Nowadays business environment has been changing whereby every company is facing big risk within their scope of the business. To mitigate the above mentioned risky situation companies are looking at various strategies. As a result of that, looking forward and explore new business opportunity to mitigate risk under diversification strategy. Here companies are looking at related and unrelated diversification strategy. Selection and suitability of those strategies are depending on the vision of the company, nature of the business, attitude of top management towards risk and competition as well as profit and growth of selected industry. According the situation, proposed business or selected project has been identified via related retail industry case study in Sri Lanka. That case study is highlighted importance of such strategies for those industry players to entering into new business help to increase their profitability and variance of perishable items. Therefore that case is study providing base to develop & writing this business from the perspective of industry leader. In that industry leader is Cargill Ceylon PLC (Super market chain brand name called "Cargills Food City")
In Sri Lanka most fast growing industries are supermarket/retail industry, FMCG industry, telecommunication industry, banking & financial service industry. Major reasons are expansion and growth of those industries; ending of ethnic war, increasing the disposable income of the people, new investment of business, etc. As above mentioned, retail /supermarket industry leader and others closer competitors are mainly facing problem is that reducing their products variances especially departments where selling products such as vegetables & fruits, fish and meat. Out of that high risk facing perishable item selling departments are vegetable & fruits and fish because of minimum life time of them. Currently following strategies to reduce those wastages or variances produce value added products such as fresh cuts, fruit salad, cut fruits, etc. there may another form of value added products fruits as well as having for fish department fried fish or ambutiyal, etc. But the problem is these productions are happening at the outlet (branch) level and very low quantity even staff who works in that outlets don't have such a good experience food science and technology. Therefore this project report is addressing the related diversification strategy to start new subsidiary for Cargill's Ceylon PLC. The following grid is showing that basic information of new company and its mother company.
Name of the company
Cargills Fresh (Private) Limited
Industry
Process Food
Size of the company
Medium Scale
Ownership of new company
100% own subsidiary of Cargill Ceylon PLC
Mother Company
Cargills Ceylon PLC
Legal form
Quoted public company with limited liability,
incorporated in Sri Lanka on 1 March 1946
Auditors
KPMG Ford, Rhodes, Thornton &Co. Chartered Accountants
Other subsidiaries
Cargills Quality Foods (Private) Limited
Cargills Distributors (Private) Limited
Cargills Quality Dairies (Private) Limited
Cargills Food Processors (Private) Limited
Cargills Food Services (Private) Limited
CPC Agrifoods Limited
CPC Lanka Limited
Cargills Retail (Private) Limited
Millers Limited
Bankers
Bank of Ceylon
Commercial Bank of Ceylon
Deutsche Bank
DFCC Bank
HSBC
Nations Trust Bank
Sampath Bank
SeylanBank
Standard Chartered Bank
1.1. Major objectives of the project report
Main objective of writing of this report and report focus areas are;
Main objectives
Establish new profitable venture
Reduce Cargills Retail (Private) Limited variance
Increase the market share and entering into export market
Report focusing areas
Importance of establishing of this new business venture Cargills Ceylon PLC
Business analysis - Problem &issues
Stakeholders analysis of the new company
Objective of the projects
Forecast future business potential by conducting research
Financial analysis of the project
Way of Implementing the project
Make recommendation for future development of the business
Task 01
2. Importance of establishing of new company
After establishing of this new subsidiary the following benefit can be gained for Cargills PLC (group)
Help to reduce variance of Cargills retail private limited
Mainly facing problem is the perishable department stock variances are very high, therefore they can reduce that variance once this subsidiary is established by the company by starting different preservative techniques and applying dehydrated technology via new subsidiary.
Increase the profitability cargills retail food private Ltd
Once the variance has been stopped, that will help to increase the profitability of that company.
Strengthening existing businesses
Cargillas business strategy is applying related diversification by which strength internal relationship of the business and strategic alliance of the business
Increase market share of the group of companies
Once new company come and start their business activities that will help increase the market share of the group and new company develop new market also.
Beat the competition
Main competitors of Cargills are, John Keels Group and Laufus Group they don't have such new business, even new company help to increase the and attract their customer by offering best quality and wider range of products.
Share the experience and core competencies
Cargills posses a distributing company (Cargills Distributors (Private) Limited) and retail chain (Cargills food city), by using that competencies, experience and strategic alliances further strength distribution efficiency and new market.
2.1. Problem & Issues that the company will face
Special problems and issues are key environment changes and risk factors can be considered as main problems and issues. Changes in external environment and internal environment directly affect on Cargills fresh strategic decisions therefore needs to screen both external environment and internal environment at pre strategic development stage. Hard affect creating environment is macro environment that consisted political & legal, economic, social, technology and physicals environment as well as Cargills fresh need to look at internal analysis (strength and weakness) future arising risk and mitigating strategies for that.
