Bunge Report

Strategic Operations Management Project Report

Bunge Limited Case Study

Goals and Strategy—Alignment Initiatives of Bunge Limited

Date: April 28, 2010

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Contents

Section

Page(s)

1. Introduction

3

2. External Analysis Using Porter’s Five Forces Analysis

3

2.1 Suppliers

3

2.2 Customers

3

2.3 Competitors

3

2.4 New Entrants

3

2.5 Substitutes

4

Summary of External Analysis

4

3. Internal Analysis Using VRIO

4

3.1 Value

5

3.2 Rarity

5

3.3 Imitability

6

3.4 Organisation

5-6

3.5 Summary of Internal Analysis

6

4. Goals and Strategies

6

4.1 Market Development

7

4.2 Regional Facility Configuration

7

4.3 Vertical Integration

7 [2]

4.4 Investment /Divestment Decisions

7

5. Strategy Evaluation and Conclusion

8

6. End Notes

8-9

1. Introduction Bunge is a global agribusiness and food company. Through its crop financing strategy, it has remained a strong player in oilseed and grain origination. Bunge is also fully integrated in its oilseed processing and fertilizer businesses. Its primary competitors are ADM and Cargill though it has a very strong position in South America. However its major competitors are increasing competition by going into joint venture partnership with Bunge’s customers. Bunge has continued to strengthen its distribution and product line systems; it needs to continue to be innovative in market that has little or no differentiation to keep its market share of the agribusiness.

2. External Analysis Using Five Forcesi&ii 2.1 Suppliers Due to Bunge’s grain origination programme, it has a very strong position with regards to its suppliers. Bunge finances the farmers directly and gets paid back in grains. Its origination network is so effective that Bunge supplies itself with virtually all the oilseeds and grains required for its processing operations.  Therefore the threat exerted by suppliers is very low.

2.2 Customers  The threat by customers is high and real. About half of the grains from Bunge’s origination strategy are used in its own operations with the rest being sold to customers. In the agribusiness, grains, oilseeds and their basic products have established industry quality and standards requirements. This results in little or no differentiation of the products. Customers’ preference is therefore based on price. To survive, Bunge and others in the industry have to be innovative, provide services that exceed customers’ expectation and build brand loyalty.

2.3 Competitors Bunge has two primary competitors namely ADM and Cargill. There is also the emerging group from Asia who are already entering into joint venture agreement with ADM and other international companies. The competition is two-fold: in the area of sale of grains, its [3]

customers have developed alternative sources and are also getting involved in upstream integration by building processing capacity to compete with Bung’s products in the local market. The competitive threat is high due to the re-alignment of strategies among its customers and competitors.

2.4 New Entrants  There is an opportunity for new entrants into the agribusiness as long as the barriers are overcome. New entrants will face formidable and well established opponents in ADM, Cargill, Bunge and other emerging alliances from Asia as previously discussed. However, Bunge needs to get out of complacency and engage in continuous process improvement to remain competitive. Geographically, Bunge is well established in Brazil handling one third of  the grains from that country and it is the largest soybean processor in Argentina. It also has strategically located port facilities in the USA, Brazil and Argentina for its export business. Given the competitive positioning of Bunge in the market, threat of new entrants is low.

2.5 Substitutes Customers can switch from the product of one company to the other due to little or no differentiation as a result of similarity in their nature and standardization. There is a high threat of substitutes for Bunge’s product. Customers’ preference may only be due to brand loyalty and price which is derivable from high-end customer service and relationship building efforts.

2.6 Summary of External Analysis Competitive

Effect on Bunge

Ranking

Suppliers

Favorable

1st

 New Entrants

Favorable

2 nd

Competitors

Moderately Favorable

3 rd

Substitutes

Unfavorable

4 th

Customers (Buyers)

Unfavorable

5 th

Overall

Moderately Favorable

 The five forces analysis above leads to the conclusion that the agribusiness industry is relatively favorable to Bunge. This is due to its strength in the upstream side of its supply chain and the difficulty of new entrants coming into the market. Its relative positioning among its competitors also makes it possible for its continuous profitability. However, it has to continue to be customer focused due to the volatility of the market with products being fungible and customers having wide latitude of choice to make in terms of products.

3. Internal Analysis Using VRIOiii [4]

Bunge is being evaluated using the VRIO frame work with a view to determining how competent they are to deliver competitive advantage in terms of value, rarity, imitability, and organization (VRIO). The main competitive factors adopted for VRIO evaluation are Bunge’s distribution system, pricing strategy, human resource management, procurement, marketing and technology.

