Showing posts with label MBA. Show all posts
Showing posts with label MBA. Show all posts
Friday, May 7, 2010
Saturday, November 28, 2009
Corporate Governance - NZ Farming Systems Uraguay
Big Bully Approach to Farming outside New Zealand
What are the Corporate Governance Issues involved with NZFSU, and how do they compare with the principals and rules of Corporate Governance and Responsibility?
Issue 1)
Principle: Balance of Board (SEC, 2004)
Issue: The Directors that has been elected, was put in place via biased means. (Gaynor, 4/11/2009)
Why a problem?
Because the old board was re-instated, the existing problems were not addressed and no improvements will be made. It also means that the board of Directors will only change when the directors step down. It could mean that the Directors are being setup as puppets for the board. This directly ties to other issues addressed below.
Issue 2)
Principles: Effectiveness of the Board, Ethics of Directors, Quality and Independence of Auditing and Checking of Processors to Manage Risk (SEC, 2004)
Issue: The board has not pursued a balance between NZFSU and PGG Wrightson (Gaynor, 27/10/2009). Allowing for miss-management of funds between the two. From my perspective this was covered with 'creative accounting'. However, this was eventually discovered during an NZX audit where "Fudge this" (Young, 2009) was left on the copy of the books.
Why a problem?
Due to the board not pursuing irregularities in accounts. This also led to a large public outcry when colloquial terms were used in accounts presented to the NZX (Young, 2009), scaring away new investors from NZFSU.
The recovery of this situation was bad. Chairman Keith Smith was quoted for saying:
“The board has investigated the matter and is satisfied that it is an isolated incident that will not occur again with appropriate checks and controls now in place. Having said that we certainly regret the negative impact the matter caused.” (Smith, 2009)
Clearly stating that he only felt bad for the negative impact it caused externally. And that the incident would not occur due to internal controls not releasing similar information. Very trivial for an issue which involves cash-flow and 'depreciation' according to the reply to the NZX (Young, 2009).
This has accumulated a massive dilution of shares combined with a debt larger than PGG Wrightson. This is discussed later in the article.
Issues 3)
Principles: Boards relationship with Shareholders and Stakeholders
Issue: Purchasing of assets is not being disclosed to the share or stakeholders. (Gaynor, 27/11/09)
Why a problem?
By not disclosing the assets history or nature to their shareholders, investors do not know where the money is going. Land is being purchased via internal channels, with no history of rateable value (Gaynor, 27/11/09) - which due to the nature of the business cannot be considered internal trading, but does leave suspicions on many investors.
This combined with a complete watering down of shares due to reinvestment overseas has left shareholders concerns about what revenues are being made. (Baldwin, 2009)
Stakeholders are also cautious. With slight outrage that NZFSU are based purely in Uruguay, where apparent parent group PGG Wrightson (and their parent PGC), are suppose to be New Zealand companies for the New Zealand farming community.
However this is only the basics of what NZFSU and PGG, under the eyes of the Corporate Governance Principles.
Later we will address if they have Qualitative Governance at all.
As an Investor, what do I think is wrong with the boards and the governance of PGGW and NZFSU?
I think the reasoning behind NZFSU existing has not been fully disclosed to investors (of either PGGW or NZFSU).
Questions have been raised about how NZFSU has allocated its resources. Or what its purpose is. Consistently there have been Management and Performance fee's exchanged between the two firms (Gaynor, 27/10/2009). This with the included costs of purchasing lands between the two firms - I would question who the stakeholders are of the NZFSU.
This issue has been buried consistently with the lack of a new board of Directors. Leaving all new eyes off the existing books and new minds off the company direction. To quote Gaynor (4/11/2009):
"The old boys’ network is firmly in control in New Zealand, even though its performance has left a lot to be desired."
This is reinforced by the NZFSU website which states:
"At each annual meeting one third of the Directors must retire. The Directors who retire are eligible for re-election." and "John Suffield Parker retired and offered himself for re-election. Graeme Henry Wong retired and offered himself for election having been previously appointed by the Board of Directors subsequent to the 2008 Annual Shareholders Meeting. Each was elected by separate motions passed by ordinary resolution of shareholders." (*, 2009)
This means that a significant percentage of shareholding would be required to sway this downward spiral the company is on. It is worth noting also that PGG Wrightson's board members and NZFSU are one and the same - and not even further investment by PGC and Agria could affect the electing of new members in to PGG Wrightson's. (Baldwin, 11/2009)
When prospecting investors have looked into NZFSU, they have found that the operations do not have very sound operations. Duncan McGregor warned investors with this comment:
"What I am saying is if I buy a commercial building to rent out in NZ I can expect a return on capital between 6% to 8% in rent plus a capital gain when I sell. If I buy a farm in any country in this world...I can only expect a 3pc return on capital if I run it myself plus a capital gain when I sell.
To place managers in and run it like a company is a fool’s investment.
That’s only my opinion having been around farms in quite a few different countries. The investors coming into this will be city people I can’t see any practical farmers investing in this." (2007)
So with a board that can't be fixed, operations that are not transparent, expenses that don't add up, stakeholders being ignored and operations that don't make sense - Investment would be the last thing on my mind. The closest thing that comes to mind is a pyramid scheme.
How has the board met and failed to meet its obligations to stakeholders?
Who is the stakeholder?
NZFSU on its own is business set to fail.
- It does not have any links back to New Zealand with the exception of the board (who are also the board of PGGW).
- It is apply New Zealand market dynamics to an international product
- The product NZFSU produces is in direct competition with PGGW's stakeholders
- There is no rational reason to purchase land in Uruguay for a New Zealand based company.
- Re-investment cannot be counted as income.
This leaves the stakeholders as:
- PGG Wrightson’s (customer / owner ???!!!)
- Uruguay farming (customer / supplier)
- The Board (owners)
- Shareholders (owners)
Note that the New Zealand farming community, New Zealand public and New Zealand Government is not a stakeholder in NZFSU.
Stated on NZFSU is nothing about its obligations to the stakeholders. Only the Shareholders are mentioned.
Currently NZFSU has delivered its obligations to PGG Wrightson’s and the Board. It is yet to deliver its potential obligations to the shareholders - expected time for this is 2011. (Baldwin, 8/2009)
2011 is expected to be the first year when NZFSU's figures of income and expenses will break even. However you could question whether this will ever occur, with the ever-increasing annual Management and Performance Fee's being paid to PGG Wrightson. (Gaynor, 27/10/2009).
What obligations do I think the directors have, to ensure that they investors are protected?
Directors, in theory should be able to follow the basic rules of Quantitative Governance. Mervyn King's 8 questions are an easy assessment of Quantitative Governance:
Is there Conflict?
Yes there is conflict.
As stated previously, the board of NZFSU have no degrees of separation between them and the board of PGGW. This has prevented issues to be properly addressed, and has created a loop of money out of investors pockets, into NZFSU, out of NZFSU into PGGW. There also is a conflict in terms of PGGW's stakeholders (NZ Farming) and their relationship with NZFSU who is effectively a competitor to NZ Farming.
Do the Directors have all the facts to make a decision?
Yes they do. They have an excess of information which has given them a competitive advantage to go against the NZ Farming industry (direct competitor).
They have more information than most of their competitors due to operating in 3 different countries. This is due the fact that there are close direct ties between NZFSU, PGGW, PGC and Agria. They are aware of how much shares are required for each step - and they are dictating expenses from NZFSU to PGGW accordingly.
Is this a rational business decision based on all the facts?
Rational - yes, however the ethics could be questions.
With NZFSU, PGGW has a legal money laundering operation. If excess funds are required - they can put a request for shares in NZFSU onto the market - then claim the funds as an expense on NZFSU's accounts. (Gaynor, 10/2009) Likewise if they require to push money out of the PGGW accounts they invest into NZFSU through over-inflated land (which they are not required to declare the history).
However separate PGGW from NZFSU, and the decision to move with NZFSU would not just be irrational, it would be suicidal.
Is the decision in the best interest of the company?
Yes for PGGW, No for NZFSU.
PGGW as stated above has created a legal money laundering process with NZFSU. This however does mean that NZFSU will only exist until either a law makes it illegal - or a principle makes the shareholders aware of the situation they have invested in. Most likely the latter - when NZFSU has to show the true value of the assets on its books.
