Insights of Strategy Management - Essay Example

Student’s Name: Strategy management-A3 Instructor’s Name: Course Code & Name: Date of Submission: Abstract Gunns Ltd is the largest company dealing with hardwood and softwood products in Australia. In 2010, the company announced its plans to build a pulpwood mill in Bell Bay in order to expand its operations. However, lack of funds and pressure from the public made it difficult for the company to implement the project. This report begins by exploring Gunns external environment. The paper then goes ahead and analyses the company internal environment. The report then conducts a SWOT analysis in order to gain a deeper understanding about the company. Finally, the report identifies and analyzes the company strategy and then comes up with recommendations. Contents Student’s Name: Strategy management-A3 1 Abstract 2 Contents 3 1.0 Introduction 5 2.0 Gunns Ltd external environment 5 2.1 Gunns general environment 6 2.11Legal environment 6 2.12 Economic environment 7 2.13 Gunns Social Environment 9 2.14 Gunns International environment 9 2.15Technological environment 10 2.2 Gunns operating environment 11 2.21 Customers 11 2.22 Suppliers 11 2.23 Competitors 11 3.0 Gunns Internal Analysis 12 3.1 Competencies 12 3.2 Capabilities 12 3.3 Resources 13 4.0 SWOT Analysis- Gunns Ltd 14 4.1 Strengths 14 4.2 Weaknesses 15 4.3 Opportunities 15 4.4 Threats 16 5.0 Changes in Gunns environment 17 6.0 Gunns Strategy 18 7.0 Viability of the Strategy 18 8.0 Conclusions 19 9.0 Recommendations 19 References 20 1.0 Introduction Gunns Ltds is the largest company in Australia dealing with the production of hardwood and softwood. The company obtains its raw materials from native forests and forest plantations around the country. The company started its operations in 1875 with three listed divisions. The divisions include Forest products, plantations and other. Gunns Ltd exports its products in international market with Japan being the company’s main market. In 2010 the company announced its plans to build a $2 billion pulpwood mill in Bell Bay. However, its operations have been facing challenges which include resistance from the community as well as lack of adequate financial resources. This report is going to explore Gunns Ltd in order to identify and analyze its strategy. 2.0 Gunns Ltd external environment The purpose of analyzing the external environment is to identify the strategic opportunities and threats that surround an organization (Hill & Jones, 2010). Through external analysis an organization can be able to predict how changes in the external analysis will affect its strategies. According to Fleisher and Bensoussan (2007) an organization external environment can be analyzed by considering the general and the operating environment. The general environment comprises the legal, economic, social, international and technological factors that surround a firm while the operating environment involves the organization suppliers, customers and competitors. Therefore, analyzing Gunns general and external environment will assist in understanding the factors that surround the company. 2.1 Gunns general environment 2.11Legal environment The legal environment relate to government regulations and public attitudes towards lobbying efforts (Fleisher & Bensoussan 2007). Gunns legal environment is characterized by Greenhouse regulation. The greenhouse regulation was implemented with an aim of reducing global warming by reducing the level of carbon in the atmosphere. The regulation has made the company to incur about 10% of its production costs as compared to other competing industries in other countries. Certification requirements which require the company to be certified in matters pertaining to sustainability in forest management. The development of Australia Forestry Standard requires the company to be accredited by the Forest Stewardship council in order to meet the demands of its customers and the public. Australian environmental regulations and customers demand for chlorine free products. The use of chlorine made the wood pulps to release a lot of organic materials into the environment and this necessitated the need for government regulations. This has forced the company to identify alternative breaching agents. The national forest policy statement has led to many large public forests in the country been declared as plantations hence the forests have been transferred into conservation reserves. This has presented a challenge to the company as it means a reduction in its sources of raw materials. Plantation regulation and standards acts in Australia. The regulation and standards acts provide guidelines to the company in order to manage forest plantations hence ensure sustainable development. These regulations create a limitation to the company’s operations. 2.12 Economic environment According to Hitt, Ireland and Hoskisson (2010) the economic environment refers to the direction and nature of the economy in which an organization competes in. It includes factors like economic resources, demand and supply trends and prevailing economic conditions. The economic conditions that surround Gunns include; Financing difficulties which made it difficult for the company to finance its project. This was after ANZ withdrew its funding due to public pressure. Furthermore, new projects were canceled due to difficulties in obtaining funds. This made the company to find it difficult to finance its operations. Strict requirements which were set by investment partners. Gunns Ltd was required to comply with strict environmental provisions before it could obtain investment funds from Sodra. The requirements were difficult to meet hence this created a barrier to the company’s ability to finance its projects. Fluctuation