mpcs - up strategy case (edited final)
TRANSCRIPT
MGT 6263
MANAGEMENT POLICY AND CORPORATE
STRATEGY
STRATEGY CASE
Presented by:
Lujja Sulaiman G1217141
Sirin Alsarmini G1224192
Muhammad Afiq bin Mohd Nordin
G1212639
Nuzaihan bin Majidi G1214123
Habib M.A. Abuomer G1214733
PRESENTATION OUTLINE
1. Introduction
2. External Analysis
3. Internal Analysis
4. Identification of Strategies
5. Problems and Challenges
6. Implementation Issues
7. Recommendations
8. Conclusion
INTRODUCTION
The History of Palm Oil Industry in Malaysia
• Palm plant has been grown for over 1000 years in West Africa.
• In 1917 the crop was introduced into Malaysia by the British colonial rulers.
• Oil palm is one of the main drivers of Malaysia’s agriculture sector (71% of national agricultural land bank).
1885
• UP founder Mr. Aage Westenholz, served in the Danish Army as an Artillery Officer living in Bangkok and formed Siam Electric Co.
1906
• Mr. Westenholz established Jendarata Rubber Estate of 809 hectares followed by Corner, Raja Una and Westenholz Brothers Coconut Estates in Selangor.
1911
• Mr. Westenholz retired and was succeeded by his younger cousin, Commander William Lennart Grut,
1917
• all the above companies were merged to become United Plantations Limited.
1918
• Commander Grut acquired 2,428 hectares above Bernam River, and established Bernam Oil Palms, one of the pioneers of the Malaysian Palm Oil Industry.
The History of United Plantations
1932
• Bernam Oil Palms got listed on the Copenhagen Stock.
1966
• the two companies, United Plantations Ltd. and Bernam Oil Palms Ltd. were incorporated into United Plantations Berhad.
1969
• United Plantations Berhad got listed on the Kuala Lumpur Stock Exchange.
2004
• UP acquired Socfin’s Lima Blas Estate (totaled land bulk of 40,874 hectares).
2006
• UP acquired 2 Indonesian plantation companies, i.e., PT. Surya Sawit Sejati and PT. Mirza Pratama Putra - 40,000 hectares of plantation land in Indonesia.
The History of United Plantations
United Plantations’ Group Philosophy
“We strive towards being recognized as second to none within the plantation industry, producing high quality products, always focusing
on the sustainability of our practices and our employees’ welfare whilst attaining acceptable returns for our shareholders.”
BUSINESS MODEL
Company primary business is cultivation of oil palm and other plantation crops and their processing.
How UP generates income?
• Production and sell of semi-finished goods e.g. CPO.• Research and Development - high yielding palm products.• Derivatives trading e.g. CPO futures - hedge against
losses.• Effectiveness and efficiency company - best quality
product - premium price.
PRODUCTS OF UNITED PLANTATIONS
• Plantation– Crude Palm Oil (CPO)– Crude Palm Kernel Oil (CPKO)
• Refinery– Cocoa Butter Substitute– Palm Acid Oil– Biomass/Biodiesel
• Manufacturing– Margarine– Cooking Oil
PESTEL ANALYSIS• ETP: 8 EPP to sustain Malaysian Palm Oil Industry• Palm Oil Industrial Cluster in ECERPolitical
• Global demand for oils and fat increased by an average of 7% from 2000 till 2010. Palm oil increased by 10%
• FTA’s : Negotiations for TTP/ India-Malaysia FTA in 2011Economic/Global
• Awareness about the benefits of palm oil is increasing• Malaysian population base is small- fertility rate is -2.2 POI is
export oriented • Government is building Iskandar Malaysia with a planned
population of 3mn
Socio-cultural
• Malaysia is recognized world wide for its R&D activities • Patent laws are set by the MPOB; however, there’s a need for
stricter enforcement of intellectual property rights.Technological
• Deforestation, pollution, threat of habitat to indigenous groups and some animals
• RSPO: Roundtable on Sustainable Palm Oil (only oil with sustainable certification)
• MSPO: Malaysian Sustainable Palm Oil certification expected in 2014
Environmental
• Well regulated by Malaysian Palm Oil Board• MPOB serves as technical advisory and research institutions• Tax incentives, strict labor law for foreign workers
Legal & Regulatory
THE 5-FORCES MODEL OF COMPETITION
Rivalry among competitors
• Players competing for global share, come from different countries with different strategies and objectives, doubled with land scarcity , which makes the rivalry intense.