External Environment analysis
Changes political environment is directly affect on the key strategic decision of the business. Role of the government and supporting for the business is depending on economic policy, local and foreign trade policy. Under this are need to carry out the following analysis
Cargills need to analyze political risk and government changes, support and contribution their business related government policy making. Here this analysis help the following areas;
Nationalization - once political party has changed, they might be look their local products as well as more close and friendly countries market and keep up their business relationships.
Taxation policy- Corporate tax, VAT, capital allowances, tax holidays, government grants, etc. those which help strengthen the Cargills business further or discourage.
Foreign trade regulation - this helps to determine import and export market activities.
Changes in the economic environment are creating huge impact on the business. Regionally and globally need do analysis trend of economic.
Trend of GNP- Trend of GNP shows economic growth as well down. This help to determined income, export and import and balance of payment. The above mentioned sub sectors making huge impact on the strategic decisions.
Business cycles - Need to look, whether there is economic depression or boom to decrease or expand production of the companies.
Disposable income- By looking at disposable income can determined the consumer behavior and market segmenting profitability.
Interest rates- this affect on the cost of borrowing as well as impact on capital expenditure of the company.
Inflation - Directly affect on factors of production such as raw materials (vegetables, fish &fruits), labor and components which are used to business plant operation.
Capital market growth- growth of capital is positive sign for investment and source of fiancé is become easy.
Legal environment showing that new legislation as well as strengthening existing legislation or regulation to protect different parties in the countries. Here following are can be identified;
Construal law, corporate law and those impacts that decide business supporting or encouraging as well as discourage business expansion provision for mergers and acquisition, anti competition, etc.
Effect of protection law such as employer's protection, customer protection, environment protection (tax for reduction of carbon emission, harmful effect on the environment).
Technology environment creating new distribution channels such as make an online ordering, new technological application for dehydration of fruit and vegetable, dry fish will make easy to produce and cater to increasing demand quickly.
Social environment shows people's attitudes, choices and consumer behaviors towards new products. Therefore cargills fresh need to analyze carefully those attitudes of the future customers and their chicves.
Additional areas need to be analyzes by the Cargills fresh the following
Group financial position
This can analyze via balance sheet. By looking at financial position of the company can be determined level of short term and long term liquidity, gearing level, efficiency of capital employed, etc. This is very important for the Cargills fresh company because of major financer is mother comapny.
Industry cost structure
Industry cost structure is help to determine the cost of the production, pricing policy, marketing investment and new product developments. Not only Cargills freshhas to identify future emerging cost and their adverse effects to develop cost minimizing strategies, while maintaining substantial level profit.
Contributors of Company capital and return
One of the most important sides is capital structure that drives dividend policy, profit retention rate and new expansion, power of creditors in businesses, level of capital investment in business. Owners of capital expecting substantial return on the business as well company expect to expand business future; these two objectives are clashing each other. This must be carefully analyzed to minimize interest gaps.
Competitors activities
This also making huge impact on the Cargills fresh business, if the competitors carry out mega substitute product promotions that make huge impact on selected segment. Competitors tried create barriers to prevent new market opportunities by using merging and takeover strategies. On the other hand they try to attack existing distribution channels by using different strategies.
Cost of capital Return On Investment
To create sustainable business growth and substantial return to investors as well company itself need to analyze cost of capital.
Risk factors need to be analyze
Effect of changes in exchange rate
Effect of exchange rate is directly affected on the profitability on export market of the company as well as creating loss on company. Because of money appreciation and depreciation derived by economic activities like import and export.
Threat from natural environmental risk
Some of natural environment effects are making impact business. Cyclones, heavy raining, flood, are directly affected on crops of farmers (increase price of vegetables and fruits as well as fish) plant operations and product distribution.
Changes in Interest rate risk
Interest rate makes huge impact on cost borrowings. This is directly affected on financial cost of business and profitability. As well as, it will make impact on the cost of raw material and machinery .Ultimately that will lead to reduce the profitability and raise the price of the product.
Labor turnover rate
Highly trained or experience staff might acquired by competitors by giving high salaries as well attractive benefit. This issue directly affect on plant operations, raising new staff training and development.
Trade secret and leakage of information
There risk to leak trade secrets and top importance information (financial and non financial) which are directly influence on decision making and operational activities of business. Such information leakages strengthen competitors. It is very good opportunity for them attack on cargills fresh weaker areas as well as group. Some situations if the inland revenue gets to know about that information, tax issues might be raised.