Is they communication to the stakeholders transparent?
No for both NZFSU and PGGW.
Only expenses are accounted for with NZFSU - and there is no proof what they have proposed with their mission statement and goals is even achievable.
Is the company acting in a socially responsible manner?
No for both
By not disclosing full transparency. They have taken shareholders money and shown no true return for it. This dishonesty towards shareholders is echoed to the stakeholders of PGGW who are now in competition with NZFSU.
Are the directors acting as good stewards of the company's assets?
PGGW - Yes, NZFSU - No
NZFSU is buying assets at whatever price the directors dictate. This is also noticeable in the annual fees NZFSU has in association with PGGW. Shareholders money is being spent not invested.
Would the board be embarrassed if its decision and the process employed in arriving at the decision appeared on the front of the national newspaper?
Yes they would.
This has happened to them before (Smith, 2009). And will continue to happen so long as the system currently in place are allowed to continue. Eventually you can expect that NZFSU will collapse - taking PGGW and Uruguay farming with it.
What options are open to them to meet these obligations?
They need to make NZFSU a completely separate company, if they do not separate it from PGGW and PGC – the collapse NZFSU could backfire on both.
Complete foreign ownership would be the best solution.
What changes are required from the regulators to prevent this happening again?
This is a situation where regulation may not have been the issue. Due diligence has been lost.
Shareholders were willing to invest in a company that promised high returns, without looking at the situation, background or even the parent group.
A warning flag should have been raised at the first signs of the start up. It was started by a director of PGG Wrightson's. It was assumed that because he was working with PGG Wrightson's at the same time of NZFSU - that no conflict would occur. Yet no one considered the concept of who the stakeholders of NZFSU would be, and if their needs would conflict with the stakeholders of PGGW.
The only way they can prevent this is more transparency with reports to the NZX, which hopefully would aid investors from making unwise investments. A similar approach is being trialled in the US.
References:
SEC, (2004),.CORPORATE GOVERNANCE IN NEW ZEALAND, PRINCIPLES AND GUIDELINES - A Handbook for Directors, Executives, and Advisers
Securities Commission (New Zealand)
Gaynor, B (2009),. Old Boys Club remains closed to new entrants
http://www.briangaynor.co.nz/blog/2009/11/4/old-boys-club-remains-closed-to-new-entrants.html
(last viewed 4/11/2009)
Gaynor, B (2009),. PGG Wrightson bills NZ Farming Systems Uruguay for US$62M
http://www.briangaynor.co.nz/blog/2009/10/27/pgg-wrightson-bills-nz-farming-systems-uruguay-for-us62-mill.html
(last viewed 23/11/2009)
Young, C, Daly, J (2009),. NZ Farming Systems Uruguay Ltd – Annual Financial Statement ("Fudge This")
NZX / NZFSU
http://www.nzx.com/markets/NZSX/NZS/announcements/2806777/NZ-Farming-Systems-Uruguay-Ltd-Annual-Financial-Statement
(last viewed 23/11/2009)
Smith, R (2009),. NZFSU gets pass fudge comment
National Business Review - Thursday October 15 2009 - 03:25pm
http://www.nbr.co.nz/article/nzfsu-gets-pass-fudge-comment-113321
(last viewed 23/11/2009)
Baldwin, L (2009),. NZFSU targets 2011 breakeven
National Business Review - Wednesday August 26 2009 - 04:50pm
http://www.nbr.co.nz/article/nz-farming-systems-uruguay-targets-2011-breakeven-109122
(last viewed 23/11/2009)
Baldwin, L (2009),. Chinese Balance - Shift in Power at PGG Wrightsons
National Business Review - Friday November 20 2009 - 02:52pm
http://www.nbr.co.nz/article/chinese-shift-balance-power-pgg-wrightson-115247
(last viewed 23/11/2009)
* (2009) New Zealand Farming Systems Website
http://www.nzfsu.co.nz/index.pasp
(last viewed 23/11/2009)
History of PGG Wrightson
http://www.pggwrightson.co.nz/assets/about%20wrightson/history/History%20Of%20PGG%20Wrightson.pdf
(last viewed 23/11/2009)
McGregor, D,. (2007) - nz farming systems Uruguay
Sharetrader Forums
http://www.sharetrader.co.nz/showthread.php?s=ec40f7bd2b131f0d0fad60962ed199b0&t=4650
(last viewed 23/11/2009)
Other Resources (read but not quoted or paraphrased):
http://en.wikipedia.org/wiki/Corporate_governance
http://www.kpmg.com/aci/gov.asp
http://shareinvestornz.blogspot.com/
http://www.iod.org.nz/
http://www.briangaynor.co.nz/
http://www.stuff.co.nz/business/blogs/stirring-the-pot/
www.farrst.blogspot.com
What are the Corporate Governance Issues involved with NZFSU, and how do they compare with the principals and rules of Corporate Governance and Responsibility?
Issue 1)
Principle: Balance of Board (SEC, 2004)
Issue: The Directors that has been elected, was put in place via biased means. (Gaynor, 4/11/2009)
Why a problem?
Because the old board was re-instated, the existing problems were not addressed and no improvements will be made. It also means that the board of Directors will only change when the directors step down. It could mean that the Directors are being setup as puppets for the board. This directly ties to other issues addressed below.
Issue 2)
Principles: Effectiveness of the Board, Ethics of Directors, Quality and Independence of Auditing and Checking of Processors to Manage Risk (SEC, 2004)
Issue: The board has not pursued a balance between NZFSU and PGG Wrightson (Gaynor, 27/10/2009). Allowing for miss-management of funds between the two. From my perspective this was covered with 'creative accounting'. However, this was eventually discovered during an NZX audit where "Fudge this" (Young, 2009) was left on the copy of the books.
Why a problem?
Due to the board not pursuing irregularities in accounts. This also led to a large public outcry when colloquial terms were used in accounts presented to the NZX (Young, 2009), scaring away new investors from NZFSU.
The recovery of this situation was bad. Chairman Keith Smith was quoted for saying:
“The board has investigated the matter and is satisfied that it is an isolated incident that will not occur again with appropriate checks and controls now in place. Having said that we certainly regret the negative impact the matter caused.” (Smith, 2009)
Clearly stating that he only felt bad for the negative impact it caused externally. And that the incident would not occur due to internal controls not releasing similar information. Very trivial for an issue which involves cash-flow and 'depreciation' according to the reply to the NZX (Young, 2009).
This has accumulated a massive dilution of shares combined with a debt larger than PGG Wrightson. This is discussed later in the article.
Issues 3)
Principles: Boards relationship with Shareholders and Stakeholders
Issue: Purchasing of assets is not being disclosed to the share or stakeholders. (Gaynor, 27/11/09)
Why a problem?
By not disclosing the assets history or nature to their shareholders, investors do not know where the money is going. Land is being purchased via internal channels, with no history of rateable value (Gaynor, 27/11/09) - which due to the nature of the business cannot be considered internal trading, but does leave suspicions on many investors.
This combined with a complete watering down of shares due to reinvestment overseas has left shareholders concerns about what revenues are being made. (Baldwin, 2009)
Stakeholders are also cautious. With slight outrage that NZFSU are based purely in Uruguay, where apparent parent group PGG Wrightson (and their parent PGC), are suppose to be New Zealand companies for the New Zealand farming community.
However this is only the basics of what NZFSU and PGG, under the eyes of the Corporate Governance Principles.
Later we will address if they have Qualitative Governance at all.
As an Investor, what do I think is wrong with the boards and the governance of PGGW and NZFSU?
I think the reasoning behind NZFSU existing has not been fully disclosed to investors (of either PGGW or NZFSU).
Questions have been raised about how NZFSU has allocated its resources. Or what its purpose is. Consistently there have been Management and Performance fee's exchanged between the two firms (Gaynor, 27/10/2009). This with the included costs of purchasing lands between the two firms - I would question who the stakeholders are of the NZFSU.
This issue has been buried consistently with the lack of a new board of Directors. Leaving all new eyes off the existing books and new minds off the company direction. To quote Gaynor (4/11/2009):
"The old boys’ network is firmly in control in New Zealand, even though its performance has left a lot to be desired."