• KLSE-London Exchange Market- Singaporean & Indonesian Co
Substitute products
• Awareness about the benefits of palm oil is increasing ( in the U.S consumption increased by 38% for the past five years).
• CPO plantations are renewable assets and once the land is mature it is a very cash generative business.
• CPO prices are competitive because of lower production costs and high yield of oil palm.
Bargaining power of suppliers
• Most buyers are vertically integrated they rarely buy from suppliers.
• Pesticides & fertilizers : bulk purchasing decrease power of suppliers, tendency to decrease use of chemicals.
• Engineering companies: their numbers is larger than plantations, some plantations have their own Eng. Co.
• Funding is easy: many banks would offer loans (strong banking system), this industry is less risky than others and profitable.
THE 5-FORCES MODEL OF COMPETITION
Bargaining power of buyers
• Five main countries buys in trillion tons annually thus they can exert bargaining power over plantations; however, demand is on the rise, while supply is restricted which moderates the power of buyers.
• Indonesia offers more competitive CPO prices.
Threat of new entrants
• Scarcity of land. • Palm oil is capital intensive and takes long time to achieve
economies of scale• Vertical integration of the major players is a major hurdle.• Technological and managerial expertise are not easy to be
obtained and takes long time to accumulate.
THE 5-FORCES MODEL OF COMPETITION
Rivalry among
CompetitorsHigh
Bargaining Power of suppliers
Low
Threat of entryLow
Threat of substitute ProductsModerateBargaining
Power of BuyersModerate
DRIVERS OF CHANGE
Industry's long- term
growth
Cost Efficiencies, increases in productivity
Product& Marketing innovation
Technological change &
manufacturing change process
Regulatory influences & government
policy changes Attractive industry
STRATEGIC GROUP MAPPINGIt is important to understand the complexity of this industry, many
ramifications are present through the manufacturing process, it starts from preparing the land and nursing the seedlings, and then
harvesting the FFB, and it goes up until the production of palm kernel
Mature harvested Area
FFBHow many
fruit bunches
you can get from a tree
FFB yieldHow much
oil you can get from a bunch
CPO Producti
onFrom pulp of the fruit
Palm Kernel
Production
From nut of the fruit
Extracted Value
STRATEGIC GROUP MAPPINGQ
ual
ity/
Pri
ce
EV/Ha
HIGHMEDIUMLOW
HIG
HM
ED
IUM
LO
W
Legend: Malaysia- Singapore- Indonesia
Sime Darby
35 EV/ha
p
kLk
G Wilmar127 EV/ha
IOIIndo10
Ev/ha
FGV A
Strategic Group Mapping
FINANCIAL RATIOS ANALYSIS
PROFITABILITY
2005 2006 2007 2008 2009 2010 2011 2012Operating Margin 29.4349 31.8729 33.5052 39.3375 40.7536 35.0878 33.7837 38.4551Profit Margin 22.3832 25.1075 26.6097 29.0573 34.466 27.2717 26.7416 28.9204Return on assets 11.508 12.4816 13.8776 19.9202 16.1671 13.7547 17.78 14.9724Return on Equity 14.2387 14.632 15.8161 22.7848 18.3304 15.5009 19.8464 16.505
LIQUIDITY
2005 2006 2007 2008 2009 2010 2011 2012Cash ratio 1.35 1.90 0.09 0.08 3.30 3.19 5.08 6.10Quick ratio 1.56 2.45 0.54 0.49 3.48 3.44 5.73 6.79Current Ratio 2.32 3.71 3.83 4.17 4.83 4.67 7.68 8.40
EARNINGS
2005 2006 2007 2008 2009 2010 2011 2012Net Income 133.03 150.01 179.40 299.56 281.48 264.31 373.95 342.24Free Cash Flow 154.09 116.62 114.20 328.37 214.61 238.89 336.99 402.99Price Earnings Ratio (P/E) 11.02 13.54 14.77 7.15 9.47 13.46 10.56 15.15
ACTIVITY
2005 2006 2007 2008 2009 2010 2011 2012Inv Raw Materials 0.70 0.38 6.77 5.79 7.85 6.50 5.44 23.73Inventory Finished Goods 61.43 50.92 84.67 85.95 89.64 95.66 134.99 114.29Inventory to Sales 14.36 14.06 17.51 13.53 16.55 14.47 12.95 15.10
SWOT ANALYSIS
Strengths Higher Quality Production Cost efficiency Big emphasis on TQM, JIT Good Corporate Social
Responsibility
Weaknesses Difficulty obtaining skilled Sales
and Marketing Professionals Inability to create better Sales
and Marketing Opportunities in Malaysia
Small amounts of plantable land
Opportunities Availability of land in Indonesia
and Africa Market expansion to new
markets due to TPPA Higher acceptance due to health
concerns
Threats Environmental issues and Smear
campaigns Climate change and natural disasters
KEY SUCCESS FACTORS
Strong capital baseManaging significant
investment spending during the planting/development
stage period
Strong management teamThe complexity of industry requires
a strong management team (chemical engineering, bio-
engineering, food technology, agricultural science, finance,
product R&D, etc.)
