Gunns and the Australian Pulp and Manufacturing Industry - Research Paper Example

? GUNNS AND THE AUSTRALIAN PULP AND PAPER MANUFACTURING INDUSTRY Table of Contents Executive Summary 3 2.External Environmental Analysis 4 2 PESTEL Analysis 4 2.2 Porter’s Five Forces Model Analysis 6 2.3 Major Global Forces 7 3.0 Internal Environmental Analysis 8 3.1 SWOT Analysis 8 3.2 Core Competencies 10 4.Financial Analysis 11 5.Strategic Issues 11 6.Strategic Alternatives 12 7.Strategic Recommendation 13 References 14 Bibliography 15 1. Executive Summary Gunns Ltd. is one of the largest companies operating in the paper industry business sector of the Australian economy. The company is facing some difficulties operating its business activities in the recent years due to some strategic issues associated with it. This study highlights the strategic problems of the company and suggests measures that can be taken up by the company to ensure its sustainable growth in future. The external environment of the company has been analysed using PESTEL analysis and the various competitive factors affecting the company have been identified utilising the Porter’s five forces model analysis concerning the global paper industry. The strict environmental regulations and the strong supplier power in the paper industry are identified to be having a significant impact on the company. The internal environment of the company has also been analysed utilising SWOT analysis as the strategic tool. The core competencies of the company have been identified to be its diversified products portfolio and it is trying to attain competitive advantage in the market through the strengthening of its core competencies. The financial analysis of the company shows that indebtedness is a major problem of the company and it is facing difficulty to source its fund for future investments. Based on the in-depth analysis of the company and its environmental conditions the best strategic alternative for the company has been identified to restructure its business model, focusing more on plantation based business and accepting the proposed investment proposal related to Bell Bay pulpwood mill. 2. External Environmental Analysis Gunns Ltd. is engaged in the business activities related to forest management, processing, milling, exportation and merchandising of wood products (Bloomberg, 2012). The company operates its business in the global paper industry and the external environmental analysis of the company has been done in this study utilising various strategic tools like PESTEL analysis and Porter's Five Forces Model. 2.1 PESTEL Analysis PESTLE stands for Political, Economical, Social, Technological, Legal and Environmental factors. It is an external environmental analysis tool which helps the organisations to determine the external trends (Knowhownonprofit, n.d.). Hence Gunns Ltd. which is an Australian company, the country’s business environment can be better understood through the PESTEL analysis presented below: (Source: Businessmate, n.d.). a. Political: Different types of social welfare policies have been undertaken by the Australian government in the recent years like lending support to the aging people and the introduction of the scheme of paid parental leave. Apart from this the carbon tax was enacted by the Australian government recently but had to face protest from different industrial sectors of the country (BBC News Asia, 2012). b. Economical: There has been a steady growth of the Australian economy in the past 10 years. It is likely that the economy would continue to be strong paving way to further industrial growth and development in the nation. On the other and the indebtedness of Australia has increased which is evident from the rise of external debt as a percentage of GDP. At the end of the year 2011, Australia's debt from foreign countries grew to around 94.58% of GDP (Marketline, 2012). c. Social: In accordance with Central Intelligence (CIA) World Factbook the Gini coefficient of Australia ranges from 0 to 100, i.e. from perfect equality to inequality were 30.5 in 2006. The aging population of the country is also on the higher side which implies higher healthcare spending (CIA, 2012). d. Technological: The Australian government is found to encourage technological innovations in the country through various means like concessions, research grants and subsidies, etc. The business sector of the Australian economy is also found to increase its investments in research development which is a good sign for the country's economy. e. Legal: According to the Doing Business 2012 rankings presented by World Bank, Australia was ranked in the 15th position out of 183 countries (The World Bank, 2012). The country has an open economy and free trade is encouraged in the country. f. Environmental: Australia experiences climate change as a major concern. There has been an increase in the carbon dioxide emissions in the country as well in the recent years. This is also a major concern for the country's commitment towards environmental protection. 2.2 Porter’s Five Forces Model Analysis Porter’s five forces model helps an organization to assess the competitive forces which exists within the industry (Hill & Jones, 2012, p. 49). The forces which help out in the process are named as a) threat of new entrants, b) threat from the substitute products or services, c) bargaining power of the suppliers, d) bargaining power of the consumers and finally e) competition within the industry (Society for Human Resource Management (U.S.), 2006, p.38-39). Porter’s five forces analysis of the global paper industry would give us an insight about the impact of various competitive industrial forces that can have an impact on Gunns Ltd. a. Buyer Power: Most of the paper products produced globally are utilised for packaging, writing and printing purposes. The consumption of paper is mainly dominated by the companies operating in the food industry. The number of market players in need of paper is large. However the buyers have low switching costs as well. Hence the buyer power in the global paper industry can be adjudged to be moderate in nature. b. Supplier Power: The key suppliers of the paper industry are the electricity providing companies and electricity companies are mostly large corporations of the world. Wood pulp is another major raw material used as an input in the industry. Wood pulp is traded globally and switching costs are low which slackens the supplier power. Number of companies like, Gunns Ltd. have adopted the strategy of vertical integration and operates their own wood pulp mills. Thus the supplier power in the industry is comparatively