of global market prices for wood products. The increased supply in the international market led to a reduction in prices of pulp and papers. This meant that the company’s profits were affected negatively. Global financial crisis which made it difficult for the company to access investments funds. Financial crises increases interest rates and reduces the ability for firms to access credit (Smolo & Mirakhor, 2010). Increased cost of paper manufacturing equipments and machinery. The high cost of manufacturing machinery required the company to have a large capital outlay. Moreover, the cost of raw materials formed a large proportion of the company’s operating costs. High cost of fuel and chemicals used in manufacturing wood products. The high cost of fuel increased the company’s cost of transporting raw materials and final products. Moreover, high chemical prices meant that the company was incurring high operating costs. Increase in value of the Australian Dollar. The increase in the value of the Australian Dollar was accompanied by a decrease in the price of pulp paper. This in turn had a great impact on the company’s profits given that most of its products were exported to the international markets. 2.13 Gunns Social Environment A business is part of the society and thus the society influences the activities undertaken by the business (Sekhar, 2009). Social factors include values and beliefs held by the society as well as habits and preferences. Gunns social environment includes; The communities around the country value forests and this has made them to resist the company’s operations. The Australian people place a high value on native forests and thus the company’s involvement in cutting down natives trees has been a major concern for the society. The Australian society holds strong belief that cutting trees leads to environmental pollution. This has made the company to come under harsh opposition from the public in an aim to support the environment. Change in social preference. Customers currently prefer to purchase books online and this means a reduction in the demand for papers. Therefore, the change in social preference would create a negative impact on the company’s profits. 2.14 Gunns International environment Cherunilam (2010) argues that the international environment is very important to businesses which depend on exports. Thus, this environment is crucial to Gunns because it is a major exporter of wood products. Increase in pulp and paper global competition. This was because the pulp and paper industry became a major source of exports for many countries around the world. This made the company’s profits to reduce due to a reduction in prices. Increase in world consumption of paper and tissue. The high demand of paper and tissue in international markets provided an opportunity for the company to increase its profits. Increase in the use of recycled paper in the international markets which continued to displace the use of wood pulp. The high demand for recycled papers meant a decline in the demand for the company’s products hence a reduction in its profits. 2.15Technological environment According to Hill and Jones (2010) the technological environment brings about changes in products and services offered by a business. Adapting to new technologies enables a business to be more efficient in its operations. Gunns technological environment is characterized by; Development of fast paper manufacturing machines. These machines enable the company to produce more papers at a higher speed hence gain from economies of scale. Developments in plastic technologies. The developments in plastics technologies led to production of superior plastic products which in turn created considerable competition to paper products hence reducing the demand for paper. Modernized technologies in china and other developing economies. The adoption of modernized paper and pulp production technologies in modernized economies created large competition in the global wood products markets. 2.2 Gunns operating environment The operating environment refers to the industry characteristics. This environment has immediate and specific implications on a firm (Fleisher & Bensoussan 2007). According to Plasad (2009) the operating environment of a firm can be analyzed using porters industry analysis model. 2.21 Customers Customers are faced with variety and substitute products which can make them fail to purchase firms products (Plasad, 2009). The use of recycled papers presents Gunns customers with substitute products. The increased investment in recycle based paper production led to a decrease in the demand for wood pulp because customers preferred to use recycled papers. This caused a downturn in the company’s profits given the fact that the company depends heavily on wood pulp (Baum, 2012). 2.22 Suppliers According to Baum (2012) the bargaining power of suppliers can make a firm incur large expenses in purchasing its raw materials hence reduce its profits. Gunns Ltd incurs high cost in purchasing its raw materials. Moreover, its chemical supplies cost forms a big portion of the company total operating cost 2.23 Competitors Rivalry among the current competitors and threats of new entrants dilutes the company’s market share, increases the industry capacity, destabilizes prices and thus affects the company’s profits (Gabriel, 2006). Competitor analysis enables a firm to identify the current and the future strategies that the competitors are willing to adopt. Gunns faced high competition in international wood products markets from U.S.A, China and Canada. Moreover, new competitors emerged from developing countries like Brazil and Chile. The increased competition made the company to adopt price competition strategies and this lead to a