and 2.7% in 2020
which is considered as perfect.
Beta shares are a measure of systematic risk of shares and are used in the CAPM model.
It shows a correlation between the shares and the market, and the reference measure is
1. The Beta 1 share is perfectly correlated with the market, while the value of Beta shares
that are greater than 1 are considered aggressive and are more responsive to changes.
A Beta value less than 1 indicates that the share is less volatile than the market. The
current five-year Beta shares value of Coca-Cola shares stand at 0.62 indicating that the
company’s shares are not volatile and are less responsive to market changes.
Table 9. Investment indicators
Investment indicators 2017 2018 2019 2020

Price per share 44.35$ 45.41$ 50.83$ 49.95$
Price to earnings ratio (P/E) 47.69 60.55 28.72 24.49
Earnings per share 0.93$ 0.75$ 1.77$ 2.04$
Dividend payment ratio 159.14% 208% 90.40% 80.39%
Dividends per share 1.48$ 1.56$ 1.60$ 1.64$
Dividend yield 3.20% 3.50% 3.50% 2.70%
4.6. Comparison with the main competitor

In order to obtain the best possible insight into business operations of a company, it is
important to compare its business operations with its main competitor. In the case of
The Coca-Cola Company, this refers to PepsiCo Inc. and the comparison will be made
on the basis of the selected investment indicators.
Table 10. Investment indicators PepsiCo Inc.
PepsiCo Inc.
Price per share 112.95$ 110.7$ 127.94$ 136.3$
Price to earnings ratio (P/E) 24.05 25.58 16.81 26.22
Earnings per share 4.39$ 4.72$ 7.96$ 5.05$
Dividend payment ratio 92.01% 39.41% 72.50% 77.30%
Dividend per share 3.11$ 3.46$ 3.77$ 3.96$
Dividend yield 2.67% 3.09% 2.88% 2.82%
Source: Authors’ elaboration according to PepsiCo Inc.’s financial reports
Investment indicators measure the success of investments in company shares, i.e.,

they view the enterprise as a potential investment. By comparing Coca-Cola and Pepsi,
it is clear that there are differences in the observed indicators. The price to earnings
ratio (P/E) in the observed period for Coca-Cola was around 40.36, which is almost
double that of Pepsi’s (23.17). In other words, Pepsi’s stock would pay off almost twice
as much as Coca-Cola’s.
If we look at other indicators, we can see that Pepsi leads in almost all of them. The
main reason for this is Pepsi’s diversified portfolio which derives the majority of its
revenues from snack and chips industries. In this case, Coca-Cola seems to be a worse
option for the investor because of its focus on the beverage industry.
5. SWOT AND TOWS ANALYSIS

Table 11. SWOT analysis of Coca-Cola
STRENGTH WEAKNESSES
• Efficient marketing strategy • Insufficient diversification of portfolios
• Brand recognition among all groups and • Product’s poor nutritional composition
beyond • Environmental pollution due to high
• Dominant market share production volume
• High investment in R&D • Overexploitation of limited water resources
• Expansion of assortment to food products • High level of debt financing
• Reducing production costs and economies • Possibility of theft of secret formula
of scale • Losses due to exchange rate changes
• Large number of suppliers results in large
negotiating power of Coca-Cola
• Adequate organisational structure
• Derivatives securities
• Proceeds from franchise fees
• Ecological sustainability strategy
• Supporting vulnerable groups
• Large number of qualified experts and
efficient human resources management
• New partnerships • Trend of strengthening healthy habits of
• Opportunities for acquisitions and consumers
networking • Economic crisis caused by SARS-CoV-2
• New Customer segments emerge pandemic (COVID 19)
• Market orientation to sustainable • Decline in consumer purchasing power
development • Limited natural resources
• Government programmes of foreign • Competition with Pepsi and other
markets related to exploitation of water competitors
and other natural resources • Growth in market interest rates
• E-commerce growth • Tax burdens rise
• Cyber attacks
• Legal restrictions on exhaust gases and waste
5.1. Strengths
According to Brand Finance69 Coca-Cola ranks as the strongest brand in the United
States with the brand power based on factors such as marketing investments, cus-
tomer knowledge, staff satisfaction and corporate reputation. Coca-Cola scored 91.7
on the brand power index out of 100.70 The Coca-Cola logo is written in the Spelerian
alphabet, which was used by accountants and that is exactly what distinguishes it from
the competition.71 It has continuously improved its rapport with the customers and
become one of the world’s most famous brands.72 In 2020, The Coca-Cola Company’s
value was estimated at US$ 84 billion.73
Over the past 17 years, Coca-Cola has spent an average of US$ 40 billion on adver-
tising – mainly trying to outperform the competition in commercials. Last year alone,
Coca-Cola spent a total of US$ 3.96 billion on advertising, compared to its closest rival
Pepsi Co. that spent $ 2.4 billion dollars. Coca-Cola has always been famous for launch-
ing vivid and amazing advertising campaigns, one of which is Share a Coke.74 The cam-
paign has successfully extended to over fifty countries. In each country, the message
is adapted to the local culture and language. Even the most popular names of people
living in every region are printed on cans and bottles instead of company names. This
marketing campaign is a perfect example of effective application of the localised posi-
tioning strategy on the global market. The Coca-Cola Company argues that a success-
ful global brand should establish human ties, remain innovative and faithful to simple
principles. All these Coca-Cola’s global marketing techniques have contributed to the
company’s position as the industry leader.75
69
Brand Finance is the world’s leading brand valuation consultancy. Available at: https://brandfinance.
com/ (accessed 26.4.2021.)
70
Food Business News (2021), Coca-Cola gains top brand ranking in United States, [online] Avail-
able at: https://www.foodbusinessnews.net/articles/17809-coca-cola-gains-top-brand-rank-
ing-in-united-states#:~:text=Coca%2DCola%20scored%2091.7%20out,decreased%209%25%20to%20
%2451.2%20billion.&text=Its%20brand%20strength%20index%20score%20was%2088.4. (accessed
26.4.2021.)
71
Business Insider (2016), 7 strategies Coca-Cola used to become one of the world’s most recognizable
brands, [online] Available at: https://www.businessinsider.com/strategies-coca-cola-used-to-become-
an-iconic-brand-2016-2#2-its-logo-uses-a-timeless-font-2 (accessed 26.4.2021.)
72
Brain to (2020), Marketing strategy of Coca-Cola, [online] Available at: https://www.brainito.com/
blog/marketing-strategy-of-coca-cola#:~:text= Coca%2DCola%20uniquely%20designs%20its,fol-
lows%20the%20marketing%20mix%20strategy. (accessed 26.4.2021.)
73
Statista (2020), Coca-Cola Brand value, [online] Available at: https://www.statista.com/statis-
tics/326065/coca-cola-brand-value/ (accessed 26.4.2021.)
74
Straton (2018), How Coca-Cola became the most recognized brand in the world, [online] Available
at: https://stratondc.com/how-coca-cola-became-the-most-recognized-brand-in-the-world/ (accessed
26.4.2021.)
75
Merca 2.0 (2019), What You Can Learn from Coca-Cola’s Marketing Strategy, [online] Available
at: https://www.merca20.com/what-you-can-learn-from-coca-colas-marketing-strategy/ (accessed
26.4.2021.)
Economies of scale means lower cost per unit or lesser average total costs with an
increase in production volumes – thereby higher competitive advantage. The largest
share of the costs are promotional campaigns (US$ 816 million76) and investments in
fixed assets and installations(US$ 1.77 million77). Since Coca-Cola produces more than
200 brands of products, its fixed costs are divided into many product units, the pro-
duction of the additional unit is lower, and the revenue per product sold is higher.
Besides its headquarters in Atlanta The Coca-Cola Company has 255 offices across the
US and the operating management is divided to fit the different regions in which the
company operates78. The regions are divided geographically to best adapt to the local
market. The decentralised management enables regional and local managers to make
adequate decisions and respond to market changes in different parts of the world and
to adapt to different consumer segments.
In 2020 Coca-Cola’s R&D team in Brussels collaborated with a Danish start-up Paboco
to develop a prototype of a bottle made of 100 % recycling paper. It will be presented
in 2021 via an online retailer in Hungary with Coca-Cola’s AdeZ79 plant drink. Coca-Cola
must also invest in research to reduce exhaust gases and adjust its production to more
environmentally friendly processes that reduce the consumption of water and thus
respond to the claims of water shortage, especially in India. Therefore, the company is
committed to recover 100 % of the water it uses.
The two leading producers of aerated soft drinks, Pepsi and Coca-Cola, control the in-
dustry’s market share. Since 2004 Coca-Cola has been the market leader. In 2015, the
market share of Coca-Cola’s carbonated non-alcoholic drinks was 42.5%,80 and contin-
uously it has been ranked as the leading non-alcoholic beverages in the world with a
global brand value of over US$ 71 billion.81 The market capitalization of The Coca-Cola
Company in 2020 amounted to US$ 185.8 billion.82
76
Statista (2020), Coca-Cola Company’s advertising spending in the United States from 2009 to 2019,
[online] Available at: https://www.statista.com/statistics/463084/coca-cola-ad-spend-usa/ (accessed:
26.04.2021.)
77
The Coca-Cola Company (2021), Cash flow, available at: https://investors.coca-colacompany.com/
financial-information/cash-flow (accessed: 26.04.2021.)
78
My Best Writer (2021), Organizational Structure: Coca-Cola Company, [online], Available at: https://my-
bestwriter.com/organizational-structure-coca-cola-company/#:~:text=The%20organizational%20struc-
ture%20for%20Coca,Bottling%20Corporate%20and%20Bottling%20Investment (accessed: 26.04.2021.)
79
Coca-Cola 2020 Business & Environmental, Social and Government Report (2021), p. 33, Available
at: https://d1io3yog0oux5.cloudfront.net/_1e0e0b6fda65b81c703d0bd963036fb8/cocacolacompany/
db/734/7647/annual_report/coca-cola-business-environmental-social-governance-report-2020.pdf (ac-
cessed: 26.04.2021.)
80
Investopedia (2020), Coca-Cola and Pepsi Control the Global Beverage Industry, [online]Available
at: https://www.investopedia.com/ask/answers/060415/how-much-global-beverage-industry-con-
trolled-coca-cola-and-pepsi.asp (accessed 26.4.2021.)
81
Statista (2021), Coca-Cola Company – statistics & facts, [online] Available at: https://www.statista.
com/topics/1392/coca-cola-company/ (accessed 26.4.2021.)
82
Investopedia (2020), Coca-Cola and Pepsi Control the Global Beverage Industry, [online] Available
at: https://www.investopedia.com/ask/answers/060415/how-much-global-beverage-industry-con-
trolled-coca-cola-and-pepsi.asp (accessed 26.4.2021.)
Coca-Cola is best known for its sweet carbonated drink Coca-Cola, but also for its
contribution to environmental pollution. This image can be changed through new busi-
ness approaches, and Coca-Cola’s plan is to enable recycling of the packaging of its
products worldwide by 2025, that is to use at least 50% of recycled materials in its
packaging by 2030,83 by e.g., returning to glass packaging as an even simpler recycling
option is an even better opportunity.
Another aspect of ecological sustainability is the preservation of the resources of nat-
ural water which Coca-Cola can further develop in the production process by improv-
ing production technology and filling Coca-Cola products, by investing in new plants
that will aim to reduce water consumption in finding solutions to reducing most of the
waste water from the production process by purifying it and returning to nature.
While The Coca-Cola Company owns various brands of non-alcoholic beverages and
is likely to continue investing in this field, they have not yet taken the first step in the
food industry. This industry has a huge potential for Coca-Cola – both with regard to
creating new products and to acquiring the existing companies. Its main competitor
PepsiCo Inc. has been the owner of various food products such as chips and flakes for
many years and derives the greatest income from the sale of these products. The Co-
ca-Cola Company is certainly considering this venture and has no reason avoid moving
in that direction. The brand that the company has been building for more than a cen-
tury and its loyal customer base would certainly facilitate success of any food products
potentially included in Coca-Cola’s wide range of assorted products.
5.2. Weaknesses
The main weakness of Coca-Cola is its current strategy, which is not focused on diver-
sifying its portfolio.84 Taking into account the reduced income over the years as well
as main competitor Pepsi which earns almost twice as much revenue, it is clear that
spreading outside the beverage industry is the only logical step for Coca-Cola towards
increasing income and market share. In addition, a major deficiency of this company
is the health problems that can be caused by its long-term use, which may influence
a reduced number of new, modern consumers who watch the nutritional values of
products. Besides caring for their own health modern consumers are also committed
to environmental protection, and this may present a disadvantage for Coca-Cola due
to its poor management of the limited water resources. This is accompanied by envi-
ronmental pollution resulting from mismanagement and consequently creation of a
negative image of the company.
Growing environmental awareness has led to potential problems for Coca-Cola re-
garding the production of plastic packaging. According to a clean-up operation, con-
83
Business and Sustainability Report (2019), [online] Available at: https://d1io3yog0oux5.cloudfront.
net/_5443b525384da5513d9396cb39203bd1/cocacolacompany/db/734/7242/annual_report/coca-co-
la-business-and-sustainability-report-2019+%281%29.pdf
84
Business Finance Articles (2020), What is Coca-Cola Differentiation Strategy?, Available at: https://
businessfinancearticles.org/what-is-coca-cola-differentiation-strategy (accessed: 26.04.2021.)
ducted in 51 countries and 6 continents for years now, Coca-Cola is the leading polluter
in plastic packaging and in 2019 the total pollution from Coca-Cola’s packaging exceed-
ed the next top 3 pollutants.85 The vast majority of these non-recycled bottles end up
in less developed countries where they are burned or simply thrown away, and thus
further impair human health in the less developed countries.86
Another potential weakness is the high level of debt financing. Although the current
level of indebtedness is not spectacularly high and Coca-Cola is an extremely valuable
brand, which means it could pay its debts in case of an accident, there is still cause for
concern. According to the data from 2020, earnings before interest and taxes dropped
by 5.4 % in the last 12 months, while the debt level increased by US$ 5.9 billion. This
shows Coca-Cola’s inefficiency in increasing earnings before interest and taxes, which
could become a problem if the trend continues and if external factors, such as in-
creased interest rates, change.87
5.3. Opportunities
Opportunities related to new partnerships relate to strengthening positions or entering
developing markets (South America, Africa, or Asia), finding partners that are well posi-
tioned and creating smaller partnerships that enable the potential of significant growth
through knowledge transfer and technology. In such areas Coca-Cola could organize, im-
prove and technologically and physically equip the entire process chain with new part-
ners as well as through its own production facilities, factories and distribution, with the
ultimate aim of reducing damage to the environment and natural resources in the area
of production. By entering the South African market, Coca-Cola has partnered with a
company that develops a plastic bottle recycling factory and by joining forces with such
environmentally conscious companies, it is improving its image on the market.
The growing trend of healthy lifestyle among the customers has inspired Coca-Cola
to include waters in its range of bottled products (spring water, mineral water, and
flavoured water), but it still has an opportunity to increase its product range and sales
quantities significantly. According to this same segment of buyers, Coca-Cola can also
perform more strongly with its smoothies and other healthy beverages.
Acquisition is a process in which one company, the acquirer, purchases a target com-
pany and becomes its owner. Like every successful global company, Coca-Cola has
an interest in increasing revenue, expanding into as many industries as possible and
improving the quality of its brand. One way he can do that is by acquiring other com-
85
Forbes (2019), Coca-Cola Named The World’s Most Polluting Brand in Plastic Waste Audit, [online]
Available at: https://www.forbes.com/sites/trevornace/2019/10/29/coca-cola-named-the-worlds-most-
polluting-brand-in-plastic-waste-audit/?sh=7b83e83174e0 ( accessed: 27.4.2021.)
86
The Guardian (2020), Report reveals ‘massive plastic pollution footprint’ of drinks firms, [online]
Available at: https://www.theguardian.com/environment/2020/mar/31/report-reveals-massive-plastic-
pollution-footprint-of-drinks-firms (accessed: 27.4.2021.)
87
Simplywall.st (2020), Is Coca-Cola (NYSE:KO) Using Too Much Debt?, [online] Available at: https://
simplywall.st/stocks/us/food-beverage-tobacco/nyse-ko/coca-cola/news/is-coca-cola-nyseko-using-
too-much-debt-2 (accessed: 27.4.2021.)
panies in the same industry or even outside the industry. Coca-Cola is constantly
searching for new opportunities to expand its range and be more accessible to as
many consumers as possible. Acquisitions mostly included the companies that pro-
duced non-alcoholic beverages such as teas, juices, and water, and hence Coca-Cola
managed to reduce the impact of competition and keep its market leader position.
The largest findings about the need for an urgent and global solution to water re-
source management, waste water management and waste management are expressed
through significant investments of developed countries in these segments and various
aspects of assistance to developing countries in joining these trends. This assistance is
expressed through transfer of knowledge, latest technologies and financial assistance.
In recent years, the United States invested tens of billions of dollars in co-financing
water protection and management in the form of long-term favourable loans or direct
incentives to local administrations and investors.88 At the global level, such activities
are carried out with participation of the OECD, the World Bank and various similar
organizations. Following the programmes of international organizations and govern-
ments, Coca-Cola is able to use some of them for faster and cheaper development of
its programmes in these countries.
With the global e-commerce growing especially during the current pandemic, Coca-Co-
la can also grow in this area, which has already begun at a significant level in 2020. The
company’s online traffic increased by 50 % in some countries in 2020 and it realised
that this way of doing business is practical for both them and the consumers. At Co-
ca-Cola they believe that the accelerated expansion of e-commerce is sustainable and
a good position for continuing long-term growth.89
5.4. Threats
The new trend of healthy lifestyle and the increasing importance of nutritional values
for customers represent a potential danger to Coca-Cola. In order to adapt more ad-
equately to the market, Coca-Cola will have to offer much more than just sugar-free
products like Coca Cola Zero.
The current economic crisis brings challenges for all businesses due to a decline in the
consumer purchasing power and a rise in the unemployment rate. People who drink
Coca-Cola on a daily basis will certainly not give up on the consumption, but they are
a minority. The problem is posed by the majority of consumers who do not categorise
carbonated beverages as necessary goods and do not consume them as often as pos-
sible. Due to the smaller amount of money available to customers, they change their
behavioural patterns, so there is a threat of finding alternatives in cheaper brands.
88
Federally Supported Water Supply and Wastewater Treatment Programs [online] available at: https://
fas.org/sgp/crs/misc/RL30478.pdf (accessed: 11.5.2021.)
89
S&P Global (2020) Coca-Cola leans into growing e-commerce sales as COVID-19 hits other channels.
[online] Available at: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-head-
lines/coca-cola-leans-into-growing-e-commerce-sales-as-covid-19-hits-other-channels-58129744 (ac-
cessed 27.04.2021.)
The resources necessary for day-to-day production are limited and controlled by com-
panies placing them to Coca-Cola, as well as under the influence of the movement of
the economic systems in which they are located. Therefore, for successful cost man-
agement, the company must provide a wide portfolio of suppliers and buy raw ma-
terials at the lowest material prices following conditions in the markets from which it
procures them.
Due to limited resources, the company has developed a specific policy for environmen-
tal protection and recycling of materials, such as plastics and aluminium, by re-using
these materials in production, and, therefore, does not require additional production
materials. The company produces enormous quantities of products in 200 countries
around the world daily,90 creating a disproportionate amount of waste. According to
the Statistical 2020 report, the annual volume of plastic waste produced in 6 countries
in the world was calculated: Mexico, the Philippines, India, Brazil, China and Nigeria
accumulated 200,000 metric tons of mismanaged plastic waste.91 Considering plastic
waste and the amount of carbon dioxide emissions in the countries with the highest
concentration production facilities, the governments of these countries can impose
fairly high penalties and thus affect Coca-Cola’s cash flow and revenues. Therefore, the
company must continuously improve its processes of reducing waste and hazardous
gases.
Due to debt financing, it is necessary to constantly monitor developments in the capi-
tal market so that it can continuously finance the activities for achieving its strategies
and objectives. The growth of tax liabilities in the countries where it operates can oc-
cur through an increase in profit tax or value added, in which case the company must
be secured through contracts and plan cost policies in order to avoid additional cost
burdens and capital outflows.
Market research and investment in R&D of new brands add to Coca-Cola’s consumer
awareness and prevent the penetration of new competitors and market take-overs.
As the company constitutes a large information system, it is possible to break into
the system and steal business-related data that will cause long-term reputational and
financial consequences. Therefore, the company must have a developed protection
system and highly qualified IT science experts to prevent this type of attack.
90
Coca-Cola Middle East (2020) How many drinks does The Coca‑Cola Company sell worldwide each
day? [online] Available at: https://en.coca-colaarabia.com/our-business/faqs/how-many-drinks-does-
the-coca-cola-company-sell-worldwide-each-day (accessed 27.04.2021.)
91
Statista (2019) Annual volume of mismanaged plastic waste created by Coca-Cola [online] Avail-
able at: https://www.statista.com/statistics/1127423/annual-plastic-waste-volume-coca-cola/ (accessed
14.05.2021.)
5.5. TOWS analysis

Table 12. Coca-Cola TOWS analysis
SO (maxi-maxi) WO (mini-maxi)
1. Increase the dominant market share 1. Expand the weak diversification of
with accelerated expansion in the field of portfolios through new partnerships and
e-commerce acquisitions
2. Use significant investments in R&D to raise 2. Use government efforts to protect
environmental sustainability in production the environment to share costs and
to a higher level responsibilities between the state and
3. Win over new customer segments with business in exploiting water resources
an effective marketing strategy and use 3. Reduce the possibility of a poor reputation
brand recognition image due to high indebtedness for high-
quality acquisitions and partnerships
ST (maxi-mini) WT (mini-mini)
1 Expand the range to food products to 1. Replace nutritionally poor ingredients of
reduce the threat of Pepsi losing market the product in order to prevent the loss of
share and other competitors consumers due to the increasing trend of
2 Further investment in R&D and use of healthy nutrition
predictive analytic tools to reduce potential 2. Continue reducing the use of water in
losses due to current economic crisis production in order to avoid the reputation
3 Use economies of scale to achieve of socially irresponsible company
production savings as well as to lower 3. Reduce existing production costs or
prices in a situation of significant decline introduce new products with the aim of
in consumer purchasing power stimulating revenue growth in order to
4 Seek to use the decentralised prevent potential liquidity problems due to
organizational structure for direct a potential crisis in the capital market
placement of products at the point of sale
with the aim of reducing costs
5 Further develop protective networks and
programmes by highly qualified IT experts
to prevent cyber attacks
6. IDENTIFICATION, ASSESSMENT AND PROPOSAL OF RISK

MANAGEMENT MEASURES
Business goals and strategy
Coca-Cola’s recent vision statement places the greatest emphasis on sustainable busi-
ness, community creation, human rights and equality. In line with that the company
promises to refresh the world with their famous brands, and inspire and bring joy
through sustainable business operations and creating changes for people, communi-
ties and finally our planet.92 The research of this company suggests that their overall
92
The Coca-Cola Company (2021), Purpose and Vision, [online] Available at: https://www.coca-cola-
company.com/company/purpose-and-vision (accessed 12.5.2021.)
strategic goal is to change its image in the consumer’s eyes from the biggest consumer
of water and plastics and the cause of people’s health problems to that of a socially
responsible enterprise. The Coca-Cola Company is aware that regardless of the enor-
mous strength of its brand it needs to embrace the environmental trends and offer
a long-term sustainable alternative to its image associated with sugar, caffeine and
pollution in the eyes of the consumers.
Accordingly, at the moment their main goals are: to reach a wider range of consumers,
to obtain a larger market share, to achieve strong economies of scale and stronger in-
vestor influence, and essentially to outperform the competition.93 In accordance with
the set objectives, a decision has been made to optimize the brand portfolio so that
more resources and energy can be directed towards new products that will follow the
latest trends and be in line with the company’s main objective – ecological sustainabili-
ty. Despite Coca-Cola’s commitment to building a new company perception as a social-
ly responsible one, this process requires a lot of investment, invested work and time.
Production, packaging and distribution of products in an environmentally friendly way
shall be possible only with the high-quality technology. The same applies to replacing
the ingredients in products by those of higher nutritional value and thus avoid the
products’ negative impact on health.
Coca-Cola’s long-term goal implies financial stability and adequate return of capital
to investors by maintaining a high A grade credit rating,94 achieving a revenue growth
of 4% to 6% and a 6% to 8% growth in operational income from business activities by
2025, and by increasing the profits per share of 7 % to 9 % and a return in dividends.95
The goal of long-term profitability is integrated into the strategy of building a portfolio
of products for each occasion, adjusted to all consumer habits and tastes96 which will
ensure a stable business climate through focus on consumers and creating long-term
relationships with them, thus achieving higher value of cash flows and overall financial
stability. By achieving increased financial results, Coca-Cola will be able to continuous-
ly acquire capital and redirect it into innovation and portfolio development.
Appetite and risk tolerance

Coca-Cola would not have been an industry leader had it not been ready to take on
the host of risks in the previous years. Therefore, confidence prevails in an enterprise
that a risk does not necessarily mean threat, but can also create a new business op-
portunity. Therefore, ERM continuously monitors particularly environmental risks in
order to react promptly and turn potential risks into opportunities. The decision on
the level of the risk appetite to take at a given moment is made by the management.
93
The Coca-Cola Company (2021), Latest financial results, [online] Available at: https://investors.co-
ca-colacompany.com/ (accessed 12.5.2021.)
94
Fitch Ratings (2021), Fitch affirms Coca-Cola’s IDR at “A”; outlook stable, Available at: https://www.
fitchratings.com/research/corporate-finance/fitch-affirms-coca-cola-idr-at-a-outlook-stable-11-03-2021
95
Coca-Cola HBC (2021), Strategy, Financials, online, Available at: https://investors.coca-colacompany.
com/strategy/financials (accessed 15.05.2021.)
96
Coca- Cola Femsa (2020), Our strategic priorities, online, Available at: https://coca-colafemsa.com/
KOF2020/our-strategic-priorities/ (accessed 15.05.2021.)
Consequently, Coca-Cola has quite a high risk to tolerance due to high indebtedness
and numerous launches of innovative products for which a positive outcome could not
always be positively established.
Risk identification, or risk assessment based on the scenario and proposal of risk man-
agement measures are key activities for quality implementation of the ERM process
(integrated risk management). In the following steps, based on the conducted analyses
of the internal and external environment, the key risks and their negative impacts on
Coca-Cola’s business are identified. Then, after the implementation of the relevant
scenarios, we shall conclude with a proposal for measures to manage these risks.
Table 13. Likelihood of risk realisation
Likelihood of realisation Level

> 95% 5
> 65% < 95% 4
> 25% < 65% 3
> 5% < 25% 2
< 5% 1
Source: Authors’ elaboration according to materials from Risk Management course teaching materials
Table 14. Significance of risk realisation
Significance Level
Critical 5
High 4
Medium 3
Low 2
Negligible 1
Source: Authors’ elaboration according to materials from Risk Management course teaching materials
Table 15. Identified risks
Identified risks Significance(1-5) Likelihood(1-5) Risk value

Environmental risk 5 4 20
Health risk 3 5 15
Cybersecurity risk 4 3 12
Risk of shortage of raw materials 3 3 9
Competition risk 4 2 8
Reputational risk 4 2 8
Interest rate risk 2 4 8
Risk of poorly placed products 2 3 6
Tax risk 3 2 6
Risk of revealing a secret formula 4 1 4
Currency risk 2 2 4
Table 16. Risk map

Table 16. Risk map

6.1. Health risk

Health care is gaining more and more in importance. Information is becoming more
6.1. Health risk
available, people are more educated and becoming more aware that excessive sugar
consumption negatively affects health, i.e. leads to a drop in energy and fatigue, as well
as to obesity and type 2 diabetes. Hence, there is a risk of a falling product demand
Health care is gaining more and more in importance. Information is becoming more availab
and consumption. If Coca-Cola wants to be a well-known global brand, ensure that its
people
drinks are are more
consumed daily,educated
and to widenand its
becoming
consumer more awareit is
segment, that excessive
important thatsugar
it consumpti
responds and adapts to the changes in consumer behaviour by reducing the sugars
negatively affects health, i.e. leads to a drop in energy and fatigue, as well as to obesity and ty
and improving the nutritional value of its products. To date, Coca-Cola has reduced the
amount 2ofdiabetes.
added sugar by 30%
Hence, thereinisits leading
a risk of abrands,
falling offered
product smaller
demandpackages of 250
and consumption. If Coca-Co
ml to help the consumers control their intake, and dropped the calories by 21%.
wants to be a well-known global brand, ensure that its drinks are consumed daily, and to wid
Scenario
its1:consumer segment, it is important that it responds and adapts to the changes in consum
If that Coca-Cola
behaviourdoes not respond
by reducing the to consumer
sugars demandsthe
and improving related to the healthy
nutritional value oftrend,
its products. To da
there will be a drop in demand which will result in a drop in sales, and ultimately a drop
Coca-Cola
in the company has reduced the amount of added sugar by 30% in its leading brands, offered small
revenue.
packages of 250 ml to help the consumers control their intake, and dropped the calories by 21%
Scenario 2:
If Coca-Cola successfully implements management measures, it can increase its an-
Scenario
nual revenues by 1:
10% within 5 years due to the introduction of new lines of nutritious
quality products at higher prices. Health risk has significance (3) and a high likelihood
of occurrence (5), which is why this risk should be prevented. Unless actively managed,
there may be a significant decline in the revenues.
Risk management strategy:

The amount of sugar in the existing products is recommended to be reduced to a min-
imum of 50% in the next 5 years. In order to further improve the offer and respond to
consumer demands, Coca-Cola can offer a new line of nutritional quality products, e.g.
it can replace sugar by stevia or erythritol in order to keep its consumers who have
joined the growing trend of healthy eating. They can also introduce healthy alterna-
tives such as smoothies or hot drinks. Less sugar will result in reduced calories and will
reduce the negative impact on health.
6.2. Reputational risk

Reputation signifies public opinion about a company, or how the stakeholders perceive
it. Companies with bad reputation find it difficult to attract quality employees and
business partners, and negotiate the terms for contracts with investors and financial
institutions. Reputational risks arise when a company operates unethically, pollutes
the environment and fails to meet its obligations.
Coca-Cola consumes a lot of water in production and is therefore targeted by environ-
mental activists. The biggest water shortage crisis is in India where more than 50% of
people do not have access to drinking water, and Coca-Cola is responsible for huge
consumption of water in numerous areas. In addition to leading the way in the ex-
ploitation of water resources, Coca-Cola is also the biggest polluter of the environment
with plastics.
Coca-Cola has a high level of debt financing. According to data from 2020, earnings
before interest and taxes fell by 5.4% within a year, and the level of debt increased by
5.9 billion US$. If the downward trend in earnings before interest rates and taxes con-
tinues to rise, Coca-Cola could face liquidity and solvency problems, which could result
in weaker relations with investors and financial institutions. This high level of indebted-
ness can have a negative impact on the company’s reputation with the investors and
especially with the creditors. This leads to yet another source of reputational risk, and
that refers to increased cost of borrowing for the highly leveraged companies.97
Scenario 1:
Unless Coca-Cola reduces water consumption in the countries affected by major short-
ages, the production of its beverages could be banned because drinking water is a pri-
ority for the population.
97
Anginer, D., Mansi, S., Warburton, A. J., & Yildizhan, C. (2011). Firm reputation and cost of debt capital
[online]. Available at: https://econpapers.repec.org/paper/pramprapa/64965.htm (accessed 20.8.2021.)
Scenario 2:
A high level of debt financing leads to mistrust of creditors and investors, and may
result in a decline in reputation. The risk comes to the fore during a crisis if a drop in
revenues occurs and the company achieves lower cash flows to settle its liabilities.
Considering the possible scenarios, it can be concluded that reputational risk has a
high significance (4) on the company’s operations, but a low likelihood (2), as Coca-Co-
la is making progress in reducing water consumption and has a very stable business
despite high debt financing.
Risk management strategy 1:

In order to reduce the consumption of drinking water, Coca-Cola is committed to re-
turning 100% of the amount of water it uses and is working with CARE to create ef-
fective and sustainable solutions to global problems with water and sanitation. The
partnership enables CARE to support initiatives such as the Replenish Africa Initiative
(RAIN) on water and sanitation programming and the Water and Development Alliance
(WADA) to bring drinking water to communities in Mozambique, Morocco and Tanza-
nia.98 The company is committed to reduce plastic pollution by packaging products
in 100% recyclable packaging and using recycled packaging material.99 Coca-Cola can
also conduct campaigns urging people to recycle to support a healthy, waste-free en-
vironment.

In order to reduce the possibility of reputational risk due to the high level of debt fi-
nancing, Coca-Cola could pursue a policy of maximum transparency, i.e., report exact-
ly how efficiently the borrowed capital is used. This strategy would show the investors
that the company is well organized and fully committed to achieving the best business
results. It would also always have to fulfil its obligations to creditors in order to avoid
the risk of a decline in reputation and credit rating.
6.3. Risk of shortage of raw materials

Due to the lack of carbon dioxide, which is a key ingredient for packaging and one
of the main raw materials of Coca-Cola products, there is a possibility of suspending
production lines and increasing the price of carbon dioxide. In such a situation, more
expensive procurement costs can spill over and be reflected in the final price of the
product, which could ultimately lead to closures of individual outlets and dismissals of
workers.
98
Care (2021), The Coca-Cola Company, [online] Available at: https://www.care.org/about-us/stra-
tegic-partners/corporate-partnerships/leadership-partners/the-coca-cola-company/ (accessed
20.08.2021.)
99
Coca-Cola Business and Sustainability Report (2019), [online] Available at: https://d1io3yog0oux5.
cloudfront.net/_5443b525384da5513d9396cb39203bd1/cocacolacompany/db/734/7242/annual_re-
port/coca-cola-business-and-sustainability-report-2019+%281%29.pdf (accessed 20.8.2021)
Scenario:
Another possible scenario is that, due to the pandemic caused by a virus SARS-CoV-2,
carbon dioxide production could be reduced as could the deliveries in the food and
beverage industry – partly due to the suspension of production during lockdown, and
partly for the use of carbon dioxide in vaccine packaging and transportation. Given the
higher priority at the moment of the transport of the vaccine and the vaccination of
the population, part of the industry could be affected and forced to suspend certain
production lines.
We rate the likelihood of this risk at 3 because carbon dioxide shortages are more
common during a pandemic when carbon dioxide is needed to transport the vaccine.
The significance of this risk is 3 because the lack of carbon dioxide would close certain
filling stations and it would not be possible to produce and deliver large numbers of
sparkling products for which carbon dioxide is the main raw material such as Fanta,
Sprite, Coca-Cola and others.

In order to protect itself as successfully as possible from this risk, it is necessary for
Coca-Cola to apply new technologies and a strategy of low carbon dioxide content in
production. Coca-Cola should also be protected by contracts in which the delivery of
carbon dioxide would be agreed in advance at fixed prices.
6.4. Risk of poorly placed products

Coca-Cola must be constantly up to date with the trends and meet the consumers’
needs by introducing new products and innovations. When placing new products on
the market, there is a risk of marketing myopia and ineffective products that do not
return the investment. This leads to product failure due to unclear positioning and
insufficient product differentiation.
Scenario:
Assuming that Coca-Cola decides to launch a new Coke with coffee and produces a large
number of products and distributes them to retail outlets, but sales do not achieve sig-
nificant results. Product stocks have accumulated and need to be withdrawn from the
market. The marketing team is prone to mistakes if the market is not adequately re-
searched and evaluated. However, Coca-Cola’s team for innovation, product creation
and marketing is constantly improving and applying new technologies, so the proba-
bility of this risk is 2, while the significance is 3 because each new product placement
requires the allocation of financial and time resources, which if not properly directed
and utilized, can lead to losses for the company.

We suggest conducting market research frequently to formulate adequate bases for
creating and launching new products. It is also necessary to develop products in accor-
dance with the consumer needs, strengthen long-term relationships with the custom-
ers, regularly advertise on social networks, invest in improving the range of products
and properly manage public relations.
6.5. Competition risk

Competition risk refers to the possibility that the business activities of other compa-
nies will affect Coca-Cola through loss of consumers, which will result in reduced rev-
enues. Coca-Cola and Pepsi together hold 65% of the world soft drinks market,100 and
are the biggest competitors. Pepsi is the market leader in the United States and Can-
ada where its consumption is 7 times higher than Coca-Cola’s. Pepsi-prone markets
are also Finland, Uzbekistan, Kazakhstan, Saudi Arabia, Oman and the Czech Republic,
but Coca-Cola is gaining market leadership in the rest of the world with 9 times higher
demand for its products, which generates significant revenues. Pepsi may accomplish
two significant activities that could negatively impact Coca-Cola’s business: reduce
production costs which can lead to lower product prices, and improve promotional
activities that would attract new consumers.
Scenario 1:
If Pepsi reduces production costs, it will be able to sell products in stores at lower
prices. With the same margin and taxes, the product prices will fall and become more
affordable to consumers, especially in less developed countries.
Scenario 2:
Coca-Cola spends an average of about $ 4 billion a year on promotional activities,
and Pepsi between $ 2.5 and $ 3 billion. If Pepsi increases its promotion budget and
starts implementing activities similar to Coca-Cola’s Share a Coke campaign, it will at-
tract more consumers who would otherwise consume Coca-Cola products. Competi-
tion risk has a high significance (4) on the company’s operations and a lower likelihood
(2) of occurrence.

To successfully manage competition risk and maintain market leadership, Coca-Cola
can further diversify its portfolio by adding food products to its range and continue
to improve the nutritional value of the existing product brands. Coca-Cola is globally
more expensive than Pepsi, and in order to justify higher prices, it should improve
the nutritional composition of the product along with offering specific and varied
flavours.
100
Statista; “Market share of leading carbonated soft drink (CSD) companies in the United States
from 2004 to 2019”, Published by Jan Conway , Nov 26, 2020, Available at: https://www.statista.com/
statistics/225464/market-share-of-leading-soft-drink-companies-in-the-us-since-2004/ (accessed
16.05.2021.)

In order to stay close to customers, Coca-Cola could increase promotional activities
through the official website in each country in which it operates, such as 2 + 1 dis-
counts and making personalized gifts, e.g., glasses, T-shirts and towels with the Co-
ca-Cola logo. Also, they should provide more affordable packages in larger quantities
for celebrations and personalized gifts for larger orders online.
6.6. Currency risk

As a multinational company whose business extends to the whole world, Coca-Cola is
exposed to the risk of changes in exchange rates. In accordance to its most lucrative
markets, the most important foreign currencies are the European euro, the Japanese
yen, the Brazilian real, and the Mexican peso,101 and their movement against the US
dollar as they can affect Coca-Cola’s revenues. This risk needs to be properly managed
to reduce its significance. Although the largest share in the revenue structure is oc-
cupied by the USA, it is important to note that other markets together represented a
majority share of 65% in 2020.102
Scenario 1:
The importance of currency risk is reflected in Coca-Cola’s global business and the
fact that 65% of total revenues come from outside the US. Based on this and the avail-
able data in the financial statements, the table shows the change in exchange rates in
total income. The base year in this case is 2020, when the exchange rate fluctuations
amounted to 2% of total revenues. Considering the changes in previous years, three
increases of 3%, 4% and 5% of total revenues are assumed for the first scenario. These
assumptions were taken on the basis of the multi-year strengthening of the dollar
against the Mexican peso and the Brazilian real, which had the greatest impact on the
increase of the differences in negative exchange rate.
Table 17. Percentage change in exchange rates in net income of Coca-Cola (mil. $)
2020 = 100 3% 4% 5% 1%
Net Operating Revenues 33014.00 33014.00 33014.00 33014.00 33014.00
Gross Profit 19581.00 19581.00 19581.00 19581.00 19581.00
Operating Income 8997.00 8667.00 8337.00 8007.00 9327.00
Exchange rate fluctuations -660.00 -990.00 -1320.00 -1650.00 -330.00
Income before Income Taxes 9749.00 9419.00 9089.00 8759.00 10079.00
Income Taxes (20,3%) 1981.00 1912.057 1845.067 1778.077 2046.037
Consolidated Net Income 7768.00 7506.94 7243.93 6980.92 8032.96
Percentage change 0.000% -3.361% -6.746% -10.132% 3.411%
Source: Authors’ elaboration based on financial statements of The Coca-Cola Company
101
The Coca-Cola Company (2020), Filings and reports: p. 20
102
Table 17. clearly shows that an increase in foreign exchange losses, with other condi-
tions unchanged, may affect the value of the net profit and that any increase of 1%
further reduces the net profit by 3.4%.
Scenario 2:
In addition to the increase in exchange rate fluctuations, their decrease by 1% was
also stated. This scenario assumes a weakening of the dollar against the euro and the
pound, i.e. a further strengthening of these currencies against the dollar. Positive ex-
change rate differences would affect the increase in the net profit by 3.4%, with other
conditions unchanged.
Based on the implemented scenarios and the results of the estimated changes in ex-
change rates, we assessed that the impact of the currency risk for Coca-Cola is equal
to the medium likelihood of 3 with a lower significance of 2.

Due to the current economic crisis caused by the SARS-CoV-2 virus, there could be
greater exchange rate fluctuations, so Coca-Cola needs to constantly monitor this risk.
In addition to the already existing natural hedging used by Coca-Cola, external safe-
guards are proposed in the form of the use of financial derivatives such as currency
options, currency futures and currency swaps. For example, if the dollar is expected
to appreciate against the euro in the next few months, it is necessary to pre-define
the prices for the supplies of materials and raw materials from the European suppliers
using futures contracts in order to avoid potential financial losses.
6.7. Interest rate risk

Interest rate risk can be defined as the possibility of loss due to changes in market in-
terest rates compared to those that were valid at the time of contracting the credit line.
Like many companies, Coca-Cola is used to reducing the cost of capital by extensive
debt financing. The price of debt financing is the interest rate whose increase could
lead to higher cost of Coca-Cola’s debt to creditors, and consequently to a decrease in
the net profit for the current year.
Table 18. Change in interest rates
2020 = 100 0,5% 1,0%

Net Operating Revenues 33014.00 33014.00 33014.00
Gross Profit 19581.00 19581.00 19581.00
Operating Income 8997.00 8997.00 8997.00
Income before Income Taxes 9749.00 9743.66 9738.33
Income Taxes (20,3%) 1981.00 1977.96 1976.88
Consolidated Net Income 7768.00 7765.7 7761.45
Percentage change 0.00% -0.03% -0.08%
Source: Authors’ elaboration based on financial statements of The Coca-Cola Company
Scenario:
One of the consequences of the current economic crisis caused by the SARS-CoV-2
virus is the rise in interest rates. In case of a 0.5% increase in the interest rates, ceteris
paribus, based on the base year 2020, this would consequently lead to a decrease in
net profit of 0.03%. In the event of a 1% increase in interest rates, ceteris paribus, total
net profit would decrease by 0.08%.
Although this risk can affect the earnings, we believe that it cannot lead to serious
financial problems for the company, so we rate it as 2. Coca-Cola with its responsible
approach to debt financing reduces the likelihood of the interest rate risk, but the cur-
rent economic crisis may encourage interest rates to rise. We estimate the likelihood
of this risk at 4. One of the possible problems in the future is high inflation, which the
central banks will resist by raising interest rates on commercial banks, which would
also mean an increase in interest rates for bank customers.

The Coca-Cola Company can manage the interest rate risk through financial instru-
ments offered in the financial markets. Coca-Cola implements the most commonly
used interest rate risk management instruments, such as forward interest rate con-
tracts, option contracts and interest rate swaps to manage this risk.103
6.8. Risk of revealing a secret formula

One of the best kept trade secrets in the world is the Coca-Cola formula. Since from its
inception in 1886104 until today the full formula has not reached the public, the prob-
ability of this event occurring is very small although it could bring with it significant
consequences. The risk of revealing the secret formula is not a danger in the sense
that competitors will start producing an identical product, but in the fact that Coca-Co-
la would lose its exclusivity, which makes it so special in the eyes of the public. The
formula in the form of classified information is available only to selected employees,
which places the risk in the group of operational risks of fraud by employees.
Scenario:
Due to the expressed market competition of soft drink producers, one of the competi
tors could inappropriately acquire the secret formula from an employee for a compen-
sation. It is assumed that due to the volume of production and distribution around the
world, it is impractical that only two people really know the secret formula,105 but the
formula has remained secret over the years, and the probability of this risk is estimat-
103
104
The Coca-Cola Company, The Birth of a Refreshing Idea [online]. Available at: https://www.coca-co-
lacompany.com/company/history/the-birth-of-a-refreshing-idea (accessed 11.5.2021.)
105
Today I found out (2014) Is the recipe for Coca-Cola really only known by two people? [online]. Avail-
able at: http://www.todayifoundout.com/index.php/2014/10/formula-coca-cola-know-two-people/ (ac-
cessed 5.5.2021.)
ed at 1. If the secret formula leaked, the competition would not be able to copy the
product because one of the key ingredients, the cola leaf extract, is processed only for
The Coca-Cola Company, under a firmly binding contract, by Stepan Co.106
Even if all the ingredients were available to the competition, Coca-Cola could file numer-
ous lawsuits for infringement of copyright. The biggest damage to Coca-Cola would ac-
tually be tarnished reputation as once they were no longer perceived as a unique brand,
the sales could drop and consequently the revenues too would decline. The secret rec-
ipe and centuries of tradition is what gives this drink special significance. The question
remains, what would happen if they lost their USP, i.e., what has set them apart from the
competition for many years. Therefore, the significance of this risk is rated at 4.

Although it is clear that Coca-Cola is aware of the significance of this risk and has man-
aged it successfully for over 130 years, we consider that the strongest form of pro-
tection against this risk is legal protection in the form of clearly and strictly defined
contracts whose breach would lead to large-scale consequences. In that case, no one
would actually find it worthwhile to violate the provisions of the contract. In addition,
it is important that people in key positions are carefully selected, so numerous tests
and checks are some of the additional ways of protection against competitors’ attacks
on the formula.
6.9. Cybersecurity risk

Cybersecurity can be defined as a set of technologies, processes, and practices de-
signed to protect a company’s network, computers, programmes and data from at-
tack, damage, or unauthorized access.107 Despite the fact that these attacks on large
companies occur almost every day, Coca-Cola has minimized the likelihood of cyber
risk by its quality management and timely responses. Much of Coca-Cola’s business,
from the procurement process to internal and external reporting, is contained in their
information systems, which makes the leaks of extremely sensitive data a serious risk.
Moreover, cybersecurity risk can have serious reputational and financial consequenc-
es unless it is addressed in a timely manner.
Scenario:
In a possible future scenario a hacker attacks the company’s confidential data. In this
situation, a rapid response of a pre-trained team of experts and pre-defined processes
is required so that the potential damage has minimal consequences for the business.
106
Technology.co (2019) Coca-Cola does not contain cocaine anymore, but there still is a connection
to the production of the drug [online]. Available at: https://www.technology.org/2019/03/15/coca-co-
la-does-not-contain-cocaine-anymore-but-there-still-is-a-connection-to-the-production-of-the-drug/
(accessed 11.5.2021.)
107
Miloš Sprčić D. et al. (2019), Primjena modela integriranog upravljanja – Zbirka poslovnih slučajeva.
Zagreb. Sveučilište u Zagrebu, Ekonomski fakultet, p. 70.
In March 2019 when a number of companies were attacked by a virus named Driving
Life, Coca-Cola was affected minimally, owing to its pre-installed antivirus program
Sangfor Endpoint Secure,108 while other companies suffered great damages. Despite Co-
ca-Cola’s good preparedness for these types of attacks, due to their frequency among
large companies, the probability of cyber-attacks is estimated at 3.
If Coca-Cola were not able to respond in a timely manner to this type of danger from
the outside, its reputation could be seriously tarnished with consumers and partners
as it would no longer be perceived as a safe and trustworthy company. Financial losses
due to production downtime, resulting in delayed product deliveries, and inability to
collect, would also be very likely. Additionally, unplanned financial losses could occur
due to high costs for repairing damages and repairing the information systems. There-
fore, the significance of this risk is rated 4.

Cyber security risk is placed in the first quadrant because of the significant financial
and reputational consequences it can entail. As some of the measures to manage this
risk, we propose continuous monitoring and improvement of existing IT systems, fur-
ther investments in technological staff and their education, use of insurance and con-
trol of the system’s resistance to potential attacks in the future. Proactive defence
management and continuous monitoring of changes in the environment is crucial for
this risk. If a company is not prepared ahead of the attack, when it occurs the damage
cannot be avoided has already been done and it is too late to reacts.
6.10. Environmental risk

Environmental risk is negative behaviour of the company towards the environment
through violating legally regulated measures, which entails misdemeanours and oth-
er penalties and high costs for eliminating the consequences for the environment or
human health. Throughout this text it has been emphasised that The Coca-Cola Com-
pany is one of the largest polluters with plastic in the world, which is evident from the
fact that it produces three million tons of plastic packaging per year worldwide.109 The
biggest problem occurs in the developing countries where, due to the lack of waste
management infrastructure, plastic waste is burned in open landfills. Coca-Cola’s an-
nual emissions of plastic waste in six countries alone (China, Brazil, India, the Philip-
pines, Mexico, Nigeria) are estimated at 2.5 million metric tons of carbon dioxide.110
108
Sangfor (2019), Coca-Cola Security Recipe [online]. Available at: https://www.sangfor.com/en/in-
fo-center/success-stories/coca-cola-security-recipe (accessed 4 May 2021.)
109
Statista (2021) Greenhouse gas emission of the Coca-Cola Company worldwide from 2010 to 2020
[online] Available at: https://www.statista.com/statistics/575829/coca-colas-carbon-dioxide-emis-
sions-worldwide/ (accessed 3.5.2021.)
110
Statista (2020) Emissions from mismanaged plastic waste created by leading beverage manufactur-
ers in 2019 across six nations (in 1,000 metric tons of CO2 equivalent) [online] Available at: https://www.
statista.com/statistics/1127523/annual-plastic-waste-emissions-by-drinks-manufacturers/ (accessed
3.5.2021.)
Coca-Cola also stands out as the largest consumer of water in the world, thus endan-
gering many civilizations that certainly suffer from water shortages. The company has
become active in this area as well, especially in Africa, but human rights activists will
certainly not just forget and forgive everything from the past.
The problem with environmental risk is that it is accompanied by potential political
risk, so if Coca-Cola had not started working on solving the problem of environmental
in the future or even keep old ones, and the same goes for employees. The company had
pollution in time, it would most likely have lost the support of political friends. Further-
more, environmental
certainly alreadyrisk
lostis aassociated withofthe
large number loss of reputation,
customers which will make
for whom environmental it
protection plays a
very difficult to attract new customers in the future or even keep old ones, and the
key role in life and who boycott companies that do not advocate it.
same goes for employees. The company had certainly already lost a large number of
customers for whom environmental protection plays a key role in life and who boycott
companies that do not advocate it.
Although Coca-Cola has met its goal of reducing its carbon footprint by 25% by the end of 2020,
Although Coca-Cola has met its goal of reducing its carbon footprint by 25% by the end
and although it plans to make its product packaging from 50% recycled material by the end of
of 2020, and although it plans to make its product packaging from 50% recycled mate-
rial by the endwe
2030, ofbelieve
2030, we
thatbelieve that
this risk is this
still risk is still
present. Aspresent. Asshows,
the figure the figure
the shows,
companythe
has reduced its
company has reduced its carbon footprint per product unit, however it is evident that
carbon footprint per product unit, however it is evident that the total amount of the emitted CO2
the total amount of the emitted CO2 has not decreased.
has not decreased.
Figure 4. Greenhouse gas emissions by The Coca-Cola Company 2010 – 2020 (million metric
tons) 4. Greenhouse gas emissions by The Coca-Cola Company 2010 – 2020 (million metric tons)
Figure
Source: (2021)
Source: Statista StatistaAvailable
(2021) Available at: https://www.statista.com/statistics/575829/coca-colas-carbon-dioxide-
at: https://www.statista.com/statistics/575829/coca-colas-carbon-dio-
xide-emissions-worldwide/ (accessed 3.5.2021.)
emissions-worldwide/ (accessed 3.5.2021.)
Scenario:
Scenario:
Supposing that Coca-Cola has reduced its efforts to protect drinking water, fossil fuel
Supposing
consumption that Coca-Cola
and pollution, and hashas reduced
stopped its efforts
monitoring to protect
the changes drinking in
in legislation water,
in- fossil fuel
dividualconsumption
markets. This puts it in a position to be in violation of the legal provisions, which
and pollution, and has stopped monitoring the changes in legislation in individual
entails financial penalties and has direct implications on the reputation of the company,
markets.
and hence This putsloss
the potential it ofin customers
a position and
to befurther
in violation
harm to of its
theimage.
legal Due
provisions,
to suchwhich entails
an attitude towards
financial ecological
penalties and has sustainability, ecological
direct implications excesses
on the can of
reputation also
theoccur in theand hence the
company,
potential loss of customers and further harm to its image. Due to such an attitude towards
ecological sustainability, ecological excesses can also occur in the form of, for example,
wastewater spills that have not previously undergone treatment process. Even if it could be only
form of, for example, wastewater spills that have not previously undergone treatment
process. Even if it could be only a local event, in today’s global world connected by the
media, the whole world would be informed about the situation in a very short term.
The significance of this risk is estimated at 5, and the probability of occurrence is
deemed to be 4 as, although Coca-Cola has recently invested considerable efforts and
resources in reducing the carbon footprint and all negative environmental impacts, it
is still a major polluter. On the other hand, the awareness of the need to protect the
environment is rapidly increasing and there are accelerated changes in regulations
with the strengthening of the legal restrictions on pollutants and shortening the dead-
lines for achieving new standards.

Success in achieving the goals in the use of recycled material in the production of packaging
and achieving the set goal in the realisation of 100% recyclable packaging will not yield the
expected positive effect if the packaging is not actually recycled. In the developing coun-
tries, consumers and governments should be encouraged to increase recycling Coca-Co-
la’s packaging or organize their own system for collecting and disposing of it, especially
in Mexico, Coca-Cola’s largest consumer, thus solving the problem of plastic packaging
in open landfills. Moreover, the threat of environmental risk can be reduced by develop-
ing principles and technologies that encourage and increase environmental sustainability
through reduced fossil fuel consumption in production and distribution, increased use of
recyclable materials, and reduced water consumption and wastewater treatment.
6.11. Tax risk

One of the possible risks that can affect Coca-Cola’s business is tax risk. Tax risk refers
to tax laws that vary from country to country, and any increase or decrease in tax rates
affects the company’s profits. In addition to profit tax, other most important taxes are
the environmental tax, whose purpose is to achieve sustainable economic develop-
ment, and the harmful ingredient tax in the context of external taxes.
Scenario:
If the profit tax and the environmental tax on greenhouse gas emissions increase, and
if higher tax rates are imposed on the amount of sugar in Coca-Cola’s products, the
company’s net profit will fall significantly. Conversely, if some of these taxes decline,
the company’s net profit increases.
Considering the possible scenario, we conclude that tax risks are of medium signifi-
cance (3) for the company’s operations and have a lower probability of occurrence (2).

Successful tax risk management requires continuous monitoring of changes in tax
laws, reduction of exhaust gases, lessening of sugar in products, or the use of nutri-
tional sugar substitutes.
7. CONCLUSION
Founded in 1886 as a new alternative in the food and beverage market, Coca-Cola is
today one of the most recognizable and successful brands in the world. It has left an
immeasurable impact on humanity throughout its history, and its gigantic position in
the food industry market is impossible to replace.
The Coca-Cola Company is a trend-setter with the power of market monopoly with
stable long-term and constantly superb popularity outperforming the competition. In
2020, its profit was US$33 billion dollars, which showed the adaptability of their busi-
ness in the unpredictable year of the crisis. The Coca-Cola Company has maintained
its loyal customer base and reputation mostly by intensive marketing and promotion,
product range differentiation and long-term smart business solutions. By further mar-
ket research they intend to get to know their consumers even more deeply and adapt
to their wishes. Thus, due to its competitive advantage and strong performance the
risks of Coca-Cola losing the market share and declining reputation are extremely
small.
The biggest challenge that Coca-Cola has to face are health and environmental risks
as consumers become aware of the impacts of the products that they consume daily
on their health and the environment, especially the sugary drinks like Coca-Cola. Al-
though Coca-Cola knows that its products will not stop selling, especially in the less
developed countries, the company needs to deal with these risks in order to continue
the business. Therefore, they are developing sugar-free and calorie-free drinks, ex-
panding their range to healthier alternatives, and reducing the calorie content of all
their products. Coca-Cola has proven that it can and does adapt to this risk, and we
believe that this trend will continue. As regards the environmental pollution with the
plastic packaging and the huge amounts of drinking water used in the production of
their products, these risks can have a significant impact on the decline in popularity
and respect for the company. Coca-Cola is well aware of this, and for many years they
have been implementing new projects with the aim of minimizing environmental pol-
lution through recycled packaging, reducing the consumption of fossil fuels, and com-
pensating for the drinking water used in their products and production. We believe
that these risks will always be present and that Coca-Cola must continue to search for
adequate solutions through the ERM processes for continuous risk monitoring if they
want to attain the sustainable company status.
All risks that may affect the company should be constantly researched, recorded and
ultimately, effectively addressed. With its top business, financial results and the cul-
ture it has created, Coca-Cola has proven that it responds perfectly to all the problems
and threats by making the most of its strengths, and working on their weaknesses to
achieve high performance.
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The Case Study of Intel Corporation (INTC) 127
THE CASE STUDY OF INTEL CORPORATION (INTC)
Darjan Božić, Lucija Buchberger, Antonela Bakotić,

Marijana Andrešić, Marija Ančić1
1. INTRODUCTION
About Intel Corporation
Intel Corporation is an American multinational technology company founded in 1968
and based in Santa Clara, California. The company was set up by Gordon E. Moore and
Robert Noyce, after leaving Fairchild Semiconductor.2 Interestingly, another former
employee Fairchild Semiconductor founded AMD, one of the Intel’s largest competi-
tors and one of the leaders in the IT sector. Intel’s first products were memory chips,
including the world’s first metal oxide semiconductor. During the 90s, the company
invested significant funds in market research and development of new products re-
sulting in more efficient and faster launch of various chips, which prompted the fast
growth of computer industry and awarded it a dominant position. The main reason for
the customers’ great trust in Intel’s products is the amount of effort, expertise, as well
as passion that it invests in the development of new products. Quality marketing and
sales strategy allow Intel to awaken the feeling of confidence in Intel as a brand even
with the complete laymen in the field of electronics and computer science. Intel de-
signs and manufactures unique technology that drives the computer industry such as
stem-plate chips, integrated circuits, flash memory, graphics chips, network interface
controllers and many other communication and computer-related devices.
Since the world of computing has moved from the era of computer orientation to the
era of data orientation over the past few years, Intel has adapted its operational and
business model to keep up with modern IT innovations and solutions, which has gen-
erated an increase in the revenue and profits in both of its business models.3 The
company dominates on the market with its various types of processors. The Intel Core
processor is best known and the most represented of all consisting of several genera-
1
2
Briticany, Intel, American company, Mark Hall, Erik Gregersen, 2020; https://www.britannica.com/
topic/Intel
3
Notesmatic, Business Model of Intel, Abhijeet Pratap, 2019: https://notesmatic.com/2019/06/busine-
ss-model-of-intel/
tions like COREi3, COREi5 and COREi7. There are also other types of processors, such
as Intel Quark, Intel Atom, Celeron, Pentium, Intel Xeon and Itanium.4 In addition to the
above, Intel is the inventor of the X86 series of microprocessors that are found in most
personal computers. The only competitor on the market regarding this product is AMD
(Advances Micro Device) that entrusted the manufacturing of their X86 processors to
the VIA company. However, as these processors have less power and are used only in
portable equipment, they are not a threat for Intel. Table and laptop computers world-
wide use the Intel Corporation processors carrying the logo Intel Inside. This marketing
move created a reputation for the processor as well as for the entire Intel corporation.
Dell, a US multinational company, was Intel’s largest single customer in 2020 account-
ing for as much as 17% of the total revenues. Nevertheless, Intel’s largest market is
China with almost 30% of the company’s total sales.5
Mission
“Delight our customers, employees and shareholders tirelessly delivering the platform
and technological progress that become crucial to our way of working and living.”6
Obviously, Intel focuses on the satisfaction of its customers instead of the products
themselves and their progress.
Vision
“If it’s smart and connected, it’s best with the Intel.” 7 The vision carries an intellectual
statement suggesting that their work is based on excellence and perfection, and that
Intel has both ambition and capability to be the best in business in its field of work.
2. PESTLE ANALYSIS

Political factors relate to how governments and government organizations determine
and influence the business and economy as a whole. They include foreign trade policy,
political stability or instability, corruption, etc. One of the main political factors of the
Intel Corporation is government support in the process of globalization, which cer-
tainly affects the company’s business and its opportunities to expand the market and
improve market conditions. This can be both an advantage and a threat because of
the shared benefits with the competition. Namely, the process of globalization enables
foreign companies to enter domestic markets reducing the opportunities for monopo
lies locally. Over the years of its operations within the microprocessor industry Intel
4
Intel, official website: https://www.intel.com/content/www/us/en/products/overview.html
5
Currency, About Intel Corporation: https://www.vault.com/company-profiles/computer-hardware/
intel-corporation
6
The balance of small business, Mission Statements of Technology Companies, Barbara Farfan, 2019.:
https://www.thebalancesmb.com/tech-companies-mission-statements-4068549
7
Intel Mission and Vision Analysis: https://mission-statement.com/intel/
has managed to expand its operations in the countries around the world and thus
diversified the risks posed by the political factors.
One of the most important political factors for Intel occurred in early 2018, when the US
President Donald Trump imposed duties on Chinese imports to raise the price of their
products and encourage purchases of the domestic products within the United States.8
With this move Donald Trump began a Trade War with China. The highest customs duty,
as much as 15%, was levied on the imports of meat products and musical instruments
from China. Shortly after the introduction of customs duties, China reciprocated by tax-
ing US products in the amounts from 5% up to 25%. According to an agreement signed
in early 2020, China promised to increase US imports, while the United States undertook
to reduce the duty rates on the imports of goods originating in China.

Economic factors are all those related to a country’s economy playing a central role in
the international business context of all companies – including Intel. Changes in the
inflation rates, exchange rates, interest rates, GDP, phases of the economic cycle, em-
ployment levels and levels of economic activity all have a direct impact on the markets
around the world. These market trends also affect the sales and the profitability of
large technology companies, and Intel’s revenues largely depend on them. For this rea-
son, it is extremely important to know how to use these trends competently in order
to predict growth trajectories – both of the sector and of the entire organization within
Intel. The economic stability of the developed markets, the growth of the developing
markets, the rise of the disposable income and the phases of the business cycle all
have a strong impact on Intel’s semiconductor business.9
Most developed markets are relatively economically stable and as such provide oppor-
tunities for the Intel Corporation to improve its semiconductor business revenues and
make new alliances in these markets in order to strengthen their competitiveness and
increase the market share. The external factor of the rapid growth of the developing
market creates opportunities for further improvements in the business performance.
For instance, if consumers in the developing markets, such as Asia, increase the pur-
chase rate of computer devices, many of which contain Intel processors, the company
can expect an increase in the revenue from these markets. Furthermore, there are
benefits based on the increasing levels of the disposable income. Namely, with higher
disposable incomes, consumers worldwide will be more able to buy new computers
containing Intel microprocessors, and thus provide INTC with additional earnings op-
portunities.
It should be noted that every recession or economic slowdown brings negative side
effects, such as a decline in the net asset value and financial instruments, more strin-
gent credit conditions, negative impact on the suppliers, leaving further impact on the
8
BBC News, 2020: https://www.bbc.com/news/business-45899310
9
Panmore Institute,Intel Corporation PESTEL/PESTLE Analysis & Recommendations, Edward Fergu-
son, 2017: http://panmore.com/intel-corporation-pestel-pestle-analysis-recommendations
total demand, aggregate investments, and the business climate of the enterprise in
general. Also, during this period, it is very likely that the company will suffer a loss. For
example, during the Great Recession, the corporation recorded a significant decrease
in consumer demand which took a toll of a 90% drop in the net profit during the 4th
quarter of 2008 compared to the same period in 2007.10 EBITDA11 has also showed a
decline in the recession,12 which is obvious from Table 1.
Table 1. Decline in Intel’s net profit, during the 2008 recession
Source: Elaborated by authors according to SBI, Intel Headed the 2008 Recession, Sara Winkle, 2020,
Source: Elaborated by authors according to SBI, Intel Headed the 2008 Recession, Sara Winkle, 2020,
https://salesbenchmarkindex.com/insights/intel-headed-into-the-2008-recession-at-the-top-but-did-it-stay-there/
https://salesbenchmarkindex.com/insights/intel-headed-into-the-2008-recession-at-the-top-but-did-
it-stay-there/
Despite the negative market trends and new adverse business conditions caused by the
Despite theCOVID-19
negativepandemic,
market the survival
trends of Intel
and newasadverse
an industry leader requires
business further accelerated
conditions caused by
growth in consumer spending, revenue growth and profitability.
the COVID-19 pandemic, the survival of Intel as an industry leader requires furtherThese efforts are necessary
accelerated for
growth in consumer
Intel to react swiftly to thespending, revenue
recession before growthand
its competitors, and profitability.
avoid These
large-scale layoffs
efforts are necessary for Intel to react swiftly to the recession before its competitors,
and plant closures. 12
and avoid large-scale layoffs and plant closures.13

GAAP net revenue
GAAP netin the first
revenue in thequarter of of2021
first quarter 2021 was compared
was compared to $billion
to $ 19.7 19.7 and
billion and
resulted in re-
sulted in a a1% drop vis-à-vis the same period in the previous year, while Non-GAAP
1% drop vis-à-vis the same period in the previous year, while Non-GAAP revenue observed
revenue observed in the same periods was equal, at 13 $ 18.6 billion. USD14. Furthermore,
the same periods was equal, at $ 18.6 billion. USD . Furthermore, COGS growth14 and the
in 15
COGS growth and the operating costs have decreased operating revenue by almost
50%, leading operating
to a fallcosts have from
in EPS decreased operating
$ 1.33 revenue
to $ 0.83. 16 by almost 50%, leading to a fall in EPS
Hence, the impact of the pandemic
15
is already visible and poses a potential negative riskpandemic
from $ 1.33 to $ 0.83. Hence, the impact of the for Intel.
is already visible and poses a
potential negative risk for Intel.
10
Intel, Intel Reports Fourth-Quarter and Annual Results, Jan 15, 2009: https://www.intc.com/news-
events/press-releases/detail/876/intel-reports-fourth-quarter-and-annual-results
Table 2. Financial results for Q1 in 2021 of Intel Corporation
11
EBITDA (earnings before interest and taxes) is one of the financial indicators of the company’s busi-
ness performance. GAAP non-GAAP
12
Macrotrends, EBITDA for INTC 2005-2021: https://www.macrotrends.net/stocks/stock-compari-
Revenue ($B) $19,70
son?s=ebitda&axis=single&comp=INTC $18,60
13
Intel, Intel Reports First-Quarter 2021 Financial Results, Apr 22, 2021: https://www.intc.com/news-
Gross Margin 55,2% 58,4%
events/press-releases/detail/1460/intel-reports-first-quarter-2021-financial-results
14
ibid https://d1io3yog0oux5.cloudfront.net/_6c73f4faf03e210382ddbc10cfc9ef56/intel/news/2021-
04-22_Intel_Reports_First_Quarter_2021_Financial_1460.pdf
15
Forbes, 2021, Weak Q1 2021 Results Could Drag Down Intel Stock, Apr 27, 2021: https://www.
12
Intel, Intel Reports First-Quarter 2021 Financial Results, Apr 22, 2021:
forbes.com/sites/greatspeculations/2021/04/27/weak-q1-2021-results-could-drag-down-intel-
https://www.intc.com/news-events/press-releases/detail/1460/intel-reports-first-quarter-2021-financial-
stock/?sh=102e1ef05764
results
16
Trefis, Intel
13
(INTC)
ibid Stock Has gained 26 % Between 2018-End And Now Primarily Due To Favorable
https://d1io3yog0oux5.cloudfront.net/_6c73f4faf03e210382ddbc10cfc9ef56/intel/news/2021-04-
Changes In Its 22_Intel_Reports_First_Quarter_2021_Financial_1460.pdf
P/E Multiple: https://dashboards.trefis.com/data/companies/INTC/no-login-required/
jAzrqUjK/Intel-INTC-Stock-Has-Gained-26-Between-2018-End-And-Now-Primarily-Due-To-Favorable-
14
Forbes, 2021, Weak Q1 2021 Results Could Drag Down Intel Stock, Apr 27, 2021:
Changes-In-Its-P-E-Multiple-?fromforbesandarticle=trefis210427
https://www.forbes.com/sites/greatspeculations/2021/04/27/weak-q1-2021-results-could-drag-down-intel-
stock/?sh=102e1ef05764
15
Trefis, Intel (INTC) Stock Has gained 26 % Between 2018-End And Now Primarily Due To Favorable Changes In
Its P/E Multiple: https://dashboards.trefis.com/data/companies/INTC/no-login-required/jAzrqUjK/Intel-INTC-
Stock-Has-Gained-26-Between-2018-End-And-Now-Primarily-Due-To-Favorable-Changes-In-Its-P-E-Multiple-
?fromforbesandarticle=trefis210427
5
Table 2. Financial results for Q1 in 2021 of Intel Corporation
GAAP non-GAAP
Revenue ($B) $19,70 $18,60
Gross Margin 55,2% 58,4%
R&D i MG&A ($B) $5,00 $4,80
Operating Margin 18,8% 32,8%
Tax Rate 14,0% 13,7%
Net Income ($B) $3,40 $5,70
Earnings Per Share $0,82 $1,39
Source: Elaborated by authors according to INTC’s financial report, 2021.: https://www.intc.com/finan-
cial-info
The current solution, which refers to the continued investment in R&D and the ad-
justment of the product market strategies, contributes to the business stability in the
short term.17 However, in the long run, this approach can bring new risks that the cor-
poration may not be ready to respond in the required time.
2.3. Social factors

As one of the leading technology companies, Intel has been focusing in the last 10
years on increasing the company’s social responsibility and sustainability. In this as-
pect of the analysis the main socio-cultural factors that influence the operations of
Intel will be considered. The demographic characteristics such as age, gender, level
of income or education play an important role in the consumer’s decision to buy a
specific product or service.18 Furthermore, the past 10 years have been characterised
by an increase in interaction via the Internet and by digitalization in business that has
brought various opportunities for progress, but also threats in this industry.19 The
downside of digitization is the weakening of PC markets and strengthening of mobile
phones where Intel’s results have not been significant and where its main competitor
AMD holds the advantage.20 Also, an increasing number of customers no longer make
decisions based on the product itself or its price, but pay attention to the fact that the
manufacturer, in this case Intel, works and for what it stands for21. That is why Intel has
17
SBI, Intel Headed Into the 2008 Recession at the Top – but Did It Stay There?, Sara Winkle, Feb 7,
2020: https://salesbenchmarkindex.com/insights/intel-headed-into-the-2008-recession-at-the-top-but-
did-it-stay-there/
18
The influenza demographic factors on attitudes toward brands and brand buying, 2013: https://
www.ijern.com/journal/November-2013/36.pdf
19
Panmore Institute, Intel Corporation PESTEL/PESTLE Analysis & Recommendations, Edward Fergu-
son, 2013: http://panmore.com/intel-corporation-pestel-pestle-analysis-recommendations
20
Ict business: https://www.ictbusiness.info/poslovna-rjesenja/intel-krece-u-uvodenje-velikih-pro-
mjena-u-mainstream-trziste-procesora.phtml
21
World Forum, Here’s how digital transformation will create a sustainable world: https://www.wefo-
rum.org/agenda/2020/01/digital-transformation-sustainable-world/
to work on differentiating its products to ensure its competitive advantage. As far as

the demographic structure is concerned, although the picture has changed over the
years, as the technology industry is growing stronger, it is becoming more present in
the lives of the older age groups which has expanded the target market.
As the technology industry strengthens encompassing wider populations, Intel’s im-
portant goal is to achieve long-term social impact in three ways.22 Firstly, this refers to
Employees who change the world. Namely, in 1995 Intel came up with the idea of a global
volunteer program for its employees entitled Intel Involved, which today includes over
40% of all staff. The program encourages the employees to communicate their exper-
tise and enthusiasm to communities through volunteering.23
Strengthening the community encompasses establishing various programs that influ-
ence the development of the society, especially the young people. The most famous
program, called Intel Al for Youth, supports young people in creating their own socio-in-
fluential projects that would ultimately enable them to acquire various technical and
social skills. The company also organises many other projects, such as the She will con-
nect and Future skills projects.
The Intel Foundation, already a pre-listed foundation, cooperates with non-profit, public
and private organizations and schools that are financially unstable to provide them as-
sistance. The priorities of this foundation are to promote STEM experiences to the un-
derrepresented population, more precisely the youth and women, and to respond to
natural disasters so that employees direct their donations and volunteer hours where
needed.
2.4. Legal factors

Legal factors include laws that can affect business operations of companies, such as
the Consumer Protection Act, the Anti-Discrimination Act and the Copyright Act. As im-
provement of international protection for patents would undoubtedly be a major legal
factor for the Intel Corporation, each new patent is more protected than previously
which presents an opportunity for Intel’s innovations as well as the entire Intel Cor-
poration. Many laws have been adopted regarding waste disposal and as time passes,
they are increasingly complex as the entire industry had to adapt to the same laws so
did the Intel Corporation. Particularly, the problem of the disposal of electronic waste
which must not be exported, according to the Law on Protection and Use of Resources
(RCRA), but must be disposed of and recycled, according to special regulations depend-
ing on the materials they contain. One of the major threats for the Intel Corporation is
the increasing regulation on the market which tries to reduce the monopoly since Intel
has a visible monopoly on all Windows systems. The company has long been exposed
22
Corporate responsibility, Intel, annual report, 2019-2020. 1998: http://csrreportbuilder.intel.com/
pdfbuilder/pdfs/CSR-2019-20-Full-Report.pdf
23
Intel, What is the Intel Involved Program?,: https://www.intel.com/content/www/us/en/support/ar-
ticles/000015106/programs.html
to criticism over uncompetitive agreements with equipment manufacturers24 for its

microprocessors, network cards and dedicated integrated circuits.25 There are certain-
ly other competitors, such as the AMD, although the Intel Corporation has the largest
market share.