low. c. Threat of New Entrants: The entry barriers to the paper industry are quite low. However regulations concerning climate change, sustainable management of forests, etc. are making it difficult for the new entrants. This industry is associated with high initial capital investment and high fixed costs to run the production process as well. However it is easier for companies to enter the market on a small scale. Thus the threat of large new entrants in the market is low. d. Threat of Substitutes: There are many substitutes of paper available in the market depending on its application and use. Like plastic is a substitute for paper used in packaging. However plastics pose environmental threats. Printing and writing papers do not have such substitutes in the market. Hence threat of substitutes is low. e. Degree of Rivalry: There are many large corporations operating their business in the paper industry at present. For a particular type of paper product, the market players are also similar in nature. There has been a modest growth in the recent years. All these facts suggest a high degree of rivalry in the global paper industry. 2.3 Major Global Forces Pulp prices have been increased manifold in recent years hence as a result total value chain cost also increased. Prices of recovered fibre is also showing upward trend for last two years which is cause of concern for small players. Increasing value chain cost is a major challenge for small players (in terms of financial and other resources) to survive in a market dominated by big players such as International paper (USA), Stora Enso (Finland), P&G (USA) and others. Currency fluctuation is a major concern for global paper manufacturers. Cost of value chain increases due to currency fluctuation. Major players in paper manufacturing industry are based on USA hence in currency fluctuation period only US dollar based manufacturers are the beneficiaries. Small regional players (based on Australia, Brazil and Chile) are losing in market competition due to their weak currencies in comparison to USA dollars. Total cost of manufacturing in terms of fibre, chemical and energy usage has increased sharply from third quarter of 2010 and hence restoring paper making margin became difficult for small and regional players. 3. The growth of countries like China, India and other developing economies is changing the equilibrium of supply and demand condition for global paper industry. 3.0 Internal Environmental Analysis The analysis of the existing internal environment of Gunns Ltd. is necessary to identify the strategic issues associated with the company. Identification of strengths, weaknesses, opportunities and threats of the company can be better understood using the SWOT analysis of the company presented below: 3.1 SWOT Analysis Strengths Weaknesses Business operations followed by the company are diversified in nature. It has three operating divisions namely, forest products, plantations, and others. The company is global exporter of hardwood woodchips to countries like Japan and other countries. The company can penetrate Asian market with their product line due to well established reputation in that region. The growth prospects of the company are also quite high. It has started operating its business way back in the year 1857 and is considered to be one of the largest producers of integrated softwood and hardwood products in Australia. Hence it has a huge capital base to expand its future growth prospects in different diversified fields of the paper industry. The company also has an advantageous strategic location and has proximity to the essential input materials required in its production process. The current financial condition of the company is not good. Its net income has gone down significantly in the financial year 2011 and has suffered a net loss of $355.5 million in 2011 (Gunns Ltd., 2012). The leverage position of the company is also not good because of increase in its gearing ratio in 2011. Global currency fluctuation has affected non USA based manufacturers and the story is not different for the company mentioned in the case study. Reliance on export is also a major weakness of the company because fluctuations in foreign exchange rates can have a significant impact on the profitability of the company. The company’s inability to sustain its operational efficiency during bad market conditions due to the recent global financial crisis (GFC) is also a major concern for the company. Opportunities Threats The proposed Bell Bay pulpwood mill is a good opportunity for the company to divert its reliance from forest resources to plantations. The demand for paper products is expected to rise after the good recovery of Australian economy from the negative impacts of GFC. The company can increase their global supply chain network by entering Asian market with their hardwood woodchips. Inorganic growth strategy is also an opportunity for the company to increase its profitability. Heavy reliance of the company on its supply contracts is a major threat for the company and can affect its future growth and development in the paper industry. China with their low cost manufacturing process is becoming major threat for global players. The company will face major threat from Chinese competitors. Uncertain nature of the timber market also poses a major threat for the sustainable growth of the company. Stringent environmental regulations can pose a threat for the company as well. Competition threat is also prevalent in the market. The SWOT analysis of Gunns Ltd. suggests that its core competency lies in its offering of diversified products. The company is trying to establish its competitive advantage in the market through its divergence from its reliance on forest products to plantations based business operations. Moreover the business experience of the company in the paper industry is an added advantage to be able to create a sustainable growth strategy for the company. 3.2 Core Competencies The company has developed 200,000 hectare plantation estate in order to fulfill their commitment to manufacture quality products. The company is one of the largest tree farmers in Australia and also one of the oldest players in the paper manufacturing industry. The company has long standing reputation for serving the demand of people for more than 100years. Gunns tries to regenerate more forest in contrast to harvesting trees in order to maintain sustainability of environment. The company follows environment friendly model for their designing the value chain. 