This is reinforced by the NZFSU website which states:
"At each annual meeting one third of the Directors must retire. The Directors who retire are eligible for re-election." and "John Suffield Parker retired and offered himself for re-election. Graeme Henry Wong retired and offered himself for election having been previously appointed by the Board of Directors subsequent to the 2008 Annual Shareholders Meeting. Each was elected by separate motions passed by ordinary resolution of shareholders." (*, 2009)
This means that a significant percentage of shareholding would be required to sway this downward spiral the company is on. It is worth noting also that PGG Wrightson's board members and NZFSU are one and the same - and not even further investment by PGC and Agria could affect the electing of new members in to PGG Wrightson's. (Baldwin, 11/2009)
When prospecting investors have looked into NZFSU, they have found that the operations do not have very sound operations. Duncan McGregor warned investors with this comment:
"What I am saying is if I buy a commercial building to rent out in NZ I can expect a return on capital between 6% to 8% in rent plus a capital gain when I sell. If I buy a farm in any country in this world...I can only expect a 3pc return on capital if I run it myself plus a capital gain when I sell.
To place managers in and run it like a company is a fool’s investment.
That’s only my opinion having been around farms in quite a few different countries. The investors coming into this will be city people I can’t see any practical farmers investing in this." (2007)
So with a board that can't be fixed, operations that are not transparent, expenses that don't add up, stakeholders being ignored and operations that don't make sense - Investment would be the last thing on my mind. The closest thing that comes to mind is a pyramid scheme.
How has the board met and failed to meet its obligations to stakeholders?
Who is the stakeholder?
NZFSU on its own is business set to fail.
- It does not have any links back to New Zealand with the exception of the board (who are also the board of PGGW).
- It is apply New Zealand market dynamics to an international product
- The product NZFSU produces is in direct competition with PGGW's stakeholders
- There is no rational reason to purchase land in Uruguay for a New Zealand based company.
- Re-investment cannot be counted as income.
This leaves the stakeholders as:
- PGG Wrightson’s (customer / owner ???!!!)
- Uruguay farming (customer / supplier)
- The Board (owners)
- Shareholders (owners)
Note that the New Zealand farming community, New Zealand public and New Zealand Government is not a stakeholder in NZFSU.
Stated on NZFSU is nothing about its obligations to the stakeholders. Only the Shareholders are mentioned.
Currently NZFSU has delivered its obligations to PGG Wrightson’s and the Board. It is yet to deliver its potential obligations to the shareholders - expected time for this is 2011. (Baldwin, 8/2009)
2011 is expected to be the first year when NZFSU's figures of income and expenses will break even. However you could question whether this will ever occur, with the ever-increasing annual Management and Performance Fee's being paid to PGG Wrightson. (Gaynor, 27/10/2009).
What obligations do I think the directors have, to ensure that they investors are protected?
Directors, in theory should be able to follow the basic rules of Quantitative Governance. Mervyn King's 8 questions are an easy assessment of Quantitative Governance:
Is there Conflict?
Yes there is conflict.
As stated previously, the board of NZFSU have no degrees of separation between them and the board of PGGW. This has prevented issues to be properly addressed, and has created a loop of money out of investors pockets, into NZFSU, out of NZFSU into PGGW. There also is a conflict in terms of PGGW's stakeholders (NZ Farming) and their relationship with NZFSU who is effectively a competitor to NZ Farming.
Do the Directors have all the facts to make a decision?
Yes they do. They have an excess of information which has given them a competitive advantage to go against the NZ Farming industry (direct competitor).
They have more information than most of their competitors due to operating in 3 different countries. This is due the fact that there are close direct ties between NZFSU, PGGW, PGC and Agria. They are aware of how much shares are required for each step - and they are dictating expenses from NZFSU to PGGW accordingly.
Is this a rational business decision based on all the facts?
Rational - yes, however the ethics could be questions.
With NZFSU, PGGW has a legal money laundering operation. If excess funds are required - they can put a request for shares in NZFSU onto the market - then claim the funds as an expense on NZFSU's accounts. (Gaynor, 10/2009) Likewise if they require to push money out of the PGGW accounts they invest into NZFSU through over-inflated land (which they are not required to declare the history).
However separate PGGW from NZFSU, and the decision to move with NZFSU would not just be irrational, it would be suicidal.
Is the decision in the best interest of the company?
Yes for PGGW, No for NZFSU.
PGGW as stated above has created a legal money laundering process with NZFSU. This however does mean that NZFSU will only exist until either a law makes it illegal - or a principle makes the shareholders aware of the situation they have invested in. Most likely the latter - when NZFSU has to show the true value of the assets on its books.
Is they communication to the stakeholders transparent?
No for both NZFSU and PGGW.
Only expenses are accounted for with NZFSU - and there is no proof what they have proposed with their mission statement and goals is even achievable.
Is the company acting in a socially responsible manner?
No for both
By not disclosing full transparency. They have taken shareholders money and shown no true return for it. This dishonesty towards shareholders is echoed to the stakeholders of PGGW who are now in competition with NZFSU.
Are the directors acting as good stewards of the company's assets?
PGGW - Yes, NZFSU - No
NZFSU is buying assets at whatever price the directors dictate. This is also noticeable in the annual fees NZFSU has in association with PGGW. Shareholders money is being spent not invested.
Would the board be embarrassed if its decision and the process employed in arriving at the decision appeared on the front of the national newspaper?
Yes they would.
This has happened to them before (Smith, 2009). And will continue to happen so long as the system currently in place are allowed to continue. Eventually you can expect that NZFSU will collapse - taking PGGW and Uruguay farming with it.
What options are open to them to meet these obligations?
They need to make NZFSU a completely separate company, if they do not separate it from PGGW and PGC – the collapse NZFSU could backfire on both.
Complete foreign ownership would be the best solution.
What changes are required from the regulators to prevent this happening again?
This is a situation where regulation may not have been the issue. Due diligence has been lost.
Shareholders were willing to invest in a company that promised high returns, without looking at the situation, background or even the parent group.
A warning flag should have been raised at the first signs of the start up. It was started by a director of PGG Wrightson's. It was assumed that because he was working with PGG Wrightson's at the same time of NZFSU - that no conflict would occur. Yet no one considered the concept of who the stakeholders of NZFSU would be, and if their needs would conflict with the stakeholders of PGGW.
The only way they can prevent this is more transparency with reports to the NZX, which hopefully would aid investors from making unwise investments. A similar approach is being trialled in the US.
References:
SEC, (2004),.CORPORATE GOVERNANCE IN NEW ZEALAND, PRINCIPLES AND GUIDELINES - A Handbook for Directors, Executives, and Advisers
Securities Commission (New Zealand)
Gaynor, B (2009),. Old Boys Club remains closed to new entrants
http://www.briangaynor.co.nz/blog/2009/11/4/old-boys-club-remains-closed-to-new-entrants.html
(last viewed 4/11/2009)
Gaynor, B (2009),. PGG Wrightson bills NZ Farming Systems Uruguay for US$62M
http://www.briangaynor.co.nz/blog/2009/10/27/pgg-wrightson-bills-nz-farming-systems-uruguay-for-us62-mill.html
(last viewed 23/11/2009)
Young, C, Daly, J (2009),. NZ Farming Systems Uruguay Ltd – Annual Financial Statement ("Fudge This")
NZX / NZFSU
http://www.nzx.com/markets/NZSX/NZS/announcements/2806777/NZ-Farming-Systems-Uruguay-Ltd-Annual-Financial-Statement
(last viewed 23/11/2009)
Smith, R (2009),. NZFSU gets pass fudge comment
National Business Review - Thursday October 15 2009 - 03:25pm
http://www.nbr.co.nz/article/nzfsu-gets-pass-fudge-comment-113321
(last viewed 23/11/2009)
Baldwin, L (2009),. NZFSU targets 2011 breakeven
National Business Review - Wednesday August 26 2009 - 04:50pm
http://www.nbr.co.nz/article/nz-farming-systems-uruguay-targets-2011-breakeven-109122
(last viewed 23/11/2009)
Baldwin, L (2009),. Chinese Balance - Shift in Power at PGG Wrightsons
National Business Review - Friday November 20 2009 - 02:52pm
http://www.nbr.co.nz/article/chinese-shift-balance-power-pgg-wrightson-115247
(last viewed 23/11/2009)
* (2009) New Zealand Farming Systems Website
http://www.nzfsu.co.nz/index.pasp
(last viewed 23/11/2009)
History of PGG Wrightson
http://www.pggwrightson.co.nz/assets/about%20wrightson/history/History%20Of%20PGG%20Wrightson.pdf
(last viewed 23/11/2009)
McGregor, D,. (2007) - nz farming systems Uruguay
Sharetrader Forums
http://www.sharetrader.co.nz/showthread.php?s=ec40f7bd2b131f0d0fad60962ed199b0&t=4650
(last viewed 23/11/2009)
Other Resources (read but not quoted or paraphrased):
http://en.wikipedia.org/wiki/Corporate_governance
http://www.kpmg.com/aci/gov.asp
http://shareinvestornz.blogspot.com/
http://www.iod.org.nz/
http://www.briangaynor.co.nz/
http://www.stuff.co.nz/business/blogs/stirring-the-pot/
www.farrst.blogspot.com
New Zealand Corporate Governance Regulations: Running on International tides of change?
