The Strategic Situation of Kepak - Coursework Example

Review of the strategic situation of Kepak   Executive summary This paper examines the challenges and opportunities affecting the Irish beef industry with a focus on Kepak. The paper evaluates Kepak’s business strategy in response to the challenges and opportunities. The company has adopted a strategy that fits it business environment by engaging with both customers and suppliers in ways that helps it achieve its objectives. This strategy is effective in the short-term though there are doubts about the long-term sustainability of some aspects of Kepak’s strategy.                    Introduction Kepak was founded in the mid-1960s by Noel Keating as a retail butcher’s business supplying wholesale beef to the food service sector and into other markets. Kepak had a turnover of Є750 million in 2010 and had 1700 employees. The company processes 300 000 cattle and 1.5 million lambs each year. It operates through nine manufacturing facilities in Ireland and UK. The company’s principal activity is animal slaughter and the sale of meat in cut and processed formats through Kepak Meat Division. The firm has substantial business interests in convenience foods operated through Kepak Convenience Foods and an agricultural commodities trading business, Agra Trading. This paper explores Kepak’s business strategy in response to industry challenges and opportunities (Bell, Mcloughlin and Shelman, 2011, P.3). Examination of Kepak’s business environment The most popular tool in strategic management for analysing the business environment of a company is PESTEL. In the case of Kepak, the economic environment was affecting business negatively as the industry lacked predictability in financial performance. This according to the company CEO from 2010, John Horgan, made it difficult for Irish beef processors to plan for growth. In addition, Kepak was not a listed company thus limiting its access to capital to borrowing or trading profits in a very capital intensive business (Bell, Mcloughlin and Shelman, 2011, P.3). Supply chain consists of producers who sell cattle to processors who market the product internationally. Most of the cattle are grass fed and takes up to 30 months to mature compared to cereal fed beef which can finish in 12-15 months. The presence of agents hampers innovation in the supply chain as their role is historical and; therefore, they added little value (Bell, Mcloughlin and Shelman, 2011, P.3). Political and legislative factors are seen to influence the firms business where the EU-wide introduction of decoupled Single Payment Schemes moved subsidy payments from actual production of commodities to other objectives contributing to a reduction in beef production. These factors negatively affected the firms business as there was an increase in live beef exports after 2008 as it was more profitable to export live-calf than to mature, slaughter and process them in Ireland. Change in the economic environment caused an increase investment by farmers in dairy products leading to a reduction in beef production as well as a concern among processors that this would lower the quality of beef products (Bell, Mcloughlin and Shelman, 2011, P.3). With respect to porter five forces, there were three major players in the beef processing industry and who accounted for 60-65% of the capacity and output. The perception was that these competitors would rather suffer lower margins than take compromises and retailers used this weakness to play processors against each other. Therefore, there was a negative effect of competitor rivalry in the beef business and, which affected the firm’s bottom line. According to literature by Porter, rivalry limits profitability in an industry as it transfers profitability directly to customers through price cuts and in this case customers try to achieve the same by playing firms against each other. Britain is Ireland’s major market for beef exports and shares similarities in both markets in beef tastes, systems of production and breeds. Economic factors again come into play when supplying the firms major market as Irish beef exporters were vulnerable to fluctuations in the euro to sterling pound exchange rates. The fluctuation was unfavorable to Irish exports (Bell, Mcloughlin and Shelman, 2011, P.3). Here, the economic factor is price currency fluctuation which negatively impact profitability. Buyer power is evident in the firm’s business environment with 90% of Irish beef being sold to the high value retail, food service and manufacturing markets in the EU. The primary sale channel for Irish beef is multiple retailers in Ireland, UK and continental Europe. The post financial crisis customers were more price sensitive, and retailers had to be price competitive. Large retail chains were expanding to Europe and, as a result, there was an increase in retailer buying power as more retailers adapted supply chain consolidation through global sourcing. The economic factor at play in this case is the global economic crisis that promotes customers to be more price sensitive causing retailers to consolidate the supply chain in order to lower the price. This has the effect of lowering industry profitability. In essence, retailers could terminate tenders with suppliers in an effort to reduce prices for the customer. This was a challenge for suppliers as tenders were awarded based on price. However, Irish beef has a strong position in the market with Irish beef accounting