Gunns Case Study
The PESTEL framework below analyses the environment in which Gunns Ltd. operates by identifying the forces that have the most impact on Gunns performance: Political factors: The Commonwealth and state government environmental support for the pulp mill project had been achieved in 2007, despite bitter public opposition.
This is a very strong support from the Government in order to utilize Australia’s expanded forest resource, as there is a significant increase in hardwood pulpwood availability projected and Australia’s hardwood pulpwood currently processed onshore less than 7%.
“Plantation 2020”, a partnership between the Governments of Australia, was established in 1997, although its Vision 2020 had been established as part of the National Forest Policy Statement in 1992.
Vision 2020 aimed to treble the area of tree crops by 2020. The Government also expected continued economic growth, especially in Asia-Pacific region. It is also recommended that Vision 2020 might maximize potential economic and environmental benefits of plantations through market development that would attract more private investment The Australian Government recognized that its proposed Emissions Trading Scheme could lead to a loss of competitiveness for trade-exposed firms.
In response, in late 2009, the Australian Government committed $19 million to address four areas of importance to the industry (Creation of ForestWorks as the Forest Industry Skills Council, Development of a forest industry database, addressing climate change impacts on forestry, Assisting industry value-adding) Economic factors: Since ANZ had withdrawn funding in May 2008, under public pressure, and the Global Financial Crisis had made investment funds even more difficult to access. In 2008 and 2009, many projects for new capacity were either cancelled or put on hold due to financing difficulties.
Since 1997 more than 0. 5 million hectares of new MIS plantations had been established. Plantations had largely been established with private capital through managed investment schemes (MIS) encouraged by favorable tax treatment. Whereby investors paid tax on returns when timber was sold and the MIS paid tax on scheme profits. This allows deductions for investments upfront while deferring tax. Australia had developed an Australian Forestry Standard (AFS) to provide consumers with an independent assessment of claims about the sustainability of forest management in Australia.
However, there was a strong pressure to adopt AFS as it was more relaxed about the logging of native forests, which was generally not permitted under the Forest Stewardship Council (FSC) Social factors: The Australian industry had employed over 19000 people in predominantly rural and regional communities, mainly working for seven major domestic and international companies. It was an important customer for the domestic forestry industry. Environmental factors:
While the Australian industry had historically been characterized by ageing equipment and lower than world average capacities, capital investment and product development had enabled productivity gains that supported ongoing competitiveness and a reduction in the industry’s environmental footprint such as: * Greenhouse gas emissions and energy intensity had improved by 22% and 28% respectively since 1990, just under 30% of energy consumption derived from renewable sources * Environmental regulation and market demand for chlorine-free products had driven the industry to find alternatives to chlorine as a bleaching agent such as elemental chlorine-free and totally chlorine-free pulp. The quantity of water used per unit of output in the worldwide pulp and paper industry had nearly halved from that used in 1990, but the Australian industry savings were even greater * The maximum speed of most paper machines was estimated at 2000 meters per minute in 2005, compared with only 1600 meters per minute in 1995 Legal factors: Plantation forestry was one of the most highly regulated rural industries in Australia. All states and territory governments had codes of practice and/or guidelines for plantation management that conformed to the principles of sustainable development and took into account key regional characteristics such as cultural heritage and specific environmental impacts. ( 8 Federal Acts).
These factors will create a safe protection and assistance for Gunns Ltd with its projects * Environmental Protection and Biodiversity Conversation Act 1999 * Export Control Act 1982 * Native Title Act 1993 * Renewable Energy (Electricity) Act 2000 * Conservation, Forests and Lands Act 1987 (for Victoria_ * Flora and Fauna Guarantee Act 1999 (for Victoria) Competitors’ analysis It is suggested that Gunns includes very high pulp and paper production and processing costs relative to other international countries such as Brazil and China, which means that the company is unable to compete effectively and sustainably in these markets (Samuel, 2010).