New Zealand Corporate Governance Regulations: Running on International tides of change?
Due to the core fundamentals of Corporate Governance, it is something that cannot be ruled and regulated easily. The fact that not only does it tie investors to operations to accounting – it does so while trying to negotiate a “General set of ideas” for all individuals involved.
With that in mind, the world has split 2 ways on how Corporate Governance should be enforced. In the America’s – a set of rules are laid out, should you exceed the boundary of the rule, you are found to be using incorrect Corporate Governance. The black and white are set by the rules – the grey, unknown, unexploited area is something that the rules do not cover.
New Zealand (and other European countries), operate under a set of Corporate Governance Principals (SEC, 2004). These principals are broken down under the following headings:
a) Ethics of Directors
b) Balance of the Board
c) Effectiveness of the Board
d) Integrity and Timeliness of Disclosures to the Board
e) Fair, Transparent and Reasonable pay to Directors
f) Checking of Processors to Manage Risk
g) Quality and Independence of Auditing
h) Boards relationship to shareholders
i) Boards relationship to stakeholders
These are broken down to a more refined set of Guidelines. The reason why the principals fit well with Business is due to the fact that the same countries that use principal based accounting, also use principal based Corporate Governance. This however also means that the accountants are also heavily involved in the Corporate Governance.
So if we have different ways of conforming to Corporate Governance, how was it that a series of crashes overseas? Well apart from the obvious that they are linked markets with shared investments – when the US market had large players display poor corporate governance, all corporate entities were then considered “evil”.
When the books of a few of these entities were researched, some less than pleasing results occurred. While in the US, companies were getting away with it due to being outside the rules; in New Zealand (and other European countries) it was where the line was not drawn where exceptions were made.
If you look at the New Zealand Principals of Corporate Governance (SEC, 2004), you will notice that the 9 principals are actually quite specific. The board must be balanced, well informed and able to maintain a relationship with the board. The Directors must have a relationship with the board, and make ethical decisions. But it is because of this – which large voids appear.
What happens if the board are not well informed, who’s disclose is it at?
Where are the Directors business related decisions? Are they purely based on ethics and board?
Are the employees stakeholders? If so how is their relationship to the board? Is it only through the director?
Why don’t the Risk Management Audits have independent?
What are good ethics? What cultural backgrounds are they based?
Who is monitoring whom? Are they biased?
How quickly can the board react if they find something out of place?
Does the old boy’s club of Boards still exist? (Gaynor, B, 2009)
By not setting a clearly defined rule, the principals can be interpreted in different ways. Even the Handbook for Directors, Executives, and Advisers (SEC, 2004) states that it is:
“It is intended as a reference for directors, executives and advisers, as they decide how best to apply the Principles to their particular entity. The nine Principles and their accompanying guidelines are included together with the Commission’s view on the particular area of corporate governance.”
So how to you enforce principals, when you state they are up for miss-interpretation? Well the system is not set in place to “go out and get people” – It’s actually set in place so that individuals exceed the recommendations. Reading the individual guidelines show evidence of this, with words such as “should” rather than “required”. It is the diligence of the board and directors that “should” changes to “must” and “required”.
However one could argue, how do you punish someone that “should” have done something, but failed to recognize it? If a formal charter is not established – can you really hold the board accountable?
The Principals rely heavily on Due Diligence, and Common Sense (PWC, 2003) – which are no longer punishable by the law (corporate or civilian). So while there are “winners” who will exceed the S.E.C.’s recommendations, there will also be losers who may choose to ignore them.
So why are there still holes in Corporate Governance? Can this be fixed?
As stated earlier, Corporate Governance is not an easy thing to regulate. Whenever an issue arises – this hole in the theory is either covered up or a “safety net” is placed underneath to try and catch it next time.
Most acts amendments or “safety net” acts are based on the accounting side of Corporate Governance. This does not identify with the core fundamental flaw that is the moral obligation of the direction of the company. Even the famed reform act, the Sarbanes–Oxley Act (see “Other Resources” in rear) – which was written up to protect investors, can only protect them from an accounting perspective. Which, given the current financial situation is obviously not sufficient.
The reason for this being, that most situational issues regarding poor Corporate Governance are only formally recorded as accounting errors. Emails, notes, conversations and other recordings of poor governance are very difficult to follow and monitor.
While the accounting processors can monitor the outbreak of a Corporate Governance failure, in most situations when it has reached that stage, the problem is already deep rooted. Meaning the only acts that can be made are that of Retribution by holding the Directors (and on occasion the board) responsible. It has only fallen on the moral obligations on the directors and the board during recent times, to decide whether to declare issues before they become problems. However, in most of these situations – doing this also does not put you in a good light with the stakeholders or shareholders, as it usually means the company will require entering a form of receivership.
The current proposed solutions out there involve reform and compliance to new policy. Two strong contenders are Basel II (a review of Basel I – Risk Reserve) and Solvency II (a review of Solvency I – Company operations vs. Solvency)
The problem with Basel II is very simple; how do you measure risk? Currently the only way this is done – is purely on a financial basis. If I do this, and it goes wrong, I stand to lose “X” dollars....
This then is covered by a banking operation and reserve accounts. However is this not just another safety net which protects the stupid? What happens to those that fail to use good operational risk management? Well this is covered by Solvency II – which (from an insurance firm’s perspective) checks to see if the safety nets can actually be paid in full.
But wasn’t this already in place before? Yes, yes it was. Remember principals 6 and 7? To calculate, manage and audit risk. This has been a corporate governance principal in NZ for many years.
It also in the US rules based system. But it also relied on the principal of “disclosure”. If you did not disclose the problem – you did not have to address. This is where the rules failed.
So have we solved any problems by introducing Basel II and Solvency II? Well actually all we have done is put more specifics, and made the topic a bit less broad. But it does not solve the issue of disclosing the true figures of risk.
The USA is also tightening policy outside of business. With investors’ acts, they hope to prevent people from making unwise investment. Taking the supply of bad investment away from Poor Corporate Governance. (Willkie, Farr, Gallagher, 2009)
How will this reform process in the USA and Europe feed down to New Zealand?
Due to New Zealand being tucked away from the world, policies usually are not enforced here immediately. However they will be put in place overseas – so international trading companies will have to comply, along with multinational companies with branches in New Zealand.
This in turn will slowly dictate how the market will operate. As a large percentage of the big companies in New Zealand fall into the 2 categories described below. First people will be “exceeding” the “advice” of the current principals by apply to the new system (to continue business), and then we may have our own reform to change the standards to what we are already doing in New Zealand.
This however still will not fix all the problems, unless the individuals are continuously driven to exceed the recommendations of the Corporate Governance Principals. Likewise can be said about the USA and applying above the required for the rules based system.
