Strategic Management: Company Analysis Introduction

Strategic Management: Company Analysis

Introduction to the Business and the Company

Analysis of Competitive Threats Faced by CSR

Analysis of Strengths and Weaknesses

Financial Performance

Overall Conclusions

CSR is the dominant player in the Australian sugar market, holding an approximately 40% share. They market sugar, ethanol and other related industry products. They are part of a larger conglomerate with three other major business lines. CSR's financial performance has been weak the past few years, due in part to challenges in the industry and also because CSR is not properly leveraging their strengths in response to the current industry conditions.

The industry is characterized by moderate intensity of rivalry, moderate buyer power, low supplier power, moderate to high threat of substitutes, and low to moderate threat of new entrants. This means that the industry is moderately challenging. The lack of growth increases those challenges.

CSR has some strengths such as vertical integration, logistics and economies of scale. They have weaknesses in that they remain vulnerable to global price shifts, they have relatively high fixed costs and a conglomerate structure.

CSR has economies of scale and operates with a strategy to control costs and leverage operational efficiencies to gain profit in their declining market. They do not have greater strategies to address the sluggishness in the domestic sugar industry, nor to penetrate some of the world's growing sugar markets, like China. Without these, CSR will continue have difficulties and their performance will continue to lag that of its potential.

Introduction to the Business and the Company

CSR was founded in 1855 as Colonial Sugar Refining Co, in Sydney, as a refiner of imported raw sugar. The company was incorporated in 1887, by which point it had expanded its operations to Melbourne and New Zealand. They began milling in 1870 in New South Wales, later adding milling operations in Queensland and Fiji. The Fiji and NSW operations were divested in the 1970s.

Today, CSR is a leading producer of sugar in Australia, and has expanded into other ventures as well. The sugar segment of their operations includes all manner of sugar types, and also includes ancillary sugar products. This includes ethanol and related products, which are derived from the sugar. Therefore, CSR's sugar division also produces solvents, cleaning solutions, refrigeration products, and organic fertilizer.

Overall, CSR recorded $3,231.3 million in revenues in 2008, an increase of 3.86% over the previous year. Of this, the sugar group accounted for $1,280.5 million, or 39.6% of the group total. Profits for the group were $213.8 m, down 30.5% from the previous year. The sugar segment's profits were $45.9m, which was down 49% from the previous year. In 2008 the sugar segment accounted for 21.4% of the group's profits.

The other major operational segments of CSR are building products (42.5% of group revenue, 40.1% of group profit); aluminium (17.1% of revenues, 25.4% of profits); and property (1.4% of revenue, 17.1% of group profit).

According to IBISWorld, CSR accounted for between 40.1-419% of the Australian sugar market in 2006-2007. This was approximately four times the size of their nearest competitors Finasucre, Mackay Sugar Co-operative, and ten times the size of industry #4 Manildra. Between 34.1-38.9% of the industry is comprised of "other," smaller firms and imports.

CSR does not have a mission or vision statement. The company's goals and objectives are alluded to in their annual report and on their website, but are never expressly stated. From what can be inferred, CSR wants to be an industry leader, and grow shareholder value. What can be deduced is that the company has only basic strategic goals shared by all public corporations, or that their strategic goals are something they feel they need to keep hidden. A lack of stated goals or objectives is not a critical problem, but it does not necessarily help the company develop a sense of focus.

According to Abell's model, a firm's industry is defined and described by evaluating three considerations - who is being satisfied, what is being satisfied, and how are customer needs being satisfied? For CSR's sugar business, they serve two main groups of customers - consumer and industrial. They market sugar directly to end users (consumers) and to other food manufacturing companies. They hold 40% of Australia's retail market. They market other sugar-derived industrial products to various industrial operations. Both products have broad-based target markets. The customer needs being satisfied are the needs for sugars and sugar-derived chemicals such as ethanol, food additives like sorbitol, solvents and cleaning solutions. These needs can be broken down more simply into a need for sweeteners, solvents, cleaners, etc. Much of CSR's product line in their sugar divisions consists of base products devoid of complex branding or production.

CSR achieves meets these market needs through a handful of distinctive competencies. Among them are experience, vertical integration, and first-mover advantages.