The factors that influence the environment play an increasingly important role in the
technology industry, influencing the formation of laws and regulations on environmen-
tal control. In the past 10 years, a trend of favouring environmentally conscious prod-
ucts has been prominent as well as a major problem of increasing the environmental
pollution, especially electronic waste, that produces a bad impact on the reputation
of such companies.26 Due to the increasing environmental awareness and impact of
man on the environment, with a particular emphasis on the global warming, the Intel
Corporation was forced to adapt its business to new market preferences by adhering
to an eco-friendly approach. Consequently, Intel has focused its development and pro-
duction on environmentally friendly products and started developing more energy-ef-
ficient processors. Climate change is important for the network infrastructure. Wi-Fi
and Wireless network infrastructure are globally represented and spread around the
world because of this fact they are influenced by all weather conditions which may
have drastic influences on the business of the corporation. Since Intel’s goods and ser-
vices include products closely connected to the Internet and technological infrastruc-
ture, even Wi-Fi and Wireless services themselves, the environmental factors such as
weather, climate and environmental pollution, have a strong impact on changing the
company’s production and business operations as well as on the quality and availabil-
ity of Intel Services.
As environmental issues are now increasingly being brought to attention, such as the
austerity of resource consumption and environmental protection, the environmental
protection laws are becoming more stringent, as violations of these norms and regula-
tions and environmental scandals can easily damage the reputation of environmental
awareness of the company. Many scientists believe that the concentration of CO2 in
the Earth’s atmosphere, which is constantly increasing, will reach catastrophic levels
impact in the near future and produce such an impact on Earth that it will be very
difficult to save the environment.27 As a responsible company, the INTC corporation
has in mind the aforementioned claims and manages its processes in such a way that
it reduces the negative impact on the environment and supports recycling by sorting
waste, and in the manufacturing process increases the share of the environmental-
ly friendly recycled raw materials. In addition, over 20 years Intel has been investing
24
http://panmore.com/intel-corporation-pestel-pestle-analysis-recommendations
25
https://seekingalpha.com/article/4377146-for-years-intel-sat-on-cpu-monopoly-and-now-tide-
turns-against
26
Ibid: http://panmore.com/intel-corporation-pestel-pestle-analysis-recommendations
27
NASA Global Climate Change, Scientific Consensus: Earth’s Climate Is Warming: https://climate.nasa.
gov/scientific-consensus/
great efforts in reducing the release of greenhouse gases and the amount of energy
used in the production process. In the period from 2012 to 2019 Intel invested over
$200m in projects aimed at reducing energy consumption in the manufacturing pro-
cesses, which resulted in the savings of about $500m. Moreover, since 2000 it achieved
emission reduction in 1 and 2 greenhouse gas groups by 31%, despite a significant
increase in the production capacity.28 Additionally, in 2007 a non-profit organisation
of consumers, companies and other organizations The Climate Sever Computing Ini-
tiative, was formed to promote smart technology that improve energy efficiency and
reduce energy consumption.29

Technological factors are of great importance, but technological changes in the IT sec-
tor can pose major threats to an IT giant such as Intel in case they are neglected. Intel
has changed its business model to adapt to the market trends shifting from a comput-
er-oriented business to a data- and processor-oriented business. The company also
added a wide range of new products and services, which resulted in fast and profitable
growth worldwide.
Following the technological advances is one of the most important factors in Intel’s
business, those being – the growing adoption of mobile devices, the R&D investment
rate and the technological obsolescence rate.30 Although Intel may have recognized
the need for mobile computing, the increasing adoption of mobile devices poses a
threat for Intel as its presence in the smartphone processor market is only marginal.
The corporation primarily focuses on processors for laptops and personal desktop
computers, i.e. their systems, with a special emphasis on the Windows systems. Con-
sidering the rapid growth of the mobile device market, Intel has undertaken some ven-
tures to expand its business towards the embedded systems and mobile computing.
Although they are still not too significant in business terms, Intel has demonstrated its
capability to develop competitive processors for mobile devices such as smartphones.
The high growth rate of R&D investment value threatens Intel as a result of increasing-
ly aggressive competition in product development. However, this technological factor
also creates an opportunity to increase its R&D efforts to counter competitive rivalry.
As the main competitor in recent years, AMD is putting significant pressure on Intel to
respond quickly and efficiently. With the launch of its 64-bit technology,31 it has co-
erced Intel into investing in many projects such as exploring efficient data storage, fast
data transmission, removing certain barriers that are present in the modern computer
world, and ultimately Intel’s implementation of AMD64. Intel must closely observe
28
Intel, 2019., Corporate Class at Intel [pdf]: http://csrreportbuilder.intel.com/pdfbuilder/pdfs/CSR-
2019-20-Full-Report.pdf
29
Wikipedia: https://en.wikipedia.org/wiki/Climate_Savers_Computing_Initiative
30
ibid http://panmore.com/intel-corporation-pestel-pestle-analysis-recommendations
31
UK Essays, PESTEL Analysis Of Intel Sponsors Of Tomorrow Economics Essay, Jan 1, 2015: https://
www.ukessays.com/essays/economics/pestel-analysis-of-intel-sponsors-of-tomorrow-economics-es-
say.php?vref=1
the technological changes and take advantage of the profitable opportunities arising
from the improvements in technologies. For example, it can develop better products
for efficient competition in the desktop computer market and in the mobile processor
market where it has yet to prove its originality and uniqueness.
Technology can quickly change the price structure and the competitors in the short
run. It is becoming extremely important to innovate constantly and consistently, not
only to maximize profits and achieve the market leader position, but also to avoid
becoming obsolete in the near future. Rapid technological obsolescence forces con-
sumers to buy more computing devices, as new models are launched often and in in-
creasingly shorter time periods on the market. Intel is skilled in technological analysis
but needs to enhance its analysis of the speed at which technology is disrupting the
industry. While slow pace gives a company more time to navigate and be profitable,
the high pace of technological disruptions provides a short time frame for coping and
earning profits. Therefore, it is essential to keep up with the latest trends and watch
the competitors on the market. As competition in the technology industry grows, a
company like Intel must also focus more on improving its product portfolio in order to
stay ahead of its competitors.
For example, Intel recently signed a contract to purchase McAfee, a security system
developer,32 with the aim of expanding its business into the computer security indus-
try. Such ventures clearly show that Intel is preparing well for the future which is in
advanced mobile computing technologies and security systems.
3. INDUSTRY ANALYSIS BY PORTER’S FIVE FORCES MODEL

A firm’s development strategy should be based on the analysis of the industry struc-
ture. The key elements of market success, along with their possible implications for
achieving competitive advantages for the firm, are based on the industry analysis.
Porter’s five forces model identifies and analyses the five competitive forces: industry
rivalry, threat of new entrants, threat of substitutes, bargaining power of suppliers and
bargaining power of buyers. The joint interplay of these forces determines the prof-
it-risk potential of the industry.33
3.1. Industry rivalry

Intel Corporation is one of the leading manufacturers of semiconductor chips, which
account for a significant part of the company’s revenue. Although it is the market lead-
er, the company operates in a highly competitive market with strong rivals, such as
AMD (Advanced Micro Devices), Samsung, Nvidia and IBM respect. The semiconductor
global industry was marked by a constantly fast paced growth until 2010 when the
annual growth slowed down to between 0% and 10%. In 2017, there was a significant
32
ibid https://www.ukessays.com/essays/economics/pestel-analysis-of-intel-sponsors-of-tomor-
row-economics-essay.php?vref=1
33
Miloš Sprčić D. (2013) Upravljanje rizicima: 3.1.3. Analiza industrije, pg. 88.
fall of 22.2%, which can be explained by high prices due to material shortages. In 2018
Samsung generated $73,65 billion in revenue outperforming Intel’s $66 billion, and
thus became the world’s biggest chip manufacturer. More recently, in 2020 Intel recov-
ered its lead recording $72.76 billion in revenue compared to Samsung’s 57.73 $ billion.
Next is SK Hynix with 25.85 $ billion and Nvidia with 10.64 $ billion. The data for the
2009 – 2020 period shows that the market concentration is high which also leads to
high competition.34 Intel’s main competitor in the laptop and personal computer mar-
ket is AMD whose consistent efforts to outperform the competition by developing the
newest technology and stronger processors have been driving Intel’s advancements
in technology and output.35

High earnings and long-term profitability are just some of the factors that encourage
many to enter the market. However, there are also barriers to entry such as market size
and saturation, high initial investment needs, strong and well-established competition,
long-standing customer loyalty and high investment costs in the specific technologies.
It is easier for the existing leaders to maintain their market share due to the existence
of economies of scale, access to raw materials and distribution channels as well as their
market image.36 An example of the realized risk of recent entry is a new competitor, Ap-
ple, which replaced Intel processors by their own M1 chips in the new MacBook series.
Apple claims that their laptops have longer battery life and better performance. Intel will
thus lose the profits from potential customers who invest in Apple computers and lag
behind in chip production in comparison to Apple’s new manufacturing partners.37
3.3. Threat of substitutes

The danger of substitute products begins at the moment when the price of the sub-
stitute product affects the demand, i.e., when substitutes affect the price elasticity
itself due to the availability of several alternative products at a given moment. Since
the market is constantly growing and recording numerous changes, a high tendency
towards substitute products can be noted. For example, Apple’s processor for smart-
phones and iPad tablets can be listed as a replacement for Intel’s processor-based
laptops.38 The tablet computer copes well with a wide range of jobs and tasks and thus
34
Statista, Semiconductor Companies Market, 2021.: https://www.statista.com/statistics/270590/glo-
bal-revenue-generated-by-semiconductor-vendors-since-2009/
35
Investopedia, Why AMD Is Intel’s only Competitor, Adam Hayes, 2020.: https://www.investopedia.
com/insights/why-amd-intels-only-competitor-intc-amd/
36
Miloš Sprčić D. (2013.) Upravljanje rizicima
37
Appstudio.ca, Apple’s M1 Chip vs Intel Core i7: https://www.appstudio.ca/blog/apples-m1-chip-vs-
intel-i7-which-one-is-better/
38
Laptop.hr, Zašto je novi Apple-ov IPad odlična zamjena za prijenosno računalo, https://www.lap-
top.hr/smartphone/za%C5%A1to-je-novi-appleov-ipad-odli%C4%8Dna-zamjena-za-prijenosno-i-stol-
no-ra%C4%8Dunalo
becomes a replacement for the laptop and desktop computer. Thanks to the A12Z Bi-
onic chip, the iPad Pro is faster than some PCs on the market, and the 8-core graphics
processor provides good graphics in games and applications.39 In order for Intel to
better cope with replacement products and services, it needs to understand the real
needs and preferences of the consumers.
3.4. Bargaining power of buyers

The analysis of the buyers’ bargaining power begins with their segmentation. Namely,
the customer categories of Intel products include retailers, manufacturers, healthcare
providers, energy companies, car manufacturers and governments.40 All these catego-
ries of customers are presumed to be guided by competitive principles, that is, they
want the best possible product that they can integrate into their computers or cars for
example. Given the high level of substitution opportunities in the computer processor
manufacturing industry, the customer bargaining power is becoming significant.
More precisely, the pronounced trend of rapid advancement in the computer industry
implies the need to change the physical parts of the computer every couple of years. If
quality substitutes with better performance than the currently offered Intel products
are available and if their replacement is relatively uncomplicated, the customers will
be expected to buy them. This then creates pressure on Intel to develop better prod-
ucts. In other words, customers indirectly display their bargaining power by buying the
best the market can offer. A concrete example of this is the Ryzen series of processors,
released by the main competitor AMD, whose new iteration achieved comparable per-
formance to Intel products and was partly responsible for the 20% fall of Intel’s share
price in the 2019 – 2020 period.41
A special category are individual customers who can be segmented according to their
general knowledge of computer functioning, or simply, to those who make informed
decisions based on performance and those who are less computer literate. Namely,
as a leader in the microchip manufacturing industry throughout history, starting with
Intel Quark, Atom and Celeron, Intel can expect a certain level of trust from its cus-
tomers based on the company’s reputation, which would by that logic mean that the
population with a lower degree of IT knowledge tends to buy Intel products simply be-
cause they are recognizable compared to the competitors which they are not aware of.
This is ultimately favourable for Intel because it reduces the overall bargaining power
of customers and allows it to set prices to a higher level.
39
Apple, IPad Pro: https://www.apple.com/hr/ipad-pro/
40
Intel Corporation, Annual Report, 2020.: https://www.intc.com/filings-reports/annual-reports/con-
tent/0000050863-20-000011/0000050863-20-000011.pdf
41
Author’s calculation based on Intel Corporation’s Annual Report, 2020.: https://www.intc.com/fil-
ings-reports/annual-reports/content/0000050863-20-000011/0000050863-20-000011.pdf

As an international company, Intel enjoys a position of not having to look for suppliers
as they come on the basis of advertisements by logging in through Intel’s website.42
The products are standardized and the selection process is organised in such a way
that the position is offered to the supplier who passes the training and meets all the
necessary criteria.43 This selection process implies a large and diversified selection of
suppliers, which means that they do not have a significant bargaining power and do
not affect prices outside the normal market framework. For the individual supplier,
this position is also economically satisfactory as the contract with Intel grants job
security for a certain amount of time and profits, and thus facilitate planning cash
flows.
4. ANALYSIS OF FINANCIAL INDICATORS
4.1. Financial indicators

“We’ve all heard stories of wizards who can calculate several financial ratios from part
of a company’s financial statements in the minutes and reveal the company’s darkest
secrets.”44 Although financial ratios are not a substitute for a crystal ball, they are a
simple tool for determining a company’s financial condition and its performance in
general. In this part of the paper, using financial indicators, the financial condition and
performance of Intel Corporation its business will be evaluated. But before embarking
on the analysis itself, it is necessary to define financial ratios, explain the rationale for
using them, and list and categorize them into groups for analysis purposes.
According to a simple definition a financial ratio is “an indicator that links two account-
ing items and is obtained by dividing one item by another.”45 Financial ratios are calcu-
lated to obtain more useful information than the raw numbers of the financial state-
ments. Two types of comparisons with financial indicators will be presented: internal
and external comparisons. Internal comparisons refer to comparing current ratios
with past and / or expected future ratios of the same enterprise, while external com-
parisons refer to comparing the ratios of an enterprise with those of similar enterpris-
es or with the industry average (at a given time). Therefore, the analysis will include the
ratios of Intel and industrial averages, as well as the comparison of Intel and its main
competitors.
42
Intel Prospective Supplier Application Portal, https://intelapplication.myconnxion.com/user/login,
[11.5.2021]
43
Intel Corporation, Supplier Training, April 2021.: https://www.intc.com/filings-reports/annual-re-
ports/content/0000050863-20- 000011/0000050863-20-000011.pdf
44
Brealey, Myers, Marcus, Fundamentals of Corporate Finance, McGraw-Hill, 5th Edition, page 456
45
James C. Van Horne, John M. Wachowicz, Jr., Fundamentals of Financial Management, Pearson Edu-
cation, page 134
The indicators to be analysed are divided into five groups of analysis, and will be pre-
sented in more detail and enumerated during the development in the 2016 – 2020
period. They are: leverage performance indicators, liquidity indicators, activity indica-
tors, profitability indicators and investment indicators.46
4.2. Methodology and sources used in the calculation of

indicators
In addition to listing and interpreting the values of the observed financial ratios, it is
necessary to explain where the values of these indicators come from. For example, the
second column in the tables will feature the “Industrial value of the indicator”. Also, it is
important to indicate which industry is referred to, and which data was used to obtain
these values.
Intel Corporation, as stated in the previous sections, primarily belongs to the micro-
chip and the related electronic device manufacturing industry. Specifically, according
to the SIC (Standard Industrial Classification), a system for classifying industries in the
United States, Intel belongs to the Semiconductors and Related Devices47 industry
(industry code: 3674). This code for classifying industrial activities includes a total of
1.230 companies. The number of enterprises whose values will be included in the in-
dustrial values listed in the paper, which are of interest for this analysis, is 231 (under
code 36; the other two digits include further categorization, hence the different num-
ber of enterprises).48
Since the analysis of industrial indicators and their physical calculation would be
an almost impossible undertaking, the paper uses calculations made by using soft-
ware, more precisely using SaaS (Software as a Service), i.e. software for financial
analysis ReadyRatios 49. Calculations and calculation methods were made using the
methodology developed by Ankon Consulting.50 For the purpose of this paper, these
sources meet the required demands, and the accuracy of the data is ensured by the
calculation methodology, which assumes that the analysed data are taken from the
SEC database (US Securities and Exchange Commission), more precisely, from ED-
GARA (Electronic Data Gathering, Analysis, and Retrieval system). The industry data
refers to 2020 and the ratios for which values are not available are marked by “/”.
The individual financial indicators for Intel and other corporations listed in the paper
were calculated based on the data from the consolidated annual reports, available
on their official website.
46
Division according to: Orsag S., Business Finance, Hufa, Avantis, p. 99
47
For the sake of precision, the original name was left in English. Therefore, we will not translate it in
this case. In The Republic of Croatia, this classification is performed according to the NKD (National Clas-
sification of Activities), which entered into force on 1 January 2008 (NN,58/07 and 72/07).
48
SIC: 36 – Eletronic And Other Eletrical Equipment And Componenets, Except Computer Equipment)
49
ReadyRatios: https://www.readyratios.com/
50
Ankon Consulting: https://ankon.com.tr/

The leverage ratios (indicators) show the extent to which a company, in this case Intel
Corporation, is financed by debt. The ratios used, their meaning and interpretation are
shown in Table 3.
Table 3. Leverage performance indicator
Leverage
Industrial value of
performance 2016 2017 2018 2019 2020
indicators
indicator
Debt ratio 0.45 0.42 0.44 0.42 0.43 0.47

Degree of indebtedness: shows how much of the company’s total assets are financed from
other people’s sources (debt service risk indicator; creditors and other creditors of the
company). The ratio of total liabilities to total assets.
Debt-to-equity
0.67 0.70 0.77 0.71 0.76 0.89
ratio
Debt-to-equity ratio: shows us how much creditors finance a company for every $ 1 given by
shareholders. The ratio of total debt to principal.
Long-term debt
/ 0.39 0.34 0.33 0.32 0.37
ratio
Long-term debt ratio: shows the relative importance of long-term debt in the capital
structure (long-term corporate financing). Long-term debt to total capitalization ratio (long-
term debt + principal).
Interest
3.75 20.21 27.94 49.57 45.87 37.63
coverage ratio
Interest coverage ratio: shows the company’s ability to cover interest costs (it also explains
to some extent the company’s ability to take out new loans). The ratio of earnings before
interest and taxes and accrued interest.
Source: author’s work according to the annual reports of Intel Corporation for the period 2016-2020
years.
The degree of indebtedness (or the ratio of debt to total assets) shows what percent-
age of an enterprise’s assets are acquired through borrowing. For example, in 2020
47% of Intel’s assets are debt-financed (in all forms), while the remaining 53% of fund-
ing comes from the company’s equity. The debt-to-equity ratio plays a similar role as
the degree of indebtedness. The ratio says that creditors (in 2020) contribute 89 cents
in funding to every 1USD given by the shareholders. The lower this ratio is, the greater
the protection of creditors from possible losses is. The long-term debt ratio shows the
relative importance of long-term debt in the capital structure, a ratio complementary
to the degree of indebtedness. It can be interpreted as a kind of solvency measure
that shows the degree of leverage in the company (debt financing in relation to the
total capitalization). The capital structure, in which the value of debt is higher, reduces
the cost of capital because creditors do not participate proportionally in the realized
profit, but only in the amount of contracted interest. Such a structure is particularly
desirable when the company expects strong growth and high earnings that allow it to
pay such liabilities within defined deadlines. It also indicates the risk of doing business,
because these debts, which represent a legal obligation, must be serviced. The long-
term debt ratio for Intel was 0.37 in 2020. Indebtedness ratios show the relative shares
in capital invested by owners and creditors. Later, when external comparisons are
made, i.e. comparisons of financial indicators with competitors, these numbers will be
significant for interpretation.
Before analysing the competitors, Intel will be compared with the average values of the
industry (using the median). In 2020 Intel showed the largest difference in debt-to-eq-
uity ratio (+0.22) and interest coverage (+33.89) relative to the industry averages. Why
is Intel so different from industry companies? One reason for this is certainly the size
of the company itself and its ability to invest in better and more profitable investment
opportunities. Likewise, economies of scale allow Intel to have higher productivity,
and therefore higher earnings before interest and taxes to cover relatively low interest
costs. The last thing that should be considered is the degree of indebtedness and the
debt-to-equity ratio. Although it is higher than the average, its value does not deviate
significantly. These values will be more similar for companies that represent Intel’s
main competitors.
4.4. Liquidity ratios

In addition to the financial leverage, liquidity ratios are also observed to determine
a company’s performance. They analyse the liquid assets, i.e. the assets that can be
converted into money cheaply and quickly. Liquidity indicators indicate the possibili-
ty of servicing a company’s short-term liabilities. Therefore, in addition to the capital
structure and the burden of long-term debts, the amount of cash in the company (and
other liquid assets) is also important, and whether it has sufficient funds to settle the
liabilities in the short term. For example, banks (in this case creditors) will find this
ratio certainly of interest, because “if you give a loan to a client or take a short-term
loan from a bank, then you are interested in much more than the leverage ratio in the
company. You want to know if the company has enough cash to pay you off.”51 In this
paper, three liquidity indicators are observed: current ratio, fast ratio and cash ratio.
Liquidity ratios are shown in Table 4.
51
Brealey, Myers, Marcus, Fundamentals of Corporate Finance, McGraw-Hill, 5th Edition, page 460
Table 4. Liquidity ratio
Industrial value
Indicators 2016 2017 2018 2019 2020
of indicators
Current ratio 2.56 1.75 1.69 1.73 1.40 1.91
Current ratio: used to measure the company’s ability to meet current liabilities (provides
insight into the company’s solvency). The ratio of current assets to current liabilities.
Quick ratio 1.74 1.48 1.29 1.30 1.01 1.57
Quick ratio: shows the ability of a company to cover current liabilities with its most liquid
assets. The ratio of the difference between current assets and inventories and current
liabilities.
Cash ratio 0.95 0.84 0.80 0.70 0.59 0.97
Cash ratio: shows the cash balance of the company and its current liabilities that must be
settled in cash.
Source: author’s calculation according to data from the annual reports of Intel Corporation for the peri-
od 2016-2020 years.
Intel figures and the industry figures are much closer than those given by the leverage
performance indicators. This is to be expected, because if the products are similar,
substitutes and / or complements, then a similar structure of positions in the balance
sheet of the companies that produce them can be expected. Companies will always
aim for the optimal structure of long-term and short-term assets, and therefore liabili-
ties, and this is the reason why the industry average converges (companies choose the
best combination of assets to be liquid and solvent; the ratio values themselves are
different and industry-dependent; there is no optimal value for indicators).
The current ratio, which warns of the possibility of servicing liabilities (links assets
that are transformed into cash within less than a year, with associated liabilities), is
1.91 for Intel Corporation. The growth of this ratio is visible in the balance sheet of the
company, where the amount of current assets of 136 billion in 2019, grew to 47 billion.
In 2020. The rise in short-term liabilities is just over one billion in a given year, which
leads to the conclusion that Intel has improved its liquidity. The growth of current as-
sets is mostly reflected in the increase in ‘Trading assets’, which doubled compared to
the previous year. “Trading Assets is a portfolio of securities held by a company for the
purpose of selling for profit”52 which are intended for sale within one year. These are
short-term and safe securities and the source of their liquidity. The fast ratio and the
cash ratio are complementary indicators that accompany positive growth trend at In-
tel (generally speaking, the higher these ratios, the more pronounced the assumptions
for maintaining corporate liquidity are).
52
Investopedia, Trading Assets, Will Kenton, April 2021.: https://www.investopedia.com/terms/t/trad-
ing-assets.asp

Activity indicators measure how efficient an enterprise is in using its assets. They indi-
cate the speed of circulation of assets and parts of assets, so they can be considered
as indicators of liquidity of the company (indicators of the duration of business pro-
cesses). Two groups of such indicators are distinguished: turnover ratios and capital
commitment. The calculated activity indicators are shown in Table 5.
Table 5. Activity indicators
Industrial value
Indicators 2016 2017 2018 2019 2020
of indicators
Total asset
0.75 0.55 0.53 0.56 0.54 0.54
turnover
Total asset turnover: shows the relative efficiency of using a company’s total assets to
generate revenue
Inventory
/ 4.33 3.78 3.8 3.73 3.98
turnover ratio
Inventory turnover: period during which an enterprise sells and replaces products sold during
a given period; the ratio of the cost of products sold and the average inventory engaged
Accounts
receivable / 11.77 11.06 10.43 9.36 10.73
turnover ratio
Accounts receivable turnover ratio: measures the speed of receivables collection; an
indicator of how efficiently a company collects its receivables
Accounts
58 31 33 35 39 34
receivable days
Accounts receivable days: average period of time between the sale of receivables and the
collection of receivables
Days sales of
101 30 34 37 41 91
inventory
Days sales of inventory: measures how many days it takes on average for inventories to be
converted into trade receivables
Source: author’s calculation according to data from the annual reports of Intel Corporation for the peri-
od 2016-2020 years.
The median turnover ratio of total assets for the industry is 0.75 which means that
Intel generates less sales revenue per dollar invested in assets than the industry on
average. But that does not necessarily mean that Intel is in a worse position. It is also
important to emphasize that an overly high turnover ratio may indicate certain risks in
business. “Excessive turnover ratios may indicate that there are no reserves, indicating
excessive liquidity tensions and the risk of business process downtime.”53 One of Intel’s
53
Silvije Orsag, Business Finance, Avantis, Hunfa, p. 109
main competitors AMD) has a total asset turnover ratio of 1.29, which suggests that if
Intel could generate the same sales revenue with a few dollars less invested in assets
on average, the total asset turnover ratio would improve. Intel’s days sales of inventory
have been growing since 2016. If this data were reconnected and compared with AMD
again, the result would be that AMD’s days sales of inventory were 45 days. This shows
that Intel turns out its inventories on average 10 days faster than the industry and 46
days slower than its competitor.

When analysing the profitability indicators, two main groups are distinguished: indica-
tors that show profitability in relation to sales revenue and those that show profitabil-
ity in relation to investments. The division of profitability ratios and their values are
shown in Table 6.
Table 1. Profitability indicators, values in %
Indicators Industrial average 2016 2017 2018 2019 2020

Contribution
37.9 60.56 62.12 61.47 58.28 55.75
Margin
Contribution Margin: selling price (sales) and costs (expenses) contained in the sold products
(administrative costs are excluded)
Gross Profit
4.5 22.11 28.76 32.91 30.62 30.40
Margin
Gross Profit Margin: ratio of gross profit, i.e., earnings before interest and tax, with sales, i.e.,
total income
Net Profit Margin 2.7 17.37 15.30 29.72 29.25 26.84
Net Profit Margin: ratio of earnings after interest and tax and sales
ROA 2.0 11.59 14.65 18.22 16.14 15.47
Return on Assets: gross profit in relation to the total assets engaged to realize those earnings
Return on Equity 1.5 15.58, 13.91 28.24 27.16 25.79
Return on Equity: relates to the part of the total profit which increases the wealth of the owner
with the book value of the capital which the owners have made available to the company
Source: Author’s calculation based on Intel Corporation’s Annual Reports for 2016 – 2020 period
Quite different values of Intel and the industry in which it operates are observed in
profitability indicators. Some of the reasons for this have already been mentioned in
the analysis of leverage performance indicators, but additionally, Intel is ranked sec-
ond in the industry of 231 companies in terms of revenue of $77,867 billion. To better
explain the difference between the industry average and Intel, one can take as an
example the values of the first ranked in terms of revenue, General Electric Company
(GE), which has a significantly lower gross profit margin than Intel of 11.79%.54 Third-
54
General Electric Company, annual report 2020: https://www.ge.com/sites/default/files/GE_AR20_
AnnualReport.pdf
ranked Jabil Inc. has a gross profit margin of 1.83% with the net profit margin of only
0.2%.55 The same data for Jabil Inc. can also be found on the official Wall Street Journal
(WSJ) website.56
It is already clear from several examples that the values can vary considerably. With
Jabil Inc. the reason is the high cost of products sold in relation to revenue, as well as
the high interest burden that is far higher than Intel’s, which is evident in the compa-
ny’s debt ratio of 0.87 compared to Intel’s 0.47. A detailed analysis of the indicators
and the reason for the great differences in them would go beyond the scope of this
paper. Some of the reasons are certainly the differences in the product range, the
differences in production costs for seemingly similar products, as well as the differ-
ences in the capital structure and the stage in which an individual company is, e.g.,
a period of intensive investment. Likewise, it should be considered that the industry
classification that is observed here is very specific and may not include all companies
of interest but only those that may be considered redundant in size or efficiency.
Profitability indicators of one of Intel’s biggest competitors, AMD, are more compa-
rable and similar to Intel’s. Comparisons of indicators for Intel and its most similar
companies (by similarity in manufactured products, size, etc.) were processed for
this reason in the analysis of competitors to obtain more representative values for
certain groups of indicators.

Investment indicators view a joint stock company, i.e., its shares as an investment. In
a broader sense, these indicators can be considered as indicators of the efficiency of
the company’s equity.57 Most commonly used investment indicators are visible and
calculated for Intel Corporation in Table 7.
55
Jabil Inc., annual report 2020: https://s27.q4cdn.com/276975351/files/doc_financial/annual_report/
JABIL_2020_AR_FINAL.pdf
56
Wall Street Journal (WSJ), Markets, Jabil Inc. (U.S.: NYSE), 17 May 2020.: https://www.wsj.com/mar-
ket-data/quotes/JBL/financials
57
Orsag S., Poslovne financije, Hufa, Avantis, page 114
Table 2. Investment indicators
Indicators Industrial average 2016 2017 2018 2019 2020

EPS / 2.18 2.04 4.57 4.77 4.98
Earnings per share: indicates the profit efficiency of stocks; they measure the amount of
earnings available to ordinary shareholders
PPS58 / 32.558 42.607 44.237 58.269 46.786
Price per share: is based on prices realized on the organized capital market, primarily the
stock exchange; it is not an indicator calculated on the basis of data from financial statements
DPS / 1.04 1.0775 1.20 1.26 1.32
Dividends per share: indicates the amount of cash income per share; shows the portion of
earnings distributed to shareholders
EPD / 3.194 2.53 2.71 2.16 2.82
Earnings per dividend: indicates the profitability of the investment in the stock; measures
the size of dividends according to its market price
P/E / 14.93 20.89 9.68 12.29 9.39
P/E: the most important value used by investors in the market; the ratio of price per share
and earnings per share
DPR 0,24 0.48 0.53 0.26 0.26 0.27
Dividend pay-out ratio: quantitative indicator of dividend policy; measures the size of calcu-
lated and paid dividends to ordinary shareholders in realized earnings
Source: Author’s calculation based on Intel Corporation’s Annual Reports for 2016 – 2020 period
Earnings per share measure the amount of earnings available to ordinary sharehold-
ers. More precisely, they measure the earnings after interest and tax (possible deduc-
tion for preferential dividends) per share. Table 3. shows that Intel’s earnings per share
have been growing steadily since 2016. It is also evident that the price per share rose
from 2016 to 2019.
There is an evident decline in the share value in 2020, which is primarily the result of
Intel’s announcement that it was delaying the production of its ‘7-nanometer scale’
processors and the falling demand due to the global COVID 19 pandemic and Apple’s
switching from Intel to M1 processors.59 The same reasons are responsible for the neg-
ative change in the P / E ratio, which is one of the most important measures used by
analysts. This indicator is often called a multiplier, because multiplied by earnings per
share it gives the value of the share.
58
The values of the stock prices were taken as the last price in the observed period (year) and down-
loaded from official website of Intel Corporation, annual report for the 2016 – 2020 period.
59
Forbes, Markets, Weak Q1 2021 Results Could Drag Down Intel Stock, January 2021: https://
www.forbes.com/sites/greatspeculations/2021/04/27/weak-q1-2021-results-could-drag-down-intel-
stock/?sh=3b68a5955764
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IBM
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Indicators Intel Corp. AMD Oracle NVIDIA IBM
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Net Profit
26.84 25.50 11.02 25.94 25.98 7.47
Margin
Net
Net
Net
Net
Profit
Net
Profit
Profit
Net
Profit
Profit
Profit
ROA 26.84
26.84
26.84
26.84
15.47 26.84
26.84 25.50
25.50
25.50
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33.2225.50
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11.02
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25.94
25.94
25.94
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25.94 25.98
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25.98
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25.98
25.98 7.47
18.79 7.47
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7.47
7.47
7.47
3.57
Margin
Margin
Margin
Margin
Margin
Margin
ROE 25.79 57.48 9.99 59.87 29.78 26.55
ROA
ROA
ROA
ROA
ROA
ROA 15.47
15.47
15.47
15.47
15.47
15.47 33.22
33.22
33.22
33.22
33.22
33.22 7.14
7.14
7.14
7.14
7.14
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9.04
9.04
9.04
9.04
9.04 18.79
18.79
18.79
18.79
18.79
18.79 3.57
3.57
3.57
3.57
3.57
3.57
Current
ROE
ROE
ROE
ROE
ROE 1.91
ROE 25.79
25.79
25.79
25.79
25.79 2.54
25.79 57.48
57.48
57.48
57.48
57.48
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9.99
9.99
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59.87
59.87
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1.91
1.91
1.91
1.91
1.91
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0.88
0.88
0.87
0.88
0.88
Debt Ratio
EPS Long-term4.94
Long-term
Long-term
Long-term
Long-term
Long-term 2.06 3.84 3.16 6.99 6.18
0.47
0.47
0.47
0.47
0.47
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0.35
0.35
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Source:
DebtWall
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Debt Street
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Debt
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Debt
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costs at IBM are $23.082 billion, while the same field at Oracle is only $1.181 billion.
60
Wall Street Journal, Markets, 2021.: https://www.wsj.com
Due to its size, which can be seen in the revenues generated by IBM, it is reasonable to
expect higher management costs. Samsung’s low profit margin can be justified simi-
larly, i.e., by high administrative and selling costs. Administrative and selling expenses
more than double the value of IBM, amounting to $53.325 billion.
Regarding the industry average, Intel is at an advantage with the values of its ratios and
other business characteristics listed in the previous sections. In the analysis of the com-
petitors, there are similar values whose
causes were briefly described in this section.
5. SWOT ANALYSIS
SWOT analysis is one of the important instruments used in the identification of the sit-
uation of the company, which is the basis for further steps in the implementation of the
integrated risk management process. The data obtained from the analysis of the envi-
ronment, industry and competitive strategies are the basis for creating a SWOT analysis.
This analysis tries to give an insight into the risk-profit position of the company.
• Partnership with Microsoft
• Strong market position – leading player in
the CPU industry
Small share of smartphone market
• High R&D investments
• Customer loyalty
• Technologically most agile (Digital
• Microsoft high dependency (Windows)
Transformation Leader)
• Low diversification
• Strong financial performance
• High costs of production and training of
• Brand’s strength, good image, and long
employees
tradition (since 1968)
• Capital investment required due
• Highly educated and highly qualified staff
to continued development of new
owing to continuous training
technologies
• Systematic investment in quality improvement
• Intense competition
• High degree of social responsibility –
• Single-segment dependence
environmental protection and rational and
economic use of resources
• Volume economy
• Opportunities of expanding in new markets • IT security and ability to cyber attack
• Company acquisitions for expansion of • Decrease of consumer purchasing power
product range as a result of economic crisis caused by
• 4th industrial revolution: digitization, 5G, COVID-19 pandemic
IoT, AI • Competitors’ innovation - Apple’s and
• Development of marketing – Esports, AMD’s Ryzen chip series
gaming competitions, use of media for • Prices war with AMD
promotion of companies • Legal regulations, legal pressures and expo-
• Refinancing of debt at lower interest rates sure to lawsuits — SEC reporting standards
Source: authors
5.1. Strengths
Transparency and quality are Intel’s value that bring the company record longevity of
business. This is evidenced by the financial analysis from which shows the company’s
successful business performance. One of the reasons for Intel’s leadership in the tech-
nological market industry of processor production is its proven reliability of product
over the years.
As a globally present technology company, Intel’s economic power of volume is visible
from its mass production of processors, chips, portable devices and other products.
Also, the long-standing history of the company focusing on the production of semicon-
ductors has led to economies of scale that the competitors have to cope with. As one
of the biggest players on the technology market and as the world’s largest producer of
microchips, Intel creates major obstacles to entering new competitors. An additional
strength providing additional security and advantage for Intel are long-term contracts
with a number of laptop manufacturers such as Acer Inc. and Asus who use its intel-
lectual products in their laptops and their shift to making own competitive intellectual
products would necessarily imply optimisation costs.61
Partnership with Microsoft is partly responsible for the success of the two compa-
nies. Intel uses profit network channels for its processors developed for the Windows
systems with a dominant market, and Microsoft enjoys the performance of Windows
systems based on the processing power of Intellectual products. Both companies use
this power as a barrier to tackle the effects of new competitors.62
The value of the Intel brand is significant. According to the Inerbrand63 report and to
the Forbes’ report from 2020,64 Intel is rated 12th in the world, which places it among
the leading companies in the world when we consider only technological giants. The
value of its brand is visible from the chart showing that it amounts to almost $40,000
million according to the recent indicators. It should also be noted that Intel is ranked
45th on Fortune’s list of the world’s most respected companies.65.
61
Media and Gaming Laptops Powered by Intel: https://www.intel.in/content/www/in/en/products/
devices-systems/laptops/gaming-media-laptops.html
62
Intel and Microsoft partner to simplify IoT solutions development: https://iotbusinessnews.
com/2021/02/18/28021-intel-and-microsoft-partner-to-simplify-iot-solutions-development/
63
Ibid: https://www.interbrand.com/best-global-brands/intel/
64
Intel Newsroom, 2020, Intel Named One of Forbes’ ‘World’s Bridge Valuable Brands’ of 2020: https://
newsroom.intel.com/articles/intel-named-forbes-worlds-most-valuable-brands-2020/#gs.zn3ou0
65
Fortune, 2020: https://fortune.com/company/intel/fortune500/
Chart 1 Intel value, 2000-2020 year

Chart 1 Intel value, 2000-2020 year
Source: production of authors according to Interbrand, Best Global Brands, 2020: https://interbrand.
com/best-global-brands/intel/
Source: production of authors according to Interbrand, Best Global Brands, 2020: https://interbrand.com/best-
global-brands/intel/
Regarding the commitment to the environment, Intel adheres to responsible business

practices the
Regarding continuously
commitmentseeking to improve energy
to the environment, efficiency
Intel adheres and sustaining
to responsible business resources
practices
in its operations. In 2015 the company purchased 3.4 billion kWh of green energy and
continuously seekingfor
installed projects to solar
improve energy
power efficiency
plants andpower
and wind sustaining resources
plants.66
Withinthe
its assistance
operations.
Inof2015
partners and engaged
the company employees,
purchased they
3.4 billion useoftechnology
kWh green energyto address environmental
and installed projects for
challenges. 65
solar power plants and wind power plants. With the assistance of partners and engaged
Top talent is one of the largest resources of the company. Intel pays special attention
employees, they useoffering
to its employees technology to address
them environmental
professional training challenges.
and advancement opportunities.
In addition to the offices around the world the company operates in 4 production sites
for assembly and 6 production sites, which provides excellent flexibility on the global
Top talent is one of the largest resources of the company. Intel pays special attention to its
production network67 that includes countries like China, Malaysia, Vietnam, Mexico,
USA, Ireland,
employees and them
offering Israel.professional training and advancement opportunities. In addition to
The
the imagearound
offices and recognition of the
the world the Intel brand
company is another
operates key force.
in 4 production Thefor
sites Intel Inside logo
assembly andis6
on almost every laptop and desktop. The manufacturing of the semiconductors takes
production sites, which provides excellent flexibility on the global production network66 that
place in their own plants, enabling the optimisation of the performance. One of their
includes countries
competitive like China,
products Malaysia,
is a series Vietnam, Mexico,
of microchips USA, Ireland,
Intel ®️ WM490 and68Israel.
Chipset.
5.2.
The Weaknesses
image and recognition of the Intel brand is another key force. The Intel Inside logo is on
almost every laptop andondesktop.
Small representation The manufacturing
the smartphone of the
market; Intel semiconductors
is primarily takes
focused place
on the in
lap-
top segment
their andenabling
own plants, therefore,
theitsoptimisation
competitors,ofsuch as ARM and QUALCOM
the performance. directed
One of their their
competitive
efforts towards the smartphone market. The pace of innovation creation is slower com-
products is a series of microchips Intel ®� WM490 Chipset.67
66
Intel, Intel’s Climate Change Leadership: https://www.intel.com/content/www/us/en/environment/
65eco-responsible-operations.html
Intel, Intel’s Climate Change Leadership: https://www.intel.com/content/www/us/en/environment/eco-
67
Intel, Helping Maintain Industry Leadership and Driving Innovation: https://www.intel.com/content/
responsible-operations.html
66www/us/en/architecture-and-technology/global-manufacturing.html
Intel, Helping Maintain Industry Leadership and Driving Innovation:
68
Intel: https://ark.intel.com/content/www/us/en/ark/products/204447/intel-wm490-chipset.html
https://www.intel.com/content/www/us/en/architecture-and-technology/global-manufacturing.html
67
Intel: https://ark.intel.com/content/www/us/en/ark/products/204447/intel-wm490-chipset.html
29
pared to Samsung that, apart from building chips, gained a respectable status in the
production of smartphones. Intel is the market leader of the CPU for personal comput-
ers, especially due to the domination of the Windows system. The growth of the smart-
phone market poses a threat to Intel because the company is underdeveloped in that
area. For example, as computer sales decline, the sales of mobile devices is growing. This
situation threatens Intel who failed to take up position in the mobile processor market.
By major strategic changes, Intel would also be able to protect itself from the minimal
diversification of business which is a key business weakness. The problem is also the
high training costs of the employees which is a challenge of the entire whole industry.
Intel Corporation operates in a highly competitive industry; therefore it has to have all
the answers ready to successfully face the potential sources of new competition and
an unsafe market.69 The main threat comes from AMD, which exceeded Intel’s share
of desktop processors for the first time in the first quarter of 2021. However, Intel
maintains significant leadership in two of the most profitable segments – servers and
laptops. The global market share grants the company a leading position in production
of processors.70
Chart 2 Advanced Micro Devices (AMD) and Intel — market shares
Source: Authors’ elaboration according to analysis PassMark Software

Source: Authors’ elaboration according to analysis PassMark Software
Intel’s mutually beneficial partnership with Microsoft could become a weakness as it forces
Intel’s mutually beneficial partnership with Microsoft could become a weakness as
Intel toIntel
it forces focustoonfocus
the design
on theand production
design of microprocessors
and production for the Windows
of microprocessors systems.
for the Win- As a
dows systems. As a result, the company also neglects parallel comprehensive business
result, the company also neglects parallel comprehensive business processes for other
processes for other products. For example, Intel remains unsuccessful in developing
products. For
competitive andexample,
profitableIntel remains
mobile unsuccessful in developing competitive and profitable
processors.
mobile processors.
69
Ibid
https://www.intc.com/news-events/press-releases/detail/1460/intel-reports-first-quarter-2021-fi-
nancial-results
The loss of any of its significant customers due to delays in delivery, even if it is only a
70
PassMark Software, AMD vs Intel Market Share, 2021: https://www.cpubenchmark.net/market_sha-
temporary cancellation of significant orders by customers, would affect the company’s
re.html
income during the grace period and damage its ability to achieve and maintain the expected
levels of operating results.
The loss of any of its significant customers due to delays in delivery, even if it is only a
temporary cancellation of significant orders by customers, would affect the company’s
income during the grace period and damage its ability to achieve and maintain the
expected levels of operating results.
5.3. Opportunities
Diversification of business in different segments is an important opportunity that has
not been fully used considering the Intellectual Generic Strategy and Strategy of In-
tensive Growth. Intel has the opportunity to invest in drone processors which have
become a useful part of our everyday life and consume little energy while performing
powerful operations. With regard to the lack of Intellectual processors for the afore-
mentioned, an additional opportunity that could potentially create new opportunities,
revenue and growth channels for Intel is expanding its share in the mobile market.
Furthermore, the company can develop semiconductor products to target new seg-
ments on the household appliances market.
The various acquisitions of Intel would contribute to the development of technological
branches in which it is not yet developed and recognizable, and which are considered
crucial for taking leadership in the field of all technological machines, robots and tech-
nologies in general. Furthermore, such ventures could help companies fight market
competitors like Nvidia and Qualcomm, who also want to expand segments of their
business. An example of the successful Intellectual Acquisition is the purchase of the
Israeli company for machine learning of Mobileye in 2017.71 In this way Intel has pro-
moted its growth strategy for long-term chips to help its brand grow as quickly as pos-
sible, and create new revenue channels and diversification by expanding to the realm
of autonomous vehicles.
While 4G time is connected to smartphones, 5G is connected to the Internet of Things
(IoT). IoT is a technology that connects physical devices, vehicles, and other things that
collect, share, and exchange information online.72 This gives Intel the opportunity to
empower them with its Quark chips designed for 5G technology73 that will enable fast-
er Internet access and better connection for the devices with reliable communication.
In order to increase its popularity in other markets, Intel could focus more on social
media as well as on other digital channels to better introduce themselves to custom-
ers and achieve better engagement. Even if its business model is dependent on other
brands, creating brand recognition and greater airworthiness can facilitate the gener-
ation of new revenue and growth channels. The appropriate way to do so, which Intel
already uses to some extent, is the marketing activities directed to the population
71
Intel, Intel Acquisition of Mobileye: https://intelandmobileye.transactionannouncement.com/#pre-
sentation
72
What is IoT and How Does It Work? : https://internetofthingsagenda.techtarget.com/definition/Inter-
net-of-Things-IoT
73
Support for Intel Quark SoC: https://www.intel.com/content/www/us/en/support/products/79047/
processors/intel-quark-soc.html
of players, via the fast-growing E-sports competitions, i.e., competitions in computer

games.
Similarly, the financial measures stemming from the pandemic and the effects on the
economies around the world present an opportunity for Intel as it provides additional
incentives to alleviate the crisis, such as lower interest and lower taxes. This could give
the company an opportunity to significantly refinance its debts at lower interest rates.
5.4. Threats
The technology industry has progressed rapidly, and new technologies are constant-
ly appearing, which puts the industry at risk as they can pose serious threats in the
long term. Apple’s entry into the market is just one of the big competitors for Intel. In
the new MacBook collection, Apple has replaced Intellectual processors by creating
their own M1 chips claiming better performance and higher battery74 life. Because of
Apple’s products, Intel loses profits from potential customers, and has to invest a lot
more in innovation. It has moved from a computer-oriented model to a data-driven
business model, although the PC-focused business is still the largest source of income.
Given the changing form of the technology industry, Intel will need to be more flexible
and skilled to advance others.
The development and innovation in technology are crucial for economic growth, but
also pose a major threat. Trends such as e-commerce, mobile payments, cloud com-
puting, IoT, ASI, and social networks increase cyber risk for both the users and busi-
nesses. Cyber-attacks are among the fastest-growing crimes today, and their cost is
expected to increase globally by 15% annually by 205075.
Intel is facing various competitors in business, and some of the main Intellectual com-
petitors are AMD, ARM Ltd., International Business Machines Corporation, NVIDIA
Corporation, QUALCOMM, Samsung Electronics Co. The increase in could competition
negatively affects the ISO market share in the future. For example, the AMD series of
Ryzen processors from 2019 should be reported76 which outperformed the quality of
the Intel processor at the time, and the price of its shares fell for the same reason. In
addition, in the first quarter of 2021 AMD surpassed Intel by a modest 1% in the mar-
ket share of desktop computers,77 and consequently the struggle for power over this
market continues. There is also a persistent threat of emerging business models from
manufacturers of various technological equipment such as Apple and Samsung, who
decided to integrate their semiconductor and software elements to some extent.
74
MacRumors, 2021, Apple M1 Chip: Everything You Need To Know, Juli Clover: https://www.macru-
mors.com/guide/m1/
75
Cybercrime Magazine, 2020, Steve Morgan, Cybercrime To Cost The World $10.5 Trillion Annually By
2025: https://cybersecurityventures.com/cybercrime-damages-6-trillion-by-2021/
76
AMD, 2021, Radeon™ Software Adrenalin 2019 Edition 19.12.1 Release Notes: https://www.amd.
com/en/support/kb/release-notes/rn-rad-win-19-12-1
77
ibid https://www.cpubenchmark.net/market_share.html
6. TOWS ANALYSIS
TOWS analysis arose from the evolution of SWOT and has the same input factors as
SWOT, but its approach is different. TOWS refers to the strategic options where the
results of the SWOT analysis are observed through appropriate strategies in order to
seize opportunities and avoid threats. 78
Table 5. TOWS analysis
Strengths Weaknesses
• Partnership with Microsoft • Low representation in
• Strong market position smartphone market
–leading player in CPU • Questionable customer
industry loyalty
• High investment in R&D • High dependency on
• Technologically agile (leader Microsoft (Windows)
in digital transformation) • Poor product diversification
• Strong financial • High production and
performance training costs for employees
• Strength of brand with good • Large capital investments
image and long tradition – required due to constant
since 1968 development of new
• Highly educated and highly technologies
qualified employees – • Intense competition
continuous educational • High dependence on one
process product segment
• Systematic investment in
quality improvement
• High degree of social
responsibility –
environmental protection
using rational and economic
resources
• Economies of scale
78
TOWS ANALYSIS, Nina Begičević Ređep: https://decision-lab.foi.hr/kratka-prica/tows-analiza
Strengths Opportunities Weaknesses Opportunities

Opportunities
(Maxi Maxi) (Mini Maxi)
• Further increase • Product diversification -
in production by expanding into smartphone
diversification and market
economies of scale • Increasing customer
• Possibility to expand into
• Marketing / advertising loyalty through marketing
new markets
via gaming competitions investments (additional
• Company acquisitions to
(Esports) – investing in advertising in gaming
expand product range
brand competitions)
• 4th Industrial Revolution
• Extend collaboration with • Reducing production and
• Digitization, 5G, IoT, AI
Microsoft labour costs by acquisitions
• Marketing development
• Continuation of relations for economies of scale
- Esports, gaming
with Asus and Acer • Gaining comparative
competitions, use of media
regarding the use of Intel advantage over competitors
to promote company
processors in their laptops by better adapting
• Debt refinancing at lower
• Further efforts to improve processors to use new
interest rates
energy efficiency of technologies such as 5G
manufactured processors network and IoT technology
• Expanding the business to
IoT technology
Strengths Threats (Maxi Mini) Weaknesses Threats (Mini
Threats • Increased investment in Mini)
innovations to increase • Ignore smartphone market
• IT security and possibilities
product competitiveness and focus on those where
of cyber attacks
• Using economies of scale the company is already
• Decreased consumer
and brand power to present
purchasing power due to
position as price setter and • Detailed compliance
economic crisis caused by
squeeze out AMD with necessary reporting
COVID-19 pandemic
• Use of professional and regulations and publication
• Competitor innovation –
engaged staff to comply of additional voluntary
entry of Apple and AMD’s
with all stock exchange and management reports for
Ryzen series of chips
legal regulations investors and public
• Price war with AMD
• Focus on reducing
• Legislation, legal pressures
employee training costs
and exposure to lawsuits –
• Increasing budget of
SEC reporting standards
department in charge of
cyber insurance
• Revise processor fabrication
process and reduce costs by
process economization
6.1. O-S strategy (maxi maxi)

With maxi-maxi strategy Intel can leverage the current ways of business management
according to market opportunities. The basic mode of competition, i.e. economies of
scale, should be maintained with a further increase in production as well as a poten-
tial expansion of the product range. Larger investments in marketing and digital com-
munication are desirable as they would contribute to brand strengthening and even
greater global visibility. Marketing campaigns focused on more aggressively advertis-
ing their processors in gaming competitions are a potential choice. Furthermore, the
extension of the contract with Microsoft is as they generate a large percentage of the
sales revenues. The close connection between Intel and Microsoft, which is evident
through the production of processors exclusively for the Windows system, gives Intel
the assurance that their product and what is invested in the development will bring
additional benefits and this partnership is desirable to continue. In addition to Mic-
rosoft, the continued collaboration with Acer and Asus as highly represented laptop
manufacturers provides security to Intel due to the mass use of its products rather
than those of the competitors. Switching to Intel’s competitors’ processors would re-
quire higher costs due to the necessary optimization, which gives Intel advantage due
to revenue security. Furthermore, tracking market changes, such as the emergence of
the Internet of Things technology, which is closely linked to the latest 5G technology,
creates an opportunity for Intel to create a competitive advantage in this market seg-
ment as well. Finally, the strategy involves the use of funds intended for R&D for the
purpose of further improving the energy efficiency of processors and thus improving
the company’s creditworthiness.
6.2. W-O Strategy (mini maxi)

With this strategy, Intel would overcome its strategic weaknesses by using the identified
market opportunities. The first goal would be to diversify the product selection by ex-
panding into the smartphone market, which, along with the changes to its processors,
would provide new channels for generating profits. Secondly, through increased invest-
ment in marketing activities in the form of advertising in computer game competitions,
the so-called Esports, Intel would facilitate access to its target audience thereby invest-
ing in its future. Furthermore, a possibility to reduce production costs per unit manufac-
tured through potential strategic acquisitions with smaller partners has been identified.
Finally, Intel has the ability to achieve comparative advantage over its closer competitors
through better fine tuning of its processes so that they are able to make better use of
technologies like 5G networks and the Internet of Things before their competition does.
6.3. S-T strategy (maxi mini)

Investing in innovation is extremely necessary in order to take the lead in technology
segments such as artificial intelligence, IoT, autonomous driving and smartphones, thus
leaving no room for competitors to compete. By using its capital reserves to achieve
a greater degree of innovation in the manufacturing process, Intel could increase its
competitive advantage. Moreover, the goal of this strategy could be to improve the
current series of Intel processors through investment, so that the output could better
match the performance of the competing Ryzen processor series launched by AMD.
In addition, the use of Intel’s brand recognition is necessary due to price competi-
tion with the main competitor AMD, which creates fear of possible leadership in the
price segment. Also, according to this strategy, Intel should keep employing highly ed-
ucated professionals and offering them additional training in order to ensure the best
business practices of good corporate reporting, and thus protect themselves from the
threat of scandals and loss of investors.
6.4. W-T Strategy (mini mini)

The implementation of the strategy for resolving weaknesses and threats implies
more conservative management of the company and adherence to the already proven
business practices. This would neglect the attempts to further expand into the smart-
phone market and steer the entire focus on expanding the existing business on the
desktop and laptop components market. Also, in compliance with the statutory obli-
gations of corporate reporting, new investors would be attracted through public dis-
closure of additional, optional, managerial reports, which would try to increase the
creditworthiness of the company and investors’ faith in the same. Furthermore, for
the problem of cyber security, i.e., possible theft of their intellectual property, addi-
tional investment in the department in charge of cyber security is advised. Finally, the
entire processor design process should be revised in an attempt to find inefficiencies
and economize them.
7. INTEGRATED RISK MANAGEMENT
7.1. Introduction
The goal of the enterprise risk management process is not to create a risk-free envi-
ronment, but to effectively and dynamically manage the company’s risks and increase
its value. Risk analysis is one of the key components of the ERM process in which it is
necessary to individually analyse all risks that affect the company’s business and de-
velopment, as well as to determine their likelihood and importance while considering
the company’s strategy and goals, its appetite and risk tolerance.79
In this section, Intel’s strategy and goals will be defined, as well as its tendency and
tolerance for risk. To begin with, the strategic risks will be analysed with special atten-
tion to risk of innovation, expansion, and R&D risk. The analysis will further include the
following risks: currency and price, liquidity and interest rate, and credit risk as part of
the financial risks group. Finally, after examining the operational risks a management
method will be proposed for each stated risk.
79
Miloš Sprčić, D., (2013) Risk management: basic concepts, strategies and instruments, Synergy, Za-
greb, p.38
7.2. Strategy and business goals (horizon five years)

Intel is a technological company whose products are within a significant number of desk-
top and laptop units sold. As a result of the pandemic, many companies were forced to
leave their offices and to accelerate the digitalization of their businesses. The authors
believe that this trend will continue and that the long-term consequences of the current
situation will increase the number of jobs performed from home. Intel’s primary strate-
gic goal is to take advantage of this situation by further increasing the performance of its
processors through investment in R&D. Secondary goals include pursuing an expansive
business policy through increased investment in research and development, increasing
the network of distributors and expanding business through acquisitions. These invest-
ments would imply the desired advancement of Intel’s cloud computing technology, as
well as the output of their processors, which would position them as a market leader
and actively work to achieve the company’s vision. Furthermore, the successful imple-
mentation of these business objectives would mean an increase in the company’s cred-
itworthiness and value, which would also enable the attraction of cheap capital in the
form of issuing new bonds or issuing new shares that would further finance the needs of
the strategy. The presented strategy implies the need to take greater risks, which is why
the importance of their active and overall management is emphasized.
7.3. Appetite and risk tolerance

In modern microeconomic theory, the behaviour of individuals is explained through a
neoclassical utility function that links the individuals’ wealth and consumption to their
level of satisfaction. The shape of the utility curve determines the degree of aversion,
propensity, or indifference to risk. Thus, the utility function in an individual with a
risk-neutral attitude is shown in a linear direction, the utility function of an individual
who avoids risk is concave, while the utility function of an individual with appetite for
risk is convex.80 The attitude of individuals towards risk differs, so there are people who
are more prone to higher risks and those who avoid them. A graphical representation
of the indifference curve map shows the relationship between risk and reward. Each
investor has their own map of the indifference curve with regard to risk appetite.81
Therefore, there are conservative investors whose indifference curves are steeper due
to greater risk aversion. On the other hand, the curves of aggressive investors have
a milder slope due to their greater willingness and risk tolerance. Namely, the conse-
quences that the corporation suffered due to non-compliance with the law greatly
affected the business, and thus the caution in larger ventures is more pronounced.
After the past scandals, Intel cannot afford loopholes in the legislation and regulation
and the laws must be strictly adhered to avoid damages to the corporation’s reputa-
tion. But, when it comes to expanding into new markets, investing in innovation, and
research and development, Intel seizes every market opportunity and its risk appetite
80
greb, p. 36-38
81
Ibid., p.48
is very high. From the legal perspective, Intel’s willingness to take risks is less than its
usual appetite for risks.
7.4. Risk identification, evaluation and management
7.4.1. Research and development risk
Significance Probability of occurrence

4 4
R&D is one of the most important factors for the development of a successful business
and quality market research saves time, money and efforts while reducing potential
risks. It is the key to understanding the opportunities that are provided and how they
can take advantage of them. The information gathered on the sector structure, the
competitors, the nature of demand and business practices will help make thought-out
and reliable business decisions.82 Quality research in the field of product and service
development starts with ideas and understanding what the existing and potential cus-
tomers want. Research and product development is a fundamental part of the modern
business world as the company bases its decisions on the results obtained in R&D.83
Scenario
In order to increase the success rates of its projects and minimize uncertainty, Intel plans
to invest in a new chip factory based in Jerusalem. Creating a research and development
campus for the development of automotive technology, Intel would provide new quality
and safe products for its consumers worldwide.84 One of the risks is that the invested
funds do not return to them, or that the implementation of the plans does not occur
because of the currently unfavourable political situation and potential unrests in Jeru-
salem. A safe threat can be a constant delay and a lack of chips. When looking at the
data from the last four years, Intel spent about $39.9 billion on R&D, while AMD and
NVIDIA together invested only $12.7 billion.85 Although the intellectual problems with
the new chip production could leave the corporation in the short term, Intel has plenty
of resources to make up for them. As for the assessment of this risk, in the third quad-
rant there are less significant risks, the great probability of emergence, which requires
active management in order to avoid an adverse impact on the operating conditions by
increasing the risk. In the case of Intel, the R&D risk belongs to this group. We estimate
this risk as highly significant (4) as well as the likelihood of appearance (4), because lag-
ging behind the competitors R&D may jeopardise the company’s future performance.
82
Market Research (05.05.2021.): https://izvoz.hbor.hr/izvozni-vodic/istrazivanje-trzista/
83
Research and product development – True idea: http://pravaideja.eu/istrazivanje-i-razvoj-proizvoda/
84
Intel to invest $600 million to expand chip, Mobileye R&D in Israel. Retrieved 5 May 2021 from
https://www.reuters.com/world/middle-east/intel-invest-600-mln-expand-chip-mobileye-rd-isra-
el-2021-05-02/
85
Forbes.com: https://www.forbes.com/sites/greatspeculations/2020/08/18/put-your-chips-on-the-
table-with-intel-corporation/?sh=414dc3d43595
Risk Management
It is necessary to see whether the intellectual investment in Jerusalem a greater sig-
nificance from the revenue side in comparison to the situation will have where the
business is disrupted due to the greater political risk. Intel must assess whether their
investments in the factory will be returned. It is preferable to use the acquired knowl-
edge to further develop creative concepts and innovations in their business sectors. It
is necessary to strengthen the network of research and development centres through
innovative partnerships at every stage of product development – from the early phase
of cooperation with other companies to the partnership at a later stage with the key
suppliers.
7.4.2. Innovation risk

3 3
Innovation risk is defined as the risk that an innovation will not be accepted or that its
application will not achieve the desired result.86 The goal of any innovation is to ulti-
mately improve the business. Although today innovation is indispensable for creating
competitive advantage and the survival of companies in the modern market, innova-
tion is an activity characterized by high risk and requires numerous investments in
human and financial resources. The most important effects of innovation are increas-
es in the market share and product quality, reductions in material costs per unit of
product, environmental improvements, health and safety aspects along with meeting
standards and numerous legal regulations.
Scenario
Almost every aspect of today’s life depends on technology, and the demand for great-
er production and advanced microchip packaging systems is more critical than ever
as more people work from home and many parts of education and communication
become virtual.87
Intel plans to invest in a plant in New Mexico, which would spur a “new era of innova-
tion” and advanced computing, as the demand for small microchips used in almost all
modern devices increases. The Rio Rancho plant would be modernized to focus on an
advanced chip packaging and stacking system that would provide better performance
and more capabilities for artificial intelligence, graphics, and other programs to be of-
fered to customers.88
86
Miloš Sprčić D., Julija Puškar, Ivana Zec, (2019.): Primjena modela integriranog upravljanja rizicima –
Zbirka poslovnih slučajeva: 3.5. Rizik inovacija, page 49.
87
Intel: $3.5 billion investment at New Mexico facility is critical to microchip future (05.05.2021.): https://
www.marketwatch.com/story/intel-3-5-billion-investment-at-new-mexico-facility-is-critical-to-microc-
hip-future-01620089137?siteid=yhoof2
88
New Mexico applauds Intel’s $3.5 billion expansion in Rio Rancho, (05.05.2021.): https://www.gover-
nor.state.nm.us/2021/05/03/new-mexico-applauds-intels-3-5-billion-expansion-in-rio-rancho/
The problem may arise if the competitors can produce a better final product – a mi-
crochip that would raise Intel costs. A good example is the race in processes between
Intel and TSMC. Measured by nodes in nano-meters, the smaller nodes are generally
considered more advanced than the larger nodes because they are more energy effi-
cient. Intel’s 10-nanometer chips are just as dense as TSMC’s 7-nanometer chips, with
approximately 100 million transistors per milli-meter per square.89
The new chips, which Intel plans to launch by the end of 2021, should offer even better
performance than TSMC’s 7-nanometer chips. As thinking and actively planning the
future is critical, Intel’s innovation risk must be continuously monitored. Although the
company has managed this risk well for the time being, the trend of the skilled work-
force leaving and thus taking their knowledge elsewhere is present in the countries
where Intel’s production facilities are located. Therefore, the probability of this risk’s
occurrence and its significance are assessed as relatively high (3).
Risk Management
By increasing investments, Intel would strive to be one step ahead of its competition
by creating new and better products. Intel needs new nano-meter nodes that would
provide better performance to its customers compared to its competitors, TSMC and
AMD. Intel spends a lot of money on innovation, and that spending results in big busi-
ness revenues. As for the process management itself, they should be at a high level – it
is necessary to establish control points that signal possible deviations at each stage to
avoid unwanted situations. With the help of strategic controlling, Intel would influence
external factors and adapt the environment to itself, namely: macroeconomic trends,
customers, suppliers, and political and social environments.90 As new factory is being
constructed for the needs of advanced computing, it is important to identify positive
and negative trends, and to suggest improvements for all components within the or-
ganization and control. In that way, a better and more reliable production would be
achieved.
7.4.3. Aggressive expansion risk caused by M&A

4 3
The expansion risk is often associated with aggressive expansions occurring through
acquisitions. Takeovers, or acquisitions are the risky ventures of incorporating one
company into the business combinations another company with the aim of business
development and value creation. Intel’s management have always been inclined to risk
and, as a large, global company, it is active in acquisitions with a total of 106 mergers
89
Where will Intel be in 5 years: https://www.fool.com/investing/2021/07/31/where-will-intel-be-in-5-
years/
90
Osmanagić Bedenik, N.: Kontroling – Abeceda poslovnog uspjeha, 3. promijenjeno izdanje, Školska
knjiga, Zagreb, 2007.
and acquisitions so far.91 Consequently, Intel has an appetite for expansion risk caused
by acquisitions. The company’s overall strategy is based on aggressive investment in
R&D and on expanding the segments of its business, mainly with the aim of entering
new markets. Numerous successful acquisitions strengthened the company’s position
as the leading manufacturer in the technological branches, but many acquisitions were
not successful and resulted in failure, or failed to achieve the expected goals. In the
case of a failed acquisition, Intel would not be significantly damaged as it has a good
market position, although such a scenario is not completely excluded either. Accord-
ingly, the company should monitor closely this risk when embarking on ventures of
this kind because reckless acquisitions and inadequate risk management in the com-
pany’s expansion can cause it to collapse.
Scenario
The Intel Corporation has visibly aspired for years, and will likely continue to do so to
increase its core value through strategic acquisitions. The lack of Intel’s products in
the smartphone market, which is considered today as one of the leading markets and
a fast-growing industry, can be considered as its major omission. In order to compen-
sate for the lack of presence in that market, Intel is turning to investing in the areas
such as autonomous cars, AI, IoT, fitness watches and the like. Based on its historical
decisions and the profile of the company, Intel can be expected to potentially invest
in acquisitions of AI and IoT companies in the coming period. Aggressive expansion of
production and entry into the above-mentioned industries will require large invest-
ments in the acquisitions themselves. Such ventures could cause additional costs and
business losses in the coming period if Intel overpays for the purchase of the target
company and the merger does not meet the expectations of synergies. In addition,
the integration shortcomings after a merger play a key role in creating significant
risks. Poor cultural integration, an important factor, can result in poor integration of
sales forces, loss of value, and employee dissatisfaction, and hence can lead to repu-
tational risk.92 Despite positive development trends, AI and IoT still do not represent
a significant portion of the market enabling an acceptable level of profitability. Addi-
tionally, many companies in these segments are experimenting with value creation
of their products and services on the market. Poor preparation and practice of in-
depth analysis of Intel as an acquirer of other companies in the IoT and AI fields can
result in poor valuation, increased risks and misjudgements in decision making. Risks
that need to be detected, and continuously monitored and prevented are located be-
tween the first and second quadrant, these are risks with high significance and high
probability of occurrence. Therefore, the likelihood of this risk is assessed by 4, and
its impact of occurrence by 3.
91
Mergr, Intel Mergers and Acquisitions Summary: https://mergr.com/intel-acquisitions#cma-tab
(05/05/2021)
92
I-SCOOP, Making sense of IoT (Internet of Things) – the IoT business guide: https://www.i-scoop.eu/
internet-of-things-guide/ [29.07.2021]
Risk management
The analysis shows that Intel’s business strategy is largely based on further business
expansion. Prior to aggressive expansion, Intel needs to conduct in-depth market re-
search and investigate consumer preferences in more detail, in order to assess which
companies they will take over in the future, so that the selected companies do not
cause them business losses or reputational damage. For this reason, in order to select
the right candidates, in its acquisitions Intel should carefully use analytical instruments
such as economic capital, risk cash flow methods, RAROC, and synergies tools such as
spreadsheets and M&A project management platforms, and avoid rushing into such
business ventures. This is particularly important bearing in mind the impact of the
COVID-19 pandemic on the entire market and economies around the world. The risk
of expansion resulting from an extremely bad acquisition could significantly damage
the company, so Intel should strive to minimize the chances of unpleasant surprises,
maintain a rational stance regarding the synergy of the agreement, and permanently
monitor the likelihood of this type of risk.
7.4.4. Intellectual risk

2 2
The risk of hiring of unqualified and inadequate workers, and the departure of highly
qualified and specialised staff is classified as intellectual risk. The companies that are
ready and trained to learn faster than their competitors, and have a better under-
standing of the environmental challenges and the ways to motivate their employees
have less chance to suffer from outflows of high-quality employees93
Scenario
The young talent leaves primarily because of the state and the atmosphere in a com-
pany. Intel is a very developed and strong company, which makes it difficult for the
employees in lower positions to emphasize and express their ideas, and therefore
many of them are not happy and feel limited in growth and development.94 The total
number of employees in 2020 was 110,600, showing a decline of 0.18% compared to
2019.95 Intel’s employee fluctuation is quite low, but it is expected that the employees
will quit if they are not satisfied with the working conditions and if they feel that they
93
Business.hr (2016) Intellectual capital today is the most powerful weapon in the battle for busine-
ss success. Available na: https://www.poslovni.hr/poduzetnik/intelektualni-kapital-danas-je-najmocni-
je-oruzje-u-bitci-za-poslovni-uspjeh-310268
94
Quora, Why do people not like working at I Intel?:https://www.quora.com/Why-do-people-not-li-
ke-working-at-Intel?encoded_ access _token= 65db6dbe93f f406a979dfa4bf59904 a9&expires _
in=5183999&fb_uid=3571007406337437&force_dialog=1&provider=facebook&success=True#_=_
95
Macrotrens, Intel: Number of Employees 2006-2021 | INTC: https://www.macrotrends.net/stocks/
charts/INTC/intel/number-of-employees
do not fit into the assigned team or see a better opportunity in another company.96
The new competitor in this industry is Apple, which has a small but growing team, and
employs only highly educated and experienced people, which can pose a threat to In-
tel through departure of its people from high positions in search of better conditions
and better deals.97 This would result in a loss of human resources, which is also one
of the key factors of the company success. Intel can face the intellectual risk in several
ways whether it is about leaving human resources due to retirement, dissatisfaction,
or more attractive offers from the competitors. These risks would slow the company’s
growth in spite of good management of this risk as the trend of departure of qualified
workforce is increasingly stronger.
Due to the occurrence of possible losses this risk was evaluated at 2 on the materiality
scale (from 1 to 5). Although the risk of going quality employees affects the company, we
cannot say that the significance is higher than 2 because the departures of employees
occur individually and not in groups. The likelihood of this risk in Intel is not significant
because Intel provides its employees with a multitude of benefits, so the probability of
this risk is estimated at 2. The risk is in the fourth quadrant and requires minimum control.
Risk management
Intel provides its employees with a variety of benefits such as flexible working hours,
paid holidays and programs such as weight loss programs, psychological therapy and
many other similar programs. However, although Intel is already investing great ef-
forts in the satisfaction of its employees, it is necessary to offer them more intangible
compensation such as professional training and education. The possibility of improv-
ing and presenting their opinions and ideas is an important motivator for every em-
ployee. Also, regular individual and group conversations with employees give the best
insight into their satisfaction, desires, and possibilities. In that way, Intel can increase
the satisfaction of its employees and manage intellectual risk effectively.
7.4.5. Customer loss risk

5 4
The risk of losing customers may arise as a result of the customers’ preference for
competitors’ products because of their higher quality, better price, or because the
brand they have been loyal to no longer has equal value for them. Due to the avail-
ability of the Internet, customers have quick and easy access to information and can
evaluate products based on the mentioned criteria. This leads to constant exposure
to the risk of losing customers and needs to be managed on a daily basis, considering
their preferences, habits, needs and attitudes.
96
Quora, What is employee turnover like at Intel?,: https://www.quora.com/What-is-employee-turno-
ver-like-at-Intel
97
Quora, Should I choose a job at Apple or Intel?: https://www.quora.com/Should-I-choose-a-job-at-
Apple-or-Intel
Scenario
Intel is under constant pressure from this risk due to easy measurability of the pro-
cessor performance and uncertain customer loyalty. Namely, the speed of the pro-
cessor can be tested by the number of operations performed per minute, and if a
competitor offers a faster processor at a similar price it can be expected that a certain
share of customers will switch to the competitor’s product. This situation occurred
when a competing company, AMD, produced a new series of Ryzen processors (Ryzen
5000 and Ryzen 3000), whose performance was superior to Intel’s ninth generation.
As a result, AMD sold 35,000 units in the German market in November 2020 while
Intel sold only 5,000.98 Even though this data concerns only one market, the example
demonstrates the disloyalty of customers who base their purchase decisions on the
best performance rather than on the brand name. Customer loss risk is one of the
most significant risks for Intel and as such is evaluated as highly significant at 4, which
emphasizes the need for competent risk management.
Risk management
This risk is extremely relevant to Intel and as such should be the focus of attention.
Managing it implies continuous efforts to observe the wishes and attitudes of custom-
ers, monitor the competitors’ products, and plan the time of launching new products
on the market. Namely, if the rivals launch a new series of processors, Intel should be
ready to do the same as soon as possible, or counterbalance the competitors’ chances
of realising significantly higher earnings, and minimise missed opportunities for Intel.
The key to avoiding this risk is to invest in R&D and thus ensure Intel’s position as a
market leader.
7.4.6. Reputational risk