References:
Willkie, Farr, Gallagher, (2009),. IMPLICATIONS OF PROPOSED U.S. FINANCIAL REGULATORY REFORM FOR NON-U.S. FUND MANAGERS
www.willkie.com
SEC, (2004),.CORPORATE GOVERNANCE IN NEW ZEALAND, PRINCIPLES AND GUIDELINES - A Handbook for Directors, Executives, and Advisers
Securities Commission (New Zealand)
Gaynor, B (2009),. Old Boys Club remains closed to new entrants
http://www.briangaynor.co.nz/blog/2009/11/4/old-boys-club-remains-closed-to-new-entrants.html
(last viewed 4/11/2009)
PWC (2003),. Audit Committees - Good practices for meeting market expectations (2nd ed)
PWC
Other Resources (read but not quoted or paraphrased):
http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act
http://en.wikipedia.org/wiki/Corporate_governance
http://www.kpmg.com/aci/gov.asp
http://www.questia.com/googleScholar.qst;jsessionid=KxhCd7rf0ltYlNwTrVFGz95L0QQLgVGvNkFp3wpZpxK10QTpvPhL!-950397748!568259201?docId=5008765482
http://en.wikipedia.org/wiki/Basel_II
http://en.wikipedia.org/wiki/Operational_risk_management
http://en.wikipedia.org/wiki/Solvency_II
http://en.wikipedia.org/wiki/Data_governance
http://shareinvestornz.blogspot.com/
http://www.iod.org.nz/
http://www.briangaynor.co.nz/
http://www.stuff.co.nz/business/blogs/stirring-the-pot/
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14738392
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14756903
http://search.ft.com/search?queryText=corporate+governance&ftsearchType=type_news
http://books.google.co.nz/books?id=Vrm4b4sLzz8C&pg=PA170&lpg=PA170&dq=regulatory+review+of+US+corporate+governance&source=bl&ots=o5IBshaYLK&sig=wYHOlbRwjWtfnv2LFsy5bk2Z0UI&hl=en&ei=s6TxSo-vBo_ssQOUxbX4AQ&sa=X&oi=book_result&ct=result&resnum=3&ved=0CBQQ6AEwAjgU#v=onepage&q=regulatory%20review%20of%20US%20corporate%20governance&f=false
www.farrst.blogspot.com
Due to the core fundamentals of Corporate Governance, it is something that cannot be ruled and regulated easily. The fact that not only does it tie investors to operations to accounting – it does so while trying to negotiate a “General set of ideas” for all individuals involved.
With that in mind, the world has split 2 ways on how Corporate Governance should be enforced. In the America’s – a set of rules are laid out, should you exceed the boundary of the rule, you are found to be using incorrect Corporate Governance. The black and white are set by the rules – the grey, unknown, unexploited area is something that the rules do not cover.
New Zealand (and other European countries), operate under a set of Corporate Governance Principals (SEC, 2004). These principals are broken down under the following headings:
a) Ethics of Directors
b) Balance of the Board
c) Effectiveness of the Board
d) Integrity and Timeliness of Disclosures to the Board
e) Fair, Transparent and Reasonable pay to Directors
f) Checking of Processors to Manage Risk
g) Quality and Independence of Auditing
h) Boards relationship to shareholders
i) Boards relationship to stakeholders
These are broken down to a more refined set of Guidelines. The reason why the principals fit well with Business is due to the fact that the same countries that use principal based accounting, also use principal based Corporate Governance. This however also means that the accountants are also heavily involved in the Corporate Governance.
So if we have different ways of conforming to Corporate Governance, how was it that a series of crashes overseas? Well apart from the obvious that they are linked markets with shared investments – when the US market had large players display poor corporate governance, all corporate entities were then considered “evil”.
When the books of a few of these entities were researched, some less than pleasing results occurred. While in the US, companies were getting away with it due to being outside the rules; in New Zealand (and other European countries) it was where the line was not drawn where exceptions were made.
If you look at the New Zealand Principals of Corporate Governance (SEC, 2004), you will notice that the 9 principals are actually quite specific. The board must be balanced, well informed and able to maintain a relationship with the board. The Directors must have a relationship with the board, and make ethical decisions. But it is because of this – which large voids appear.
What happens if the board are not well informed, who’s disclose is it at?
Where are the Directors business related decisions? Are they purely based on ethics and board?
Are the employees stakeholders? If so how is their relationship to the board? Is it only through the director?
Why don’t the Risk Management Audits have independent?
What are good ethics? What cultural backgrounds are they based?
Who is monitoring whom? Are they biased?
How quickly can the board react if they find something out of place?
Does the old boy’s club of Boards still exist? (Gaynor, B, 2009)
By not setting a clearly defined rule, the principals can be interpreted in different ways. Even the Handbook for Directors, Executives, and Advisers (SEC, 2004) states that it is:
“It is intended as a reference for directors, executives and advisers, as they decide how best to apply the Principles to their particular entity. The nine Principles and their accompanying guidelines are included together with the Commission’s view on the particular area of corporate governance.”
So how to you enforce principals, when you state they are up for miss-interpretation? Well the system is not set in place to “go out and get people” – It’s actually set in place so that individuals exceed the recommendations. Reading the individual guidelines show evidence of this, with words such as “should” rather than “required”. It is the diligence of the board and directors that “should” changes to “must” and “required”.
However one could argue, how do you punish someone that “should” have done something, but failed to recognize it? If a formal charter is not established – can you really hold the board accountable?
The Principals rely heavily on Due Diligence, and Common Sense (PWC, 2003) – which are no longer punishable by the law (corporate or civilian). So while there are “winners” who will exceed the S.E.C.’s recommendations, there will also be losers who may choose to ignore them.
So why are there still holes in Corporate Governance? Can this be fixed?
As stated earlier, Corporate Governance is not an easy thing to regulate. Whenever an issue arises – this hole in the theory is either covered up or a “safety net” is placed underneath to try and catch it next time.
Most acts amendments or “safety net” acts are based on the accounting side of Corporate Governance. This does not identify with the core fundamental flaw that is the moral obligation of the direction of the company. Even the famed reform act, the Sarbanes–Oxley Act (see “Other Resources” in rear) – which was written up to protect investors, can only protect them from an accounting perspective. Which, given the current financial situation is obviously not sufficient.
The reason for this being, that most situational issues regarding poor Corporate Governance are only formally recorded as accounting errors. Emails, notes, conversations and other recordings of poor governance are very difficult to follow and monitor.
While the accounting processors can monitor the outbreak of a Corporate Governance failure, in most situations when it has reached that stage, the problem is already deep rooted. Meaning the only acts that can be made are that of Retribution by holding the Directors (and on occasion the board) responsible. It has only fallen on the moral obligations on the directors and the board during recent times, to decide whether to declare issues before they become problems. However, in most of these situations – doing this also does not put you in a good light with the stakeholders or shareholders, as it usually means the company will require entering a form of receivership.
The current proposed solutions out there involve reform and compliance to new policy. Two strong contenders are Basel II (a review of Basel I – Risk Reserve) and Solvency II (a review of Solvency I – Company operations vs. Solvency)
The problem with Basel II is very simple; how do you measure risk? Currently the only way this is done – is purely on a financial basis. If I do this, and it goes wrong, I stand to lose “X” dollars....
This then is covered by a banking operation and reserve accounts. However is this not just another safety net which protects the stupid? What happens to those that fail to use good operational risk management? Well this is covered by Solvency II – which (from an insurance firm’s perspective) checks to see if the safety nets can actually be paid in full.
But wasn’t this already in place before? Yes, yes it was. Remember principals 6 and 7? To calculate, manage and audit risk. This has been a corporate governance principal in NZ for many years.
It also in the US rules based system. But it also relied on the principal of “disclosure”. If you did not disclose the problem – you did not have to address. This is where the rules failed.
So have we solved any problems by introducing Basel II and Solvency II? Well actually all we have done is put more specifics, and made the topic a bit less broad. But it does not solve the issue of disclosing the true figures of risk.
The USA is also tightening policy outside of business. With investors’ acts, they hope to prevent people from making unwise investment. Taking the supply of bad investment away from Poor Corporate Governance. (Willkie, Farr, Gallagher, 2009)
How will this reform process in the USA and Europe feed down to New Zealand?
Due to New Zealand being tucked away from the world, policies usually are not enforced here immediately. However they will be put in place overseas – so international trading companies will have to comply, along with multinational companies with branches in New Zealand.
This in turn will slowly dictate how the market will operate. As a large percentage of the big companies in New Zealand fall into the 2 categories described below. First people will be “exceeding” the “advice” of the current principals by apply to the new system (to continue business), and then we may have our own reform to change the standards to what we are already doing in New Zealand.