Factor

V

R

I

O

Competit ive Advanta ge

Distribution System

Y

Y

Y

Y

Y

Pricing

Y

N

Y

Y

Y

Procurement

Y

N

Y

y

Y

Y

Y

Y

Y

Y

 Technology

3.1 Value A good question that pertains to value is, “Do resources and capabilities enable a firm to exploit an external opportunity or neutralize an external threat?” iv. Bunge’s values are aimed at promoting “integrity, openness and trust, teamwork, an entrepreneurial spirit, farmer and customer focus”v. Bunge delivers high value in its distribution system. It has more than 20 offices and warehouses at its product destination points and manages more than 100 chartered ocean-going vessels. They also have facilities at strategic places for their export business. The distribution resources of Bunge gave them a clear advantage over their competitors Bunge’s pricing policy is based on efficient operations strategy. To achieve competitive advantage, Bunge acquired Cereol and leveraged on the efficiency of the combined company to deliver its product at attractive prices. Bunge has a strong footing in terms of  pricing. Bunge’s procurement strategy of grain origination by dealing directly with the farmers delivers best value in terms of price, steady source of raw materials and excess raw materials capacity which are sold to its customers. This gives them a clear advantage over their competitors  Though Bunge is still a small competitor in the soy ingredients market, it is one of the only three producers of isolated soy proteins (ISP) and lecithin. Production of ISP is technology based; however, Bunge has developed proprietary production technology for this product thereby breaking the technological entry barrier. It has recently doubled its production capacity and has a plan to produce new lines of soy ingredients to serve other industries.  Technology is therefore of value to Bunge

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3.2 Rarity  This deals with the uniqueness of a company’s offerings. What is considered under rarity is, “How many competing firms already possess particular valuable resources and capabilities?” vi Bunge’s distribution system is export-oriented compared to its two major competitors that are US-focused. On pricing, Cargill, one of its main competitors is also customer focused like Bunge making Bunge’s price a non-rarity. Procurement strategy of giving input/financing to farmers is not unique to Bunge. Its competitors are also using same strategy though their areas of operations and influences are in different geographies. This is a temporary advantage which requires continuous strategic thinking to ward off threats from competitors in what may be regarded currently as its “comfort zones”.  The ISP production technology is obviously a rarity. The development of a proprietary production technology in this area makes Bunge a competitor that cannot be ignored by the two leading companies in this area.

3.3 Imitability Question that needs to be answered about imitability is, “ Do firms without a resource or  capability face a cost disadvantage in obtaining or developing it compared to firms that  already possess it?”vii The distribution system of Bunge is imitable but will require a lot of  resources and planning. It will take a competitor with deep pocket to imitate Bunge’s vast network of distribution system. Both pricing and procurement are imitable since all the players in the industry including Bunge continue to pursue strategies that lead to common ends: low cost and farmerfocused grain and oilseed origination.  Technology, especially the one in which Bunge hold proprietary rights is difficult to imitate. It will require a lot of investment in R&D for a competitor to imitate Bunge’s high-end ISP production technology.

3.4 Organisation  The last element to be considered in the VRIO framework is Organisation. We will set out to ask this question “Is a firm organized to exploit the full competitive potential of its resources and capabilities?”viii

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Bunge runs a decentralized management structure where regional business units still operate as separate profit centers. Most functions were devolved to these units who are in good positions to take decisions based on the vast knowledge of the business environment in which they operate. However, there is the challenge of getting strategy alignment between the different business units because of the global nature of its activities. To overcome this, Bill Wells, Bunge’s CFO stated, “ The bias is that if something should not be centralized then it definitely would not be. And if there is any doubt, then it should be decentralized”ix. Bunge’s main rivals, ADM and Cargill, run highly structured centralized organisation. So Bunge’s management structure is a competitive advantage as business decisions can be made quickly and bureaucracy is not allowed to get in the way of business opportunities.

3.5 Summary of Internal Analysis Bunge’s strength lies in its integrated business approach. It has competitive advantage in the way its distribution system is structured. Its origination scheme makes it its own raw materials supplier which allows for strategic fit along its value chain. Its management structure continues to encourage collaboration among regional SBUs so as to align all its business units with the corporate strategy of the organization. It has also evolved an internal operations strategy that is conducive to technological innovation to further enhance its competitive advantage.

4. Goals and Strategies According to Weisser, Bunge’s CEO, described the company’s business model in these words: “We need to be integrated in the whole chain. We have really focused on integration and the most defining factor for integration is logistics. At Bunge, logistics doesn’t just mean transportation—we mean getting the product to the right consumer, in the right quantity, at  the right time and the right price”  x  Integration along the entire value chain which this strategy entails require the three dimension to logistics –transport; having the right industrial footprint and locationally advantaged production assets—as described by Weiss to be well managed through collaborative efforts of the different strategic business units scattered across the globe. Integration also allows Bunge to have cost advantage by creating value in every stage of  the chain instead of in one part of the chain.  To accomplish this goal, Bunge took strategic steps in the direction outlined below:

4.1

Market Development:

 The agribusiness value chain covers grain origination, processing, freight, storage and distribution to customers. Bunge was initially involved in the origination and processing parts of the chain. In order to have a good understanding of destination [7]

trends, Bunge decided to get involved in the international marketing of its products.  This culminated in the establishment of Bunge Global Markets (BGM) which was saddled with four main functions of “ marketing physical products, freight, risk  management and trade finance”xi. These functions were further encapsulated into two major operations namely product lines and distribution. Product lines deals with global functions such as trade finance, freight and risk management while distribution businesses which serve customers in the local markets are managed from the regions. These arrangements created an avenue for a flow of information between the destination markets and the origin offices to give all Bunge companies an overview of the demand and supply scenarios in the world. Availability of  information served as a good tool for capacity management thus creating a competitive advantage.