4 3
Reputation affects the external perception of the company and stakeholders’ trust in
management. It also has an impact on how potential new employees, as well as the
current ones, see the company and whether they want to work in it. Building a com-
pany’s reputation is a long process and risk management is vital to its preservation.
Reputational risk generally arises from other financial, operational and strategic risk
categories, but it also may arise as a result of poor performance by the public relations
department in the event of a crisis.99
98
Wccf tech, https://wccftech.com/amd-ryzen-5000-ryzen-3000-decimate-intel-10th-9th-gen-cpus-
in-sales-figure-november/, May 2021.
99
Miloš Sprčić, D., (2020.) Enterprise risk management: Theory and practice with selected case studies
of multinational companies, University of Zagreb, Zagreb p.83, 84
Scenario
Based on Intel’s annual financial reports, there is a visible trend of growing profitability
and consistent payment of dividends, which is positive for the reputation from the in-
vestor’s perspective. However, based on the analysis of financial indicators conducted
by the authors, Table 3. shows a decline in the market price per share in 2020. This
decline is largely the result of a (short-term) decline in investor confidence in Intel after
their competitor AMD in the market offered a superior series of processors.100 Intel is
traditionally the market leader, and AMD is a rival that offers a more affordable alter-
native, but with this move it reversed the situation, which is clear from the aforemen-
tioned decline in the market value. The significance of this risk was evaluated at 4, and
the probability of its occurrence at 3.
Risk management
As a company Intel currently has a good reputation and the goal of managing this risk
is to preserve and advance it. The market leader position in the industry is achieved
through increased investment in research and development, as well as providing
above-average wages for workers that would attract top talent. Further efforts to im-
prove financial performance and continue the dividend payment policy are also de-
sirable. Finally, the social responsibility aspect is emphasized through adherence to
production in accordance with the best industry standards and emphasising this fact
for marketing purposes and maintaining its favourable reputation.
7.4.7. Price risk

3 4
Market induced risks are price risk, interest rate risk and exchange rate risk. As almost
all companies are exposed to financial risks arising from changes in the price of goods,
this risk affects the entire financial operations of the company. Risk exposure can be
direct, generated by the prices paid by the company for the goods used in manufac-
turing and built in the finished products sold to the customers, or indirect, contained
in the price changes of energy and transport prices.101 Similarly, price risk can also be
seen as a potential price war between the competitors in the same industry.
Scenario
In the case of Intel, the risk of a change in the price of goods is mainly related to its
products, as well as to the competitors’ products and services. Another influential fac-
100
Wccf tech, https://wccftech.com/amd-ryzen-5000-ryzen-3000-decimate-intel-10th-9th-gen-cpus-
in-sales-figure-november/, May, 2021.
101
Business Expert Press, Digital Library, Managing Commodity Price Risk: A Supply Chain Perspective,
Second Edition, Zsidisin, G.A., 2017: https://www.businessexpertpress.com/books/managing-commod-
ity-price-risk-supply-chain-perspective-second-edition/
tor is the changes in the prices of raw material used in manufacturing the final prod-
ucts. As Intel has a number of competitors on the market, of which AMD, Samsung,
NVIDIA and IBM are four major players, it is exposed to constant market competition
and price wars. The customers’ exodus to cheaper competitors entails a number of
unwanted business events: it causes a decrease in the volume of the overall business,
which further negatively affects the sales revenues. The recession caused by the coro-
navirus pandemic is forcing Intel to change prices of goods. Like any recession, this one
will certainly be accompanied by inflation, which will lead to an increase in the general
level of prices and a decrease in the consumer purchasing power. Consequently, Intel
will be forced to reduce the prices of its products to boost sales, which will further
weaken the company’s financial image compared to the pre-recession period. The like-
lihood of this risk for the above reason is extremely high and is assessed as 4, while the
impact of the occurrence of this event is marked 3.
Risk management
Price risk should be managed through mutual agreements with the competitors in
the industry and through further investments and marketing activities to convince
the consumers that behind Intel’s products and prices are quality and reliable prod-
ucts and services that are a level above the competition. In addition, efforts should be
made to reduce production costs. The use of cheaper production materials could re-
duce the price of products, which would thus become more accessible to larger num-
bers of consumers and preserve the loyal customers.
7.4.8. Aggressive IT system risk and cyber security risk

4 4
Cyber security risks are operational risks – the risks of losses arising from errors in in-
adequate internal procedures, systems or policies, employee errors, IT system errors,
fraud or criminal activities. They are very difficult to identify as there is no statistics to
rely on. Generally, the greatest damage results from risks caused by an unpredictable
event. Any IT system is bound to be exposed to a cyber-attack, but its type is difficult to
predict. For this reason, each company must monitor the events related to cyber secu-
rity in the world and understand the relevance of such events for its own business. For
this reason, the risk of cybersecurity has been quantified through a decline in the sales
revenue and an increase in other operating costs. Therefore, business processes and ICT
systems require continuous improvement in accordance with the available information
on the realised attacks and vulnerabilities. Since it is impossible to fully predict cyber
risks, every company, including Intel, needs to monitor continuously the dangers of such
attacks, and build and maintain a resilient organizational and technical architecture.102
102
ICTbusiness: https://www.ictbusiness.info/poslovanje/sto-je-kiberneticki-napad-na-kljucnu-nacio-
nalnu-infrastrukturu-i-kako-se-obraniti.phtml (10.5.2021)
Scenario
According to the Allianz Risk Barometer for 2021, cyber-attacks are ranked third given
their increasing incidence.103 Intel is constantly investing in technology advancement
and following the trends in the security aspects of technological development which
is confirmed by 1.875 employees trained in IT structure and security technologies.104
In parallel with the improvement of technology, the technology used to carry out cy-
ber-attacks is advancing, which works to the advantage of cybercriminals (“hackers”)
who are becoming more successful and cunning in their intentions, and often engage
in endangering the companies. Consequently, it is realistic to expect that Intel, as one
of the leading companies in the technology industry, will face significant cyber-attacks
in the future. As its products are an integral part of many computer enclosures, their
misuse and data corruption pose a security threat that leads to negative effects and
incidents. Some of the possible scenarios caused by cyber security breaches include
unauthorized access to data and identity theft, damage to the company’s reputation,
loss of revenue, breach of trust and loss of a certain number of customers, or elec-
tronic malfunction that could also cause security issues. In addition, the possibility of
this risk is increased by various mergers and acquisitions that Intel is prone to. Namely,
as many companies do not engage enough in-depth analyses in this area acquiring a
company with poor cyber security or existing vulnerabilities can also lead to cyber se-
curity threats.105 Due to the increasing number of attacks and violations of IT security,
the likelihood of both this risk’s occurrence and its impact were estimated at 4. This
risk is in the first quadrant and should be prevented.
Risk management
The primary and the most important IT task of a company is to protect all data, pro-
grams, computers and the entire technology network, and to prevent the occurrence
of cyber security risks. It is important to continue to invest and maintain the compa-
ny’s information system and monitor the trends in the protection of business systems
and data. In order to reduce as well as to understand the nature and impact of cy-
ber incidents on business, Intel should pay particular attention to IT system security
and continue to invest in and work on improving the overall technology that monitors
trends in full data protection and security system control. In addition, services includ-
ing 24-hour access to IT professionals and legal support would help to improve Intel’s
cyber resilience. Since cyber risk has an impact on the occurrence of some other risks,
such as reputational risk, it should be managed seriously as the synergistic occurrence
of this, and the related risks could pose a serious threat to the company’s operations.
103
Allianz, Allianz Risk Barometer, 2021: https://www.agcs.allianz.com/news-and-insights/reports/alli-
anz-risk-barometer.html (11.5.2021)
104
MSSPAlert, D. Howard Kass, Intel: Cybersecurity Transparency, Assurance Drive Technology Pur-
chases, Mar 18, 2021: https://www.msspalert.com/cybersecurity-research/intel-cybersecurity-trans-
parency-assurance-drive-technology-purchases/ (11/05/2021)
105
Allianz, 2020, Allianz Risk Barometer 2020 – Cyber-incidents, Jan 14, 2020: https://www.agcs.
allianz.com/news-and-insights/expert-risk-articles/allianz-risk-barometer-2020-cyber-incidents.html
(11.5.2021)
7.4.9. Liquidity risk

4 2
Liquidity risk is defined as the risk that a company’s cash receipts will not be sufficient
to cover cash outlays, which often results in the liquidation of the company’s assets at
values less than real to compensate for the cash shortfall.106 The impact of this risk on
the company’s operations is extremely large. Liquidity risk exposure is quite high as it
is directly related to market risks and the volatility that characterizes them. Liquidity
means a measure that refers to the ability to meet the financial obligations and the
liquidity position itself speaks of the competence of the company. Furthermore, liquid-
ity risk cannot be viewed in isolation from other risks such as credit risk or customer
loss risk because all risks that have a direct impact on the company’s cash flows, i.e.,
cash receipts and expenditures, affect the exposure to liquidity risk.107
Scenario
Investors who consider in investing in companies with high liquidity and a lower level
of on-balance sheet debt should consider investing in Intel shares because they are
characterized by these features. With a market estimate of 232 billion US dollars, Intel
Corporation is a safe haven in times of market uncertainty due to its strong balance
sheet.108 One of the liquidity indicators, the current ratio, which is used to measure the
company’s ability to meet current liabilities and provides insight into the company’s
solvency, is 1.91 for 2020. Compared to the industry average, it represents an enviable
result that needs to be maintained. However, the debt-to-equity ratio, which shows
the creditors’ share in financing a company for every $1, exceeds the industry average
and has been growing over the last four years. The increasing leverage represents
additional costs and risk for Intel which can be explained by an aggressive debt-fi-
nanced growth strategy. The significance of liquidity risk was rated 4 because this risk
is directly related to other business risks that cover different business segments. The
probability of its occurrence was rated 2 because Intel successfully manages and set-
tles its liabilities.
Risk management
Liquidity risk management requires active monitoring of cash flows and simultane-
ous management of assets and liabilities. If the other risks to which the company is
exposed are effectively managed, the exposure to liquidity risk will automatically be
reduced.
106
greb, p. 28.
107
Ibid., p.28
108
Simply Wall St; All you need to know about Intel Corporation’s financial health: https://simplywall.
st/stocks/us/semiconductors/nasdaq-intc/intel/news/all-you-need-to-know-about-intel-corporations-
nasdaqintc-financial-health May, 2021.
7.4.10. Potential risk of inadequate internal processes

2 3
The human factor is an integral part of every company as it is involved in the design, man-
agement, operation, maintenance, supervision and organization of work processes and
procedures. It is human to make mistakes, so it can be expected that people make unin-
tentional mistakes in the workplace. These errors can occur due to omission, improper
execution of the action and unnecessary or redundant actions. Most of the protection
mechanisms of industrial processes are focused on technical failures, and only a small
focus is placed on protection against possible human error. Human error accounts for
23% of unplanned downtime and production losses,109 and there are active and latent hu-
man errors. The former arise due to the lack of skills and knowledge of employees, while
latter ones are attributed to the design of technical-technological systems, organization,
management, and local working conditions.110 Human error has a significant impact on
the risks for most of the work processes that Intel Corporation implements.
Scenario
Workers in the manufacturing plant or those in the management of Intel, may inadver-
tently cause large losses to the company due to, for example, errors related to man-
agement support, relationships with business partners, customers and suppliers, out-
dated or inaccurate reporting or incorrect and imprecise reports. This, inadvertently
and incompetently, jeopardizes the crisis management system and increases the risk
exposure of companies. For example, if the parts on the PC case are not properly as-
sembled, and if scientists and engineers working on computer products for high-per-
formance computer units misdesign the components that are installed in desktop
computers, the product may fail, which in turn binds many side effects in the compa-
ny’s business operations. Furthermore, stress, fatigue, illness and similar symptoms
negatively affect employees’ attention, memory and decision-making processes, and
contribute to the likelihood of errors in the workplace. Intel has automated its process-
es to reduce the human factor and thus potential errors. Furthermore, mistakes at the
managerial level are resolved hierarchically by the business organizational structure.
Based on the above, the estimated impact of the risk of inadequate internal processes
is 2, and the likelihood of occurrence is 3, while the risk is placed between the third and
fourth quadrants.
Risk management
Eliminating human mistakes once and for all is impossible, but they can be avoided. In
order to prevent human error, it is important to focus on the causes that lead to errors.
109
Human Error Solutions, Problems and Solutions: AI and Human Error: https://humanerrorsolutions.
com/problems-and-solutions-ai-and-human-error/ [12.05.2021]
110
Miloš Sprčić D. (2019) Primjena modela integriranog upravljanja rizicima – zbirka poslovnih slučajeva:
5.1. Rizik grešaka u internim procedurama, pg. 67
Intel needs to first identify the important elements and steps at work and find ways
to eliminate the incorrect steps, or to improve workflows to give people a chance to
achieve the desired results. Moreover, performance review with feedback to provide
the workers with the awareness of they need to perform well and to actively seek ways
to improve and operationally plan the work process are the foundations of human
error prevention.111
7.4.11. Risk Maping

Table 11. Risk severity
Probability Significance Level

> 95% Critical 5
> 65% < 95% High 4
> 25% < 65% Medium 1
> 5% < 25% Low 2
<5% Negligible 1
Source: authors’ elaboration according to teaching materials for the Risk Management course
Table 12. Risk quantification
Probability of
Risk Type Significance Risk Value
occurrence
Buyer loss risk 5 4 20
R&D risk 4 4 16
Aggressive IT systemic and cyber
4 4 16
security risk
Reputation risk 4 1 12
Acquisition expansion risk 4 1 12
Price risk 1 4 12
Innovation risk 1 1 9
Liquidity risk 4 2 8
Potential risk of inadequate internal
2 1 6
processes
Intellectual risk 2 2 4
Source: authors’ elaboration according to materials for the Risk Management course
Based on Table 12. that summarises the identified risks for Intel and the corresponding
characteristics and probabilities of the appearance, a risk map was created.
111
Cavendish Scott: The ISO 9001:2015 “Preventing Human Error” Requirement: https://www.caven-
dishscott.com/articles-news/iso-90012015/the-iso-90012015-preventing-human-error-requirement/
[12.05.2021]
Figure
172
1.Company
Risk Map
Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
Source:
Figure authors
1. Risk Map
Source: authors
8. CONCLUSION
8. CONCLUSION
The analysis of Intel Corporation has indicated the company’s high quality leadership to date
The analysis of Intel Corporation has indicated the company’s high quality leadership
and identified
to date the strategy
and identified the of expanding
strategy its market its
of expanding share through
market investments
share in research and
through investments
in research and
development withdevelopment with the aim
the aim of improving of improving
performance performance
and optimisation ofand
theiroptimisa-
processors.
tion of their processors. This approach implies an increased need for risk exposure,
which further emphasises the role of integrated risk management.
The most relevant risks for Intel are the risk of customer loss, R&D risk, reputation-
al risk, aggressive IT system risk and cyber security risk. They are placed in the first 57
quadrant of the risk map and as such require detailed management processes and
continuous monitoring of its potential realization. With the successful management of
all these risks, Intel has the potential to maintain its market leader position and ensure
long-term operations.
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The Case Study of Match Group 177
THE CASE STUDY OF MATCH GROUP
Ivana Šendulović, Marko Šoštarić, Nora Tomljanović,

Jerko Zadro, Vid Zavalić, Adrian Zvizdić1
1. INTRODUCTION
1.1. The topic and the aim od the paper

A rising importance of risk management puts forth new challenges to organizations, in
relation to reaching higher levels of competitiveness, achieving set business goals and
additionally raising the company’s value. The aim of this paper is to analyze the busine-
ss risks of the Match Group company and determine an exhaustive risk management
strategy. A detailed analysis of the company’s environment and business will allow for
identification and quantification of risks which influence the company’s business and
consequently a risk management strategy will be determined.
1.2. About Match Group

Match Group is an American technology company established in Februray 2009 with
headquaters in Dallas, Texas.2 Its origines date from 1995 when a Stanford University
student Gary Kremen founded Match.com with the intention to create a meeting place
for older people looking for long-term relationships. A year later, due to disagreements
with the investors, he left the start-up with just 50,000 dollars. In 1999 IAC, a holding
company that owns brands across 100 countries mostly in media and Internet, bought
Match.com for 50 million dollars. In the following years, with a 68% rise in revenue
between 2003 and 2006 from 185.3 to 311.2 million dollars under Jim Safka’s leader-
ship, Match became one of the most successful Internet companies for meeting par-
tners in the USA. Consequently, the president of IAC Barry Diller decided to divide IAC
into five separate companies, which resulted in the official establishment of The Match
Group as athat unifies all dating platforms.3 Only a few months later, IAC began nume-
1
2
Match Group, Wikipedia, available at: https://en.wikipedia.org/wiki/Match_Group [10.04.2021.]
3
How Tinder and Hinge owner Match Group grew to dominate the country’s online dating market –
but let Bumble get away, Business Insider (2021.), available at: https://www.businessinsider.com/what-
is-match-group-history-of-tinder-parent-company-2021-1 [10.04.2021.]
rous acquisitions of companies that provide online dating services, and today’s Match
Group’s wide portfolio includes Match a total of 45 global dating services including
Tinder, Hinge, POF (Plenty of Fish), OkCupid, etc. Since 2014, it has recorded about 56
million application downloads globally with the number reaching 82 million in the first
three quarters of 2020. In 2015, the company was listed on the NASDAQ stock exchan-
ge when it raised over $400 million.4 As of July 2020 Match Group is no longer owned
by IAC,5 but it owns all online dating apps in the USA, with the exeption of Bumble.
Today, over 2,000 Match Group’s employees in 20 offices deliver products in over 40
languages to users around the world.
Match Group’s mission is to ”encourage meaningful relationships for each individual
in the world“ through its diverse portfolio of companies, each designed for this purpo-
se. In the US, 40% of relationships start online, and Tinder plays a key role as a large
number of young people use this user friendly application. The app boasts the highest
earnings as its direct revenue has grown from virtually zero dollars in 2014 to an esti-
mated $1.4 billion in 2021.6 In a situation of a global pandemic, dating apps are more
attractive to potential users than ever before.
2. ANALYSIS OF MATCH GROUP’S ENVIROMENT AND BUSINESS

OPERATIONS
2.1. PESTLE analysis
2.1.1. Political factors

Without a doubt, the biggest political factor concerning Match Group’s business is
none other than the political orientation and values of the people in power. Applica-
tions that The Match Group offers are available anywhere in the world and hence are
prone to certain regulations imposed by certain governments.
The countries ruled by radical islam such as Pakistan banned applications like Tinder
and Grindr on the premise of breaking ’moral code’. Non-marital relations and homo-
sexuality are both forbidden by law in Pakistan and the above mentioned applications
are banned for deviating from that same law. Nevertheless, Pakistan’s government
offers an option of adjusting the content, i.e., filtering out all inappropriate content to
facilitate free use of the app to the citizens.7
4
5
Match Group, available at: https://mtch.com/ourcompany [10.04.2021.]
6
7
Pakistan blocks Tinder and Grindr for ‘immoral content’, BBC (2020), available at: https://www.bbc.
com/news/technology-53977780 [10.04.2021.]
An equally serious threat to Match Group is political orientation, i.e., ‘leaning’ to a cer-
tain political side. As politicians are openly vocal about supporting or opposing appli-
cations the likes of Tinder, Grindr, etc. Thus, if the far right start endorsing an appli-
cation of a direct competitor of The Match Group, a large number of users who agree
with this ideology will migrate to them and may cause a substantial loss of the group’s
clients.8 In order for The Match Group to deal with this kind of problems, adequate
adjustment of applications in accordance with the particular country’s political orien-
tation is necessary. When such adjustment is impossible, market penetration is hardly
possible and may result in longterm loss for the company.
2.1.2. Economic factors

Since biggest part of Match Group’s business is done online through various applica-
tions, that type of a business model can survive even the roughest economic crisis
such as the one caused by COVID-19. Economic factors affecting Match Group’s per-
formance are a country’s overall economic stability, threat of a potential crisis, and the
population’s buying power.
Match Group’s largest user base is located in the United States of America, followed
closely by India and Ireland.9 The data collected from the US Office for Economic
Analysis presented in Figure 1. shows a GDP growth of 4.3% in the last quarter of
2020. Positive results reflected in the growth of consumer spending, export, private
investment, and government spending despite the ongoing pandemic.10 Contrary to
these results, February of 2021 marked a fall of 7.1% in consumer spending. The ne-
gative numbers are directly reflected on the potential decline of Match Group’s ear-
nings whose main source of revenue comes from monthly and annual subscriptions
to their applications.
8
Politics on dating apps are thornier than ever now that Trump is gone, available at: https://mashable.
com/article/dating-app-politics/?europe=true [10.02.2021.]
9
Dating.com Reveals the Top Five Most Active Countries for Online Dating During the Era of Social
Distancing, PR Newswire (2020), available at: https://www.prnewswire.com/news-releases/dating-
com-reveals-the-top-five-most-active-countries-for-online-dating-during-the-era-of-social-distan-
cing-301033213.html [10.04.2021]
10
Gross Domestic Product, (Third Estimate), GDP by Industry, and Corporate Profits, Fourth Quarter
and Year 2020, Bureau of Economic Analysis, U.S. Department of Commerce (2021), available at: https://
www.bea.gov/news/2021/gross-domestic-product-third-estimate-gdp-industry-and-corporate-pro-
fits-4th-quarter-and [10.04.2021.]
decline of Match Group’s earnings whose main source of revenue comes from monthly and
annual subscriptions to their applications.
Figure 1. Real GDP – percentage change compared to last quarter for 2020
35
25
15
Value in percentage
-5 2020 Q1 2020 Q2 2020 Q3 2020 Q4
-15
-25
-35
Source: author's elaboration using data from Bereau of Economic Analysis, available at:
Figure 1. Real GDP – percentage change compared to last quarter for 2020
https://www.bea.gov/news/2021/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-4th-
Source: author’s elaboration
quarter-and using data from Bereau of Economic Analysis, available at: https://www.bea.
[10.04.2021.]
gov/news/2021/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-4th-quar-
ter-and [10.04.2021.]
The economic situation in India was not different from the rest of the world. Figure 2. reveals
The economic situation
a 9.3% drop in GDPin India
causedwas
by not
the different
Covid-19from theThe
crisis. reststaggering
of the world.
fall Figure
hit the 2.
consumer
reveals a 9.3% drop in GDP caused by the Covid-19 crisis. The staggering fall hit the
spending sector the most resulting in a colossal 32.31% fall between the second and third
consumer spending sector the most resulting in a colossal 32.31% fall between the
second and third quarters of 2020.11 The last quarter saw a rise of 22% leading India
into a prosperous start of the new year with a steady rise of 12% in the first quarter of
2021.12 The uptrend reflected positively on India’s buying power, forecasting a possible
rise in Match Group’s earnings in the near future.
8 Dating.com Reveals the Top Five Most Active Countries for Online Dating During the Era of Social
Distancing, PR Newswire (2020), available at: https://www.prnewswire.com/news-releases/datingcom-reveals-
the-top-five-most-active-countries-for-online-dating-during-the-era-of-social-distancing-301033213.html
[10.04.2021]
9
Gross Domestic Product, (Third Estimate), GDP by Industry, and Corporate Profits, Fourth Quarter and Year
2020, Bureau of Economic Analysis, U.S. Department of Commerce (2021), available at:
https://www.bea.gov/news/2021/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-4th-
quarter-and [10.04.2021.]
11
Consumer spending in India 2016-2020, Statista (2021), available at: https://www.statista.com/sta-
tistics/233108/total-consumer-spending-in-india/ [10.04.2021.]
12
Moody’s upgrades India’s GDP growth to 12% in 2021, Mint (2021), available at: https://www.livemint.
com/news/india/moodys-analytics-upgrades-india-s-growth-forecast-to-12-for-2021-11616082021410.
html [10.04.2021.]
positively on India’s buying power, forecasting a possible rise in Match Group’s earnings in
the near future.
Figure 2. Consumer spending in India from January 2018 to October 2020
24000
23000
Value in billion Indian Rupees
22000
21000
20000
19000
18000
17000
16000
15000
14000
Jul-18
Jan-18
Mar-18
May-18
Jan-19
Mar-19
May-19
Jul-19
Sep-18
Nov-18
Sep-19
Nov-19
May-20
Jan-20
Jul-20
Sep-20
Mar-20
FigureSource: author's elaboration
2. Consumer spendingbased on the
in India dataJanuary
from of Statista, available
2018 at:
to October 2020
https://www.statista.com/statistics/233108/total-consumer-spending-in-india/ [10.04.2021.]
Source: author’s elaboration based on the data of Statista, available at: https://www.statista.com/sta-
tistics/233108/total-consumer-spending-in-india/ [10.04.2021.]
Figure 3. shows an expected drop of 5.1% followed by a decline of 2.24% in consumer
12
Figurespending,
3. showsmarking
an expectedIreland’s
dropfourth
of 5.1%quarter in 2020.
followed Despite
by a decline the negative
of 2.24% results and an
in consumer
spending,
ongoingmarking
crisis, Ireland’s fourththe
analysts expect quarter
GDP to 2020.byDespite
in grow 13
3.4% in the
2021. negative
13 results and
The negative results at the
an ongoing crisis, analysts expect the GDP to grow by 3.4% in 2021.14 The negative
end
results at of
the2020
endresulted
of 2020 in a decline
resulted in aofdecline
earningsof for The Match
earnings for TheGroup
Matchin Group
the lastinquarter,
the but a
last quarter, butbuying
rise in the a rise power
in the and
buying powerspending
consumer and consumer spending
in Ireland is to beinexpected
Ireland in
is to
thebe
upcoming
expected in the upcoming year.
year.
10
Consumer spending in India 2016-2020, Statista (2021), available at:
https://www.statista.com/statistics/233108/total-consumer-spending-in-india/ [10.04.2021.]
11
Moody's upgrades India's GDP growth to 12% in 2021, Mint (2021), available at:
https://www.livemint.com/news/india/moodys-analytics-upgrades-india-s-growth-forecast-to-12-for-2021-
11616082021410.html [10.04.2021.]
12
Economic indicators of Ireland – private consumption, Moody's Analytics, available at:
https://www.economy.com/ireland/private-consumption [10.04.2021.]
13
Irish economy set to grow by 3.4% in 2021, RTE (2021), available at:
https://www.rte.ie/news/business/2021/0211/1196467-irish-growth-forecast/ [10.04.2021.]
13
Economic indicators of Ireland – private consumption, Moody’s Analytics, available at: https://www. 5
economy.com/ireland/private-consumption [10.04.2021.]
14
Irish economy set to grow by 3.4% in 2021, RTE (2021), available at: https://www.rte.ie/news/busine-
ss/2021/0211/1196467-irish-growth-forecast/ [10.04.2021.]
Figure 3. Consumer spending in Ireland from first quarter of 2018 to last quarter of 2020
30000
28000
Value in million €
26000
24000
22000
20000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020
Source:
Figure author's elaboration
3. Consumer spendingbased on the data
in Ireland fromfrom
firstEconomic
quarter indicators
of 2018 tooflast
Ireland – private
quarter consumption,
of 2020
Moody's Analytics, available at: https://www.economy.com/ireland/private-consumption [10.04.2021.]
Source: author’s elaboration based on the data from Economic indicators of Ireland – private consumpti-
on, Moody’s Analytics, available at: https://www.economy.com/ireland/private-consumption [10.04.2021.]
2.1.3. Demografic factors

2.1.3. Demografic factors
In theInlast
thedecade the modernt
last decade world
the modernt hashas
world seen a large
seen number
a large number ofof
couples
coupleswho
whohave
havemet
met online.
online. Finding partners through dating apps is already a part of everyday reality as hectic
Finding
lifestyles partners
hinder through
people dating
spending apps
their is already
leisure a part
time out andofmeeting
everydayother
reality as hectic
people, bothlifestyles
friends and potential
hinder partners. their
people spending Consequently, online
leisure time out dating apps have
and meeting become
other people,a common
both friends and
and suitable place for finding a date or even a soulmate. They allow an individual to get out
potential
of their partners.
usual social circleConsequently,
and meet newonline dating apps
acquaintances andhave
form become a common and suitable
relationships.
place dating
The online for finding a date or even
conglomerate a soulmate.
is expanding They allow
globally, but it an individual
is still trying totofind
get the
out of their usual
right
way to adapt
social to different
circle and meetsocial and cultural norms.
new acquaintances The
and form chances that someone who did
relationships.
not grow up in such cultures will understand and know their rules are slim. India has a
long history of arranged marriages that is still strong and present.15 Marriage is the ul-
timate goal
The of a romantic
online relationship,isand
dating conglomerate familiesglobally,
expanding play a dominant
but it is role
still in the process.
trying to find the right
This culture opposes frequent changes of sexual partners and this does not support
way
Tinder to adapt
which to different
is a synonym for social and cultural
the hookup culturenorms.
and inThe chances
its new that someone
marketing who did not
campaigns
boasts slogans
grow up insuchsuchascultures
“single does what the single
will understand and wants.”
know theirDespite
rulesallare
this, India
slim. repre-
India has a long
sents an important market for the Match Group due to its growing 14
young population.
history of arranged marriages that is still strong and present. Marriage is the ultimate goal of
Because online dating apps are associated with non-binding based on data relations-
hips, athey
romantic relationship,
are not and familiesinplay
the most acceptable a dominant
Japan role insex
where casual the is
process. This culture
still a taboo topic. opposes
Also, frequent
it wouldchanges
never occur to Western
of sexual partners developers
and this doestonot
include
supportblood
Tindertype as ais profile
which a synonym for
question even though in Japan it stands as a definition of personality and a compati-
the hookup culture and in its new marketing campaigns boasts slogans such as "single does
15
Current trends arranged marriages in India, Wmmatrimonial, Medium.com (2016), available at: https://
medium.com/@solutionswebomania/current-trends-arranged-marriages-in-india-e0435d455e8e
14
Current trends arranged marriages in India, Wmmatrimonial, Medium.com (2016), available at:
[11.04.2021.]
https://medium.com/@solutionswebomania/current-trends-arranged-marriages-in-india-e0435d455e8e
[11.04.2021.]
6
bility factor. Having in mind the crowded work schedules in Japan and the widespread
use of mobile devices, online dating would actually meet many needs.
This way of meeting partners is of great importance for social groups whose members
are difficult to locate in physical reality – for example, the marginal social groups that
lack meeting places in particular social context. One of these social groups would be
the LGBTQ + community for which the Match Group applications are of great impor-
tance. Even before the emergence of such sites and applications in the period from
2008 to 2009, more than 60% of LGBTQ + people in the United States met online.16 In
the last ten years, 41% of homosexual couples have met online, while for heterosexual
couples this percentage is lower (17%). In the context of social norms that certain in-
dividuals perceive as repressive, in this case in terms of homosexuality that still bears
the social stigma, Match Group’s online dating apps provide platforms for safe sociali-
zation and meeting potential partners.
In times of the COVID-19 crisis, recommendations for social distancing and laws restri-
cting the social life of every individual around the world, meeting people online and
developing both friendly and romantic relationships in a virtual way has never been
more popular. While business in most sectors suffered due to the pandemic, Tinder,
the most popular app in the Match Group’s portfolio, recorded huge increases in the
number of new users.17 Figure 4. shows a large increase in the number of new subscri-
bers to Tinder
Figure 4. since the end
Percentage of March,
change of newie., the subscribers
Tinder beginning of the pandemic.
29/02/2020 – 30/06/2020
15%
10%
Percentage change
5%
0%
-5%
-10%
-15%
01/02/2020 01/03/2020 01/04/2020 01/05/2020 01/06/2020
Months
Tinder - North America and Western Europe Tinder - the rest of the world
FigureSource:
4. Percentage changebased
author's elaboration of new Tinder
on data fromsubscribers 29/02/2020
Business Insider – 30/06/2020
(2020), available at:
Source:https://www.businessinsider.com/tinder-hinge-match-group-dating-apps-more-users-coronavirus-2020-8
author’s elaboration based on data from Business Insider (2020), available at: https://www.busi-
nessinsider.com/tinder-hinge-match-group-dating-apps-more-users-coronavirus-2020-8 [14.04.2021.]
[14.04.2021.]
16
Rosenfeld M.J., Thomas R.J., Searching for a Mate: The Rise of the Internet as a Social Intermedia-
ry, Sage Journals (2012), available at: https://journals.sagepub.com/doi/full/10.1177/0003122412448050
2.1.4. Technological factors
[14.04.2021.]
17
These figures from Match Group show more people are turning to online dating during the pan-
demic, Business Insider (2020), available at: https://www.businessinsider.com/tinder-hinge-match-gro-
Technological factors have a significant
up-dating-apps-more-users-coronavirus-2020-8 impact on the operations of the Match Group.
[14.04.2021.]
Initially, today's platforms existed only in the form of a single website, but smartphones and
the development of mobile internet and mobile applications as well as their increased use
allowed easier access to their services, which contributed to the rapid growth of the company.
2.1.4. Technological factors

Technological factors have a significant impact on the operations of the Match Group.
Initially, today’s platforms existed only in the form of a single website, but smartp-
hones and the development of mobile internet and mobile applications as well as their
increased use allowed easier access to their services, which contributed to the rapid
growth of the company.
Of great importance has been the development of artificial intelligence on which the
company bases the work of most of its apps. At first, in such applications, you could
only look at the profiles of people available on the list, but today this process has
changed significantly. AI algorithms can memorize user behavior and tailor the list of
people they might like based on it. This technology can analyze previous matches and
show only the top potential dates to increase the chances of finding partners based
on data. The more the user uses the app the more data AI gets and, respectively, gives
more accurate matches. 18
The technological tool, the so-called swipe movement introduced by the Match Group
with the Tinder application, involves moving a finger, left or right, over the user profile,
which symbolizes the rejection or acceptance of a person as a potential partner. Unlike
the websites that required more time to read the profiles of potential partners, the
nature of the swipe feature allows for quick decision making based mostly on visual
appearance.
The Match Group’s business can certainly be affected by illegal user activities in the
form of fraud, better known as catfishing. If the application is flooded with fake pro-
files, it will directly affect the overall use of the application and user satisfaction. The
better the experience is for people during their free use of the app, the greater the
chances are that a user will subscribe to a premium account that offers much greater
features. Technology can significantly improve the security of the application and is
very effective in detecting any suspicious activity and make solving such problems
much faster and easier. It assess the risk of the profile and, in case the rating is too
high, the profile will be blocked.19
As with any online companies, cyber-attacks pose a risk to the Match Group as well. No
threat that the United States faced grew so rapidly and in such an incomprehensible way as
the threat of cyber attacks. There are 4,000 cyber attacks in the world every day, and 64%
of the companies around the world have experienced at least one of its forms to date.20
Thus, as the company that holds most of the dating apps, the Match Group could find
itself on the radar of cyber attackers and suffer great damages.
18
Sychyk A., AI for Dating Apps: How Machines Help People Find Based on data (2020), available at:
https://readwrite.com/2020/05/08/ai-for-dating-apps-how-machines-help-people-find-based on data/
[14.04.2021.]
19
Sychyk A., AI for Dating Apps: How Machines Help People Find Based on data (2020), available at:
https://readwrite.com/2020/05/08/ai-for-dating-apps-how-machines-help-people-find-based on data/
[14.04.2021.]
20
Bulao J., How Many Cyber Attacs Happen Per Day in 2020? (2021), available at: https://techjury.net/
blog/how-many-cyber-attacks-per-day/#gref [14.04.2021.]
2.1.5. Legal factors

The legal environment and the laws themselves vary from country to country, and gi-
ven the fact Match Group is a multinational dating conglomerate, adjustments to the
laws of each country are necessary. An additional challenge arises from adapting to
the online laws of the countries in which Match Group plans to launch its applications
to the market and operate successfully.
Many states, such as Australia, have laws in place against cyberbullying, offensive con-
tent, and image-based abuse. Fines for breaching those laws reach up to $110,000,
the cost of which is borne by the company behind the application. Under the above
law, users have the right to complain about offensive content on an application and
the application managers have to remove the content. Failure to remove the content
within the given deadline results in court proceedings and a fine.21
The GDPR (General Data Protection Regulation), which was passed in 2016, also had a
major impact on Match Group’s operations. It has been in effect since 2018 and repre-
sents a significant challenge for all online companies which use personal data. Namely,
the GDPR puts a barrier on the processing, storage and transfer of personal data, and
companies that operate in EU and collect information from EU residents must invest
great efforts to adapt to the GDPR measures. Any trade in personal data is prohibited
and a large security measure is required to protect the personal data from malicious
use by employees or hackers. Fines for violating the GDPR requirements can amount
up to € 20 million or 4% of the global revenue (whichever is greater), and in the case of
the Match Group it would be $ 95,600,000 in 2020.22 Adapting to GDPR norms for a gro-
up like Match could be of great importance later in the future due to the large amount
of personal data used every day. Despite many suspensions and penalties, The Match
Group has not yet been punished for violating the GDPR. In order to maintain this sta-
tus, it should constantly invest in further development of methods for protecting and
securing the personal data of its users.
2.1.6. Ecological factors

In recent years, there has been a global shift towards more environmentally sustaina-
ble ways of working. In addition to the quality of the products, the attention that the
company pays to preserve the environment as well as to be responsible in their busi-
ness has become increasingly important to the customers and users of the services.
Importance is also given to the working conditions of employees which have not been
the most ideal in the history of Match Group.
21
Dating apps could be fined up to $110k if they don’t deal with unsafe material (2021), available at: https://
www.abc.net.au/triplej/programs/hack/dating-apps-fined-online-safety-bill/13257172 [15.04.2021.]
22
Match Group: annual revenue 2012-2020, Statista (2021), available at: https://www.statista.com/sta-
tistics/449432/annual-dating-revenue-match-group/ [15.04.2021.]
2.2. Porter’s five forces

The best known and most commonly used approach to industrial analysis was develo-
ped by Michael Porter. In practice, there are many characteristics of the industry, i.e.,
its structural features that determine the intensity of rivalry and the level of profitabi-
lity. In his model, Porter classified these factors into five competitive forces, namely:
competition between the existing competitors, the threat of new companies entering
the market, the danger of substitute products, the bargaining power of customers and
the bargaining power of suppliers.23
2.2.1. Competition
The online dating industry generated revenues of 3.08 billion US dollars in 2019.24 Figure
5. shows total revenues and forecasts for the future of this industry in the United States.
It can be seen that therevenues have a growing tendency and the forecasts are positive.
The result is listed as the socio-cultural and technological factors in the PESTLE analysis.
The hectic lifestyle, lack of free time, development of smartphones, the availability of
mobile internet, and the emergence of a revolution in the homosexual community have
caused high growth of the online dating industry in the last decade.25
1000
900
755
Revenue in millions of USD
800 707 733

674
700
577 602
600
496
500
390
400
300
200
100
0
2017 2018 2019 2020 2021 2022 2023 2024
Year
Source:
Figure 5. Totalauthors' elaboration
revenue based dating
of online on data from Statista,
industry andavailable at:
predictions for USA
https://www.statista.com/statistics/426025/revenues-us-online-dating-companies/
Source: authors’ elaboration based on data from Statista, available at: https://www.statista.com/sta-
tistics/426025/revenues-us-online-dating-companies/
Table 1. Annual revenues of largest companies in online dating industry in 2020
23
Miloš Sprčić, D. (2013) Upravljanje rizicima: Temeljni koncepti, strategije i instrumenti, Sinergija, Za-
DatingPorter,
greb, str.88 prema: companies
M.E. (1998) CompetitiveDating apps Techniques for
Strategy: Annual revenue
Analyzing (in USD)and
Industries
Competitors, TheMatch
Free Press,
Group New York, str.4
Tinder, Match, Hinge, OkCupid 2.4 billion
24
Dating App Revenue
Bumbleand Usage Statistics (2021), Bumble
Business of Apps, available at: 488.9
https://www.busine-
billion
ssofapps.com/data/dating-app-market/ [15.04.2021.]
eHarmony eHarmony 250 billion
25
Based on data at First Swipe: The Evolution of Online Dating, Stylight , available at: https://www.
Grindr
stylight.com/Magazine/Lifestyle/Based Grindr
on data-First-Swipe-Evolution-Online-Dating/ 100[10.05.2021.]
billion
Coffee Meets Bagel Coffee Meets Bagel 16.6 billion
Source: authors' elaboration based on data from Yahoo Finance and official company websites
Table 1. shows the market shares of the online dating industry, which revealss that the number
Table 1. Annual revenues of largest companies in online dating industry in 2020
Dating companies Dating apps Annual revenue (in USD)

Match Group Tinder, Match, Hinge, OkCupid 2.4 billion
Bumble Bumble 488.9 billion
eHarmony eHarmony 250 billion
Grindr Grindr 100 billion
Coffee Meets Bagel Coffee Meets Bagel 16.6 billion
Source: authors’ elaboration based on data from Yahoo Finance and official company websites
Table 1. shows the market shares of the online dating industry, which revealss that the
number of competitors in the industry is very small and the companies are large. The
Match Group’s biggest competitors are Bumble, eHarmony and Grindr. Thus, there are
very few competitors in the market that carry a large market share.
Source: authors'
Figure 6. Market shares elaboration basedcomapnies
of largest on data from Bussiness
in onlineofdating
Apps, available
industryat: globally in 2020
(in millions of monthly active users)
https://www.businessofapps.com/data/dating-app-market/, [20.04.2021.]
Source: authors’ elaboration based on data from Bussiness of Apps, available at: https://www.busine-
Figure 6. reveals that Badoo
ssofapps.com/data/dating-app-market/, currently has the largest number of active users in the world,
[20.04.2021.] 60
million, followed by Tinder with 55 million active users. Badoo was founded in 200625, but
Figure 6. reveals that Badoo currently has the largest number of active users in the
world, 60 did not pose
million, a serious
followed bythreat
Tinderto with
The Match Groupactive
55 million until 2020 when
users. it merged
Badoo with Bumble. 26
was founded
in 200626, but did not pose a serious threat to The Match Group until 2020 when it
merged with Bumble. 27
Competition in the online dating industry is very intense due to rapid changes in trends and
26 introductionStatistics,
Badoo Information, of new technologies, as well
Facts and History, as customers’
Dating switching
Sites Reviews, easily
available from one application
at: https://www.
datingsitesreviews.com/staticpages/index.php?page=Badoo-Statistics-Facts-History
27 [10.05.2021.]
to another. Businesses have to constantly adapt, e.g., Bumble introduced the BFF and Bizz
27
Bumble Poised to Take Over Badoo as Part of MagicLab Rebrand, Global Dating in Sights (2020),
application
available at: modes. BFF is a mode that serves to make new friendships, and Bizz is
https://www.globaldatinginsights.com/news/bumble-poised-to-take-over-badoo-as-par- made to
t-of-magiclab-rebrand/ [10.5.2021.] 28
connect and network professionals in the business world, similar to LinkedIn. Although
Bumble has exceeded all expectations in the last 2 years, Tinder is still the most popular and
well known application that pioneered the introduction of double matching partners’ interests
and similar significant innovations.
Competition in the online dating industry is very intense due to rapid changes in
trends and introduction of new technologies, as well as customers’ switching easily
from one application to another. 28 Businesses have to constantly adapt, e.g., Bumble
introduced the BFF and Bizz application modes. BFF is a mode that serves to make
new friendships, and Bizz is made to connect and network professionals in the bu-
siness world, similar to LinkedIn. 29 Although Bumble has exceeded all expectations
in the last 2 years, Tinder is still the most popular and well known application that
pioneered the introduction of double matching partners’ interests and similar signi-
ficant innovations.
2.2.2. Threat of New Entrants

The threat of new entrants to the market is high, but because Match Group, Bumble,
eHarmony and other large companies with the largest market share have achieved
economies of scale, it is unlikely that new competitors will gain a large market share.
Even though there are a large number of online dating sites and apps, only a few are
on top and are constantly growing.
Given the minimal barriers to entry, The Match Group faces significant competition
from a host of smaller players, such as Meet Group and Grindr, as well as larger players
like Facebook.30 As mentioned earlier, The Match Group has 45 applications designed
for a wide range of different users. If potential competitors wanted to enter the indu-
stry, they woud have to create the applications that offer innovations on the market as
well as use the differentiation strategy – unless they are already giants on the market
(such as Facebook) that can succeed by using a cost leadership strategy. A cost leader-
ship strategy for smaller players would be completely unsustainable. In addition, the
market is already oversaturated. There are more than 5,000 partner-finding websites
in the world, and nearly 1,000 new ones appear every year. Also, in order to achieve a
positive cash flow, it is necessary to have thousands, if not millions of users.31
2.2.3. Threat of Substitute Products

The risk of substitute applications is not very high because they are quite differentia-
ted. Of all the apps that Match Group owns, Tinder has transformed the industry and
become the most popular dating app in just a few months after launch in 2012. Intere-
stingly, it did not introduce the latest algorithm or introduce any new technology, but
28
What are Match Group biggest competitors?, The Motley Fool (2016), available at: https://www.fool.
com/investing/2016/11/22/what-are-match-groups-biggest-competitors.aspx [10.05.2021.]
29
What is Bumble? available at: https://bumble.com/en/help/what-is-bumble-bff-bizz [10.05.2021.]
30
Moody’s affirms Match’s Ba2 CFR and assigns Ba1 rating to new delayed draw term loan at Match
Group Holdings II; outlook revised to stable, Moody’s (2021), available at: https://www.moodys.com/
research/Moodys-affirms-Matchs-Ba2-CFR-and-assigns-Ba1-rating-to--PR_446040 [10.05.2021.]
31
8 Reasons Online Dating Sites Are a Business Dead End, Entrepreneur Europe, available at: https://
www.entrepreneur.com/article/272724 [10.05.2021.]
based its success on focusing on the overlooked young population and introducing
new features similar to games such as the swipe movement.32
One of Tinder’s main substitutes is Bumble, an application that differentiates itself by
allowing only women to take the first step and get in touch with a potential partner.
Another substitute for The Match Group applications is Grindr; the first application
specifically designed for LGBTQ + people.33 Although both Tinder and Bumble have
settings for homosexual and queer people, Grindr is the most popular app for this
segment. Another substitute is Tantan; an extremely popular app in China, especially
among students.34 These apps have various features by which they are oriented to
specific groups of users. Of the mentioned applications, only Tinder and Bumble inclu-
de the users of diverse interests, sexual orientation, age, etc.
2.2.4. Bargaining Power of Customers

The bargaining power of customers in the online dating industry is not high because
the prices are fixed and do not change. For example, Tinder can be used free of char-
ge, but it also has premium options with paid subscriptions. Tinder Gold is available at
mounthly subscriptions ($14.99 US) or annual subscription rates ($83.04)35 and offers
unlimited swipes, better contol over your own profile, hiding locations, and greater
control over showing one’s age, etc. Tinder Plus’s slightly cheaper subscription rates
are $ 4.99 per month and $ 27.96 annually.36 Tinder Plus has almost the same options
as Tinder Gold, but with a few extra features such as faster connections with partners
whose interests match. The listed prices are valid for people under 30, while for those
over 30 the prices are almost twice as high. Match Group earns most of its earnings
through the registration of many users, which is why they do not have a big impact
on the prices. Given that the users want to join a platform with a large number of the
existing users, in order to have as many potential partners to choose from as possible,
the customer bargaining power is small.
2.2.5. Bargaining Power of Suppliers

Match Group’s suppliers are companies that sell IT equipment. If the suppliers have
great bargaining power, it can lead to a reduction in the overall profitability of the Mat-
ch Group. In the IT industry, it is common for suppliers and IT companies to have fully
formed relationships. IT companies are important to suppliers because they are their
32
Dating Disruption – How Tinder Gamified an Industry, MIT Sloan Management Review (2020),
available at: https://sloanreview.mit.edu/article/dating-disruption-how-tinder-gamified-an-industry/
[10.05.2021.]
33
Dating App Revenue and Usage Statistics, Business of Apps (2021), available at: https://www.busine-
ssofapps.com/data/dating-app-market/ [10.05.2021.]
34
Why Chinese womaen enjoy using Tantan, SEO Agency China, available at: https://seoagencychina.
com/chinese-women-enjoy-using-tantan/ [10.05.2021.]
35
Tinder Cost, available at: https://healthyframework.com/dating/cost/tinder/ [10.05.2021.]
36
Tinder Cost, available at: https://healthyframework.com/dating/cost/tinder/ [10.05.2021.]
primary customers, but suppliers are even more important to customers (IT compa-
nies). Given that most relationships between companies and suppliers are well establi-
shed, neither suppliers nor companies have the reason to terminate or disrupt these
relationships.
2.3. The analysis company competitive strategy and competitive

advantage
The word strategy derives from the ancient Greek word strategos which means “lea-
ding the army, the supreme command.”37 Today, in the business world, strategy stands
for actions taken by menagers in order to achieve one or more goals of the organi-
zation. It can also be defined as a general direction for the company and its various
components to achieve the desired state in the future resulting from a detailed stra-
tegic planning process.38 If the set goals are not achieved, it can be assumed that the
appropriate strategy has not been used and there is a possibility that the company has
overestimated its capabilities in setting these goals.
Every organization, be it successful or not, uses a strategy. Match Group, as a global
company, is forced to use a combination of several types of strategies in order to en-
sure business consistency in these challenging times. Match Group’s applications and
websites are used worldwide, available in over 45 languages, and have over 10 million
users.39 Global companies like this one often use low cost strategy by economies of
scale that grants them cost leadership in comparison to other smaller companies. One
example of the use of this strategy is the possibility of reusing, i.e., ‘recycling’ software.
When creating a new application, Match Group probably did not have to create a new
software every time. With the help of the professional staff and access to high tech-
nology, the ‘old’ software is improved into the ‘new’ software by a few algorithms and
improvements, thus creating a new application, in this case, a dating application. IT
technicians and developers have expertise in the field of informatics, and as such are
able to solve potential problems in any application from Match Group’s portfolio. This
approach is very effective because the company knows exactly how many and what
kind of staff they need to employ, which creates great time and space savings. The
company stores all its users’ data on servers, many of which are located in countries
where technology costs and taxes are low, such as Ireland and Belgium – thus achie-
ving cost leadership. The fact that Match Group opened its branch office in Dublin is
considered to be due to the low cost of server maintenance.40
37
Strategija, Enciklopedija, available at: https://www.enciklopedija.hr/natuknica.aspx?id=58330
[24.04.2021.]
38
Strategy – Definition and Features, Management Study Guide, available at: https://www.manage-
mentstudyguide.com/strategy-definition.htm [24.04.2021.]
39
40
Successfully Doing Busines Overseas: Is Ireland the Perfect Match for the Online Dating Industry?,
A&L Goodbody (2018), available at: https://www.algoodbody.com/insights-publications/successfully-do-
ing-business-overseas-is-ireland-the-perfect-match-for-the-o [05.05.2021.]
In addition to using the low cost strategy, The Match Group evidently also uses a diffe-
rentiation strategy. Namely, each application is intended for a targeted user segment
divided according to age, gender, hobbies, lifestyle, geographical location, and many
other factors. As an example, we can see the OurTime dating website and app for sin-
gles over the age of 50 who want to meet a potential partner. Pairs is an application in
Japan, Korea and Taiwan that allows complete anonymity and privacy, given that these
are very conservative countries. The Plenty of Fish app is intended exclusively for sin-
gles who want to find out and determine what exactly interests them and what they
expect in relationships. From these examples we can see how each of these applica-
tions focused on a specific market segment of users, and on meeting the sociological
needs of specific people with similar characteristics and attitudes.
In modern times, it is necessary to constantly combine multiple business management
strategies. Managing a company on a global level is a great challenge, given the cultural
diversity and beliefs, attitudes of the inhabitants of certain countries towards finding
based on data, legislation and regulations, technological progress and monitoring te-
chnological trends and innovations. Match Group must constantly evaluate its per-
formance strategies in foreign markets because there are many different user groups
whose needs they strive to meet. Since the environment is unpredictable, the trends
are changing, the society is changing its attitude towards same-sex marriages and
relationships, The Match Group is forced to constantly change and combine different
types of strategies in order to survive in the global market.
Competition has drastically affected the world in the 21st century. Competitiveness in
business has had some negative as well as many positive effects on the market. The
sources of competitive advantage such as skills, knowledge and advanced technology
can have positive effects not only on the company that possesses these advantages,
but also on the entire market. ‘Forcing’ other market participants to improve their pro-
ducts, changing the technologies used in business, adds on to an already existing value
created by the initial competitive advantages of a company.
Match Group is a world leader in the online dating market in several categories.41 The most
important categories are represented by the share in total revenues of the industry, the
share in the total quantity of sold products, and the share in the total number of products
in the assortment of the industry. Match Group has several online dating services, the
most famous of which are Tinder, Match, and Hinge. The company has excellent coverage
as it is available on all smart devices which use the Android or IOS platforms.42 Application
services can be consumed on all continents, especially in the North American market,
where this form of interaction between people is becoming increasingly appealing.
Recent research shows that approximately 40% of young people in the United States
start their relationship online43, which creates a huge market in this specific area where
41
Dating App Revenue and Usage Statistics (2021), Business of Apps, available at: https://www.busine-
ssofapps.com/data/dating-app-market/#3 [05.05.2021.]
42
Best dating apps for 2021, Tom’s Guide (2021), available at: https://www.tomsguide.com/best-picks/
best-dating-apps [05.05.2021.]
43
Match Group, available at: https://mtch.com/ [05.05.2021.]
the products and services are available to 95% of the population.44 Online dating has
an upward trend and is assumed to continue growing given the increasing reliance on
the use of online and virtual services.45 Therefore, it is important to use all the existing
advantages in order to occupy the largest possible market share and, thus, increase
their chances of survival in a volatile market.
As noted earlier, the most important sources of competitive advantage are shares in
the volume of products sold, and total revenue in the industry as a whole. Match Group
is a market leader with 45 online dating apps in its product portfolio which are available
worldwide. This means that a company has access to almost all consumers, which is a
rare case. With its application portfolio, The Match Group occupies a large part of the
market share. The large market share represents a great advantage over other compe-
titors in the industry, given that other competitors do not have the financial capacity to
follow Match Group. The company boasts over 2,000 employees, which ensures smo-
oth operation of applications and opportunities for constant improvement.46 Given that
the first application from the entire Match Group range began operating in 1995, it can
be said that the company has a long tradition and is one of the pioneers of the online
dating market. The company maintains the best position in the US market where it is
now an integral part of their culture, mostly thanks to the Tinder application,47 which is
also the largest application in the company portfolio and in the industry market.48 The
US market leads the rest of the world in the use of smartphones and the establishment
of relationships via the Internet. As the US market is strategically very important, The
Match Group strives to maintain or increase its ownership share in that market. North
America is a demanding market which, due to the technological education of the po-
pulation, quickly recognizes innovative ideas and rejects outdated ones. Therefore, it
is very important to constantly invest in the development of applications, especially
Tinder as the most popular and appreciated app among the consumers.
As the online dating market grows, new companies with innovative ideas attempt to
enter the market, or the pre-existing companies in other industries try to emerge in
this one. Thus, Facebook has established its own version of an online dating servi-
ce called Facebook Dating,49 which already has a great financial potential and a huge
existing user base, and represents a major upcoming competitor to Match Group. The-
re are other established dating apps on the market like eHarmony, Grindr and Bumble
that also provide quality services and have a large number of users. Therefore, it is
very important that Match Group recognizes its competitive advantages over others
44
Digital 2019: Global Internet Use Accelerates, We Are Social (2019), available at: https://wearesocial.
com/blog/2019/01/digital-2019-global-internet-use-accelerates [05.05.2021.]
45
Online dating, Statista, available at: https://www.statista.com/outlook/dmo/eservices/dating-servi-
ces/online-dating/worldwide [05.05.2021.]
46
47
Most popular online dating apps in the U.S. (2019), Statista, available at: https://www.statista.com/
statistics/826778/most-popular-dating-apps-by-audience-size-usa/ [05.05.2021.]
48
49
It’s Facebook Official, Dating Is Here, Facebook (2019), available at: https://about.fb.com/
news/2019/09/facebook-dating/ [05.05.2021.]
and uses their full potential because, as it can quickly lose its market leader status to
market volatility.
2.4. Company analysis

The2.3.1. Separation
analysis of Match
of the company Group
includes thefrom IACof the financial report based on fi-
analysis
nancial indicators,
Match.com in addition
is an online tofounded
dating site the SWOT and TOWS
in 1993 in San analysis.
Francisco. IAC (InterActiveCorp),
an American holding company, bought Match.com in 1999 and thus began acquiring various
2.4.1. Separation of Match Group from IAC
sites and apps in this industry. By acquiring various companies in this industry, such as
Match.com
OkCupid, is an onlineetc.,
PlentyOfFish dating site founded
the Match in 1993
Group was in San
created and Francisco. IAC
today is one of(InterActi-
the world
veCorp), an American holding company, bought Match.com in 1999 and thus began
leaders in the online dating industry. By issuing shares on the NASDAQ market in 2015,
acquiring various sites and apps in this industry. By acquiring various companies in
49
Match Group became
this industry, such asa public company.
OkCupid, PlentyOfFish etc., the Match Group was created and
today is one of the world leaders in the online dating industry. By issuing shares on the
NASDAQ market in 2015, Match Group became a public company.50
Figure 7. Timeline of Match Group and IAC
Source: Cardona F., The Rise of Online Dating and the Company that Dominates the Market (2019), available
Figure 7. Timeline of Match Group and IAC
at: https://www.visualcapitalist.com/online-dating-big-business/ [20.04.2021.]
Source: Cardona F., The Rise of Online Dating and the Company that Dominates the Market (2019), avai-
lable at: https://www.visualcapitalist.com/online-dating-big-business/ [20.04.2021.]
Figure 7. illustrates Match Group’s and IAC’s business over the years, from the IAC’s
purchase
Figure 7.ofillustrates
match.comMatch
up until 2019 when
Group’s and the twobusiness
IAC’s companies separated.
over The from
the years, parentthe
company
IAC’s
purchase
IAC of match.com
announced up until
in 2019 that a final2019 when the
agreement two off
to spin companies separated.
a 80% stake The parent
in the Match Group
company IAC announced in 2019 that a final agreement to spin off a 80% stake in the
was reached, which was approved by the board of directors of both companies.50 On 1 July
Match Group was reached, which was approved by the board of directors of both com-
2020 The
panies. 51 Match Group announced successful finalization of separation from the remaining
On 1 July 2020 The Match Group announced successful finalization of sepa-
IAC companies. The general annual assembly51 voted that in exchange for each outstanding
share of the former Match Group common stock that they held the former Match Group
50
stockholders
51 (except
Is Match Group for
a Buy theItsformer
After owners
Separation Fromof IAC
IAC?, stocks)
The Motley receive one share
Fool, available of the Match
at: https://www.fool.
com/investing/2019/12/27/is-match-group-a-buy-after-its-separation-from-iac.aspx [21.4.2021.]
49
50 Is Match Group a Buy After Its Separation From IAC?, The Motley Fool, available at:
ration from the remaining IAC companies. The general annual assembly52 voted that in
exchange for each outstanding share of the former Match Group common stock that
they held the former Match Group stockholders (except for the former owners of IAC
stocks) receive one share of the Match Group common stock, and either $3.00 in cash
or a fraction of the $3.00 worth common stock.
Due to their separation, the 2020 financial reports of these companies greatly deviate
from the previous reports. Therefore, the financial reports for this year are slightly more
complex and reveal higher debts. A brief analysis of the 2020 balance sheet will allow for
explaining how the separation influenced the cash flow and the debt structure.
2.4.2. Analysis of financial positions

Table 2. Financial indicators
Years
Group Indicators
2016 2017 2018 2019 2020
Current ratio 2.58 2.66 3.13 3.67 2.04
Liquidity
Quick ratio 2.30 2.43 2.87 3.57 1.75
indicators
Money ratio 1.86 2.04 2.41 0.46 1.48
Debt to equity ratio 0.96 0.72 0.69 0.89 -3.11
Long-term debt ratio 0.49 0.42 0.41 0.47 1.48
Total indebtedness 0.57 0.50 0.48 0.53 1.40
Debt
Relative indebtedness 1.31 0.99 0.94 1.15 -3.53
indicators
Degree of indebtedness 0.57 0.50 0.48 0.53 1.40
Interest coverage 0.30 1.79 5.17 4.27 4.59
Cash flow coverage 1.09 2.90 6.85 4.55 4.90
Inventory turnover ratio 15.39 17.84 18.68 19.08 16.60
Days sales of inventory 23.72 20.46 19.54 19.13 21.98
Receivables turnover ratio 14.26 10.88 15.27 15.95 17.45
Activity
Days sales outstanding 25.59 33.55 23.90 22.89 20.92
indicators
Fixed asset turnover ratio 1.12 0.90 1.05 1.11 1.22
Asset turnover ratio 0.68 0.56 0.62 0.57 0.80
Current asset turnover ratio 1.70 1.56 1.54 1.28 2.34
Gross profit margin 0.89% 5.21% 20.06% 14.97% 31.85%
Profitability Net profit margin -0.51% 10.82% 17.78% 11.43% 7.86%
indicators Return on assets 0.60% 2.94% 12.44% 8.55% 25.58%
Return on equity -0.80% 12.15% 21.33% 13.95% -15.96%
P/E 8.40 5.47 16.43 285.48
Investment
EPS -0.52 3.81 7.52 5.12 0.58
indicators
DPS 0 0 0 0 0
Source: authors’ elaboration based on Match Group’s financial reports, available at: https://ir.mtch.com/
financials/sec-filings/default.aspx [12.04.2021.]
52
Godišnje izvješće Match Group, available at: https://ir.mtch.com/financials/sec-filings/default.aspx
[21.04.2021.]
Liquidity indicators
Liquidity indicators measure a firm’s ability to meet its short-term liabilities and are
calculated based on the balance sheet of the analyzed firm. The required levels of liqu-
idity vary by industry and company, so the final conclusions about the liquidity of com-
panies should be made on the indicators, but also on the analysis of historical, current,
projected future and potential financing needs. There are several liquidity indicators,
but the current, fast and money ratio indicators are included in this analysis. The cu-
rrent ratio in all observed years was higher than 1, which means that the company was
able to cover all its short-term liabilities with current assets on the balance sheet date.
The optimal value of the indicator is around 2, which we see that The Match Group has
been achieving consistently, which means theoretically that the company has no liqu-
idity problems. The quick ratio is more conservative than the current ratio and shows
whether the company has enough short-term assets to settle the due liabilities witho-
ut selling inventories. The preferred value of this ratio is 1, and from Table 2. it can be
seen that the company in all observed years has values of this indicator greater than 1.
The last analyzed liquidity indicator is the money ratio, which is also the best indicator
in crisis situations because it puts cash and cash equivalents with current liabilities in
a ratio. The values of this indicator vary the most compared to the previous two, and it
was 0.46 in 2019 when The Match Group separated from IAC, which explains the large
decrease in cash and cash equivalents. However, despite this setback, the company
seems very liquid today.
Debt indicators
This group of indicators is calculated from the company’s balance sheet and profit and
loss account that show how capital is structured and how a company finances its as-
sets. Indebtedness is not necessarily bad and prudent use of funds can result in high
returns on investment, but it is therefore important to keep in mind the link between
the indebtedness indicator and the profitability indicator.The debt-to-equity ratio ten-
ded to decline from 2016 to 2018, but in 2019 it started growing. The high value of this
indicator signifies difficulties in repaying the borrowed funds and paying interest, but
the debt-to-equity ratio of The Match Group is below 1, which means that capital is
greater than the total debt and that the company did not have these difficulties until
2020. The debt-to-equity ratio for this year is negative due to the negative value of
equity. The long-term debt ratio shows the share of long-term debt in the sum of long-
term debt and principal, and growth of this indicator, as in the past, points to an incre-
ase in financial risk of default on long-term liabilities. During the observed years, the
indicator was under 0.5, which is positive, except for 2020 when it amounted to 1.48.
The large increase of this indicator shows that the company is over-indebted, which
is expected after the large payments effected to IAC. Just as the long-term debt ratio
and the debt-to-equity ratio are linked, so are total and relative indebtedness, which
were at a satisfactory level until 2020. The level of indebtedness in 2016 was 0.57, and
in other years it neared 0.5. The year 2020 was a special year because the indicator
increased to 1.4 showing that the total debt is much higher than total assets. Since the
value of this ratio should be 0.5 or less, this means that the company is financed by
borrowing money as well as from capital and reserves in equal measure. Indicators of
interest coverage and cash flow coverage are calculated from the income statement.
Interest coverage measures how many times interest on debts is covered by the amo-
unt of earnings before interest and taxes. The higher the coverage ratio, the higher the
solvency of the company and the greater the guarantee that the company can settle its
debts from earnings before interest and taxes. It can be seen from Table 2 that the in-
terest coverage indicator was positive and had a growth trend until 2018, but in 2019 it
decreased slightly and continued to grow again in 2020. According to this indicator, we
can see that the company is not over-indebted and that it can repay the debt with inte-
rest. In 2020, the interest coverage ratio was 4.59, which means that interest expenses
can be covered 4.59 times from operating revenues. The cash flow coverage ratio is
calculated as the ratio of the sum of earnings before interest, taxes and depreciation
and the sum of interest paid and other possible similar expenses. Like the previous
indicator, cash flow coverage rose until 2019 when it fell slightly, but continued growing
in 2020, which demonstrates that the company has no major problems in settling in-
terest obligations on the previously used debts
Activity indicators
This group includes the indicators that measure how efficiently a company manages
certain activities, especially how efficient it is in managing certain assets, such as cu-
rrent assets or inventories. Activity indicators are calculated based on the company´s
balance sheet and income statement. They can be divided into two groups, turnover
ratios and ratios of specific assets or liabilities.53 The first of the analyzed indicators are
the inventory turnover ratio and the days of inventory on hand. Both indicators use
inventories as the basis for the calculation, and thus are not relevant for the company.
Match Group works in the digital services industry and does not use inventories as the
main means for profit a making. The next pair of activity indicators are the receivables
turnover ratio and days of sales outstanding. Thus, in the observed period the receiva-
bles turnover ratio was around 15, which means that the company can collect its recei-
vables approximately fifteen times per year. Accordingly, the days of sales outstanding
are moving around 22, meaning that it takes approximately 22 days for the company
to collect its receivables. These two indicators clearly show that Match Group´s custo-
mers pay their payables regularly and promptly. The following three indicators are
assets turnover ratios. The total assets turnover ratio puts total revenues in ratio with
total assets, i.e., how successfully the company uses its assets to generate revenue.
The indicator tends to be lower in more capital-intensive industries, while in compa-
nies engaged in service activities it is higher. If we compare Match Group´s numbers
with the industry average, which is around 0.55, 54 we can see that the company fits
the into the industry average for the period until 2019 and has the above the industry
average numbers for the year 2020. The fixed assets ratio reveals that the company
successfully uses the fixed assets. According to the ratio in the last four years a growth
trend is evident suggesting that investments in fixed assets are being held at an opti-
53
Janus A., Analiza financijskih izvještaja, Financijski Klub (2010), available at: http://finance.hr/wp-con-
tent/uploads/2009/11/ja14112010.pdf
54
CSIMarket, available at: https://csimarket.com/stocks/at_glance.php [24.04.2021.]
mal level. Looking at the current assets ratio we note a declining trend from 2016 until
2019, i.e., the current assets were used less and less efficiently every year. In 2020 the
ratio rose sharply due to a change in the structure of the financial statements resulting
from the separation, which hinders drawing any specific conclusions.
Profitability indicators
The ability of a company to make a profit in terms of the capital invested is crucial
to the overall value of the company and the securities it issues. These indicators are
among the most used when deciding to invest in company stocks or bonds. Profitabili-
ty designates the company’s position in the market and the quality of its management.
Profitability indicators are calculated based on the balance sheet and income state-
ment, and as all indicators in this group they should be as high as possible.55 The gross
profit margin of the Match Group in the observed years is 14.6% on average, which is
much below the industry average of 62.6%.56 Looking at 2020 alone, when this indica-
tor was the highest and amounted to 31.85%, which is approximately half the average,
it is evident that the Match Group has a small gross profit margin and that its earnings
before interest and taxes are too low compared to the total revenues. The net profit
margin shows the ratio of net income to total income and Match Group’s average is
about 9.5% in the observed period with a downward trend (7.9% in 2020). In compa-
rison to the industry average of 20.3%, this segment also places the Match Group at
a much lower rank than the industry average. Return on assets measures the return
that an enterprise has made on an asset. The higher the indicator, the higher the profit
made with a certain level of assets. The size of this indicator primarily depends on the
ability of the management responsible for the financial, investment, and business acti-
vities.57 In the case of the observed company, the average ROA is 10%, which is above
the industry average of about 7%.58 In 2020, this indicator is 25.58%, but this growth
can be attributed to a decrease in the company’s assets and not to an increase in pro-
fits. Return on equity measures the return that an enterprise has made on equity and,
due to its importance, it can be broken down into the product of three components:
profit margins, total assets turnover ratio, and financial leverage. This means that each
of the three components can affect the return on equity, which allows a more detailed
analysis of the indicators.59 This indicator for the Match group averaged around 11.5%
55
56
Revenue Multiples by Sector (US), Damodaran data (2021), available at: http://pages.stern.nyu.edu
/~adamodar/New_Home_Page/datafile/psdata.html [24.04.2021.]
57
Wild, J. J., L. A., Subramanyam, K. R.: Financial Statement Analysis, Tenth Edition, McGraw Hill - Irwin,
New York, 2008., str. 446
58
Ahern D., Everything to Know on ROA, with Average ROA by Industry Data (2020), dostupno na: Wild,
J. J., L. A., Subramanyam, K. R.: Financial Statement Analysis, Tenth Edition, McGraw Hill - Irwin, New York,
2008., str. 446
59
Robinson T.R. van Greuning H., Henry E., Broihahn M.A.: International financial statement analysis,
Wiley, 2008., str. 298.
until 2019, which is below the industry average of around 16%.60 In 2020, we see that
this indicator is negative. The reason for this is the negative amount of equity in Match
Group’s balance sheet, due to the separation that occurred that year. This alarming
fact suggests that the company is highly leveraged and in danger of failing to run a
profitable business.
Investment indicators
The investment indicators, along with the profitability indicators, will be mostly used
by investment analysts to decide on investing in company shares. They are calculated
on the basis of the balance sheet and income statement, and other data sources that
are needed for this set of indicators. The information on the number of shares can
be found in the notes to the financial statements, and the market prices of shares
can be found on stock exchanges where the stock is traded or on web portals.61 The
price-to-earnings ratio is the ratio of share price to earnings per share, and to be able
to interpret it, it should be compared with the industry average, which was 157.38.62
in the last 12 months. The price-to-earnings ratio for the Match Group in 2020 was
285.48, which is almost twice the industry average suggesting that the stock is over-
valued. This fact is not in favor of the current and future investors, especially because
the company’s large debts require constant influx of new investors. The earnings per
share in 2020 were $0.58 is not encouraging for the Match Group shareholders. Their
dissatisfaction is further aggravated by the fact that the company does not pay divi-
dends.
The analysis of Match Group’s balance sheet in 2020

An analysis of the Match Group’s balance sheet shows that the company’s liabilities
exceed its assets as a result of taking over the debt on separation from the IAC. The
balance sheet shows a decrease in money and cash equivalents by almost $3.9 billion
paid to the IAC, borrowing $1.8 billion, and issuing new shares worth $1.4 billion. The
result is a negative cash flow in 2020 when Match Group reported its losses through
negative retained earnings of $8.49 billion.
60
Revenue Multiples by Sector (US), Damodaran data (2021), available at: http://pages.stern.nyu.edu
/~adamodar/New_Home_Page/datafile/psdata.html [24.04.2021.]
61
62
PE Ratio by Sector(US), Damodaran data (2021), available at: http://pages.stern.nyu.edu/~adamo-
dar/New_Home_Page/datafile/pedata.html [24.04.2021.]
2.4.3. SWOT analysis