This however still will not fix all the problems, unless the individuals are continuously driven to exceed the recommendations of the Corporate Governance Principals. Likewise can be said about the USA and applying above the required for the rules based system.
References:
Willkie, Farr, Gallagher, (2009),. IMPLICATIONS OF PROPOSED U.S. FINANCIAL REGULATORY REFORM FOR NON-U.S. FUND MANAGERS
www.willkie.com
SEC, (2004),.CORPORATE GOVERNANCE IN NEW ZEALAND, PRINCIPLES AND GUIDELINES - A Handbook for Directors, Executives, and Advisers
Securities Commission (New Zealand)
Gaynor, B (2009),. Old Boys Club remains closed to new entrants
http://www.briangaynor.co.nz/blog/2009/11/4/old-boys-club-remains-closed-to-new-entrants.html
(last viewed 4/11/2009)
PWC (2003),. Audit Committees - Good practices for meeting market expectations (2nd ed)
PWC
Other Resources (read but not quoted or paraphrased):
http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act
http://en.wikipedia.org/wiki/Corporate_governance
http://www.kpmg.com/aci/gov.asp
http://www.questia.com/googleScholar.qst;jsessionid=KxhCd7rf0ltYlNwTrVFGz95L0QQLgVGvNkFp3wpZpxK10QTpvPhL!-950397748!568259201?docId=5008765482
http://en.wikipedia.org/wiki/Basel_II
http://en.wikipedia.org/wiki/Operational_risk_management
http://en.wikipedia.org/wiki/Solvency_II
http://en.wikipedia.org/wiki/Data_governance
http://shareinvestornz.blogspot.com/
http://www.iod.org.nz/
http://www.briangaynor.co.nz/
http://www.stuff.co.nz/business/blogs/stirring-the-pot/
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14738392
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14756903
http://search.ft.com/search?queryText=corporate+governance&ftsearchType=type_news
http://books.google.co.nz/books?id=Vrm4b4sLzz8C&pg=PA170&lpg=PA170&dq=regulatory+review+of+US+corporate+governance&source=bl&ots=o5IBshaYLK&sig=wYHOlbRwjWtfnv2LFsy5bk2Z0UI&hl=en&ei=s6TxSo-vBo_ssQOUxbX4AQ&sa=X&oi=book_result&ct=result&resnum=3&ved=0CBQQ6AEwAjgU#v=onepage&q=regulatory%20review%20of%20US%20corporate%20governance&f=false
www.farrst.blogspot.com
Friday, November 27, 2009
Marketing Management - Australian Wine
Winery’s Steady Growth to the Top Marketing Management Memo
The Key issue:
Witchmount Estate is restricting their market due to concentrating on defender strategies in their small local market. Market Expansion is required to take them to the next step.
Why is this concern?
This is a concern for many reasons. The most obvious is market size – it was stated that “Australians consume less than half the amount of wine per person that the three leading wine-producing countries” (Walker*, 2009, p377). Australia was ranked 8th in terms of Consumption in wine producing countries (Walker*, 2009), while production has increased. Production has reached levels that Australia is now the 5th largest wine producer. So while there is a market for Australian grown wines, a large percentage of this market is overseas, with very few Australians suppliers tapping into what is a very large potential international supplier.
This is also a concern as the local Australian market is reaching a form of saturation, due to having a large number of high quality wineries – all of which are now facing a price war due to high supply and low demand for their wine. This has led many to Guerrilla type tactics as they attempt to grab market share of the Australian market.
So how does this fit with the cases of Witchmount Estate?
Witchmount Estate is a well established Australian winery. They have established means to get exposure within both Victoria, and Australia as a whole. They now have a reasonable share of the domestic wine sales market within Australia through their distribution chain of resellers and integrators (hotels and restaurants) (Walker* 2009).
Where is the problem then?
They now find themselves concentrating too much on defender strategies. Whereas new markets need to be considered to move the company forward. Currently the only opportunity they have to sell wine to an international based consumer is via their local distribution network. Due to the unlikelihood that a visitor to Australia will not buy a bottle of wine from a reseller – this means that Witchmount are relying heavily that international tourists coming to the Victoria region, will visit their vineyard or drink it at their hotel.
So how is this solved?
Changing from a Defender Strategy to Share Maintenance:
Defender strategies do not work forever. Eventually new markets and new reputation will need to be sought to keep the brand name alive. My recommendation would be to go international (explained later in the article). By becoming an international brand, Witchmount Estate sets a point of difference between themselves and other competitors in the local market.
By pushing a Share Maintenance strategy (Walker*, 2009) developing a new area internationally – the respect will be reflected back into their local market.
This strategy can also be improved by making repeat sales easier, an example of this might be to give a discount to local sales if they ‘trade-in’ their old, empty Witchmount Estate bottles for discounts on a new one. This also creates a “Positive Network Effect” (Walker*, 2009, p208)
Grow an International Market by leapfrogging competitors:
By skipping a country-by-country distribution, and rolling out a full international strategy, Witchmount Estate effectively “Leapfrogging” (Walker*, 2009, p222) their competitors.
This could be done via their supply chain, where they arrange a contract to offer discounted wine to Airlines and their meal suppliers. This means they are effectively offering ‘sampling’ around the world. Increased production will be required, but this should not be too much of a problem as currently only 55 of 200 acres are planted with vines.
Another leapfrog activity would be to enter international competitions. Currently Tony’s goals are set to low – with him only wanting to achieve high prestige within the state of Victoria (Walker, 2009). These goals need to be lifted to continue forward. Without the shift in objectives, Witchmount Estate will enter a price-war with other local wineries over a very small market.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing: Core Concepts & Applications
Qld, Australia: Wiley
www.farrst.blogspot.com
The Key issue:
Witchmount Estate is restricting their market due to concentrating on defender strategies in their small local market. Market Expansion is required to take them to the next step.
Why is this concern?
This is a concern for many reasons. The most obvious is market size – it was stated that “Australians consume less than half the amount of wine per person that the three leading wine-producing countries” (Walker*, 2009, p377). Australia was ranked 8th in terms of Consumption in wine producing countries (Walker*, 2009), while production has increased. Production has reached levels that Australia is now the 5th largest wine producer. So while there is a market for Australian grown wines, a large percentage of this market is overseas, with very few Australians suppliers tapping into what is a very large potential international supplier.
This is also a concern as the local Australian market is reaching a form of saturation, due to having a large number of high quality wineries – all of which are now facing a price war due to high supply and low demand for their wine. This has led many to Guerrilla type tactics as they attempt to grab market share of the Australian market.
So how does this fit with the cases of Witchmount Estate?
Witchmount Estate is a well established Australian winery. They have established means to get exposure within both Victoria, and Australia as a whole. They now have a reasonable share of the domestic wine sales market within Australia through their distribution chain of resellers and integrators (hotels and restaurants) (Walker* 2009).
Where is the problem then?
They now find themselves concentrating too much on defender strategies. Whereas new markets need to be considered to move the company forward. Currently the only opportunity they have to sell wine to an international based consumer is via their local distribution network. Due to the unlikelihood that a visitor to Australia will not buy a bottle of wine from a reseller – this means that Witchmount are relying heavily that international tourists coming to the Victoria region, will visit their vineyard or drink it at their hotel.
So how is this solved?
Changing from a Defender Strategy to Share Maintenance:
Defender strategies do not work forever. Eventually new markets and new reputation will need to be sought to keep the brand name alive. My recommendation would be to go international (explained later in the article). By becoming an international brand, Witchmount Estate sets a point of difference between themselves and other competitors in the local market.
By pushing a Share Maintenance strategy (Walker*, 2009) developing a new area internationally – the respect will be reflected back into their local market.
This strategy can also be improved by making repeat sales easier, an example of this might be to give a discount to local sales if they ‘trade-in’ their old, empty Witchmount Estate bottles for discounts on a new one. This also creates a “Positive Network Effect” (Walker*, 2009, p208)
Grow an International Market by leapfrogging competitors:
By skipping a country-by-country distribution, and rolling out a full international strategy, Witchmount Estate effectively “Leapfrogging” (Walker*, 2009, p222) their competitors.
This could be done via their supply chain, where they arrange a contract to offer discounted wine to Airlines and their meal suppliers. This means they are effectively offering ‘sampling’ around the world. Increased production will be required, but this should not be too much of a problem as currently only 55 of 200 acres are planted with vines.