Good logisticsRequires an efficient and well-
arranged and integrated system of organizations, people, activities,
technology, information and resources required to move a
product from supplier to customer.
Good Planningdevelopment of new sites of
plantations and replantation plans - feasibility studies and an
environmental impact assessment (EIA) to determine potential
environmental and social impacts.
Size of plantationMalaysia’s palm oil industry faces
a major threat of limitation of cultivable lands due to concerns of deforestation and environmental
degradation. - expanding in Indonesia and Africa.
Technical expertiseRequire a strong expertise in the technical know-how in the food and health segment - Upstream products comprise 81.5% of the
total palm oil exports.
COMPETITIVE STRENGTH ASSESSMENT
KSF WeightsUnited
PlantationsGenting
PlantationsSime Darby
Plantation Size 0.30 5 1.50 5 1.50 9 2.70Good Planning 0.20 7 1.40 6 1.20 7 1.40Good Logistics 0.18 8 1.44 6 1.08 7 1.26Capital Base 0.15 5 0.75 6 0.90 8 1.20
Strong Management
team0.10 6 0.60 6 0.60 8 0.80
Technical expertise
0.07 6 0.42 7 0.49 8 0.56
1.00 6.11 5.77 7.921 = very weak; 5 = average; 10 = very strong • United Plantation is in the middle not enjoying a competitive advantage
and not suffering the competitive disadvantage.• United Plantation is competitive in 1) Good Logistics 2) Good Planning • However, UP has to improve on these areas; 1) Plantation size, by
acquiring more land for expansion in Indonesia and Africa, 2) Capital base, by raising more funds through selling more shares and bonds.
CORPORATE-LEVEL STRATEGIES
Related Diversification
Vertical Integration Acquisition Strategic Alliance
• Unitata Berhad – Palm-oil refinery• PT Surya Sawit Sejati & PT Surya Sawit Seberang (Indonesia) – Oil-palm plantation• Butterworth Bulking Installation Sdn. Bhd. – Oil-palm collection and transportation• Bernam Agencies Sdn. Bhd. – Sales and marketing• Aarhuskarlshamn – Sales and distribution in Europe
Oil-palm plantation Palm-oil refineryManufacturing of palm-oil based products
BUSINESS-LEVEL STRATEGIES
Broad Differentiation Strategy
UP’s Quality Philosophy:
To uphold the name and reputation of United Plantations as a top producer of premium quality palm products.
Product features and performance
Input quality
Quality control process
Customer service
Production R&D
Technology and innovation
Employee training, skill and experience
Sales & marketing
FUNCTIONAL-LEVEL STRATEGIES
R&D and Technology Production
OPERATIONAL-LEVEL STRATEGIES• Managers at the operational-level are required to engage in all aspects of
operation• Operational activities are conducted in one integrated place in Jenderata
Estate, Perak
PROBLEM AND CHALLENGES
1) Issues concerning labor:
a. High turnover rate
b. Disciplinary issues for foreign workforce
c. Hiring talented workers
PROBLEM AND CHALLENGES
2) Issues concerning land:
a. Availability
b. Type/Quality
c. Irrigation
d. Transportation
IMPLEMENTATION ISSUES
• In solving the shortage of sales and marketing professionals.
• Other processes are better than competitors.
RECOMMENDATIONS
1. Hire talented sales and marketing
professionals.
2. Extend business operations to potential
new markets (e.g. Africa and the Middle East).
3. Acquire more of the plantable lands.
4. Seek more stable workforce.
5. Improve their R&D activities.
CONCLUSION
• Is UP’s strategy a Winning Strategy ?!– Fit test
(In Harmony with External Environment, Good management of Resources)– Competitive Advantage test
(distinctive quality, excellent at TQM & JIT)– Performance test
(financial strength / competitive strength and market standing)