Behavior of Employees
Negligence, Omissions, fraud, judgmental errors, less knowledge of operations and decisions making might create high risky situations where create huge loses, impact on reputations and loosing the customers.
2.2. Analyze the stakeholders and their main concern regarding the Cargill fresh company
Stake holders
Concerns
Share holders and investors
Return on capital employed or invested in the business.
Earnings per share of new subsidiary
Risk areas and their effect and mitigate action taken by management
PE and dividend policy of group of companies.
Management
Profitability of the business
financial status of the business
Cash flow information
Lenders or creditors
Whether new company capable enough cover level of interest
Level of Gearing information in the group
Nature and longevity of other loan categories
Suppliers of business (farmers)
Whether new company offer reasonable price for them.
Whether farmers payment settled down immediately or will get it delayed.
level of Working capital
Working capital cycle
Employees
Profitability and Segmental information
Benefit offers by the Cargills fresh such fair and reasonable remuneration for them, retirement benefits and bonus, continuous training and development for them to upgrade their skills.
Customers
Quality and freshness of new products and product information such as nutrition, way of preparing, additives, etc.
Product availability &distribution method
Whether they Cargills fresh posses quality assurance certification of those product range.
Government and their agencies
Protection of farmer as per government agricultural policies.
Whether company is qualified to give grants and capital allowances
Profitability information to compute tax
Statistics of the business and industry to prepare annual reports.
General public
Employment opportunities information
Provision for environmental issues
CSR activities towards the society
2.3. Objectives of Cargills fresh (Pvt) Ltd
Reduce the perishable department variance of cargills retail private limited by 50%
Develop new market and increase the group existing market share by 15%
Achieve the 45% profit before interest and tax
Export cagills fresh products for 5 south Asian countries
Task 02- Conduct the research to justify the theory
This is focused in which way data is collected. There are two major methods available those are;
Secondary data
Primary data
2.1. Secondary data collection methods
This type data collection is already available at any time some time it can be obtain free of charge or by paying subscription. Main problem is theses data has been collected different purposes by various groups.
Secondary
data
Internal
Ready to use
Sales data bases
Sales by line
Department wise sales
Regional wise sales
Variance analysis report
Stock Variance of each dept
Customer data base
Demographic data
Requires further processing
Sales Invoices analysis
Credit invoice analysis
Secondary
data
External
Published materials
General business sources
Competitors annual reports
Guides
Directories
Indexes
Statistical data
Government
sources
Census data - Central bank report
Other government publication - Different departments publications
Computerized data base
Online
Bibliographies
Numeric data base
Full text data base
Directory data
Internet
Offline
Syndicate services
House hold /consumer
Surveys
(Psychographic, lifestyles, general, advertising evaluation)
Panels(Purchases, media)
Electronic scanner service
(volume tracing data, Scanner diary panel, Scanner diary with cable TV)
Retailers
Wholesalers
Institution
Industrial Firms
Direct inquiries
Clipping services
Corporate reports
Company has to be careful when use the above data because those sources are having advantage and disadvantage. For instance, advantages by looking at central bank report can be identifying disposable income of customers, General demographic data, growth of retail and whole sales business. This save the cost of company has identify most relevant sources for that. Such as;
Online researches
Syndicated service
Annual reports of the competitors
International secondary data
2.2. Primary data collection
Primary data can be collected via qualitative and quantitative manner. There are many methods to of collecting primary data. Those are;
Questioners - This most popular and structured method to collect primary data
Interviews
Focus group
Depth interviews
Observations
Case studies analysis
Projective techniques
Association techniques
Completion techniques
Construction techniques
Expressive techniques
Different type of survey methods (Over the phone interviews, Personal interviews, mail and email interviews)
According to my recommendation, most appropriate method is by using questionnaire has to face to interview with customers. That will bring lot of benefit; can be clearly identified mood & expression of the customers regarding supermarket service, new ideas & thought to develop the business.
2.3. Identify the entire cost requirement for the project
2.3.1. Budgeting and Cash Flow
Sale budget (LKR)
Year 1
Year 2
Year 3
Year 4
Year 5
From all the product range
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
budgeted Production cost (LKR)
3,025,000
3,575,000
4,125,000
4,675,000
5,225,000
Cash flow from (LKR)
Operating activities
1,500,000
2,500,000
3,500,000
4,500,000
5,500,000
Investing activities
60,000,000
2,500,000
3,500,000
5,500,000
6,500,000
Financing activities
80,000,000
2,000,000
3,000,000
4,000,000
3,000,000
Assumptions;
Sales is expected increased by 10% in every year
Year 1 company is expecting do more investment on plant and machineries and more fiancé activities
Premises cost (land and building) & machineries cost, cost of equipments included in the investment.