Another leapfrog activity would be to enter international competitions. Currently Tony’s goals are set to low – with him only wanting to achieve high prestige within the state of Victoria (Walker, 2009). These goals need to be lifted to continue forward. Without the shift in objectives, Witchmount Estate will enter a price-war with other local wineries over a very small market.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing: Core Concepts & Applications
Qld, Australia: Wiley
www.farrst.blogspot.com
Marketing Management - Toyota and Subaru
Driving Forces in the New Car Market Marketing Management Memo
The Key issue:
PRODUCT DIFFERENTIATION: The case shows 2 extremes of product differentiation. Subaru with is ‘All Wheel Drive’ niche’ market, and Toyota with is similarities to its direct competitors.
Why is this concern?
Image 1: How Points of Differentiation affect Marketing Strategies and Planning
(If you can’t see the image above email farrst@gmail.com and request a copy)
When talking about product differentiation Walker* states:
“In the auto industry, this can be achieved by having an effective manufacturing system that allows upgraded vehicles to be produced at a little extra cost.....The success of best-cost provider strategy depends on a strong focus on low cost combined with the ability to differentiate.” Walker (2009, p61)
Without this contrast in products – the customer will get confused and rely on simple principals e.g. Price, Colour or Brand name (with no associated values). Or the customer will simply fall back to what they have known to work for them in the past, eliminating any marketing done to promote new products.
So how does this fit with the cases of Toyota and Subaru?
In the case it states “Kevin studies this table...” (Walker*, 2009, p349), meaning Kevin had already skipped over any marketing to do with the product and was only comparing RACV rating and score for the car (against price).
With Subaru, everything is facing the other extreme – they have sectioned out their own niche’ market with their sponsorship of motorsport, and specialisation in “AWD” system. Their products are completely different from similar vehicles.
Where is the problem then?
Kevin compares the Fiesta as a direct comparison to the Yaris – which means the products have no points of difference between them. This means that Toyota’s segmentation strategy has failed. They are relying on the fact that their competitors are not as good as them, constantly defending their territory of mediocrity.
Subaru – they have done an excellent strategy of becoming leaders in AWD systems (niche’ market). Their true direct competitors sit above them (Audi, VW...) with indirect competitors sitting above their price (Toyota, Nissan...). However Subaru now have the problem of how do they market outside the box they have so well created? Is their Niche’ now holding them back from attempting a Growth-Market strategy (Hybrids etc)? As developing new technologies outside what they know will take large budgets (on a very high risk).
So how is this solved? – Segmentation Strategies
Toyota:
Toyota need to stop intimidating the market in some segments (case: small car segment), and put some specialist strategies in place to emphasise product differentiation with its competitors – e.g. mp3 or fuel economy etc.
Perhaps Toyota take some of its R&D from other divisions (Robotics, Hybrid....) and operate a Prospector (Walker*, 2009) Business Unit. To provide new product advancements across all divisions using a broad product-market domain.
Subaru:
By making an alliance with another manufacturer, they can have a joint product platform to target a market that neither currently has access too. (Note this currently has happened with Toyota and Holden)
Subaru needs to have a small division that does projects completely different from all other designs in Subaru.
This needs to be done without sacrificing their motorsport sponsorships – which seem to give a good image of the company. The products in this division have potential to become new ‘star’ ranges into the mix, or prototype ‘dogs’. However if this is not performed the company will find growth slow and difficult.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing : Core Concepts & Applications
Qld, Australia : Wiley
www.farrst.blogspot.com
The Key issue:
PRODUCT DIFFERENTIATION: The case shows 2 extremes of product differentiation. Subaru with is ‘All Wheel Drive’ niche’ market, and Toyota with is similarities to its direct competitors.
Why is this concern?
Image 1: How Points of Differentiation affect Marketing Strategies and Planning
(If you can’t see the image above email farrst@gmail.com and request a copy)
When talking about product differentiation Walker* states:
“In the auto industry, this can be achieved by having an effective manufacturing system that allows upgraded vehicles to be produced at a little extra cost.....The success of best-cost provider strategy depends on a strong focus on low cost combined with the ability to differentiate.” Walker (2009, p61)
Without this contrast in products – the customer will get confused and rely on simple principals e.g. Price, Colour or Brand name (with no associated values). Or the customer will simply fall back to what they have known to work for them in the past, eliminating any marketing done to promote new products.
So how does this fit with the cases of Toyota and Subaru?
In the case it states “Kevin studies this table...” (Walker*, 2009, p349), meaning Kevin had already skipped over any marketing to do with the product and was only comparing RACV rating and score for the car (against price).
With Subaru, everything is facing the other extreme – they have sectioned out their own niche’ market with their sponsorship of motorsport, and specialisation in “AWD” system. Their products are completely different from similar vehicles.
Where is the problem then?
Kevin compares the Fiesta as a direct comparison to the Yaris – which means the products have no points of difference between them. This means that Toyota’s segmentation strategy has failed. They are relying on the fact that their competitors are not as good as them, constantly defending their territory of mediocrity.
Subaru – they have done an excellent strategy of becoming leaders in AWD systems (niche’ market). Their true direct competitors sit above them (Audi, VW...) with indirect competitors sitting above their price (Toyota, Nissan...). However Subaru now have the problem of how do they market outside the box they have so well created? Is their Niche’ now holding them back from attempting a Growth-Market strategy (Hybrids etc)? As developing new technologies outside what they know will take large budgets (on a very high risk).
So how is this solved? – Segmentation Strategies
Toyota:
Toyota need to stop intimidating the market in some segments (case: small car segment), and put some specialist strategies in place to emphasise product differentiation with its competitors – e.g. mp3 or fuel economy etc.
Perhaps Toyota take some of its R&D from other divisions (Robotics, Hybrid....) and operate a Prospector (Walker*, 2009) Business Unit. To provide new product advancements across all divisions using a broad product-market domain.
Subaru:
By making an alliance with another manufacturer, they can have a joint product platform to target a market that neither currently has access too. (Note this currently has happened with Toyota and Holden)
Subaru needs to have a small division that does projects completely different from all other designs in Subaru.
This needs to be done without sacrificing their motorsport sponsorships – which seem to give a good image of the company. The products in this division have potential to become new ‘star’ ranges into the mix, or prototype ‘dogs’. However if this is not performed the company will find growth slow and difficult.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing : Core Concepts & Applications
Qld, Australia : Wiley
www.farrst.blogspot.com
Marketing Management - DHL and SLSNZ
DHL & SLSNZ Marketing Management Memo
The Key issue:
No one has assessed if the partnership between DHL and SLSNZ is of benefit. To quote Walker (2009); “Market Research has indicated that the public perceptions of both brands are high, and the relationship has not been detrimental to either” (p394)
Why is this concern?
While the decision on SLSNZ’s part was that of financial return, with brand balance – DHL is not receiving any direct tangible benefit for its participation. So it can be assumed that they are doing this for multiple reasons:
- Brand awareness
- New potential for emerging “goodwill marketing”
- Strategic Planning
However how do you put a figure on these things? How can it be shown to be beneficial to DHL? There would clearly be a financial expenditure on DHL’s part for this marketing exercise – how can this be accounted for?
So how does this fit with DHL
Brand Awareness
DHL is already a well established brand, but it has maintained a dominant market presence. This needed to be reflected in its sponsorship of SLSNZ. This is why not only is it ‘mentioned’ with kind regards, but also DHL being the juggernaut that it is, is mentioned everywhere. On the backs of surf lifesavers shits, on signage......to the posters on the wall.
Emerging “Goodwill” Markets
SLSNZ has well structured procedures to protect its own brand name and view in the public eye – which will always positive connotations associated with it. Therefore, having related social values and ethical principles (Walker, 2009, p 35) as SLSNZ (due to being effectively ‘partners’) will give DHL a new-economy strategy (Walker, 2009, p 259) for this new ‘morals and ethics’ market that has been established recently.
Strategic Planning
There is the possibility for DHL to use their ‘goodwill’ credits as an emotional leverage on the market – to offset distaste in the market caused by some of DHL’s operations. Previous sponsor of SLSNZ, BP, did this quite well. Likewise this can be similarly attributed to Marlborough and racing, or Caltex and Solar Energy.
