Analysis of Guajilote Cooperativo Forestal - Research Paper Example

Guajilote Cooperativo Forestal Honduras The case (Nebbe & Hunger, 1999) s that the Guajilote cooperative is an enterprise jointly owned and operated by members who use its facilities and services (p. B-1) and who all share from its profits (p. B-4). It is a business venture where the members are acting as the shareholders. It can hire employees who are paid their wages out of the cooperative’s revenues, which are also used to pay for other expenses and capital investments. Some members like Munguia act as the cooperative’s “leader” or CEO and may be paid for his services, while others perform less strenuous functions and are paid proportionately. As a business enterprise, Guajilote Cooperative is a socially oriented not-for-profit organization of illiterate farmers who serve the market of furniture makers by providing low-priced, high-quality mahogany lumber. The cooperative does not seem to have any sufficient strategic direction beyond the good intentions of its original project proponents, the USAID (the foreign aid agency of the United States government) and COHDEFOR (the forestry development service of Honduras), to develop a sustainable model that can be imitated by other national parks for social, environmental, and political motives. Strategic direction is lacking because there are no specific plans to assess the cooperative’s strengths and weaknesses and how these can help address the opportunities and threats it is currently facing. The cooperative needs a strategic plan because without one, it may lose its viability as a business enterprise and collapse from the external and internal pressures that similar organizations face when dealing with the market. This strategic direction that will allow Guajilote to continue to exist and compete in the marketplace is also known as the organization’s competitive strategy, a concept that we define below. Without a strategy, the cooperative can fail as a business venture and a model project, causing serious social consequences: the shortage of mahogany lumber; the return of its members to a life of poverty; dashed hopes for Honduran farmers in other parts of the country who want and expect the project to succeed; and many other imaginable political, economic, and social costs. The strategic plan begins with an assessment of the enterprise and its business environment, and there are three popular tools we can use: the SWOT analysis (Andrews, 1971/1987; Ansoff, 1965; Chandler, 1962), the PEST(EL) analysis (Steiner, 1979; Andrews, 1987), and Porter’s Five Forces model and Generic Strategy (Porter, 1980 and Porter, 1985). For this first part, we will combine the SWOT/PEST(EL) approach as it is usually done. SWOT/PEST(EL) Analysis The SWOT analysis requires an assessment of the organization’s internal (strengths and weaknesses) and external (opportunities and threats) environment. The PESTEL analysis considers six environmental factors that affect the enterprise and its business: Political, Economic, Social, Technological, Environmental, and Legal. Most strategic assessments include these six factors in the SWOT analysis, so we can do the same by including them in the appropriate headings. A SWOT analysis of the Guajilote Cooperative reveals the following: Strengths: cooperative format and ownership of enterprise by members and employees (a strength because the worker-owners are motivated to earn higher revenues); (Legal) monopoly on resource supply in the forest reserve; charismatic leader; strong (Economic and Social) incentives to members to be productive; and the strong (Social) bonds among the members. Weaknesses: lack of transport facilities for its products; inability to add value to its final product due to lack of technical and business skills of its illiterate members and a lack of technology; dictatorial leader; indifference of members to leader’s domination (or surrendering their participation in management in exchange for higher income); absence of viable successor to present CEO; potential of CEO to abuse power and authority (corruption?); poor financial management capability; minimal capital investments to improve productivity; and the lack of access to lines of credit and other financial resources. Opportunities: high demand for its products (good quality mahogany lumber); additional revenue generation (two to three times present levels) with the elimination of middlemen and diversification into furniture making. Threats: decline in raw materials (mahogany trees) due to forest fires and continuous depletion by illegal loggers; poor forest-to-market roads; full dependence on distributors; rough terrain and inadequate technology to minimize its negative effects on productivity; (Political) instability at the local and national levels; political ambition of CEO leading to mismanagement (his greater involvement in other concerns, or his disappearance in case of election to a political position, is a serious weakness that threatens the enterprise also from the outside, because without his charisma, the cooperative would not have gotten higher prices for its products); the influx of settlers to the territory; and listing by CITIES (the international convention on trade in endangered species) of mahogany (which eventually happened in 2003 (ARKive, 2004)). Guajilote’s Competitive Advantage and Competitive Strategy A competitive advantage can be defined as the significant advantage that an enterprise has over its competitors so that it is able to add more value for its customers compared to what its competitors can do (Porter, 1985, 3). Using this definition, Guajilote’s competitive advantage is its monopoly in harvesting felled mahogany trees (raw material advantage), which means that it has no competitor in harvesting such raw material from its geographical territory. It has, however, several competitors – mostly illegal loggers in other national parks of Honduras and probably bigger loggers in forests all over the world where mahogany trees are grown – in supplying mahogany lumber to the market. Guajilote is competing globally with its products. A competitive strategy, also known as competitive positioning, describes a set of objectives that enable an enterprise to achieve competitive advantage through the way they position their activities in their competitive environment. Porter (1980) also prescribed the Five Forces model to help an enterprise analyze its environment and design its competitive strategy, choosing one of three generic strategies. The five forces defined by Porter, as applied to the market supply of mahogany, are: bargaining power of suppliers (high, since mahogany is prized by the market, and this is somewhat sustained by the continued depletion of mahogany stocks worldwide), bargaining power of buyers (also high, since furniture makers can source their wood from other suppliers inside or outside the country), threat of substitutes (several for mahogany, although mahogany has unique characteristics that make it a high value product), the intensity of rivalry (several forests worldwide supply the lumber, but illegal logging can), and the threat of new entrants (other national forest parks in Honduras). Using these concepts, we can say that Guajilote’s competitive strategy must go beyond pricing their products higher to maximize its