for 20% of all burgers sold by McDonalds in Europe in 2010. It was reliable and had an effective system of traceability (Bell, Mcloughlin and Shelman, 2011, P.3). Buyer power is aggravated by low switching costs as most of the industry’s products are highly undifferentiated, and this affects Kepak as 70% of its sales are fresh beef with little opportunity for differentiation. Analysis of Kepak’s current strategy Kepak responded to the uncertainties occasioned by lack of performance predictability in the beef industry by diversifying into other parts of the business like in the trading division and in convenience foods to smooth out its performance. Meat was the core business of Kepak accounting for 70% of its revenue. About 25% of the beef volume and the highest quality product went through special programs where Kepak took control of cattle from birth in response to the increasingly rigorous quality standards of its customers (Bell, Mcloughlin and Shelman, 2011, P.3). The company, therefore, took more control of the value chain by taking control of the most strategically relevant activities through which utility is added to the beef by controlling the production of 25% the total volume from birth. Ten customers accounted for 80% of the company’s fresh meat market. The company’s strategy of satisfying these customers was to add value to their business. This was achieved by advising its retail customers on the category based on its own experience. It taught them how to display meat, what SKU’s to add and take out of the meat case, and how to use meat to drive foot fall. It also helped them build margins by helping them understand their customers (Bell, Mcloughlin and Shelman, 2011, P.3). The decision to be more involved in marketing is in line with theory by Porter as it helps retailers target the right customers in their marketing mix. The after sales services to customers are welcome and help sustain customer loyalty. The company used its customer experience to shape its own product innovation. For instance, it introduced a new line of heat-and-serve products in the Meat division to cater for customers who wished to serve a beef joint but did not have the time to cook this type of meat. The company adopted the French technique sous vide to cook meat, and the customer only needed to heat it up. This process was superior to similar solutions in the market (Hisrich, 2010, P.368). The heat-and-serve products are a good example of functional differentiation, which increases the customer perceived value in the company’s products beyond price. The company developed consumer brands to help restore lost margin. For example, the company launched a range of four frozen coated chicken pieces and two beef burger products under the Big Al’s brand name in Ireland in 1996 to mitigate the loss of profitability in the UK. It further differentiated its products to cater for the needs of different segments in the market by introducing brands such as Rustlers targeting 16 to 24 year old males with the UK market as the principle target. Speedy snack, on the other hand, targeted younger kids as a junior version of Rustlers (Sadler and Craig, 2003, P.12). The differentiation strategy as per marketing literature helps develop a position that potential customers see as unique based on certain features that satisfy that class of customers. In this case, the highly popular Rustlers brand identifies with the values and tastes of the young and highly mobile youths in their mid-twenties. To serve the convenience food business more effectively, the company relocated the marketing, supply chain and manufacturing parts of Rustlers business to the UK. This was informed by a desire to be closer to the market, to reduce currency exposure, minimize transportation costs as well as to design a state-of-the-art production facility (Bell, Mcloughlin and Shelman, 2011, P.3). The company, in this case, adopted a positioning strategy that helped it tackle external pressure. With its activities based in the UK, Kepak could now use its capabilities to defend against other competitors and respond to both industry shifts and external factors in time. To mitigate the effects of shrinking beef herd, Kepak negotiated a co-opetition arrangement with its rival Irish Food Processors. The plan involved encouraging farmers to feed cattle at home in exchange for a higher price. The project was successful with the companies getting a contract from retailer to buy the beef at a price that would cover the extra cost (Bell, Mcloughlin and Shelman, 2011, P.3). This strategy again involved taking more control of the supply chain as the ability to supply customers with beef and especially major retailers who took 80% of the beef is a key success factor and having a guaranteed source of beef would moderate the effects of shortages and delays. Appraisal of the strategy Porter five forces In respect to porter’s forces of competitiveness, the most prominent force in the case study is buyer power. Buyer power is exhibited by the retailers that buy Kepak’s products playing it against its competitors in order to drive down prices. The company attempts to counter this threat by developing a close relationship with its buyers especially in the fresh meat market. This is done by using the company’s experience in the business to guide retailers on how to add value to their business using Kepak’s products (Porter, 2008, P.53). For example, Kepak showed them how to display meat and