Management Fundamentals
Industry Dynamics:
Fruits and vegetables have become one of the most attractive foods to consumers in the world today. They have always been a big part of the day food intake for us but in the recent years consumption trends have shown products based on fruits and vegetables, like fruit juices, to be consumed at rapidly increasing rates.
The main reason for the attractiveness of such products is due to the consumers getting more concerned about staying healthy and eating right. They have changed their lifestyles and the food consumption pattern to become that of convenience and on the go while still striving for nutritious elements. “Recently, the blending of traditional and tropical juices, have pushed the consumption levels of traditional juices to 25 litres in 2002. This is an increase of over 24% from 1992 in Canada” (Consumer Trends for Fruit and Vegetable Products, 2001). There is also a sharp increase in the demand for exotic fruits and their products. “A recent Beverage World magazine article on the future of drink explains, ‘Kids today, you know, are growing up with bottled water, not cola, as an automatic choice’ ” (Consumer Demands, Spending Patterns and Preferences for Beverages, 2007)
The factors which are directly influencing the increase in the demand for fruit based products and fruit juices by consumers include:
Health and Wellness: The population in the developed countries is aging with an overall awareness of health. As a result the demand for natural and organic foods is increasing and the food is being treated as a medicine.
Convenience: People value their time and there is an overall faster paced lifestyle. The household size is also decreasing and people as a result are looking for ready made nutritional meals and alternatives.
Pleasure: Food has become a tool for entertaining, socializing as well as for comfort seeking.
Value: Consumers are going for private premium based brands which signify trust and quality. People with constraints income also want the same nutritional value and quality at lower costs
Some of the value based trends in the Canadian market which are reflected in other developed markets include increasing consumption of fresh foods, consumption of drinks and fresh fruit juices targeting certain activities like sporting and working out. “Traditionally, private label has been seen as lower quality and generally less desirable than national brands. However, in recent years, private label has changed dramatically. Stores are starting to introduce premium private label products. Store brands lower price attracts customers while the improved packaging and quality is retaining them and developing brand loyalty” (Understanding Consumer Trends Can Present New Opportunities, 2007)
Current Internal Process Model:
The main functions of the company include the four main departments namely, Sales, Production, Finance and Human Resource Management. Each of these divisions comprises management levels with a span of maximum 4 subordinates. These management teams are diversified and fragmented and report to the head of their division once a month. The production line however has five links in its scalar chain based on the trade, qualification and time in service.
The operation process includes the following steps:
The raw materials, i.e. the fruits are purchased from the farmers in rural areas
The raw material is shipped to the company’s processing plant
The inputs are then peeled, pureed, sieved, processing, treated and packaged. The packaging is bought from a third party.
The finished product is then sent for distribution to retailers on the Just-In-Time stock management basis
Porter’s Model:
For the purpose of the analysis of the environment for the fruit juice industry the Porter’s model has been used.
The key dynamics that effect the company in the industry are:
Competitive Rivalry: The fruit juice industry has very big commercial players like Nestle, Pepsi, and Tango. The rivalry as a result is very high with water and coke being substitutes for fruit juices. The product differentiation for different companies is also minimal with brands having juices for the same fruits.
Power of Buyers: The consumers in the industry are very price as well as quality conscious. With recent health trends the consumers have become picky about the nutritional value and wholesomeness of the juices as well. Moreover it does not require certain time, money or though investment to switch to another brand.
Threat of Substitutes: There are low prices substitute products in the market such as coke, water, carbonates fruit flavored drinks, squashes, energy drinks etc. making threat of substitutes very high
Threat of New Entrants: Although due to the presence of big commercial beverage giants like Nestle, Coca Cola and Pepsi the threat of new entrants was very low, but with the advancement in technology and the ease of making high quality plastic bottles and packaging the retailer fruit juice brands have also come up which are less expensive and more accepted by the consumers.
Porter’s Value Chain / Supply Model:
The following diagram shows Porter’s generic supply chain/ value chain model which fits the company as well.
Inbound
Logistics
>
Operations
>
Outbound
Logistics
>
Marketing
&
Sales
>
Service
>
M
A
R
G
I
N
Firm Infrastructure
HR Management
Technology Development
Procurement
Inbound Logistics:
The raw materials are bought from farms and orchards in rural settings and are shipped to the company plant.
Operations:
The raw material is processed by washing, peeling, sieving, processing/ making pulp, preserving and then packaging. The packages are brought in from an outsourcing package manufacturer.
Outbound Logistics:
The finished goods are dispatched to the retailers on the JIT basis. The transportation is carried out in terms of rail, road and ship transportation.
Marketing and Sales:
The sales staff is allowed to sell the stock to the retailer at low as well as negative margins in order to retail shelf space. Also no customer based intelligence is collected or sales projections are made
Firm Infrastructure:
The firm has established office as well as factory infrastructure for carrying out the business activities
HR Management:
Currently there exists 1 percent attrition for blue collar workers is in the company and a60 percent attrition for managers.
Technology Development:
There is no centralized MIS system installed in the company for tracking orders, invoicing and production schedules, units etc. aside from this the sales staff also does not have access to computers. The only support they are allowed are motorcycles, order books and mobile telephones.
Flaws and Effects
The current model of the company has resulted in the following flaws:
The shareholder demand is not met and the investors in the company are not happy with the business and their returns on the investments as a result there is imminent danger of the shareholders selling their stocks to other investors which can also result in a hostile takeover
The management teams are fragmented and report to the division heads once a month as a result there is a communication delay between the two parties.