There also would be a significant blocking strategy – as only a few services (that require public sponsorship) are considered ‘lifesaving’. By partnering with SLSNZ, DHL has gained the advantage, blocking its competitors from using such a high key player in the stakes of the ‘ethics’ market.
Where is the problem then?
The problem that exists is very simple – How do you test to see if this is in the best interests of the DHL?
Should this much resources be allocated to a task that has no returns? (Walker, 2009, p295)
Is partnering with SLSNZ, any better than partnering with St John Ambulance? Will more brand awareness occur?
This has to be considered a long term (and very expensive) investment. As the results will start off as intangible for quite some period of time.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing : Core Concepts & Applications
Qld, Australia : Wiley
www.farrst.blogspot.com
The Key issue:
No one has assessed if the partnership between DHL and SLSNZ is of benefit. To quote Walker (2009); “Market Research has indicated that the public perceptions of both brands are high, and the relationship has not been detrimental to either” (p394)
Why is this concern?
While the decision on SLSNZ’s part was that of financial return, with brand balance – DHL is not receiving any direct tangible benefit for its participation. So it can be assumed that they are doing this for multiple reasons:
- Brand awareness
- New potential for emerging “goodwill marketing”
- Strategic Planning
However how do you put a figure on these things? How can it be shown to be beneficial to DHL? There would clearly be a financial expenditure on DHL’s part for this marketing exercise – how can this be accounted for?
So how does this fit with DHL
Brand Awareness
DHL is already a well established brand, but it has maintained a dominant market presence. This needed to be reflected in its sponsorship of SLSNZ. This is why not only is it ‘mentioned’ with kind regards, but also DHL being the juggernaut that it is, is mentioned everywhere. On the backs of surf lifesavers shits, on signage......to the posters on the wall.
Emerging “Goodwill” Markets
SLSNZ has well structured procedures to protect its own brand name and view in the public eye – which will always positive connotations associated with it. Therefore, having related social values and ethical principles (Walker, 2009, p 35) as SLSNZ (due to being effectively ‘partners’) will give DHL a new-economy strategy (Walker, 2009, p 259) for this new ‘morals and ethics’ market that has been established recently.
Strategic Planning
There is the possibility for DHL to use their ‘goodwill’ credits as an emotional leverage on the market – to offset distaste in the market caused by some of DHL’s operations. Previous sponsor of SLSNZ, BP, did this quite well. Likewise this can be similarly attributed to Marlborough and racing, or Caltex and Solar Energy.
There also would be a significant blocking strategy – as only a few services (that require public sponsorship) are considered ‘lifesaving’. By partnering with SLSNZ, DHL has gained the advantage, blocking its competitors from using such a high key player in the stakes of the ‘ethics’ market.
Where is the problem then?
The problem that exists is very simple – How do you test to see if this is in the best interests of the DHL?
Should this much resources be allocated to a task that has no returns? (Walker, 2009, p295)
Is partnering with SLSNZ, any better than partnering with St John Ambulance? Will more brand awareness occur?
This has to be considered a long term (and very expensive) investment. As the results will start off as intangible for quite some period of time.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing : Core Concepts & Applications
Qld, Australia : Wiley
www.farrst.blogspot.com
Tuesday, November 24, 2009
Case Study - 42 Below
Its been a while since I put something up here. And since I just finished a Marketing Management Assignment. I figure - hey,what the hell.....Why don't I put an older one up here for you guys to read. So here some Analyzing of 42 below - the fantastic vodka company.
42 below Marketing Management Memo
The Key issue:
The key issue with 42 below is what happens to their marketing forward from this point. As the article left the impression that with 42 below’s current situation – they could relax on the marketing base they had grown. Geoff Ross (CEO) was quoted for being “loaded” (Morrish, 2007) and somewhat satisfied from what he has achieved.
Why is this concern?
42 below are known as a loud and very non-traditional. They have gone against norms within marketing, which stated that you cannot publish advertising which would cause public outcry. They took large gambles with their marketing – attempting to not only target a very specialist and well hidden market (high class bars), but do so by putting themselves in the spotlight
For a company whose following was built on the principal of loud blatant advertising, to rest on their laurels (Morrish, 2007) – would mean that they would be relying wholeheartedly on the aspect that their product was the best.
So what? The guy deserves a break – how does this affect the company as a whole?
42 below’s marketing policy is very left-field, and such abrupt marketing may not join well with new owners – Bacardi. Bacardi’s Vice President – Atul Vora, was quoted for saying the following;
“Take them back to the nostalgia of what we believe represents New Zealand, the purity and beauty of the country” (Walker, Gountas, Mavondo, Mullins, 2009, p374)
When talking about 42 below’s future marketing strategy. This missed the key point behind 42 below (and often New Zealand’s) strategy – they hit their target market via being “outspoken”, and “loud”.
So how can this move forward?
It seems obvious to me that the marketing management of the 42 below operations sit squarely on Geoff Ross’s shoulders. He has done what he set out to achieve, upon his departure (as he is looking at retirement) 42 below will simply become a notch to Bacardi’s belt of products (conforming 42 below to the Bacardi template of marketing).
So with that said my first recommendation would be that Geoff Ross takes on some apprentice’s so that he can pass on how he has built and maintains the marketing perspective of 42 below. Bacardi need to treat 42 below as their ‘wild card’ brand, to maintain the market built up around the left-field marketing performed in the past. Otherwise points of differentiation will be lost.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Morrish, S,. (2007?) 42 Below: The Story of Spirited Vodka Company
N.S.W. Australia: McGraw-Hill [Case Study 6 in Walker, Gountas, Mavondo, Mullins (2009)]
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing : Core Concepts & Applications
Qld, Australia : Wiley
www.farrst.blogspot.com
42 below Marketing Management Memo
The Key issue:
The key issue with 42 below is what happens to their marketing forward from this point. As the article left the impression that with 42 below’s current situation – they could relax on the marketing base they had grown. Geoff Ross (CEO) was quoted for being “loaded” (Morrish, 2007) and somewhat satisfied from what he has achieved.
Why is this concern?
42 below are known as a loud and very non-traditional. They have gone against norms within marketing, which stated that you cannot publish advertising which would cause public outcry. They took large gambles with their marketing – attempting to not only target a very specialist and well hidden market (high class bars), but do so by putting themselves in the spotlight
For a company whose following was built on the principal of loud blatant advertising, to rest on their laurels (Morrish, 2007) – would mean that they would be relying wholeheartedly on the aspect that their product was the best.
So what? The guy deserves a break – how does this affect the company as a whole?
42 below’s marketing policy is very left-field, and such abrupt marketing may not join well with new owners – Bacardi. Bacardi’s Vice President – Atul Vora, was quoted for saying the following;
“Take them back to the nostalgia of what we believe represents New Zealand, the purity and beauty of the country” (Walker, Gountas, Mavondo, Mullins, 2009, p374)
When talking about 42 below’s future marketing strategy. This missed the key point behind 42 below (and often New Zealand’s) strategy – they hit their target market via being “outspoken”, and “loud”.
So how can this move forward?
It seems obvious to me that the marketing management of the 42 below operations sit squarely on Geoff Ross’s shoulders. He has done what he set out to achieve, upon his departure (as he is looking at retirement) 42 below will simply become a notch to Bacardi’s belt of products (conforming 42 below to the Bacardi template of marketing).
So with that said my first recommendation would be that Geoff Ross takes on some apprentice’s so that he can pass on how he has built and maintains the marketing perspective of 42 below. Bacardi need to treat 42 below as their ‘wild card’ brand, to maintain the market built up around the left-field marketing performed in the past. Otherwise points of differentiation will be lost.
References:
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Morrish, S,. (2007?) 42 Below: The Story of Spirited Vodka Company
N.S.W. Australia: McGraw-Hill [Case Study 6 in Walker, Gountas, Mavondo, Mullins (2009)]
Indirect References:
Pride, W, Ferrell, O, Elliott, G, Rundle-Theile, S, Waller, D, Paladino, A,. (2008). Marketing : Core Concepts & Applications
Qld, Australia : Wiley
www.farrst.blogspot.com
Wednesday, July 22, 2009
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