In terms of experience, CSR trades on 150 years in the sugar business, which has allowed them to adapt to changes in the industry, identify and capitalize upon opportunities and develop a strong brand in the marketplace. Vertical integration allows them to control costs and compete in many non-sugar markets. They leverage their access and experience in sugar production to produce everything from ethanol to power that they sell into the Queensland electrical grid. They have also managed to capitalize on first-mover advantages. They are a dominant player in the sugar industry in Australia, a position gained from their entry into the market 150+ years ago.

The company has made only vague statements regarding corporate social responsibility. On their website, they state the following:

CSR strives to be responsible and ethical, providing good returns for shareholders, and a safe and satisfying workplace for its people. But we have an equally strong responsibility to the broader community, by being a good corporate citizen, and helping to make our world a better place."

Their strategy for addressing the issue is outlined in their Safety, Health and Environment (SHE) program. This program is a well thought out, formalized program that allows CSR to adhere strictly to local and international laws. The program addresses issues of health and workplace environment that had previously caused issues for CSR, such as the Wittenoom asbestos debacle.

Analysis of the Opportunities and Threats Faced by CSR

Using Porter's Five Forces model, we can evaluate the industry structure. The five forces are: intensity of rivalry, buyer power, supplier power, threat of substitutes and threat of new entrants. The intensity of rivalry is moderate, but increasing. In the domestic market, CSR is dominant, but the market is mature, which increases the intensity of rivalry. In global markets, which account for 50% of dollar value and 80% of production in the Australian sugar industry, competition is intense. The United States has successfully implement tariffs limited Australia's ability to enter that market. India is becoming an increasingly strong competitor. Low product differentiation only serves to increase this competitive pressure.

The power of buyers is moderate. Competition in global markets results in low switching costs, increasing buyer power. Domestic demand is softening, but this increases the power for the strong buyers that remain, as they become increasingly important. Deregulation also lowers switching costs and barriers. Supplier power is low. CSR is vertically integrated, and typically deals in base commodities. CSR, however, has little pricing power over any raw sugar it needs to procure on the commodities market. That said, as the dominant market player, they have significant power over any suppliers they do have.

The threat of substitutes is moderate to high. Sugar products are suffering in terms of reputation, and there are many competitors who are trading on greater health benefits and/or lower cost. High fructose corn syrup in particular is a strong competitor, and its market penetration in Australia is lower than in, for example, North America. That said, many substitutes are inappropriate for certain products, which limits their threat. The threat of new entrants is low to moderate. Although the deregulation opens the doors to new entrants, there remain significant barriers to entry, including access to raw sugar, and the lack of growth in Australia's mature market. However, in global markets, new producers have been known to emerge, particularly during times of high commodity prices for sugar.

The domestic sugar industry is in a slight decline (IBISWorld, 2008). The only major factor expected to impact the structure of the industry would be significant shifts in commodity prices. These shifts can affect the power of buyers, and the intensity of rivalry. The latter is especially susceptible, as in a mature industry margins are typically under pressure. A decrease in sugar prices could reduce profits throughout the industry, resulting in an increase in competitive pressures. In the global sugar market, shifts are expected to be more significant, as new countries enter the market and demand in China drives the world market. Trade barriers are another potential impactive factor, in particular the current barriers to entry into the U.S. market.

There are no particular clusters in the sugar industry. The Australian firms have developed competencies in transport and processing that allows them to be amongst the lowest-cost producers in the world. Beyond that, there is little evidence of clusterization either domestically or in the global market

The sugar industry is in decline. However, there remain a few opportunities. The first major opportunity is the growth in China. One of the true growth markets in the sugar world, China is increasing in affluence and increasing its consumption of sugar-laden Western foods. The Chinese market increased by two-thirds in just six years, from 2000 to 2006, and still lags Western sugar consumption levels. Another opportunity, albeit farther out in terms of time frame, is the U.S. market. To enter this market will involve the Australian government breaking down the trade barriers that U.S. sugar producers have erected. There are more threats. The first major threat is the growth of India and other producers. India is poised to become the world's largest sugar producer, and will have a significant impact on prices worldwide. Another key threat is the decline in the domestic market. This will create capacity issues for CSR, and increase the intensity of competition. Another key threat is that of high fructose corn syrup, a major sugar competitor in the United States that is now making inroads into the Australian market.