Strenghts Weaknesses
- quality staff - separation form IAC
- modern infrastructure and technology - accumulated large debt
- software - large capital investment required due to sep-
- security of holding its users data aration from IAC
- differentiated services - not attractive to investors (shareholders) due
- strong portfolio to large debts and non-payment of dividends
- brand image and recognition - high interest rate on debts
- long tradition of doing business - higher operating costs than industry average
- independent of geographical location - low level of business transparency
- large market share – market leader - small investments in marketing activities
- economies of scale - departure of skilled labor
- high liquidity - high employee costs
- patented technological tools - bad credit rating
- employees from different cultures - bankruptcy risk
- following trends - damaged reputation due to poor relationship
with employees
Opportunities Threats
- there is no great danger of substitutes - IT security and cyber crime
- bargaining power of suppliers is low - decline in consumer income
- bargaining power of customers is low - strong competiton
- possibility of further global expansion - religius norms
- changes in people’s dating lives and habits - social norms
- increased demand - legal regulations
- catfishing
- insufficient verification
Strenghts
Operating since the 1990s, Match Group has slowly but surely built its image as well as
its global brand recognition. Their prevalence is reflected in the phenomenon of the
name of one of their most famous applications – Tinder, which has become a part of
everyday speech in the 21st century; instead of asking “Do you date online?” it has be-
come common to enquire “Do you have Tinder?” Over its long business history, Match
Group has created a strong and well-diversified portfolio of services which offers a to-
tal of 45 globally available applications, including Tinder which is specifically designed
to facilitate finding the right partner. The services differ according to the interests of
the users they want to please. Namely, depending on whether the user is looking for
a serious relationship or not, whether s/he is a member of the LGBTQ + community or
not, the Match Group can meet all preferences thanks to a well-diversified portfolio.
Accordingly, they have a huge market share and their business imposes itself as a mar-
ket leader that is extremely difficult to compete with. Highly qualified employees bring
innovative technology tools to the business, such as the “swipe” movement, which is
very well accepted by customers, making it a globally recognizable trend and the Mat-
ch Group’s exclusive patented innovation and advantage.
Thanks to partnerships with various organizations combined with modern technology,
Match Group guarantees the privacy and security of its users data as witnessed by
over 750 million downloads of their applications globally. Apps are available worldwide
so their business is independent of a user’s geographic location. With the intention of
further business expansion to the countries where social and religious norms can be
a huge obstacle, Match Group has employed experts from these countries to better
understand the sensitive issues typical for these cultures. Through joint consultations,
they devise more successful strategies for expanding into such markets. They have
achieved economy of scale which means that they produce large quantities at low cost
which gives them an advantage when new competitors enter the market who can pro-
vide their services at significantly lower prices due to low operating costs, which also
makes them price competitive. However, Match Group’s financial indicators show high
liquidity even after the separation, and its developed quality software is continuously
innovated and improved following the latest trends.
Weaknesses
The transaction by which the Match Group paid a large amount of money to the IAC
in 2020 resulted in a decline of creditworthiness. The debt-to-equity ratio of $1.48
from the 2020 analysis of financial indicators shows that this transaction caused gre-
at financial difficulties and resulted in distrust of banks and all other investors. The
company risks facing great financial difficulties and bankruptcy because it struggles
with returning the borrowed funds and paying interests. The degree of indebtedness
reached 1.4 in 2020, in comparison to approximately 0.5 of the previous years. In ad-
dition to the financial problems, the company’s reputation was damaged because of
some incidents with the employees. Namely, a few Match Group female employees
filed claims and complaints of physical and verbal abuse, which ruined the company’s
reputation drastically since they were long ignored. After one bigger scandal occurred,
Wolfe Herd left Match Group to become the executive director of Bumble.
The Match Group accumulated high debts by separating from the IAC. Due to its ne-
gative working capital, it is now in need of high investments to quickly compensate for
all endured losses. Therefore, the effective interest rate on debt is high and amounts
to approxiamtely 5%.63 Because of the uncertainty of future business, the company is
not overly attractive to potential investors. Besides this, the Match Group does not pay
dividends, which puts them in an even worse position regarding finding investors. One
of the greatest weaknesses is the insufficient transparency towards the public. Even
though they underwent a great separation and lost a large amount of money, they
have not presented correct and specific data to the shareholders, but only showed
them the basics. It is not publicly announced how they plan to get out of debt and
avoid bankruptcy.
63
GuruFocus, available at: https://www.gurufocus.com/term/EffectiveInterestRate/MTCH/Effecti-
ve-Interest-Rate-on-Debt-Percentage/Match%20Group%20Inc [27.04.2021.]
The Match Group also has a problem with losing highly qualified workers caused by
a few scandals of abuse and sexual harassment of their employees, which highlights
the need of frequent education of new employees and in turn creates high operating
costs, as well as occasional legal costs. High employee costs emerge because of the
frequent need for their education and training, as well as a great need for IT techni-
cians, programmers and other IT industry workers, who present an expensive work
force. The company does not invest much into marketing, which may soon cause them
harm. Their new rival, Facebook Dating, is highly promoted and advertised on social
networks and has quickly become a serious competitor.
Opportunities
Match Group has 45 applications on the market, which shows that the company has
covered the vast majority of markets demand, so there is no great danger of substi-
tuting their service. The company is proposes to meet the wishes and needs of diffe-
rent groups of people via its applications for hookups, serious relationships, and even
marriage.
As the company has a very large market share in the industry, suppliers and customers
do not have much bargaining power. Suppliers are forced to lower their prices because
the rest of the industry is not large and developed enough, so suppliers cannot afford
to lose Match Group as a customer. Moreover, it is in the interest of all suppliers to do
business with Match Group.
The bargaining power of customers is also low, given that Match Group holds a large
market share, all customers are forced at some point to use their services. Should the
customer bargaining power increase, Match Group would have to completely change
its customer approach strategy in the short term. As long as the company has a very
large share in the industry, with no competitors to match it either in terms of number
of customers or revenue, Match Group can keep the bargaining power of customers
small.
Because the company offers services in virtual form, the boundaries for expansion are
almost non-existent. The apps are compatible on both Android and iOS platforms ma-
king the global app free for use on all continents. It is important to constantly monitor
and adjust the business policy according to the new regulatory laws of countries, so
that the company continues to sell and offer its services globally. For now, there are no
major obstacles that prevent Match Group from operating freely around the world and
the goal is to maintain such a situation.
With the arrival of new technological age, the attitude of people and consumers in
general is bound to change. More and more young people are downloading the app
and embarking on online dating which brings them fun, but are not seeking serious
relationships. Based on the regulations and requirements of publishers of online da-
ting applications, online dating seems to be an increasingly reliable form of meeting
people because a large number of users communicating with each other on a daily
basis makes it easier to spot fake accounts. In the US, 40% of young people started
their relationship through online dating, which is a huge database of users who have
embraced the changes in the ways of making social contacts.
Covid-19 pandemic has brought many changes to every industry in the world and has
greatly affected the lives of all, especially the young people who have been denied
the opportunities of socializing with their friends and schoolmates. This has led to
online dating skyrocketing in popularity and frequency of use. Thus, the changes
brought about by the coronavirus benefit companies like Match Group that offer da-
ting services without violating legal rules and regulations in proper conduct during
the pandemic.
Threats
Cyber attacks are on the rise for all Internet companies, including the Match Group. As
already mentioned in the PESTLE analysis, the US faces a markedly growing risk of cy-
ber attacks. A large number of companies in the world have experienced some form of
such attack and this is claimed to be one of the biggest threats to this type of business
activity. The decline in consumer income due to the corona virus pandemic has cau-
sed lower corporate profitability and continues to pose a threat due to the uncertain
situation around the world. Generally speaking, consumer habits and their possible
change in online shopping behavior pose a threat not only to the Match Group but to
the industry as a whole.
The competition is also extremely strong as a small number of companies hold a high
market share, which creates pressure to lower the prices of their services. In this way
the profitability of the Match Group and its competitors is reduced, which furthermore
strengthens the bargaining power of customers. Religious and social norms can also
be a form of a threat. In Pakistan, for example, radical Islam is strongly opposed to
homosexuality, which is why Match Group will have to adapt in that as well as in other
specific markets. In terms of social norms, Japan represents a completely different cul-
ture from the West, which requires further adjusting to the culture that nurtures the
seriousness of marriages, anonymity, etc.
Another threat is the rise of various forms of violence on the Internet, such as ‘catfis-
hing’ or creating a false identities to produce humiliation or deceit. This could pose a
major threat to the Match Group – unless they adapt to the situation and strengthen
the security measures for their customers, their customers will lose confidence in the
company. Verification of all users needs to be intensified to facilitate them to feel safe
and have confidence in the applications they use.
2.4.4. TOWS analysis

Table 4. TOWS matrix
Internal factors
Strengths Weaknesses
S1 – quality staff W1 – large debt
S2 – modern infrastructure and technology W2 – separation from IAC-a
S3 - software W3 – higher business expenses than industry
S4 – safely storing users’ data standard
S5 – diversified services W4 – unattractive to investors
S6 – strong portfolio W5 – low level of transparency
S7 – brand recognition W6 – high interest on debt
S8 – long business tradition W7 – large capital investments needed
S9 – geographically independent W8 – small investments in marketing
S10 – big stake in the market – market leader W9 – leave of adequate work force
S11 – economies of scale W10 – high staff costs
S12 – high liquidity W11 – bad credit rating
S13 – patented tech tools W12 – bankruptcy risk
S14 – staff from different cultures W13 – bad reputation caused by bad work
S15 – monitoring trends relations
W-O strategy
Opportunities S-O strategy (Maxi-Maxi)
(Mini-Maxi)
O1 – no great danger O1-S2-S3-S5-S6-S7-S8-S10-S11 O4-W8
of substitutes Use modern software and technology to surpass Expand services
O2 – low bargaining the competition on the market. Diversify the port- globally in order to
power of suppliers folio to ensure coverage and active dominance increase investment
O3 – low bargaining over the market. Use brand recognition to im- in marketing activi-
power of buyers plant safety and trust in users around the world. ties for
O4 – possibility for O2-S3-S13 covering a larger
global expansion Use modern software and patented technolog- market.
O5 – changes in peo- ical tools for strengthening bargaining power O6-W1-W7
ple’s familiarity and against suppliers. Due to increased
habits O3-S5-S6-S7-S10-S11 demand, increase
O6 – increased de- Minimize the risk of users crossing over to com- production, generate
mand petition by diversifying portfolio and strength- higher revenues in
ening the economy of scale. the company which
O4-S1-S9-S11-S14 can reduce the
Adapt to new markets by employing staff from amount of debt and
all corners of the world and using geographical increase capital in-
independence. vestment.
O5-S15
Follow trends for more effective market adap-
tation.
O6-S11-S12
Use economy of scale and high liquidity rate to
monitor the increasing demand rate with ade-
quate supply.
W-T strategy
Threats S-T strategy (Maxi-Mini)
(Mini-Mini)
T1 – cyber attack T1-S2-S4 T3-W9
T2 – decline in con- Securely store data on a technologically ad- Improve working
sumer income vanced system due to possible cyber-attacks. conditions.
T3 – strong compe- T3-S7-S8-S10
tition Maintain current services as well as produce
T4 – religious norms new ones which is necessary to suppress com-
T5 – social norms petition.
T6 – legal laws T4-S14
T7 – catfishing Adhere to religious norms through employees
T8 – deficient verifi- from different cultures.
cation system T5-S14-S15
Take advantage of employees coming from
different cultures and monitor trends to ensure
compliance with emerging social norms.
Source: authors’ elaboration
The TOWS matrix gave insight into Match Group’s biggest issues, low creditworthiness
and a risk of bankruptcy. Paying more attention to current market services, developing
new, innovative services and breaking into new markets despite some religious and
social norms are the key steps in raising profits and gradually reducing debt. Along
with the process of reducing debt and increasing capital, it would be beneficial to in-
crease its attractiveness to the investors to further increase the capital of the Match
Group. Economies of scale, geographical independence, employees of all cultures, and
monitoring of trends together represent the Match Group’s advantage in order to ac-
hieve results as quickly and efficiently as possible and implement the strategies pre-
sented in the TOWS matrix.
3.1. Risk appetite and risk tolerance

The Match Group displays a great, even dangerous risk appetite. Risk tolerance can be
observed in the financial indicators from 2020, which are highly unfavorable. At this
time the company is not profitable and is over-indebted. Despite this, in February the
Match Group bought Hyperconnect, a global video and AI technology company he-
adquartered in Seoul, South Korea, that employs approximately 400 staff.64 This aggre-
ssive investment strategy will probably be continued throughout the next few years as
the company, having been faced with financial difficulties, wants to drastically increase
the investments into risky projects in order to attract new investors and settle its debt
as soon as possible.
64
Match Group to aquire Hyperconnect (2021), available at: https://ir.mtch.com/news-and-events/
press-releases/press-release-details/2021/Match-Group-To-Acquire-Hyperconnect/default.aspx
[04.05.2021.]
The risk aversion of the Match Group is reflected in their adnerence to dealing with the
security risk as one of the most important risks in the business. They are aware that the
security and wellbeing of the users is the highest priority and therefore use numerous
tools to prevent and remove those who behave inappropriately on their platforms.
Hence, they teamed up with companies such as Garbo, a non-profit background check
platform, founded by females, and Noonlight, a first-of-its-kind safety company, which
provides emergency response services and personal safety products.65 The next risk
closely related to the security risk is the cyber risk, to which they adverse, and invest
large amounts of funds to protect the users’ data from attacks. Finally, all data which
is no longer needed is immediately deleted, and no data about the activities on other
websites or platforms is collected.66
3.2. Business goals and strategy

The Match Group, as many other companies, does not publicly declare strategies and
business goals so as not to provide their competitors insight into the company. To
stay in the lead the Match Group does not have publicly announced strategic goals,
however this does not mean that they are absent from the company. The main goal
the company should focus on is ensuring financial stability as soon as possible. The
high debts originated in 2020 need to be paid off in order for the company to reduce
interest expenses and establish itself as a well-performing company. This can be ac-
hieved by acquiring and merging with new companies, as well as by finding new inve-
stors. Because of the already mentioned separation transaction, the company became
unattractive to shareholders and hence needs to consider paying dividends or finding
other ways of attracting investors. Another important strategic goal is the capacity
expansion and increasing the company’s value by expanding into new markets. The
Match Group originated on the US market and to this day expanded to many countries
around the world, and the limits to its expansion hardly exist. The service they offer is
in high demand on a global scale, and only appears in different forms. An example is
Harmonica, an app intended for members of the Islamic faith, whose culture is more
conservative and less open-minded. Precisely because of the delicacy of the process
of expanding into these new markets, the Match Group can be said to be currently
doing well on a global scale. Nevertheless, they are always looking for new locations
and devising new app forms to acquire new customers, yield higher income, and cre-
ate new opportunities for improvement. They should certainly dedicate themselves
to both general and continuous enhancement of the quality of their services through
research and development. Since they have strong competitors, and innovations in
such a market can appear out of nowhere, it is important to constantly monitor the in-
dustry trends and update and innovate services. Without research and development,
the company would quickly become obsolete and uninteresting on the market.
65
Match Group Safty (2021), available at: https://mtch.com/safety/ [04.05.2021.]
66
Match Group Privacy (2021), available at: https://mtch.com/privacy/#data_retention_and_deletion
[04.05.2021.]
3.3.1. Risk associated with the COVID-19 pandemic

The health crisis caused by the COVID-19 pandemic has affected the whole world in
a very short timeframe and caused a historically unique and unexperienced impact
on all spheres of human life, including the economic relations that suffered a crisis of
unimaginable proportions with unknown duration.67 With the ongoing pandemic the
damage is still being added up, and the drop in GDP and the duration of the coming
crisis are being estimated.68 However, in spite of all the estimates and expectations,
nobody can know with certainty what the consequences this crisis will have on the
economy. Unless the worst-case scenario is prevented, there is a strong posibility that
the crisis caused by the COVID-19 pandemic will be more severe than the financial
crisis od 2007. Millions of people lost their jobs, and others adjusted to working from
home as offices closed.69 The Match Group has so far benefited from the pandemic,
their revenues have grown, and Tinder has become the market leader. Nevertheless,
the company may feel the effects of the pandemic due to reduced revenue, and hence
purchasing power of the consumers.
Scenario
Most countries around the world are likely to be affected by the impending recession
caused by the consumer purchasing power decline as a result of the COVID-19 pande-
mic. The Match Group is threatened by the loss of users, i.e., customers whose purcha-
sing power is reduced due to the fall in GDP. However, although though the company’s
revenue grew at the beginning of the pandemic when nearly the entire world was loc-
ked in their homes and the desire to communicate and meet new people and potential
partners was great, it can be assumed that in the coming years people will want to
return to normal and meet in person. After almost 2 years of longer or shorter peri-
ods of isolation a large number of people crave an offline life. This development could
affect the financial stability of the Match Group and force the company to develop new
and innovative services if they want to survive in the market. The probability of the risk
associated with COVID-19 is rated 3, and the significance of the risk is estimated at 3.
Management
As a defence against the negative consequences of this risk, the Match Group must rapidly
settle its debt and establish financial stability. According to financial indicators, the com-
pany liquid but highly indebted. Therefore, it must focus on reducing debt by attracting
67
Čavrak, V. (2020). Makroekonomija krize COVID-19 i kako pristupiti njenom rješavanju. EFZG working
paper series, (03), 1-19. available at: https://hrcak.srce.hr/236781
68
Buterin, V. (2020) Ekonomska kriza u uvjetima pandemije COVID-19: prijetnja ili prilika za ubrzani
institucionalni rast?. U: Kalić, I. (ur.)8. Međunarodni simpozij Finansije, računovodstvo i menadžment u
kriznom periodu.
69
The future od work after COVID-19, McKinsey (2021), available at: https://www.mckinsey.com/featu-
red-insights/future-of-work/the-future-of-work-after-covid-19 [04.05.2021.]
new investors. In order to ensure its long-term liquidity, the company should also pay
attention to the existing costs and attempt to minimize them. Continuous cost control is
essential to maximize the quality of your service and increase profitability in the long run.
3.3.2. Exchange rate risk

Exposure to exchange rate risk is an increasingly significant global problem due to
globalization and the development of international trade. It refers to the risk of pen-
ding fluctuations in currency market, and is most often related to changes in the value
of currencies (devaluation or revaluation).70 The importance of the exchange rate risk
and currency exposure management is recognized by all multinational corporations.71
Match Group is an American corporation and their largest market share among the
countries in which it operates is the USA. Match Group’s annual report shows that re-
venues are divided into U.S. revenues and international revenues, and that revenues
from international operations are slightly higher than those from US operations. This
is precisely why the Match Group is largely exposed to the exchange rate risk. Since
the results are reported in US dollars, the effect will be positive regarding international
revenues if the dollar weakens against other currencies, or negative if the dollar stren-
gthens against other currencies.
Scenario
Although the financial statements do not report revenue by region, but only by the
U.S. and the rest of the world, revenue generated in the U.S. is lower than internati-
onal revenue. In the Match Group’s annual report for 2020, the effect of the changes
in exchange rates is visible. The revenue from international operations decreased by
almost $10 million compared to the previous year due to exchange rate fluctuations
alone. With the recent purchase of Hyperconnect, Japan became an important market
for Match Group. Its currency, the Japanese Yen, is a significant one in the currency
markets, and the USD / JPY exchange rate will clearly affect the company’s revenues.
Namely, an increase of the value of the Yen against the US dollar will reduce Match
Group’s revenues. Figure 8. shows the fluctuation of the USD / JPY exchange rate from
1/1/2021 to 4/5/2021. Obviously, the Yen has shown a tendency to grow, which me-
ans that the Match Group will again materialize negative exchange rate differences.
Because the losses arising from changes in the exchange rates are noticeable in the
company’s revenue, especially at times when the company is financially unstable, this
risk is of medium significance. The probability of occurrence is rated 3.5 because the
countries in which Match Group operates are not necessarily stable and their exchan-
ge rate may change as the US dollar rises or falls.
70
Bodrožić, A. (2016). ‘UPRAVLJANJE TEČAJNIM RIZIKOM SREDNJEG PODUZEĆA NA PRIMJERU IZ PRAK-
SE : završni rad’, Specijalistički diplomski stručni, Sveučilište u Splitu, Ekonomski fakultet, available at:
https://urn.nsk.hr/urn:nbn:hr:124:728258 [04.05.2021.]
71
Bodrožić, A. (2016). ‘UPRAVLJANJE TEČAJNIM RIZIKOM SREDNJEG PODUZEĆA NA PRIMJERU IZ PRAK-
SE : završni rad’, Specijalistički diplomski stručni, Sveučilište u Splitu, Ekonomski fakultet, available at:
https://urn.nsk.hr/urn:nbn:hr:124:728258 [04.05.2021.]
112
110
108
106
104
102
100
1/1/2021 2/1/2021 3/1/2021 4/1/2021 5/1/2021
Figure 8.Source:
USD/JPY exchange
authors' ratebased
elaboration fromon
01/01/2021 to 04/05/2021
data from Macrotrends, available at:
https://www.macrotrends.net/2550/dollar-yen-exchange-rate-historical-chart [04.05.2021.]
Source: authors’ elaboration based on data from Macrotrends, available at: https://www.macrotrends.
net/2550/dollar-yen-exchange-rate-historical-chart [04.05.2021.]
Management
Management
Given that the Match Group is a global company operating in over 40 countries, quality
Given that the Match Group is a global company operating in over 40 countries, quality
exchange rate risk management is an important aspect of their business. There are
exchange
two methods rate risk
available for management is an important
managing exchange rate risk:aspect of or
internal their
usedbusiness.
within There
the are two
company, and external, i.e., offered by the financial system. Match Group does not
72
methods available for managing exchange rate risk: internal or used within the company, and
publicly disclose how it deals with exchange rate risk, which is not a common practice
71
of listedexternal,
companies,i.e., but
offered by of
some thethe
financial
optionssystem.
are openMatch Group
market does not by
operations publicly
takingdisclose
or how it
grantingdeals
loans, futures
with contracts,
exchange and
rate risk, financial
which is notderivatives. In addition,
a common practice the companies,
of listed company but some
can be protected by natural insurance, i.e., by adjusting the currency structure of as-
sets andofliabilities
the options arecurrency
in the open market operations by taking or granting loans, futures contracts, and
it uses.
financial derivatives. In addition, the company can be protected by natural insurance, i.e., by
3.3.3. Reputational riskstructure of assets and liabilities in the currency it uses.
adjusting the currency
A damaged reputation of a company can be a great threat and challenge for compa-
nies that provide
3.3.3.Internet services.
Reputational This is especially true in the online dating industry
risk
where there are multiple segments in which reputation can be drastically damaged.
Every high-ranking company must guarantee the safety and satisfaction of its custo-
mers and employees. As various forms of online violence are on the rise, Match Group
A damaged
must protect reputation
users from, of a company
for example, can bewhich
‘catfishing’ a great threat violence
denotes and challenge for companies
by creating a that
false identity
provideforInternet
the purpose of deceiving
services. the person
This is especially true on the online
in the other side ofindustry
dating the Internet
where there are
line. This risk is closely related to cyber risk.
multiple segments in which reputation can be drastically damaged. Every high-ranking
72
Miloš company
Sprčić, D., Puškar J., Zec I. (2019)
must guarantee thePrimjena modela
safety and integriranog
satisfaction ofupravljanja rizicimaand
its customers – Zbirka
employees. As
poslovnih slučajeva, Sveučilište u Zagrebu, Ekonomski fakultet, Zagreb, str. 58
various forms of online violence are on the rise, Match Group must protect users from, for
71
Miloš Sprčić, D., Puškar J., Zec I. (2019) Primjena modela integriranog upravljanja rizicima – Zbirka
The next reputational risk to be analysed is improper attitude towards employees and
the violation of their rights and dignity. Match Group is significantly exposed to this
risk due to the incident that took place in 2014. Namely, Tinder’s vice president of mar-
keting, Whitney Wolfe Herd, resigned in April 2014 due to growing tensions with com-
pany executives. On June 30, 2014, she filed a lawsuit against Tinder for sexual hara-
ssment, and in September 2014, she received more than $ 1 million in settlement.73 In
October of the same year, she founded Bumble, an app more suitable for women as it
was created with the idea that women have the priority in taking the first step towards
a potential partner, strongly opposing sexual harassment and gender discrimination.
Scenario
Considering the Match Group’s past with Whitney Wolfe Herf, a situation is concievable
when some other employees join in on such complaints claiming abuse and or viola-
tion of their rights. For example, employees file a sexual harassment lawsuit against
Match Group and information about the event is made public. In the modern world,
the public reacts very negatively to all violations of rights in the workplace, particularly
to the sexual abuse of women. Such information will lead to a reduction in the number
of users, which in turn leads to a loss of market share, a drop in profitability and the
company must invest great efforts to re-establish its good reputation. The probability
of occurrence of this risk was rated 3, and the significance is high, i.e., rated 4.
Management
Match Group must work to create a safe community in which everyone feels equally
important. They must build relationships of mutual respect and non-discrimination.
The company needs to build an awareness of women’s rights and the fight against vio-
lence in the workplace culture. In particular, they should activate the human resources
department and conduct surveys among employees so that company leaders have an
insight into the needs and desires of their employees. In this way, possible disagree-
ments and problems could be eliminated prematurely.
3.3.4. Competition risk

Match Group has an extremely narrow business focus in a highly competitive indu-
stry and their concentration of revenues is in the Tinder brand. Due to minimal entry
barriers, Match Group faces significant competition from smaller players.74 Although
the Match Group is a global leader in online dating, it is not the only company in the in-
dustry. One of the bigger competitors of the Match Group is Bumble. Bumble is a com-
pany that became world famous even though it only came out on the market 7 years
73
Oused Tinder Codounder Settled Her Sexual Harassment Lawsuit Against The Company For
‘Just Over $1 Million’, Business Insider (2014), available at: https://www.businessinsider.com/whit-
ney-wolfe-settles-sexual-harassment-tinder-lawsuit-1-million-2014-11 [12.05.2021.]
74
ago. Match Group, aware of the growing threat, tried to buy Bumble for $ 450 million
in 2017, but the offer was unsuccessful.75 The online dating market is subject to sudden
changes in consumer engagement, and users are generally not loyal to companies.
Scenario
One of the smaller competitors, Grindr, for example, patents a new innovation that
potentially occupies most of the market. Match Group thus loses its dominant position
in the market, loses its users who switch to the Grindr application and consequently
loses a large part of its revenue. This risk is unlikely because the Match Group invests
significantly in research and development to ensure the innovation of its services, but
it is certainly of great importance. In the event that this risk materializes, the Match
Group may find itself in a situation where revenues are declining, which, together with
the large debt they have assumed, can lead to major financial difficulties for the com-
pany. The probability of such a scenario is less than 5% and therefore rated 1, while the
significance of the occurrence of risk is high and is rated 4.
Management
Competitive risk needs to be continuously managed and monitored. It is important
for the Match Group to continue to make great effort financially in research and de-
velopment, technology and machine learning, and new product features to anticipate
competition. The goal is to meet the desires and needs of its existing and new custo-
mers in order to create a loyal customer base. In case of loss of market dominance, it
is necessary to invest much more effort in attracting new customers and gaining old
ones that have gone to the competition. In the first quarter of 2021, the Match Group
invested $ 55.58 million in research and development.76
3.3.5. Customer loss risk

Exposure to the risk of losing customers is becoming an increasing problem in most
businesses. Although the Match Group dominates the market, there is always the po-
ssibility of losing existing and potential customers. Customers are the most important
part of any business that provides its services on the market. The average number of
Match Group subscribers in the first quarter of 2021 was 11.1 million, which is an incre-
ase of 12% compared to the first quarter of 2020.77 Although there are a large number
of users, with each loss of user , Match Group loses a part of its revenues and the risk
of bankruptcy increases. This risk in itself is of moderate importance, but in combina-
75
Billion-Dollar Bumble: How Whitney Wolfe Herd Built America’s Fastest-Growing Dating App, Forbes
(2017), available at: https://www.forbes.com/sites/clareoconnor/2017/11/14/billion-dollar-bumble-how-
whitney-wolfe-herd-built-americas-fastest-growing-dating-app/?sh=69498e3d248b [12.05.2021.]
76
Match Group Reasearch and Development Expense, YCharts, available at: https://ycharts.com/com-
panies/MTCH/r_and_d_expense [12.05.2021.]
77
Match Group, Letter to Shareholders (2021), available at: https://s22.q4cdn.com/279430125/files/
doc_financials/2021/q1/Earnings-Letter-Q1-2021-vF_a.pdf [12.05.2021.]
tion with other risks, such as competition risk, it becomes extremely dangerous if not
continuously monitored.
Scenario
Bumble, one of Tinder’s biggest competitors, has devised a new way to approach
users, in the form of targeted ads that attract users to their dating app. Tinder users,
intrigued by Bumble’s innovation, are downloading a new app to try out an improved
version of Bumble. If a third of Tinder users downloads Bumble and decides to stay on
that app and delete Tinder, it would cause a huge drop in users for the Match Group,
given that Tinder has as many as 6.7 million subscribers..78 Existing customers are not
the only ones that Match Group has to lose through competitor innovation. Potential
buyers, seeing the new Bumble concept, may choose to bypass Tinder and become a
Bumble user. The probability of occurrence of this risk is less than 5% and rated 1, and
the significance of the risk is medium and rated 3.
Management
The Match Group must be aware of this risk and manage it continuously. Also, any
risk that occurs, that affects the reputation of the company, will increase the risk of
losing customers. This risk becomes very certain if the users data gets stolen. There-
fore, Match Group should make additional efforts to prevent the theft of their users’
data, should consider new ways to keep its user in a certain loyalty program, they
have to think about how to further facilitate the use of the application, how to reduce
discrimination among its users and everything else that affects the user’s decision to
change the provider of a particular service. In addition, the company needs to pay gre-
at attention to research and development, in order to outpace its competitors in new
innovations.
3.3.6. Interest rate risk

With the majority shareholders exiting, the company took on all of the obligations. In
a short time, the company was left without a very large source of capital, which some-
how had to be replaced. In order to remain liquid, the company borrowed funds. With
such large liabilities, it is extremely important to take care of repaying loans and the
agreed interests. If there is a change in interest rates on debts that the company did
not anticipate and reacted in time by converting the loan, it is certain that the company
will have to either issue new shares or declare bankruptcy. Information on contracted
interest rates and loan amounts are not publicly available, but it is realistic to expect
that due to the sudden outflow of capital and the urgency of raising new capital, the
company failed to agree on very favorable terms. If a variable interest rate is agreed
upon for the entire period of the loan, the company is exposed to interest rate risk
for the entire duration of such a loan agreement. If a combined interest rate is agreed
78
Tinder Revenue and Usage Statistics (2021), Business of Apps, available at: https://www.businesso-
fapps.com/data/tinder-statistics/#9 [12.05.2021.]
upon, which includes a period of fixed interest rate and a period of variable interest
rate, the company is exposed to interest rate risk in the period in which the variable
interest rate is applied. By negotiating a fixed interest rate for the entire duration of
the loan agreement, interest rate risk is avoided.79
Scenario
The company took out a loan with an agreed variable or combined interest rate. Due to
the financial crisis caused by the COVID-19 pandemic, market interest rates are rising.
The company will have a very steep increase in the interest it has to pay on a previo-
usly taken loan and thus automatically reduce its liquidity due to increased expenses
for repaying this interest. Worst case scenario, the company contracted a loan with a
variable interest rate for the duration of the entire loan repayment. The company must
then repay the increased interest amounts throughout the repayment of the loan plan,
unless the market interest rates fall. The probability of the occurrence of interest rate
risk is rated 3, as well as the significance of the risk, which is medium.
Management
Data on the agreed types of interest rates and the amount of the Match Group’s loan
are not publicly available, which is an additional evidence of the Group’s non-transpa-
rent operations, but the Group pays a high interest rate on its issued bonds ranging
from 4.125% to 5.625% depending on maturity.80 Due to such high interest rates on
bonds, it can be assumed that the contracted loans will also have high interest ra-
tes. If the company has taken out a loan with a fixed interest rate during the entire
repayment period of the loan, the interest rate risk of these loans is not significant.
But due to the rapid need for money, it can be expected that the company has failed
to agree on such favorable lending terms. Due to the confidentiality of indebtedness
data, it is impossible to determine with certainty how much a certain increase in the
interest rate would have an impact on the change in indebtedness.If the company has
contracted a loan with a variable interest rate, it may use some of the financial instru-
ments to manage this risk. Some of these are the use of futures, interest rate swaps
and interest rate options, forward rate agreements, money market futures and similar
derivatives.81
3.3.7. Cybersecurity risk

Companies that possess a huge amount of sensitive and private customer information
are the target of cyber attacks that pose a growing threat to business. The rapid de-
velopment of advanced technology, the daily use of mobile devices in many activities
79
Što je kamatni rizik?, HNB, available at: https://www.hnb.hr/-/sto-je-kamatni-rizik- [11.05.2021.]
80
81
Što je kamatni rizik?, HNB, available at: https://www.hnb.hr/-/sto-je-kamatni-rizik- [12.05.2021.]
and easy access to the Internet actually facilitates the malicious target of cybercrimi-
nals. Violated privacy of user data can lead to a number of serious consequences, such
as damaged image or reputation, loss of users and consequently liquidity problems.
These consequences would have a significant impact on the company’s operations, so
investing in cyber security today is considered a necessity, not a luxury.
Scenario
When logging in to the Match Group applications, users reveal private information
about themselves such as name and surname, current location, date of birth, hobbies
and in case of payment, bank card details are also displayed. A cyber attack can result
from a conversation between two people, one of whom presents himself with a false
identity. The moment the user clicks on the link he received in the chat, the attacker has
access to the victim’s account including all personal information and private conversa-
tions. Depending on the intent of the attacker, the situation can result in identity theft,
blackmail if the victim sent explicit content to other users or theft of funds from the
account. In that case, Match Group loses the trust of its customers around the world
which is just the beginning of the problems that follow right after. Match Group, as the
leading Internet company in its industry, is significantly exposed to this risk, but thanks
to its investments in cyber security so far, it has not had any problems with attacks of
this kind so far. As it consistently improves the security of its business, as shown by the
recent partnership with the non-profit organization Garbo, while at the same time de-
veloping more sophisticated ways to attack information systems, the estimate of the
probability of this scenario occurring is 2 (5% - 25%). Consequences from attacks for
which Match Group would not be adequately prepared, would significantly jeopardize
the company’s operations, which is why the assessment of significance is 5.
Management
Given the growing threat of this risk, it should by no means be ignored, but should be
continuously monitored and supervised. Aware of the dangers, in its desire to provide
a secure platform for its customers, Match Group is constantly investing in cyber se-
curity and improving its technology and service. In addition to security measures alre-
ady in place, Match Group should invest in a dual authentication program that would
require some form of additional verification in addition to a password, such as finger-
print or a face recognition, with the intent of preventing third parties from accessing
a particular account. Continuous education of employees and users, how to recognize
and react to a cyber attack, as well as the employment of IT experts in the field would
certainly reduce the risk of this risk.
3.3.8. Risk of financial difficulties

The onset of financial difficulties is a significant problem for all companies. The causes
are various, and the consequence is the inability to serve current payables. The pro-
blem can be seen by looking at the analysis of Match Group´s financial indicators. Most
profitability indicators are significantly lower than the industry average. Lower mar-
gins indicate less efficient business compared to the competition. In addition to the
above data, looking at the investment indicators it can be concluded that the Match
Group is a less desirable investment than the rest of the industry. In addition, the very
high indebtedness of the company should also be mentioned. Match Group pays on
its bonds, compared to a risk-free interest rate of 1.66%82, a high interest rate ranging
from 4.125% to 5.625% depending on the maturity date.83 Moody’s credit rating for
bonds issued by the Match Group is Ba3, which is characterized as a debt instrument
below the investment grade, i.e., junk bonds.84 It can be noted that the Match Group
is exposed to a high risk of financial difficulties, when considering all the data above.
Scenario
Match Group’s revenue is declining. The reasons can be various; the strengthening
of one of the competitors, leading to lower market share, the crisis caused by the
COVID-19 pandemic that could lead to reduced consumer purchasing power, inflati-
on which is now at its highest levels since 2008,85 increased investment for research
and development, the decline in popularity of some of the major applications. Each
of these scenarios may cause a further decline in profitability and an increasing need
for further borrowing. If the interest paid by the Match Group on bonds issued in the
pre-crisis period and their credit rating are considered, it is very likely that further
borrowing will not be possible, or it will be too expensive. The decline in the level of
revenue may also affect the required returns of investors, and if they are not realized,
investors will move their capital into more profitable assets. This does not go in favor
of the last financing option left to the Match Group, which is an additional issuing of
shares. The probability of the occurrence of the risk of financial difficulties is higher
than 95%, and the significance of the risk is at a critical level.
Management
Faced with the risk of financial difficulties Match Group will have to adapt its busine-
ss plans to the possible crisis. By taking over small dating companies that have high
growth potential, the company can take a big risk, but end up with a big reward. Busi-
ness optimization and achieving economy of scale for some of the other applications
owned would lead to an increase in profit margins. Debt restructuring could also redu-
ce interest costs. What Match Group must do next is to make the company more desi-
rable to investors. For now, it can be achieved with a good business plan and realistic
goals, but only time and positive business results in the period that follows will really
show how the company will react to changes.
82
CNBC (2021), available at: https://www.cnbc.com/quotes/US10Y [13.05.2021.]
83
84
BA3/B--, TempleProtestant, available at: https://hr.templeprotestant.org/ba3-bb-4224 [13.05.2021.]
85
US Inflation Rate, YCharts (2021), available at: https://ycharts.com/indicators/us_inflation_rate
[13.05.2021.]
3.3.9. Legislative risk

The GDPR (General Data Protection Regulation) is a regulation of the European Union
approved in 2016.86 It has been in effect since 2018 and sets strict standards for all
online companies that use personal information. The GDPR places a barrier to the
processing, storage and transfer of personal data. Companies operating in the EU and
collecting information from their customers who are also EU residents must make an
effort and show a high level of professionalism in order to adapt to GDPR measures.
Any trade in personal data is strictly prohibited, emphasizing a high degree of security
and protection of personal data from malicious use by employees or hackers. Fines for
violating GDPR requirements can be up to € 20 million or 4% of global revenue (whic-
hever is higher).87
Scenario
Given the amount of personal data that Match Group has at its disposal, it can be
expected that government agencies in charge of personal data protection will, in the
future, issue charges followed by fines if they suspect data misuse. If the Belgian State
Agency for Personal Data Protection makes a final decision and rules the Match Group
for violating GDPR regulations and issues a fine, it will greatly affect their business. The
fine is issued based on the amount of personal data compromised and amounts to 4%
of global revenue. Total revenues for Match Group in 2020 amounted to 2.39 billion US
dollars.
The agencies responsible for the protection of personal data in the European Union
are equally meticulous in monitoring companies and ensuring compliance with the
standards prescribed by the GDPR. Given the numerous fines already issued for vio-
lating GDPR regulations, the seriousness of the situation and the importance of com-
plying with these norms are not to be taken lightly. If the above scenario unfolds, the
Match Group may be penalized with a maximum of 4% of its global annual revenue,
giving a maximum fine of $ 95.6 million. Such an amount would not drastically affect
the profitability of the Match Group in the future and therefore this risk is assigned a
significance level of 2, and the probability of risk occurrence is low.
Management
GDPR risk management implies compliance with all regulations set by the GDPR. Mat-
ch Group needs to harmonize business processes, adopt internal rules and prescribe
detailed procedures for the protection of personal data. Due to the many laws and
regulations that require companies to coordinate their operations, there should be
specialized offices within the company. Because personal information can be made
public as a result of a cyber attack, the best protection is to invest in IT security. From
86
Uredba (EU) 2016/679 Europskog Parlamenat i Vijeća od 27. travnja 2016. o zaštiti pojedinaca u vezi
s obradom osobnih podataka i o slobodnom kretanju takvih podataka te o stavljanju izvan snage Direk-
tive 95/46/ez, Službeni lost Europske Unije, available at: https://www.porezna-uprava.hr/bi/Documents/
Op%C4%87a%20uredba%20o%20za%C5%A1titi%20osobnih%20podataka-GDPR.pdf [15.05.2021.]
87
GDPR Fines / Penalties, available at: https://gdpr-info.eu/issues/fines-penalties/ [15.05.2021.]
the above, we conclude that cyber attack risk management affects GDPR risk manage-
ment. Match Group transparently informs the public about what data is collected and
how it is managed, and in this way it should continue to operate.
3.3.10. Employee departure risk

Employees of large companies such as the Match Group enjoy a number of benefits,
such as job security, paid trainings, and opportunities for advancement, but such jobs
are also accompanied by some negative consequences. In large companies, mobbing,
doing someone else’s work, excessive workloads, and feelings of worthlessness often
occur. Match Group employees have significant amounts of knowledge and skills and
the departure of any of them is a great loss for the company.
Scenario
A possible threat situation would be if, due to pressure from the superiors and poor
working conditions, several employees decide to resign from Match Group and ac-
cept a job with its competitor, Bumble. The employees would easily identify with its
founder, Whitney Wolfe Herd, and be happy to move into a rival company. If several
employees from a key R&D department moved to Bumble, Match Group would suffer
a major blow. In addition to losing the talent and skilled people who understand the
industry, it would also lose the costs invested in education of the resignees. More-
over these employees have the insider information on Match Group‘s activities and
could easily redirect Bumble towards overtaking Tinder and becoming a market lea-
der. The probability of this scenario was rated 2, while the significance was negligible,
i.e., rated 1.
Management
Match Group must provide its employees with good working conditions with appropria-
te monetary compensation for the work performed, introduce additional monetary
and non-monetary incentives, organize appropriate working hours, and allow working
from home in unexpected situations such as the COVID-19 pandemic. If the human
resources department makes sure that every employee feels fulfilled and satisfied
while working in Match Group, then the company can be said to be managing this risk
actively. In addition, attention should be drawn to creating positive working atmosp-
here, for which everyone is responsible individually, but mostly the management and
the heads of departments. It can be assumed that the company pays special attention
to this risk, having learned its lesson after the departure of Whitney Wolfe Herd, who
has since founded one of Match Group’s biggest competitors.
3.4. Risk assesment and risk mapping

After determining the risks, they are evaluated on the scales of significance and proba-
bility of occurrence as shown in Tables 5. and 6. Table 7. shows all identified risks and
their estimates of significance and probability ratings.
Table 5. Overview of levels and associated risk values
PROBABILITY OF OCCURRENCE RATING

< 5% 1
> 5% < 25% 2
> 25% < 65% 3
> 65% < 95% 4
> 95 % 5
Source: Miloš Sprčić, D., Teaching materials for the course „Risk management“, Academic year 2020/2021
Table 6. Overview of ratings and associated significance of risks
SIGNIFICANCE RATING
Negligible 1
Low 2
Medium 3
High 4
Critical 5
Source: Miloš Sprčić, D., Teaching materials for the course „Risk management“, Academic year 2020/2021
Table 7. Risk categorization of Match Group
Probability of
Rizici Significance Risk value
occurrence
Risk of financial
5 5 25
difficulties
Exchange rate risk 3.5 3 10.5
Cybersecurity risk 2 5 10
Interest rate risk 3 3 9
Risk associated with the
3 3 9
COVID-19 pandemic
Legislative risk 2 2 4
Customer loss risk 1 3 3
Employee departure risk 2 1 2
Ranking risks according to he probability of occurrance and signicifacne is the basis

for creating a risk map consisting of 4 quadrants displayed in the coordinate system.
Significance is shown on the ordinate and is assessed by grades from 1 to 5, with grade
1 representing negligible risk and grade 5 is critical risk. The probability of occurrance
is shown on the abscissa ( horisontal axis) and is also assessed by grades from 1 to 5,
where grade 1 suggests that the probability of occurrance is less than 5 % and grade
5 suggests that the probability of occurrence is greater than 95%. According to the po-
sitioning of the risk in the coordinate system, the company decides which risks should
be given the most attention in the risk management process, and which risks do not
have such a significant impact on the company’s operations.88 The company must pay
special attention to the risks of high significance and probability of occurrance, which
are situated in the first quadrant, because if they are not managed properly, they pose
a serious threat to the company’s operations and the achievement of its goals. It poses
a risk of financial difficulties to the Match Group that has a significant impact on the
company’s operations and should be prevented. Reputational risk is on the border of
the first and second quadrant, while exchange rate risk is on the border of the first and
third quadrant. The second quadrant contains risks that need to be detected and con-
stantly monitored. In the case of Match Group, the risks are cyber risk and competition
risk, while the risk of losing customers is on the border of the second and fourth qua-
drant. The third quadrant, which includes the risks that need to be actively managed,
contains no issues for Match group. The risks situated in the fourth quadrant are not
significant and have low probability of occurrence and should be minimally controlled.
In the case of Match Group, these are legislative and employee departure risks. The
remaining risks are risk related to the COVID-19 pandemic and interest rate risk, which
are located in the middle of the coordinate system with medium rates for significance
and probability of occurrence. The results of this analysis are shown in the risk map of
the Match Group is shown in Figure 9.
Figure 9. Risk
Source: map
authors' of Match Group
elaboration
4. CONCLUSION
88
Miloš Sprčić, D., Puškar J., Zec I. (2019) Primjena modela integriranog upravljanja rizicima – Zbirka
Match Group is the leading company in the online dating industry, with over 20 years of
history. It was founded in Dallas, Texas in 2009 when the IAC split Match into five separate
companies. Today, Match Group owns a wide range of applications and websites. From the
4. CONCLUSION
Match Group is the leading company in the online dating industry, with over 20 years of
history. It was founded in Dallas, Texas in 2009 when the IAC split Match into five separate
companies. Today, Match Group owns a wide range of applications and websites. From
the total of 45, the most famous are Tinder, OkCupid and Hinge. In 2015, the company was
listed on the NASDAQ stock exchange raising just over $400 million. Since 2020, Match
Group is a separate company and no longer has ties with its former parent company IAC.
Barriers to entry into the online dating industry are weak, consequently the competiti-
on is strong. Therefore, Match Group must continue to invest in research and develop-
ment, new technologies, machine learning, data science and other business enhancing
departments to stay competitive inside the industry.
Financial analysis has shown that the company is not doing well and is over-leveraged.
Since this is attributed to the separation from IAC, it is not possible to predict accura-
tely whether the company will solve its debt issues or not.
The analysis of the Match Group has also shown that the company’s risk exposure was
high, mostly due to the risk of financial difficultie caused by the recent separation from
IAC. The company’s management will need to have clear and well-analyzed financial
plans to successfully lead the company towards financial success. Further increase in
profitability and continued growth of cash flows will be the key to repaying the assu-
med debt. The current situation with the COVID-19 pandemic has so far contributed to
the company’s growth and higher profitability, but, due to future possible crises, the
company must prepare for worse financial results. The analysis has also demonstrated
the importance of continuous risk management. Cyber, competition and reputational
risks carry high importance if they occur. From the risk map, it is evident that the Mat-
ch Group is a high-risk company with a lot of potential structural problems which could
significantly affect its business. Here the importance of the actively managed ERM
system becomes evident. Risks will need to be audited and managed each time a new
financial statement is issued. The management must pay close attention to the com-
pany’s risks with each new business move. Predictions and new analyses are needed
to examine how the future decisions will affect current risks. To protect itself from po-
tential competitors, Match Group must continue to expand its range of products and
successfully take over existing companies in which they see great growth potential.
For now, such strategy has proven to be profitable and new applications yielded high
revenue growth rates. Of course, such acquisitions must be consistent with the risk
analysis and financial situation. Match Group would also successfully address some of
the most important risks, if in the coming years they develop smaller applications from
the current portfolio for the leaders of their segment. Every small application would
then behave as a small growth company and generate significant cash flows. Match
Group would increase profitability and set an almost unreachable scale for competi-
tors. Otherwise, business stagnation will lead to drastic problems in a very short time.
The intensity of the business environment and the attractiveness of the online dating
industry are some of the key reasons for serious approach to risk management. To
ensure the operation of its business and achievement of company goals, the Match
Group must monitor and manage all relevant risks with high proficiency.
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nessinsider.com/what-is-match-group-history-of-tinder-parent-company-2021-1
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news/business/2021/0211/1196467-irish-growth-forecast/
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The Case Study of Nestlé S.A. 223
THE CASE STUDY OF NESTLÉ S.A.
Bruno Huljić, Filip Jagar, Manda Klanjčić1
1. INTRODUCTION
Description of company
S.A. is a multinational company founded in 1866 and operating in the food produc-
tion segment. The company is based in Vevey, Switzerland, while the processing is
dispersed in 80 countries around the world. Of the many Nestlé’s products, the main
and most important are: milk powder, sweets, baby food, chocolate products, soups,
instant coffee and teas, bottled water, spices and frozen food2. Nestlé ranks the first
by revenue criterion as the largest among 10 largest food production companies in the
world.
Mission and Vision

Its vision Good Food, Good life Company Nestlé emphasises how food quality defines
the quality of life. They define their goal as constant progress in the production of food,
beverages and other nutritional supplements in order to influence people’s future and
quality of life, while also considering the environmental concerns. The company’s long-
term strategy is defined as focusing on attractive and propulsive segments and fur-
ther developing the research department3.
History of the company

The history of Nestlé dates back to 1866, when two food processing companies were
established in Switzerland, which would later merge and form the core of Nestlé. Henri
Nestlé founded a company specializing in the production of baby food, while anoth-
er dairy company was established in Cham and named Anglo-Swiss Condensed Milk
Company. In 1905, two companies merged under the name Nestlé and Anglo-Swiss
Condensed Milk Company which remained until 1947, when the soup and foodstuff
1
2
Britannica, Nestle SA, 2020, available at: https://www.britannica.com/topic/Nestle-SA (accessed 10
April 2021)
3
Nestle, 2020 Annual Review, 2021, available at: https://www.nestle.com/sites/default/files/2021-
03/2020-annual-review-en.pdf (accessed 10 April 2021)
company Maggi was taken over. Nestlé’s strategy, since the beginning of the 20th cen-
tury, was diversification of the production portfolio (which is still highlighted today as
one of the strengths of the company). For example, in 1904 Nestlé bought the rights
to chocolate manufacturing, entered the production of cheeses in 1927, and began to
produce instant coffee in 1937.4 An extremely large number of acquisitions continued
during the las century, however, for the purpose of a more transparent and simple
presentation of the company, the mentioned were the most significant events. More
recently, the acquisition of Ralston Purina was significant as it allowed Nestlé to enter
the animal feed processing segment.
2. PESTLE ANALYSIS

The analysis of the political factors belongs to the analysis of the external environ-
ment of enterprises, which analyses various political influences such as government
stability, policy impact on education, health and infrastructure, foreign trade policy,
tax policies, labour law, etc5.
Nestlé, as a truly global company operating in factories in 80 countries around the
world6, is well exposed to political influences at various fronts. Furthermore, the sector
in which it operates (food industry, pharmaceuticals) is often a very sensitive policy
topic when it comes to consumer protection. Since this is an extremely large and com-
plex system, the analysis will concisely summarise the political influences in the key
markets, i.e., the areas where the largest share of production takes place.
The organizational structure of Nestlé is divided into 3 geographical zones: EMENA(Eu-
rope, North Africa and the Middle East), AMS (North and South America) and AOA
(Asia, Oceania and Africa). Within the EMENA zone, the largest share of sales (63.8 %
in 2020) was made in Western Europe, where the most factories are located.7 Brexit
remains one of the essential political factors that can influence Nestlé’s production
processes and operations. In spite of non-restrictive agreements on various tax and
quantitative barriers on imports and exports, the United Kingdom now has the free-
dom to form its own trade policy towards other countries, which may potentially have
a significant impact on Nestlé, given that it has 9 factories in the UK.8 However, chang-
es have occurred in the loading and disembarkation procedures in ports, which could
4
Britannica, Nestle SA, 2020, available at: https://www.britannica.com/topic/Nestle-SA (accessed 10
April 2021)
5
Miloš Sprčić D., Puškar J., Zec I (2019): Application of integrated risk management model – collection
of business cases, Zagreb: Faculty of Economics, p. 18
6
7
8
BBC, “Brexit: What are the key points of the deal?”, 2020, Available at: https://www.bbc.com/news/
explainers-55180293 (accessed 12 April 2021)
lead to disruptions in the transport of products. Furthermore, the EU attaches great

importance to environmental policies (Green Deal), which has been recognized by the
Nestlé Group as a positive shift towards facilitating the development of sustainable
production, as opposed to selective policies aimed at specific points in the value chain.
The Common Agricultural Policy (CAP) is also an area that has an impact on the op-
erations of the Nestlé Group, therefore the effects of the agricultural policy reform
should be assessed, given that it is intended to reduce the amount of support to large
producers in order to correct income disparities.
As for the AMS zone, the largest share of sales is concentrated in United States and
Canada, while the largest number of factories are located in the US, Brazil and Mex-
ico9. The US relationships with third countries is the biggest political factor that can
affect Nestlé’s operations. With the new president in the United States and his decision
to reform the immigration policy the tensions at the Mexican-US border are expect-
ed to diminish.10 The expansion of the Panama Canal will have a positive impact on
trade, i.e., the logistics through further increase in efficiency and circulation through
the channel.11 Furthermore, the countries in the AMS zone are extremely economically
interconnected through various bilateral agreements and memberships in trade orga-
nizations, which facilitates business in this organizational zone.
The AOA Zone is much more diversified than the mentioned two and, thus, are most
complex to analyse. The largest shares of sales are concentrated in the ASEAN coun-
tries and the rest of Asia, while significant shares are recorded in the Sub-Saharan Af-
rica, as well as in Japan and Oceania. On the manufacturing side, the story is different,
considering that by far the largest number of factories are located in China.12 There-
fore, China’s relations with the rest of the world can significantly affect the production
processes. The constant tensions between China and the US, and China’s influence on
Taiwan, i.e., the entire South China Sea region, are important political factors that can
trigger trade wars and numerous sanctions.

Economic factors refer to various economic variables (unemployment, interest rate,
exchange rate) that have a direct or indirect impact on the business of the enterprise.
Nestlé, due to its size and presence in all parts of the world, must be extremely careful
when analysing its (macro) economic environment.
9
10
White House, “Fact Sheet: President Biden Sends Immigration Bill to Congress as Part of His Com-
mitment to Modernise our Immigration System”, 2020, available at: https://www.whitehouse.gov/brief-
ing-room/statements-releases/2021/01/20/fact-sheet-president-biden-sends-immigration-bill-to-con-
gress-as-part-of-his-commitment-to-modernize-our-immigration-system/ (accessed 12 April 2021)
11
The New York Times, “The New Panama Canal: A Risky Bet”, 2016, available at: https://www.nytimes.
com/interactive/2016/06/22/world/americas/panama-canal.html (accessed 12 April 2021)
12
Economic conditions in the US will have a significant impact on the operations of the
AMS organizational zone, but due to the size of the economy, the economic conditions
can spill all over the world. Interest rates in the US are at record lows, which is not a
huge novelty in the last decade after the 2008 financial crisis. The COVID crisis has
stalled interest rate growth and the FED’s view is that the interest rates should be tar-
geted between 0 % and 0.25 % in order to support the economy during the pandem-
ic.13 Moreover, in March 2021 the Federal Open Market Committee (FOMC) announced
its plans to keep the interest rate target at extremely low levels until the long-term in-
flation rate reaches 2%. This monetary policy is expected to result in a rise of inflation
to 2% in 2021 and stabilisation in 2022.14
In the European Union, the situation is similar. The interest rates are at record low lev-
els, practically zero. The ECB plans to target the three main interest rate benchmarks
ranging from -0.50% to 0.25% until the inflation expectations converge close to 2%. It
also plans to continue open market operations (PEPP programme) with an envelope of
EUR 1.850 billion until the end of the first quarter of 2022, i.e., as long as the conditions
of the pandemic persist.15 Nevertheless, compared to the US, the pace of vaccination
of the population is much slower and it is not yet fully clear when the measures in Eu-
rope will slow down while the economy remains heavily dependent on the support and
assistance of the governments to the most affected sectors.
On the other hand, for 11 consecutive months China’s central bank, PBoC has set a
target interest rate for borrowing at 3.85% and warns of the risk of inflation as a result
of high liquidity arising from the US monetary policy.16 In other words, unlike the US
monetary policy, which is currently expansionary (through unconventional channels),
the Central Bank of China is taking a more restrictive stance towards large flow of li-
quidity that could cause inflationary pressures.
13
The Balance, “Current Federal Reserve Interest Rates and Why They Change”, 2021, available at:
https://www.thebalance.com/current-federal-reserve-interest-rates-4770718 (accessed 12 April 2021)
14
The Balance, “Current Federal Reserve Interest Rates and Why They Change”, 2021, available at:
https://www.thebalance.com/current-federal-reserve-interest-rates-4770718 (accessed 13 April 2021)
15
European Central Bank, Press releases on Monetary policy, 2021, available at: https://www.ecb.
europa.eu/press/pr/activities/mopo/html/index.en.html (accessed 13 April 2021)
16
China Macro Economy, “China leaves key interest rate unchanged for 11st straight month as it moves
to cautiously scale back economic stimulus”, 2021, available at: https://www.scmp.com/economy/chi-
na-economy/article/3126453/china-leaves-key-interest-rate-unchanged-11st-straight-month (accessed
16 April 2021)
of China is taking a more restrictive stance towards large flow of liquidity that could cause
inflationary pressures.
Figure 1. Currency exchange rate USD/CHF March-May 2021
Figure 1. Currency
Source: exchange rate USD/CHF
authors’ elaboration March-May
according to IMF 2021
Source: authors’ elaboration according to IMF

The above figure shows the fluctuation of the Swiss franc against the US dollar. The above-
mentioned exchange rate relationship is shown due to the fact that Nestlé’s business is
The above figure shows the fluctuation of the Swiss franc against the US dollar. The
denominated
above-mentioned exchangein francs, and that a large
rate relationship number
is shown due oftocentral banks
the fact that in Nestlé’s
the world consider the
business is denominated in francs,Since
dollar as a benchmark. and the
thatprices
a large number
of many rawofmaterials
central are
banks alsoinexpressed
the in dollars
world consider the dollar as a benchmark. Since the prices of many raw materials are
the in
also expressed relationship
dollars, thebetween the twobetween
relationship currencies
thehas
twoancurrencies
impact on hasthe success
an impact of the business. I
on the success of the business. It can be observed that there is a depreciation trend of
the dollar against
14
the franc, i.e., the appreciation of the franc against the dollar since
European
the beginning of the firstCentral Bank, Press
quarter releases
of this year.onThis
Monetary
trendpolicy, 2021, available
has some positiveat: effects, as
https://www.ecb.europa.eu/press/pr/activities/mopo/html/index.en.html (accessed 13 April 2021)
there may be 15 profits from the exchange rate swings and the prices of raw materials
China Macro Economy, “China leaves key interest rate unchanged for 11st straight month as it moves to
may result lower for the
cautiously scalecompany. Onstimulus”,
back economic the other hand,
2021, Nestlé’s
available products may rise rela-
at: https://www.scmp.com/economy/china-
tively and thus be less competitive.
economy/article/3126453/china-leaves-key-interest-rate-unchanged-11st-straight-month (accessed 16 April
2021)
At the beginning of the COVID crisis, we witnessed a sharp increase in the unemploy-
ment rate, but due to the governments’ measures to support the economy, the rates
stabilized and started to converge with the pre-crisis values – although it should be
noted that the US is far from reaching the rates of 2019). The current unemployment
rate in the US is 6%, while in the European Union it is around 8%.17
17
Eurostat, Unemployment statistics, 2021, available at: https://ec.europa.eu/eurostat/statistics-ex-
plained/index.php/Unemployment_statistics (accessed 15 April 2021)
from reaching the rates of 2019). The current unemployment rate in the US is 6%, while in
the European Union it is around 8%.16
Figure 2. Unemployment 1990-2020 in China, EU and USA
Figure 2. Unemployment 1990-2020 in China, EU and USA

Source: authors’ elaboration according to World Bank data
Source: authors’ elaboration according to World Bank data
The unemployment rate is shown as a result of the impact of the consumer disposable
income, which
The unemployment rate is is defined
shown as aasresult
an essential variable
of the impact in the
of the analysisdisposable
consumer of the demand for food
income, which is defined
products as an essential
and consumer variable
confidence. 17 in the analysis of the demand for food
In spite of a strong increase in the unemployment rates
products and consumer confidence. In spite of a strong increase in the unemploy-
18
ment rates in 2020, this

in 2020, this year
year it
it is
is expected
expected to to decline
decline further
furtherasasthe
theeconomy
economygradually
gradually recovers. These
recovers. These factors
factors cantolead
can lead to an increase
an increase in demand
in demand for foodfor food products
products and thusand
havethus
a positive impact
have a positive impact on Nestlé’s business performance.
on Nestlé’s business performance.
2.3. Socio-cultural
16
and demographic factors
Eurostat, Unemployment statistics, 2021, available at: https://ec.europa.eu/eurostat/statistics-
explained/index.php/Unemployment_statistics (accessed 15 April 2021)
The socio-cultural
17 and demographic factors refer to population growth rates, age
Mordor Intelligence. Industry Reports, 2021, available at: https://www.mordorintelligence.com/industry-
structure, income distribution, attitudes
reports/category/food-beverage to15career
(accessed and lifestyle, health and safety
April 2021)
awareness, attitudes to socio-responsible behaviour, etc.19 These factors can have a
significant impact on business operations and therefore deserve special attention. At-
titudes about lifestyle and socially responsible behaviour and health awareness are
particularly current and are of great importance to Nestlé.
The importance of a healthy diet is widely recognised today and more attention to the
quality of the products is paid by the consumers. The global pandemic has contributed
to awareness of the importance of health and healthy living habits, thus increasing the
demand for food and beverages that have a positive impact on health and the immune
system.
18
Mordor Intelligence. Industry Reports, 2021, available at: https://www.mordorintelligence.com/in-
dustry-reports/category/food-beverage (accessed 15 April 2021)
19
Miloš Sprčić D., Puškar J., Zec I (2019): Application of integrated risk management model – collection of
business cases, Zagreb: Faculty of Economics, p. 18
Archer Daniels Midland (ADM) studies show that 31% of consumers buy products that
are adapted to their health, and 50% of them prefer foods and drinks containing natu-
ral ingredients.20 This trend opens up new opportunities for companies such as Nestlé
to create new and innovative products adapted to new market preferences, but also
poses a risk in case of untimely response to the new demand. Therefore food compa-
nies change and improve their recipes reducing the amounts of sugar, salt and saturat-
ed fat so that they can adapt to the new trends.
Sustainability has also become one of the important factors in purchasing products.
According to ADM research, around 65% of the consumers want to have a positive
impact on the environment through their daily activities, and 32% of them buy prod-
ucts that are produced sustainably. 21 The company is expected to operate its busi-
ness and production process sustainably while reducing the negative impact on the
environment. This refers to doing business with responsible suppliers who provide
high quality grown naturally products, use renewable energy sources, reduce food
waste, and finally provide recyclable packaging. Nestlé has published its 2050 plan
to minimize adverse environmental impacts, which includes sustainable sourcing
of raw materials, improved packaging, optimization of logistics routes, transforma-
tion of production portfolio, the use of renewable energy sources in production,
nature-based solutions such as agroforestry and land restoration, and engagement
in climate change. 22
In the recent years, a new segment of consumers who do not consume meat or dairy
products has emerged on the market. According to ADM research, 56% of these con-
sumers prefer to eat more vegetable foods and beverages containing proteins that are
alternative to meat.23 The demand for such protein products, as well as for alternatives
to dairy products, is growing and in response, Nestlé has been expanding its range and
offering various alternatives to milk, ice cream, cheese, burgers and sweets24.
Transparency is one of the key factors building the trust of today’s consumers who
expect transparency on food declarations and throughout the product lifecycle. ADM
studies show that 26% of the consumers are looking for a country of origin on food
and drink labels. They also deem it is important to recognize the ingredients, without
20
ADM.com, “Top Five Global Trends that Will Shape the Food Industry in 2021”, 2020, available at:
https://investors.adm.com/news/news-details/2020/Top-Five-Global-Trends-that-Will-Shape-the-Food-
Industry-in-2021/default.aspx (accessed 12 April 2021)
21
ADM.com, “Top Five Global Trends that Will Shape the Food Industry in 2021”, 2020, available at:
22
Nestle, Nestle’s net zero roadmap, 2021, available at: https://www.nestle.com/sites/default/
files/2020-12/nestle-net-zero-roadmap-en.pdf (accessed 14 April 2021)
23
ADM.com, “Top Five Global Trends that Will Shape the Food Indsutry in 2021”, 2020, available at:
24
Nestle, Embracing plant-based, 2021, available at: https://www.nestle.com/stories/
healthy-food-meatless-meals-flexitarian-nutrition-needs (accessed 15 April 2021)
artificial dyes or sweeteners.25 Therefore, Nestlé reduces and simplifies the lists of
ingredients and artificial dyes, provides nutritional information on packaging and on-
line,26 and publicly discloses where its key suppliers of the raw materials used in food
processing come from27.
Corporate social responsibility increases the attractiveness of the company itself, both
for consumers and for the shareholders and employees. Research shows that social
responsibility is a very important factor that influences the perception of a company.
It is extremely important for the consumers to know that the company assumes re-
sponsibility for its social and environmental impact, and how much the company con-
tributes to society.28 Thus, a responsible company will have a better image and status
in the eyes of consumers and investors, otherwise it may be exposed to loss of repu-
tation and, consequently, customers. Nestlé has repeatedly found itself at the heart of
scandals, that have influenced its reputation. In the last century, Nestlé was criticized
publicly for selling baby food in economically underdeveloped countries, particularly
targeting the poor. At that time, they claimed that their formula was as good as breast
milk, which was considered unethical. More recently, Nestlé has been at the heart of
a scandal over draining of the sources without the necessary permits to exploit wa-
ter during massive droughts in California. The exploitation and child labour on cocoa
plantations is another series of charges directed at Nestlé. Other charges include illic-
it and dangerous ingredients in products, environmental pollution, price tampering,
promotion of unhealthy food and mislabelling the products.29 Due to the above prob-
lems, Nestlé’s reputation has been compromised, and some customers have decided
to boycott their products.

Technological factors relate to technological incentives, levels of innovation, automa-
tion, R&D, technological changes, levels of technological awareness and technological
literacy of the market.30 Today, technology plays an increasing role in people’s lives,
including companies. Regardless of a company’s size or activity, the development of
25
ADM.com, “Top Five Global Trends that Will Shape the Food Indsutry in 2021”, 2020, available at:
26
Nestle, Creating Shared Value and Sustainability Report 2020, available at: https://www.nestle.com/
sites/default/files/2021-03/creating-shared-value-report-2020-en.pdf (accessed 15 April 2021)
27
Foodpolitics, ‘Nestle makes its supply chain transparent’, 2020, available at: https://www.foodpoli-
tics.com/2020/01/nestle-makes-its-supply-chain-transparent/ (accessed 15 April 2021)
28
Ellis-Hall, Winnie; DRP group, “The Importance of CSR and Why a Company Should Embrace it”, 2020,
available at: https://www.drpgroup.com/en/blog/the-importance-of-csr-and-why-a-company-should-
embrace-it (accessed 15 April 2021)
29
Andrei, Mihai; ZME science, “Why Nestle is one of the most hated companies in the world”, 2021,
available at: https://www.zmescience.com/science/nestle-company-pollution-children/ (accessed (18
April 2021)
30
technology brings many benefits as well las challenges for all market players. New
technologies such as the Internet of Things, artificial intelligence, augmented reality,
blockchain and computing clouds contribute to facilitating and accelerating business
and production processes.31 Without following the trends and the use of new technol-
ogies, the company is harder to compete in the market, especially during the global
pandemic. Digitalization has become the key factor for business success. In the case of
Nestlé, it is part of all aspects of business, i.e., the supply chain management, produc-
tion, marketing and sales32.
In times of pandemic, due to difficulties in movement and travel, Nestlé is expanding
the use of augmented reality to provide remote support to its production and R&D
locations and communicate with the suppliers. Company experts and external associ-
ates can use new tools such as remote desktops, smart glasses, 360-degree cameras
and 3D software to remotely connect with the workers in factories and other facilities
around the world. The use of augmented reality has increased efficiency and enabled
managing multiple projects at the same time.33 Food and beverage producers, such as
Nestlé, rely on the flexibility of production lines in adapting to new and changing con-
sumer tastes and demands. Nestlé uses ABB robots in the factories to increase pro-
ductivity. In 2020, plants in Brazil recorded productivity growth of as much as 53%.34
As one of the founders of IBM’s Food Trust, Nestlé uses blockchain technology to man-
age the food supply chain. For this company, IFT is a solution for transferring and
consolidating the existing data sources that enable product tracking, which increases
data transparency.35
In times when technology drives the world and when trends are changing rapidly, it is
essential to create innovation and differentiate from the competition. Nestlé invests
annually around CHF1.7 billion in R&D every year36.
Social networks and the internet have become key advertising channels for companies,
especially for younger generations. In 2020, Nestlé launched an advertising campaign
for gamers on Twitch, telling them to “Take a Break” with Kit Kat. In another campaign
it features Milo Grains on TikTok to encourage the young people to work and live a
31
DeVry University, “The Impact of Technology on Business”, 2020, available at: https://www.devry.
edu/blog/impact-of-technology-on-business-infographic.html (accessed 18 April 2021)
32
Globenewswire.com, Nestle highlights innovation, digitalisation and sustainability in 2019 Annual
Report, 2020, available at: https://www.globenewswire.com/news-release/2020/03/24/2005203/0/en/
Nestl%C3%A9-highlights-innovation-digitalization-and-sustainability-in-2019-Annual-Report.html (ac-
cessed 18 April 2021)
33
Nestle, “Nestle speeds up factory support with augumented reality”, 2020, available at: https://
www.nestle.com/randd/news/allnews/nestle-speeds-factory-support-augmented-reality (accessed 19
April 2021)
34
ABB.com, “ABB robots boost productivity at Nestle’s Brazilian plants by over 50 percent”, 2021, avail-
able at: https://new.abb.com/news/detail/76017/abb-robots-boost-productivity-at-nestles-brazilian-
plants-by-over-50-percent (accessed 18 April 2021)
35
Pollock, Darryn; Forbes, “Nestle Expands Use OF IBM Food Trust Blockchain To Its Zoegas Coffee
Brand”, 2020, available at: https://www.forbes.com/sites/darrynpollock/2020/04/15/nestl-expands-
use-of-ibm-food-trust-blockchain-to-its-zogas-coffee-brand/?sh=2e37f3b51684 (accessed 18 April 2021)
36
Nestle, Innovation, 2021, available at: https://www.nestle.com/randd (accessed 18 April 2021)
healthy life at home.37 As e-commerce continues to grow, Nestlé’s e-commerce sales

grew by 48.4% resulting in online sales now accounting for 12.8% of the total sales.38
New technologies support successful businesses today and create new opportunities
for companies, but on the other hand they can pose a threat. Fast digitalization and
teleworking increased the exposure to IT risks. According to Allianz’s 2021 barometer,
cyber incidents rank third among the key business risks. “At the peak of the first wave
of closures in April 2020, the FBI reported a 300% increase in incidents, and the esti-
mated cost of cyber-crime to the world economy currently stands at more than a tril-
lion US dollars, which is an increase of 50% compared to 2018. Ransomware incidents
are becoming more harmful and are increasingly affecting large companies by so-
phisticated attacks and massive extortion demands.”39 Nestlé has been implementing
PhishScreener software since 2020 as a solution used by Microsoft Azure DevOps and
Azure machine learning to quickly detect identity theft before an employee clicks on
a malicious connection. As a result, Nestlé has reduced the number of false positives
received by these solutions, accelerated the time of detection of dangerous emails,
and increased its overall protection against data theft40.
2.5. Legal factors

Legal factors refer to the parts of the external macro-environment of the observed
company in the legislation segments of individual countries. Since Nestlé is a multina-
tional company whose products can be purchased in 190 countries, special attention
must be paid to legal factors that vary from country to country and, for the benefit of
the business, considerable resources should be devoted to adapting to this part of the
company’s total macro-environment.
Nestlé is required to pay particular attention to food regulation as one of the most
critical segments of the market, since food is the essential factor of people’s lives and
food regulations are generally stricter than regulation in most other areas. One of
Nestlé’s largest markets, the United States, has particularly strict regulations in the
food industry and the agency that oversees the implementation of these regulations
is entrusted to the Food And Drug Administration (FDA).41 Of the most significant laws
37
Globenewswire.com, “Corporate Giant Nestle Remains Top Of the Food And Beverages Market”,
2021, available at: https://www.globenewswire.com/news-release/2020/11/25/2133944/0/en/Corpo-
rate-Giant-Nestl%C3%A9-Remains-Top-Of-the-Food-And-Beverages-Market.html (accessed 18 April
2021)
38
Nestle, Nestle reports full-year results for 2020, 2021, available at: https://www.nestle.com/media/
pressreleases/allpressreleases/full-year-results-2020 (accessed 18 April 2021)
39
Allianz.hr, Allianz Risk Barometer for 2021, 2021, available at: https://www.allianz.hr/hr_HR/privat-
ni-korisnici/o-nama/press/allianzov-barometar-rizika-za-2021.html (accessed 22 April 2021)
40
Microsoft.com,” Nestle prevents cybersecurity threats with Azure Machine Learning”, 2020, avail-
able at: https://customers.microsoft.com/en-us/story/844797-nestle-consumer-goods-azure (accessed
22 April 2021)
41
Us Food & Drug Administration, Food, 2021, available at: https://www.fda.gov/food (accessed 22
April 2021)
passed in this area in the United States is the legislation adopted in 2011 under the title
Food Safety Modernisation Act (FSMA), which tightened the public control over safety in
the food industry.
The European Union as one of Nestlé’s most important markets is highly regulated in
terms of food safety. As the European Union is more decentralized than the United
States, European Food Safety Authority42 plays a significant scientific and advisory role
in food quality control in Europe, although it is not strictly in charge of for managing
this area. The Agency of the Member States of the European Union is linked through
EFSA, and thus participates in overseeing the safety of the food industry. Each country
adopts the laws on regulating the food markets and the minimum standards are set
by the European Commission.
The People’s Republic of China is less stringent in terms of food security than the US
and the EU and the agency in charge of safety in the food industry in China is called the
State Food and Drug Administration (SFDA).43 The latest significant regulations for the
food industry in China were adopted in 2007, but in the future more stringent control
of the food industry can be expected as a result of the COVID-19 virus which may have
emerged from wild animal markets in the Wuhan province.
The areas of Africa, Asia and South America need to be on special radar as they are
politically and legally more volatile than those of North America, Australia and Europe,
although doing business in Europe requires increasing attention due to the growing
legal regulations imposed by the European Commission.
Nestlé must have excellent coordination and flexibility to comply with the legal provi-
sions that regulate the labour markets in all the countries in which they operate. Nestlé
found itself in a scandal following the announcements of lawsuits for this and some
other companies using child labour in their chocolate production.44 Considering the
sensitivity of this topic and the company’s promise of 20 years ago that they would not
employ children, it is extremely important to address it for ethical reasons and good
reputation.
Another very delicate concern for Nestlé is the issue of breast milk substitutes for
infants. Nestlé had a long history of fighting against those who boycotted them for
allegedly promoting dairy substitutes although breast milk is healthier for babies.45
The latest cases of such accusations came from India where the company was charged
42
European Food Safety Authority, available at: https://www.efsa.europa.eu/en (accessed 23 April
2021)
43
Pharmacy Boardroom, State Food and Drug Administration (SFDA) – China, 2014, available at:
https://pharmaboardroom.com/directory/state-food-and-drug-administration-sfda-china/ (accessed
22 April 2021)
44
The Guardian, “Mars, Nestlé and Hershey to face child slavery lawsuit in US”, 2021, available at:
https://www.theguardian.com/global-development/2021/feb/12/mars-nestle-and-hershey-to-face-
landmark-child-slavery-lawsuit-in-us (accessed 22 April 2021)
45
Business Insider, “Every Parent Should Know The Scandalous History Of Infant Formula”, 2012,
available at: https://www.businessinsider.com/personal-finance/nestles-infant-formula-scan-
dal-2012-6#new-mothers-everywhere-received-promotional-material-for-formula-5 (accessed 23 April
2021)
with breaking the law on this matter over a period of the last 8 to 10 years.46 Therefore,
it is very important for Nestlé to protect its trademark and to have a strong legal team
in this field.
IPOs and acquisitions are important and common practice in multinational compa-
nies, but require legal caution and good coordination of all elements of the hierarchy.
This applies in particular to the less developed countries that do not have long legal
and political traditions, and thus the management need to pay more attention there
than in the developed systems of the Western world.

