Strategic Management at Kepak Group - Case Study Example

? Review of the Strategic Situation of Kepak Executive Summary Kepak has an excellent reputation and offers a broad range of frozen and fresh beef products in manufacturing, food service, and retail sectors to their customers. Their products are procured via schemes of quality farm assurance in ensuring that their wide range of customers is serviced with the best raw materials. The main aim of this paper is to assess the strategies currently in use at Kepak group in relation to the beef industry, in Ireland, and in the EU, which is its main market. In the course of this assessment, the report tackles opportunities and challenges faced by Kepak Group, as well as the beef industry in order to come up with ways to develop it over the long and medium term. From the report, it is clear that the greatest threats that face Kepak Group are the increase in costs for the beef industry in terms of technology and the threat from cheaper beef from South America. However, they have major opportunities in the increase of population and evolving diets in Asia. This has informed their strategy. Table of Contents Contents Page 1. Executive Summary……………………………………2 2. Introduction……………………………………………4 3. Kepak’s Business Environment……………………......4 4. Kepak’s current strategy………………………………7 5. Appraisal of Kepak’s Business Strategy……………...10 6. References…………………………………………….12 7. Appendix……………………………………………..13 REVIEW OF THE STRATEGIC SITUATION OF KEPAK Introduction Kepak Group is a dynamic and young business that has become a leading company for food processing in Europe. Their success has been informed by their belief in pursuing a partnership approach through the development of customer relationships. The company is dedicated to consumer focus, brand management, innovation, as well as unwavering commitment to ensuring food safety. Because of volatile market requirements, Kepak Group continues to provide its consumers with quality products at prices that are competitive. Their operations are divided into three business units that comprise of Agra Trading, Kepak Convenience Foods, and Kepak Meat Division. Each of this division plays a crucial role in the expansion and growth of Kepak Group. The group processes more than 25,000 tons of consumer foods, 1.5 million lambs, and 30,000 cattle every year and has more than €750 million in turnover, employing in excess of 2,000 people. They have nine facilities for manufacturing across Ireland, as well as the UK, with sales presence in major countries in the EU and globally and a South American operations office. Kepak’s Business Environment PEST Analysis Political factors: With regards to the WTO, the lift from a successful DOHA Round deal would have to be balanced, as well as take Ireland’s agricultural interests into account. Ireland’s department of Agriculture continues to show strong reservations concerning current agricultural proposals in agricultural, particularly its potential effects on the Irish beef industry (Garavan, 2011: p43). It is estimated that Irish cattle prices could drop by 9% with output value of Irish beef dropping by €120m. A tariff reduction of 23%, furthermore, under sensitive designation of products would see beef imports increasing in the EU by 30%. Alternatively, if beef is not designated as a sensitive product, its negative impact on agriculture in Ireland could be higher. These circumstances, which would lead to a 70% tariff cut, would result in a drop in price for Irish beef, by more than 28% before the year 2017 and an annual beef output fall of €380m every year. Economic factors: The recent years have seen fluctuations of commodity prices, especially for beef and cereals. The medium-term products concerning agricultural commodities, despite the economic crisis, are promising (Garavan, 2011: p45). Changing dietary patterns, improved living standards, and rising population levels in Asian markets have contributed to increased demand of food. There is also a threat from outside lower cost producers. Given low costs of production and scale of operation, beef production from South America poses a threat to the Irish beef producers if they are given unrestricted access to the EU market. Social factors: Concerning demographics, specialist production of beef is dominant and accounts for about 68,000 farms. 