use meat to drive foot fall. Using this strategy, the company expects to increase the cost of switching suppliers which serves as a motivator for buyer royalty. The other strategy used by the company to reduce buyer power is diversification into the convenience food business. This strategy has been effective with products such as Rustlers being market leaders in their segment (Stokes, Wilson and Mador, 2010, P.64). Value chain analysis The supply chain consists of producers who sell cattle to processors with the processors selling the product as fresh meat or convenience foods. Kepak aimed to improve the supply chain by investing in a program where it controlled cattle from birth in response to rigorous quality demands of its customers. The company also provided after sales services to its customers by educating them on customer behavior and how to use its products to increase foot fall (Talaja, 2012, P.52). Key success factors The company’s CSFs are the innovative products that it has developed that competitors lack and provide competitive advantage. Such products include the heat-and-serve products in the Meat Division that cater for customers who would like to serve beef but lack time to cook it. The company adopted the sous vide technique to cook meat so that customers only need to heat it before serving. This innovation is superior to other solutions in the market (HBR, 2011, P39). Another CSF is the introduction of differentiated products that target segments of the market such as Speedy Snack, which target younger kids. This helps the company attract customers by offering better value beyond price incentives, thus increasing return on investment. Even though, the CSFs of the company were strong at the time the case study was done, they lack protection from imitation since it has no patent for such innovations as the sous vide. While others are trademarked, they are susceptible to substitution by rivals through similar products with different brand names (Hill and Jones, 2007, P112). Differentiation The company achieves differentiation by offering products that cater for different segments of the market or by developing products with different functional features. Differentiation based on segmentation is observed where the company introduces brands such as Rustlers and Speedy snack to cater for different segments thereby providing perceived value to customers beyond price. Functional differentiation is achieved through such innovations as the sous vide which is convenient for working mothers (Markides, 1999, P.47). Positioning The company positions itself to tackle externally imposed pressures by relocating the marketing, supply chain and manufacturing parts of Rustlers business to the UK. This allowed the company to be closer to the market, reduce currency exposure and minimize transportation costs. This strategy protected the company from competitors who could exploit the distance from its customers to introduce substitutes. In anticipation of shifts in supply expected in the future, the company entered into a partnership with IFP in initiating a program to raise cattle at home in exchange for a higher price for the farmers. The company on its part secured a sustainable supply chain (Harrison and John, 2010, P.85). VRIN analysis While the company lacks resources that meet VRIN requirements, it attempts to achieve this through a web of capabilities such as securing tenders with major retailers like MacDonalds and securing supplies by supervising the production of 25% of its beef from birth. Major retailers have stringent requirements, which lock out other competitors, and by specializing in high value markets, Kepak maintains a web of capabilities that some competitors would struggle to replicate as is the case with South American producers (Talaja, 2012, P.52). Conclusion Kepak has adopted a market strategy that is supposed to ensure that it remains stable by securing tenders with buyers in the high value market, therefore, cushioning itself from the competition by new entrants. Supplies are critical to its business, and it invests in a system where 25% of its beef requirements are supervised by the company. This strategy ensures that it can always supply its most important customers.      Bibliography: Bell, D., Mcloughlin, D. and Shelman, M. (2011). Kepak and the future of the Irish Beef Industry. Boston, Mass.: Harvard Business Review Press Talaja, A., (2012). Testing Vrin Framework: Resource Value And Rareness As Sources Of Competitive Advantage And Above Average Performance. Management, 17(2), 51-64 Stokes, D., Wilson, N. and Mador, M., (2010). Entrepreneurship. Hampshire, UK: South- Western/Cengage Learning EMEA. HBR, (2011). HBRs 10 must reads on strategy. Boston, Mass.: Harvard Business Review Press Hill, C. and Jones, G., (2007). Strategic management: an integrated approach. Boston, Mass.: Houghton Mifflin; Enfield: Publishers Group UK [distributor. Porter, M., (2008). Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press Markides, C., (1999). All the right moves: a guide to crafting breakthrough strategy. Boston, Mass.: Harvard Business School Press. Harrison, J. and John, C., (2010). Foundations in strategic management. Mason, Ohio: South- Western Cengage Learning. Sadler, P. and Craig, J., (2003). Strategic management. London; Sterling, VA: Kogan Page. Hisrich, R., (2010). International entrepreneurship: starting, developing, and managing a global venture Los Angeles: SAGE.       Read More