In the recent decades, ecology in the form of long-term environmental conservation
of the nature for the future generations has attracted increasing attention all over the
world. Therefore, Nestlé as a socially responsible multinational company operating in
190 countries of the world is required to position itself as the leader of the new envi-
ronmental paradigm. Ending the use of disposable plastic packaging is a worldwide
trend, especially in Western countries due to the long lifespan of plastic materials in
the environment and their threat to marine organisms in the oceans.
Reducing the use of carbon dioxide (CO2) is also an important global trend aimed at
preserving ecosystems and protecting the environment. Furthermore, the new waste
recycling habits, sorting and reuse are all focused on sustainability. Therefore, Nestlé
plans to make all its packaging from recyclable or reusable materials by 2025. It has
also started replacing plastic packaging of certain products by other materials that
are less harmful to the environment. In September 2019, the Company presented the
Nestlé Institute of Packaging Sciences. This institute evaluates and develops new less en-
vironmentally harmful packaging. Nestlé also launched a venture fund worth CHF 250
million for financing start-ups dealing with the development of new forms of packaging
and recycling.47 Between 2009 and 2019 Nestlé reduced the required amount of PET
packaging in the production of plastic bottles by 22%, and by 2025 it plans to increase
the percentage of PET plastic packaging derived from the recycled material to 50%.
Now, it is hugely important to present this positive data on Nestlé’s environmental
efforts to the general public. Namely, the negative picture of the company that had de-
veloped in public due to the past mistakes could be corrected precisely through active
campaigns for the protection of nature.
46
National Herald India, “Nestle violates law in India, Conducts clinical trials on premature infants for
baby food”, 2019, available at: https://www.nationalheraldindia.com/india/nestle-violates-law-in-india-
conducts-clinical-trials-on-premature-infants-for-baby-food (accessed 12 April 2021)
47
Nestle, “What is Nestlé doing to tackle plastic packaging waste? 2021, available at: https://www.
nestle.com/ask-nestle/environment/answers/tackling-packaging-waste-plastic-bottles (accessed 12
April 2021)
3. ANALYSIS OF PORTER’S 5 FORCES
3.1. Competition between existing competitors

The food industry is worth $8.49 billion.48 In order to be able to carry out quality anal-
ysis of the competition between the existing competitors in the food industry, it is
necessary to present the entire portfolio of the products managed by Nestlé. The com-
pany defines 12 product categories in its portfolio: baby food, bottled water, cereals,
chocolate and sweets, coffee, frozen food, dairy, beverages, nutritional supplements,
ice creams, pet food and catering. For the purpose of simpler presentation, the follow-
ing table has been constructed.
Table 1. Product range of Nestlé and selected competitors,
Market segment Nestlé products Competitors

Baby food Gerber, NaturNes, Cerelac Danone S.A., Reckitt Benckiser
Group plc, Abbot Laboratories,
Feihe International Inc,
Bottled water Pure Life, Perrier, S. Pellegrino Danone S.A., The Coca-Cola
Company, PepsiCo Inc., Otsuka
Pharmaceutical Co., Ltd.
Cereals Fitness, Nesquik, Cheerios, Lion General Mills Inc., Kellog Company,
cereals PepsiCo Inc., Attune Foods, Marico
Limited
Chocolate and KitKat, Milkybar, Nestlé Les Recettes Mars Inc., Ferrero, Mondelez
sweets de l’Atelier, Nestlé Toll House, International, Meiji Holdings Co.,
Smarties, Quality Street, Aero, Ltd.
Garoto, Orion, Cailler
Coffee Nespresso, Nescafe Original, The Kraft Heinz Company, The

Nescafe Docle Gusto, Nescafe Ready Coca Cola Company, J.M. Smucker
to Drink, Nescafe Original 3in1, Company, JAB Holding Company
Coffee-Mate, Nescafe Gold, Nescafe
Cappuccino, Starbucks® Coffee at
Home
Cooking foods, Maggi, Hot Pockets, Stouffer’s, General Mills, Unilever, Tyson
frozen foods Thomy, Jack’s, Tombstone, Herta, Foods, Nomad Foods Ltd.
and chilled Buitoni, Digiorno, Lean Cuisine
foods
Dairy products Carnation, Nido, Laitière, Coffee- Lactalis, Danone S.A., Fonterra,
Mate Freislandcampina
Drinks Nesquik, Nestea, Milo, PepsiCo Inc., The Coca-Cola
Company, Monster Beverage
Corporation, Red Bull GmbH,
Danone S.A.
48
Statista, Food: Consumer Market Outlook, 2021, available at: https://www.statista.com/outlook/
cmo/food/worldwide (accessed 15 May 2021)
Market segment Nestlé products Competitors

Nutritional Boost, Peptamen, Resource, Nutren Abbot Nutrition, Baxter Healthcare,
supplements Junior B. Braun Melsungen AG, Danone
S.A.
Ice cream Dreyer’s, Mövenpick, Häagen-Dazs, Unilever, Wells Enterprises,
Nestlé Ice Cream, Extrême Tillamook, Blue Bells Creameries
Pet food Purina, Purina ONE, Purino Alpo, Mars Inc., Colgate-Palmoilve, Genral
Purina Felix, Purina Pro Plan, Purina Mills (Bluebuffalo), J.M. Smucker
Cat Chow, Purina Fancy Feast, Purina Company,
Chef Michael’s, Purina Bakers, Purina
Friskies, Purina Dog Chow, Purina
Beneful, Purina Gourmet
Food for Milo, Nescafe, Maggi, Chef, Nestea, McDonald’s Corporation, Starbucks
catering Stouffer’s, Chef-Mate, Sjora Corporation, Burger King
Source: authors’ elaboration according to Nestlé, Mordor Intelligence
Between these segments, Nestlé holds a leading position in the segment of baby
food,49 where its market share is estimated at 20%50 and one of the leading positions
in the dairy products segment.51 The two segments differ in the degree of concen-
tration of producers, namely the number of producers whose market share is large
enough to be able to control the market. The baby food market is rather concentrated
with Nestlé, Danone S.A., Reckitt Benckiser Group PLC, Abbot Laboratories and Feihe
International playing an important role. Fewer strong market rivals do not crowd out
the profitability of the industry and businesses can offer more value to consumers, but
can also set higher prices.
However, a number of important factors that may reduce the profitability of the indus-
try should be taken into account. The projected growth rate for the children’s food seg-
ment is low at 3.67%52. In addition, due to the sensitive nature of the product, the seg-
ment is under the strict supervision of regulatory agencies and companies potentially
face large exit barriers, which is an additional motive for competing with the rivals. It is
also worth to note the past scandals in which Nestlé’s products were at the centre of
public attention, and it is therefore essential for the company to provide quality prod-
ucts that meet the needs of the consumer while adhering to the guidelines of the regu-
lator. On the other hand, the dairy market is fragmented and there are a large number
of multinational as well as regional and local companies that seek to attract consumers
and ensure a greater share in their geographical areas through innovation and pricing
strategies. Given the high level of competition, there is the possibility of profit margin
49
Mordor Intelligence, Baby Food Market: Industry Reports, 2021, available at: https://www.mordorin-
telligence.com/industry-reports/baby-food-market (accessed 7 May 2021)
50
Fortune Business Insight, Infant Formula Market, 2021, available at: https://www.fortunebusinessin-
sights.com/press-release/infant-formula-market-9286 (accessed 7 May 2021)
51
Mordor Intelligence, Dairy Products Market: Industry Reports, 2021, available at: https://www.mor-
dorintelligence.com/industry-reports/dairy-products-market (accessed 7 May 2021)
52
Mordor Intelligence, Baby Food Market: Industry Reports, 2021, available at: https://www.mordorin-
telligence.com/industry-reports/baby-food-market (accessed 7 May 2021)
shrinking through price wars, and high exit barriers with economies of volume will only
be an addition to this form of competitive strategy. The CAGR projection of the dairy
market from 2021 to 2026 is 5.0%.53
The segments in which Nestlé is one of the leading players in the market are: bottled wa-
ter, sweets and chocolate, coffee, frozen food, cooking and chilled food, nutritional sup-
plements, ice cream and pet food. Among these, a higher degree of concentration of sev-
eral companies at a multinational level is found in the pet food segment and the nutritive
supplements segment.54 The pet food segment is perhaps the most interesting, given the
high growth rates as well las due to the increasing trend of pet humanisation. CAGR (Cu-
mulative annual growth rate) for the period 2021 to 2026 is estimated at 7.4%55 with the
biggest market players, Mars and Colgate-Palmolive56, while Nestlé entered this segment
thanks to the acquisition of Purina. The competitive strategy will be based on innovation,
i.e., product differentiation, introduction of new products and marketing campaigns.
3.2. Threat of new businesses entering the market

The threat of new businesses entering the market exists if there are opportunities
to make high profits.57 Since Nestlé operates in 12 different segments with their own
characteristics, they need to be analysed separately. As already stated in the text, the
baby food market has lower growth rates than other segments and is characterized by
high entry and exit barriers. Therefore, it can be concluded that presently the risk of
new competitors entering the market is low.
The bottled water market has a higher growth rate, estimated at 6.1 % for the period
until 2026.58 Pollution and contamination of drinking water, as well as the increase in
the popularity of functional beverages are one of the main causes of the increase in
the demand for bottled water in the world. While the market is fragmented at interna-
tional and regional levels, there is a potential for penetration of new companies that
want to seize the opportunity to make a profit owing to growth in demand.
The market for breakfast cereals has a growth potential due to increasing demand in
India and China. However,59 there is a threat in the form of substitutes, i.e., traditional
53
Mordor Intelligence, Dairy Market: Industry Reports, 2021, available at: https://www.mordorintelli-
gence.com/industry-reports/dairy-products-market (accessed 7 May 2021)
54
Mordor Intelligence, Industry Reports, 2021, available at:
https://www.mordorintelligence.com/industry-reports (accessed 7 May 2021)
55
Mordor Intelligence, Pet Care Market: Industry Reports, 2021, available at: https://www.mordorintel-
ligence.com/industry-reports/pet-care-market (accessed 7 May 2021)
56
Mordor Intelligence, Pet Care Market: Industry Reports, 2021, available at: https://www.mordorintel-
ligence.com/industry-reports/pet-care-market (accessed 7 May 2021)
57
58
Mordor Intelligence, Bottled Water Market: Industry reports, 2021, available at: https://www.mor-
dorintelligence.com/industry-reports/bottled-water-market (accessed 9 May 2021)
59
Mordor Intelligence, cereals Market: Industry reports, 2021, available at: https://www.mordorintelli-
gence.com/industry-reports/breakfast-cereals-market (accessed 9 May 2021)
breakfast dishes. As a product, cereals have been promoted as a substitute for tradi-
tional meals that require longer time to prepare, but there is a change in the attitude
of the consumers who increasingly give importance to the health and quality of the
product. Therefore, the potential for high profits is low and the risk of new competitors
entering is low.
Confectionery and chocolate have less propulsive growth, due to increased consumer
awareness of the impact of sugar on health and growth in demand for natural sweet-
eners.60 The existing manufacturers will have to adapt their marketing activities and
innovate to meet new consumer needs, and the new trends can reduce the risk of new
businesses entering the market.
The coffee market is traditionally dominated by demand from Europe.61 Urban lifestyle
and coffee drinking culture have created strong demand in Europe, but Asia is emerg-
ing as an important player with huge volumes of sales. The barriers faced by potential
competitors are the economy of volume and access to quality raw materials.
Demand for food, including frozen and chilled products, is conditioned by an acceler-
ated lifestyle. High input costs and access to raw material sources make it difficult for
new competitors to enter the market, but businesses can see an opportunities in de-
veloping countries62 where socio-cultural patterns are changing and becoming more
similar to the countries in the west.
The growth potential of the dairy market is reflected in the growing global popula-
tion and an increase in disposable income.63 Barriers to entry for new competitors
are high-quality sources of raw materials, economies of volume, but also distribution
channels through which producers place their products on the market.
The growing demand for innovative products and a focus on consumer health are sig-
nals of potential profits in the beverage market that can attract new competitors and
thus reduce potential prospects for the producers.64 On the other hand, the existence
of a well-established brand and cumulated experience with better access to distribu-
tion channels make it difficult for new challengers to enter the market.
Growth of middle class, higher prevalence of metabolic disorders and higher public
health expenditures open up market opportunities for potential competitors in the
60
Mordor Intelligence, Confectionery Market: Industry reports, 2021, available at: https://www.mor-
dorintelligence.com/industry-reports/confectionery-market-industry (accessed 10 May 2021)
61
Business Wire, Global Coffee Market: Industry Perspective, Comprehensive Analysis and Fore-
cast, 2021, available at: https://www.businesswire.com/news/home/20201006005799/en/Global-Cof-
fee-Market-2020-to-2026---Industry-Perspective-Comprehensive-Analysis-and-Forecast---Research-
AndMarkets.com (accessed 10 May 2021)
62
Mordor Intelligence, Frozen Food Market: Industry Reports, 2021, available at: https://www.mor-
dorintelligence.com/industry-reports/frozen-food-market (accessed 10 May 2021)
63
Mordor Intelligence, Dairy Products Market: Industry Reports, 2021, available at: https://www.mor-
dorintelligence.com/industry-reports/dairy-products-market (accessed 10 May 2021)
64
Mordor Intelligence, Functional Beverage Market, 2021, available at: https://www.mordorintelli-
gence.com/industry-reports/functional-beverage-market (accessed 13 May 2021)
nutritional supplements market.65 By contrast, high entry costs, regulation and over-
sight of agencies, the necessary knowledge, and high output costs make it difficult for
new competitors to enter this segment.
Among these market segments, ice cream has the lowest growth projections and,66
consequently, an incentive for new companies to enter the market is low. In addition,
economies of scale and the established brands make it even more difficult for the ex-
isting companies to enter the market and crowd out the profits. Pet food is a segment
that offers huge opportunities for new businesses to make a profit. As already stated,
the trend of humanization of animals is in momentum, which is reflected by the sharp
increase in the company’s share prices within the pet product markets.67 Barriers to
entry are manifested in the strong position of the current players in the market that
aim to further secure their position and expand their market share with the assistance
of an established brand as well as merger and acquisition strategies.
3.3. Threat of substitute products

The food industry is a very dynamic field and constantly subject to changes in consumer
tastes and new trends. Therefore, there is a justified threat of substitute products, and
companies need to be prepared for agile and continuous research into market needs.
Cereals are advertised as a practical substitute for traditional dishes that allow people
to have a quick breakfast, in accordance with their hectic lifestyles. But the trend of a
healthy diet restores the demand for traditional forms of breakfast ingredients and new
products such as smoothies, protein drinks and other increasingly popular dishes.68 The
candy and chocolate market is undergoing a revolution in terms of shifting towards nat-
ural sweeteners due to the awareness of metabolic diseases and sugar addiction.69
Coffee is an interesting case because it is very often used and promoted as a beverage
that is consumed with breakfast. However, the new trends coerce the consumers into
substituting coffee with lemon water and various teas.70 Similarly to the cereals segment,
healthy beverages are taking on a growing market share compared to drinks like Neste.71
65
Mordor Intelligence, Medical Clinical Nutrition. Industry Reports, 2021, available at: https://www.
mordorintelligence.com/industry-reports/global-medical-clinical-nutrition-market-industry (accessed
13 May 2021)
66
Mordor Intelligence, Ice Cream Market. Industry Reports, 2021, available at: https://www.mordorin-
telligence.com/industry-reports/north-america-ice-cream-market (accessed 13 May 2021)
67
Investor Place, “8 Pet Stocks That Will Make You Purr”, 2021, available at: https://investorplace.
com/2020/12/8-pet-stocks-that-will-make-you-purr/ (accessed 14 May 2021)
68
FutureFit, Healhty Alternatives for cereals, 2016, available at: https://www.futurefit.co.uk/con-
tent-hub/5-healthy-alternatives-to-cereal/ (accessed 15 April 2021)
69
Mordor Intelligence, Confectionery Market Industry. Industry Reports, 2021, available at: https://
www.mordorintelligence.com/industry-reports/confectionery-market-industry (accessed 15 April 2021)
70
Healthline, Nutrition, 2018, available at: https://www.healthline.com/nutrition/coffee-alterna-
tives#TOC_TITLE_HDR_11 (accessed 15 April 2021)
71
Entrepreneur, 4 Healthy Alternatives to Energy Drinks, 2013, available at: https://www.entrepre-
neur.com/article/228087 (accessed 15 April 2021)
Water is also imposed as a substitute, but Nestlé’s production of bottled water in its
portfolio somehow protects the company from competitive substitutes in the water and
beverage segments. Like the entire food industry, the ice cream market is also influ-
enced by the healthy diet trend. As an alternative to ice cream products such as yogurt,
handmade ice creams and ice creams from natural sweeteners are becoming popular.72

Nestlé is a globally present company with an extremely wide range of products, which in
itself implies that it is not overly exposed to individual suppliers. Since Nestlé offers its
products in more than 187 countries73 and that, according to Forbes, it is the largest 74
food company in the world, it can be concluded that in most of these countries its suppli-
ers are present as much as are its customers. For example, one of the most famous and
the most controversial raw material, cocoa, is supplied to Nestlé from 6 different coun-
tries by over 40 different suppliers75. As a rather good indicator of the complexity of the
company’s procurement process, this may suggest that the probability of a single suppli-
er’s impact on Nestlé’s business is relatively low. Of course, there are larger and smaller
players among the raw material suppliers, such as Cargill. This company is one of the
larger players in the food industry in general and one of the suppliers of cocoa (and many
other raw materials) from Ivory Coast to Nestlé. Naturally, a disruption of the relationship
with this supplier can easily cause many problems in the value chain, which is why the
bargaining power of Cargilla and other suppliers of that calibre is significantly greater.
With regard to its size, it is difficult to estimate the total number of suppliers with
which Nestlé operates, but recently major efforts have been made towards the trans-
parency of the supply chain for raw materials to inform the customers about the origin
of the products. Nestlé has so far boasted of public disclosure 95 % of origin of the raw
materials procured in a year.76
Global companies’ value chains, the food industry and the economy as a whole have
been affected strongly by environmental care, global warming, eco-production, slav-
ery and similar forms of exploitation. Although it is devastating that some of these
phenomena still exist today, it is reasonable that the suppliers who meet the men-
tioned conditions gain certain advantages and have greater bargaining power.
72
Mordor Intelligence, Ice Cream Market: Industry Reports, 2021, available at: https://www.mordorin-
telligence.com/industry-reports/north-america-ice-cream-market (accessed 16 April 2021)
73
Nestle, About us – Suppliers, 2021, available at: https://www.nestle.com/aboutus/suppliers (ac-
74
Forbes, The World’s Largest Food And Restaurant Companies In 2020, available at: https://www.
forbes.com/sites/chloesorvino/2020/05/13/the-worlds-largest-food-and-restaurant-companies-in-
2020/?sh=eebb6f5262d5 (accessed 15 April 2021)
75
Nestle, Nestlé supply chain disclosure: Cocoa Plan, 2020, available at: https://www.nestle.com/sites/
default/files/2019-09/supply-chain-disclosure-cocoa-plan-2019.pdf (accessed 15 April 2021)
76
Nestle, Supply chain disclosure, 2021, available at: https://www.nestle.com/supply-chain-disclosure
(accessed 15 April 2021)
Finally, we can conclude that the overall bargaining power of the suppliers in the case
of Nestlé is low to moderate, with certain exceptions whose bargaining power is great-
er owing to their market share or the specific characteristics of the production process
that is desirable and generally accepted in today’s market conditions.
3.5. Bargaining power of customers

As we have already mentioned when analysing the bargaining power of the suppliers,
Nestlé is the largest company in the food industry in the world. With this status comes
a large number of potential customers as well as a large number of competitors and
substitutes. The factors that have the greatest influence on the bargaining power of
customers are the number of customers, the number of bidders, the cost of replacing
the product, the qualitative utility and the cost utility of the offered product,77 and the
influences of certain factors on Nestlé’s customers’ bargaining power will be analysed
below. On the other hand, considering the product diversity offered by Nestlé and its
presence in most world markets, we can conclude that the risk of losing customers is
relatively low.
The number of customers, as well as the number of bidders, does not favour Nestlé
since their numbers is extremely high due to the nature of the industry. Furthermore,
in the case of standardized products, the replacement costs are very low because the
customer is most likely to have a wide range of products available in the same place,
which also reduces Nestlé’s bargaining power.78 The two factors over which Nestlé has
the greatest control are quality and cost-effectiveness that the product provides to the
customer. These are the two factors by which Nestlé seeks to increase its bargaining
power, which is achieved by moderate product differentiation.
In its 2020 annual review79 Nestlé strives to show how much they care about continu-
ous communication with the customers regarding both wholesale or retail chains, dis-
tributors, end consumers, or households. In this way, the company intends to achieve
a higher level of quality and cost-effectiveness for its customers by trying to better
understand their needs and attitudes, and then implements the obtained knowledge
into its products. The result of Nestlé’s efforts are satisfied and loyal customers and
consequently an increase in Nestlé’s bargaining power.
Considering the above facts, it can be concluded that the buyers’ bargaining power in
the case of Nestlé is very high. The reason for this lies primarily in the nature of the
food industry, which is generally present in human lives as one of existential needs,
77
Silo Tips, Michael Porter’s 5 forces model and future trends of FMCG industry, 2017, available at:
https://silo.tips/download/michael-porter-s-5-forces-model-and-future-trends-of-fmcg-industry (ac-
78
Science direct, The Firms’ Survival and Competition through Global Expansion: A Case Study from
Food Industry in FMCG Sector, 2011, available at: https://www.sciencedirect.com/science/article/pii/
S1877042811015497 (accessed 15 April 2021)
79
Nestle, Annual review 2020, 2021, available at: https://www.nestle.com/sites/default/files/2021-
but also in a large number of competing companies in the same industry. Nestlé, like
other companies, has little influence on the level of bargaining power of the custom-
ers, but product differentiation can yield some positive effects in that respect.
3.6. Analysis of the company’s competitive strategy

Porter’s (1985) defines three generic strategies that companies can use to cope with
5 forces that shape every industry (competition between competitors, threat of new
competitors entering the market, threat of substitute products and services or sub-
stitutes, bargaining power of suppliers and bargaining power of customers) are cost
leadership, qualitative differentiation and focus strategy. The cost leadership strategy
is based on the ability to deliver products of the same or similar quality at lower prices
than competitors. Production costs play a very important role in achieving economies
of volume and input prices, but there are also certain risks associated with this strate-
gy. Indeed, there may be attempts to imitate, requirements to improve product quality
and marketing myopia.80 The strategy of qualitative differentiation is based on creat-
ing the products that are price-like or the same as with the competition, but have high-
er quality.81 Similarly, as with any strategy or decision, there are risks that may arise
from wrong differentiation decisions, overpricing of products, or over-differentiation.
Strategic focus refers to a strategy in which a company aims at a narrower segment of
a given market because it believes that it is able, thanks to its competitive advantag-
es, to meet the consumer’s needs much better. The risks are that the company does
not offer a sufficiently differentiated product, consumers’ tastes turn towards a wider
market or there is aggressive entry by other companies.82
Among these strategies, Nestlé generally implements the differentiation strategy, i.e.,
through major investments in research and development, investment in product mar-
keting and sustainable business policy, it aims to create value for all actors in the value
chain (suppliers, local communities, consumers). In other words, the idea is to create a
perception of higher quality products than those by competition, that are produced in
an environmentally and socially acceptable way.
In order to maintain its prices competitive, Nestlé strives to invest constantly in the
development of its production processes, i.e., increasing efficiency through digitaliza-
tion of business, reducing costs arising from production errors and concentrating the
raw material sourcing process. Also, for the purpose of flexibility in operations and
maintaining favourable financing conditions, great attention is paid to the capital man-
agement process as well as the due diligence in the merger and acquisition processes
of other companies.
80
81
82
4. ANALYSIS OF FINANCIAL INDICATORS

Table 2. Liquidity indicators 2017 - 2020

Current ratio 0.86 0.86 0.95 0.83
Quick ratio 0.6 0.63 0.74 0.59
Cash ratio 0.13 0.18 0.10 0.21
Source: authors’ elaboration based on Nestlé financial reports from 2020 and 2018
Liquidity indicators determine the ability of a company to meet arrears of short-term

obligations. Liquidity indicators are current ratio, quick ratio and cash ratio, and their
indicators are calculated by applying the balance sheet positions.
The value of the current ratio indicator is below 1, which may indicate the problem of
outstanding current liabilities. The indicator’s rise in 2018 is attributed to the increase
in the short-term investment item, which grew from CHF655 million to CHF5.8 billion.
The indicator value remained at 0.86 in 2019 and 2020 due to a proportional decrease
of 4.5 % in the current assets and current liabilities. A quick ratio shows the ratio be-
tween current assets less inventories and current liabilities. Looking at the trend over
the years, it is clear that the level of the indicator rose in 2018, but this was followed by
a continuous decline due to a decrease in the receivables and cash and cash equiva-
lents. The cash ratio is the ratio of cash to current liabilities. Over the observed years,
the decrease in the current liabilities contributed to the indicator’s increase, but the
decrease in cash and cash equivalents in 2020 caused the indicator to fall to 0.13.
A comparison of the liquidity indicators of rival firms and the industry shows that
Nestlé generally achieves lower values than the industry average, which points to its
possible liquidity problems.83
83
ReadyRatios, Food and Kindred Products: average industry financial ratios for U.S. listed companies,
available at: https://www.readyratios.com/sec/industry/20/ (accessed 18 April 2021)

Table 3. Leverage indicators 2017 - 2020

Long-term debt ratio 0.45 0.6 0.38 0.35
Debt-to-equity ratio 0.81 0.63 0.61 0.53
Degree of indebtedness 0.63 0.59 0.57 0.53
Interest coverage 15.05 13.22 13.64 11.98
Leverage84 1.86 1.7 1.69 1.48
Financing coefficient 0.86 0.7 0.69 0.48
Leverage indicators measure the level of financing of the enterprise through borrow-
ing. The long-term debt ratio gradually increased over the considered period. The in-
crease in this indicator poses a problem with the ability to settle debts towards debt-
ors. The debt-to-equity ratio is increasing as a result of a reduction in equity and an
increase in debt. The above indicators indicate an increase in the overall indebtedness
and the level of indebtedness. Interest coverage shows that the value of earnings be-
fore interest and taxes decreased in 2019 compared to previous years, thus decreasing
the value of interest coverage. However, regardless of the decline, it is evident that the
operating profit is satisfactory in terms of costs of interest.
The leverage indicators have increased over the period under review, showing that
the company is increasingly using other people’s funds in the settlement of liabilities,
which is evident from the financing ratio obtained as a relationship between the oth-
ers’ own sources of financing. The interest coverage indicator increased between 2017
and 2020 from 11.98 to 15.05, which shows that the company had a higher capacity to
use other people’s funds, owing to the growth of EBITDA.

Table 4. Activity indicators 2017 - 2020

Turnover coefficient of fixed assets 0.94 1 0.95 0.88
Stock turnover coefficient 8.35 9.91 10.02 9.76
Turnover coefficient of total assets 0.68 0.72 0.67 0.67
Current asset turnover coefficient 2.48 2.6 2.23 2.81
Turnover coefficient of receivables 7.85 7.87 8.19 7.44
Average billing time 45.87 45.76 43.97 48.36
Stock bonding days 43.11 36.33 35.93 36.89
84
Alpha Capitalis, 8 key financial indicators, 2017, available at: https://alphacapitalis.
com/2017/06/27/8-kljucnih-financijskih-pokazatelja/ (accessed 28 April 2021)
Activity indicators measure the efficiency of the management of resources used by the
enterprise in its operations. This indicator is known for the turnover coefficients that
show the speed of circulation of assets that should be as high as possible, while the
tying days should be as few as possible, thus showing the performance and safety of
the business. The turnover coefficients tend to vary over the period under consider-
ation. The current asset coefficient decreased by 0.58 in 2018 compared to 2017, while
it increased by 0.37 in 2019 compared to 2018 and dropped again in 2020. This indica-
tor measures the relative level of efficiency that an enterprise uses current assets to
generate revenue. The decrease in the average billing time in 2020 compared to 2017 is
a good business indicator, which has improved despite uncertain operating conditions
in 2020.
Over the four observed years Nestlé recorded continued growth in total revenues,
which was particularly affected by sales. Between 2017 and 2019, sales rose by 3.22 %,
except when sales fell by 8.89 % in 2020 due to the impact of the COVID-19 pandemic.
Notwithstanding that the turnover coefficients of total, fixed and current assets, inven-
tories and receivables vary over the four years observed, activity indicators indicate
that the assets are used efficiently and rationally.

Table 5. Investment indicators 2017 - 2020

Earnings per share 4.3 4.3 3.36 2.31
Price-to-Earnings ratio 26.19 26.33 25.74 37.4
Dividends per share 2.75 2.70 2.45 2.35
Investment indicators are used as measures of success of investing in shares of a com-

pany. For the purpose of this analysis, three indicators have been considered: earnings
per share, price-to-earnings ratio and dividends per share. Earnings per share show
profitability per ordinary share. This indicator is obtained using the difference between
the net profit and the value of preference dividends divided by the number of ordinary
shares. Earnings per share for Nestlé amounted to CHF 4.30 in 2020 and 2019. The ra-
tio of P/E represents the ratio of the share price to the value of the company’s earnings
per share and answers the question of how much money investors are willing to pay
in relation to one monetary unit of the company’s earnings. This indicator is one of the
most used indicators by the investors because it can assess whether the market price
of the share is overestimated or underestimated. The indicator should be seen in rela-
tion to the average values of P/E of the relationship between the industry in which the
enterprise operates. A higher price-to-profit ratio compared to the industrial average
tends to indicate the overestimation of the shares of the company analysed. This indi-
cator was 26.19 for Nestlé in 2020, which is lower than in 2017 when the relationship
was 37.4. This decline was favourable for Nestlé as lower price-to-profit ratios increase
the attractiveness of the shares for the investors. In that respect, dividends per share
have been increasing steadily since 2017, amounting to CHF 2.75 for 2020, which is an
increase of just over 17 % compared to 2017.

Table 6. Profitability indicators in 2017 - 2020

Gross profit margin 0.1754 0.1737 0.1504 0.1134
Net profit margin 0.1467 0.1394 0.1145 0.0838
Return on assets (ROA) 0.1193 0.1257 0.1004 0.0762
Return on equity (ROE) 0.266 0.2441 0.1792 0.1207
Profitability indicators measure the ability of enterprises to achieve a certain level of

profit in relation to income, assets and capital. Profitability indicators are considered
as profit margin, asset, and equity profitability indicators.
Gross profit margin shows the relationship between earnings before interest and tax-
es and the total sales income. The result shows how much revenue remains for the
company after their products are placed on the market. Each company aims to set the
gross profit margin as high as possible, and Nestlé’s gross profit margin for 2020 was
17.54 %, compared to 11.34 % in 2017.
Net profit margin puts in the ratio of earnings after interest and taxes and total sales
income. This indicator measures the realized net profit in the company’s total income,
and for each company it is better that this indicator is as high as possible. The example
of Nestlé shows an increase in the net profit margin over the past four years. In 2017,
the net profit margin was 8.38 %, and in 2020 it was 14.67 %.
Return on assets or ROA is an indicator of the success of using assets in generating
profits. The calculation includes the net profit and total assets, and the resulting rate
refers to the profit generated by the company from a single monetary unit of assets.
Between 2017 and 2019, ROA Nestlé grew to 12.57 %. In 2020, it declined slightly to
11.93 %.
Return on equity or ROE is an indicates the ratio between net profit and equity. The
resulting rate shows how much CU profits an enterprise generates on a single unit of
equity. The profitability of Nestlé’s equity has increased significantly since 2017 from
12.07 % to 26.6 % over the past four years.
5. SWOT ANALYSIS
Table 7. SWOT analysis by Nestlé S.A.
Strengths (S) Weaknesses (W)

• Brand recognition • Complex organizational structure
• Global distribution • Scandals from the past
• Wide range of products • Ongoing disputes due to inability to
• Low exposure to individual suppliers and supervise business at all levels
customers • Negative trend of leverage indicators
• High R & D investment • Stagnation of activity and liquidity
• Product innovation indicators
• Products adapted to various markets
• Transparent and comprehensive reporting
to investors and the public
• Efficient production processes
• Strong market position of the main
products
• Positive trend of indicators of investment
and profitability
• Attractiveness of shares
Opportunities (O) Threats (T)
• New partnerships and acquisitions • Disruptions in the value chain caused by
• Creating a socially and environmentally COVID-19 pandemic
friendly value chain • Creating socially and environmentally
• Healthy diet trend friendly value chain
• The trend of humanization of pets • Shaken customer confidence
• Opening of new market niches (vegan, • Trade wars of world’s leading powers
gluten free) • Resource constraints (cocoa, water)
• Rapid growth of e-commerce due to • Logistical challenges linked to growth of
COVID-19 pandemic e-commerce
• Global growth trend in food industry • Difficulties at local level – specialized
• New technologies competitors and protectionism
• Social networks as a new advertising • Cyber risks
channel • Exposure to strict regulation
Interpretation of SWOT analysis

The most important strategic factors affecting the company’s operations are combined
in the SWOT analysis. They are divided into 4 groups – strengths, weaknesses, oppor-
tunities and threats. These groups of factors are further divided in terms of where the
factor comes from. The factors outlined in the firm’s strengths and weaknesses come
from the internal environment, i.e., the company, while on the other hand, opportuni-
ties and threats stem from the external environment of the company. When viewed as
a whole, SWOT analysis provides an overview of the overall situation and conditions
under which the undertaking operates. The purpose of the SWOT analysis is to raise
awareness of positive and negative sides of the current situation of the company, and
to identify possible opportunities and threats that the company can take advantage
of in the future. The SWOT analysis is complemented by the TOWS matrix which is
actually a strategic roadmap that enables the company to create concrete proposals
and strategic goals with the purpose of further developing the company in the desired
direction.
As stated above in the PESTLE analysis and the analysis of Porter’s 5 forces, Nestlé
has a number of forces that it has built over the long history of the company, and
the current market position is partly due to the forces listed below. The forces can be
divided into the following three spheres: product and market portfolio, investment
in research, development and production, and financial results. Nestlé, as a globally
present company, has an extremely wide range of products, some of which are the
same for all markets while others are tailored to specific markets. All brands listed in
Table 1. prove how wide Nestlé’s product range is, which also implies that dependence
on individual brands or product groups is not high. Also, given the global presence and
the globalization trend in general, Nestlé’s exposure to individual customers and sup-
pliers is not high, and a quality and flowing value chain in the food industry is one of
the main prerequisites for success. The brands in Nestlé’s assortment are recognizable
in all markets where they are present and have maintained a stable market share for
years. In addition to all the above, Nestlé has achieved positive advances in indicators
of investment, liquidity and profitability since 2018, which has directly increased the
attractiveness of Nestlé’s shares.
Nestlé has its weaknesses as all other companies do. One of the most pronounced
weaknesses is the complexity of its organizational structure. The intricacies and iner-
tia of the organizational structure influences timely decision-making at all levels, and
the biggest problems occur at the medium and strategic levels of governance, which
are inherently complex enough. Nestlé is also plagued by numerous past scandals
and consequentially litigations. In the recent decades, Nestlé has been exposed to
numerous charges, including child labour, slavery, illegal exploitation of water sources,
unethical conduct related to the promotion and sale of baby food formula and many
others. Although its financial results from 2018 to the present show mostly positive
developments, a few negative trends have also been noted. Thus, Nestlé shows a neg-
ative trend in activity indicators, from which it can be inferred that for some reason
there is a disruption in the value chain, and some of those distortions are attempted to
be neutralized by borrowing which spoils the outlook of leverage indicators. Of course,
the increase in indebtedness can be attributed to investment in R&D, for example. So,
it is not entirely clear why Nestlé’s indebtedness is increasing.
In today’s market conditions, businesses are confronted with numerous opportuni-
ties, and the fact that we are at the beginning of the part of the business cycle that
brings with it the recovery from the COVID-19 pandemic due to the increasing number
of vaccinated people awakens the consumers’ optimism.85 The rise of optimism and
85
Fidelity Institutional, Business cycle update, 2021, available at: https://institutional.fidelity.com/app/
item/RD_13569_40890/business-cycle-update.html (accessed 29 April 2021)
the decline in household savings that rose sharply in early 202086 are just some of
the factors that open up new market opportunities for Nestlé. But most of these op-
portunities will require further investment and adjustments of the product portfolio.
Now, Nestlé has the opportunity to realize numerous new partnerships and acquisi-
tions that will facilitate the monitoring of modern trends in the food industry, above all
the trend towards healthier diets, and the establishment in the growing niches, such
as gluten-free, vegan and dog food. With the recent acquisition of Purina, which has
numerous established brands in its product portfolio, Nestlé has secured a strong
market position in the dog food market. The global trend of growth in the food indus-
try will undoubtedly affect Nestlé, and in order to exploit the full potential of growth,
Nestlé will have to integrate into its business new technologies such as artificial intelli-
gence, blockchain, IoT and many others. Also, e-commerce is a sales channel that has
been increasingly talked about in recent decades, and the COVID-19 pandemic has
contributed greatly to its steep growth in 2020. The share of e-commerce in sales is ex-
pected to grow further, and through marketing activities on numerous social networks
and other online platforms Nestlé can reach a large number of consumers. Finally, it is
necessary to mention the CSR movement, which is increasingly present in all sectors of
industry, and a company such as Nestlé can benefit significantly from this movement
if it successfully transforms its value chain and the consumers start to perceive it as
socially responsible. Accordingly, Nestlé has made great efforts in the recent years to
report on its value chain through various annual reports and reviews.87
Despite the numerous benefits of Nestlé’s global spread and globalization in general,
Nestlé is also facing certain threats on the market, which have further intensified as
a result of the COVID-19 pandemic. For a business the size of Nestlé’s, it is extremely
important to ensure a flow-through and efficient value chain, starting from suppliers
to wholesale and retail chains, and at the end of the consumers themselves. To begin
with, global trade wars, notably between the US and China, can potentially lead to
major disruptions in Nestlé’s value chain. In addition, the COVID-19 pandemic has dis-
rupted the value chain caused by various bans on the movement of people and goods.
Such disturbances were the most pronounced in the less developed countries from
which Nestlé often supplies raw materials,88 as previously mentioned in the example
of cocoa. Furthermore, the creation of a socially and environmentally friendly value
chain is primarily seen as an opportunity for Nestlé, but if Nestlé does not transform
its value chain on time, it does not inform investors and the public about it, and if a
similar scandal occurs again, this opportunity can become a major threat to Nestlé.
It is also important to mention global movements towards fair and sustainable allo-
cation of the resources such as cocoa and water, which may cause predicaments for
Nestlé. Consumer confidence that Nestlé needs to maintain has been mentioned sev-
86
OECD, Household savings forecast, 2021, available at: https://data.oecd.org/hha/house-
hold-savings-forecast.htm (accessed 29 April 2021)
87
Nestle, Creating shared value report [EPub], 2020, available at: https://www.nestle.com/sites/de-
fault/files/2021-03/creating-shared-value-report-2020-en.pdf
88
Nestle, Suppliers, 2021, available at: https://www.nestle.com/aboutus/suppliers (accessed 29 April
2021)
eral times, but numerous past scandals, such as the baby food scandal, have shaken
the consumer confidence and placed the company under public scrutiny over the past
few decades. Finally, it is also important to pay attention to the logistical challenges
posed by the rapid growth of e-commerce as well as to the cyber risks arising from the
growing data pool at Nestlé’s disposal.
6. TOWS ANALYSIS
Table 8. TOWS analysis by Nestlé S.A.,
Strengths-Opportunities (S-O)
• Brand recognition, global distribution and wide range of products enable revenue
growth and business expansion in a time of global trend of growth in food industry and
e-commerce
• Wide assortment, market-friendly products and high investment in research and
development of new products meet new customer needs and attract new customers, in
particular by opening new niches
• Support new acquisitions and partnerships with positive trend of investment and
profitability indicators that can further improve business and expand existing product
range or adapt it to new market trends
• Continue to contribute to product innovation through high investment in research and
development, but also support implementation of new technologies that will increase
existing production efficiency and help on path towards environmental sustainability
• Contribute to creation of socially and environmentally friendly value chain through
transparent and comprehensive reporting to investors and public
Strengths-Threats (S-T)
• Low exposure to individual suppliers and customers to mitigate negative impacts and
disruptions in supply chain caused by pandemics or trade wars
• Through transparent and comprehensive reporting to investors and public, help restore
customer confidence
• Compete with local recognised rivals with strong market position of main products
• Deploy new technological solutions through high R & D investments and create adequate
software internally to help identify cyber-attacks;
Weaknesses-Opportunities (W-O)
• Use the creation of socially and environmentally friendly value chain to restore lost
customer confidence due to past scandals and ongoing disputes
• Use new technologies to help faster decision-making and information sharing in the
organizational structure, and to supervise business at all levels
• Improve leverage indicators, activity and liquidity by growing e-commerce, food industry
and demand for healthy products
Weaknesses-Threats (W-T)
• By reducing dependency on individual suppliers and expanding supply chain, mitigate
negative impacts of pandemic and trade wars that may disrupt production by delaying or
stopping supply of raw materials needed for production
• Adequately responding to scandals and disputes, responsible behaviour and exposure to
strict regulations to restore customer confidence
7. BUSINESS PLANS AND OBJECTIVES
7.1. Introduction
Nestlé lists a portfolio of products and services as its main strategic determinant that
progresses in parallel with customer requirements,89 and is making great efforts to
ensure that the newly developed products meet the needs of customers as well as to
minimise the impact of its traditional products on the environment and global health.
These strategic determinants are planned to be realized through the development of
new products, innovation in production, and potential acquisitions and partnerships
that may occur in the future. Nestlé is oriented towards an increase in revenue, but
also profit in the long term, with the help of efficient management of resources and
capital.90 The three main pillars underpinning the value system in Nestlé are: continu-
ous innovation, increased operational efficiency, and disciplined allocation of resourc-
es according to clear priorities.
7.2. Optimization of product and market portfolios with

continuous development of innovative products
The strategy to achieve this goal is quite clear: Nestlé must be up-to-date and precise
in the sphere of innovation, effectively manage the portfolio of products and markets
in which it operates, and it is necessary to achieve certain increases in market shares91.
Portfolio and innovation management is primarily about investing in the products with
the highest growth potential, and the same applies to the geographical regions.92 One
of the threats, as well as opportunity for business is certainly the arrival of new trends
on the market, such as healthy, vegan and gluten-free diets. It is, therefore, necessary
to identify and eliminate from the portfolio the product groups that are no longer as
attractive on the market and do not have such growth potential. In order to respond
to future market demands, Nestlé develops and implements of modern technologies,
cooperates with the suppliers and customers at all levels, invests in resources and the
creation of new product groups with higher levels of personalization.93
As the main strategic factors that will drive its growth Nestlé’s sees investment in rap-
idly growing categories in the coffee, dog food, nutrition, water and health products
industry. It is also important to maintain the strength of the existing key brands such
89
Nestle, Annual review 2020 [EPub], p. 9, 2021, [EPub], available at: https://www.nestle.com/sites/
default/files/2021-03/2020-annual-review-en.pdf,
90
Nestle, Annual review 2020 [EPub], p. 9, 2021, [EPub], available at: https://www.nestle.com/sites/
91
Nestle, Annual review 2020 [EPub], p. 10, 2021, [EPub] available at: https://www.nestle.com/sites/
92
Castelar Articles, Nestle Competitive Strategy, 2005, Available at: https://articles.castelarhost.com/
nestle_competitive_strategy.htm (accessed 02 May 2021)
93
Nestle, Annual review 2020 [EPub], p. 10, 2021, available at: https://www.nestle.com/sites/default/
files/2021-03/2020-annual-review-en.pdf, p. 10
as Maggi, Milo and Nido, and each of the 34 key brands generates more than CHF1
billion annually. As mentioned earlier, the developing regions accounted for as much
as 41% of the revenue and a 3.4% growth in 2020. Another opportunity previously
identified in the SWOT analysis is the increase in e-commerce which holds a 12.8%
share in the revenue and an increase of 48.4 % compared to 2019.94 In line with its
competitive strategy, Nestlé opted to encourage ‘premiumization’ or further develop-
ment of those product groups that significantly deviate from competition in quality.
On the other hand, in order to maintain a balance in the production portfolio, Nestlé
also encourages the development of products with favourable prices as well as high
nutritional values, thus offering the products that represent the best price-quality ra-
tio to customers95.
However, portfolio optimization does not always mean selling or acquiring a particular
company or brand. In 2020, Nestlé made additional funding and efforts to revive several
brands, namely Wyeth baby food in China, frozen food lines Lean Cuisine and added the
Life Cuisine brand, and placed a special focus on the water industry in North America
where they aim to turn to recognizable and quality brands from their portfolio.96
7.3. Continuous increase in efficiency and release of funds for

reinvestment
As one of its goals, Nestlé places great importance on disciplined cost management
and increasing operational efficiency at all levels of business. Combined with increased
sales, the company generates more resources towards reinvesting in product innova-
tion, to form self-sustainable business policies, and ultimately to increase the value
of shares.97 Nestlé claims that it continuously invests in the flexibility of companies
through active digitalization of business and increased savings (cost cuts). In particu-
lar, this is done by cutting costs in areas such as production, administration, and raw
material procurement. According to its 2020 Annual report, Nestlé’s savings amounted
to CHF2.8 billion.98
Between 2016 and 2020 Nestlé achieved cost savings of 6% per year on production
processes, excluding labour costs and direct costs of resources.99 Furthermore, the ad-
94
95
96
Nestle, Nestlé continues strategic transformation of water business, agrees on sale of Nestlé Waters
North America brands, 2021, available at: https://www.nestle.com/media/pressreleases/allpressreleas-
es/agreement-sale-nestle-waters-north-america-brands (accessed 02 May 2021)
97
Nestle, Annual review 2020, 2021 [EPub], available at: https://www.nestle.com/sites/default/
files/2021-03/2020-annual-review-en.pdf
98
99
ministration is undergoing continuous standardization of processes in order to elimi-

nate unnecessary business-congesting procedures. With regard to raw materials, it fo-
cuses on centralising the procurement process through three main (general) logistics
centres, in order to reduce the costs and complexity and to establish more efficient
control over company costs.
7.4. Efficient allocation of capital

In line with the objectives of increasing reinvestment in innovation, flexibility and firm
resilience, Nestlé is pursuing a disciplined approach to capital allocation in order to
ensure flexibility in financial markets, to allow for growth, i.e., the expansion of compa-
nies and the growth of shareholders’ profits. The drivers of growth of profitability, i.e.,
organic growth and expansion, are investments in R & D, support and strengthening
of brands in the company portfolio, and focus on projects with the highest probability
of achieving high yields.
Special attention is paid to mergers and acquisitions. As stated in the introduction,
Nestlé has historically participated in an extremely large number of mergers and ac-
quisitions that were horizontal and vertical, as well as in entering into new market
segments. Although this strategy has many advantages, such as diversification of the
production portfolio, reducing the influence of suppliers and customers, and achiev-
ing extremely large economies of scale, managing organisational units has become
increasingly complex. Therefore, these transactions must be carried out with an in-
depth analysis of the impact on the liquidity and solvency of the company as well as on
the return on capital. In conclusion, great emphasis is placed on the balance between
reinvesting the earnings in the enterprise to continue continuous growth, efficient
R&D, and dividend payments and capital appreciation.
7.5. Creating a common value

Nestlé places great emphasis on its publications and reports on sustainable business
and creating the common value of all actors in the value chain. This policy can be de-
scribed as a way for Nestlé to implement qualitative leadership strategy and, thus, to
separate itself from the competition. Accordingly, the company has defined targets
for full reduction of greenhouse gas emissions and the use of reusable and recyclable
packaging by 2050.100 However, although the company is very transparent in its oper-
ations and has very ambitious plans, in the recent history Nestlé has been bound by
various human health and environmental scandals, such as baby food and depletion
of drinking water sources for production purposes in third world countries.
100
7.6. Risk appetite

Like any large company, Nestlé is more prepared to take some risks in order to po-
tentially achieve higher market share and higher profits, but in some areas it pursues
more conservative business policies. A higher appetite for risk is clearly visible in the
acquisitions and mergers, which is a common strategy for entering new market seg-
ments that are estimated as potentially propulsive.
Nestlé’s conservative approach is particularly visible in advertising where it places an
extremely strong emphasis on creating the company’s perception as a socially respon-
sible player that contributes to the health and quality of life of its customers as well as
to the well-being of all other actors in the supply chain. In other words, the company’s
campaigns seem to be designed to play on a securely verified strategy that has proven
to give a positive impression to the consumers.
Correspondingly, in the field of financial risks, Nestlé takes a more conservative stance.
It aims to take as little risk in borrowing as possible, and the policies to reduce the
costs caused by inefficient production processes are pursued.
8. RISK IDENTIFICATION
8.1. Political risk

Political risks arise as a result of various political events, or any unexpected intervention-
ist policy implemented to protect a country’s interests. As Nestlé operates in more than
190 countries, it is easy to conclude that political risk is very present and can pose danger
to the company. On the other hand, it is important to note that Nestlé is one of the few
companies affecting the stability of the country in which it operates as it employs over
three hundred thousand people worldwide and has the highest number of factories
operating in Western Europe. It can be inferred from this how significant it would be for
a country to lose Nestlé as an employer. However, Nestlé must comply with the local
regulations and standards regarding the production and quality of food products.
Scenario:
It is possible that Nestlé may be forced out of the market due to increasingly pro-
nounced attempts by state authorities to introduce stronger control over the distribu-
tion of confectionery products in Western Europe where almost 64 % of the company’s
total revenue is generated.101 One of the possible scenarios is that Nestlé does not
meet the increasingly strict minimum requirements for certain food products, and
cease to be sold on the market in the short term. Considering the fact that the rev-
enues from the confectionery products amounted to approximately CHF6.98 billion
in 2020, it is clear that the sharp drop in sales would have a strong impact on its total
101
Confectionery News, German Confectionery Industry calls for uniform regulation of all supply
chains, 2020, available at: https://www.confectionerynews.com/Article/2020/09/28/German-Confec-
tionery-Industry-calls-for-uniform-regulation-of-all-supply-chains (accessed 08 May 2021)
revenues. In view of the above, the significance of the occurrence of this risk is 3. As
trends lead towards increasingly stricter regulation of the value chain in the food in-
dustry, but due to Nestlé’s diverse product portfolio stricter regulation in this branch
is unlikely to have a major impact on its overall business operations. Also, according to
numerous Nestlé annual reports and reviews, the company actively manages its value
chain and makes great efforts to build good relationships with suppliers operating in
an environmentally and legally acceptable way. On the other hand, the probability of
occurrence of this risk is high and is estimated at 4 because it can lead to significant
disruptions in the value chain unless it is actively managed, i.e., unless the responses
to the new regulations are adopted prior to their introduction. As mentioned above,
this may lead to a ban on the sales of products on the market or to high costs caused
by forced changes of suppliers and internal procedures.
Management measures:
Risk can be actively managed through additional investment in research and develop-
ment of healthier products or sugar substitutes to reduce the health hazard of confec-
tionery products and to position Nestlé on the market as a company involved in the
process of raising the quality of life and health of people. The risk can also be managed
by a more rigorous selection of suppliers in order to provide raw materials from envi-
ronmentally friendly sources, higher nutritional values, and zero harmful substances
used in cultivation. In the end, the simplest way to manage this risk is to exit the highly
regulated part of the food industry, i.e., in this case to sell the parts of the company
engaged in the production of confectionery products.
Risk Probability Significance

Political risk 4 (65%-95%) 3 (medium)
8.2. Reputational risk

A good reputation is one of the key factors for successful operation and survival of
companies as it will step up customer loyalty and hence their inclination to more prod-
ucts or services. A reputable company also is likely to attract investors who are willing
to invest more funds and provide lower capital costs. A favourable reputation can even
recruit better employees and motivate the current ones to raise the company perfor-
mance. However, as much as good reputation can have a beneficial effect on the busi-
ness, bad reputation can have extremely negative effects on the company. According
to Benjamin Franklin, “it takes a lot of good deeds to build a good reputation, and only
one bad for it to be lost.”102 Namely, reputation is usually built gradually and compa-
nies have to make remarkable efforts to achieve a good and strong reputation, and
only one mistake is enough to lose it. As a result, companies are extremely sensitive to
loss of reputation leading to weaker performance.
102
Eccles, Robert G., Newquist, Scott C., Schatz, Roland; Harvard Business Review, Reputation and Its
Risks, 2007, available at: https://hbr.org/2007/02/reputation-and-its-risks (accessed 10 May 2021)
In the past, Nestlé had a problem of losing its reputation and customers’ trust. In the
1970s, the company was criticized for promoting infant food as a healthier alterna-
tive to breastfeeding in economically underdeveloped countries. Although Nestlé won
the lawsuit against those who wrote articles on this problem, the public remained
appalled and part of the customers decided to boycott their products.103 The company
was once again at the heart of a scandal when it was accused of depleting water sourc-
es during the heavy droughts in California.104 The public rebelled against Nestlé once
again to disapprove a statement of its former CEO, Peter Brabeck-Letmathe, who said
that there were two opinions on access to water, one of which was that water was a
human right adding that he considered it extreme.105
In addition to these, Nestlé found itself in numerous other scandals involving illicit
and dangerous ingredients in products, environmental pollution, illegal price setting,
promotion of unhealthy foods and wrong labelling of ingredients. The latest scandal
again concerns child exploitation in Ivory Coast. Namely, in 2021 eight children brought
charges against Mars, Nestlé and Hershey for “helping and encouraging the illegal en-
slavement of thousands of children on cocoa farms in their supply chains.”106
Due to all these scandals and controversies, Nestlé harmed its reputation and lost a
worrying portion of its customers. Boycott and public expression of discontent can
be extremely unfavourable for the company and may result in the loss of reputation
and good image – especially today when social networks rule the world. Such a loss
is then ‘transformed into a decrease in revenue, an increase in costs, a decline in the
number of customers and, consequently, a decline in market share and a decrease in
production’.107 We can conclude that reputational risk is extremely significant for every
company because it is associated with other strategic, financial and operational risks,
and is, therefore, known as “risk of risk”.108
103
Krasny, Jill; Business Insider, “Every Parent Should Know The Scandalous History Of Infant Formula”,
2012, available at: https://www.businessinsider.com/personal-finance/nestles-infant-formula-scandal-
2012-6#the-bad-publicity-sparked-a-global-boycott-of-nestl-11 (accessed 10 May 2021)
104
Perkins, Tom; The Guardian, “The fight to stop Nestle from taking America’s water to sell in plastic
bottles”, 2019, available at: https://www.theguardian.com/environment/2019/oct/29/the-fight-over-wa-
ter-how-nestle-dries-up-us-creeks-to-sell-water-in-plastic-bottles (accessed 10 May 2021)
105
Andrei, Mihai; ZME science, “Why Nestle is one of the most hated companies in the world”, 2021,
available at: https://www.zmescience.com/science/nestle-company-pollution-children/ (accessed 11
May 2021)
106
Balch, Oliver; The Guardian, “Mars, Nestle and Hershey to face child slavery lawsuit in US”, 2021,
available na: https://www.theguardian.com/global-development/2021/feb/12/mars-nestle-and-her-
shey-to-face-landmark-child-slavery-lawsuit-in-us (accessed 11 May 2021)
107
Miloš Sprčić, D. and Jakirlić, L. (2017) Reputation risk management using integrated risk management
model. Proceedings of the Faculty of Economics in Zagreb, p. 143
108
Scenario:
It can be assumed that Nestlé presents its new vegan product line stating that the
products are manufactured in an environmentally sustainable way and that the pack-
aging is fully recyclable. However, the ingredients of these products show that one of
the main ingredients is palm oil, the production of which is known to be harmful to the
environment. The media, using a transparently published list of suppliers, come across
the name of a supplier that is associated with intentional ignition and destruction of
rainforests in order to plant the palms for oil production. The public is appalled by the
misrepresentation of products as environmentally friendly, and the targeted buyers
refuse to buy the products because of harming the environment and the destruction
of rainforests, as well as due to endangering numerous animal species that lost their
natural habitats. As a result, a new boycott is launched that undermines the compa-
ny’s reputation. Since the reputational risk is associated with other risks and consid-
ering the past scandals and lawsuits directed against Nestlé, such or similar scenarios
are quite possible. The probability of the occurrence and materiality of such a risk is
high and valued at 4 which indicates its high significance for the company and income.
This risk is therefore located in the 1st Quadrant and must be prevented.
The awareness of reputational risk is extremely important for every company and
it should manage this risk proactively to satisfy its employees, investors and clients.
To manage reputational risks successfully, companies’ managers have to identify the
key interest groups to address in crisis communication in case an adverse event oc-
curs.109 In the case of the palm oil supplier problem, Nestlé should direct its attention
to the purchasers of the questionable product through ‘rebranding’. Namely, market
repositioning and creating a new image of the product in consumers’ eyes helps miti-
gating the consequences of the raw material supplier scandal and avoiding the nega-
tive impact on other areas of the business. In the future, it is important that Nestlé’s
management recognizes the importance of reputational risk and, with that in mind,
adopts a strategy and strategic goals that will serve as a guide for the organization and
all employees towards a more successful business, and a strong and good reputation.

Reputational risk 4 (65%-95%) 4 (high)
8.3. Liquidity risk

Liquidity risk is defined as the risk that the cash inflows of an enterprise will not be
sufficient to cover cash outflows, which often happens in cases of liquidation of a com-
pany’s assets at a lower value lower than the market value to compensate for the
109
cash gap.110 Liquidity risk is linked to market risks as it stems from the cash flows of
undertakings that may be affected by changes in financial prices. The deterioration of
liquidity can also be due to the weaker liquidity of customers, and consequently the
entire industry has a major impact on the liquidity of individual companies. The anal-
ysis of the financial indicators leads to the conclusion that Nestlé maintains a level of
liquidity in the past 4 years at a level that does not indicate major problems. However,
a comparison of the financial indicators at the industry level and the values of the
same indicators achieved by Nestlé, it is evident that its performance has been slightly
below the industry average. Considering that Nestlé is one of the industrial leaders, it
can be concluded that their liquidity indicators should by no means be below the in-
dustry average. On the other hand, there is hope for better results in the future thanks
to the fact that Nestlé is present in almost all world markets and has an extremely
wide portfolio of products. As an example, there is a possibility that a specific market
segment, such as pet food, performs extremely poorly, but it is highly probable that
other segments will remain at the same level or even achieve growth, thus mitigating
the overall impact of the disturbance on the enterprise. Finally, it seems that Nestlé
has all the necessary preconditions for achieving financial results as at market leader,
but does not manage to transform them in its daily business.
Scenario:
There is a possibility of a study published and showing a link between pets diag-
nosed with diabetes and certain ingredients of canned and similar “wet” foods used
by most producers on the market. Since the entire segment of pet food accounted
for a significant 15%111 share of sales in 2019, the poor sales results in such a large
segment would hardly have gone unnoticed with the Nestlé group. Furthermore, the
additional costs caused by a number of controls by food safety authorities, poten-
tial litigation, the costs of withdrawing products from the market, etc., could aggra-
vate the situation. Given the numerous scandals from Nestlé’s past, many112 of which
were caused by harmful ingredients, the probability of such a scenario reoccurring
is certainly high. However, the probability of such a negative scenario leading Nestlé
to liquidity problems in the short term is relatively low. On the other hand, the sig-
nificance of the liquidity risk is rather high as liquidity problems are interconnected
with other risks such as, for example, credit risk, buyer loss risk, reputation risk and
price risk. Accordingly, it can be concluded that liquidity is a phenomenon that serves
as a specific catalyst or lubricant in an organization and allows resources to move
smoothly throughout the value chain.
110
Miloš Sprčić D. (2013): Risk management – Core concepts, strategies and instruments, Zagreb: Sinergija,
p. 28
111
Pet Food Processing, ‘Nestlé reports ‘stellar year’ for Purina PetCare, 2020, available at: https://www.
petfoodprocessing.net/articles/13623-nestle-reports-stellar-year-for-purina-petcare (accessed 07 May
2021)
112
ZME Science, “Why Nestle is one of the most hated companies in the world”, 2021, available at:
https://www.zmescience.com/science/nestle-company-pollution-children/ (accessed 07 May 2021)
Liquidity risk includes problems that accumulate gradually, but also sudden shocks
such as the study outlined in the liquidity risk scenario, media scandals etc. Liquidity
risk management is possible through the firm’s strategy, including the development of
liquidity management plans involving banks’ credit lines and factoring services, diver-
sification of funding methods and instruments, and holding a larger volume of liquid
assets.113 In this way, the company provides sources of cash flows despite disruptions
in the value chain, or in the industry as a whole. Despite the positive sides of financial
instruments, the use of those instruments entails certain costs and fees and it is there-
fore necessary to carry out a cost-benefit analysis before signing any contracts with
financial institutions. Regarding the negative effects of this scenario, doubts about the
safety of canned and ‘wet’ food may lead to an increase in the sales of dry pet food
which consumers consider as a substitute for “wet” food. In this way, Nestlé would be
able to compensate for the lost revenues in one segment by increasing revenues in
another. As another solution to this scenario, additional investment in R&D of novel
products should also be considered.

Liquidity risk 3 (25%-65%) 4 (high)
8.4. Currency risk

Nestlé’s wide range of operations spanning in almost 190 countries faces significant
currency risks, which is an inevitable consequence of operations in such a large num-
ber of countries. This analysis will focus on the main currencies in which Nestlé oper-
Figure 3. Currency
ates: Swiss Franc,exchange
Euro, US rate USD/CHF
Dollar 2011-2021
and Chinese Yuan.
Figure 3. Currency exchange rate USD/CHF 2011-2021

Source: Investing.com
The figure above shows the fluctuations in the exchange rates of the US dollar against the
Swiss franc in the period from 2011 to 2021. The United States, as the largest consumer of
113
Miloš Sprčić D. (2013): Risk management – Core concepts, strategies and instruments, Zagreb: Sinergija,
Nestlé’s products, is an important link in the valuation of currency risk. A strong dollar is
p. 28
better for Nestlé, since the US is a net importer of its products, and an appreciated dollar
leads to increased imports of the company’s products. The average exchange rate in 2020 was
0.937 Swiss francs to the US dollar. The exchange rate has been relatively stable in the last
Swiss franc in the period from 2011 to 2021. The United States, as the largest consumer of
Nestlé’s products, is an important link in the valuation of currency risk. A strong dollar is
260
better forCompany
Nestlé,Analysis
sinceand
theRiskUS
Management Strategies in the Global Business Environment – A Case Study Collection
is a net importer of its products, and an appreciated dollar
leads to increased imports of the company’s products. The average exchange rate in 2020 was
The figure above shows the fluctuations in the exchange rates of the US dollar against
0.937 Swiss
the Swiss francs
franc to the
in the US dollar.
period The exchange
from 2011 rate United
to 2021. The has been relatively
States, stable
as the in the
largest last
con-
sumer
10 years.of Nestlé’s products, is an important link in the valuation of currency risk. A
strong dollar is better for Nestlé, since the US is a net importer of its products, and an
appreciated dollar leads to increased imports of the company’s products. The average
One of Nestlé’s largest markets is the European Union, particularly the Eurozone and its
exchange rate in 2020 was 0.937 Swiss francs to the US dollar. The exchange rate has
official currency,stable
been relatively the euro.
in the last 10 years.
One of Nestlé’s largest markets is the European Union, particularly the Eurozone and
Figure 4. Currency
its official exchange
currency, rate EUR/CHF 2011-2021
the euro.
Figure 4. Currency exchange rate EUR/CHF 2011-2021

Nestlé
Source:as this means that Europeans will import more products from other countries,
Investing.com
including those where labour costs are cheap. After significant fluctuations over the years, the
The figure above presents the ten-year movement of the exchange rate between the euro and
exchange rate has stabilized in the recent years, with the average exchange rate in 2020
TheSwiss
the figurefranc.
aboveAs
presents the ten-year
in the case movement
of the dollar, of the exchange
the appreciation rate is
of the euro between the
desirable for
amounting to 1.07 Swiss Francs to the euro.
euro and the Swiss franc. As in the case of the dollar, the appreciation of the euro is de-
sirable for Nestlé as this means that Europeans will import more products from other
countries,
China is one including thosemarkets
of the largest where for
labour costsproducts,
Nestlé’s are cheap.
so After
in thissignificant fluctuations
case the stability of the
over the years, the exchange rate has stabilized in the recent years, with the average
exchange
exchange raterate
is very important.
in 2020 amounting to 1.07 Swiss Francs to the euro.
China is one of the largest markets for Nestlé’s products, so in this case the stability of
Figure 5. CHF/CNY
the exchange rateexchange rate 2011 – 2021
is very important.
Figure 5. CHF/CNY exchange rate 2011 – 2021

The figure above shows the ten-year exchange rate between the Swiss franc and the Chinese
yuan. The yuan exchange rate is extremely important since China is both a major consumer,
and a manufacturer of Nestlé’s products. In the past 6 years, there has been a slight trend of
The figure above shows the ten-year exchange rate between the Swiss franc and the
Chinese yuan. The yuan exchange rate is extremely important since China is both a
major consumer, and a manufacturer of Nestlé’s products. In the past 6 years, there
has been a slight trend of depreciation of the yuan compared to the franc, but the av-
erage exchange rate in 2020 was 13.96 Swiss francs for 100 Chinese yuan.
The overall conclusion suggests that Nestlé copes very well with currency risks through
different types of commodity and financial derivatives, operational and natural hedging.
Scenario:
The company is exposed to currency risk via two channels. The transaction exposure
arises from transactions in foreign currencies and is managed by financial instruments.
The translation exposure is due to the consolidation of the financial statements of for-
eign operations in Swiss Francs, where there is no protection in the form of financial
instruments.114 Assuming that the company pays insufficient time and attention to the
analysis of currency risk in foreign currency transactions, a scenario in which Nestlé
suffers significant financial losses as a result of fluctuations in exchange rates can be
elaborated. For example, the Cailler chocolate company, which is located in Switzer-
land, exports its products worldwide with a special focus on the US and China’s mar-
kets.115 Assuming that Cailler’s sales in the US market amount to $5 million, a fall in the
exchange rate from 0.91 to 0.85 Swiss Francs for 1 dollar (dollar depreciation) will incur
Cailler financial loss of CHF 300,000.
For the purpose of hedging transaction currency risk, derivative financial instruments
should be available to Cailler in order to protect itself against adverse foreign exchange
rate movements. Specifically, in the aforementioned case, Cailler purchases currency
call options, which give it the right to purchase Swiss francs at the strike price, with the
intention of making it relatively lower than the future price of the Swiss franc expressed
in US dollars. In other words, with the earned dollars from the sale of chocolate in the
United States Cailler wants to buy as many francs as possible and, as insurance against
unpredictable foreign exchange rate movements, it buys a financial instrument that
guarantees income stability and neutralizes currency risk. Certainly, the exchange rate
may move in the favourable direction of the dollar appreciation in which case 1 dollar
could buy more Swiss francs, but since the currency call option gives the right to pur-
chase but does not bear the obligation to purchase the Swiss Franc at the strike price,
Cailler can let the option expire and execute the transaction at the current price, prof-
iting from the movement of the exchange rate. Moreover, Cailler can cover most of the
US product demand through US production through natural hedging, thus avoiding its
transaction currency risk, but will remain exposed to translation currency risk during
consolidation of financial statements.
114
Nestle, Consolidated Financial Statements of the Nestle Group 2020, 2021 [EPub], available at:
https://www.nestle.com/sites/default/files/2021-02/2020-financial-statements-en.pdf
115
Nestle, Annual review 2016, 2017 [EPub], available at: https://www.nestle.com/sites/default/files/
asset-library/documents/library/documents/annual_reports/2016-annual-review-en.pdf

Currency risk 4 (65%-95%) 2 (low)
8.5. Price risk

Price risk can be seen through the risk of a decline in the selling prices and the risk of
growth in raw material prices. Nestlé sells most of its products through retail chains
and is, thus, protected by contracts against the fall in the selling prices of its products
to some extent. On the other hand, as a company that operates in the food industry,
Nestlé is exposed to the fluctuations of the prices in raw materials, particularly the
agricultural produce. Given the high dependence on climate conditions and harvest
results, the prices of agricultural products may vary considerably and many business-
es are forced to use forward contracts to protect themselves from price increases.116
Oil prices should also be mentioned as an important factor in production costs since
under the conditions of a weaker demand, i.e., recession. Namely, a fall in oil prices
could reduce production costs, but in case of a rise in oil prices the deliveries of sup-
plies could be delayed.
Scenario:
Large retail chains have the ability to put pressure on their suppliers through multiple
mechanisms such as refusing to place products in visible places. Nestlé may thus be
in a disadvantageous position where it must agree to further negotiations and poten-
tial reductions in the selling prices of its products. On the other hand, Nestlé buys raw
materials (cocoa, coffee, wheat) from suppliers all over the world and, although it has a
developed network of suppliers and is not dependent on individual suppliers, it cannot
influence a global rise in the prices of raw materials. The prices of agricultural raw mate-
rials are showing an upward trend, with the exception of the period during the COVID-19
pandemic in 2020.117 A possible scenario is that, due to price increases, Nestlé is unable
to produce certain products in the same volumes. As a consequence, some products
may become completely unprofitable due to a sharp rise in prices, which may cause a
loss of market share and income losses. However, owing to its wide portfolio of prod-
ucts, Nestlé already has a solid protection against significant price risk impacts.
The risk of a fall in the selling prices cannot be avoided and should therefore be man-
aged. It is necessary to diversify the sales of products to retail chains so that sudden
and unannounced interruptions of distribution in individual chains would not affect
the company’s revenues significantly. It is also possible to invest resources in launching
their own e-commerce to reduce dependence on trading chains. The purchase price
116
117
Index mundi, Commodity Prices, 2021, available at: https://www.indexmundi.com/commodi-
ties/?commodity=agricultural-raw-materials-price-index&months=60 (accessed 09 August 2021)
risk can also be managed using different types of financial and commodity derivatives
in a commodity market. In case of scarcity of raw materials such as cocoa, Nestlé can
arrange forward purchases and protect itself against future rises in the price of the
raw material. By doing so, the company could stabilise its costs, allowing it to manage
the costs more easily in the future.
Probability: 4 (65%-95%) Significance: 2 (low)

Price risk 4 (65%-95%) 2 (low)
8.6. Credit risk

The source of credit risk lies in the existing or potential inability of a business partner
to settle due accounts payable or to execute an agreed business transaction.118 Credit
risk is subdivided into credit risk before the transaction is executed and at the execu-
tion of the transaction, where the credit risk before the obligation is fulfilled implies a
situation where the supplier is unable to execute the commercial transaction due to a
poor financial situation. On the other hand, the credit risk at the execution of a trans-
action relates to a situation in which the buyer is unable to meet the obligations to the
supplier arising from the transaction. Based on all of the above, it can be concluded
that it is important to actively manage credit risk, in order to avoid delays in deliveries
to customers, paying fees and penalties, and deteriorated relations with the suppliers
and customers and the resulting reduction in cash flow and profitability. Nestlé ac-
tively manages its credit risk and does so by establishing a credit limit defined on the
basis of the size and credit rating of the counterparty, i.e., the buyer. Nestlé must also
analyse the health of its suppliers based on the publicly available data and a customer
satisfaction questionnaire in order to optimize the supplier’s portfolio. The utmost
attention must be paid to the supplier’s financial situation and dependence on Nestlé,
and to the prices and quality of raw materials and semi-finished products. Considering
that Nestlé is a global company and cooperates with more than 165,000 suppliers,119
its exposure to credit risk is relatively low globally under normal economic conditions
while at local level it may be slightly higher. Of course, in the event of a new global
financial or similar crisis, the likelihood of credit risk occurring increases significantly.
Scenario:
One of the largest distributors of Nestlé’s products, Walmart, has had a negative finan-
cial result in the last two quarters and was therefore unable to meet its liabilities with
Nestlé on a regular basis. Nestlé therefore has problems in settling its liabilities with
the suppliers and other creditors. Given the fact that Walmart is the leading trading
chain in the US, it is difficult to imagine that other market participants would remain
118
Miloš Sprčić D. (2013): Risk management – Core concepts, strategies and instruments, Zagreb: Sinergija
p. 28
119
Nestle Supplier Portal, 2021, available at: https://supplier.nestle.com/ (accessed 14 August 2021)
intact if Walmart runs into financial difficulties. Hence, the emergence of larger and
more serious market disturbances could also increase the likelihood of occurrence of
credit risk in Nestlé’s business. In Nestlé’s value chain, the materiality of this risk is high
and valued at 4. Due to the size and influence of a company such as Walmart, as well as
a large number of Nestlé’s customers and distributors, the probability of this scenario
to occur is relatively low and is valued at 2.
Credit risk is located in the 2nd quadrant, which means that it should be detected and
monitored on a daily basis and prevented if the probability of its occurrence increases.
In order to reduce the possibility of credit risk, Nestlé must use all relevant and avail-
able information about its partners. Then it can decide whether and under what con-
ditions it will settle payments with its partners and establish adequate credit limits.
Likewise, credit risk can be reduced by the company operating with a larger number
of verified suppliers and distributors. In this way, it will reduce its dependency on a
particular distributor and the impact of financial difficulties for certain partners will be
less important for Nestlé.