Analysis of Strengths and Weaknesses value chain analysis breaks down where the firm adds value in its operations. The first stage of the chain is the inbound logistics. CSR adds value during this stage in two ways. First, it has a degree of control over its pricing, due to supply contracts with growers. Also, its size gives it efficiencies in transporting sugar to its mills. Operations is a key link in the value chain for CSR. This includes the first step, which is milling the sugar into various sugar products, and secondary and tertiary steps as well. This includes the distillation of sugar into ethanol and the use of the ethanol to produce other end products. At each of these three steps, CSR sends product to the market. From there, more value is added during outbound logistics due to transportation efficiencies, and well-established distribution channels that bring CSR products to grocery stores and food service wholesalers. There is further value added in the marketing stage, on account of CSR's strong market position and brand recognition. There is little value added during the service stage.

CSR has several key strengths. As one of the oldest Australian companies, they have strong brand recognition amongst both retail and institutional end consumers. Their vertical integration gives them unique abilities to control costs. It also allows them to leverage competencies in one area to expand their presence in other areas. They have economies of scale that allow them to keep variable costs lower than those of their competitors. Moreover, they have non-sugar diversification that helps to insulate them against the cyclicality of the global sugar market.

The main generic building block that CSR uses as a source of competitive advantage is superior efficiency, a result of its economies of scale, geographic concentration and decades of experience in the sugar business. This competitive advantage is sustainable. There are high barriers to entry, such as access to raw materials, to the Australian sugar market. The Queensland producers have a slight geographic competitive advantage in their transportation and production efficiencies which, combined with CSR's size, make the company's competitive advantages relatively sustainable (for an industry based around a largely undifferentiated product). CSR's advantages are imitable by other global competitors, but it will not be easy.

CSR's functional strategy is to improve efficiency and control costs. Its business-level strategy is to leverage its dominant market position to maintain profitability in the domestic market, but they have a relatively passive approach to expansion in the global market. The corporate level strategy is undetermined, as the company is mulling over the possibility of breaking up their conglomerate. Until they decide if they are going to pursue this or not, there is little corporate-level strategy to evaluate. The industry is in a life cycle that is either in maturity or decline, although the global market shows some growth. CSR's efficiency and cost control strategy fits with the stage of the life cycle, as gains cannot be made with market growth. Their lack of action at the business level in terms of both building domestic market share through acquisition or in terms of expanding into overseas markets like China, is incongruous with the stage of the industry life cycle. They should be building economies of scale in order to increase volumes and reduce variable costs. Their lack of corporate-level strategy is also incongruous but not unexpected, given the lack of benefits accruing from their conglomerate structure to the sugar business.

In terms of weaknesses, the diversification is a double-edge sword, as their conglomerate structure means that management must focus on disparate businesses. With few similarities to one another, this becomes a distraction for senior management, who cannot give each business line the attention it deserves. Moreover, the component parts of the CSR conglomerate do not offer any synergies that would normally make such a structure worthwhile. Another weakness is that CSR is still subject to global sugar prices. Although their supply contracts hedge against this, those contracts also lock in prices and that can mean that CSR pays more than the spot price for its sugar, putting it at a competitive disadvantage. The company believes that their contracts and location close to sugar fields helps defray this weakness, but profits have been affected in recent years by fluctuations in sugar price, and as late as 2000 they considered exiting the sugar business altogether. Another weakness is the high capital cost structure of CSR, given the mills, distilleries and other production facilities, and continuous investment in refining technology. This high fixed cost structure demands that CSR focus on volume sales, a potentially difficult proposition in a declining market.

Financial Performance

Over the past five years, CSR has held their gross margin in a range. The past two years, however, were the lowest at 17.02% in 2007 and 16.62% in 2008. The highest margin over the period was 18.59% in 2006. Return on assets was strongest in 2007 at 10.01%, but weakest in 2008 at 6.55%. The past year also saw the weakest return on equity in the past five years for CSR at 13.02%. Two years ago, CSR recorded a high ROE of 25.57%.

The company's liquidity has been similarly challenged in the past couple of years, deteriorating from a high current ratio of 1.71 in 2005 to just 0.91 last year, the only in the past five below 1. CSR has also increased its leverage significantly over the past few years. In 2005, the debt-to-equity ratio was 0.941, but last year this had increased to 1.576.