60% of production in specialist beef farms in 2010 occurred in the Western, Midland, and Border regions. (Jutzi, 2011: p54) The scattered nature of these holdings leads to poorer use of modern methods of management and extra costs with little holding consolidation taking place in the recent past. Specialist beef producers are also at a higher than average age with less than 30% being below 6%. Technological factors: The differences in gross margins for the beef industry between the lower and upper quartiles highlight the productivity issues facing the beef sector. Significant differences also exist between what is achieved on the farms and optimum blueprints for beef farms (de Wit & Meyer, 2010: p32). Beef carcase classification is another technological aspect that affects the beef sector. Discussions are underway for the introduction of new pricing grids for farmers to be rewarded for quality beef production wanted by consumers. The grid will have its basis on the EUROP conformation scale and a fat scale of 1-5 and a further subclass use for the main classes. Kepak aims to retain its status as a leader in technological developments, in the meat industry. Incomes from beef have been underpinned by the direct payment system instituted by the European Union (Victoria. Dept. of Natural Resources and Environment, 2009: p333). It is, therefore, vital for Kepak to feature a robust system of direct payment, which underpins the suckler herd of beef and rewards active farmers of livestock. Beef produced to the level of quality, which is expected by the European Union consumer is expensive and financial returns are relatively poor in EU member states. The business would be unsustainable sans financial support from the EU with approximately €850 million of the current CAP envelope in Ireland of the €1.3 billion can be attributed to beef producer payments before the introduction of SFP, or Single Farm Payment. This is equal to approximately €600 for every slaughtered animal. The sector requires retaining a portion of this envelope for currently active, beef producers (Victoria. Dept. of Natural Resources and Environment, 2009: p333). They have to rely heavily on negotiators in the EU to make sure that reform of the SFP is done in a manner, which will be sustainable to future beef production. Kepak’s Current Strategy First, a SWOT analysis will be carried out to identify what affects the current strategy at Kepak Group. SWOT Analysis Strengths: Production of beef is a significant export earnings contributor, accounting for a third of Ireland’s gross agricultural output Ireland produces steer product, which is grass fed that contrasts with the cull cow product from mainland Europe, which is intensively fed Irish farmers are provided with relevant and comprehensive advice and education information (Harrigan, 2009: p87). Ireland is a part of the EU high value market, which has high returns for beef and is in a position of strength to check the growing beef deficit in the EU A predominant system of grass based feeding gives the Irish farmer the opportunity of a system that has low cost compared to mainland Europe Weaknesses: Ireland, in recent years, has exported over half of its beef to the UK only Farmers are individual marketers, which gives them low bargaining power The number and size of farms nationally in Ireland offers the farmers few economies of scale (Michman & Mazze, 2009: p73). Producers are reluctant to face up to realities of the finances and examine the costs of production with feedstuff costs rising by 9% and little improvement in live-weight production for every hectare over the same period Inefficient exploitation and use productive outlets for the by-products impose extra costs on the beef sector Opportunities: The world population is increasing, especially in Asia and Africa, which could lead to increased beef intake The rapid diet evolution in China has seen an increased market for beef products Beef cattle are among the first livestock that have had their genes mapped, which should see optimization of beef stocks The rate of grain production in the world is increasing, which will reduce the cost of cattle feed Threats: There is a growing population of vegetarians, especially in Europe, which could see a drop in demand for beef (Yeager, 2011: p64). Mad cow disease is a threat that always stalks the beef industry The beef industry produces a lot of green house gases during processing and transport, which could lead to a backlash from the consumer Beef Industry: Value Chain The basic structure of the EU industry is depicted in the appendix as the value chain analysis. The first column, inputs, in the chain is referent to the main services and products that farmers require so as to raise cattle for beef, such as breeding, veterinary services, and feed (Jutzi, 2011: p45). The column for production is inclusive of three separate beef farming stages, representing three various sets of farmers, i.e. those who keep calves until they are weaned, feedlot operators, and stockers. Cattle are moved from one farm to the other according to the stages of production and often cross-country lines. The dairy beef box enters the beef industry value-chain via lateral means from the dairy sector. One portion of the Irish beef industry consists of dairy beef, which is made up of cows that are culled from dairy cows for age reasons or low milk production. Approximately 18% of total veal and beef production is from dairy cattle. Meat from dairy cattle is processed primarily into ground beef (Jutzi, 2011: p45). Appraisal of Kepak’s Business Strategy In 2013, cattle supplies are expected to decline, based on live export patterns from recent years and census data, by about seventy to eighty thousand