Credit risk 2 (5%-25%) 4 (high)
8.7. Risk of errors in internal procedures

The risk of errors in internal procedures belongs to the group of operational risks that
occur in every company because people are not perfect and there is always a possibil-
ity of inadvertent errors that can lead to disruptions in the company’s operations and
financial losses. Nestlé has been managing all operational risks, including errors in in-
ternal procedures, very well. External and internal controls and attention of all levels of
management keep the risks of errors in internal procedures at the minimum. As Nestlé
is part of the food industry, which is very sensitive to errors given the importance of
the industry to people’s lives, potential human mistakes in this area could undermine
the company’s reputation. That is why it is crucial for Nestlé to continue the process of
internal trainings, and continue its policy of positive discrimination, i.e., rewarding the
employees who make the least mistakes.
Scenario:
Due to the failure of servers containing databases from the ERP system of Nestlé,
which was caused by a human error during regular maintenance, expiration dates of
the entire current stock and all other vital data about the products currently kept in
storage, are no longer available. This situation may cause high operating costs during
the process of collecting the lost data as well as delays and errors in future deliveries.
Given the high level of investment in the company’s infrastructure, and in new proce-
dures and products, the probability of this risk occurring is low, and amounts to 1, i.e.,
it is expected to occur in 1 – 5% of cases. However, the significance of the risk of errors
in internal procedures can cause extremely high costs due to the complexity of the
operations of the company such as Nestlé, and hence amounts to 4.
Nestlé must take all necessary steps to avoid such incidents, especially through proper
employee training. In addition, a back-up of all data stored on company servers is rec-
ommended. In order to minimize the financial expenditure caused by this or similar sit-
uations in the future, it is possible to take out an appropriate insurance policy against
professional errors. In addition to all the above, one of the most important measures
is investment in research and development of internal procedures, with the purpose
of reducing the likelihood of errors occurring, minimizing costs, reducing the impact
on the environment and increasing the quality of products.

Risk of errors in internal procedures 1 (0%-5%) 4 (high)
8.8. Cyber security risk

New technologies, digitalization of business and e-commerce offer many benefits to
companies, especially in times of the pandemic when most businesses move online.
Companies implement digitalization plans, store their data in clouds, use artificial in-
telligence and robots to increase productivity and production efficiency, and redirect
to e-commerce. With the many benefits of the new technologies and the internet, new
threats come in the form of cyber-attacks. That cyber-attacks are quite common and
dangerous, according to Allianz’s risk barometer which places them on 3rd place of the
most significant business risks.120 Companies suffer huge financial losses when faced
with a hacker attack that most often act by disabling the company services and prevent-
ing access to data, which often leads to a shutdown of operations. Such attacks affect
the revenues in particular, especially for those companies that rely more on the internet
and e-commerce. Attacks may also be aimed at stealing identity or installing ransom-
ware, which hinders business operations and harms the company’s reputation.121
Nestlé’s exposure to cyber-attacks is the consequence of the growing dependence on
the internet. In the event of a cyber-attack, Nestlé’s large database of customers and
operations in almost all world markets could fall into the wrong hands, and theft of that
information would greatly harm the company’s reputation. Due to its dependence on
the internet and e-commerce, which accounted for 12.8% of the total sales in 2020,122
120
Allianz.hr, Allianz Risk Barometer for 2021, 2021, available at: https://www.allianz.hr/hr_HR/privat-
ni-korisnici/o-nama/press/allianzov-barometar-rizika-za-2021.html (accessed 10 May 2021)
121
The voice of Istria, The rise of cyber attacks increases the risk to companies, 2020, available at:
https://www.glasistre.hr/gospodarstvo/porast-kibernetickih-napada-povecava-rizike-za-tvrtke-680957
(accessed 12 August 2021)
122
Nestle, Nestle reports full-year results for 2020, available at: https://www.nestle.com/media/press-
releases/allpressreleases/full-year-results-2020 (accessed 12 August 2021)
a cyber-attack on Nestlé would disable its services and hinder access to its data, and
hence produce a slowdown or interruption in business operations which would incur
to major financial losses for the company.
Scenario:
Assuming that there has been a cyber-attack on Nestlé and hackers managed to block
the computers and lock documents with ransomware. They demand a large sum of
money for unlocking, and threaten to release all documents and confidential informa-
tion to the public. Nestlé is forced to meet the demands of the hackers and pay a large
sum of money because the estimation is that trying to unblock the documents would
cause even more damage because the business would be suspended for a longer pe-
riod. Given the increasing dependence of companies on the internet and the massive
shift to doing business online, the significance of cybersecurity risks is high and valued
at 4. Although cyber-attacks are becoming more common in today’s world, the proba-
bility of their occurrence in Nestlé is low and valued at 2. This is due to the operational
security centre and a software solution that extracts emails containing suspicious links
and other potentially dangerous content. This risk can be found in the 2nd quadrant,
which means that it needs to be detected and continuously monitored.
In order to detect and control cyber security risks, it is necessary to implement an in-
tegrated cybersecurity management system123 and to assign this responsibility to the
person or a team that needs to report to the management on all relevant cybersecu-
rity developments.124 Therefore, Nestlé must employ high-quality personnel and con-
tinue to invest in its security centre called Global Security Operations Center (GSOC),
which is tasked with tracking over 300,000 email accounts and keeping them safe from
cyber-attacks. It is also desirable to facilitate the work of this centre and speed up the
process of finding potential viruses or ransomware by means of software solutions
and machine learning such as PhishScreener which can extract all suspicious emails. It
is also necessary to raise awareness and educate all employees in order to be able to
identify possible attacks and react appropriately.125

Cyber security risk 2 (5%-25%) 4 (high)
123
Deloitte, The Deloitte Consumer Review, 2015, available at: https://www2.deloitte.com/content/
dam/Deloitte/uk/Documents/consumer-business/deloitte-uk-consumer-review-nov-2015.pdf (accessed
12 August 2021)
124
125
Microsoft.com, “Nestle prevents cybersecurity threats with Azure Machine Learning”, 2020, avail-
able at: https://customers.microsoft.com/en-us/story/844797-nestle-consumer-goods-azure (accessed
14 August 2021)
8.9. Environmental risk

Environmental risk is one of the most important risks in terms of the consequences
that threaten Nestlé as a multinational company engaged in, inter alia, the production
of food products for humans and animals, as it uses large quantities of plastic in order
to pack its products, thus polluting the environment. Notably, environmental activism
is growing in developed countries of Europe and North America, and many companies
are heavily criticised by the public because of their inadequate environmental mea-
sures and their products are boycotted in some extreme cases as a result. Taught by
the poor experience from the previous years, Nestlé has recognized the importance
of environmental protection and is conducting an advertising campaign that places an
increasing emphasis on recycling and use of degradable plastics - announcing that by
2025 they will replace plastic packaging of their products with the materials that do
not cause environmental pollution. Today’s trends in the world are very closely related
to the environmental protection and that is why big companies pay more respect to
it, both because of legal regulations and positive publicity. It is for these reasons that
environmental risk should not be overlooked in any way, because it entails financial
and reputational risks as well as legal risks. Potential neglect or ignorance of the envi-
ronmental risks can produce catastrophic consequences for businesses.
Scenario:
In case Nestlé ignored the carbon dioxide emission regulations adopted by the Euro-
pean Union as a signatory to the Paris Agreement and directly endangered the envi-
ronment through such a process. Failure to comply with the legislation and by-laws
in the Member States of the European Economic Area could lead to a lawsuit against
Nestlé, and the company could be publicly be accused of being a global environmental
polluter. This could lead to public protests in terms of demand for Nestlé’s product and
poor financial situation for the company caused by reduced demand and high fines.
The probability of such a scenario amounts to 2 given that the company is aware of the
importance of environmental protection. Due to the loss of reputation and scandals
from the past, Nestlé would have to take extra effort to restore and maintain the trust
of its customers. The significance of such an event is considered high and is rated 4 be-
cause in case of intentional ignorance or non-compliance with the agreement, Nestlé
would be forced to pay a large fine and lose its environmentally conscious customers
whose numbers are increasing significantly.
Nestlé has recognised the importance of investing in environmental issues and will
invest $3.98126 billion in order to halve its CO2 emissions by 2030.127 Nestlé’s net zero
126
CNBC, Europe news published, 2020, available at: www.cnbc.com/amp/2020/12/03/nestle-to-invest-
3point58-billion-to-cut-carbon-emissions.html (accessed 10 May 2021)
127
Nestle, Improving our environmental performance:our focus on water, 2020, available at: https://
www.nestle.com/cvs/global-initiatives/zero-environmental-impact/caring-for-water (accessed 11 Au-
gust 2021)
program aims to reduce CO2 emissions to zero by 2050. Nestlé is also conducting sev-
eral campaigns that increasingly focus on recycling and replacing plastic products, and
has announced plans to replace the plastic packaging of their products by 2025 with
certain materials that do not cause environmental pollution. Nestlé’s website high-
lights how it responds to the climate change by reducing greenhouse gases and waste,
and by actively educating its suppliers to apply environmentally sustainable business
processes as well. Above all, Nestlé points out that their main focus is on clean drinking
water, which is allegedly at the heart of their campaign. They divided their concern in
this action into 3 key components: constant increase in efficiency of use of water in
production, protecting water sources from pollution at the sources of water in coop-
eration with the partners, and providing clean drinking water in communities where
they are present.

Environmental risk 2 (5%-25%) 4 (high)
8.10. Legal risk

As a multinational company operating in over 190 countries in the world, Nestlé deals
with a very high legal risk in view of the different legislative regulations of the countries
in which it operates. On the one hand, there is potentially less legal risk in the Europe-
an Union and the European Economic Area due to the harmonization of the European
law with the national laws of the Member States, but on the other hand the European
Commission has been adopting increasingly stringent regulations on environmental
factors every year. Legal risk is closely linked to the environmental and reputational
risks. As stated in the PESTLE analysis, Nestlé faces increasing legal regulations re-
lated to the quality of their foods and environmental regulations. For example, a law
called the Food Safety Modernisation Act was adopted in 2011 in the USA to tighten
the public control over the safety of the food industry. Nestlé was sued in February
2021 in America for exploiting child labour along with Mars, Hershey and others. In
addition to the lawsuit, controversies regarding Nestlé’s downplaying the importance
of breast-feeding through its promotion for breast-milk substitutes. Because of these
lawsuits and controversies, Nestlé acquired a very bad image in the media that seri-
ously undermined its reputation. Compliance with the legal norms and laws is one
of the key tasks of companies so that this type of risk should be approached with in-
creased care and caution, as new potential lawsuits and controversies could have very
serious financial and reputational consequences.
Scenario:
When testing certain food products on the territory of the EU, it is established that
some Nestlé products contain a legally prohibited substances, i.e., pesticides. Due to
the strict regulations and laws that the EU applies to food, these products are imme-
diately withdrawn from sales and destroyed, and the customers who purchased the
products have to be informed and compensated. Such a scenario could put Nestlé in
a very unfavourable situation where it would lose its reputation in addition to suffer-
ing financial losses. Recalling a product could also lead to mistrust of other Nestlé’s
products and customers could opt for switching to the products of its competitors.
Due to the increasing awareness of healthy diets and customers who pay attention
to the composition of the products they consume, this scenario could have great sig-
nificance for Nestlé and is valued at 4. Given the long tradition of food preparation,
large investments in R&D and increasing transparency on the supply of raw mate-
rials, the probability of the occurrence of this scenario is low and valued at 2. The
legal risk is located in the 2nd quadrant which means that it should be detected and
continuously monitored.
Risk management measures:

In order to prevent this risk, laws and new regulations must be closely monitored
and business decisions taken accordingly. When producing food, it is of the utmost
importance to choose suitable and reliable suppliers, i.e., to choose quality raw ma-
terials that will not present potential danger to human health and the environment.
It is also essential to keep an eye on the entire production process in order to make
the final products safe for their consumers. Another option to prevent such an event
is an independent analysis that Nestlé could carry out on its own products before
they are available to end consumers. By doing this, Nestlé could ensure that any
lawful substance or illicit level of a substance would be found before those products
reach the market.

Legal risk 2 (5%-25%) 4 (high)
8.11. Risk Mapping

Further to the risk analysis carried out above, Tables 9. and 10. were constructed as a
base for Nestlé’s risk quantification. The risks are assigned values 1 to 5 according to
their significance and probability. The ERM analysis for Nestlé S.A. results in Table 11.
demonstrate all of the risks mentioned and sorted by their values.
Table 9. Substrate for quantification of risk probability
Probability Value
95%< 5
65%-95% 4
25%-65% 3
5%-25% 2
<5% 1
Table 10. Substrate for quantification of risk significance
Significance Value
Critical 5
High 4
Medium 3
Low 2
Negligible 1
Table 11. Risk quantification of Nestlé S.A.
No. Risk Probability Significance Risk value

2 Reputational risk 4 4 16
5 Price risk 4 3 12
9 Environmental risk 3 4 12
4 Currency risk 2 4 8
8 Cyber security risk 2 4 8
10 Legal risk 2 4 8
1 Political risk 3 2 6
3 Liquidity risk 2 3 6
6 Credit risk 2 3 6
7 Risk of errors in internal procedures 1 4 4
The key risks that Nestlé encounters are shown in Figure 6. The reputational risk is
located in the 1st quadrant and is most important for Nestlé, which means that it must
be prevented by all means. Price and environmental risk are located on the borders
of the 1st quadrant which means that a slight rise in their probability and significance
would promote them to the 1st quadrant. Furthermore, most risks – legal, currency,
risk of errors in internal procedures and cyber security risk – can be found in the 2nd
quadrant, and need to be detected and monitored systematically and continuously.
Credit, liquidity and political risks are at the outer borders of the 4th quadrant, which
means they do not pose massive threats to Nestlé, although they should be monitored
actively and controlled in case of changes in circumstances.
systematically and continuously. Credit, liquidity and political risks are at the outer borders
of the 4th quadrant, which means they do not pose massive threats to Nestlé, although they
should
The be monitored
Case Study actively
of Nestlé S.A. and controlled in case of changes in circumstances. 271
Figure
Figure 6. Risk Map
6. Risk Map of
of Nestlé
Nestlé S.A.,
S.A.,

9. CONCLUSION
Over the past two years (2020 and 2021), companies have been operating under ex-
ceptional conditions that are best characterized as uncertain. While many activities
have been stopped or largely limited, a large number of risks have not materialized
as a result of government measures. However, this does not mean that the situation
is simple and easy as a large number of risks and decisions of companies depend on
unpredictable situations and their responses to them. In such an environment, it can
be concluded that Nestlé successfully maintains a stable business with relatively small
difficulties. Due to the broad product portfolio, the decline in demand for certain prod-
ucts such as food for catering, bottled water and beverages, that resulted from the re-
strictions on tourism activities, did not significantly affect the company’s performance
due to stable sales of other products.
It is important to emphasize that, although certain financial indicators have deterio-
rated or stagnated slightly, Nestlé’s strategy and efficient capital allocation aims to
stabilise its financial position and return to the path of a positive indicator trend. By
diversifying the production portfolio, Nestlé managed to reduce significantly the im-
pact of financial risks and a large number of operational and strategic ones. The lower
demand for some products may be offset by stable or higher demand in other product
categories, which mitigates the negative effects on the company’s business results.
The risks that need to be eliminated due to their higher probability of occurrence and
high importance for the company’s operations are reputational and environmental
risks. If materialized, these two can significantly jeopardize the strategic objectives of
the company and jeopardise its business. The previous scandals, i.e., unfair practices
and violations of the law, had a major impact that created a negative image of a global
company motivated by profit, and lack of care for the environment and human health.
Their materialization could lead to a significant decline in the sales of all products in
the portfolio, despite its large diversification, which would further reduce the availabil-
ity of funds to finance the research of new products and loss of pace with consumer
preferences and needs, which is a critical factor in the food industry.
In response to all that, Nestlé has been actively striving to ensure the best possible per-
ception with the consumers through positive and transparent marketing campaigns
highlighting their socially responsible role in the value chain, showing their business in
line with the UN Sustainable Development Goals, and promoting products as goods
that raise their consumers’ quality of life and health. Nevertheless, the potential for
improvement is great through stepping up controls and the strategic management of
the raw materials procurement process, active participation in the campaign against
child labour and other unfair practices in business, and the continuous process of dig-
italization of business to achieve greater efficiency and flexibility of the administrative
processes.
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The Case Study of Netflix 279
THE CASE STUDY OF NETFLIX
Janko Rešetar, Marko Seljan1
1. INTRODUCTION
Netflix was founded on August 29, 1997 in Scotts Valley, California by two entrepre-
neurs, Reed Hastings and Marc Randolph. Initially, it provided only movie rental ser-
vices through which consumers could order DVDs online and receive them by e-mail.
In 1999 Netflix started offering subscriptions, i.e. users could borrow an unlimited
number of DVDs with movie content for a fixed monthly fee. However, with the ex-
ponential trend of technological development in the last two decades, Netflix has be-
come one of the largest OTT (Over-The-Top) service providers globally. The OTT service
can simply be described as transmission of multimedia content, most often movies,
series, and shows over the Internet. The forerunners of OTT were the so-called cable
and satellite TV. As early as in 2000, Netflix introduced a personalized content recom-
mendation system based on previous user orders, which significantly differentiated it
from the then main competitor Blockbuster Entertainment.2 Just two years later, after
a significant improvement in service quality, Netflix launched an initial public offering
(IPO) under the NASDAQ at $ 1 per share. Today’s steep share price of $ 505 reflects
Netflix’s high-quality development and ability to recognize market opportunities.3
A significant innovation occurred in 2007 when Netflix allowed its subscribers to watch
movie and TV show streams. After a couple of successful years of streaming movies
and TV shows, in 2010 Netflix decided to remove DVDs from its offering and provide
users with an unlimited content streaming service over the Internet. Shortly after this
decision, the company began providing its services beyond the borders of the United
States, and eventually, in 2012 Netflix started to produce its own content.4
1
2
Angelova, A. (2020) How was Netflix Developed? Retreived 25 April 2021 from https://wiredelta.com/
how-was-netflix-developed/
3
NASDAQ (2021). Retreived 25 April 2021 from https://www.nasdaq.com/market-activity/stocks/nflx
4
Netflix. (n.d.). Retreived 25 April 2021from https://about.netflix.com/en
2. PESTLE ANALYSIS
Pestle analysis studies the external environment that covers the analysis of several
macroeconomic factors such as political, economic, social, technological, legal, and en-
vironmental factors. It is used in the research of the components of strategic manage-
ment environment and is part of the company’s external analysis.

Political factors are of increasing importance and influence to IT companies around the
world. Netflix was originally a streaming service, but it is also classified as an IT compa-
ny which is why it is subject to intensive surveillance of various governments and gov-
ernment bodies. Governments around the world have tightened laws and regulations
relating to data collection and similar practices, as can be seen clearly in the example
of the European Union5. The Parliament of the European Union has implemented strict
measures against those technology companies that benefit from non-competitive ad-
vantages and behaviours and successfully target their users and the content they will
offer by collecting data.6 These companies profit greatly in the market from private us-
ers’ data that is not required to be monitored and can aggressively promote their sales
goals. Depending on the regulatory needs for each market, Netflix adapts its services
to each separate region or market.
Another important threat to Netflix caused by political factors is the growing desire of
various governments to tax online services. Many EU countries include new tax laws
for similar companies, which could increase Netflix’s tax liabilities in the near future7.
With most of the barriers that Netflix has in Europe, as a technology company that has
access to a large amount of data, Netflix is not available in all countries, such as North
Korea, Syria, and Crimea, which have banned all U.S. companies from conducting their
business practices in their states. For this reason, Netflix as a U.S. company is banned
from providing services in these areas.8

Economic factors also play an important role in international business. Higher eco-
nomic activity and higher employment lead to higher consumption of luxury goods for
their pleasure and entertainment. In recent years, the productivity of the global econ-
5
Easton, J. (2020). Government mulls Ofcom regulation for Netflix and other streamers. Retrieved
25April 2021 from https://www.digitaltveurope.com/2020/12/16/government-mulls-ofcom-regulati-
on-for-netflix-and-other-streamers/
6
Tax-News.com Editorial (2020). The Rise Of The Netflix Tax. Retrieved 25 April 2021 from https://
www.tax-news.com/features/The_Rise_Of_The_Netflix_Tax__574278.html
7
Tax-News.com Editorial (2020). The Rise Of The Netflix Tax. Retrieved 25April 2021 from https://
www.tax-news.com/features/The_Rise_Of_The_Netflix_Tax__574278.html
8
Netflix. (n.d.). Where is Netflix available? Retrieved 25 April 2021 from https://help.netflix.com/en/
node/14164
omy has continued to rise resulting in an increasing number of people in the world
who spend on services like Netflix. However, despite the sudden changes in trends
when the world ended in a lockdown and many jobs were lost due to the COVID-19
pandemic, Netflix has experienced a huge increase in the number of users
Although 2021 showed that people have started to get used to living in lockdowns,9 the
economic activity is expected to recover when most world businesses resume opera-
tions. Some countries have already brought the COVID-19 pandemic under control, as
is the case of China, and the economic activities have resumed. Nevertheless, isolation
measures, quarantines and increased unemployment could become a potential threat
to Netflix as a luxury and entertainment good provider as users could find themselves
in a situation of ‘cutting’ the unnecessary costs or having less spare time as a result of
Figure 1 Source: Statista Unemployment rate US from March 2020 to March 2021
new hiring due to reopening of the economy.10
Figure 1 Source: Statista Unemployment rate US from March 2020 to March 2021
Figure 1 shows the unemployment rate from March 2020, when the first lockdown
introduced, to March 2021.
Figure 1 shows the unemployment rate from March 2020, when the first lockdown was
Figure 2 Source: Mott capital management chart Nov 02/2018
9
Statista. (2021). Monthly unemployment rate in the United States from March 2020 to March 2021
[Data file]. Retrieved from https://www.statista.com/statistics/273559/unadjusted-monthly-unemploy-
ment-rate-in-the-us/
10
Sherman, N. (2020). Five ways the virus has changed Netflix. Retrieved 20 April 2021 from https://
www.bbc.com/news/business-54623959
Figure 1 shows the unemployment rate from March 2020, when the first lockdown was

Figure 2 shows how Netflix’s stock experienced unexpectedly favourable growth even before
Figure 2 shows how Netflix’s stock experienced unexpectedly favourable growth even
COVID-19
before COVID-19when
whenit itsaw
sawthe
themost
mostrobust
robustincrease
increaseofofall
allthe
thelargest
largesttechnology
technology companies in
companies in the US.
the US.
Figure 3 Source: Google finance NFLX stock price 21 April 2021
Figure 3 Source: Google finance NFLX stock price 21 April 2021

The graph on Figure 3 shows how the Netflix share price has risen considerably since th
COVID-19 pandemic broke out.
Figure 4 Source: FactSet, company statements

The graph on Figure 3 shows how the Netflix share price has risen considerably since the
COVID-19 pandemic broke out.
The graph on Figure 3 shows how the Netflix share price has risen considerably since
the COVID-19 pandemic broke out.

The
The last last graph
graph showsshows the failure
the failure in theinexpectations
the expectations
of 6ofmillion
6 million
newnew users
users in the
in the first quarter
first
quarter
ofof 2021
2021 when
when Netflix
Netflix recorded
recorded onlyonly 4 million
4 million newnew users.
users.
2.3. Social factors

These days, the global population is more inclined to watch movies and series on the
internet than via the classic cable television. The main reason for this is the fact that
Netflix allows the user to watch movies and series through various devices, such as
5
smartphones, tablets and personal computers, which are regularly used by young
people in particular.11 Also, as price determines the consumer behaviour, Netflix’s low-
er rates make it more attractive than the traditional cable television. ix also, being that
is more expensive than Netflix’s service. Furthermore, Netflix offers a personalized
selection of series and movies with similar features12 based on the user’s interest in
watching certain content.
An additional reason for the popularity of Netflix is the fact that the content is not in-
terrupted by advertising messages, which are a regular and unwanted by-product of
other forms of television programming. In addition, Netflix’s selection of movies and
series content is more extensive than the average packages that can be consumed via
cable TV. The feature that allows choosing subtitles and dubbing in multiple languag-
11
Alexander, J. (2020). The entire world is streaming more than ever — and it’s straining the Inter-
net. Retrieved 20 April 2021 from https://www.theverge.com/2020/3/27/21195358/streaming-netflix-di-
sney-hbo-now-youtube-twitch-amazon-prime-video-coronavirus-broadband-network
12
Bouargane, A. (2020). Netflix vs Cable tv. Retrieved 20 April 2021 from https://www.bbntimes.com/
society/netflix-vs-cable-tv
es13 provides the user with an opportunity to enjoy, or learn and improve different lan-
guages. The richness of Netflix’s content allows each consumer to find some content
that is interesting to him/her, or through which he/she can acquire some new knowl-
edge. The company is also involved in charity work and has donated one hundred mil-
lion dollars as part of the Black Lives Matter campaign to associations that contribute
to the campaign directly.14 Furthermore, the company has donated one hundred and
twenty million dollars to several universities and various colleges.15

Advances in technology have strongly influenced Netflix’s performance. Each person-
alized recommendation of a movie or a show is created through a complex algorithm,
a program that Netflix invests in and that makes it easier for the viewers to choose the
content as it is based on the viewing history, i.e., the de facto user’s interest in certain
content.16 In addition to offering a personalized selection of services, user reviews help
other users choose the content visible on the homepage17.
The advancement of mobile phone technology and greater availability of the Internet
has resulted in a larger number of consumers. Thus, today people spend more time
online, both in their free time and working hours, which makes Netflix’s service visible
and easily accessible. In terms of technological advancement, Netflix is a fairly suc-
cessful platform available through any smart device. Moreover, social networks have
strongly influenced the advertising of the latest ways of watching shows and movies –
thus, contributing to the popularity that the platform is gaining.18 The purchases of the
4K TV devices is increasing for the reason that Netflix offers 4K resolution that attracts
most consumers.
Technological advancement in this category is fairly steady as Netflix adapts very quick-
ly to new needs and is constantly evolving. It offers a wide range of ways to sell the
service and thus simplifies the sales process.19 An extensive network of translators has
13
14
VOA News (2020). Netflix to Donate $100M to Black Communities. Retrieved 20 April 2021 from
https://www.voanews.com/usa/race-america/netflix-donate-100m-black-communities
15
Asmelash, L. (2020). Netflix CEO donates $120 million to black colleges in an effort to ‘reverse ge-
nerations of inequity’. Retrieved 20 April 2021 from https://edition.cnn.com/2020/06/17/business/net-
flix-ceo-hbcus-donate-trnd/index.html
16
Netflix (n.d.). How Netflix’s Recommendations System Works. Retrieved 24 April 2021 from https://
help.netflix.com/en/node/100639
17
Netflix (n.d.). How Netflix’s Recommendations System Works. Retrieved 24 April 2021 from https://
help.netflix.com/en/node/100639
18
Alexander, J. (2020). The entire world is streaming more than ever — and it’s straining the Inter-
net. Retrieved 20 April 2021 from https://www.theverge.com/2020/3/27/21195358/streaming-netflix-di-
sney-hbo-now-youtube-twitch-amazon-prime-video-coronavirus-broadband-network
19
brought the Netflix service closer to most of the world’s population in an ever-growing
number of countries.
2.5. Ecological factors

Netflix strives to be an environmentally conscious company; their policy is based on
the implementation of renewable energy sources. The company buys renewable en-
ergy from certified producers and strives to use that energy as rationally as possible20
and uses renewable energy sources to reduce the release of carbon dioxide into the at-
mosphere, making the information on energy consumption publicly available on their
website.21 Although as an online company Netflix does not have any major impacts
on climate change, the company is trying to attain the goal of complete avoidance of
greenhouse gas emissions by the end of 2022. This plan, called Net-zero + Nature, pro-
poses several steps: the first step is to reduce greenhouse gas emissions; the second
step involves funding projects to prevent carbon from entering the atmosphere; the
last step is to emit carbon from the atmosphere by the end of 2022.22 As for waste
management, Netflix fulfils the conditions stipulated by legal regulators for disposing
of electronic and other waste, and thus helps the global efforts to maintain the ecology
system within reasonable limits.23
2.6. Legal factors

Legal factors are still one of the main threats to the technological and digital enter-
tainment industry where the laws are still in the process of being creating and gov-
ernments around the world are working to develop a legal framework under which to
regulate the technology industry. As already mentioned, many technology giants like
Facebook, Google, Amazon, and Apple are often subjected to law suits regarding un-
competitive behaviour and use of users’ private data. Many of them, including Google
and Facebook, have already paid high fines.24 In the case of Netflix, the privacy of the
users and the use of their data remain one of the company’s as any misuse would, not
only because of high penalties but also, more importantly, because of potential dam-
age to the brands’ reputation.
20
Netflix (2019). A renewable energy update from us. Retrieved 20 April 2021 from https://about.net-
flix.com/en/news/a-renewable-energy-update-from-us
21
Netflix (2019). A renewable energy update from us. Retrieved 20 April 2021 from https://about.net-
flix.com/en/news/a-renewable-energy-update-from-us
22
Stewart, E. (2021). Net Zero + Nature: Our Commitment to the Environment. Retrieved 20 April 2021
from https://about.netflix.com/en/news/net-zero-nature-our-climate-commitment
23
Thomsen, M. (2020). Netflix reveals its energy consumption nearly doubled last year as it streamed
content to 158 million subscribers. Retrieved 22 April 2021 from https://www.dailymail.co.uk/sciencete-
ch/article-7997607/Netflix-reveals-energy-consumption-nearly-DOUBLED-year-global-streaming-servi-
ce.html
24
CW Atlanta (2018). Legal Issues And Controversies Surrounding Netflix. Retrieved 22 April 2021 from
https://cwatlanta.cbslocal.com/tag/legal-issues-and-controversies-surrounding-netflix/
Netflix still does not operate in China, one of the world’s largest economies, due to
the Chinese government censorship. For Netflix to do business in China, it would have
to censor its content heavily, which could mean banning entire episodes and mov-
ies depending on the Chinese government requirements.25 Netflix already practices
restrictions in more than 130 countries, including Croatia, although not through its
fault. Namely, the Netflix American headquarters offer a rich catalogue of content that
every state wants, but may only broadcast what the countries, i.e., television stations
in those countries, will allow. The company is working to address this issue, and the
complete ‘video library’ is expected in all 130 countries soon. In the meantime, users
can access the content illegally using VPN, torrents, and streaming sites.
3. PORTER’S FIVE FORCES
3.1. Competitive rivalry

In the world of the entertainment industry, Netflix has promptly become a platform
for movie streaming. The reason for this is the fact that Netflix recognized the current
trends and opportunities in the market, and the unmet needs of consumers in time
– thus, profiting by taking advantage of new technologies and soon becoming the mar-
ket leader.26 In other words, digitalization and accelerated technological progress have
led Netflix to correct or modify their business model.27 However, Netflix’s success has
prompted other companies to join this fast-growing and profitable industry.
The competition is significant, and the rivalry between the streaming services is inten-
sifying. Long-term participants in this market, such as HBO and Amazon Prime, have
already a built-in status, and thus hold a certain market share of loyal users. The com-
petitive advantage of these companies, among other things, is based on many years
of experience and financial resources. HBO offers a wide selection of original content
and popular and cult shows such as Game of Thrones, and users pay their service or
the entire package as part of the HBO GO upgrade ($14.99 per month).28 On the other
hand, Amazon Prime offers an additional service in the form of the ability to watch
shows offline, besides the regular availability of movies and shows online.29
Among the competitors, CBS and Hulu need to be mentioned. Namely, CBS previously
broadcast its content via the CBS All Access channel, but that channel was closed after
25
CW Atlanta (2018). Legal Issues And Controversies Surrounding Netflix. Retrieved 22 April 2021 from
https://cwatlanta.cbslocal.com/tag/legal-issues-and-controversies-surrounding-netflix/
26
Littleton, C., Roettgers, J. (2018). Ted Sarandos on How Netflix Predicted the Future of TV. Retrie-
ved 23 April 2021 from https://variety.com/2018/digital/news/netflix-streaming-dvds-original-pro-
gramming-1202910483/
27
Oomen, M. (2019). Netflix: How a DVD rental company changed the way we spend our free time. Re-
trieved 23 April 2021 from https://www.businessmodelsinc.com/exponential-business-model/netflix/
28
HBO (n.d.). Retrieved 23 April 2021 from https://hbogo.hr/
29
Amazon (n.d.). About Amazon Prime Insider & Prime Membership Benefits. Retrieved 23 April 2021
from https://www.amazon.com/primeinsider/about?ref=insider_homepage
the merger with Viacom, thus creating a new company name, ViacomCBS.30 In March
this year, a new streaming channel called Paramount Plus was launched, which is an
expansion and redesign of its predecessor. Paramount Plus plans to merge the content
of CBS TV channels with the content owned by Viacom, such as MTV, VH1 and Nickel-
odeon.31 Hulu is more focused on shows and documentaries and attracts its users by
offering access to shows on most major networks and cable television after they are
broadcast.32 In this way, the subscribers can watch current shows on TV channels. In
addition, Hulu owns the exclusive rights to broadcast most shows from the FX televi-
sion network, and the initial price of their service is $5,99per month.33
Netflix and its existing competitors are facing the arrival of new, ambitious, and pow-
erful rivals, the most important of which are Disney Plus and Apple TV+. Both giants
started operating in 2019 and despite the fact that they are quite new in this market,
they are already attracting the attention of the media and the public and it is likely that
they could become the most important competitors to Netflix. Disney Plus offers an ex-
tremely wide range of content in the form of animated films, documentaries, the Marvel
franchise as well as a collection of old Disney movies dating back to the 1950s.34 That
same year, Disney took over the Fox television network by adding their own shows, such
as The Simpsons.35 Furthermore, their competitive advantage also lies in the nostalgic
value of the Disney movies given that many generations grew up with the popular Dis-
ney classics. Adding to these strengths a more affordable price of $6.99, it can be con-
cluded that Disney Plus currently holds a strong position in the industry and could gain
a large number of subscribers in a short time and become Netflix’s major competitor.36
Apple TV+ is also making efforts to build relevant status in the streaming market. In ad-
dition to the service being available in over 100 countries, they have signed contracts
with some of the best directors and actors in Hollywood to create new TV shows.37 It is
30
Axon, S. (2021). CBS All Access is dead, long live Paramount+: „New“ streaming service launches
March 4. Retrieved 23 April 2021 from https://arstechnica.com/gadgets/2021/01/paramount-will-repla-
ce-cbs-all-access-on-march-4/
31
Blanchet, B. (2021). Paramount Plus is now available for $6 a month, and you can get a 7-day free trial
when you sign up. Retrieved 23 April 2021 from https://www.businessinsider.com/paramount-plus-stre-
aming-service
32
Frank, A., Wilkinson, A., VanDerWerff, E., Abad-Santos, A. (2020). The best and the worst of the biggest
streaming services. Retrieved 23April 2021 from https://www.vox.com/culture/2020/5/29/21263715/
hbo-max-peacock-netflix-hulu-disney-plus-amazon-apple-cbs-all-access-streaming-service-guide
33
Pendlebury, T. (2020). Best streaming services of 2021. Retrieved 23 April 2021 from https://www.
cnet.com/news/best-streaming-service/
34
Frank, A., Wilkinson, A., VanDerWerff, E., Abad-Santos, A. (2020). The best and the worst of the biggest
streaming services. Retrieved 23 April 2021 from https://www.vox.com/culture/2020/5/29/21263715/
hbo-max-peacock-netflix-hulu-disney-plus-amazon-apple-cbs-all-access-streaming-service-guide
35
Leger, H. (2020). Disney Plus vs Netflix: who will win? Retrieved 23 April 2021 from https://www.te-
chradar.com/news/disney-plus-vs-netflix-who-will-win
36
Leger, H. (2020). Disney Plus vs Netflix: who will win? Retrieved April 24, 2021, from https://www.
techradar.com/news/disney-plus-vs-netflix-who-will-win
37
Tambini, O. (2020). Apple TV Plus vs Netflix: will Apple eclipse its biggest rival? Retrieved April 23, 2021,
from https://www.techradar.com/news/apple-tv-plus-vs-netflix-could-apple-eclipse-its-biggest-rival
important to note that Apple, like Disney, is already a popular brand with a built image
and a base of loyal consumers, which creates additional pressure on other companies
in this industry. Apple fans will surely want to add Apple TV+ to their collection of Apple
products and services.

Barriers to entry are high for the new entrants who do not produce their own video
content. Due to the extremely high investment required to develop any new content or
acquire content from the big players. For the established organizations in the industry,
barriers to entry are quite low (they can immediately launch a service with their con-
tent and are already a well-known name in the market).38 The threat of new members
in the industry is a serious issue for Netflix given the growing number of organizations
that have decided to launch similar services with their content. While many customers
will be subscribing to multiple platforms, when there will certainly come a time sub-
scribing to a great number of services is no longer sustainable, and they will decide to
close their accounts. The threat of new companies entering the market is moderate
due to the following facts:39
1. Netflix is working on large-scale economy with a wide variety of services, keeping
costs low and increasing profits. New investors with small investments are more
likely to enter this market, but larger companies like Google and Apple with strong
financial and technological capabilities could be a major threat to Netflix.40
2. On the other hand, competition in online streaming is likely to intensify in the futu-
re as the film and television industry is a well-recognized growing sector.41
3. Traditional service providers are entering the market. Crave TV which is owned by
Bell, one of Canada’s leading telecommunications companies, has entered the Ca-
nadian market providing an online streaming service at a significantly lower price
than Netflix. However, the service is only available to Bell’s customers, while Netflix
is available to anyone with Internet access. Likewise, HBO and CBS are new entries
into the U.S. market with the competitive advantage of owning large amounts of
content and brand names.42
38
Alitte Solli, R. (2018). A Competitive Analysis of Netflix (Master’s Thesis). Graduate Scho-
ol of Seoul National University. Retrieved 22 April 2021 from https://s-space.snu.ac.kr/bitstre-
am/10371/141687/1/000000150529.pdf
39
Tough Nickel (2020). Porter’s Five Forces Analysis of Netflix, Inc. Retrieved 22 April 2021 from https://
toughnickel.com/industries/Porters-five-forces-analysis-of-Netflix-Inc
40
Amna A., Maham H., Viola H., Rashmi K. (2020). Porter’s Five Forces. Retrieved 22 April 2021 from
https://ecampusontario.pressbooks.pub/bio16610w18/chapter/porters-five-forces/
41
Amna, A., Maham, H., Viola, H., Rashmi, K. (2020). Porter’s Five Forces. Retrieved 22 April 2021 from
https://ecampusontario.pressbooks.pub/bio16610w18/chapter/porters-five-forces/
42
Porter, M. (2008). The Five Competitive Forces That Shape Strategy Retrieved 24 April 2021 from
https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy

Given that a small number of companies create media content, the impact of suppliers
on prices is large and their bargaining power is very high in doing business with on-
line streaming channels. The process of broadcasting movies and online shows begins
with a streaming service, such as Netflix, entering into a licensing agreement with a
particular TV network. In other words, Netflix must get permission from the owner
of the TV show to be able to show its content on its channel. Such a process involves
various price negotiations where suppliers or content owners have the advantage as
their profit does not depend solely on licensing streaming channels,43 and also, in most
cases, these are not exclusive contracts where the content is only available from one
distributor.
Non-exclusive contracts are cheaper for the streaming companies, but this means that
after the contract expires, the content owner can offer the service to a competitor or
another streaming channel, thus reducing the volume of broadcast content for the
previous distributor. Exclusive rights, on the other hand, pose a significant advantage
to online channels as the distributor can emphasize that the content that cannot be
viewed through other channels. An additional problem for Netflix is created by those
vendors who distribute their content through their own channels, such as Hulu, which
is owned by The Walt Disney Company and NBC Universal.
3.4. Threat of substitute products and services

Substitutes are numerous and diverse in the context of the entertainment industry,
and Netflix is certainly one of those services that users consume in their free time.
Consumers seek ways to occupy their leisure time, and watching movies and shows
online fulfils their desire and need for fun, relaxation, and even learning.44 A substitute
for Netflix can be watching movies in the cinema or on television, as an activity closely
related to Netflix as well as playing games or reading books as a completely different
kind of entertainment.
Substitutes have considerable power within the products or services of the same func-
tion, but with higher quality and lower costs. As the ratings of traditional broadcast
television decline, especially among the young people switching to OTT video services,
the threat of a replacement product in the form of television content for Netflix is lim-
ited. On the other hand, due to the reluctance in adopting new technologies, i.e. the
commitment to traditional TV broadcasting among the elderly population in the target
market, it can be concluded that the danger of substitutes is moderate in this case.45
43
Weebly (n.d.). Buyers and supplier power. Retrieved 24 April 2021 from https://sgmanetflix.weebly.
com/buyer-and-supplier-power.html
44
Weebly (n.d.). Buyers and supplier power. Retrieved 24 April 2021 from https://sgmanetflix.weebly.
com/buyer-and-supplier-power.html
45
Penamatsa, V. (2020). Netflix Inc. Strategic analysis. Retrieved 24 April 2021 from https://static1.
squarespace.com/static/5bb796f2f4755a60eed59e31/t/5cea1f574785d31a375eeeb7/1558847328948/
Netflix+Strategy+Analysis+.pdf
Furthermore, films are often compared to books in everyday conversation, so it is not

incorrect to assume that reading would be the most convincing substitute service for
watching movies. However, it should be borne in mind that the point of the substitute
is to provide the consumer with the same utility as the original product. Given this fact,
it is questionable whether the book can replace the film because both are very specific
and targeted at specific market segments.
3.5. Bargaining power of consumers

The dynamism of the media and entertainment industry allows for the customers’
greater bargaining power and low switching costs allow them to unsubscribe from
Netflix at any time and look for other media distributors that increase the business
threat to the company.46 Because of this pressure, Netflix cannot charge high prices
and must maintain the pricing strategy based on customer demand and with minimal
price increases. Moreover, the high bargaining power of the customers results in main-
taining the quality of the service in line with the needs and desires of consumers.47
Hence, as consumers are not contractually tied to the service, most viewers pay a
monthly price with the option to cancel subscriptions at any time and, thus, maintain
the high levels of their bargaining power.
4. COMPETITIVE STRATEGY ANALYSIS

The analysis of the company’s competitive strategy is based on Porter’s model, which
classifies them into three generic strategies for making above-average profits within
the industry. The first strategy is the cost management strategy based on reducing
costs in all business segments, although not necessarily at lower prices compared to
competitors. This strategy is most often used in industries without radical technologi-
cal and marketing innovations, customers are price sensitive and the product is homo-
geneous and simple in design.48 The opposite strategy is the strategy based on prod-
uct differentiation, i.e. developing products of a higher level of quality that will create
consumer loyalty. This strategy allows companies to set a premium price due to the
complementary higher added value perceived by the customers themselves. The third
strategy defined by Porter is divided into two components – focused cost leadership
and focused differentiation. Both strategies direct the company’s activities towards a
specific market segment, the niche market. The competitive advantage of this strategy
is most intense in fast-growing parts of the industry that are significant enough to be
profitable, but also small enough not to attract a critical portion of competitors49.
46
Tough Nickel (2020). Porter’s Five Forces Analysis of Netflix, Inc. Retrieved 24 April 2021 from https://
toughnickel.com/industries/Porters-five-forces-analysis-of-Netflix-Inc
47
Financijski klub (2019). Analysis Of Netflix Inc. Student Investitor 2019. Retrieved 22 April 2021 from
http://finance.hr/wp-content/uploads/2019/06/NFLX.pdf
48
Miloš Sprčić, D. (2013). Upravljanje rizicima – temeljni koncepti, strategije i instrumenti. Zagreb. Si-
nergija.
49
nergija.
In addition to the analysis of Netflix’s strategy, the strategies of its closest competitors
will be defined in order to make a comparison of the selected strategies of key com-
panies in the industry as high quality as possible. The competitors to be analysed are
Disney+, HBO, Amazon Prime, Hulu, and Apple TV+. In such a young industry in which
the number of competitors is growing from year to year, the analysis of the strategy
selected those companies with relevant market share, i.e. whose activities may affect
the very position of Netflix.
1. Disney+
The Walt Disney Company bases its competitive advantage on a differentiation strate-
gy that seeks to provide different products to a wide range of market segments.50 They
entered the streaming platform industry thanks to the recognition of their brand and
vast amounts of capital.51
2. HBO
Home Box Office is one of the oldest platforms for providing premium content to its
subscribers and its business is based on over 40 years of experience.52 Same as Dis-
ney+, HBO bases its competitive advantage on a high level of differentiation of its ser-
vice and the provision of exclusive content that users perceive as high quality.
3. Amazon Prime
Unlike other competitors, the Amazon Prime Video streaming platform is just one of
the services that Amazon Prime subscribers receive. Amazon’s strategy is based on
cost leadership. By investing large amounts of capital in increasing productivity and
taking over the intermediate businesses, a company can offer a lower price of the ser-
vice than its competitors while maintaining the same level of margin.53
4. Hulu
Hulu is an American OTT (Over the Top) platform that allows subscribers to watch the
required content over the Internet, as do other competitors. It was founded by NBC
Universal, but the current owner is The Walt Disney Company, so it can be deducted
that Disney does not have only one streaming platform on the market.54 Unlike other
50
Williams, A. (2019). Disney’s Generic Competitive Strategy & Intensive Growth Strategies. Retrieved 19
April 2021from http://panmore.com/disney-generic-competitive-strategy-intensive-growth-strategies
51
Wingard, J. (2019). The Streaming Wars: Disney+ and the Winning Strategy. Retrieved 19
April 2021from https://www.forbes.com/sites/jasonwingard/2019/11/22/the-streaming-wars-di-
sney-and-the-winning-strategy-for-competitive-advantage/?sh=2b6383113ac0
52
Abbot, A. (2020). Top 15 Netflix Competitors & Alternatives. Retrieved 19 April 2021from https://
bstrategyhub.com/top-netflix-competitors-alternatives/
53
Amazon (n.d.). Investing in Our Employees. Retrieved 19 April 2021from https://sustainability.abou-
tamazon.com/people/employees/investments-in-employees
54
Bradley, L. (2019). How Disney Gained Full Control of Hulu and What That Means. Retrieved 19 April
2021from https://www.vanityfair.com/hollywood/2019/05/disney-full-control-hulu-comcast-nbcuniver-
sal-deal
competitors, Hulu bases its competitive advantage on a cost leadership strategy to

keep its margin at a lower price than its competitors. Furthermore, Hulu not only can
deliver movies and series on its platform but also various shows that are broadcast
both on NBC and on other television channels. It currently has 39.4 million users and
is only available in the U.S. market.55
5. Apple TV+
Apple TV+ is the youngest competitor in the OTT platform market, making its debut
in November 2019.56 Unlike others, Apple TV+ is an exclusive platform for Apple de-
vices and web browsers and does not support Android OS.57 Apple TV+ also bases its
advantage on a cost leadership strategy, and its current price is $ 4.99 / month or $
49.99 / year, which is the lowest price compared to the rest of the analysed platforms.
Comparatively, Apple TV+ cannot compete by its range of content as it is the least di-
verse of all rivals and the service is mostly subscribed to by only most loyal customers
of Apple products.
Netflix’s strategy compared to competitors’

Netflix has opted for a combination of two generic strategies – a differentiation and
cost leadership. In line with its primary strategy, the company has decided to differen-
tiate its product from that of its rivals by producing its own content.58 59 The company
started producing content from its production in 2012 when it published its first series.
After that, in the years that followed, Netflix released a series of successful series and
movies, and the success of the strategy is best evidenced by the significant increase
in new subscribers from year to year.60 To expand globally, the company decided to
record content in different languages to further increase the numbers of users world-
wide. Also, in addition to offering own content, Netflix provides its subscribers with a
variety of content from other manufacturers.61
55
Statista. (2021). Number of Hulu’s paying subscribers in the United States from 1st quarter 2019 to
1st quarter 2021 [Data file]. Retrieved 19 April 2021from https://www.statista.com/statistics/258014/
number-of-hulus-paying-subscribers/
56
Apple. (2019). Apple TV+ launches November 1, featuring originals from the world’s greatest
storytellers. Retrieved 19 April 2021from https://www.apple.com/newsroom/2019/09/apple-tv-launc-
hes-november-1-featuring-originals-from-the-worlds-greatest-storytellers/
57
Callaham, J. (2021). Apple TV Plus vs Netflix: Which one should you pick? Retrieved 19 April 2021from
https://www.androidauthority.com/apple-tv-plus-vs-netflix-1049263/
58
Pratap, A. (2020). Generic and Intensive Strategies of Netflix. Retrieved 19 April 2021 from https://
notesmatic.com/2020/04/generic-and-intensive-strategies-of-netflix/
59
Moore, A. (2019). Netflix’s Generic Strategy, Business Model & Intensive Growth Strategies. Re-
trieved 19 April 2021 from https://www.rancord.org/netflix-business-model-generic-strategy-intensi-
ve-growth-strategies-competitive-advantage
60
Iqbal, M. (2021). Netflix Revenue and Usage Statistics. Retrieved 19 April 2021 from https://www.
businessofapps.com/data/netflix-statistics/#1
61
Skinner, O. (2020). Global Content Strategy: How Netflix Became the World’s First Truly International
Movie Studio. Retrieved 20 April 2021 from https://www.voices.com/blog/global-content-strategy/
Although it attracted a large number of new subscribers by recording their content

and ensured their loyalty, Netflix decided to combine this strategy with the cost man-
agement strategy by entering new markets in order to maintain its leading role and
offer its content at an affordable price in the basic package. Still, for those willing to
pay more, Netflix has prepared two premium packages that offer additional benefits.62
According to all above stated, it can be concluded that Netflix primarily uses the same
strategy as its two closest competitors, Disney + and HBO, and that it seems to be the
main strategy in the industry. In other words, all three companies strive to retain the
existing customers and attract the potential ones by the uniqueness of their content.
In contrast, Hulu and Apple TV+, as their crucial rivals, are guided by cost leadership
offering slightly lower prices than the competition and thus hoping to increase their
market share.
5. ANALYSIS OF FINANCIAL POSITION

Table 1: Liquidity indicators

Current ratio 1.25 0.90 1.49 1.40
Cash ratio 1.05 0.73 0.58 0.51
Source: Nasdaq: Netflix Inc. [online]. Retrieved 19 April 2021 form: https://www.nasdaq.com/market-acti-
vity/stocks/nflx
Liquidity ratios measure a company’s ability to meet short-term liabilities and are cal-
culated based on the company’s balance sheet. They indirectly suggest the ability of
current assets to circulate. Of many indicators, two will be briefly analysed, current
ratio and cash ratio. The company’s current liquidity ratio should be kept above 2, i.e.
it should have at least twice as many short-term assets as the current liabilities at all
times. By analysing the trend, it can be concluded that Netflix finances less and less
short-term assets in the long run, but that they are still higher than the industry aver-
age (0.74).63 The most stringent “liquidity indicator” is the cash ratio that shows how
many times liabilities can be settled by cash and cash equivalents. In the last 4 years,
the growth trend has been continuous, and in the 2019-2020 period, this indicator
increased by more than 100%. The small difference between the cash ratio and the
current ratio indicates that Netflix holds a very small portion of its current assets in
receivables and inventories.64
62
Netflix. (n.d.). Plans and Pricing. Retrieved 20 April 2021 from https://help.netflix.com/en/
node/24926/gb
63
Žager, K., Sačer, I.M., Sever Mališ, S., Ježovita, A., Žager, L. (2017). Analiza financijskih izvještaja:nače-
la, postupci, slučajevi. 3rd edition. Zagreb. Hrvatska udruga računovođa i financijskih djelatnika.
64
nergija.
Table 2: Leverage indicators

Long-term debt ratio 0.65 0.72 0.73 0.74
Debt-to-equity ratio 1.84 2.58 2.72 2.78
Debt ratio (Total debt/Total assets) 0.71 0.78 0.8 0.81
Interest coverage ratio 5.97 4.16 3.82 3.52
Source: Nasdaq: Netflix Inc. [online]. Retrieved April 19, 2021, form: https://www.nasdaq.com/mar-
ket-activity/stocks/nflx
Leverage indicators are also formed from balance sheet values. The debt-to-equity
ratio displays the relationship between a company’s total liabilities and its shareholder
equity. Over the past four years, long-term debt has increased by approximately 100%
and equity rose by almost 400%. Netflix shows the trend of an increasing share of its
funding and the gradual decrease of the debt ratio from 0.81 to 0.71 confirms that.
The interest coverage ratio is calculated as the ratio of the gross profit (earnings before
interest and taxes), from which it pays interest, and interest paid. Although the trend
of this indicator demonstrates significant growth (which leads us to the conclusion
that the company could borrow more). This also leads to the conclusion that in the ob-
served period, earnings before interest and taxes grew significantly. Apart from Net-
flix, Warner Media, which is one of its biggest competitors, had an interest coverage
ratio of 5.97 in 2020.
Table 3: Activity indicators

Account receivable turnover ratio 41 44 44
Days sales outstanding - DSO 9 8 8
Liquid assets turnover ratio 2.56 3.26 1.63 1.52
Fixed assets turnover ratio 0.85 0.73 0.97 1.03
Total assets turnover ratio 0.64 0.59 0.61 0.62
Source: Netflix Inc: Annual report [online]. Retrieved 20 April 2021 form: https://www.annualreports.
com/HostedData/AnnualReports/PDF/NASDAQ_NFLX_2019.pdf
Activity indicators complement liquidity indicators and describe the circulation of as-
sets, i.e., the efficiency of using a particular component of assets in the company.65
The observed company, like other companies in the industry, has a specific inventory
policy. Netflix uses ‘Serialized Inventory Management’ for online streaming of movies
and series (200 million monthly subscriptions), This is a method by which movies are
produced “on-demand” based on their serial number or code, and can thus reduce
costs and make it easier to monitor inventory levels.66 For this reason, the inventory
65
Žager, K., Sačer, I.M., Sever Mališ, S., Ježovita, A., Žager, L. (2017). Analiza financijskih izvještaja:nače-
la, postupci, slučajevi. 3rd edition. Zagreb. Hrvatska udruga računovođa i financijskih djelatnika..
66
Koller, T., Goedhart, M., Wessels, D., (1990). Valuation: Measuring and Managing the Value of Compa-
nies. 6th edition. Hoboken. Wiley.
item is not featured in their reports, and the individual indicators cannot be calculat-
ed. While Netflix’s short-term assets make up 85% of the cash, its long-term assets
account for 75% of total assets, and goodwill accounts for nearly 90% of long-term
assets. Considering the average balance of the receivables in 2020, it can be inferred
that the receivables were reversed 31 times, which means that the average collection
period is 11 days. The growing trend in the turnover of total assets is also noticeable.
Table 4: Profitability indicators

Gross profit margin 38.89% 38.3% 36.9% 31.3%
Net profit margin 8.16% 10.74% 3.2% 5.65%
Return on assets - ROA 8.1% 6.1% 4.7% 2.6%
Return on equity - ROE 25.0% 24.6% 23.1% 15.6%
Source: Macrotrends (n.d.). Netflix Inc. (Data file). Retrieved 21 April 2021 from https://www.macrotrends.
net/?q=netflix
Profit margins (gross and net) and return (profitability) on assets are most often con-
sidered as indicators of profitability. Gross profit margin shows the ability of an en-
terprise to generate earnings from its core business. It is calculated by dividing the
net sales minus cost of goods sold to the net sales. The analysed company increased
this indicator from 31.3% to 38.9% in the last 4 years. Comparatively, its rival Disney’s
indicator was 24.4% in 2020.67 The net profit margin decreased from 10.74% to 8.16% in
the period 2019-2020 due to the increase in expenses and tax expenditures resulting
from the increase in revenue. Hence, in 2020, for every dollar of revenue, Netflix makes
$0.8 net profit.68
Return on assets and equity are the most important indicators for owners. Return on
assets (ROA) has experienced a growing trend in the last four years reaching 8.1% in
2020. Regarding the return on equity, it grew by over 50% in the given period. Netflix
earned a 25-cent profit on a $1 unit of equity last year. Considering these indicators, it
may be concluded that the company’s performance is very good.
Table 5: Investment indicators

Price-earnings ratio - P/E 74.08 78.9 111 168
Earnings per share – EPS 6.08 4.13 2.68 1.25
Dividend per share 0 0 0 0
Source: Investing: Netflix Inc. [online]. Retrieved 20 April 2021 from: https://www.investing.com/equi-
ties/netflix,-inc
67
The Walt Disney Company (n.d.). Fiscal year 2020 Annual Financial Report. Retrieved from https://
thewaltdisneycompany.com/app/uploads/2021/01/2020-Annual-Report.pdf
68
Netflix Inc (n.d.). 2020 Annual report. Retrieved from https://s22.q4cdn.com/959853165/files/doc_fi-
nancials/2020/ar/8f311d9b-787d-45db-a6ea-38335ede9d47.pdf
The investment indicators view the company as an investment, and provide an insight
into the performance of its shares. The most frequently analysed indicators are the P
/ E ratio, (price and earnings per share), earnings per share, and dividends per share
if the company pays them. The previous data shows that the average share price in
2020 was $450. The total market capitalization of the company divided by the price of
one share yields the total number of approximately 440 million ordinary shares. The
price-earnings ratio suggests that the price is currently over 74 times higher than an-
5: Netflix while
nual earnings, the industry average in 2020 was 63.
69
Figure Inc. share price movement
Source:
Figure Yahoo Inc. Netflix
Finance:
5: Netflix share Inc. [online].
price movementRetrieved 20 April 2021 from: https://finance.yahoo.com/
Source: Yahoo Finance: Netflix Inc. [online]. Retrieved 20 April 2021 from: https://finance.yahoo.com/
SWOT matrix
STRENGTHS WEAKNESSES
• Strong market position • Unavailability in certain countries
• Favourable financial position • Inability to broadcast entire opus to all
• Built company image countries
• Broadcast content without ads • Higher prices compared to competitors
• Personalized content recommendations • Increased borrowing
• Wide range of custom content with • Broadcast controversial content
synchronization in different languages
69
Investing.com (n.d.). Netflix Inc.Retrieved 20 April 2021from https://www.investing.com/equities/
• Technological advancements
netflix-inc • Growing number of new competitors
• The COVID-19 pandemic has increased • Political restrictions for taxation of online
the popularity of the streaming channels services
and the demand for online content • High level of possibility of cyber-attack

SWOT matrix
• Strong market position • Unavailability in certain countries
• Favourable financial position • Inability to broadcast entire opus to all coun-
• Built company image tries
• Broadcast content without ads • Higher prices compared to competitors
• Personalized content recommendations • Increased borrowing
• Wide range of custom content with synchro- • Broadcast controversial content
nization in different languages
• Technological advancements • Growing number of new competitors
• The COVID-19 pandemic has increased the • Political restrictions for taxation of online
popularity of the streaming channels and services
the demand for online content • High level of possibility of cyber-attack and
• Possible partnerships with close companies piracy
in countries that want their online stream- • High bargaining power of customers and
ing platforms (China, India, South America) suppliers
• Legal restrictions on illegal streaming plat-
forms
• Exclusive contracts and ability to create
own content
TOWS matrix
SO strategies WO strategies
• Use brand recognition to design own • Given Netflix’s competitive advantages
high quality and original content to meet and market share, decide on cheaper
the increased demand for online content service prices
• Leverage strong market position for new • Adjust price lists to specific markets – set
strategic partnerships prices according to content available on
OPPORTUNITIES
• Increase local presence by content tai- market

lored to specific markets (e.g., buying • Create free content on other platforms
Croatian content or creating content in (e.g., YouTube) to better establish com-
the Republic of Croatia) pany position and attract new users
• Use market position, financial resources,
and built image to invest in new technol-
ogy that could improve user experience
ST strategies WT strategies
• Utilizing financial resources to invest in • Reduce amount of existing borrowing
defence against hacker attacks to direct saved resources to acquiring
• Further develop personalization of con- exclusive rights from suppliers and dis-
THREATS
tent to users in order to, despite the tributing exclusive content to reduce
growing number of new competitors, bargaining power of customers
gain new, loyal consumers • Explore possibility of directing saved
• Seek to use their position to be the first financial resources in creating original,
in large markets, such as China and In- cinematic content
dia, by creating a sister company tailored
to that market
SO, the maxi-maxi strategies of Netflix are mainly related to taking advantage of the
market leader position in the industry and of the already built brand. An opportunity
such as the increased demand for online content nowadays COVID-19, Netflix should
take advantage of through the ability to create its own, original content. Moreover,
by creating content tailored to a specific market, Netflix would greatly strengthen its
local presence. The TOWS matrix shows an example of buying Croatian content, which
would affect the increased demand for Netflix in the Croatian market. Likewise, the
rapid development of technology provides an opportunity for Netflix to further invest
in improving the user experience by using its existing financial capabilities.
The most obvious weakness of Netflix is its high price of services compared to the com-
petitors. For Netflix to keep its existing users, and at the same time attract new ones,
it is necessary to conduct financial analyses, devise a financial plan through which the
most optimal solution could be determined in the context of lowering service prices.
Furthermore, there is the possibility of charging for services depending on the amount
of content distributed to a particular market. In other words, Netflix cannot offer the
same content in every country, which raises the question of whether users pay for
Netflix’s service by what is provided to them, or whether the price justifies the quality
of the service provided.
The development of technology, which is recognized as a market opportunity and rep-
resents a multitude of benefits for companies such as Netflix, on the other hand, has
also caused an increase in certain market threats such as cyber-attacks. This type of
threat is especially dangerous for companies that run their businesses through online
platforms. Apart from the fact that hacker attacks cause theft of private data of user
and companies too, they also damage the image and reputation of the company, which
is a significant long-term problem that cannot be solved in the short term. With that
in mind, Netflix would have to invest financial resources in software development and
improvements to reduce the possibility of a cyber-attacks. An additional ST strategy
refers to increased content personalization which would give Netflix a significant ad-
vantage over new competitors entering the market.
The last group of strategies, mini-mini strategies, are mostly aimed at reducing the im-
pact of suppliers and customers on Netflix’s business. Both strategies are correlated
and affect each other. Netflix would have to adjust the current situation of increased
borrowing, i.e., reduce borrowing, to be able to invest financial resources in acquiring
exclusive rights from suppliers, preferably by negotiating lower prices. In that case,
Netflix would be the exclusive distributor of the purchased content, which would re-
duce the bargaining power of customers to some extent because those users who
want to explicitly watch that content will have to use the Netflix service, as other com-
petitors will not be allowed to distribute the same content. An additional possibility
arising from the reduction of borrowing is the investment of financial resources in
the creation of its own content to be shown in cinemas. Namely, Disney owns a large
number of films that are well known to the general public precisely because of their
showing in cinemas, as well as on television. For example, if Netflix invested enough
resources in creating a quality and popular film, and distributed it in cinemas, not only
would Netflix expand its business model but would earn a significant advantage in
terms of marketing and revenue.
7. ENTERPRISE RISK MANAGEMENT
7.1. Business goals, risk appetite and risk tolerance

Business strategy as well as the direction in which the company intends to achieve its
goals is easiest to determine by knowing the statements about the mission and vision
of the company. While the mission provides an insight into the current position of the
company, the vision indicates the desired future situation, that is, where the company
wants to be in the future. In other words, the mission is oriented towards the present
and the vision towards the future.
Netflix’s mission statement, To entertain the world,70 is oriented towards the nature of Net-
flix’s business in the context of meeting the users’ needs at a given time. The first word in
the mission statement ‘entertainment’ points to the nature of the industry in which Net-
flix operates, but as such it represents a category of a wide range of possibilities – movies,
books, theatres, museums, etc., which makes it questionable due to an exceedingly wide
a range of entertainment activities. On the other hand, the notion of entertainment in
Netflix’s mission may indicate the potential expansion of business in the future, or to pos-
sible business diversification. The second part of the mission referring to the global scale
of doing business is very well connected with the entertainment industry, and suggests
that the entertainment services are provided to consumers globally.
Regarding the future of the business, the statement of the company’s vision is To con-
tinue being one of the leading firms of the internet entertainment era.71 This statement
points to Netflix’s strategic goal of staying at the very top of the entertainment indus-
try in the presence of large and ambitious competitors. Mentioning the notion of lead-
er, Netflix also points to their strong market position as well as the goal of continuing
to retain the title of the industry market leader.
The company’s mission and vision statements are aligned in the context of maintain-
ing the position in the entertainment industry and reaching a larger number of users
worldwide. However, it should be emphasised that the statements certainly need to be
improved and further harmonized in order to communicate their goals and strategy
more transparently. For example, the mission statement is short and easy to under-
stand, but not specific enough in terms of how to provide entertainment to consum-
ers. It would be useful to further expand the mission statement by presenting Netflix’s
target market segment as well as the ways it meets their wants and needs. The vision
statement clearly provides an insight into the company’s ambitions and desired posi-
tion in the future, and can be said to be better formulated than the mission although
it too could be advised to offer an explanation on how Netflix intends to maintain its
leadership position in the future.
70
Rivera, A. (2019). Netflix’s Mission Statement & Vision Statement: A Strategic Analysis Society. Re-
trieved 11 May 2021from https://www.rancord.org/netflix-corporate-vision-statement-mission-state-
ment-strategic-analysis
71
Rivera, A. (2019). Netflix’s Mission Statement & Vision Statement: A Strategic Analysis Society. Re-
trieved 11 May 2021from https://www.rancord.org/netflix-corporate-vision-statement-mission-state-
ment-strategic-analysis
Based on the conducted analysis of the mission and vision of the company, three stra-
tegic goals can be set for the next five years:
1. Retain the market leader position in the industry
2. Expand business to new markets
3. Diversify the business model by introducing new services within the entertainment industry
Given the ambition of these goals, it can be assumed that Netflix has a high appetite
for risk like most companies that are at the top of their industry.

Based on previously conducted analyses of the macro-environment, industry, strate-
gy, and finance sublimated in the SWOT and TOWS matrix, a list of nine risks that may
affect Netflix’s business has been identified. The level of significance and probability
of occurrence of individual risk is determined by subjective quantification, that is, as-
sessment. In other words, each member of the group first independently assigned
the appropriate levels of significance and probability of occurrence based on previous
analyses and results, and the final scale was created as a consensus. Risks are listed
in the table according to the total value of risk, from the highest to the lowest values.,
Table 6: Likelihood of occurrence and risk impact
Likelihood Grade Impact Grade

>95% 5 Critical 5
>65%<95% 4 High 4
>25%<65% 3 Moderate 3
>5%<25% 2 Low 2
<5% 1 Negligible 1
Source: Developed by authors based on Miloš Sprčić, D. (2013) Upravljanje rizicima, Sinergija Zagreb
Table 7: Identified risks
Likelihood Impact
Type of risk Risk Value
(1-5) (1-5)
1. Political risk 4 4 16
2. COVID-19 impact risk 4 3 12
3. Cybersecurity risk 3 3 12
4. Controversial content risk 3 4 12
5. New competitor entry risk 4 2 8
6. Intellectual risk 2 4 8
7. Supplier contract termination risk 3 2 6
8. Legal risk 2 3 6
9. Technology risk 2 2 4
9. Technology risk 2 2 4
Graph 1: Risk map

Graph 1: Risk map
Source: Developed
Source: Developed by authors
by authors based on
based on Miloš
MilošSprčić,
Sprčić,D. (2013) Upravljanje
D. (2013) rizicima,
Upravljanje Sinergija Sinergija
rizicima, Zagreb Zagreb
7.2.1. Political risk risk

7.2.1. Political
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is its absence on Chinese, Korean, and Syrian markets. Namely, due to
them, which is why users are often targeted by various ads and Netflix is in a position to their aversion
to American companies Netflix’s streaming service is not accepted in those countries.
trade. Another thankless position for Netflix is its absence on Chinese, Korean, and Syrian
Large countries like China and America find it difficult to find a common consensus in
economicmarkets.
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technological aversion
terms, to American
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these countries usually streaming
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companies in their strive to achieve supremacy 27 over large markets. In that light, the
near expansion of Netflix to the Chinese market is unlikely.
Scenario
Risk scenarios could be predicted if the European Union started to actively tax all on-
line services, which would mean for Netflix an increase in the prices of services issued
to users, which could lead to a reduction in the number of users in the future.
The risk of taxation for Netflix’s online services in the European Union is very high and
such a risk is assessed as grade 4, while the risk of strained relations between China
and the United States currently has no impact on Netflix because it does not currently
operate in the People’s Republic of China. Should Netflix’s services expand into the
Chinese market, which would certainly be beneficial for Netflix, it would be one of
the risks to watch out for because they would probably have to censor their content
heavily and the full service would not be offered to Chinese users. The significance of
political risk is also assessed as grade 4 and the most influential form of this risk is the
introduction of taxation policy on OTT platforms, which can significantly affect reve-
nues from foreign markets and changes in service prices.
Risk management strategy

Netflix does not have much power to manage the political risks, but must adapt to the
policies of the countries in which it operates through a management strategy. One way
for Netflix as a US company to be able to avoid the risk of further straining the US-Chi-
na relations is to set up a sister company in China that would offer Chinese content
that is tailored to the Chinese market.
7.2.2. COVID-19 impact risk

In 2020, the world economy found itself in an unprecedented situation in which, due to
the spread of the new and extremely dangerous COVID-19 virus, governments around
the world were forced to introduce restrictive measures and close their economies.
Although the world institutions are already estimating the extent to which the intro-
duced measures will affect the results of the economic activities, we cannot confirm
with certainty what the consequences will be. To encourage the recovery, many coun-
tries have supported the creation of measurement packages for their economies from
the outset.72
Unlike the rest of the economy, the market value of OTT platforms grew during the
pandemic so this situation did not initially negatively affect Netflix’s business, howev-
er, a decline in the market growth trend caused by the declining personal income of
consumers themselves is inevitable.73 In 2020, the share price of Netflix increased by
as much as 65.92%, while in the first quarter of 2021 the price fell by 9.83%.74 From the
above, it can be clearly concluded that the consequences of the closure of farms after
a full year began to operate in the OTT platform market, and as a result, stock prices
were corrected.
72
European Commission (n.d.). Recovery plan for Europe. Retrieved 10 May 2021 from https://ec.euro-
pa.eu/info/strategy/recovery-plan-europe_en
73
Mordor Intelligence (n.d.). OVER THE TOP (OTT) MARKET - GROWTH, TRENDS, COVID-19 IMPACT,
AND FORECASTS (2021 - 2026). Retrieved 10 May 2021 from https://www.mordorintelligence.com/indu-
stry-reports/over-the-top-market
74
Yahoo Finance (n.d.). Netflix, Inc. Retrieved 10 May 2021 from https://finance.yahoo.com/quote/
NFLX?p=NFLX
Scenario
After a year of accelerated growth trend in the business results of Netflix and oth-
er competitors in the OTT platform market, the consequences of the closure of the
world economy began to take effect. The onset of a recession will cause a reduction
in market activity, a decline in corporate income, an increase in unemployment, and
a reduction in consumer income levels. In order for households to try to survive the
recession in the most painless way, they will try to give up all unnecessary costs, and
one of these cost groups includes subscriptions to multimedia content provided by In-
ternet transmission, such as the Netflix platform. This risk will affect the strategic goal
of further business expansion so that the significance of this risk is evaluated as grade
3, while the probability of occurrence is also high and is evaluated as grade 4. Although
managing this risk is extremely challenging, it needs to be prevented.

As this risk comes from the external environment and affects the entire world econ-
omy, it is almost impossible to reduce the likelihood of its occurrence. However, one
possible solution is to focus on further developing a cost management strategy and
try to make the product more affordable to end-users. Also, investing in marketing
campaigns to convince consumers that Netflix is something they need and that it pays
to set aside some of their funds would also help retain some users.
7.2.3. Cybersecurity risk

Cybersecurity risk belongs to the group of operational risks. This risk represents the
likelihood of exposure or loss resulting from a cyber-attack or data theft in an organi-
zation. It can also be said that it is a potential loss or damage related to the technical
infrastructure, use of technology, or reputation of the organization.75
Scenario
In the case of Netflix, the risk of cybersecurity most often occurs in the form of con-
tent that is illegally posted on free sites for watching movies/series. Netflix probably
has some of the most advanced cybersecurity defences in the business world, as it is
expected to protect the original content that drives its revenue model and relies on
large releases that support customer interest. However, the vulnerabilities of third-party
partners pose an equally major threat to the cyber defence systems. An example of this
is the case of the collaboration between Netflix and Larson Studios. Namely, in 2017, 10
new episodes of the popular Netflix Original series “Orange Is the New Black” leaked as
a result of an attack on a post-production streaming service company, Larson Studios.76
75
Allianz (2015). A guide to cyber risk. Retrieved 10 May 2021 from https://www.agcs.allianz.com/
news-and-insights/reports/a-guide-to-cyber-risk.html
76
Shultz, M. (2017). Cyber Risk: Lessons Learned from the Netflix Breach. Retrieved 10 May 2021 from
https://securitytoday.com/blogs/reaction/2017/05/Cyber-Risk-Lessons-Learned-from-the-Netflix-Brea-
ch.aspx
The risk of hacker attacks in terms of hacking the accounts of consumers who use
the services is also attributed to this risk. Such attacks do not aim to get a credit card
linked to the account, but simply enter the account and use the Netflix premium con-
tent it offers at the expense of the consumers.77 Despite the continuous investment
in improving information security, it is estimated that the probability of occurrence
of this risk is between 25 and 65% (grade 3), while the impact is estimated as grade 4.

