Strategic context for a horticulture business

Background

This case study illustrates the similarities between the risk management step of 'establishing the context' and the strategic planning process of 'environmental scanning'. It outlines the business context for a horticulture company, developed as part of its strategic planning process. The company has been established for many years. It produces, packs and markets fruit, with a focus on premium fruit for the retail market. It owns substantial apple, pear and stone-fruit orchards and packing facilities. The context work was a precursor to a strategic risk assessment for the company, which is not described here.

The company group was formed to capitalise on the sweeping changes transforming horticulture across the world. Previously the domain of small scale, family-run operations, horticulture is rapidly becoming an intensive, broad-acre agribusiness. The group now has to compete internationally with the timely provision of clean, high-quality fruit and be ready to capitalise on the profitable opportunities being created by evolving consumer tastes and worldwide demographic change.

Currently all the group's assets and most of it markets are within Australia, but it is considering expanding its export activities from a currently-low base and making overseas investments.

The scope of the strategic assessment was to include:

Orchards
Packing plants
Suppliers
Markets, buyers and retailers
Australian markets
Overseas markets
Financing options
Group structure and management
Synergies within the group.

The purpose of the risk assessment was to generate a strategic risk profile for the group, to allow the management team to focus on resolving the major sources of uncertainty associated with the business. It was also to be a key step to establishing a viable framework for risk management as required by security exchange listing rules.

The following sections describe the main components of the context.

Stakeholders and their motivations

There are stakeholders who need to be taken into account both inside and outside the company. A general list of stakeholders is set out in Table 1 with a note of their main objectives.

Table 1: General stakeholder analysis
Stakeholder	Objectives
Investors in the group	Achieve required return on capital An investment that contributes to long-term growth and value creation A business that will operate efficiently and profitably, that maximises revenue and minimises costs Ensure a sustainable environment and operate in harmony with local communities, governments and other stakeholders through using resources efficiently and contributing to the conservation of the natural environment
Banks and finance providers	Reliable return on investment Low credit risk Reputable creditor
Wholesale buyers	Reliable supply of fruit Low price High quality fruit Market control Maintain preferred buyer position (for one major wholesaler)
Retailers	High quality produce Low price Well packaged to limit spoilage Small number of suppliers to reduce complexity
Consumers	Unblemished fruit that keeps Flavoursome and attractive fruit Reasonably priced produce -Range of varieties Negligible chemical contamination
Key transport provider	This is the only trucking company currently servicing the business It would wish to maintain a monopoly position Continued income stream from the group
Permanent employees	Good pay and conditions Potential for advancement Training and skills development Security of employment (i.e. no retrenchments) Good personal safety Employer with a good reputation
Chemical provider	The group is the largest customer for its main regional chemical supplier Promote and sell its products
Contract labour provider	There is one main supplier of contract labour in areas in which the group operates Maintain good relations with the company and maintain the revenue stream
Local communities	Employment opportunities with education and skills development Negligible environmental impact from operations Trickle down of income into the local community Expect the group to support and consult the local community
Nearby growers	Cooperative relationships Ability to utilise the group's packaging plants Opportunity to ‘sell out’ if required Maintain a good reputation for the sector
Overseas markets and regulators	Prevention of importation of pests and diseases Local market protection
State government agencies	Pest and disease control, especially in terms of limiting establishment and spread Employment and tax revenue Contribution to rural water management

External context

There are many external matters that influence the group's risk profile, listed in Table 2.