China and Brazil are two emerging countries that are low cost production company. They are heavily subsidized, with access to much better and innovative technologies. In addition, their pulp and paper industries are heavily subsidized, they have different approaches to taxation and are subject to less onerous environmental regulations (Samuel, 2010). Especially, China has recently been rapidly becoming the largest global tissue manufacturer and consumer. They also had plans to install over 20 million tonnes of highly modern, efficient processing capacity to around 60 million tonnes per year and become the lowest cost producer which putting much more pressure on Gunns Ltd. Samuel, D. (2010).
Case 1: Gunns and the Australian Pulp and Paper Manufacturing Industry. Final Recommendation After considering all alternatives, it is recommended that Gunns Ltd should undertake a joint venture with a company specializing in low-cost pulp and paper production. Although this is the most costly and time-consuming alternative since it requires intense negotiations between both parties as well as the divestment of Gunns’ non-core assets in order to become attractive, it will greatly assist the company in growing, funding its Bell Bay pulpwood mill and ensuring the successful operation of this project (Business Link, 2011; Gale, 2011; Morningstar, 2011g).
In addition, the joint venture recommendation will provide Gunns with the significantly great benefits and synergies as it will allow the company to gain sustainable competitive advantage by growing faster, generating greater earnings and having greater access to the other company’s resources and established markets and distribution channels (Business Link, 2011). Extra notes on Internal Analysis part: Gunns’ core competencies are in forestry establishment and management, plantation management and downstream timber processing and sale (Gunns, 2011b; Lonsec, 2009). After conducting a SWOT analysis of Gunns, it was found that their main strength was having a highly diversified and vertically integrated corporate structure (Gunns, 2011b; Lonsec, 2009). This corporate structure is very robust and allows the company to have greater capacity in controlling access to inputs along with controlling the cost, quality and delivery time of those inputs (The Economist, 2011).
As a result of its highly diversified and robust corporate structure, Gunns is able to earn much greater revenue from their diverse business activities in comparison to their competitors (Lonsec, 2009). Extra notes on Strategic Alternatives: Alternatively, Gunns should demerge their non-core businesses of providing finance, road maintenance and construction, winery management and marketing services (Yahoo Finance, 2011). The proceeds from the demerger should help reduce the company’s debt levels and allow the company to better focus on strengthening their core competencies and pursuing growth opportunities in order to gain sustainable competitive advantage (Investopedia, 2010).
The demerger is also likely to have a positive impact on Gunns’ low share price (Chappell, 2011; Investopedia, 2010). References Business Link (2011). Benefits of Joint Ventures. Retrieved October 11, 2011 from http://www. businesslink. gov. uk/bdotg/action/layer? r. i=1075411648&r. l1 =1074404796&r. l2=1074404799&r. l3=1073864682&r. s=sc&r. t=RESOURCES&topicId=1073864682 Chappell, T. (2011). Foster’s Demerger Lifts Takeover Chance. Retrieved October 10, 2011 from http://news. smh. com. au/breaking-news-business/fosters-demerger-lifts-takeover-chance-20110317-1byf1. html Gale, F. (2011). Gunns Heading for its Tasmanian Endgame. Retrieved October 11, 2011 from http://theconversation. edu. u/gunns-heading-for-its-tasmanian-endgame-3241 Gunns (2011b). Our Businesses. Retrieved October 7, 2011 from http://www. gunns. com. au/ Investopedia (2011). Debt-to-Equity Ratio. Retrieved September 30, 2011 from http://www. investopedia. com/terms/d/debtequityratio. asp#axzz1ZPjpPQif Morningstar (2011g). Stock Research: Gunns Ltd. Retrieved October 11, 2011 from http://www. morningstar. com. au/Stocks/Research/20110601/GNS The Economist (2011). Vertical Integration. Retrieved October 9, 2011 from http://www. economist. com/node/13396061 Yahoo Finance (2011). Gunns Ltd Profile. Retrieved October 10, 2011 from http://au. finance. yahoo. com/q/pr? s=GNS. AX