Netflix has begun developing its products to recover from cyber-attacks in response
to the unique risks that affect its business. Los Gatos-based streaming service has re-
leased 15 cybersecurity products in the last three years.78 The company has released
the products as open-source, which means that other companies can use them with-
out a license fee. Netflix currently has a team of about 80 employees who work contin-
uously on improving the system security, i.e., the software that analyses and responds
to threats and the products that manage access to data and systems. The company
has also developed encryption to protect the data for developers working with Net-
flix’s websites and applications.79
7.2.4. Controversial content risk

The moral and ethical norms that have been set in the society and the community are
significantly different today from previous times. People used to be traditional, conserva-
tive, and even narrow-minded. The modern age and the development of science and glo-
balization have enabled people to be educated, spread knowledge, and re-examine their
previous views and beliefs. Many social norms that were once part of everyday life are
now considered unethical and immoral. In other words, great attention is paid to moral
awareness and liberalization affirming critical approach to certain, ‘sensitive’ topics.
In this context, Netflix, like other streaming platforms, faces the problem of broadcast-
ing content on controversial or sensitive topics. Netflix has faced numerous criticisms
in the past at the expense of content broadcast on its platform. Netflix’s original 13
Reasons Why series, aired in 2017, has sparked widespread criticism and public out-
rage over youth suicide issues.80 The show has been criticized not only for showing
77
Pegoraro, R. (2019). Netflix: Why would somebody bother to hack your account on the streaming
service? Retrieved 10 May 2021 from https://eu.usatoday.com/story/tech/columnist/2019/08/31/did-so-
meone-steal-your-netflix-password/2168504001/
78
Hall, G. (2017). Why Netflix is developing its own cybersecurity products. Retrieved 10 May 2021
from https://www.bizjournals.com/sanjose/news/2017/12/13/netflix-develops-own-cybersecurity-pro-
ducts.html
79
Hall, G. (2017). Why Netflix is developing its own cybersecurity products. Retrieved 10 May
2021 from https://www.bizjournals.com/sanjose/news/2017/12/13/netflix-develops-own-cy-
bersecurity-products.html
80
Thorbecke, C. (2017). 13 Reasons Why’ faces backlash from suicide prevention advocacy group.
Retrieved 11 May 2021from https://abcnews.go.com/Entertainment/13-reasons-faces-backlash-suici-
de-prevention-advocacy-groups/story?id=46851551
the suicide scene, but also for embellishing and exploiting serious problems such as
depression and post-traumatic stress disorder.81 Critics, doctors, and professors also
believe that the show negatively affects the mental health of young people and ado-
lescents.
Another film that also provoked stormy reactions from the audiences is Netflix’s film
365 Days. It has been criticized by the public for portraying scenes of rape, kidnapping,
and sexual abuse in a ‘glamorous way’.82 The films The First Temptation of Christ and
Cuties as well as the series House of Cards have also come under public scrutiny due to
the controversial topics that they cover and the characters that they portray.
As people today are very sensitive and quite divided to complex issues such as racism,
mental health, nationality, etc., it is important to approach such content with great
care and dignity. Continuing to broadcast the controversial content could pose a se-
rious problem for Netflix as many users could unsubscribe and switch to competing
platforms. In other words, a decline in the number of users will lead to a consequent
decline in revenue, and thus a possible decline in the market share. In addition, this
type of risk is highly likely to cause reputational risk. The reputation and image of a
company are built over the years and represent added value for the company in the
eyes of the public. However, ethical and moral problems related to the broadcast con-
tent can very easily damage the current reputation of the company and in this case it
is especially difficult to attract new users.
Scenario
This year, Netflix has announced the recording of a new show called Hype House, which
will show the lives of young and popular Tik-Tok influencers.83 Creating new content, es-
pecially at a time of the COVID-19 pandemic when people are looking for extra interest,
is certainly positive news for all Netflix users, but it has already faced many negative
comments. Many Netflix fans think that the show or its topic is not attractive and inter-
esting enough for potential viewers. Moreover, several subscribers criticized individual
actors of the show who did not approach the pandemic seriously and responsibly, and
even threatened to cancel their subscriptions to Netflix and launch a petition to stop
filming.84 This negative response in the early stages of broadcasting a new show could
81
Weale, S. (2018). Netflix criticised over return of suicide drama 13 Reasons Why. Retrieved 11 May
2021from https://www.theguardian.com/media/2018/may/11/netflix-criticised-over-return-of-suici-
de-drama-13-reasons-why
82
Pisuthipan, A. (2020). A look at Netflix’s most controversial content. Retrieved 11 May 2021from
https://www.bangkokpost.com/life/arts-and-entertainment/1989563/a-look-at-netflixs-most-con-
troversial-content
83
Ylanan, A. (2021). TikTok’s Hype House is coming to Netflix – but don’t expect to see its biggest
stars. Retrieved 11 May 2021from https://www.latimes.com/entertainment-arts/tv/story/2021-04-23/
tiktok-hype-house-is-coming-to-netflix
84
Heisler, Y. (2021). Angry subscribers are canceling Netflix over a new show that was just announ-
ced. Retrieved 11 May 2021from https://bgr.com/entertainment/netflix-hype-house-show-angry-can-
cel-subscription-5921911/
create a serious problem for Netflix arising from cancellations of subscriptions, or a

decline in the number of users, and consequently a decline in its reputation and rev-
enue. Given that this is not the first time that the company has faced public criticism,
these threats of losing market share should be taken seriously as they would greatly
undermine Netflix’s strategic goal to maintain its industry market leader position.
Regarding the previous experiences with controversial content, this risk is assigned
the likelihood level of occurrence at grade 3 and the probability of realization is in the
range of 25% <65%. The significance of this type of risk is high for Netflix precisely
because the content of sensitive topics directly affects the company’s reputation,
and therefore, the level of impact is estimated relatively high (grade 4).

In order to avoid negative attention, declining revenue, and bad reputation, Netflix
should primarily invest in market research and disclosure of the views and opinions of
its and potential users. Also, proactively monitoring and studying current trends will
certainly reduce the possibility of an adverse event occurring. The problem or threat
needs to be known and understood through research and study, and then devise a
plan to manage that risk.
In the situation of creating new content, it is desirable to study carefully and meticu-
lously the previous work of the director and producer who are to be engaged in the
project in order to allow the Netflix management to gain insight into their work. In oth-
er words, Netflix should avoid collaborating with directors or producers whose reputa-
tion is characterised by controversies and whose work is frequently subject to criticism
as this will be directly reflected on the distributing platform.
As for controversial content management, on the other hand, there are two possible
approaches. The first is the temporary or permanent avoidance of distributing the
content that deals with sensitive issues and maintaining the orientation towards su-
perficial entertainment. Since monotony and a monotonous opus would quickly bore
the users, a more desirable and optimal option for Netflix is the alternative – educa-
tion in controversial topics. The time and resources invested in in-depth understand-
ing of popular public attitudes on certain topics would greatly help Netflix to devise
a way to approach such topics in producing their films and shows. Furthermore,
consulting independent experts whose knowledge and experience would enhance
the quality of Netflix’s shows greatly. For example, when producing a programme
that deals with suicide, it would be advisable to contact a professional psychiatrist
who is certainly well acquainted with the topic and can contribute to improve the
production.
7.2.5. New competitor entry risk

As can be read from Netflix’s mission and vision statement, the company’s strategic
goal is to maintain its position as a market leader.85 Based on the above, it can be easily
concluded that the risk of new companies entering the market is one of the key risks
for Netflix. In the market in which Netflix operates, there are two fundamental ways in
which it is possible to attract new consumers and ensure the loyalty of existing ones.
The first factor is product differentiation, i.e., the range of content offered on the plat-
form. If Netflix offers a platform with more content than the competing platforms at
an imperceptibly different price, it makes sense to conclude that consumers will start
directing their interest to the product that offers higher quality at the same price.
Another factor that attracts new consumers and ensures the loyalty of the existing
ones is the lower price of the product compared to the competitor’s product – natu-
rally, assuming even quality.86 Although Netflix is a global company operating in over
190 countries,87 as already stated in the PESTLE analysis of the legal factors, the full
content cannot be broadcast in 130 countries, which poses the risk of losing market
share to the competitors operating in those countries.
Scenario
As already stated in Porter’s model, the threat of new members in the industry is a
serious issue given the growing number of organizations that have decided to offer
similar services. Although Netflix is the market leader and takes advantage of the ef-
fects of economies of scale, apart from the big players like HBO or Apple, there is a
threat from smaller organizations that are increasingly trying to gain their share of the
market. These organizations, such as Pluto TV, IMDB TV, or Redbox, offer their services
completely free of charge.88 Despite the necessary financial resources needed to cre-
ate the platform itself, the continuous creation of new business models in the industry
opens the door for smaller organizations to compete with well-known corporations.
Although Netflix still holds the largest market share, the entry of a growing number of
organizations will begin to decline at first imperceptibly but later markedly. Although
this risk is related to the strategic goal of the company, it is assessed low (grade 2) due
to the quality of the company’s establishment in the market and the possibility of ex-
ploiting economies of scale, unlike new competitors. The probability of the occurrence
of this risk is evaluated as grade 4 because new business models are continuously be-
ing developed that enable the new competitors to enter the market. To deal with the
85
Rivera, A. (2019). Netflix’s Mission Statement & Vision Statement: A Strategic Analysis. Retrieved 10
May 2021 from https://www.rancord.org/netflix-corporate-vision-statement-mission-statement-strate-
gic-analysis
86
Miloš Sprčić D., Puškar J., Zec J. (2019). Primjena modela integriranog upravljanja rizicima – Zbirka
poslovnih slučajeva. Zagreb. Ekonomski fakultet – Zagreb.
87
Rosenberg, E. (2021). Why Netflix Content Is Different Abroad. Retrieved 10 May 2021 from https://
www.investopedia.com/articles/investing/050515/why-netflix-content-different-other-countries.asp
88
Adalin, J. (2021). Which Free Streaming Services Should You Be Using? Retrieved 10 May 2021 from
https://www.vulture.com/article/best-free-streaming-services-movies-tv-shows.html
risk of new competitors’ entering the market it is not enough just to monitor or control
it minimally, but it should be actively managed.

To effectively manage the risk of entry of new competitors and maintain the position
of market leader, it is important to recognize its impact on the business results. As a
measure of managing this type of risk, we propose strengthening the relationships
with the customers in terms of creating attractive offers with contractual obligations in
the markets whose consumers are accepting, and constant investment in quality and
scope of content, while maintaining a competitive price levels.
7.2.6. Intellectual risk

Intellectual risk belongs to the group of strategic risks and arises from the possibility
that employees with highly specialized knowledge may leave the company and thus
cause losses. This type of risk can be gradually reduced through a system of incentives
and the creation of a stimulating work environment for the employees.
Scenario
Netflix’s closest competitors like Amazon can offer better working conditions to em-
ployees, and due to the nature and similarity of the job, that transition is very likely.
For this reason, there is an outflow of highly qualified employees from Netflix which
causes losses, not only due to leaving but also due to spending time finding new ones.
While Netflix may offer higher salaries and possible bonuses, monetary motivation is
not always crucial. The probability of occurrence of this risk is assessed as grade 2 and
significance as grade 4, due to the already present awareness of the company about
the value of the employees themselves, and balancing their with the company’s goals.

Netflix is guided by the philosophy People ahead of the process. In order to reduce the
significance of this risk, it is necessary to offer more benefits that cannot be found in the
workplace of any of the competitors, as well as material and non-material compensation.
For example, Netflix plans to introduce unlimited vacations, a system that other com-
panies would certainly try to emulate. In fact, this type of vacation is called No Vacation
Policy, and which basically allows the employees themselves to decide their working or
vacation days for themselves. Proponents of the Holiday without rules policy love the free-
dom and flexibility of unlimited holiday offer. When the unlimited vacation policy is well
implemented, it can motivate the employees even more, increase employee satisfaction,
and prove to be a powerful recruitment tool, as well as reduce bureaucracy and adminis-
trative costs, and help attract and retain top talent, especially the young people.89
89
Bariso, J. (2020). Netflix’s Unlimited Vacation Policy. Retrieved 11 May 2021from https://www.inc.
com/justin-bariso/netflixs-unlimited-vacation-policy-took-years-to-get-right-its-a-lesson-in-emotio-
nal-intelligence.html
7.2.7. Supplier contract termination risk

In an industry where the bargaining power of suppliers is extremely high, it is possi-
ble to sever relationships with individual suppliers. As described in the Porter Model
section, Netflix distributes a significant portion of its content through non-exclusive
licensing agreements with content vendors and owners. Moreover, some of the most
popular shows on Netflix are just licensed shows that are not genuine Netflix con-
tent.90 Many Netflix users have a few favourite shows that they actively follow, and the
question arises as to what would happen if Netflix no longer had the rights to broad-
cast those shows.
The Office, which has earned the title of the most-watched live-action show on Netflix
in 2020,91 was the most-watched licensed show on Netflix in 2019.92 However, when in
2021 Netflix’s rights to broadcast expire, the users will no longer be able to watch it
on the Netflix platform.93 This type of news could mean that many fans of this show
will unsubscribe from Netflix and switch to another platform that will broadcast their
favourite show, which indicates that the company will lose a part of its consumers to
competition.
A similar situation happened with the popular and cult show Friends for which Netflix
won broadcasting rights in 2015. Namely, as the popularity of the show grew, so did
the price of licensing, which reached as much as $100 million in 2018.94 In 2019, it was
announced that the show will no longer be available on Netflix but will be broadcast on
the competing platform HBO Max.
Scenario
One of the most popular licensed shows airing on Netflix is The Walking Dead. If the
trend of cancelling the most popular shows such as The Office and Friends were to
continue, the company could face a drastic drop in the ratings. Despite the fact that
genuine Netflix’s content is also popular among its users, the loss of a certain share of
licensed show fans would have a significant impact on Netflix’s popularity.
Given the growing number of competitors and the high bargaining power of suppliers,
the level of probability of this risk is rated 3. Impact, on the other hand, is low and rated
2 because Netflix leads the way with original content among the streaming platforms.
90
Shannon Miller, L. (2021). The Top 10 Most Popular TV Shows on Netflix Right Now. Retrieved 11 May
2021from https://collider.com/top-10-netflix-tv-shows-list/
91
Schneider, M. (2020). Netflix End-of-Year Ranker: ‘Cocomelon’, ‘The Office’, ‘The Queens Gam-
bit’ Top 2020 List. Retrieved 11 May 2021from https://variety.com/2020/tv/news/netflix-most-watc-
hed-shows-2020-cocomelon-office-queens-gambit-1234852080/
92
Todisco, E. (2019). The Office beats out Friends as the Most Watched Licensed Show on Netflix – See
the Top 10. Retrieved 11 May 2021from https://people.com/tv/the-office-beats-friends-most-watched-li-
censed-show-netflix/
93
Stunson, M. (2021). ‘The Office’ is leaving Netflix. Here are multiple ways you can watch the hit show.
Retrieved 11 May 2021from https://www.sacbee.com/news/nation-world/national/article248168835.html
94
Hines, R. (2019). ‘Friends’ is officially leaving Netflix: Here’s where to watch it in 2020. Retrieved 11
May 2021from https://www.today.com/popculture/friends-leaving-netflix-where-watch-it-2020-t170876

Since Netflix does not have a significant impact on content providers and owners from
whom it obtains broadcasting rights, the company should focus predominantly on cre-
ating quality, custom content. It is certainly desirable for this company to have a share
of licensed movies and shows on its own platform for diversification purposes, but
most of them should still be owned by Netflix. In that case, provided that it is quality
content, the users will be able to watch it exclusively on Netflix, and not on other com-
peting platforms. Shows such as The Stranger Things, The Witcher, Narcos, and many
others have brought Netflix to its current position due to the quality of their content,
interesting themes, and outstanding scenery.
The goal is to encourage users to compensate the cancelled licensed shows by offer-
ing a multitude of original shows, so that a particular licensed show does not cause a
significant impact on the viewers. If Netflix wants to remain the market leader, it must
show the potential users why its content is better than the competition. Cult shows
bring a certain level of viewership, but not for long, and the demand for new shows,
new content, and new experiences is high. If Netflix continues to create and broadcast
fun, original content, it could certainly reduce the negative impact of discontinuing
business with some vendors.
7.2.8. Legal risk

Legal risk is the risk to which an enterprise is exposed when there is a possibility of
non-performance of a business contract because it is not under applicable laws or if
the contracting parties are not legally entitled to perform a contractual transaction.
Poorly written laws can also allow for malversations that can result in significant losses
for the injured parties to the contract. Furthermore, changes in laws and regulations
governing commodity and the financial markets may lead to changes in the operations
of some companies, which may turn out to be financially unfavourable for the compa-
ny in the future.95 In some countries, the content broadcast by Netflix is not available at
all, and the licenses for some series or movies in certain regions cannot be purchased.
As some countries do not allow certain content to be broadcast on Netflix, the com-
pany has adjusted its offer on regional bases, which causes losses of a market share
for the series and movies it has funded.96 In some countries, there are also restrictive
measures aimed at the content broadcast by Netflix. Thus, the Turkish government
has banned some series due to inappropriate content, and Saudi Arabia did the same
for an entire series based on one inappropriate joke.97 Hence, Netflix has to face the
95
5 Miloš Sprčić, D. (2013). Upravljanje rizicima – temeljni koncepti, strategije i instrumenti. Zagreb.
9
Sinergija.
96
Netflix (n.d.). How does Netflix license TV shows and movies? Retrieved 25 April 2021 from https://
help.netflix.com/hr/node/4976
97
Masih, N. (2021). India is the next big frontier for Netflix and Amazon. Now, the government is ti-
ghtening rules on content. Retrieved 25 April 2021 from https://www.washingtonpost.com/wor-
ld/2021/03/14/india-netflix-amazon-censorship/
fact that it will not be able to broadcast all its shows globally, even though it invested
huge material resources invested in them.
Scenario
A risk scenario is possible if Netflix publishes controversial content that could provoke
ban on broadcasting by several countries, and the company may face a situation in
which a large number of consumers stop using its services. Some of these users are
then likely to resort to illegal means such as torrents to access the desired but banned
packages.
The likelihood of this type of risk to Netflix’s business is not particularly high as most
countries do not censor its content vastly, and hence it is possible to predict which
countries will ban certain content and avoid surprises. Therefore, the probability of
unanticipated censorship is assessed low (grade 2). The impact of this type of risk is
higher because it reduces the production of the content that could be censored or
taxed additionally, which means that the significance is assigned as grade 3.

Netflix could manage this risk by anticipating the content that could be censored or
taxed additionally and refrain from offering it to the countries that are prone to such
bans. As Netflix must comply with the laws of the countries in which it sells its service,
it is not entirely possible to manage this risk.
7.2.9. Technology risk

Technological risk belongs to the group of strategic risks, which means that it can af-
fect the company’s overall business strategy and its strategic goals.98 A technology
company like Netflix bases the quality of its product on the implementation of modern
technologies, and to prevent it from being overtaken by competitors it must improve
continuously. Due to the growing choice different streaming platforms on the mar-
ket, the accessibility and intuitive use of the platform plays a key role in consumer
decision-making in addition to the price and the content. In this context, accessibility
means the possibility of using the platform on different devices whose functions are
based on specific operating systems which are regularly improved with new features
and capabilities. On the other hand, intuitive use of the platform refers to the simplici-
ty, design, and functionality of the user interface. An important feature of any stream-
ing platform is that when a user accesses it, s/he need not waste time on research and
trying to learn how to use it, but can enjoy a user-friendly model.
98
Miloš Sprčić, D., Zoričić, D., Pecina, E., Sabol, A., Dvorski Lacković, I., Štambuk, I. … Arh, M. (2020).
Enterprise Risk Management. Zagreb. Ekonomski fakultet Zagreb
Scenario
Netflix platform can be accessed via Internet browsers and through applications on
mobile devices supported by Android and iOS operating systems,99 and the key risk is
that its algorithm starts lagging behind the algorithms of newer versions of operating
systems that offer a growing number of features and optimise their use. Unless it in-
vests continuously in improving its product, there is a significant possibility that the
company will lose the advantage of product quality to the competitors whose increas-
ingly complex platforms will offer more opportunities and reduce loading time for the
desired content. Furthermore, with the development of technology and lowering of
the users’ age groups, an increased level of probability can be expected regarding the
demand for simple interfaces with the possibility of personalization. Unless Netflix
responds to these trends in consumer demand for easy possibility of switching to the
competitor’s streaming platform, there is a risk of a declining market share, which di-
rectly affects the strategic goals of the company. Based on the above, the significance
of this risk is rated 2 and the probability of this risk is also rated 2. As the values of
these ratings are supported by the current intuitively designed platform available for
access on different devices, this risk belongs to the fourth quadrant of the risk map
and needs to be minimally controlled.

Since this type of risk arises from the environment, but companies can manage it, we
suggest monitoring trends in consumer demands as the first step. If Netflix is informed
about the future trends of its users’ wishes, the platform upgrades will take place in
parallel. However, in addition to the direct features, there are also indirect features that
users will not explicitly express as wishes because they feel that they are already being
considered automatically. Below we discuss the inevitable investment in system optimi-
zation, which will reduce the time required to load the content, which correlates with in-
creased user satisfaction. Also, in addition to the elegant and attractive design that must
be implemented by the platform owner, we suggest opening the possibility of self-per-
sonalising the interface design by the end-users to deepen their connections.
8. CONCLUSION
Netflix is a media and streaming service provider that offers digital content to users who
pay a fixed monthly subscription. It was founded in California in 1997, first as an online
DVD rental service, and today counts over 207.64 million subscribers worldwide.100 The
company’s performance in the observed last 4 years was high with the profitability of
equity growing by over 50%. However, in the current half of 2021 Netflix’s subscriber
growth declined dramatically after record gains boosted by last year’s pandemic.
99
Netflix (n.d.). What devices can I use to stream Netflix? Retrieved August 23, 2021, from https://help.
netflix.com/en/node/14361
100
Statista. (2021). Netflix subscribers count worldwide 2013-2021 [Data file]. Retrieved 14 May 2021
from https://www.statista.com/statistics/250934/quarterly-number-of-netflix-streaming-subscri-
bers-worldwide/
Netflix’s internal strengths have had a positive impact on the business. This refers, in
particular to its well-developed image and a strong market position that is believed to
continue to drive the revenue growth above the market trends. Moreover, Netflix can
take advantage of technological advances as a great opportunity for further expansion
of its business, owing to its resources and continuous technological improvements it
can offer higher quality content in various formats such as smartphones and tablets.
Following the trends and dynamics of market changes, the company must focus its de-
velopment activities on dealing with unavailability in some countries and the inability
to broadcast its complete opus to all countries as these weaknesses could encourage
consumers to switch to competitors who own and can broadcast the desired content.
Entry barriers into the industry are large, both due to the extremely high investments
required to produce new content and due to the complex process of creating an OTT
platform. Moreover, the bargaining power of both the customers and the suppliers are
extremely high. This is due to the fact that the consumers can join as well as unsub-
scribe very easily, while the suppliers that can create media content and therefore set
market conditions are modest in numbers.
The conducted quantification concluded that the company manages risks moderately
well, with most of them placed in the first and second quadrants of the risk map, which
indicates that some risks are given high priority in the risk management process (quad-
rant I) as well as some significant secondary priority risks, although the probability of
their occurrence is not high (quadrant II).
The most important risks for Netflix are politically conditioned ones, the impact of
COVID-19, controversial content, and cybersecurity. Unless prevented and managed,
these risks pose serious threats to the business and its goals. The group of risks that
need to be detected and continuously monitored includes legal risk and intellectu-
al risks. Although they may be considered as significant secondary priority risks, the
likelihood of their occurrence is not high. Tertiary priority risk is the risk of competi-
tors entering the market, which must be actively managed if the company wants to
continue operating. Finally, the risk of termination of contracts with the supplier and
the technological risk require minimal supervision and control because, according to
the authors of this business case, they are not significant and the probability of their
occurrence is low.
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trieved May 11, 2021, from https://collider.com/top-10-netflix-tv-shows-list/
77. Schneider, M. (2020). Netflix End-of-Year Ranker: ‘Cocomelon’, ‘The Office’, ‘The Queens
Gambit’ Top 2020 List. Retrieved May 11, 2021, from https://variety.com/2020/tv/news/net-
flix-most-watched-shows-2020-cocomelon-office-queens-gambit-1234852080/
78. Todisco, E. (2019). The Office beats out Friends as the Most Watched Licensed Show on
Netflix – See the Top 10. Retrieved May 11, 2021, from https://people.com/tv/the-office-
beats-friends-most-watched-licensed-show-netflix/
79. Stunson, M. (2021). ‘The Office’ is leaving Netflix. Here are multiple ways you can watch
the hit show. Retrieved May 11, 2021, from https://www.sacbee.com/news/nation-world/
national/article248168835.html
80. Hines, R. (2019). ‘Friends’ is officially leaving Netflix: Here’s where to watch it in 2020. Re-
trieved May 11, 2021, from https://www.today.com/popculture/friends-leaving-netflix-
where-watch-it-2020-t170876
81. Clark, T. (2020). Netflix leads its rivals in original TV shows by a wide margin in both quantity
and quality, according to new data analysis. Retrieved May 11, 2021, from https://www.busi-
nessinsider.com/streaming-comparison-netflix-leads-rivals-in-original-tv-shows-2020-6
82. Bariso, J. (2020). Netflix’s Unlimited Vacation Policy. Retrieved May 11, 2021, from https://
www.inc.com/justin-bariso/netflixs-unlimited-vacation-policy-took-years-to-get-right-its-
a-lesson-in-emotional-intelligence.html
83. Miloš Sprčić, D., Zoričić, D., Pecina, E., Sabol, A., Dvorski Lacković, I., Štambuk, I. … Arh, M.
(2020). Enterprise Risk Management. Zagreb. Ekonomski fakultet Zagreb
84. Adalin, J. (2021). Which Free Streaming Services Should You Be Using? Retrieved May 10,
2021, from https://www.vulture.com/article/best-free-streaming-services-movies-tv-
shows.html
85. Statista. (2021). Netflix subscribers count worldwide 2013-2021 [Data file]. Retrieved May
14, 2021, from https://www.statista.com/statistics/250934/quarterly-number-of-net-
flix-streaming-subscribers-worldwide/
The Case Study of Starbucks 319
THE CASE STUDY OF STARBUCKS
Ena Ćosić, Mihael Hibler1
1. INTRODUCTION
Starbucks was founded in Seattle in 1971 by an English teacher Jerry Baldwin, history
professor Zev Siegl and writer Gordon Bowker who met while studying at the Univer-
sity of San Francisco.2 The company was named after sailor Starbuck from the novel
Moby-Dick. Their sea-inspired logo depicts a double mermaid from Greek mythology.
During the first year of operation, they sold whole roasted coffee beans and did not
serve coffee drinks which is Starbucks’ primary activity today. The popularity of this
chain of coffeehouses increased even during the COVID-19 pandemic reaching 32,660
stores in 2020 in comparison to 31,256 stores in 2019.3
Starbucks has always believed in serving the finest coffees and aimed to have all their
coffee grown according to the highest quality standards and with the highest ethical
codes. Their shops are places for family gatherings and socialising with friends where
they can enjoy quality service, cosy atmosphere and delicious coffee. In addition to a
multitude of products that can be enjoyed on the premises or taken away, they offer
includes over 30 blends of coffee, hot and cold espresso drinks, teas, Frappuccinos, re-
fresher drinks, pastries, sandwiches, salads, protein boxes, yogurts, snacks and ener-
gy drinks.
Starbucks’ mission is to inspire and nurture the human spirit – one person, one cup
and one neighbourhood at the time. Following a USD 7.15 billion worth alliance with
Nestlé for marketing, selling and distribution rights, from 2018 Starbucks’ coffees and
teas are sold worldwide. In this way the company has ensured the achievement of their
business goals – Starbucks experience for users around the world.
Starbucks is present in 83 countries around the world and, according to the data from
April 2021, the United States and China had the most of its stores. The highest number
of stores were opened in the United States with 15,328 stores, namely 8941 coffee-
1
2
Wikipedia. (n.d.). Starbucks. Retrieved August 20, 2021, from hr.wikipedia.org/wiki/Starbucks.
3
Finances Online. (n.d.). Number of Starbucks Worldwide 2021/2022: Facts, Statistics, and Trends
(2021). Retrieved August 20, 2021, from https://financesonline.com/number-of-starbucks-worldwide/.
than 70% since 2008.
Starbucks shares are listed on the US electronic stock exchange NASDAQ. Institutional
investors own a majority of all shares with over 50 % of the company. Venture capital funds
houses are operated by Starbucks and 6,387 are licensed.4 The number of Starbucks
dooutlets
not have significant investments in Starbucks. According to April 2021 data, Vanguard
has increased by more than 70% since 2008.
Group Inc. isshares
Starbucks the largest shareholder
are listed with
on the US 7.7% of stock
electronic the total numberNASDAQ.
exchange of issuedInstitutional
shares and a
investors
market valueown a majority
of nearly USD of all shares
6 billion. Thewith over
second 50 % shareholder
largest of the company. VentureInc.
is BlackRock capital
with
funds do not have significant investments in Starbucks. According to April 2021 data,
7.2% of the total
Vanguard Group number
Inc. isof issued
the shares
largest and a market
shareholder withvalue
7.7% of USDtotal
of the 5.5 number
billion. The third is
of issued
shares
State and
Street a market
Corp. value
with 4.4% of of nearly
shares andUSD 6 billion.
a market valueThe second
of USD billion.4shareholder is
3.4 largest
BlackRock Inc. with 7.2% of the total number of issued shares and a market value of
USD 5.5 billion. The third is State Street Corp. with 4.4% of shares and a market value
Figure 1. 3.4
of USD Countries
billion.with
5
highest number of Starbucks stores worldwide in September 2020
Selected countries with the largest number of

Starbucks stores worldwide in September 2020
United States
China
Japan
Canada
United Kingdom
Korea
Turkey
Indonesia
Thailand
Mexico
Taiwan
Philippines
Latin America
0 2000 4000 6000 8000 10000 12000 14000 16000 18000
Company operated stores Licensed stores
Figure 1. Countries with highest number of Starbucks stores worldwide in September 2020
Source: Authors’ elaboration according to data from https://www.statista.com/statistics/306915/countries-with-
Source: Authors’ elaboration according to data from https://www.statista.com/statistics/306915/coun-
the-largest-number-of-starbucks-stores-worldwide/
tries-with-the-largest-number-of-starbucks-stores-worldwide/
3
Finances Online. (n.d.). Number of Starbucks Worldwide 2021/2022: Facts, Statistics, and Trends (2021).
4 2. PESTLE ANALYSIS
Retrieved August 20, 2021, from https://financesonline.com/number-of-starbucks-worldwide/.
Templeprotestant. (n.d.). Prvih 5 dioničara Starbucksa. R-etrieved August 20, 2021, from
https://hr.templeprotestant.org/top-4-starbucks-shareholders-sbux-2472.
PESTLE analysis is an acronym (political, economic, sociological, technological, legislati-
ve and environmental impact) of analysis methods that examine the business environ-
ment and serve as the basis for strategic planning. PESTLE analyses the surroundings
4
Finances Online. (n.d.). Number of Starbucks Worldwide 2021/2022: Facts, Statistics, and Trends
(2021). Retrieved August 20, 2021, from https://financesonline.com/number-of-starbucks-worldwide/.
5
Templeprotestant. (n.d.). Prvih 5 dioničara Starbucksa. R-etrieved August 20, 2021, from https://
hr.templeprotestant.org/top-4-starbucks-shareholders-sbux-2472.
for the emerging or already existing markets, and provides an overview of the external
situation that may have an impact on the whole industry or on the companies within
the observed industry.

The political factors that influence Starbucks’ business are trading policy, foreign in-
fluences, laws, regulations and political trends. With over 32,000 stores in more than
80 countries (Starbucks, 2021) it is the world’s leader in special coffee sales. Starbucks
has benefited from political stability in the US, the UK, the EU and many other coun-
tries. However, doing business in countries such as Bahrain, Brazil, China, Colombia,
Costa Rica, Egypt, India, Morocco, Qatar, Romania, Russia, Saudi Arabia, Slovakia and
many others means that the company needs to adapt to different political and legal
systems.6 Also, political reversals in some countries affect day-to-day business (e.g.,
in China the demand for Starbucks products has fallen due to consumers turning to
domestic producers such as Hey Tea and Nayukikao)7 and sourcing raw materials. The
main political factor concerns the sourcing of raw materials from certain regions or
countries 8 for Starbucks’ coffee trade as in these regions or countries the local aut-
horities impose many rules and regulations on exports. If it violates the rules and re-
gulatory decisions of the countries from which it sources raw materials, the company
may face some adverse consequences. Therefore, Starbucks neds to adhere strictly to
the social and environmental standards, embrace fair trade practices, and respect the
laws and regulations of their source regions.9
The US federal government has also imposed some strict regulations on multinational
ventures and all companies are under strict control, in the US as well as abroad.10 One
mistake is enough to inflict great damage, so Starbucks must constantly monitor the
political stability within the country. Regional integration, which is also a current trend
and an external factor, gives Starbucks the opportunity to spread globally. Furthermo-
re, the improvements in infrastructure that governments around the world engage in,
provide Starbucks with access to more markets and new alternative suppliers.
6
Shrum, A. (2018). A Look inside Starbucks’ Seamless Supply Chain. Retrieved August 20, 2021, from
www.dynamicinventory.net/starbucks-supply-chain-management/.
7
Cheng, E. (2021). Starbucks Faces More Competition from Local Beverage Brands in China, Its Big-
gest Market Outside the U.S. Retrieved August 20, 2021, from www.cnbc.com/2021/04/28/rising-compe-
tition-for-starbucks-in-china-from-hey-tea-and-others.html.
8
CSI Market. (n.d.). Starbucks Suppliers Performance. Retrieved August 20, 2021, from https://csimar-
ket.com/stocks/suppliers_glance.php?code=SBUX.
9
Starbucks. (n.d.). Compliance with Law and Regulations. Retrieved August 20, 2021, from https://
livingourvalues.starbucks.com/en-us/legal-compliance.
10
Starbucks and Dunkin’ Donuts. (n.d.). DEPEST Analysis. Retrieved August 20, 2021, from https://sites.
google.com/site/starbucksanddunkindonuts/depest-1.
2.2. ECONOMIC FACTORS

Economic factors are important to properly understand the current situation of the com-
pany, but also to better anticipate and plan future situations. At the time of writing this
case study, the pandemic crisis had been going on for over a year and a half, and its end
was nowhere in sight. Some parts of the world have been coping better with the crisis
than others, but the general situation is unstable and it is realistic to expect an economic
downturn due to varying intensity in different economies. A decrease in disposable inco-
me in households and the impact of these factors on Starbucks is visible on Figure 2 in
two periods – in 2009 as a result of the global financial crisis, and in 2020 as a result of the
COVID-19 pandemic which caused the economic crisis. This has had a twofold effect as it
caused the closure of cafes and restaurants in addition to creating a bad economic situati-
on. Judging by the afore mentioned, it is easy to conclude that Starbucks is not resilient to
crises, but it should also be pointed out that the impact on the company is relatively weak,
i.e. Starbucks could recover relatively quickly from this crisis, as was the case in 2009 and
2010. In response to the economic crisis, economies often lower interest rates to boost
investment, and this means smoother and faster recovery from losses for Starbucks.
Starbucks operates
is relatively stable. Ainmore
a large number
significant of markets,
factor but 70 %
could be inflation, of their
which revenues
has risen are
to 3 per ge-
cent
nerated in the US market, which means 10 that they are exposed to certain currency
in the US, the highest in the last 12 years.
changes, but these are not significant due to the fact that the dollar, by far the most
important currency for Starbucks, is relatively stable. A more significant factor could
beFigure
inflation, which
2 Global has risen
Starbucks Netto 3 per cent
Revenue from in thetoUS,
2003 the
2020 in highest
billion $ in the last 12 years.
11
Net revenue of Starbucks worldwide from

2003 to 2020
30.0 26.51
Revenue in billions of USD
24.72
25.0 22.39
21.32
19.16 19.16
20.0 16.45
14.9
15.0 13.3
11.7
9.4 10.4 9.8 10.7
10.0 7.8
6.4
5.3
4.1
5.0
0.0
Source:2 Authors’
Figure Globalelaboration
Starbucks according to data from
Net Revenue https://www.statista.com/statistics/266466/net-revenue-of-
from 2003 to 2020 in billion $
the-starbucks-corporation-worldwide/
Source: Authors’ elaboration according to data from https://www.statista.com/statistics/266466/net-re-
venue-of-the-starbucks-corporation-worldwide/
2.3. Social factors
11
Sučec, N. (2021). U Hrvatsku se vratila inflacija. Poznati ekonomist upozorava: Treba se navikava-
ti na život s njom, mogli bismo imati još jedno izgubljeno desetljeće. Retrieved August 31, 2021, from
https://www.tportal.hr/biznis/clanak/u-hrvatsku-se-vratila-inflacija-poznati-ekonomist-upozorava-tre-
Social factors that influence Starbucks’ business are consumer attitudes, business reputation,
ba-se-navikavati-na-zivot-s-njom-mogli-bismo-imati-jos-jedno-izgubljeno-desetljece-foto-20210518.
consumer habits, ethical issues and demographic change. The social environment is an
important factor affecting every company’s business, especially Starbucks’. Coffee culture is
very well established in most developed countries. Many people drink more than one cup of
coffee a day. Developing countries have also seen an increase in coffee consumption over the
2.3. Social factors

Social factors that influence Starbucks’ business are consumer attitudes, business re-
putation, consumer habits, ethical issues and demographic change. The social environ-
ment is an important factor affecting every company’s business, especially Starbucks’.
Coffee culture is very well established in most developed countries. Many people drink
more than one cup of coffee a day. Developing countries have also seen an increase
in coffee consumption over the years. Starbucks has the opportunity to increase inco-
me and market share in many countries based on the increasing demand for special
coffee, as a result of the growing coffee culture and the growing middle class around
the world. Because of the social distancing rules, i.e. the COVID-19 situation, in some
countries cafés are only allowed to serve ‘coffee to go’, which is a great opportunity for
Starbucks as some other local cafés do not offer this option.12
The company also has the opportunity to expand its offer in the range of healthier
products to attract consumers who nurture healthy lifestyles.13 Customer preferences
and purchasing trends change every year, and this affects the company’s growth and
profitability. For example, the consumer market has shifted in recent years to organic
food and healthier diets. Starbucks quickly adapted to consumers and offered natural
energy drinks and fresh handmade juices.14 Recent studies have shown that a higher
percentage of people older than 30 buy Starbucks coffee, while younger generations
tend to replace Starbucks’ products by cheaper substitutes.15 This could be because
Starbucks has higher prices that are not as affordable for middle classes or younger
generations. The corporation should recognize that, and look for cheaper and better
solutions to reduce the cost of their coffee if they would have to change their focus to
a new demographic category. This also includes adopting new marketing strategies
that target younger generations, and implies studying their interests, habits, and ways
of living.16
Starbucks can offer cheaper products, but they may have to sacrifice quality, which is
the main societal challenge it faces. To expand the consumer base to include custo-
mers from the lower and middle classes, Starbucks has come up with an option to
offer two types of products: cheaper products with lower quality to the price conscio-
us market,17 and premium products that are intended for customers who seek high
12
Starbucks. (2021). Customer service. Retrieved August 21, 2021, from https://customerservice.star-
bucks.com/.
13
PETA. (n.d.). How to order vegan drinks at Starbucks. Retrieved August 21, 2021, from https://www.
peta.org/living/food/guide-vegan-starbucks/.
14
Starbucks. (2021). Nutrition. Retrieved August 21, 2021, from https://www.starbucks.co.uk/nutri-
tion.
15
Tamunotonye, H. (2020). Starbucks Customer Segmentation Analysis with Python. Retrieved August
22, 2021, from https://medium.com/analytics-vidhya/starbucks-customer-segmentation-19ac086e5405.
16
Racioppi, D., Altman, J., Snyder, L. (2014). Segmentation Task: Starbucks Coffee Company “Latte Love.”
[EPub] Retrieved from https://community.mis.temple.edu/danielleracioppi/files/2014/07/Segmentation-
Task.pdf.
17
Wang, M. (2018). Starbucks’ Pricing Strategy. Retrieved August 21, 2021, from https://emoryeconom-
icsreview.org/private-sector/starbuckspricingstrategy.
quality.18 A campaign called Starbucks Shared Planet, which obliges Starbucks to do the
best for people and the planet, has had a major impact on strengthening its image.
The purpose of this campaign is to show the world their commitment to fair trade.19

In today’s globalized world which is characterized by a very rapid development of te-
chnology, it is necessary to follow the technological progress and to constantly im-
prove and adapt. Starbucks is actively following trends and making additional efforts
to improve its users’ experience through new technologies, and is even considered a
technological leader in the coffee beverage industry.20 The history of Starbucks is full
of great technological breakthroughs: as early as in 1998 Starbucks was one of the first
companies to launch its official website, and in 2002 they provided their customers
with free Wi-Fi in their stores which helped them to change the concept of ‘coffee to
go’ and keep the customers in the stores during the consumption.21 Since then, inve-
stments in the technological aspects of the business and the application of modern
technological solutions in the business have increased even more.
Mass production and universal approach have ceased to be a leading business dri-
ver and nowadays the emphasis is placed on individualized approach to customers.
Starbucks has recognized this change in time, and hence has invested in collecting
different types of data and reactions from its customers for many years. The most
significant contribution to a personalized user experience was the creation of the Star-
bucks application. Namely, it provides the users with ease of use and navigation in the
rich assortment of Starbucks coffees and everything it offers, a loyalty reward pro-
gramme that stimulates consumption, integration with other platforms and services,
easy ordering and contactless payment, while providing the corporation with a wide
range of different data.22 This data facilitates personalised access to each user of the
application, and enables the promotion of conventional mass campaigns directly to
every consumer in the target segment.23 Through this technology and the work of the
Starbucks data scientists, as many as 16 million active Starbucks Rewards members
18
Roll, M. (2021). The Secret to Starbucks’ Brand Success. Retrieved August 21. 2021, from https://mar-
tinroll.com/resources/articles/strategy/secret-starbucks-brand-success/.
19
Crossroads’ Global Hand. (n.d.). Starbucks™ Shared Planet™ commitment to ethical sourcing. Re-
trieved April 22, 2021, from https://www.globalhand.org/en/search/all/document/21028?search=%-
22fair+trade%22.
20
Digital Initiative. (2016). Starbucks: A Technology Pioneer. Retrieved April 25, 2021, from https://dig-
ital.hbs.edu/platform-rctom/submission/starbucks-a-technology-pioneer/.
21
Barret Foster, L. (2018, May). 5 Ways Starbucks is Innovating the Customer Experience. QSR Magazine.
Retrieved from https://www.qsrmagazine.com/consumer-trends/5-ways-starbucks-innovating-custom-
er-experience.
22
Oragui, D. (2018, June 12). The Success of Starbucks App: A Case Study. The Manifest. Retrieved from
https://themanifest.com/mobile-apps/success-starbucks-app-case-study.
23
Rahman, W. (2020). Starbucks Isn’t a Coffee Business – It’s a Data Tech Company. Retrieved Au-
gust 25, 2021, from https://marker.medium.com/starbucks-isnt-a-coffee-company-its-a-data-technolo-
gy-business-ddd9b397d83e.
receive thoughtful recommendations from the food and drink application based on
local store inventory, popular selections, weather, time of day, community preferences
and previous orders.24 Individualized access to customers through the application and
further development of contactless payments are an example of Starbucks following
key technological trends that help increase sales and maintain customer loyalty. Mo-
reover, the application has reduced the waiting time for orders and increased the effi-
ciency of the company’s work.25
Starbucks has also started implementing IoT technology thanks to its collaboration
with Microsoft and the implementation of Azure Sphere, a solution that enables conne-
cting equipment in stores to the cloud and transferring the data and recipes more ea-
sily, which is currently mostly done via USB.26 This technology enables the collection of
data about devices, the frequency of their use and the malfunctions, and thus allows
Starbucks to predict adequate servicing and repair times. Starbucks has even made a
step further with the development of the new Clover X coffee machine that enables
diagnostics and remote repairs.27
Starbucks uses large amounts of collected data for various purposes, including deter-
mining the location of new stores considering the nearby stores and the impact that
the new one will have on the existing ones. By using artificial intelligence, this data
provides information on population, income levels, turnover, presence of competitors
and other factors in calculating, and is used for predicting revenues, profits and ot-
her aspects of economic performance.28 Starbucks has also been present on social
networks for a long time and is one of the most interesting brands. The reasons for
its success certainly lie in the fact that in the approach to customers and use of social
networks, it is capable of creating content with which customers easily identify and bu-
ilding a brand story, and consistently publishes regular posts using its customers’ con-
tent and involving them in creating a Starbucks story – thus creating the brand fans.29
Starbucks really keeps pace with time and follows technological trends, and hence is a
leader in the field of technological development of selling coffee drinks. Nevertheless,
the company must keep investing in new technologies and upgrading other aspects
of business such as inventory management systems. This would allow Starbucks to
24
Sokolowsky, J. (2019). Starbucks turns to technology to brew up a more personal connection with its
customers. Retrieved Augut 25, 2021, from https://news.microsoft.com/transform/starbucks-turns-to-
technology-to-brew-up-a-more-personal-connection-with-its-customers/.
25
26
Sokolowsky, J. (2019). Starbucks turns to technology to brew up a more personal connection with its
customers. Retrieved Augut 25, 2021, from https://news.microsoft.com/transform/starbucks-turns-to-
technology-to-brew-up-a-more-personal-connection-with-its-customers/.
27
Rahman, W. (2020). Starbucks Isn’t a Coffee Business – It’s a Data Tech Company. Retrieved Au-
gust 25, 2021, from https://marker.medium.com/starbucks-isnt-a-coffee-company-its-a-data-technolo-
gy-business-ddd9b397d83e.
28
Ibid.
29
Ravi, K. (2019). 8 Ways Starbucks Creates an Enviable Social Media Strategy. Retrieved August 25,
2021, from https://blog.unmetric.com/starbucks-social-media-strategy.
monitor the expiry dates and very accurately plan the procurement of ingredients, the
automatization of adding the ingredients that is currently done manually, which would
contribute to reducing waste and allow the company to control the temperature and
maintain it at a specific level.30 Constant investment and improvement of technological
segments of business is certainly important.
2.5. Legal factors

Starbucks must respect a wide range of different laws and legal factors in its business,
including health and safety regulations, consumer and trade laws, recycling regula-
tions, international human rights agreements and environmental policies, as well as
procedures and rules for obtaining different permits and various other legal aspects.31
This corporation is committed to full compliance with the laws, rules and regulations of
the countries in which it operates. All Starbucks partners have a continuing obligation
to familiarize themselves with the applicable laws relating to their work responsibilities
and all Starbucks policies.32 The company must respect the human rights laws, follow
all laws and regulations on wages and hours, and provide its employees with an envi-
ronmentally friendly working environment. The statutes also protect employees throu-
gh healthcare according to their requirements and provide each member or employee
with the same employment rights according to their skills.33 In its business operations,
the company must also comply with the laws on health and safety in the areas in which
it operates, which also applies to the treatment of workers as well as to the regulations
and criteria to be met in the production, processing, sale and distribution of its produ-
cts. As the problem of global warming and environmental pollution is ubiquitous, the
company must also meet certain standards relating to the reduction of emissions of
harmful gases, pollution and waste disposal.34 Starbucks supports public and internal
policies that maintain the health of the business, their partners, employees and the
communities in which they operate. The way they show commitment to responsible
business is evident from their business policies on social responsibility, responsibility
in the workplace and ethical sources of raw materials.35
The issue with the legal factors is that laws are not universal and differ from one co-
untry to another, so that a company such as Starbucks, which operates in many co-
30
31
UKEssays. (2018). PEST Analysis of Starbucks. Retrieved August 25, 2021, from https://www.ukes-
says.com/guides/pestel-examples/starbucks-pestel-2021.php?vref=1.
32
Starbucks. (n.d.). Compliance with Law and Regulations. Retrieved August 20, 2021, from https://
livingourvalues.starbucks.com/en-us/legal-compliance.
33
My Assignment Help. (2018). Legal Responsibility of Starbucks. Retrieved August 26, 2021, from
https://myassignmenthelp.com/free-samples/legal-responsibility-of-starbucks.
34
35
Starbucks. (n.d.). Committed to Transparency—People, Planet, Coffee. Retrieved August 26, 2021,
from https://www.starbucks.com/responsibility/global-report/policies.
untries in the world, must comply with the laws and regulations pertinent to each
country. An example of such a problem is a lawsuit in the state of California that
was brought against 90 coffee retailers, including Starbucks, and which resulted in
mandatory labelling of the products containing fried coffee as carcinogenic.36 The link
between coffee and its carcinogenic effect through subsequent studies has not been
found and subsequently this obligation has been abolished.37 This example shows that
legal regulations vary considerably between countries and within them, which is why it
is important to know them well and monitor their changes in order to avoid damages
for the business. Another example of a problem with legal regulations can be potential
tax avoidance in the UK, which has caused a number of controversies, as tax amounts
that Starbucks pays are insufficiently high given the size of Starbucks in the UK.38 The-
se practices can lead to highly negative publicity and significant fines and negatively
affect the overall business.

Starbucks uses thousands of cups per minute in their daily business operations, many
of which are not recyclable. Since, the impact of plastic waste on water, oceans and he-
alth is huge, the corporation’s policy has changed significantly since it started the chan-
ges as early as in 2004 to reduce its negative impact on the environment and improve
their image of environmental sensitivity and sustainability. One of the most significant
novelties is the launch of Circular Cup in stores in the UK and then across Europe, the
Middle East and Africa.39 Starbucks has set its latest target for achieving neutral CO2
emissions and reducing water use by 50% for green coffee by 2030. They aim to achie-
ve this by providing coffee producers with precise agronomic tools, distributing more
resilient varieties of coffee plants, and investing in the protection and restoration of
coffee-producing land. The goals prioritize the reduction of emissions in green coffee
cultivation, which they consider to be the biggest source of pollution.40 While Star-
bucks set the sustainability targets in 2008 that had not been met in the scheduled
time presented in the initial plan,41 its determination to meet the current sustainability
targets is shown by the fact that the company has invested over 140 million dollars in
36
Raymond, N. (2018). Starbucks coffee in California must have cancer warning, judge says. Retrieved
August 26, 2021, from https://www.reuters.com/article/us-california-lawsuit-coffee-idUSKBN1H5399.
37
Hines, M. (2019). California says those ominous warning signs about coffee being linked to can-
cer can be taken down. Retrieved August 26, 2021, from https://eu.usatoday.com/story/news/
health/2019/06/04/does-coffee-cause-cancer-california-backtracks-says-risk-low/1338781001/.
38
Bergin, T. (2012). Special Report: How Starbucks avoids UK taxes. Retrieved August 27, 2021, from
https://www.reuters.com/article/us-britain-starbucks-tax-idUKBRE89E0EX20121015.
39
Rahman, M. (2020). PESTEL analysis of Starbucks. Retrieved April 27, 2021, from https://howandwhat.
net/pestel-analysis-starbucks/.
40
Brown, A. B. (2021). Starbucks to improve sustainable coffee sourcing, reducing its largest carbon
culprit. Retrieved April 27, 2021, from https://www.supplychaindive.com/news/starbucks-commits-re-
ducing-greatest-source-carbon-emissions-coffee/597160/.
41
Lubin, G. (2014). Starbucks’ Biggest Environmental Failures Are Still Better Than Most Companies. Re-
trieved April 27, 2021, from https://www.businessinsider.com/starbucks-environmental-record-2014-5.
renewable energy procurement over the last two years.42 This certainly represents a
significant shift towards a more environmentally conscious business. According to For-
tune, Starbucks ranked ninth in obtaining renewable energy certificates among 500
companies. The company is also trying to find many other ways to save energy using
energy-efficient lighting in some stores, and in many stores it implemented the use of
fuel-saving equipment that will reduce natural gas consumption. In addition to provi-
ding customers with a 10% discount if they bring their own reusable cups and it has
introduced biodegradable packaging for their beverages.43 Starbucks is trying indeed
to reduce the environmental footprint by investing in modern technologies, saving
energy and water, and by reducing the waste they generate from everyday business.
This approach needs to be continued and innovative environmental solutions should
also be addressed in other business segments such as product distribution, stock con-
trol and the incorporation of green design into all Starbucks retail stores.
3. PORTER’S 5 COMPETITIVE FORCES MODEL

Industry analysis is most often carried out using Porter’s five competitive forces mo-
del, developed by Michael Porter. The forces are: competitive rivalry, threat of new
entrants, threat of substitution, bargaining power of suppliers and bargaining power
of buyers.
3.1. Competitive rivalry

Starbucks faces strong competition in the food and café industry. A large number of
companies are competing for their share of the market. Barriers for new entry are low.
In the event of switching to competition, consumers shall bear minimum costs. The
disadvantages of competing products are also minimal. Starbucks occupies a little less
than 17% of the market share which ranks it second in coffee production/sale, but at
the same time it is a leading chain of cafes. Starbucks’ biggest competitors are Caffé
Nero, Costa Coffee, McDonald’s McCafé and Dunkin’ Donuts. Based on the recent stu-
dies and surveys, Starbucks has the largest market share with 14,875 stores in the
United States, followed by Dunkin’ Donuts with 9 570 stores.44 Top quality products
and services, strong brand and consumer loyalty give Starbucks a certain advantage
over competitors. In addition, it has excellent management of the supply chain, which
increases its bargaining position in the market. Starbucks also has partnerships with
the US dairy industry and a diversified portfolio of renewable energy sources aimed at
reducing electricity consumption by 50%. It invests in the Global Farmer Fund, giving
42
Mace, M. (2020). Starbucks to halve environmental impacts as part of ‘resource-positive’ strategy.
Retrieved April 27, 2021, from https://www.edie.net/news/6/Starbucks-to-halve-environmental-im-
pacts-as-part-of--resource-positive--strategy/.
43
44
Collins, M. (2021). 90 U.S. and World Coffee Statistic You Should Know. Retrieved April 26, 2021, from
https://www.perfectbrew.com/blog/coffee-statistics-infoFigureic/.
coffee makers additional access to capital to make them even more productive and
sustainable. Partnerships and investments strengthen their competitive advantage
and sustainable growth. According to BizVibe’s list of world’s leading coffee brands
ranked by revenue from 2020 in billions of USD Starbucks ranks 2nd with USD 26.5
billion. Only Nestlé performs better with USD 99.71 billion.45 In 2018, Starbucks started
collaborating with Nestlé by taking responsibility for acquiring coffee and global brand
management, as well as innovations and strategies for entering the global markets
around the world
and working the experience
together. As part of of
thedrinking Starbucks
agreement, coffee using
Nestlé obtained capsules
the right that are
to market,
sell and distribute
compatible Starbucks
with Nespresso coffees and
and Nescafe teas
Dolce worldwide.
Gusto In return, Starbucks received
coffee machines.
USD 7.15 billion. This alliance will bring people around the world the experience of drin-
king Starbucks coffee using capsules that are compatible with Nespresso and Nescafe
Dolce Gusto coffee machines.
Figure 3. World’s leading brands of coffee by revenue 2020
World’s leading brands of coffee by revenue 2020

Keurig Maxwell House
Folgers 2% 0%
0% Costa Coffee
1%
Starbucks
17% Dunkin' Donuts
1%
McCafé
13%
[NAZIV
KATEGORIJE]
[POSTOTAK]
Tim
Hortons
2%
Gloria Jean's
Coffees
0%
Source:
FigureAuthors’ elaboration
3. World’s according
leading brands to data
of coffee from https://blog.bizvibe.com/blog/top-10-
by revenue 2020
coffee-brands
Source: Authors’ elaboration according to data from https://blog.bizvibe.com/blog/top-10-coffee-brands
The threat of new entrants is a moderate threat to Starbucks. There are two factors to that
statement. Firstly, the cost of setting up a coffeehouse is relatively small for small businesses
45
Marjanović, V. (2018). Nestle za 7,2 milijardi dolara kupio prava na prodaju Starbucksovih proizvoda.
that will only
Retrieved own
April 26, one store.
2021, fromSuch businesses do not require large amounts of raw materials,
https://novac.jutarnji.hr/novac/aktualno/nestle-za-72-milijardi-dolara-
kupio-prava-na-prodaju-starbucksovih-proizvoda-7326105.
so their costs are lower, but those raw materials are also more certain and more accessible
than for Starbucks. On the other hand, the cost of brand development is very high, and it takes
years or probably even decades for a brand to develop to the Starbucks level. When viewed
locally, by country or even by city, the threat to Starbucks will not be negligible due to the

The threat of new entrants is a moderate threat to Starbucks. There are two factors to
that statement. Firstly, the cost of setting up a coffeehouse is relatively small for small
businesses that will only own one store. Such businesses do not require large amo-
unts of raw materials, so their costs are lower, but those raw materials are also more
certain and more accessible than for Starbucks. On the other hand, the cost of brand
development is very high, and it takes years or probably even decades for a brand to
develop to the Starbucks level. When viewed locally, by country or even by city, the
threat to Starbucks will not be negligible due to the fact that cultures are different and
that certain local cafes may be favoured among the local population. Starbucks provi-
des recognizability and a certain level of standardisation of service similar to McDo-
nald’s, and it is expected to perform better in tourist destinations. Globally, it would be
difficult to imagine that any new company will soon grow to be a significant competitor
to Starbucks, and its management should only focus on preserving the status they
currently enjoy and monitoring current competitors.46
3.3. Threat of substitution

The threat of substitution is moderate to major as there are many Starbucks coffee
substitutes; most often they are Arabica, Robusta, drinks available in restaurants, on
vending machines, and products available in supermarkets. Also, due to the current
situation regarding the COVID-19 pandemic, as restaurants and cafés are closed to
prevent the spreading of the virus, consumers had no choice but to make coffee them-
selves at their homes, which may lead them to become less interested in consuming
Starbucks products. Most of these substitutes cost less and therefore this threat is
important. Since the only cost of switching is lower quality, the threat of substitutes is
strong. The threat of substitution in Starbucks is mitigated by top quality and custo-
mer loyalty.47

The bargaining power of suppliers is characterized as a weak force, and this is due to
the fact that Starbucks uses in its business process largely medium size suppliers. The
world market for raw coffee and tea is extremely large and competitive, which redu-
ces the bargaining power of suppliers for Starbucks. The cost of switching suppliers
for Starbucks is not high as the suppliers of raw coffee and tea are attracted to doing
business with the company due to the extremely large volumes of raw material pur-
chases. Starbucks applies a rigorous selection process in the supply of the groceries
for the preparation of their famous coffees and teas. The company has developed
business communications directly with farming facilities to avoid intermediaries, and
46
Greenspan, R. (2019). Starbucks Coffee Five Forces Analysis (Porter’s Model) & Recommendations.
Retrieved April 20, 2021, from http://panmore.com/starbucks-coffee-five-forces-analysis-porters-model.
47
Ibid.
provides significant assistance to its suppliers in the production process. Starbucks

currently operates six coffee farm support centres in Asia, Africa, the Caribbean and
South America. These centres connect the local farmers with agronomy engineers to
improve coffee quality, reduce production costs and ensure sustainable production
of coffee on farms. By doing business this way, the company achieves greater control
over its procurement chain.48
3.5. Bargaining power of buyers

The bargaining power of buyers is one of the most significant forces affecting Star-
bucks as the corporation has a large number of customers, according to their annual
revenue. Since many enjoy drinking coffee, customers are abundant as evidenced by
around 146 billion cups of coffee drunk over a year in the United States.49 Earlier, cu-
stomers had less bargaining power on the market due to the Starbucks monopoly,
but with the emergence of new competitors, the bargaining power of buyers incre-
ased. Today, given the availability of the internet, customers are well informed and
if Starbucks (or some other brand) tries to increase the price, customers will leave
because switching costs for customers are low.50 However, coffee develops a sort of
dependence that can force customers to return because of a certain taste. In addition,
some customers are less price sensitive and will continue to buy from Starbucks even
if the price is slightly higher. Starbucks coffee can be described as price elastic becau-
se a large number of customers see it as a luxurious good. This price elasticity of the
Starbucks products is good news for its competitors, who offer cheaper coffees, like
McDonald’s and Dunkin’ Donuts.
4. ANALYSIS OF THE COMPANY’S COMPETITIVE STRATEGY

The choice of a company’s competitive strategy is an important part of the company’s
business and positioning in the market. It is important to know the company, its stren-
gths and weaknesses as well as the industry in which it will operate, and accordingly
opt for one of the three possible strategies – cost leadership, differentiation or focus,
i.e., focused cost leadership or focused differentiation.51 The strategy can be changed
over the years if the market or business opportunities change and the need for such
a move arises.
48
Gupta, P., Nagpal, A., & Malik, D. (2018). Starbucks: global brand in emerging markets. Emerald Emerg-
ing Markets Case Studies, 8(4), 1-22. https://doi.org/10.1108/EEMCS-03-2018-0044.
49
Urban bean coffee. (2020). Our team spent 300+ hours on research. Here’s what we learned about cof-
fee statistics in the USA. Retrieved May 11, 2021, from https://myfriendscoffee.com/usa-coffee-statistics/.
50
UKEssays. (2018). Porter’s Five Forces Study of Starbucks. Retrieved April 25, 2021, from https://
www.ukessays.com/essays/marketing/starbucks-international-coffee-and-branded-restaurant-indus-
try-marketing-essay.php?vref=1.
51
Miloš Sprčić, D., Puškar, J., Zec, I. (2019). Primjena modela integriranog upravljanja rizicima. Retrieved
from https://www.efzg.unizg.hr/UserDocsImages/KID/Primjena%20modela%20integriranog%20upravl-
janja%20rizicima.pdf.
Starbucks has chosen a differentiation strategy since the beginning of its business – se-
lling high-quality products at a higher price than the rest of the industry, while paying
attention to the level of costs. Judging by the fact that in 2020 Starbucks was second
in terms of worldwide turnover in their industry, it can be concluded that this choice
was correct for the company. Starbucks modifies its products in accordance with the
tastes and cultures of various regions and countries around the world. They adapt to
the needs of customers and try to satisfy their wishes. They have a wide range of pro-
ducts including coffee, juices in collaboration with Pepsi Co, Starbucks liqueur through
collaboration with Jim Beam, and tea developed in collaboration with Tazo tea.52
One way in which Starbucks differentiates itself is one of the practices that has gre-
atly increased its popularity around the world: writing customer names on their cup/
glass. The company introduced an extremely simple procedure in customer relations,
which has great added value because of the minimal cost, great recognisability and
strikingness. This practice was introduced in 2012 primarily to increase the efficiency
and speed of issuing drinks in the morning crowds. However, it was quickly realized
that the move increased brand awareness.53 Over time, Starbucks assistants became
famous for often misspelling the names of customers, usually because of the lack of
time to ask for correct spelling of their customer’s names. Despite the potential sus-
picions that this would harm the company’s popularity, i.e., that it would offend the
customers. In the end it turned out that the customers felt that occasional misspellings
gave Starbucks a certain personality.
Starbucks owns support centres for farmers on four continents where their agronomi-
sts test samples of soil and provide free advice to coffee growers. They know that the
best coffee beans are produced at higher altitudes where the nights are cold and the
days are warm.54 Starbucks employees are also part of their competitive advantage
as they are not considered as employees but as partners with whom the corporation
jointly achieves their common objectives. They are offered a number of benefits as
according to the corporate culture a happy and satisfied employee creates higher re-
venues through customer satisfaction. A satisfied worker will also remain in the com-
pany and low personnel turnover reduces the cost of recruitment and training of new
employees.
These are just some of the ways in which Starbucks maintains the quality of its produ-
cts at such a high level, while at the same time trying to ensure relatively predictable
and low costs. According to the current situation, Starbucks has no need to change its
competitive strategy at least not in the near future.
52
Fellner, K. (2008). Wrestling with Starbucks: Conscience, Capital, Cappuccino. New Brunswick: Rutgers
University Press.
53
My Digital Insight. (2019). Starbucks: Three Main Benefits For Writing Customer Name On The Cup.
Retrieved April 28, 2021, from https://mydigitalinsight.blogspot.com/2019/11/starbucks-three-main-
benefits-for.html.
54
Starbucks. (n.d.). Coffee Quality. Retrieved August 24, 2021, from https://www.starbucks.co.id/cof-
fee/ethical-sourcing/coffee-quality.
5. FINANCIAL ANALYSIS
To evaluate Starbucks’ business performance objectively, it is necessary to conduct an
analysis using financial indicators55. Liquidity and leverage indicators focus on measu-
ring business sustainability, while efficiency, profitability, and market value indicators
focus on measuring performance.
5.1. Efficiency indicators

Table 1. Efficiency indicators (2016-2020)
EFFICIENCY INDICATORS 2016 2017 2018 2019 2020

Inventory turnover ratio 15.46 16.41 17.65 17.33 15.16
Days sales of inventory 23.60 22.24 20.68 21.06 24.08
Receivable turnover ratio 27.73 25.72 35.67 30.15 26.62
Days sales in accounts receivable 13.16 14.19 10.23 12.11 13.71
Accounts payable turnover ratio 11.65 11.55 6.72 7.17 7.71
Days purchases in accounts payable 31.33 31.61 54.28 50.93 47.33
Liquid asset turnover ratio 4.48 4.24 1.98 4.69 3.01
Asset turnover ratio 1.49 1.56 1.02 1.38 0.80
Source: Authors’ elaboration according to Starbucks’ annual financial statements
Efficiency indicators are used to measure how well an enterprise manages its activi-
ties, i.e. how efficiently it uses its assets and how quickly the assets are absorbed and
distributed over relatively brief periods of time in one business cycle.
The inventory turnover ratio is an indicator that measures how often an enterprise
consumes its inventory during the observed period. Higher ratio means shorter inven-
tory holding period. Starbucks’ inventory turnover ratio was highest in 2018 at 17.65,
after which the value in the following years fell to 15.16 in 2020. Days sales of inventory
tended to decline until 2018, after which they grew and are the highest in 2020. In conc-
lusion, inventories have declined at a slower pace in 2020.
The receivable turnover ratio had the same trend as the inventory turnover ratio and
was at its peak in 2018 at 35.67, while the days sales in accounts receivable are inver-
sely proportional to the receivable turnover ratios. These indicators provide an insight
into the company’s creditworthiness and debt collection procedures, i.e., how quickly
the company can collect receivables from customers and how many monetary units
of revenue it generates per one monetary unit of short-term receivables. Like the pre-
vious ratio, the higher this ratio is, the less the company needs to collect receivables
from customers.
In contrast to the previous two ratios, the accounts payable turnover ratio is reverse
and reached the lowest levels in 2018 after which it recorded growth. Days purchases
55
Starbucks. Fiscal 2016 Annual Report, Fiscal 2017 Annual Report, Fiscal 2018 Annual Report, Fiscal 2019
Annual Report, Fiscal 2020 Annual Report [EPubs]. Retrieved August 18, 2021, from https://investor.star-
bucks.com/financial-data/annual-reports/default.aspx.
in accounts payable also followed this trend. Therefore, it can be concluded that Star-
bucks took less time to pay its suppliers in 2020 than in 2018.
Liquid asset turnover ratio and asset turnover ratio showed different trends in move-
ments. Liquid asset turnover ratio recorded a decline until 2018 and then increased
until 2020. Consequently, between 2018 and 2020 fewer liquid assets were converted
into cash, which is also in line with inventory and receivable turnover ratios. Asset tur-
nover ratio decreased throughout the observed period, and since such a trend was not
accompanied by the liquid asset turnover ratio, we can conclude that the fixed assets
in the total observed period were constantly increasing.

Table 2. Liquidity indicators (2016-2020)
LIQUIDITY INDICATORS 2016 2017 2018 2019 2020
Current ratio 1.05 1.25 2.198 0.917 1.063
Quick ratio 0.74 0.93 1.952 0.669 0.851
Cash ratio 0.47 0.58 1.572 0.447 0.630
Money Conversion Cycle 5.44 4.82 —23.362 —17.762 —9.546
Source: Authors’ elaboration according to Starbucks’ annual accounts
The current ratio is the best measure to calculate the company’s ability to meet short-
term liabilities, and for the stability of the company it is desirable that this indicator be
higher than 1. It indicates the possibility of servicing liabilities, and we can see that in
2019 Starbucks had a more difficult time servicing its liabilities compared to the other
observed years of business activity.
The quick ratio is similar to the current one but differs in that it excludes inventories
from current assets. This ratio is also desirable to be higher than 1. In 2018 the ratio
was 1.95, followed by less than 1 in 2019, but slightly better in 2020.
The cash ratio follows the trend of both current and quick ratio, and we see its lowest
value in 2019, which indicates that the financing of current liabilities in 2019 has put
more strain on money and monetary surrogates.
The money conversion cycle expresses the time it takes a company to convert its inve-
stments in inventories and other resources into cash flows from sales.56 In the case of
Starbucks. we can note that this indicator decreases over time and moves to a negative
value in 2018. After 2018 the money conversion cycle grew, but remains below 0 by 2020.
A negative conversion cycle means that the company needs more time to pay its ven-
dors and other expenses than to sell inventories and collect money – thus financing the
business by suppliers. In this case, no operational money is needed for further growth.57
56
Money Nx. (n.d.). Ciklus konverzije novca – financjska analiza – 2021. Retrieved August 27, 2021, from
https://hr.earnmoneyfromhometoday.com/cash-conversion-cycle-ccc-definition.
57
El Fay, I. (2020). How Gymshark Used Negative Cash Conversion Cycles to Build a Billion-Dollar Busi-
ness. Retrieved August 25, 2021, from www.menabytes.com/gymshark-negative-cash-conversion-cycle/.
ItThe
is first necessary
Case Study to look at the sources of funding for Starbucks over the observed five-year
of Starbucks 335
period. Looking at the data in Figure 4, there was a constant decline in financing with capital
5.3.
and Leverage
reserves indicators
to the detriment of a significant jump in financing through long-term liabilities.
Short-term liabilities over
It is first necessary theatobserved
to look period
the sources have increased
of funding but do over
for Starbucks not have significant
the observed
five-year
leaps period.
or downs. Looking
This at of
structure thesources
data inofFigure 4, there
financing was athat
indicates constant declinewas
the company in finan-
heavily
cing with capital and reserves to the detriment of a significant jump in financing throu-
indebted and showed a negative value of capital and reserves in 2019, which suggests that the
gh long-term liabilities. Short-term liabilities over the observed period have increased
but do notliabilities
company’s have significant leaps
are higher thanoritsdowns. This structure
total assets. of sources
This certainly points of
to financing indi-of
the problems
cates that the company was heavily indebted and showed a negative value of capital
financing the company and the long-term sustainability of such business.
and reserves in 2019, which suggests that the company’s liabilities are higher than its
total assets. This certainly points to the problems of financing the company and the
long-term sustainability of such business.
Figure 4. Sources of funding for Starbucks (2016-2020)
Sources of funding
35000
30000
25000
20000
15000
10000
5000
0
-5000 2016 2017 2018 2019 2020
-10000
Equity and reserves Long-term debt Short-term debt
Figure 4. Sources of funding for Starbucks (2016-2020)

Source: Authors’ elaboration according to data from Starbucks’ annual financial statements
Source: Authors’ elaboration according to data from Starbucks’ annual financial statements
Debt to assets ratio of Starbucks, which showcases how much of the company's total assets
Debt to assets ratio of Starbucks, which showcases how much of the company’s total
are financed
assets from otherfrom
are financed sources,
othergrew in thegrew
sources, observed
in theperiod and in
observed 2019 and
period it is in
exceeded the
2019 it is
exceeded
value the value
of 1. This of 1.the
confirms This confirms the above-mentioned
above-mentioned conclusion on the conclusion on the
size of liabilities size of
versus the
liabilities versus the total assets of the company. Accordingly, the long-term debt to
total assets
equity of the
ratio company.
increased Accordingly,
over theperiod
the observed long-term
anddebt to equity
in 2019 it alsoratio increased
exceeded theover the
value
of 1. Theperiod
observed reason
andfor
in such
2019 high debt
it also financing
exceeded the of Starbucks
value is already
of 1. The evident
reason for in 2018
such high debt
when long-term debt to equity ratio rose by 239.05 % compared to the previous year.
financing of Starbucks
It was caused is alreadybuy-back
by a significant evident inand
2018
bywhen long-term the
implementing debtpolicy
to equity ratio rose by
of distributing
dividends
239.05 to shareholders
% compared who were
to the previous planned
year. It wastocaused
be paid
by$ a25significant
million in buy-back
revenue in thisby
and
way by 2020.58 Since November 2017 Starbucks has been financed by debt three times
implementing the policy of distributing dividends to shareholders who were planned to be
58
Linnane, C. (2018). Starbucks enters $5 billion accelerated share buyback. Retrieved August 23, 2021,
from www.marketwatch.com/story/starbucks-enters-5-billion-accelerated-share-buyback-2018-10-12.
more significantly to fund general corporate purposes such as buying back its own
shares and paying dividends.59 In March 2019 Starbucks issued a billion-dollar bond60,
which was one of the causes of Starbucks’ long-term debt increasing as much as 6 ti-
mes between 2017 and 2020. The debt-to-equity ratio is an indicator of the company’s
equity structure, and hence borrowing should be limited to the value of equity.61 In the
case of Starbucks, we can notice the adverse trend of this indicator with a negative va-
lue in 2019 and 2020. This indicator shows the stability of the company and its ability
to raise additional capital for growth, and the optimal ratio is generally between 1 and
1.5. If a company has a negative debt to equity ratio, this signals undeniable business
problems and financial instability. Regarding Starbucks, the reason for such levera-
ge indicators seems to be due to the policy of disbursing dividends that exceed the
company’s capital and debt financing to repay them as well as buying back their own
shares. The cause of this could be a potential principal – agent problem. Thanks to the
structure of the Starbucks’ incentive plan, which requires managers to increase ear-
nings per share (EPS) over 3 years and achieve certain levels of share price in relation
to the S&P 500, it is in their interest to meet these conditions in any way. The easiest
way to achieve this is borrowing money in significantly high amounts to buy back the
shares. The interest coverage ratio is positive throughout the observed period but
shows a trend of notable decline. Since it demonstrates how many times interest on
debts are covered by the size of earnings before interest and taxes. the decline in this
indicator is not good for the company. An analysis of leverage indicators shows that
at present Starbucks chooses higher returns at the cost of security and sustainabili-
ty of business in the future. This way of doing business with a significant increase in
long-term liabilities due to increased repurchase of own shares and dividend payment
policy and consequently a negative amount of company capital cannot be sustainable
in the long run.62
Table 3. Leverage indicators (2016-2020)
LEVERAGE INDICATORS 2016 2017 2018 2019 2020

Debt to assets ratio 0.59 0.62 0.95 1.32 1.27
Long-term debt to equity ratio 0.40 0.65 0.94 1.48 1.35
Debt to equity ratio 0.66 1.86 19.54 —4.08 —4.77
Interest coverage ratio 50.64 45.68 22.80 12.32 3.57
59
Starbucks. (2018). Fiscal 2018 Annual Report [EPub]. Retrieved from https://s22.q4cdn.com/869488222/
files/doc_financials/annual/2018/2018-Annual-Report.pdf.
60
Yu, J. (2019). Starbucks Stock: Capital Structure Analysis. Retrieved August 22, 2021, from www.in-
vestopedia.com/articles/markets/050616/starbucks-stock-capital-structure-analysis.asp.
61
Orsag, S. (2015). Poslovne financije. Zagreb: Avantis: Hrvatska udruga financijskih analitičara.
62
Paige, M. (2020). Starbucks’ (NASDAQ:SBUX) 100 % Return Could Be Coming at a Cost. Retrieved Au-
gust 23, 2021, from https://simplywall.st/stocks/us/consumer-services/nasdaq-sbux/starbucks/news/
is-starbucks-nasdaqsbux-negative-shareholders-equity-an-issu.