4. Financial Analysis As suggested in the SWOT analysis of Gunns Ltd., its poor financial position has been identified as one of the main weaknesses. The company has suffered huge impairment expenses while reviewing the value of its assets considered for sale. The company is thinking of complete restructuring of its organisational activities through its shift in focus from forest based products to plantations. This requires huge investment and the company needs to be financially strong to achieve its objective successfully. Both the export values and volume of different paper products is showing a decreasing trend in the recent years. This had a significant impact on the financial condition of the company. The fluctuations in the foreign exchange rates also had a negative impact on the country. The liquidity position of the company is also not good which is evident from the fact that the company is facing difficulty in managing investment funds from various financial institutions and banks in the country. The global financial crisis has also added to the concerns of the company to find financing alternatives for making its growth strategies successful. The increasing gearing ratios of the company suggest that the leverage position of the company is proving to be a major concern for the company. Moreover, the liquidity conditions of the company are also not good which might result in difficulties for the company to fulfil its current debt obligations and might hamper smooth running of its operational business activities. Overall the financial position of the company is not good and it needs to be prudent in its financial investment decisions to increase its effectiveness and efficiency to carry on its business activities in future. 5. Strategic Issues The external and internal environmental analysis of Gunns Ltd. performed in this study suggests that there are various strategic issues currently faced by the company. The industrial structure suggests that there has been a shift in demand from traditional forest wood products to plantation based products. Gunns Ltd. is heavily dependent on suppliers for sale of its forest wood products for its revenue generation. The declining demand in this industrial sector has resulted in significant reduction of the revenues generated by the company in recent years. Apart from this the deteriorating financial condition is also a major strategic issue for the company. It is mainly attributed towards the indebtedness of the company which have resulted in increase in its financial obligations in a significant manner. The company is also facing problems to source funds required for undergoing its investment strategies. These are some of the major strategic issues concerned with the company. 6. Strategic Alternatives The company needs to formulate a strategic plan and implement it in order to have sustainable growth and development in future. Some of the strategic business alternatives that can be identified for the company are stated below: 1. Finalising the investment deal associated with the Bell Bay pulpwood mill 2. Exiting from the business activities undergone by the company which is not proving to be effective for the company in generating revenues 3. Reducing the debt obligations of the company by focussing on investment on assets which can provide significant returns 4. Transition the business operations of the company from traditional forest base to plantation base 5. It is clear from the SWOT analysis that the company is global exporter of hardwood woodchips to Japan hence they can adopt Focus strategy to explore the market of Asian region with their hardwood woodchips. 6. Diversification strategy can be applied for domestic market by expanding product category for local customers. The company should invest more money on research & development to develop a cost effective way manufacture and supply paper products. 7. Strategic Recommendation Based on the six strategic alternatives that have been identified to increase the effectiveness and efficiency of the company it is recommended that the company needs to have a complete restructuring of its business model. The forest wood based business activity and business segment should be completely removed. It is so because this business segment has been highly unproductive for the company in generation of revenues in the recent years. Moreover the company needs to be prudent in its financial investment decisions, and take up the investment proposal related to Bell Bay pulpwood mill because it would help the company to shift its focus to plantations based business activities. The increased revenue generated from the pulpwood mill would help the company to achieve its objective to reduce its debt burden as well. All these strategic initiatives taken up by the company can help it to have a sustainable growth and development in future. Another recommendation for the company is to follow focus strategy for international expansion in order to decrease risk factor (financial loss from unsuccessful investment). The company need to synchronize their green initiative with their expansion strategy to achieve sustainable development. References BBC News Asia, 2012. Australia Introduces Controversial Carbon Tax. [online] Available at: [Accessed 12 October 2012]. Bloomberg, 2012. Company Profile for Gunns Ltd (GNS). [online] Available at: [Accessed 12 October 2012]. Businessmate, no date. What is the PESTEL Framework? [Online]. Available at: [Accessed 12 October 2012]. CIA., 2012. The World Factbook: Australia-Oceania: Australia. [online] Available at: [Accessed 12 October 2012]. Gunns Ltd., 2012. Annual Report 2011. [pdf] Available at: [Accessed 12 October 2012]. Hill, C. W. L., and Jones, G. R., 2012. Strategic Management Theory: An Integrated Approach. Connecticut: Cengage Learning. Knowhownonprofit. (no date). PESTEL Analysis. [online] Available at: [Accessed 12 October 2012]. Marketline, 2012. Global Paper & Paperboard. MarketLine Industry Profile, pp. 1-36. Society for Human Resource Management (U.S.), 2006. Essentials of Strategy. Boston: Harvard Business Press. The World Bank, 2012. Ease of Doing Business in Australia. [online] Available at: [Accessed 12 October 2012]. Bibliography Ahlstrom, D., and Bruton, G. D., 2009. International Management: Strategy and Culture in the Emerging World. Connecticut: Cengage Learning. Jeffs, C., 2008. Strategic Management. California: SAGE Publications. Phadtare, M. T., 2011. Strategic Management Concepts and Cases. New Delhi: PHI Learning Pvt. Ltd. Roy, D., 2011. Strategic Foresight and Porter’s Five Forces: Towards a Synthesis. Munich: GRIN Verlag. Ryall, M. J., and Sadler, P., 2003. Strategic Management. (2nd ed.). London: Kogan Page Publishers. Read More