Type of machineries and their cost decide by technical expert
2.3.2. Workforce planning, Staff cost and training & development cost
HR budget
Year 1
Year 2
Year 3
Year 4
Year 5
Recruitment of staff
2,500
500
600
850
1,000
Wages &salaries
35,750,000
7,150,000
8,580,000
12,155,000
14,300,000
Training &development cost
1,000,000
200,000
240,000
340,000
400,000
Assumptions for HR cost;
Basic salary per person
LKR 12,000
ETF (12% from basic salary)
LKR 1,440
EPF (3% from basic salary)
LKR 360
Medical insurance
LKR 500
Training cost per person
LKR 400
Total cost
LKR14,700
2.3.3. Way of financing the project
Finance budget
Year 1
Year 2
Year 3
Year 4
Year 5
Cash flow from financing activities
80,000,000
2,000,000
3,000,000
4,000,000
3,000,000
Way of financing
Internal retained earnings
70%
50%
30%
40%
80%
Ordinary shares
30%
20%
30%
20%
10%
Long term borrowings
-
30%
40%
40%
10%
Total financing
100%
100%
100%
100%
100%
Assumptions
1st year used group retained earrings for financing the project and rest of year finance by using cargiils fresh reserves (Pvt) Ltd reserves.
Long term borrowing could be bank loans or debenture issue based on the cost of those.
All the financial planning and managing activities done by Group finance manager.
Share isse made by corporate office (Head office or group) on behalf of Cargills fresh because of Cargills fresh is fully own subsidiary of Cargills Ceylon (PLC).
Task 03
3. What factors affect on implementation of plan
Misunderstanding of duties and task
Sometimes minor staff or managers misunderstood their duties and responsibilities that are directly affect on project operational activities.
Wrong decision making of manager
Situation where manager will taken wrong decision in implementing of the project, that is also directly affect on the project implementation.
Suppliers delays
Suppliers who are providing materials building office premises and plant or any other activities delayed operational activities of the project.
Natural disasters
Heavy raining, flood or lightning situation directly affect on construction activities, this is also affect on the project operation.
3.2. Way of implementation
Idea generated by
Board of Directors
Group managers
Group Executive
Suppliers
Business concept initiation
3.2.1. Preimplenting activities
Testing validity and feasibility of concept
Identify activities need to be planned before run the project
Implementing activities run the project
Start plant operation
Market testing
Launch the product to mass market
3.2.1. Plant building activities
Selecting land for build plant
Selecting the contractor to develop pant via bidding process
Guide and monitoring to Start plant activities with specification
Start plant operation activities
Advertising & Launch a product range
Distributing products
Evaluate the performance against set target
3.3. Way of monitoring
3.3.1. Responsibility base control
Manager and other staff allocated duties & responsibilities must achieve the within the deadline assigned while implementing the project. Especially plant building activities are the most crucial activities those should be managed by using technical expert.
3.3.2. Financial controlling
% of changes as panned budgeted vs. actual
Description
Year 1
Year 2
Year 3
Year 4
Year 5
Budgeted sales (total)
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
Actual Sales
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
budgeted Production cost (LKR)
3,025,000
3,575,000
4,125,000
4,675,000
5,225,000
Actual Production cost
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
Budged Operating activities
1,500,000
2,500,000
3,500,000
4,500,000
5,500,000
Actual operating cash flow
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
Budged Investing activities
60,000,000
2,500,000
3,500,000
5,500,000
6,500,000
Actual investing cash flow
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
Budged Financing activities
80,000,000
2,000,000
3,000,000
4,000,000
3,000,000
Actual financing cash flow
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
HR budget
Year 1
Year 2
Year 3
Year 4
Year 5
Budgeted Recruitment of staff
2,500
500
600
850
1,000
Actual Recruitment of staff
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
Budgeted Wages &salaries
35,750,000
7,150,000
8,580,000
12,155,000
14,300,000
Actual Wages &salaries
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
Budgeted Training &development cost
1,000,000
200,000
240,000
340,000
400,000
Actual Training &development cost
xxxx
xxxx
xxxx
xxxx
xxxx
% of changes
3.4. Recommendation for the future success
Qualified & experience people must be recruited by group HR division
Need to develop good attitude about and knowledge of the customers about those products is very essential.
To entering into export Market Company need to look each country demand, cultural differences. Customs requirement, tariff policies, competitors.
4. Conclusion
To start and operate product every mangers must have strategic thinking. Not only have that projected manager who is going to implement project must have multi disciplinary knowledge and skills to get all things align with the time frame