4.2

Regional Facility Configuration

Bunge’s strategy of locating its facilities close to supply sources and markets provides a steady flow of raw materials needed for its processing facilities and allowed it to readily meet demand for its products. For its export business, facilities were located at the ports in the US, Brazil and Argentina. Crushing plants for oilseed processing were located near soy centers or ports in the US, Brazil and Argentina. It also located its fertilizer blending plants close to soybeans elevator in Brazil, the fourth fertilizer market in the world. Its soy ingredient production facility was established in Brazil, a low-cost production area. The strategy is to take advantage of  closeness to raw materials sources and low cost sources.

4.3

Vertical Integration

Bunge embarked on vertical integration of its agribusiness to gain competitive advantage. Through its origination programme, Bunge was able to supply all the soybeans used by its crushing plants. Its fertilizer business in Brazil was fully integrated; it mined raw materials, produced fertilizer and sold them directly to farmers. This enables Bunge to benefit from the value created at every stage of the chain thereby increasing its profitability

4.4

Investment / Divestment Decisions

In order to remain efficient, Bunge shed its toga of a diversified conglomerate by “making a number of strategic acquisitions, divesting non-core business and restoring financial stability ”xii. While it acquired Ceval, Cereol and others in soy processing business, it also made eight acquisitions in the fertilizer business in Brazil to consolidate it position in these markets. It also divested from its non-core businesses by selling Bunge Paints etc. Concentrating on business where it has core competences allows it to strengthen its market positioning in the agribusiness.

5. Strategy Evaluation and Conclusion In setting the goals, Weiss reiterated that its aim was to create cost advantage for Bunge in its operations. This in turn maximizes the value generated by the supply chain. In other words the sole aim is to generate supply chain surplus. A critical view of the strategies [8]

adopted by Bunge as detailed above, reveals a lot of tremendous benefit to Bunge’s business. Its market development strategy which led to the establishment of BGM was such a huge success that the company testified that in 2001, “ marketing volumes doubled while gross  profit quadrupled, and operating income grew more than six times ”xiii. In the same year, it recorded net sales of $11.5 billion. Bunge’s strategic acquisitions and facility location strategies resulted in its being the largest soybean processor and the second largest exporter of agricultural products in Argentina by March 2002. It was also the leading Latin America fertilizer produce in 2002. In conclusion, Bunge became number 3 in the agribusiness globally and has positioned itself for future growth and opportunities through the implementation of its operations strategies.

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i

Porter, M.E. (1980) Note on the Structural Analysis of Industries. In Porter, M.E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: The Free Press. Chapter One ii

Slack, N. & Lewis, M. (2008). Operations Strategy. 2nd ed. Harlow: Financial Times and PrenticeHall, Case Study 1—Bunge Limited pp.335-363 iii

Barney, Hesterly (2006) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Pearson Education Inc. iv

Barney, Hesterly (2006) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Pearson Education Inc. pp.77 v

Slack, N. & Lewis, M. (2008). Operations Strategy. 2nd ed. Harlow: Financial Times and PrenticeHall, Case Study 1—Bunge Limited pp.347 vi

Barney, Hesterly (2006) Strategic Management and Competitive Advantage. (p. 84). Upper Saddle River, NJ: Pearson Education Inc. pp.84 vii

Barney, Hesterly (2006) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Pearson Education Inc. pp.PC-126 viii

Barney, Hesterly (2006) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Pearson Education Inc. pp.90

ix

Slack, N. & Lewis, M. (2008). Operations Strategy. 2nd ed. Harlow: Financial Times and PrenticeHall, Case Study 1—Bunge Limited pp.345 x

Slack, N. & Lewis, M. (2008). Operations Strategy. 2nd ed. Harlow: Financial Times and PrenticeHall, Case Study 1—Bunge Limited pp.339 xi

Slack, N. & Lewis, M. (2008). Operations Strategy. 2nd ed. Harlow: Financial Times and PrenticeHall, Case Study 1—Bunge Limited pp.341 xii

Slack, N. & Lewis, M. (2008). Operations Strategy. 2nd ed. Harlow: Financial Times and PrenticeHall, Case Study 1—Bunge Limited pp.335 xiii

Slack, N. & Lewis, M. (2008). Operations Strategy. 2nd ed. Harlow: Financial Times and PrenticeHall, Case Study 1—Bunge Limited pp.341