profits and minimize the profits of its distributor. Our SWOT analysis and the case facts disclose that Guajilote has no definite plans to leverage its strengths and minimize its weaknesses to overcome the threats and take advantage of opportunities. There are several opportunities and threats in the market place, but unless Guajilote draws up specific plans (training its workers on how to run a business, having a management succession plan, exploring joint ventures with furniture makers and exporters, hiring carpenters on contract, and making a strategic decision to manage its finances so that it can have enough funds to buy trucks and other productivity-enhancing tools and tap the financial markets for credit, etc.), it will end up being overwhelmed by both internal and external forces it cannot control. Applying the Five Forces model, Guajilote will be able to determine how it can improve its competitive advantage and choose a generic strategy (cost leadership, differentiation, or focus). We give our recommendations below based on the SWOT analysis. Value Chain for mahogany lumber in Honduras A value chain is the series of activities in an organization that add value to its products or services and that contributes to the firm’s competitive advantage (Porter, 1985, 36). Guajilote Cooperative’s value chain in the production and sale of mahogany lumber in the Honduras is rather simple. It may be different in other areas of the country, depending on the level of organization, the systems employed, and the technology used by similar suppliers. We can outline the value chain as follows: Search (for felled trees)  Identify (felled trees that will be harvested)  First Cut (harvest a fallen tree by cutting it from its stump)  Second Cut or Disassembly (cutting the tree to various components)  Extraction (transport the disassembled tree out of the forest by mule, human power, and stream or river power)  Sale to distributor (gather lumber and negotiate the price with the distributor)  Transport to the city (using trucks over muddy roads)  Sale in the city (where it will be transformed into furniture or wooden panels). We can include in the Guajilote Cooperative’s present value chain its charismatic leader, its special licensed concession from COHDEFOR, and its motivated members who are earning more money than ever. This last is part of the cooperative’s value chain because without the support of the members, the organization will break up. Strategic Alternatives Following Porter’s generic strategy model, Guajilote has three choices. First, it can be a cost leader. If it can supply the good quality mahogany lumber at a lower cost by improving its productivity through the use of technology and management techniques like improved security against illegal loggers, better financial management, organized search for and disassembly of trees, etc. and buying trucks to transport lumber directly to the market, it can increase its productivity, revenues, and profits. With these, it can diversify into furniture making and enter into joint ventures with exporters, carpenters (it might be feasible to put up another subsidiary cooperative for carpenters supplying labor to Guajilote), or even with the settlers (with whom they can have a venture to take care of security in the area). An important activity that will give the cooperative a firmer ground to stand on is to determine how many mahogany trees are available in its forest area. This resource assessment will help it make a projection of its future revenue streams, thereby improving its balance sheet (mahogany trees can be booked as assets to be harvested in the future and converted to cash), allowing it to mortgage some of these assets for capital investments, and so on. The settlers may be tapped to do the job of counting the trees. Second, it can go for a differentiation strategy that will allow it to charge premium prices, but this is quite limited, since mahogany trees are more or less the same worldwide, although Honduran mahogany may be perceived to be more beautiful than others (ARKive, 2004). If, however, it diversifies into furniture making, Guajilote can adopt a differentiation strategy by producing quality Guatemalan mahogany furniture. This, however, is still at least two steps beyond its present condition and may be considered an alternative once it solves its other problems (management succession, profitability, transport, etc.). The third is focus, where Guajilote supplies a specific market or niche very well, for example the U.S. exporter(s) or furniture-makers in the city. Focus can help the cooperative manage its resources better because it will have a clearer grasp of the demand situation, helping it to better adjust its supply. This will justify further investments and efforts in the reforestation of mahogany trees, which takes as much as a hundred years to mature (ARKive, 2004), or to include in its products or services the sale of mahogany seedlings by putting up a nursery. According to Porter (1980, 1985), an organization has to choose one of these three so it can compete and achieve sustainable profitability. Given the facts of the case, which of the three should Guajilote choose? Cost leadership is the most attractive, but then, we must realize that Guajilote is supposed to be a model forest cooperative. Its experiences are valuable in disseminating the model experiment to other parts of Honduras and even other countries of Central and South America. Therefore, the cooperative has to document these experiences so that it can be transmitted to others, which means that it may not have to be Guajilote’s main objective to minimize costs in order to maximize its profits, but to generate just enough (or optimal) profits so that it can continue acting as a model that will last for all time. These have to be clearly seen and agreed on by the management team of the cooperative when finalizing its competitive strategic plan. In the end, its most brutal competitor may be itself and the mistaken drive for profits that will deplete its resource. The consequences are ghastly to contemplate: an unsustainable model that achieves the opposite of what it set out to do: to preserve mahogany as a natural resource. Guajilote can be a cost leader that knows how to optimize its profits without increasing the number of trees it sells yearly. Doing this will make it a sustainable model others can imitate. Reference List Andrews, K. (1971) (1987) The concept of corporate strategy. (1st and 3rd editions), Homewood: Irwin. Ansoff H I (1965). Corporate strategy: an analytic approach to business policy for growth and expansion. London: Pelican edition ARKive (2004). Images of life on earth. Big-leaf mahogany (Swietenia macrophylla) Retrieved 31 January 2006, from: http://www.arkive.org/species/GES/plants_and_algae/ Swietenia_macrophylla/more_info.html Chandler, Jr., A.D. (1962). Strategy and structure. Cambridge MA: MIT Press. Nebbe, N. and Hunger, J. D. (1999). Guajilote Cooperativo Forestal, Honduras. (9th ed.) SMBP. Porter, M.E. (1980) Competitive strategy: techniques for analysing industries and competitors. New York: Free Press. Porter, M.E. (1985) Competitive advantage: creating and sustaining superior performance. New York: Free Press. Steiner, G.A. (1979). Strategic planning: what every manager must know. New York: Free Press. Read More