The spans of management are too high at 10 to 1. This is acceptable in a factory setting but not acceptable at the office level as no manager can take authority as well as monitoring and control of more than 5 subordinates. Beyond this figure diminishing returns start taking place.
The attrition level at the blue collar level is fine but at the managerial level it is at 60 percent. This is too high as all the talent and human resource is willfully leaving the company resulting in loss of strategic direction and commitment for the long term.
Produce is purchased on a seasonal basis from the domestic market and as a result in times of shortfalls occur, or domestic non-seasonal demand increases, concentrates and substitutes are purchased at a premium from the overseas market for repackaging and resale. This drives the cost of procurement of the raw materials high. This is probably one of the main reasons why the company is suffering huge losses even after high revenues, due to the high cost of the goods manufactures and sold.
The packaging also takes about 6 weeks to arrive after ordering. This upsets the supply of the finished products n times when the demand is not met by supply.
There are no performance standards and indexes maintained for the fruit growers. This has resulted in the raw material being of non standard nature and the finished goods not having the same quality, appearance and taste. Aside form this not future or long term planning is carried out for the growers so future source of raw materials is not planned out. This has resulted in uncertainty for future strategy development as well as business operations.
The sales staff are paid on salary basis alone and as they are all field based, there is not accountability for their actions and no monitoring of their activities. Moreover the sales staff does not collect any information relating to customer based intelligence and t dies not invest in sales projections. This provides the company with no way of determining the trends in the product consumption and the customer purchase behavior. No future demand and supply forecasting is possible as well for long term strategy planning.
Even though the outbound logistics are JIT based there is no real time system developed for handling JIT based dispatching to retailers. Moreover no sophisticated centralized MIS software is being used. This has resulted in almost no monitoring, control and security of internal documents and records. The level of detail for data records is also insufficient due to lack of MIS. A dual, paper and computer based system has caused redundancies, wastage of time and resources as well as confusion amongst the management.
Proposed Model
The proposed model for the company is extracted from the Flow Theory Model of Mihaly Csikszentmihalyi and it is as follows:
The management teams need to be brought together and linked to one another. They should also report to the division head every week as this will increase the flow of information and reduce the communication delay.
The spans of should be decreased to 4-6 subordinates at the managerial level
The HR department needs to come up with strategies and plans to retain their employees. These could include increasing their motivation to keep on working for the company by providing them with better working conditions, better pay, better fringe benefits, altering their pension plans etc.
Long term planning needs to be conducted for managing the procurement of raw materials and fruits. The seasonal fluctuations for fruit prices need to be forecasts so negotiated deals can be made proactively to by buying future raw material at pre set cost. The seasonal shortages of the fruits also have to be forecasted so alternate sources can be arranges proactively at low costs.
A deal has to be made with the package manufacturer reduce the lead time between order and delivery from 6 weeks.
Formal quality and performance standards need to be put into place for fruit growers so that the output is standardized. Using KPI the price and quantity of current and future crops can be compared and analyzed with those of previous crops for identifying trends and devising future strategies.
A formal MIS system needs to be implemented to support the JIT dispatch to the retailers. The dual paper and computer system usage also needs to be eliminated.
The sales staff need to be paid a minimal base salary with commission based salary supporting it.
They also need to be provided with PDAs so that they can record the product quantity sold, delivered and dispatched in the system in the real time. This will help monitor their performance on the field as well.
The following illustrates the proposed process model:
Proposed Organizational Structure
Of the classical theorists Henry Fayol established principles for sound and effective management of the organization and of those principles the principles for work division, discipline, unity of direction, scalar chain and subordination of the individual have been applied in the proposed structure. Max Weber established that in order to be efficient an organization has to cut costs. He proposed the specialization and defined levels of hierarchy in an organization. This is what has been incorporated in the proposed organizational structure as well. Weber introduced the system of the piece rate which has been modified to form the commission based compensation for the sales people.
The diagram of the proposed organization structure is illustrated as:
The changes to the organizational structure are outlined below:
The board of directors should be responsible for the direction of the whole company.
The CEO should be appointed by the Board and should be responsible for carrying out managerial direction
The Divisional Heads (General Managers) for the Sales, Production, Marketing, Human Resource and Finance functions should be under the CEO
There should be 3 links in the managerial scalar chain with each supervisor having 4-6 subordinates only
The Production division should have a Quality Control department
The factory management should have 3 links in the scalar chain with a maximum of 10 subordinates for each supervisor.
References
Beranek M., (2007), Consumer Trends for Fruit and Vegetable Products, available at: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis8439
Silveira, J. M., Fruit Juice Industry, available at: http://www.mre.gov.br/CDBRASIL/ITAMARATY/WEB/ingles/economia/agroind/sucos/apresent.htm
Recklies, Dagmar, (2001), Porters Five Forces Model: Industry analysis model, available at: http://www.learnmarketing.net/porters.htm
Porters 5 Forces, available at: http://www.themanager.org/Models/P5F_2.htm
Martin J., (2005), Australian Competition & Consumer Commission, available at: http://www.accc.gov.au/content/item.phtml?itemId=666105&nodeId=b3c9a84a5f943cab60a3e6762c0d343b&fn=20050307%20Fruit%20Juice%20Association.pdf
The Value Chain Model, available at: http://www.netmba.com/strategy/value-chain/
Beranek M., (2007), Understanding Consumer Trends Can Present New Opportunities, available at: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis8735
Beranek M., (2007), Consumer Demands, Spending Patterns and Preferences for Beverages, available at: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis8436
Jewels, R. B., 2000, An Integrated Approach to Business Studies, Longman, 4th Ed.
Gustafson, S., 1994. Flow Theory, available at: http://www.ebl.org/flow_article.html