reduction its profits 3.0 Gunns Internal Analysis Analyzing a company internal context involves considering the competencies, capabilities and the company resources (Ireland, Hoskisson & Hitt, 2007). The resources in an organization enable it to compete effectively. Moreover, the ability of a firm to create competitive advantage depends on its ability to respond to its competitors using its internal resources (Hefeez & Essmail, 2007). This analysis will provide an insight into Gunns competencies capabilities and resources 3.1 Competencies According to Heefeez and Essmail (2007) competence is created when members of an organization are able to perform distinctive activities effectively. Therefore, competencies refer to the essential knowledge possessed by members of an organization. Gunns ltd is competent in producing hardwoods, softwoods. In addition, the company is competent in producing wood fibre for export purposes and this has made the company to gain global recognition. Furthermore, the company distinctive knowledge enables it to manage its investment schemes as well as its construction and winery businesses. Organization competencies help a firm to increase its performance and its profitability (Hill & Jones, 2010) 3.2 Capabilities According to Hill and Jones (2010) organizational capabilities refer to an organization skills in co-coordinating its resources as well as utilizing those resources for productive purposes. Capabilities result due to the utilization of organizational procedures and systems in its operations. Gunns ltd posses the capabilities to efficiently co-ordination its production processes in all its mills. Moreover, the company is able to coordinate the activities in its autonomous divisions. The company’s co-ordination skills have enabled it to produce various wood products that meet customer demands. Building organizational capabilities leads to production of competitive products and services (Gao, Li & Clarke, 2008). 3.3 Resources Organizational resources refer to the assets that a company posses. The resources can either be tangible or intangible. Tangible resources include buildings and equipments while intangible resources consist of the brand name and company reputation (Hill & Jones, 2010). Gunns Ltd tangible resources include eight operating sawmills one veneer panel mill and one veneer mill. The company also owns five wood fibre facilities and retail hardware’s. The company has a recognized brand name as well as a good reputation in the international markets due to the quality of its products. Gao, Li and Clarke (2008) argue that organization resources can produce unexpectedly high profits for the company. Furthermore, valuable company resources can create sustainable competitive advantage. 4.0 SWOT Analysis- Gunns Ltd SWOT analysis provides an organization with the foundation for realizing its desired alignment of its issues and variables (Helms and Nixon, 2010). Through SWOT analysis a firm can come up with strategies for exploiting its strengths and opportunities as well as with means of overcoming its weaknesses and threats. SWOT analysis will help in understanding the strengths, weaknesses, opportunities and threats in Gunns Ltd. 4.1 Strengths Strengths are capabilities and skills that enable an organization formulate and implement its strategies (Griffin, 2012). Gunns strengths include; Unique brand name and image that enables the company to gain recognition in the international market. Ability to attract financial partners and investors to assist in funding its projects. The company is able to export its products in international markets. Ability to adapt to new technologies and machineries. Possession of competent and capable employees. Ownership of physical resources and three independent divisions. Innovative production techniques. The company was able to come up with new breaching techniques after government and customers demanded for chlorine free products. 4.2 Weaknesses Weaknesses refer to the factors that are within a firms control but place the firm at a disadvantage (Henry, 2008). Gunns Ltd is characterized by the following weaknesses; Inadequate fund to finance its projects. This has forced the company to rely on financial partners and investors to assist the company with funds. Inability to maintain good relationships with the society. The company inability to build good relationships with the society has in turn led to the public rejecting its projects. Inability to predict the changes in environment hence this made the company to come up with poor strategies. Overreliance on pulp and paper products. 4.3 Opportunities Opportunities refer to factors in the environment that may present an organization with an opportunity to generate higher profits (Griffin, 2012). Gunns opportunities include; Increased global consumption of papers and tissue. The steady increase in the consumption of papers and tissue presents the company with an opportunity to increase its profits. The new markets in India and Africa present the company with additional markets to exploit. The conservation of forests in the country provides an opportunity for the company to ensure its long term existence due to continuous supply of raw materials. Reduction in native forests in Canada and U.S.A means that the company will have additional market for its hardwood products. Moreover, the reduction in forest products investment by both countries will lead to a reduction in competition. 