Table 2: External factors
External factor	Implications
Australian market conditions	There is a good market for high-quality fruit Most of the group’s fruit is sold by large supermarket chains The group must comply with their requirements for quality and packaging Wholesale pricing is constrained by the limited market Stone fruit is very sensitive to handling and deteriorates rapidly if not chilled Markets are all some distance from the orchards and packaging facilities
Wholesale buyers	All fruit now has to be sold through one of two approved buying groups The group is currently unable to sell directly to the major retailers but is currently going through an ‘approvals process’ Existing wholesale buyers may be unhappy with this disintermediation
Water	The group requires substantial volumes of water for its orchards All orchards have sufficient water rights or allocations to ensure supply, even through a prolonged drought Currently the dams are full Water can come from rivers or natural springs Computer-controlled irrigation is employed Mulching is used to build soil health and reduce water evaporation Current orchard areas are predicted to suffer prolonged drought in the medium term due to climate change
Demand for organic produce	The market for organic fruit is increasing Organic products can attract premium prices The group is now considering ‘sustainable’ fruit, which brings savings in chemical usage; while it is not certified yet as ‘organic’, it can be shown to be just as beneficial
Limited suppliers in some key areas	Dependent on one transport company; the owner, a very large trucking and logistics organisation could rationalise and shut this division Predominantly dependent on one chemical supplier; if they went out of business or supplied a defective product, or their products were associated with harmful side effects, this could impact the group
Limited supply of labour	Currently casual labour is provided by one local company It sources largely overseas backpackers and working holiday makers from Europe and Asia If they ceased to trade, particularly during harvest, this would have implications for the group The Government is tightening visa and tax requirements, which might limit the supply of casual workers
Crops prone to disease, pest and blights	Crops need careful control and husbandry Pests and diseases can spread from nearby farms They require chemical control Increasing resistance in pests requires alternative and stronger chemicals Customers require contamination free products, but will not tolerate blemishes caused by pests
The business is climate-sensitive	Areas now growing fruit will have hotter, drier climate in the future Extreme weather events such as storms and floods will become more prevalent Frosts may no longer occur as frequently; while this may seem beneficial, frosts control many pests and are required for 'setting' stone fruit and 'chilling' apples; the number of hours below 7 C that is needed to condition trees to break dormancy and resume normal growth depends on the type of stone fruit and the variety; it can be as low as 50 hours for some peaches and as high as 100 to 200 hours for some plums Greater chance of bush fires Warmer temperature will encourage the southward migration of tropical pests and diseases Storage, refrigeration and transport costs may increase High winds and storms, expected to be more frequent as the climate changes, can destroy orchards, crops and packing facilities
Overseas markets	It is a difficult and expensive process to get approval to import fruit Sampling occurs at the port of arrival; the group is liable for shipping; if a sample fails, the entire shipment is dumped or returned
Overseas competition	Several countries with lower labour costs are competing for the Australian market One wholesale buyer has an overseas base from which it is supplying the local Australian market There may be an opportunity for the group to invest in those overseas markets

Internal context

There are a number of matters internal to the group that may affect its risk profile, listed in Table 3.

Table 3: Internal factors
Internal factors	Implications
Permanent staff and management team	Highly skilled and motivated Opportunity to grow internal capability, to manage and lead across the group
Packing facilities	The group could use its facilities to pack fruit for other growers
Synergies within the group	Potential to utilise green waste products in orchards Economies of scale are available to be exploited; e.g. chemical purchases and transport costs Could manage water assets as a portfolio Could widen staff horizons and provide broader challenges
Capital management	A longer term capital management solution is needed Need to optimise value of company; to do this it is necessary to show that risks are being managed properly Private equity would involve some loss of control Floating on the securities exchange is possible; this will require changes to current governance arrangements The group needs a clear and credible strategic plan and business plan

Key elements: a structure for thinking

Whether for structuring a risk assessment or to shape initial strategic planning processes, key elements provide a useful way of disaggregating the business for more detailed examination. Table 4 shows the set of six elements that was used in this case.

Table 4: Key elements
	Element	What it includes
1	Markets and products	Australia Overseas Direct sales to retailers Buyers Logistics and transport Organic compared with sustainable
2	Operations	Pests and diseases Water Critical equipment Chemicals and chemical supplies Weather and climate change Management systems
3	Structure and staffing	Group structure Permanent staff retention and morale Casual staff supply and quality Intellectual property and 'know how'
4	Growth and capital	Organic growth; e.g. packing for others Acquisitions Overseas investments Capital management
5	Synergies within the group	Between orchards With the green waste subsidiary
6	Environment and community	Carbon generation and sequestration Environmental impacts, including water Community relations

Lessons and conclusions

The steps of 'establishing the context' in risk management and 'environmental scanning' in strategic planning are very similar. They both involve considering:

The main internal and external stakeholders in the business, and their objectives
The main external and internal factors that might affect the business now and into the future, and their implications.

It makes sense to undertake a single process to encompass both these purposes, and to only do it once as part of a combined strategic risk and planning activity.

This is made easier if risk management processes are embedded in and become part of strategic planning, in a single integrated activity. Figure 1 outlines the way in which the two processes can be aligned:

Establishing the context or environmental scanning, discussed in this case study, is a direct input to the draft plan
Risk assessment is used to stress-test the draft plan, to increase the robustness of the final plan by including appropriate risk treatment activities in it
Monitoring and review of the business environment, the risks and the controls, is a core part of both risk management and strategic business management
Lessons learned from previous periods, for example through root cause analysis, also provide a direct input to the draft plan.

Figure 1: Integration of strategic planning and risk management

For additional related information, please check the following links:

Client:: Horticulture group
Sector:: Food and beverages; Agriculture, biosecurity and the environment
Services included:: Root cause analysis; Risk assessment and risk treatment; Stakeholders