head. This shows that meat factories in 2013 will have throughput of 200,000 heads below 2007’s peak; an equivalent loss of €300 million value added exports, as well as equivalent economic activity of 1,400 jobs (Booth, 2010: p55). It also appears as if the available numbers for processing across South America and Europe will remain tight with a likely downward trend before rebuilding again in the year 2013. This scenario is suggestive of prices remaining buoyant or further strengthening. However, it is also clear that inflation in 2013, in prices of red meat, is only reflected partially in higher prices of retail across the EU. Kepak Group, seeing the stabilization or weakening of cereal prices, have shown a reluctance to do this, however. Prices of beef and poultry have stabilized in the EU while also stabilizing globally in recent months. Kepak Group and other retailers believe that these economic hardships make it unrealistic to increase beef prices since there is a fall in beef consumption (Booth, 2010: p55). Therefore, any further increase in beef prices is limited by the unwillingness and limitation of capacity by consumers to pay more. The deficit in the European Union and the global market could continue, and they could portend some economic, as well as political factors that could affect the demand and supply in the EU in the future years. The sector of red meat over the past year has undergone a paradigm price shift upward to approximately €4.00/kg from €3.00/kg (Leavy, 2010: p51). The EU and global demand and supply market conditions are expected to support this via buoyant price levels and historical standards. Consequently, it is not clear if the current price levels are sustainable in the context of the recession or how sensitive beef is to substitution like pig meat and poultry. The recent European Union average price for carcasses of €3.66/kg is a record. Recent price index data for Irish consumers shows that the price of beef is up by 6% to October of last year. Whereas poultry and pig meat prices have dropped by 0.5% and 6% respectively (Leavy, 2010: p51). However, perhaps more significantly, retail prices for poultry and pig meat are at 855 of their price in 2006, whereas lamb and beef retails at 8% and &5 higher than it did in 2006, which could be much higher if current beef prices were reflected fully in them (Lesser, 2012: p102). The scenario is similar across the EU as beef consumption volumes are down as consumers switch proteins. The redeeming feature for the red meat market in Europe is the fact that there is no alternative red meat source, which is cheaper globally to undermine the prices in the EU with little significant signs of any changes in the imminent future. If the situation were to change, the demand and supply laws would lead to decreased prices (Lesser, 2012: p102). Additionally, they need to be conscious of the manner in which high prices will be perceived according to international trading blocks, free market lobby, and some sections of the European Union Commission. Conclusion The beef sector comprises of 31 processing plants that employ some 10,000 individuals. The sector has a €2 billion annual turnover with over 100,000 Irish farms having beef enterprise. Over 90% of beef, output in the Irish market is supplied to manufacturing clients, food services, and retail across the EU. The transformation of the beef industry has involved significant investment in market development, quality, and production. Kepak Group faces challenges, especially with regards to processors and producers. The WTO Doha talks and CAP Post 2013 are vital variables that will determine future possibilities of production for Kepak Group. Other issues like input costs and compliance with legislation continue to pose serious challenges to profitability for the producers. References Booth, S., 2010. Crisis management strategy: competition and change in modern enterprises. London: Routledge. de Wit, B. & Meyer, R., 2010. Strategy process, content, context ; an international perspective. Andover, Hampshire : Cengage Learning. Garavan, T., 2011. Cases in Irish business strategy and policy. Dublin : Oak Tree Press . Harrigan, K., 2009. Declining demand, divestiture, and corporate strategy. Washington : Beard Books. Jutzi, S., 2011. Good practices for the meat industry. Rome : Food and Agriculture Organization of the United Nations. Leavy, B., 2010. Strategy and leadership. London: Routledge. Lesser, W., 2012. Marketing livestock and meat. London: Routledge. Michman, R. & Mazze, E., 2009. The food industry wars : marketing triumphs and blunders. Westport : Quorum. Victoria. Dept. of Natural Resources and Environment., 2009. Meat : the aim of the meat industry strategy is to help Victoria's beef, lamb, pork and poultry industries ... Bendigo: Dept. of Natural Resources and Environment. Yeager, M., 2011. Competition and regulation : the development of oligopoly in the meat packing industry. Greenwich : Jai press. Appendix Processing Inputs Production & Marketing Distribution Feed Read More