Table 4. Profitability indicators (2016-2020)
PROFITABILITY INDICATORS 2016 2017 2018 2019 2020

Gross margin 19.57 % 18.47 % 15.709 % 15.383 % 6.640 %
Net profit margin 13.22 % 12.89 % 18.278 % 13.577 % 3.947 %
Return on Assets (ROA) 19.66 % 20.08 % 18.704 % 18.727 % 3.160 %
Return on equity (ROE) 48.97 % 51.66 % 384.27 % —57.76 % —11.90 %
The gross margin shows the extent to which revenues exceed direct costs of sales. A
higher gross margin indicates a combination of higher product prices, higher business
activity and lower product costs. Starbucks had a negative trend in gross margins in the
following years and a significant decline to 6.64 % in 2020 compared to 119.57 % in 2016.
In addition to the gross margin, net profit margin reveals the effectiveness of mana-
ging total operating expenses, including interest and tax expenses. This indicator puts
net profit and sales revenue in the ratio. The last three years followed the trend of the
previous indicator dropping to 18.29 % in 2018 and 3.95 % in 2020.
It is also important to look at the relationship between gross margin and net profit
margin. It is noticeable that the net profit margin in the entire observed period is lower
than the gross profit margin. This implies excessive use of financial leverage in busine-
ss and burdening of operating profits with interest costs. It surely points to the need
to revise debt financing policy and lending costs.63
Return on assets (ROA) shows the ratio between gross profit and total assets used
to generate that profit. It shows whether the company is making efficient use of the
available resources. In the period under review, it is obvious that the profitability of
Starbucks’ total assets saw an increase in 2017 compared to the previous year 2016,
but thereafter it shows a downward trend that was particularly pronounced in 2020
when this indicator amounted to only 3.95 %.
Return on equity (ROE) expresses a company’s ability to convert equity into net pro-
fits. In general, it is best that this indicator is close to the industry average in which the
company operates. In regard to Starbucks, we can notice two distinct extremes in the
profitability of equity. In 2018 ROA was as high as 284.27% indicating that the company
borrowed significantly and, moreover, minimized the existing capital. This manner of
business management can make a company’s ROE seem artificially higher than the
competitors’ by lower debt. Thereafter, ROE had a negative value in 2019 and 2020 as
a result of a significant increase in liabilities exceeding the total assets. This is evidence
of inefficient management or an ineffective business model.
63
Motilal Oswal. (n.d.). Interpreting operating profit margins versus net profit margins. Retrieved
August 20, 2021, from www.motilaloswal.com/blog-details/Interpreting-operating-profit-margins-ver-
sus-net-profit-margins../1621.
5.5. Market Value indicators

Table 5. Market Value indicators
MARKET VALUE INDICATORS 2016 2017 2018 2019 2020

Price-earnings ratio (P/E ratio) 29.48 27.72 17.83 28.74 107.22
Earnings per share (EPS) 1.91 1.99 3.27 2.95 0.79
Dividend payout ratio (DPR) 42.39 % 50.90 % 40.73 % 50.38 % 207.57 %
Dividend per share (DPS) 1.44 % 1.84 % 2.28 % 1.75 % 1.94 %
The most important measure of market value for investors is the price-earnings ratio
(P/E ratio). It shows the amount of dollars an investor can expect to invest in the com-
pany to receive $1 of that company’s earnings. A high P/E could mean that the share
price is high relative to earnings and possibly overvalued.64 Such a high ratio of prices
and earnings was evident in the case of Starbucks in 2020.
Earnings per share ratio divides net earnings available to common shareholders by the
average outstanding shares and hence shows the profit-effectiveness of the shares. As
for Starbucks, the growth of this indicator can be noticed until 2018 when it reached a
peak and then saw a downward trend, which indicates a decrease in the profit efficien-
cy of Starbucks’ shares in the recent years.
Dividend pay-out ratio shows the distribution of net earnings measuring the amounts
of dividends paid to common shareholders in relation to the total amount of net in-
come the company generated. This indicator should normally not exceed 100 %, but
Starbucks reached 207.57 % in 2020. This indicates that the corporation paid its sha-
reholders more than it earned, which is certainly not sustainable in the long run nor
favourable for the company’s operations.65
Dividend per share measures the size of dividends per share versus its market value. Loo-
king at this indicator, we see that it grew until 2018 and dropped afterwards. It is unusual
that it remained close to 2 % in 2020 despite the negative value of the corporation’s equity.
6.1. SWOT analysis

SWOT analysis is obtained by synthesizing information acquired from PESTLE analysis,
industry analysis using Porter’s five forces framework, and analysis of the company’s
competitive strategy. It is a presentation of the company’s internal strengths and
weaknesses and the external opportunities and threats. Strengths and weaknesses
64
Fernando, J. (2021). Price-To-Earnings (P/E) Ratio. Retrieved August 20, 2021, from www.investope-
dia.com/terms/p/price-earningsratio.asp.
65
Dividend.com. (n.d.). The truth about the dividend payout ratio. Retrieved August 20, 2021, from
www.dividend.com/dividend-education/the-truth-about-dividend-payout-ratio/.
represent the present situation based on the past, while opportunities and threats
portray the future based on the past and present. By observing its own strengths,
weaknesses, opportunities and threats, a company develops strategic guidelines for
undertaking the right measures and activities to achieve the company’s business and
other objectives.
Table 6 SWOT analysis of Starbucks
• second largest market share in world • high level of debt financing
• strong brand • principal-agent problem
• product quality • negative return on equity
• vertical integration with raw material sup- • bad dividend policy
pliers • high prices
• world-renowned and successful practices • low diversification of product portfolio
in field of human resources management66 • reputation impairment due to attempted
• technological innovation tax evasion
• significant investment in sustainable busi- • environmental pollution
ness
• standardization
• loyalty programme for customers
• location and aesthetic attractiveness of
shops (targeting visible. traffic places close
to city centres or significant sites) 67
• expanding business to new markets • global economic crisis (inflation growth,
• development of new channels of informa- falling purchasing power)
tion and social networks (TikTok) • world health crisis (related volatility of laws
• increase in online ordering and payment related to Starbucks day-to-day business)
• increased food and drink deliveries • rising labour prices in developing countries
• trend towards sustainable business model • rising coffee beans prices
• new trends in coffee drinking culture • small barriers to market entry
• technological innovations in coffee prepa- • large number of competitors and substi-
ration process tutes
• healthy lifestyle trend • increasing bargaining power of buyers
• market specificities of consumers • cyber attacks
66
Forbes. (2021). Starbucks (SBUX) [Data file]. Retrieved from www.forbes.com/companies/starbuck-
s/?sh=3e6f58428acb.
67
Haskova, K. (2015). Starbucks Marketing Analysis [EPub]. Retrieved from http://archive.sciendo.com/
CRIS/cris.2015.2015.issue-1/cris-2015-0002/cris-2015-0002.pdf.
6.1.1. Strengths
Starbucks is an international company that currently occupies second largest market
share in the world in the coffee-maker industry, smaller only than Nestle’s. As a chain
of cafes, it is certainly the largest company in the world, and has an extremely strong
and recognizable brand. Taking advantage of this fact, it charges more for its products
than the competition, but at the same time offers more luxurious quality products as
well as a more pleasant overall experience, by individualising cups and offering cosy
atmosphere in their designed outlets. One of the Starbucks’ major strengths is the
standardization of quality like McDonald’s that guarantees consistent quality of produ-
cts in all branches. Starbucks does business with more than 30.000 suppliers worldwi-
de,68 communicates directly with growers (farmers) and assists them in researching
which conditions provide the best quality coffee beans. The corporation also relies on
its employees and considers them as partners and one of the main strongholds of the
business. Starbucks claims that quality product and satisfied employees are an impor-
tant ingredients of a successful business. Such business conduct has placed them high
on several lists of best companies to work for, which has further increased the high
quality talent interested in working for Starbucks.
Starbucks is known as a technologically innovative company that uses the opportu-
nities of modern age to reach as many users as possible and improve their coffee
drinking experience. One example of technological innovation is Starbucks’ customer
loyalty programme that ensures certain benefits to the customers through their app,
like advance orders, payments, collecting points, etc. (Starbucks also offers a free drink
to customers who spend $50 through collecting stars with each purchase: 1 dollar =
3 stars; 150 stars = 1 free drink). Technological innovation can also be used to reverse
Starbucks’ negative impact on the environment. As a major polluter (primarily throu-
gh plastic-reinforced paper cups) and in order to enhance their reputation, they are
compelled to manage the waste they generate. Starbucks, therefore, often revises and
publishes its environmental targets and plans. The last plan, published in early 2021,
proposes a 50 % reduction in negative environmental impacts, namely the reduction
of carbon dioxide emissions, of water consumption, and n of waste sent to landfills.69
6.1.2. Weaknesses
The main weaknesses of Starbucks are currently related to the financial situation of
the company. Since 2018 the corporation’s equity has seen a downward trend and
higher debt financing. In 2019 the level of debt financing reached its highest level, after
which it decreased in 2020 and announced a possible reversal in the trend. i.e. positive
news for Starbucks. The drop in equity occurred as a result of a known principal –
68
Shrum, A. (2018). A Look inside Starbucks’ Seamless Supply Chain. Retrieved August 20, 2021, from
www.dynamicinventory.net/starbucks-supply-chain-management/.
69
Mace, M. (2020). Starbucks to halve environmental impacts as part of ‘resource-positive’ strategy.
Retrieved April 27, 2021, from https://www.edie.net/news/6/Starbucks-to-halve-environmental-im-
pacts-as-part-of--resource-positive--strategy/.
agent problem. Specifically, Starbucks’ incentive plan for managers consists of several
goals of which two are important to consider: the growth of earnings per share (EPS)
over the three-year period and growth of share price. This caused the management to
try to achieve the stated goals in any way possible. which they managed to accomplish
through the purchase of their own shares and payment of dividends.70 In order to re-
deem the shares and pay dividends at times when they did not have sufficient retained
earnings. they had to find external funding. Knowing the aforementioned incentive
plan facilitates understanding the causes of Starbucks’ current financial situation.
Starbucks Corporation has opted for a strategy of differentiation, which means that it
sells more luxurious and quality products at higher (compared to competition) prices.
However, higher prices also present a problem as they the deter potential customers
who watch the price rather than luxury. In addition, Starbucks has a relatively weak
product diversification, i.e., it is highly specialized in selling beverages, mostly coffee
and its various variations.
Starbucks has already been accused of paying little in taxes or tax avoidance. In the-
ory, such situations could damage their reputation, but so far this has not happened.
This is probably because the general population pays little attention to such news
and those who do so rarely give up buying Starbucks products, especially if they are
already regular consumers. On the other hand, the fact that the corporation is a large
polluter is certainly much more harmful to its reputation, because climate change is
an ongoing topic. Still, Starbucks, as already mentioned. is extremely committed to
reducing the amount of pollution for which it is responsible.
6.1.3. Opportunities
Further expansion into new markets is certainly an opportunity for Starbucks that has
an advantage in accessing new markets due to its existing brand value and worldwide
recognition as a large corporation. This opportunity would be visible in the diversifi-
cation of the business portfolio, in addition to increasing sales and consequently the
company’s earnings. Expanding into new markets offers Starbucks the opportunity
to reduce its dependence on performance in the United States market, where it ge-
nerates 70% of its revenue. The constant development of new means of information
and new social networks provides Starbucks with new platforms through which it can
access potential consumers and use for promotional purposes and to improve its own
image. Tik Tok as a relatively new social network can serve as an excellent platform for
communicating with the younger population of potential customers and has already
proven to be great in promoting trends of personalized Starbucks drinks such as Fra-
ppuccino.71 The still-present coronavirus pandemic worldwide has led to a significant
increase in online ordering and payments and an increased trend of food and bevera-
70
Paige, M. (2020). Starbucks’ (NASDAQ:SBUX) 100 % Return Could Be Coming at a Cost. Retrieved Au-
gust 23, 2021, from https://simplywall.st/stocks/us/consumer-services/nasdaq-sbux/starbucks/news/
is-starbucks-nasdaqsbux-negative-shareholders-equity-an-issu.
71
Notopoulos, K. (2021). The Rise Of The Appuccino: How TikTok Is Changing Starbucks. Retrieved Au-
gust 27, 2021, from www.buzzfeednews.com/article/katienotopoulos/appuccino-tiktok-starbucks.
ge deliveries. Starbucks may see this as an opportunity to leverage the existing mobile
app to further enhance the existing ordering and payment options and hence provide
additional benefits that would further enhance the customer loyalty programme. This
could strengthen the relationship between the consumers and Starbucks Corporation.
Moreover, the possibility of introducing the delivery service of Starbucks’ products to
the consumers’ addresses is open. In addition to this effect, the pandemic also affected
the trends in the culture of coffee drinking. A certain proportion of consumers is increa-
singly attracted to the beverages that contain milk substitutes, and a functional diet has
entered the segment of coffee with variations such as coffee with mushrooms. There
are also more and more cocktails with coffee on bar menus and nitro coffee (coffee with
nitrogen) which is recognizable by its creamy structure. Furthermore, the growing trend
of preparing interesting coffee drinks at home is supported by different videos on social
media of people preparing the Dalgona coffee, which was at one time extremely popu-
lar. Thanks to its offer of various types of coffee that can be completely personalized.
Starbucks can expand its offer by following the trends in coffee drinking and thus satisfy
a larger number of potential consumers of its beverages. Moreover, it can also offer
specific ways of drinking certain types of beverages and provide interesting techniques
of preparing products such as coffee beans for consumption at home.72 Since the Star-
bucks Corporation is investing huge efforts to make its business sustainable and reduce
environmental pollution during its business, it is essential to communicate this campai-
gn to the world. The trend of sustainable business is gaining more and more importance
and the customers, along with the quality and personalization of products, are paying
more and more attention to the very image of the brand of the products they consume.
Environmental awareness and concern for business sustainability are opportunities for
Starbucks to build an even better image and attract more potential customers. Altho-
ugh Starbucks is at the forefront of state-of-the-art coffee technology, there is always
room for improving the offer in that regard as well. Innovations such as special foam
technologies, fast cooling, automated cold cooking equipment, espresso appliances with
ergonomic design, multiple heads and innovative steam and water activation features,
as well as many others needed to monitor and improve the processes of preparation
and quality of coffee and other beverages. The trend of a healthy diet is still growing,
and more people are turning to health care through the intake of healthy drinks and
healthy food. Starbucks strives to continually improve its offer and offer healthier al-
ternatives to its beverages, and this practice should certainly be continued to retain the
existing and attract the potential new customers. It is also important to consider the size
of Starbucks, which is present in a large number of different markets each of which has
certain specifics related to consumer affinities arising from the cultural, geographical,
and economic characteristics of the area. This gives Starbucks the opportunity to take
advantage of these differences and offer market-tailored products that are available and
specific to a particular country or territory and the habits of its consumers. This provides
an opportunity to develop a better consumer relationship with the Starbucks brand and
attract more loyal consumers.
72
White, L. (2021). A Changing Coffee Culture. Retrieved August 27, 2021, from https://fesmag.com/
topics/trends/18932-a-changing-coffee-culture.
6.1.4. Threats
The biggest threat in the Starbucks business environment is the current global econo-
mic crisis caused by the COVID-19 pandemic. It has weakened the business of almost all
industries, especially service industries. In addition, it has caused a global decline in con-
sumer purchasing power making Starbucks products, which are characterized by a rela-
tively high price, less attractive and less accessible to consumers. The level of inflation is
on the rise after a larger amount of money is put into circulation to boost consumption
due to the crisis, which further weakens the purchasing power and has a negative effect
on the company’s business. In addition, the global health crisis has led to greater vola-
tility of law regulations in all countries of the world including those in which Starbucks
operates and these changes are much more difficult to monitor and adapt one’s busi-
ness to. Penalties for violating legal measures related to the corona virus protection are
not harmless and it is necessary to be constantly ready to change and adapt businesses
to these laws in the various markets in which Starbucks is present. One of the more se-
rious threats are is growth of labour prices in developing countries and of coffee bean
prices, which may consequently have an impact on the cost of purchasing and producing
coffee. This would result in lower Starbucks margins or higher product prices, which
would further jeopardize sales and revenue levels. Starbucks operates with over 30.000
stores worldwide employing nearly 350.000 people.73 Most of these stores are in the
developed countries such as the US and Canada, but some branches are located in the
developing countries where labour prices are expected to rise, which may affect Star-
bucks’ expenditures in the future. It is equally important for Starbucks to monitor coffee
bean prices, which are relatively stable, although a five-year Figure of the Arabica coffee
prices shows that they can vary up to a dollar up or down per kilogram, and a fall or rise
of up to 35% greatly affects Starbucks expenses.74 Needless to say, Starbucks has a large
number of coffee suppliers and does not depend on prices to a significant extent, but
when it comes to major shifts this can certainly affect the business.
The industry is also characterized by low barriers to entry, which may not seem threa-
tening to the company globally, but local markets may change consumer preferences
and replace Starbucks with cheaper local alternatives to coffee and coffee beverages.
In the coffee beverage industry, Starbucks has several competitors who offer cheaper
substitutes and thus jeopardize its business. Since it is an industry leader, one of the
major threats Starbucks needs to address is the loss of market share. Namely, the
competition is strong and numerous and the market is limited, and hence it is impor-
tant to consider about retaining the customers as well as attracting new ones. In addi-
tion to all the above, Starbucks is a highly technologically advanced company that uses
information technology in various areas of everyday business as well as in providing
personalized services to its customers. The fact that information technology is an im-
portant part of the company’s business makes it also very exposed to cyber- attacks,
i.e., unauthorized access to data related to the company’s business and the data en-
73
Wikipedia. (n.d.). Starbucks. Retrieved August 27, 2021, from https://en.wikipedia.org/wiki/Starbucks.
74
YCharts. (2021). Coffee Arabica Price [Data file]. Retrieved from https://ycharts.com/indicators/
world_coffee_arabica_price.
trusted to Starbucks by its customers. This may result in distortion of the company’s
reputation, decline of sales, legal claims, and loss of customer loyalty.
6.2. TOWS analysis

The TOWS matrix was developed due to the need to connect different factors of the
SWOT matrix, i.e., the need to identify the links between strengths, weaknesses,
opportunities and threats, and to form strategies based on this information.75
Table 7. Starbucks TOWS
Power-around (SO)
• Use the global strength of the brand and successful market entry strategies that have
resulted in the second-largest market share and take advantage of the opportunities to
expand into new markets outside the US to diversify the business portfolio in addition to
increasing revenues and sales.
• Apply technological innovation and company development to further improve the loyalty
programme me by upgrading the Starbucks application, allowing better use of the growing
trend of online payments and ordering.
• Double the use of recyclable cups and make use of investments in sustainable business to
raise the image of Starbucks as a green company
Power-threats (ST)
• Develop contracts that limit the level of the purchase price thanks to good vertical integra-
tion with the suppliers of raw materials in order to prevent further negative impacts of ris-
ing labour prices in third world countries and rising prices of coffee beans;
• Make use of product quality, locational and aesthetic appeal and investment policy in the
company’s human resources in order to create brand added value and improve its image,
thereby separating itself from the competition and protecting against cheaper substitutes.
• Harnessing technological innovation to prevent cyber-attacks in a timely manner and to
prevent disruptions in businesses and of the company image by continually investing in
technological protection and security systems.
Weakness-approximately (WO)
• Expand business into new markets to further diversify the business portfolio of companies
and thus reduce dependence on the United States market.
• Rebuild a reputation damaged by the attempted tax evasion by using new information chan-
nels that can promote Starbucks as a socially responsible company by representing its in-
vestment in sustainable business.
Weaknesses-threats (WT)
• Placing a product line with a lower cost of production and thus a lower price to increase com-
petitiveness with other brands (cost leadership) and reducing operating costs. This would
also enable reducing the buyer’s bargaining power as Starbucks could offer products of the
same price and of equal or higher quality than competitors.
75
7. BUSINESS OBJECTIVES OF STARBUCKS

With regard to the goals, Starbucks pays great attention to social responsibility and
environmental care. By 2022 Starbucks intends to develop 100 % recyclable hot be-
verage cups and double the use of reusable cups. Moreover, it aims to build and ope-
rate 10.000 ‘greener’ stores globally by 2025. In addition to hiring 5,000 veterans and
military spouses a year, Starbucks aims to recruit 10,000 refugees globally in the 12
countries of the EMEA region by 2022.76 Moreover, in addition to hiring refugees and
veterans, the plan is to raise the percentage of BIPOC representation to 40 % and 55 %
women in all retail roles by 2025. Another goal that is in the pipeline for achieving by
2030 is to reduce water consumption and greenhouse gas emissions by 50 %. By 2025,
Starbucks plans to invest in education and training of more than 200.000 farmers and
in planting 100 million coffee trees in Mexico, Guatemala and El Salvador.
Starbucks targets adjusted earnings per share grew more than 20 % for the fiscal year
2022 and 10-12 % for the fiscal years 2023 and 2024. In addition, they plan to open 55
000 branches worldwide by the fiscal year 2030, which is an increase of 67 %. By relying
on industry-leading digital capabilities, the expected increase in investment returns,
and the current and planned environmental care investments, Starbucks expects the
sales in US branch offices to outperform its previous projections by one percentage
point from 4% to 5 %, and from 2% to 4 % in China.77
The above-mentioned ambitious plans for the future indicate that Starbucks’ risk appe-
tite is relatively high, i.e., they plan large investments to achieve even higher returns
and strengthen their position in the market.
8. RISK IDENTIFICATION, EVALUATION AND MANAGEMENT

The risk identification process for Starbucks identified 11 risks affecting the business
and success of the company’s objectives. The expected likelihood of the risk being re-
alized and their impact on the company was determined by using the Delphi process.
This implies that each member of the team individually ranked the likelihood and the
impact of each risk on the company according to his/her subjective assessment based
on a previously conducted business analysis. Subsequently, a joint decision determi-
ned the ultimate likelihood and impact on the company of each risk that was identified.
The risks are ranked in the table according to their value, which is a product of their
likelihood and impact.
76
Starbucks Stories & News. (2021). 2020 Starbucks Global Environmental and Social Impact Report.
Retrieved May 14, 2021, from https://stories.starbucks.com/stories/2021/starbucks-global-environmen-
tal-and-social-impact-report-2020/.
77
Starbucks Stories & News. (2020). Starbucks outlines vision for the future and reaffirms strategy
for continued growth at scale. Retrieved May 17, 2021, from https://stories.starbucks.com/press/2020/
starbucks-outlines-vision-for-the-future-and-reaffirms-strategy-for-continued-growth-at-scale/.
Table 8. Identified risks of Starbucks
Identified risks Probability Materiality Value

Leverage risk 3 5 15
Commodity price risk 5 3 15
Risk of employing inadequate labour force 4 3 12
Risk of losing customers 2 5 10
Environmental risk 3 3 9
Legal risk 4 2 8
Cyber security risk 4 2 8
Foreign exchange risk 4 2 8
Expansion risk 2 3 6
Table 9. Overview of levels and associated materiality of risks
Materiality Level 2
Critical 5
High 4
Medium 3
Low 2
Negligible 1
Source: Authors’ elaboration according to teaching materials of Risk Management course.
Table 10. Overview of risk levels and associated probabilities
Probability of achievement Level 2

>95 % 5
>65 %<95 % 4
>25 %<65 % 3
>5 %<25 % 2
<5 % 1
Source: Authors’ elaboration according to teaching materials of Risk Management course.
8.1. STRATEGIC RISKS
8.1.1. Reputational risk

Reputational risk is linked to the belief of customers and partners that a company will
employ fair business practices and follow certain ethical principles.78 Starbucks not
only bases its reputation on quality services and products, but it also calls for pro-
gressive efforts and aspirations to realise certain ideals that are listed in its corporate
values. These values are creating cultures of warm atmosphere and belonging where
everyone is welcome. being present and connecting with transparency, dignity and
honesty, providing the best of everything they do, responsibility for the results of their
work, and acting boldly and provoking the status quo to find new ways of company
and personal growth.79 The company’s reputation is extremely important for achie-
ving its business model as it offers premium products that are more expensive than
other competitors in the food and drink industry. For years, consumers have opted
for Starbucks products as they perceived the brand as high quality and reliable. Also.
the staff offer an important contribution to the consumer’s experience when buying
Starbucks products or while sitting in Starbucks restaurants. The company needs to
pay great attention to maintaining its reputation, not only because of the successful
sale of its premium products but also for recruiting quality staff that will perceive the
company as a conscious and reliable employer.
Starbucks has already encountered reputational crises in its past, which have shown
a significant impact on the company’s own operations. One of the most significant in-
cidents in which Starbucks was associated with took place in Philadelphia 2018 when
two African Americans who were not guests at the were arrested by the police who
came after a call made by a Starbucks’ employees. The incident encountered a huge
international publicity where the company was accused of racial intolerance. The con-
sequences of the incident affected seriously the reputation of the Starbucks brand
among the consumers. According to YouBrandIndex. following the incident, Starbucks’
reputation as a workplace reached its lowest value in 10 years.80
78
79
Starbucks Careers. (n.d.). Expect more than coffee. Retrieved May 6, 2021, from www.starbucks.
com/careers/working-at-starbucks/culture-and-values.
80
Marzilli, T. (2018). Starbucks at 10-Year Workplace Reputation Low. Retrieved May 6, 2021, from
https://today.yougov.com/topics/consumer/articles-reports/2018/05/29/starbucks-10-year-work-
place-reputation-low.
Figure
348 6.Company
Starbucks
Analysisreputation
and Risk Management Strategies in the Global Business Environment – A Case Study Collection
Source:
Figure 6.https://today.yougov.com/topics/food/articles-reports/2018/05/29/starbucks-10-year-
Starbucks reputation
workplace-reputation-low. accessed: 16.5.2021.

Source: https://today.yougov.com/topics/food/articles-reports/2018/05/29/starbucks-10-year-workpla-
ce-reputation-low. accessed: 16.5.2021.
The company decided to deal with the incident by announcing a one-day afternoon closure of
The company decided to deal with the incident by announcing a one-day afternoon
closure
its 8000ofrestaurants
its 8000 restaurants in the United
in the United StatesStates
with with a public
a public apologyand
apology and intention
intention to train its
to train its employees about racial tolerance and interrelationships. This closing down
employees about racial
for one afternoon tolerance
is estimated and interrelationships.
to have cost Starbucks $12 This closing
million in lostdown for one
revenues. 81 afternoon
Although the overall financial impact of this incident is not fully known, studying this
is estimated to have cost Starbucks $12 million in lost revenues.80 Although the overall
example may reveal that proper management of reputational risk is crucial for the
continuedimpact
financial business
of success of the company.
this incident is not fully known, studying this example may reveal that
proper management of reputational risk is crucial for the continued business success of the
Scenario
company.
Reputation is of great importance for Starbucks because it is closely linked to the
implementation of a business model based on creating a special experience for custo-
mers who will consume premium products that the company sells in its stores. The
above mentioned example from the past when Starbucks’ reputation was tarnished
Scenario
shows how the negative impact was particularly reflected in the way the consumers
perceive the Starbucks brand. This reputational hazard resulted in a loss of consumer
confidence, which prompted top management to take certain measures to restore the
Reputation is of great
socially responsible image importance for Scandals
of the company. Starbucksthatbecause
undermine it is
the closely
company’slinked to the
reputation affect Starbucks’ business activities in other markets due to media covera-
implementation of a business model based on creating a special experience for customers who
ge, which can ultimately lead to a decline in the company’s income. The impact of the
will consumerisk
reputational premium products
was rated thatathe
5, because company
distorted sells incould
reputation its stores.
have a The above mentioned
significant
example from the past when Starbucks’ reputation was tarnished shows how the negative
81
Rostan, T. (2018). Here’s How Much It May Cost Starbucks to Close 8,000 Stores for an Afternoon.
impact was
Retrieved Mayparticularly reflected in the way the consumers perceive the Starbucks
5, 2021, from www.marketwatch.com/story/what-starbucks-said-the-last-time-it-closed- brand. This
its-stores-for-an-afternoon-2018-04-17.
reputational hazard resulted in a loss of consumer confidence, which prompted top
management to take certain measures to restore the socially responsible image of the
impact on the company’s revenues. The likelihood of such an event occurring was
rated 3.
Risk management
Due to the growing sensitivity of the market on racial, religious and social grounds
across the world and particularly in the US, Starbucks should pay special attention to
reputational risk. Additional pressure on the company is certainly the brand’s reco-
gnition at the global level because, in the event of an incident, the media are highly
interested in publishing it since they count on the readers’ curiosity and reactions.
Starbucks should therefore particularly work to educate its employees on socially sen-
sitive issues and how to deal with certain challenging situations that may undermine
its reputation. The company should also carefully invest in certain campaigns aimed
at socio-cultural issues and continue to promote its set values in order to maintain its
customer loyalty and the image of a company that respects diversity and promotes
tolerance and unity.
8.1.2. Risk of losing customers

Like most companies, Starbucks has a high risk of competition and losing customers.
The risk of losing customers means that the company has failed to meet consumer con-
ditions, has lower revenues, and is less valued on the market. Starbucks is particularly
exposed to this risk in the U.S. market. where trade overlaps has grown so much that a
sharply large number of locations harm each other’s sales and cannibalisation occurs.82
The relevance of exposure to this risk is that Starbucks generates 70 % of its total reve-
nues in the US market.83 The current crisis has the biggest impact on coffee consumers
themselves, and there is a high risk that consumers will start paying more attention
to prices. replacing Starbucks coffee with cheaper substitutes. Indeed, such an exam-
ple exists in China where Luckin coffee has penetrated the market and currently has
more subsidiaries than Starbucks. although they are focused only on delivery. Day by
day awareness of healthy diets and healthy drinks increases. and people pay more
attention to the fact what they consume. which can greatly affect the sale of coffee.
as consumers will increasingly want to replace coffee with some detox drinks. teas. or
some unsweetened and natural drinks. Also. most cafés. due to the coronavirus crisis.
started selling coffee to go. which may have a bad impact on Starbucks because. among
other things. their way of selling coffee is designed so that the coffee is ready to go.
Corporations such as McDonald’s. KFC and Dunkin Donuts are also increasingly paying
attention to coffee sales. but also offer the opportunity to stay and socialize for longer
and thus become larger competitors. Likewise, one bad move by companies can affect
significantly reputation and consequently cause the loss of loyal customers.
82
Delventhal, S. (2019). Starbucks Stores Are Finally Cannibalizing Each Other: BMO Downgrades. Re-
trieved May 11, 2021, from https://www.investopedia.com/news/starbucks-stores-are-finally-cannibal-
izing-each-other-bmo-downgrades/.
83
Farley, A. (2021). How Starbucks Makes Money. Retrieved May 5, 2021, from https://www.investope-
dia.com/articles/markets/021316/how-starbucks-makes-money-sbux.asp.
Scenario
Although the strength of Starbucks as a brand is not so questionable because there
are consumers who will always return to Starbucks, there are several scenarios that
could potentially cause problems for the corporation. Following major economic chan-
ges around the world, great opportunities have arisen for a significant proportion of
consumers to replace Starbucks coffee with cheaper alternative such as McDonald’s
coffee, Dunkin’ Donuts coffee, or home made coffee. A potential problem for Star-
bucks is its goal to introduce recyclable packaging since it would increase costs, and
hence higher selling prices and a loss of customers. An additional problem and po-
tential risk is the further cannibalization of US captive outlets, which would negatively
affect the market segment where the company generates the bulk of its revenues.
Such events would result in a significant reduction in revenue and distortion of the bu-
siness balance of the company. The impact of this risk was rated 5 because customers
are the reason why the company survives, and if they are absent there is no revenue.
The likelihood was rated 2 due to the very strong brand and the global prevalence of
Starbucks.
Risk management
In order to avoid losing their consumers, Starbucks should work on marketing and con-
vince its consumers of the worth of its quality premium products and of paying higher
prices for them. The corporation should also teach and keep reminding its customers
about the importance of recycling the packaging, because unless they understand it
they will be highly likely to decide against allocating more money for this coffee. As far
as the US market is concerned, it is necessary to analyse the business results of each
branch and to reduce the number of those that prove to be unpopular or redundant.
8.1.3. Expansion risk

Expansion risk generally refers to the risk arising from merges with other companies
and from the acquisition of other companies. With Starbucks, this risk is most promi-
nent when entering new markets. When Starbucks wants to be present in a particular
country, it is most often their best way through an existing franchise in that country.
Since the mid-1990s they began to rapidly expand into new markets investing large
sums by taking over the established franchises, and thus achieving high presence while
eliminating competition. It is to be assumed that not all 22,000 new branches that they
plan to open by the fiscal year 2030 will be on the already existing markets, and so it
is important to consider this risk. However, reverse situations are possible as well. For
example, in 2003 Starbucks had to shut down its six stores in Israel after losing $6 mi-
llion mostly due to strong local competition. The loss did not represent a threat to Star-
bucks at that time, but it would still be advisable to avoid such situations in the future.
Scenario
Since Starbucks seeks to expand the number of its branches and its presence in di-
fferent markets, and considering its currently negative capital balance, expanding to
a wrong market would be a mistaken decision that could cause significant problems.
If Starbucks happened to decide to open a more significant number of new outlets,
e.g., in China, in the event of inadequate market research of consumer needs and
wishes as well as their demand and location appeal, the significant funds allocated in
this expansion would generate a loss that would put the company’s operations at risk.
The Chinese chain Luckin coffee would likely further contribute to the disruption of
Starbucks’ business and hence would generate extremely negative effects on business
exposing Starbucks to high financial and reputational risks. Therefore, this risk is rated
3 for impact, but 2 for likelihood occurrence as Starbucks has a lot of success and expe-
rience in expanding into new markets and invests significant efforts and resources in
the market analysis process.
Risk management
Further investment in market analysis and testing is necessary as well as in identifying
new opportunities but also threats from certain markets. It is also important to look at
the overall financial position of the company and its capacities for expansion into new
markets and to assess thoroughly the risks of such undertakings. It is essential that
the company prepares for certain losses in advance and develops ways to finance and
reduce them. All of this requires competent strategic thinking and long-term planning
in which every large corporation must invest.
8.1.4. Competition risk

For the future business performance of Starbucks competition could pose a significant
risk, as a growing number of companies establish more popular brands. Although on
the territory of the United States, there is no threat of competition at least as far as
specialized coffee shops are concerned. However, the biggest rivals are McDonald’s
and Dunkin Donut that serve coffee drinks with food. In the international market. Star-
bucks faces growing competition. The biggest competitors in international markets
are Costa Coffee in the UK and Luckin Coffee in China. Costa Coffee is the largest coffee
chain in the UK with over seven times as many stores as Starbucks. Although Costa
is unlikely to ever outperform Starbucks in the US market. Costa is ready to occupy a
part of the Chinese market. With its 4,507 branches, China’s largest coffee chain Luckin
Coffee exceeded the number of Starbucks branches in China in 2020. Luckin’s outlets
are smaller and their coffee is intended for white collar workers at 25 % lower prices.84
Scenario
If the existing competitors in the US market attracted some of the customers of Star-
bucks‘ products by lower prices as a result of the processes caused by the coronavi-
rus pandemic, such as the decline in purchasing power and inflation, this would be a
significant blow to the corporation’s business. Also, if Luckin Coffe were to continue
84
Money Nx. (n.d.). Kako Starbucks zarađuje: 29.000 trgovina širom svijeta – Startups – 2021. Retrieved
August 27, 2021, from https://hr.earnmoneyfromhometoday.com/how-starbucks-makes-money.
to expand its market share in China and consequently in other international markets,
it would be able to further undermine Starbucks’ market share, recapture some of its
customers and revenues by significantly lower prices and perceived high quality. In ad-
dition, Costa Coffee could also significantly harm Starbucks’ business by strengthening
its market position, and competing prices, if the consumers find it more acceptable for
their smaller budgets due to reduced purchasing power. All of the above would signi-
ficantly jeopardize Starbucks’ revenues, market share, and brand image. In particular,
the strengthening of competitors in the US market would have a significant impact on
Starbucks as it generates 70 % of its revenues and the business of the entire company
depends significantly on it. Given this possible situation, it is clear that the impact of
this risk is high and is assessed as 4. Since Starbucks has the second largest market
share in the world and is a highly recognizable brand, it certainly has precedence over
other competitors in these markets as a result of various mechanisms for adjusting its
competitiveness and differentiating its business through years of activity in the indu-
stry. As a result. the likelihood of this risk was assessed as 3.
Risk management
Unlike McDonald’s and Dunkin’ Donuts, Starbucks offers a wide range of high-quali-
ty coffees, teas, and products on the market, thereby establishing dominance in the
coffee market. In order to keep their customers who prefer McDonald’s and similar
fast-food chains, Starbucks could set up an additional number of drive-thru outlets
and offer what the competition is already offering. They should also consider introdu-
cing a certain cheaper basic coffee drink which could compete price-wise with curren-
tly cheaper substitutes on the market. This beverage might not have the option of full
personalization like other beverages, but could cover a certain standard coffee order
which would thus become more affordable to a larger number of customers. This wo-
uld make it easier for Starbucks to compete with other companies in the US market
and other international markets. The general advice that calls for timely recognition of
market trends and moves by competitors and timely planning and response could be
recommended to Starbucks as well.
8.2. FINANCIAL RISKS
8.2.1. Leverage risk

Any use of debts in the financing of business operations is considered financial leve-
rage. Its impact is evident in the increase in external financing and an increase in the
profitability of own capital. Under the leverage rule, debt financing is profitable as long
as the business generates a higher rate of profitability than the interest rate on debts.
The problem is to balance the financing of profitability through borrowing and the
cost of the borrowed capital, which results in the very risk of leverage, i.e., a build-up
of losses. Leverage has an impact on solvency and can lead to liquidation in times of
crisis. The more leverage the company uses, the more it generates a higher proportion
of fixed costs, i.e., debts in the structure of the source of funding. Starbucks’ financial
analysis clearly shows that its long-term debt ratio has increased significantly and that
its capital is negative. A company with such a funding structure is at risk of being unable
to cover the burden of fixed costs by the volume of achieved business operations and a
threat of long-term unsustainability. For Starbucks, the question remains whether it will
justify the high level of debt and manage to compensate for the leverage risk.85
Scenario
If we imagine a situation where Starbucks in the coming years gets further indebted
and its capital becomes more negative, it will no longer be able to cover the costs
adequately due to the need for constant borrowings. Also, since past debts were main-
ly used for buying back own shares and the distribution of dividends, these processes
would have to be suspended. The non-payment of dividends would certainly displease
the shareholders and the overall economic result is increasingly worrying. The com-
pany would have to reduce the volume of the shares in circulation and would also be
no longer able to maintain their value at a satisfactory level by repurchasing them.
The decline in the size of the corporation could the result of additional borrowing, the
policy of paying dividends, and the buyback of own shares conducted so far. The cor-
poration’s business could collapse and be liquidated.86 The impact of this situation is
clear from all of the above and it certainly deserves to be rated 5, while the likelihood
of that situation is rated 3 due to the fact that Starbucks’ profits grew in 2020 and the
company still generates free cash flows. Furthermore, it has considerable experience
in dealing with difficult financial situations to achieve high performance. Therefore,
since its share price is predominantly on the rise, it is unlikely that Starbucks will allow
this scenario to happen.
Risk management
Over-indebtedness of companies needs to be stopped and dividend payments should
be suspended until positive capital and positive retained earnings are achieved. This
artificially maintained value of Starbucks’ shares is not sustainable in the long-term
and the company cannot function in the long-term by borrowing in such a way. It is
necessary to try to find ways to maximize income from the existing infrastructure and
operations, and to rationally dispose of the financial resources.
8.2.2. Foreign exchange risk

Foreign exchange risk (currency risk) is the risk of loss-making due to changes in exc-
hange rates. This risk represents possible fluctuations in the exchange rate of a given
currency around its expected mean value.87 Starbucks is exposed to this risk as it has
85
Alpha Capitalis. (2019). Financijska poluga i rizik korištenja financijske poluge. Retrieved Au-
gust 29, 2021, from https://alphacapitalis.com/2019/08/11/financijska-poluga-i-rizik-koristenja-fi-
nancijske-poluge/.
86
My Accounting Course. (n.d.). What Is a Retained Earnings Deficit. Retrieved August 29, 2021, from
www.myaccountingcourse.com/accounting-dictionary/retained-earnings-deficit.
87
Papaioannou, M. G. (2006). Exchange Rate Risk Measurement and Management. IMF Working Papers,
06 (255), 3-18. https://doi.org/10.5089/9781451865158.001.
branches around the world and earns the largest income international market reve-
nues (after the US market) Subsequently, the most significant currency is the US dollar
as the functional currency of Starbucks the primary economic environment of their
operations. Other significant currencies are the Chinese yuan, Japanese Yen, British
pound, Canadian dollar, South Korean von, and the euro, and all financial transactions
in these and other foreign currencies must be converted into the US dollars in order to
be recorded in the company’s financial statements. The changes in the exchange rates
between the foreign currency and the domestic currency represent a risk. The number
of exchange differences will be shown in the consolidated cash flow statement as ‘the
effect of the exchange rate on cash and cash equivalents’. Unlike some currencies (e.g.,
the Chinese yuan), the US dollar has recently remained stable or appreciated, and this
stability makes the US market highly attractive to foreign investors. Foreign exchange
volatility and its fluctuations can have positive and negative effects on Starbucks; in
case of a devaluation of foreign currency against the US dollar the corporation will
earn less and vice versa, if a foreign currency appreciates their revenues will rise in US
dollars.
Scenario
If the revenues from Starbucks’ operations in the US market (n which it depends)
dropped and if there were a significant depreciation of foreign currencies against the
US dollar, Starbucks would find itself in great trouble as the diminished revenues from
the US market could not be compensated by revenues from other international mar-
kets as they would also be significantly reduced. Further increase in earnings in those
markets would be needed to compensate for the exchange rate loss first, and then
an increase in revenue would still be needed to compensate for the losses in the US
market. This situation would have a major adverse impact on the company and wo-
uld cause a significant drop in revenues, which would further weaken the currently
unfavourable negative amount of the company’s capital. Considering the above, it is
important to understand that if the US dollar depreciates Starbucks would have to
depend on the positive exchange rate differences to generate positive effects on the
company’s operations and improved business results from the international markets.
The likelihood of foreign exchange risk is rated 4 as the current economic crisis has
disrupted the economic situation around the world and the negative impact of curren-
cy risk is very likely. The impact of this risk is rated 2 because Starbucks generates 70%
of its revenues in the US market and this risk should not have a very large impact on
the company’s operations (unless significant changes occur).
Risk management
In order to better manage the risk of foreign currency fluctuations, Starbucks should
close more forward contracts and use derivative financial instruments (interest swaps.
currency swaps. options. and foreign exchange forward contracts) to protect itself
against potential cash flow losses. Portions of cash flows are also necessary to provi-
de for inter-company royalty payments inventories purchases, inter-company lending
and borrowing activities, and certain other foreign currency transactions. Thus, the
corporation’s business operations should continue without significant hindrances.
8.2.3. Commodity price risk

Commodity risk is the risk a company faces due to changes in the price and other
conditions of commodities with times, and the commodity market are known to face
critical volatility problems. The commodity price risk is the primary market risk for
Starbucks arising from the purchase of green coffee, tea, dairy products, and other
products used in production. The most affected product by price volatility is green
coffee, and the corporation is aware that the factors related to pricing and supply or
availability of these vital raw materials directly affect its financial performance and
business operations both present and future. The rising costs of high-quality Arabica
coffee beans and other products that Starbucks uses in its branches generally impact
the company’s operations. Supply and price can be influenced by multiple factors in
the producing countries including weather conditions, natural disasters (e.g. drought
in Brazil), crop diseases, overall increases in agricultural inputs and production costs,
the levels of stocks and political and economic conditions, and above all the most
significant current factor – the global pandemic. The price is also affected by trading
activities in the Arabica forward market. including hedge funds and commodity index
funds. Starbucks mainly buys high-quality Arabica coffee at a high price. As the price of
high-quality coffee Arabica is prone to volatility, usually as an increase in the price, this
situation leads to expensive coffee and difficulties in negotiating fixed prices according
to purchase agreements with various inventories. While Starbucks enters into contra-
cts with its suppliers to determine quality, delivery terms, quantity, and other relevant
information, the procurement contracts do not determine dates and prices. Instead, it
is not known when the price of the goods is fixed and in order to hedge against futu-
re price fluctuations and protect its exposure to future coffee prices, Starbucks uses
forward contracts, futures contracts, and collars.
Scenario
If Starbucks intends introduce new products with a higher percentage of coffee beans
in the near future, they will have to purchase larger supplies of Arabica coffee beans
needed to produce these new products. Due to the ongoing global pandemic and to
financial and geopolitical factors, Starbucks is unable to know with certainty what the
price of coffee beans will be. Assuming that the price of Arabica coffee beans continues
to rise, Starbucks will have to pay more for supplies of high-quality coffee beans, which
will ultimately have an impact on increasing commodity costs and reducing profitabi-
lity. Consequently, this situation could also have an impact on the increase in product
prices and consumers would have to pay more for a cup of coffee than before. Due to
higher product prices. there is a possibility of losing loyal customers. which will also
affect the profitability of Starbucks. The likelihood of this risk occurring is high because
the price of Arabica coffee beans is constantly increasing as we can see from Figure 7.
and, therefore, this risk is rated 5. Price increases or shortages in supplies of Arabica
coffee beans or other commodities can affect Starbucks’ business operations and fi-
nancial performance. The impact of this risk is rated 3 because Starbucks cannot affect
the overall economic situation. In spite of applying a variety of financial instruments
(derivatives) to mitigate and prevent the price rises of raw materials, there is a possibi-
instruments (derivatives) to mitigate and prevent the price rises of raw materials, there is a
possibility that Starbucks may not be able to procure and/or purchase sufficient quantities of
green
356 coffee due to
Company macroeconomic
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may not be able to meet the demand for coffee, which could affect significantly the
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than 3 because quantities
Starbucks of
already
green coffee due to macroeconomic factors or to global or regional deficiency. There-
has a well-developed
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to meet suppliers
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coffee, whichrelationships with them to
could affect significantly
the company’s
secure quality rawprofitability. The impact
material at affordable of this risk is not higher than 3 because Star-
prices.
bucks already has a well-developed network of suppliers and long-standing relations-
hips with
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4
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Figure Authors’ elaboration
7. Arabica according
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from 30 April from
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https://ycharts.com/indicators/world_coffee_arabica_price
Source: Authors’ elaboration according to data from https://ycharts.com/indicators/world_coffee_ara-
bica_price
Risk
Riskmanagement
management
Starbucksshould
Starbucks should
useuse hedging
hedging as protection/insurance
as protection/insurance againstagainst the negative
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sequences caused by the global pandemic. Starbucks should make a contract with its
caused by the
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regardless the marketthe supplier
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at that be obliged
time. Anotherto
solution for managing this risk is to have a network of alternative suppliers. Starbucks
should hence continue to invest in their relationship with the suppliers and expand
their network to increase their ability to negotiate with other suppliers in case of unfa-
vourable price hikes for the company’s continuing operations or non-compliance with
the contractual obligations.
8.3. OPERATIONAL RISKS
8.3.1. Legal risk

We define legal risk as the risk of non-compliance with laws and regulations, non-re-
cognition of legal obligations, non-compliance with contractual terms, non-recogniti-
on of legal threats, and ineffective management of them.88 Like any other company,
Starbucks is exposed to the legal and regulatory frameworks of the countries in which
it operates. Harmonization of these rules requires considerable effort and financial
resources. Frequent changes to legal frameworks and regulations pose a significant
risk to Starbucks, which operates in many countries around the world, hence and must
comply with the applicable laws and regulations in that country. Due to the current si-
tuation with the COVID-19 pandemic. Starbucks must comply with additional domestic
and foreign regulations and health guidelines in order to be safe for customers and to
avoid negative impacts on business.89
Furthermore, it should be noted that Starbucks is subject to the complex and rapid
development of international and US privacy and data protection laws and regulations
and that companies are under increased regulatory oversight. The interpretation and
application of the existing privacy and data protection laws and regulations (GDPR and
CPA) are fluctuating, and authorities around the world are considering a number of ad-
ditional proposals.90 In July 2016 the European Commission and the Swiss Government
approved the EU-US and Swiss-US Privacy Shield framework in January 2017 which
is designed to allow U.S. companies funded by the U.S. Department of Commerce to
comply with the Privacy Shield requirements to freely import personal data from the
EU and Switzerland.91 Indeed, these frameworks face many legal challenges and their
validity remains subject to legal, regulatory, and political developments in Europe and
the US under the European-U.S. Privacy Shield approved by the European Commission.
In conclusion, Starbucks must constantly monitor political stability in all countries
where it operates, and monitor and adjust to their laws and regulations in order to
avoid litigation, fines, and influence on business and financial performance.
88
89
Peiper, H. (2020). At a glance: What customers need to know about Starbucks response to COVID-19.
Retrieved May 12, 2021 from https://stories.starbucks.com/press/2020/what-customers-need-to-know-
about-starbucks-response-to-covid-19/.
90
Starbucks. (2021). Starbucks Privacy Statement. Retrieved May 15, 2021, from www.starbucks.com/
terms/privacy-policy.
91
Europska unija. (2016). Uredba (EU) 2016/679 Europskog parlamenta i Vijeća o zaštiti pojedinaca u vezi
s obradom osobnih podataka i o slobodnom kretanju takvih podataka te o stavljanju izvan snage Direktive
95/46/EZ (Opća uredba o zaštiti podataka) [EPub]. Retrieved from https://eur-lex.europa.eu/legal-content/
HR/TXT/PDF/?uri=CELEX:32016R0679&from=EN.
Scenario
Due to the complexity of the regulatory environment in which it operates and the
changing legal and regulatory requirements in the US and Europe, if Starbucks does
not comply with the legal and regulatory changes it could face litigation, sanctions,
and fines. This would affect the company’s reputation, profitability, and business and
financial performance.
Due to the currently very unstable situation resulting from the corona crisis and the
frequent changes to legal and other measures in different countries, the likelihood of
this risk was rated 4 while the impact was rated 2. Namely, Starbucks is a large corpo-
ration operating in over 80 countries around the world and it is assumed that it has
well-developed systems for managing this type of risk.
Risk management
In order to protect itself from the legal risk, Starbucks needs to actively monitor legal
changes and coordinate its business with them. In order to maintain this, it is recom-
mended to strengthen the department’s compliance through a potential additional
workforce at least during the pandemic, which would help to monitor and harmonize
regulation across all markets where Starbucks operates.
8.3.2. Risk of employing inadequate labour force

The risk of employing an inadequate workforce is reflected in the possibility that
the company may hire inadequate workers for certain jobs, which could become the
cause of various negative consequences for the company, such as reputational im-
pairment, harm to the health of customers, or legal sanctions. As Starbucks employs
an extremely large number of workers and 70 % of them are students on temporary
jobs to cover the cost of living during their studies. there is a high risk of employing
inadequate workforce.92 In the case of jobs with a high level of employee turnover,
such as waiters and bartenders, it is difficult to eliminate the risk of employing an
inadequate workforce as such temporary posts do not require high competences
and long-term experience. Since Starbucks’ processes are standardized there is no
need to require greater competences and experience in service activities but the ba-
sic training in coffee preparation. It is therefore difficult to assess which employees
could cause problems for the business since it would be extremely expensive to
further complicate the recruitment process and deepen the testing and verification
of potential employees. In March of this year, Starbucks fired an Indiana employee
for a TikTok video recorded at work showing disrespectful answers that he and his
co-workers intended to give to more demanding customers. In his defence, the em-
ployee pointed out that it was just a party towards the end of the working hours when
92
WayUp. (2019). 13 Things You Didn’t Know about Working for Starbucks. Retrieved August 23, 2021,
from www.wayup.com/guide/community/starbucks-1722-sponsored-0-13-things-you-didnt-know-
about-working-for-starbucks/.
there were no customers in the shop.93 Nevertheless, he was fired for inappropriate
behaviour because of Starbucks’ policy of cosy environment that radiates welcoming
atmosphere and respect for customers. That was not the only case when Starbucks
employees violated its reputation. Kevin Trejo, who worked at a branch office in Park
Ridge, New Jersey, was arrested and charged after an investigation confirmed that he
had spat in a drink of the police officers patrolling that part of town who were custo-
mers in the store. They believe it had happened several times, but could not prove
that.94 The tip was enough for the entire team of police officers to worry about their
health as a result of the coronavirus pandemic. A spokesman for Starbucks said he
did not want Treyo’s behaviour to undermine the reputation of Starbucks’ or other
employees, and strongly condemned his behaviour and stressed that her behaviour
did not reflect how Starbucks employees deal with their customers daily. An additional
drawback in avoiding the recruitment of an inadequate workforce related to Starbucks
is that it offers low wages for these positions. According to the Labour Statistics Bu-
reau, the average salary of US employees in the fourth quarter of 2020 was 984 USD
per week.95 As of 5 May 2021, the average weekly salary for Starbucks barista was USD
466. Moreover, Starbucks announced a wage increase of at least 10 % to its employees
in all stores in the U.S.96
Scenario
As Starbucks employs a large number of partners (as they are internally called) in diffe-
rent markets, it is possible that several of them may simultaneously employ inadequ-
ate workforce. In that case, there would be a great possibility for those employees to
commit a series of offenses that would put Starbucks at a disadvantage and subject
it to various penalties. It is possible that in the current pandemic these employees
may fail to comply with the rules of protection against the spread of diseases that are
applied in the various branches of Starbucks, and may hence present health threats
for customers. If, in that case, this health threat could be directly linked to Starbucks
and if a similar situation recurred in the different markets where it operates, the com-
pany’s reputation could suffer a significant negative impact. In addition, depending
on the severity of the violation, Starbucks could succumb to financial sanctions and
lawsuits. This would affect Starbucks’ overall business massively and undermine its
image. The impact of the risk of employing an inadequate workforce was rated 3 and a
likelihood 4, which is greatly caused by the high employee turnover.
93
Meisenzahl, M. (2021). Starbucks Fired an Employee over a TikTok Video Made at Work as Brands Be-
come increasingly Wary of Workers’ Social Media. Retrieved August 31, 2021, from www.businessinsider.
com/starbucks-employee-fired-for-filming-tiktok-videos-is-a-trend-2021-3
94
Griffith, J. (2020). Starbucks Employee Spit in Drinks Served to Officers, Police Say. Retrieved August
23, 2021, from www.nbcnews.com/news/us-news/starbucks-employee-spit-drinks-served-officers-po-
lice-say-n1234491.
95
Doyle, A. (2021). Average Salary Information for US Workers. Retrieved August 23, 2021, from www.
thebalancecareers.com/average-salary-information-for-us-workers-2060808.
96
Manfredi, L. (2020.). Starbucks to Boost Pay for All U.S. Employees. Retrieved August 23, 2021, from
www.foxbusiness.com/money/starbucks-to-boost-pay-for-all-employees-in-the-united-states.
Risk management
This risk could be managed in such a way as to further invest in the selection process
when recruiting and by constantly investing in the education of employees, improving
their work environment, and strengthening the corporate culture. This could result in
a better link between employees and the company, and increase their job satisfaction.
In this way the risk of inadequate employee behaviour would be significantly reduced.
It would also be good to increase communication between management and other
employees in order to identify these problems more easily and quickly, and resolve
them in a timely manner.
8.3.3. Environmental risk

Starbucks’ environmental risks include water consumption, greenhouse gas emissions,
and high waste production. In 2018 Starbucks emitted 16 million tonnes of greenhouse
gases, used a billion cubic meters of water, and 868 kilotons (double the weight of the
Empire State Building) of cups of coffee and other waste. Adding whipped cream to
Starbucks drinks emits 50 times more greenhouse gases than the company’s private
plane. Dairy products are the largest source of carbon dioxide emissions.97 Starbucks’
vision for the future is to return to nature more than it has taken from it and achieve
the goals set by 2030, i.e., reduce volume 1 greenhouse gas emissions that include
direct greenhouse gas emissions from sources owned or controlled by the company
including manufacturing facilities, shops, vehicles, and aircraft owned by the company.
Scope 2 and volume 3 that include goods and services as well as 50 % emissions of
their license holders and partners, a 50 % reduction in water consumption and a 50
% reduction in waste. 98 Starbucks has diverted from the use of single-use plastic to
recycled containers and promotes its reuse. Thus, Starbucks Coffee Korea committed
to the complete elimination of disposable cups by 2025.99 Failure to comply with the
obligation to abolish single-use cups within a given time limit may lead to criminal
sanctions. In the period from 30 March to 31 May 2021 a two-month trial period of the
Borrow a Cup programme was conducted in stores in Seattle which offered customers
the opportunity to get the desired beverage in reusable packaging and return it to a
contactless packaging collection device.100 One such cup could replace 30 single-use
cups. If customers’ awareness is not instilled in the habit of returning multiple cups,
the project could fail.
97
Pfanner, E., Bloomberg. (2020). Starbucks Has a Long Way to Go to Reach Environmental Goals for
2030. Retrieved May 5, 2021, from https://fortune.com/2020/01/21/starbucks-carbon-footprint-dairy/.
98
Starbucks Stories & News. (2021). 2020 Report: Planet. Retrieved May 5, 2021, from https://stories.
starbucks.com/stories/2021/gesi-report-2020-planet/.
99
Starbucks Stories & News. (2021). Starbucks Greener Cup Timeline. Retrieved May 5, 2021, from
https://stories.starbucks.com/press/2021/starbucks-greener-cup-timeline/.
100
Starbucks Stories & News. (2021). Seattle Starbucks Stores go even greener this Earth Month with
new Borrow A Cup programme . Retrieved May 5, 2021, from https://stories.starbucks.com/stories/2021/
seattle-starbucks-stores-go-even-greener-this-earth-month-with-new-borrow-a-cup-program/.
The CaseFigure
Study of 8. Starbucks
Starbucks waste from shops and businesses 361
FigureSource: Authors’
8. Starbucks elaboration
waste according
from shops to data from
and businesses
https://stories.starbucks.com/stories/2021/gesi-report-2020-coffee/
Source: Authors’ elaboration according to data from https://stories.starbucks.com/stories/2021/gesi-
report-2020-coffee/
Scenario
Scenario
If Starbucks does not meet the set goals to reduce water consumption, greenhouse
If Starbucks does not meet the set goals to reduce water consumption, greenhouse gas
gas emissions, and waste, this can undermine the company’s reputation and negative-
ly affect customer
emissions, perceptions
and waste, thisascan
well as lead tothe
undermine high media attention
company’s andand
reputation public pre- affect
negatively
ssure from environmental organizations, which could ultimately affect the revenues.
customer perceptions as well as lead to high media attention and public pressure from
The impact of the environmental risk as a result of the potential decline in income and
environmental
reputational organizations,
impairment was rated which
3 andcould
the ultimately
likelihood affect the rated
was also revenues. Theisimpact
3. This be- of the
cause on the one hand Starbucks did not reach its previously set target for 2008 and
environmental risk as a result of the potential decline in income and reputational impairment
there is a possibility that this is too ambitious, but on the other hand such problems
was rated 3important
are increasingly and the likelihood was alsoinvests
and Starbucks rated 3.large
Thisamounts
is becauseofon the one
money in hand
theirStarbucks
ma- did
nagement.
not reach its previously set target for 2008 and there is a possibility that this is too ambitious,
but on the other hand such problems are increasingly important and Starbucks invests large
Risk management
amounts
Starbucks can of moneythis
reduce in their
risk ifmanagement.
it instils the use of multiple packaging into consumer
awareness through marketing campaigns, and invests additional resources in new te-
chnologies that are less polluting the environment.
Risk management
Starbucks
8.3.4. can reduce
Cyber security this risk if it instils the use of multiple packaging into consumer
risk
awareness through marketing campaigns, and invests additional resources in new technologies
Starbucks is a highly technologically advanced company that uses information tech-
nologythat are lessatpolluting
systems points ofthesale,
environment.
for web and mobile platforms, for online and mobile
payments, delivery services and reward programmes, and administrative functions.
For this reason, they are also responsible for any personal, financial, and other in-
formation entrusted to them by their customers and employees. Many systems also
contain proprietary and other confidential information directly related to business,
such as business plans, and product and design development initiatives. As Starbucks
relies heavily on information technologies in its operations. it is also a high risk that
cyber-attacks can cause for the company. Considering the increasing globalization of
the world and after the increasing digitalization triggered by the coronavirus pande-
mic, cyber-attacks are becoming increasingly easy to perform and pose a significant
risk to both businesses and individuals.101 In 2020 1,001 data breaches occurred in
the US and more than 115.8 million individuals experienced exposure of their priva-
te data due to insufficient information security.102 Starbucks has also been subjected
to data security issues and cyber-attacks. In 2018 the South Korean Communications
Regulator imposed a $9 thousand fine for Starbucks Coffee Korea Co. for violating the
protection of hundreds of its customers’ personal data. This data breach occurred due
to a technical failure when using the upgraded version of the Starbucks Coffee Korea
mobile app, which led to the disclosure of personal documents, nicknames, and mobi-
le phone numbers of 573 users.103 In 2015 Starbucks also encountered a problem re-
lated to cyber-attacks, but not to their company and information technology directly.
By downloading the data obtained by hacking another information system, hackers
collected passwords of individuals who were users of the Starbucks mobile applica-
tion. The users whose passwords matched the passwords that were downloaded in
the previous attacks experienced the emptying of their funds from the account on the
app.104 This is an additional indication that it is necessary to work on systems to protect
not only data breaches but also to monitor and prevent unauthorized use of user ac-
counts. Such unauthorized access, use, theft, or destruction of personal, financial, or
other data of customers, employees, or Starbucks’ own and confidential data by third
parties could affect the reputation of the entire company and expose it to potential
loss of revenue due to a negative impact on its reputation and brand, the ability to re-
tain customers and attract new ones, and potentially disrupt the company’s business
plans. In addition, such security breaches could make Starbucks responsible for vio-
lating applicable U.S. and international privacy laws and other laws, and the company
could be sued by private consumers or partners.105
101
Sobers R. (2021). 134 Cybersecurity Statistics and Trends for 2021. Retrieved May 11, 2021, from
https://www.varonis.com/blog/cybersecurity-statistics/.
102
Johnson J. (2021). Cyber crime: number of breaches and records exposed 2005-2020. Retrieved
May 11, 2021, from https://www.statista.com/statistics/273550/data-breaches-recorded-in-the-united-
states-by-number-of-breaches-and-records-exposed/.
103
The Korea Times. (2018). Starbucks Coffee Korea fined for personal data breaches. Retrieved May 11,
2021, from https://www.koreatimes.co.kr/www/nation/2018/07/694_252091.html.
104
PYMNTS. (2015). The Starbucks Breach That Wasn’t (And Other Lessons In Security). Retrieved May
11, 2021, from https://www.pymnts.com/in-depth/2015/the-starbucks-breach-that-wasnt-and-other-
lessons-in-security/
105
Sobers R. (2021). 134 Cybersecurity Statistics and Trends for 2021. Retrieved May 11, 2021, from
https://www.varonis.com/blog/cybersecurity-statistics/.
Scenario
Since Starbucks is highly dependent on information technology, data breaches, and
unauthorized access to data related to their customers’ user data in Korea as well as
providing personalized products and benefits to their customers, could occur in much
larger markets. In the event of insufficient protection and insufficient control of cyber
risk in the US market, much larger data penetration could occur, for a much larger
Starbucks market segment. In fact, 70 % of Starbucks’ revenues are generated in the
United States, which speaks enough of the number of the customers who use its in-
formation technology in the United States on a daily basis. Data breaches of this scale
could cause significant adverse consequences for the company, such as exposure to
lawsuits, significant harm to the company’s reputation, and a significant drop in the
sales in the market on which the company’s operations are most dependent. The con-
sequences for the company would be extremely significant and could lead to problems
with the shareholders, business and loyalty, and customer confidence. In light of the
above, the cybersecurity risk impact was assessed with a score of 2, while the likeliho-
od was rated with a score of 4, precisely because of the large number of people using
Starbucks’ information systems.
Risk management
Starbucks has already established a certain mechanism to manage this type of risk.
Namely, they rely on the Big Bounty programme which uses the use of ethical hac-
kers to detect and file errors or vulnerabilities within the organization’s information
systems. They operate on the principle of reward if shortcomings are found and ve-
rified within a predefined range.106 They also invite users to report possible difficul-
ties and problems or to apply for participation in the Big Bounty programme.107 This
mechanism in June 2020 resulted in rewarding security researcher Sam Curry with as
much as four thousand US dollars. He earned this amount by identifying a security
bug in Starbucks’ internet infrastructure, which had the potential to detect records
of up to 100 million customers of Starbucks products.108 Constant investment in such
a programme, monitoring global trends, and rewarding independent security rese-
archers is needed in order to better protect the data at the company’s disposal from
this type of risk.
106
HackerOne. (n.d.). Starbucks, Inspiring and nurturing the human spirit – one person, one cup, one
neighborhood at a time. Retrieved May 11, 2021, from https://hackerone.com/starbucks?type=team.
107
HackerOne. (n.d.). Retrieved May 11, 2021, from https://www.starbucks.com/whitehat
108
Leyden, J. (2020). Security researcher Earns $4k bug bounty after hacking into Starbucks database.
Retrieved May 5, 2021, from https://portswigger.net/daily-swig/security-researcher-earns-4k-bug-boun-
ty-after-hacking-into-starbucks-database.
Figure
364
9. Risk Map
Company Analysis and Risk Management Strategies in the Global Business Environment – A Case Study Collection
Figure 9. Risk Map
Source: Authors’
Source: elaboration
Authors’ elaboration
9. CONCLUSION
9. Since its establishment in 1971 and selling whole roasted coffee beans, Starbucks’ bu-
CONCLUSION
siness has changed significantly to become today’s highly recognizable and ubiqui-
tous world brand that serves different kinds of coffee drinks, teas, juices, and even
food. From the initial sale of coffee to go, Starbucks has developed into a chain of
106 cosy coffeehouses that provide free Wi-Fi and numerous other benefits to its con-
HackerOne. (n.d.). Retrieved May 11, 2021, from https://www.starbucks.com/whitehat
107
sumersJ. to
Leyden, make
(2020). their researcher
Security coffee drinking
Earns $4kexperience exceptionally
bug bounty after hacking intoenjoyable. This com-
Starbucks database. Retrieved
Maypany
5, 2021, from https://portswigger.net/daily-swig/security-researcher-earns-4k-bug-bounty-after-hacking-
also leads technological innovation in the coffee industry and constantly invests
into-starbucks-database.
in the advancement and implementation of better technological business solutions.
Starbucks also recognizes the importance of sustainable business and develops plans
while setting targets for better business energy efficiency and reduction of negative
environmental impacts.
When analysing the current situation of a company, a number of external factors that
affect business should be considered. The global economic and health crisis has had
a significant impact on all industrial sectors and companies, and the company under
analysis in this case study has not been spared either. Starbucks’ business environ-
ment is dynamic, market entry barriers are small, and competitors and substitutes are
numerous. Its performance has been high, since it has opted for a market differentia-
tion strategy offering an extremely high-quality and fully personalized product at a
slightly higher price. Although widely spread across the globe, it generates the bulk of
its revenues in the US. a total of 70 % of earnings. Considering all this it becomes clear
why Starbucks stands out as a particularly popular and interesting maker of coffee
beverages with the second-largest market share in 83 countries worldwide.
The analysis of Starbucks’ financial indicators indicates the most worrying element:
the drastic increase in long-term debts which increased as much as 6 times between
2017 and 2020. In addition, it is really worrying that Starbucks has a negative amount
of capital. From all of the above, it is clear that the ROE indicator was negative in the
last two years, in spite of a growth trend between 2019 and 2020. The liquidity indi-
cators show a negative conversion cycle, which means that the company needs more
time to pay the suppliers than to sell its own stocks and raise money – thus financing
the company by suppliers. The indebtedness indicator shows that a way of doing busi-
ness in which a company is heavily indebted in order to obtain funds for the buyback
of its own shares and the payment of dividends from a short horizon and leads to
problems in the long run. The current way of Starbucks’ business operations indicates
probable threats of long-term unsustainability.
This case study has identified 11 risks that could jeopardize Starbucks’ operations and
may have already materialised. These risks have been evaluated on the basis of their
impact on the company and the likelihood of occurrence, and were assigned values.
Reputational, leverage and commodity price risks were rated 15, followed by the risk
of employing inadequate labour force, legal and cyber security risks which were rated
12, and by customer loss and currency risk that were rated 10, and environmental
risk, and competition and expansion risks rated 9 and 8 respectively. All these risks
have been divided into strategic, financial, and operational risks and explained in de-
tail along with the analysis of scenarios of each risk and the proposed solutions for
managing them. In the final stage of this comprehensive analysis of integrated risk
management the elaboration of a risk map showing their positioning by values within
the four quadrants.
Starbucks is in a very interesting period in which it must justify the confidence of its
investors and enable smooth continuation of operations and growth by satisfactory
incomes. It is important to monitor borrowing and the negative amount of capital, and
act promptly by devising an improvement strategy. It is proposed that applying inte-
grated enterprise risk management is a useful solution for this.
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COMPANY ANALYSIS AND RISK MANAGEMENT STRATEGIES IN THE GLOBAL BUSINESS ENVIRONMENT – A CASE STUDY COLLECTION
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COMPANY ANALYSIS

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APPLICATION OF CASH-FLOW-AT-RISK METHOD IN RISK ANALYSIS

6. FREE CASH FLOW METHOD ON THE EXAMPLE OF ARENA

THE CASE STUDY OF THE COCA-COLA COMPANY

6. IDENTIFICATION, ASSESSMENT AND PROPOSAL OF RISK

THE CASE STUDY OF INTEL CORPORATION (INTC)

5.3. Opportunities . ................................................................................................ 152

THE CASE STUDY OF MATCH GROUP

2.2.3. Threat of Substitute Products............................................................ 188

THE CASE STUDY OF NESTLÉ S.A.

4. ANALYSIS OF FINANCIAL INDICATORS ............................................................ 243

THE CASE STUDY OF NETFLIX

3.3. Bargaining power of suppliers....................................................................... 289

THE CASE STUDY OF STARBUCKS

6. SWOT AND TOWS ANALYSIS................................................................................ 338

During my doctoral studies at the University of Greenwich Business School, I came

dent-centred teaching is also accepted as one of the official pedagogies implemented

Professor Danijela Miloš Sprčić, PhD

APPLICATION OF CASH-FLOW-AT-RISK METHOD IN

Julija Puškar1, Danijela Miloš Sprčić2

2. INTRODUCTION TO THE COMPANY AND BUSINESS ENVIRONMENT

2.1. About Arena Hospitality Group

2.2. Market Overview

Source: Authors’ elaboration according to Central Bureau of Statistics.

Source: Authors’ elaboration according to Central Bureau of Statistics.

Source: Authors’ elaboration according to Central Bureau of Statistics.

2.3. Overview of business segments

Arena Hotels & Apartments®

Table 1. Operating results of the Group’s segments in 2019

2.4. Destination business overview

Source: Authors’ elaboration based on AHG’s official website.

Source: Authors’ elaboration based on AHG’s official website.

3. ANALYSIS OF WIDER EXTERNAL ENVIRONMENT – PESTLE

3.1. Political factors

Role of government in economy

Membership in European Union

Figure 4. GDP per capita in Republic of Croatia 2000-2019 (in EUR)

Fiscal and monetary policy

3.3. Social factors

Figure 5. Migration balance of population in Republic of Croatia 2009-2018

Source: Authors’ elaboration according to Central Bureau of Statistics

3.4. Technological factors

3.5. Legal factors

lation to allow multinational companies to conceal ownership and money laundering.45

3.6. Environmental factors

Environmental protection management

Air quality index

4.1. Industry life cycle analysis

rates of tourism revenues. 10%

Source: prepared by the authors according to the Croatian National Bank.

4.2.Market concentration and competitor analysis

4.2. Market concentration and competitor analysis

Strategic group identification

Table 2. Selected indicators of largest companies according to revenues in 2018

Arena Hospitality Group d.d.

Source: Authors’ elaboration according to data from companies’ official websites.

Cyber security risk