4.4 Threats According to Griffin (2012) threats are factors or occurrences in the environment that may create difficulties to an organization ability to generate profits. The threats that Gunns Ltd may face include; .Limited domestic market and increased competition in the global markets. Inability to secure funds from investors and financial institutions. Increase in government regulations and provisions regarding forest products industry. Lack of hardwood trees due to the slow maturity rate. Increased use of recycled papers and plastics and this can decrease the demand of the company’s products. Increased price of raw materials as well as increase in transport cost. Increase resistance from the public concerning the company’s projects. 5.0 Changes in Gunns environment The changes in the organization environment require an organization to come up with new strategies in order to gain competitive advantage. The changes that might occur in the environment include technological changes, changes in competitors and changes in government regulations (Cummings & Worley, 2009). According to Ireland, Hoskisson and Hitt (2007) a firm must predict changes in the external environment in order to remain competitive. Gunns Ltd experienced changes in the international market. Developing countries started exporting their products to the international markets and this led to an increase in competition. Moreover, the pulp and paper industry became more competitive as it formed a source of export for many countries. The company’s external environment was further characterized by changes in technology. New and faster paper manufacturing equipments were developed. This enabled the paper manufacturing companies to increase their outputs and benefit from economies of scale. In addition, there was an increase in the demand for papers and tissue in the global market and this present an opportunity for firms dealing with forest products to increase their sales. Furthermore, the reduction in pulp and paper investment by Canada and U.S.A meant that there was a reduction in global competition. However, the increased use of recycled paper led to a decrease in the demand for pulp. The introduction of green energy regulations, chlorine regulation and Forest Stewardship Certification changed the forest products industry in Australia. Furthermore, the industry was characterized by increase in transport cost and increase in the cost of raw materials. The industry also experienced reductions in the supply of raw materials due to the conversion of some public forests into plantations. The industry also experienced difficulties in raising investment funds. 6.0 Gunns Strategy The company proposed to build a$ 2 billion Bell Bay pulpwood mill in order to expand its operations. Gunns strategy was to expand itself in order to increase its outputs by using 100% plantation timber. The company believed that its capabilities and competencies would assist it to excel by undertaking the project. Moreover, the increased demand in regard to paper and tissue provided certainty that the project would be successful. Furthermore, the reduction in production from the U.S and Canada which were the major producers of wood products provided the company with additional demand hence the need to expand its operations. 7.0 Viability of the Strategy Phills (2005) states that a good strategy should provide a clear guide to resource allocation and it should also match the organization capabilities with the appropriate external environment. By analyzing the environment effectively, a business can come up with good strategies that will ensure that it remains competitive (Pugh and Bourgeois, 2011). Gunns strategy was not viable. This is because the company did not consider the effects caused by an increase in the use of recycled papers which could eventually lead to a reduction in the demand of its products. Moreover, the company failed to recognize the difficulties that companies in the industry found in raising funds hence this meant that the strategy could not be implemented. Furthermore, the company was going to incur high operating costs with its strategy due to the steady increase in cost of raw materials and transport cost. The increase in competition in the international market and the reduction of raw materials as a result of forest conservation meant that the expansion strategy was not the best option for the company. Thus, the expansion strategy was poorly formulated. The company could have started by capturing new customers in order to create competitive advantage rather than begin by increasing its output. With the increase in customers, the expansion strategy could end up being successful. A good strategy should be consistent with the environment (Phills, 2010). To finance its expansion strategy the company can form mergers with other companies in order to obtain financial support. 8.0 Conclusions In conclusion, Gunns Ltd failed to predict the changes in its environment and this made the company to formulate a poor expansion strategy. Although there was an increase in demand for tissue and paper, the international market experienced an increase in competition and an increase in the use of recycled papers. In addition, lack of adequate funds made it difficult for the company to implement its strategy. 9.0 Recommendations The company should come up with new products in order to increase its portfolio and this would reduce its overreliance on wood pulp and paper products. Moreover, the company should establish good relationship with the community in order to succeed in its projects. References Cherunilan, F. (2010). International Business. New Delhi: PHI Learning. Cummings, T., & Worley, C.(2009). Organizational Development and Change. South- Western Cengage Learning. Fleisher, C., & Bensoussan, B. (2007). Business and Competitor Analysis. Sydney: FT Press. Gao, F., Li, M., & Clarke, S. (2008). Knowledge, Management, and Knowledge Management in Business Operations. Journal of Knowledge Management, 12(2), 3-17. 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