04-75-498-01
Strategic Management
Fall 2015

Zespri Case Analysis

Due Date: October 26th, 2015
Instructors: Prof. Jonathon Lee

Group #5
Deryck Devogelaere
Xiwen Guo
Tianxiao Tang
Zihao Huang
Zheng Leung

Introduction
Zespri is a company that is located in New Zealand, it is more specifically a grower-owned business. In 1992 the industry suffered and growers carried all of the risk, to counteract this issue, innovation and product differentiation had to occur. In 1997 the company unveiled itself as Zespri International Limited. The focus of this case is however is related to the CEO Jager, who was elected the position is 2008 by the board of directors. Jager’s idea is to increase the exporting of kiwi’s by $3 billion by 2025, and how Zespri will achieve this goal. Achieving this goal will ultimately face many challenges such as; maintaining a leading position in the industry, developing strong brands and implementing marketing techniques that differentiate from competition, all the while establishing recognition of Zespri’s products. Throughout the case we will analyze the challenges and offer possible solutions for Zespri to consider. The way we will analyze this case is implementing the VRINE and 5 forces model. Additionally we will look at internal, external and financial factors that affect Zespri, both currently and long term. Lastly with the use of the financial statements we will project financial reports and assess the possibility of increasing the exports by $3 billion before 2025.

Internal Analysis – VRINE
Implementing the VRINE model will allow us to analyze the internal environment of Zespri. By using the VRINE model we will assess the company’s resources and capabilities which ultimately will show where Zespri holds competitive advantage.
Value
Zespri is a valuable company because they are able to create global market demand by using its resources and capabilities. Zespri can gain these resources and capabilities because of the large market demand that Zespri maintains, due to the finest quality of products. The New Zealand natural environment is very suitable to grow kiwifruit, and the kiwi growing in New Zealand are always nutritional and the best quality. This gives Zespri advantage over other companies in different locations. In addition, kiwifruit is Zespri’s only product, therefore the company can concentrate all resources to ensure they are meeting growing standards and quality control. Due to these reasons, Zespri is popular in many countries and customers are willing to pay a premium price for their high quality product.
Rarity
Zespri, the kiwifruit from New Zealand, is scarce. There are many reasons that make Zespri rare. Globally, predominant geological location is unique to other countries because the location and environment cannot be copied. Domestically, there are only six local companies that can export the New Zealand kiwifruit because of the government regulation. The government also tries to eliminate the competition among the growers and encourage them to work with Zespri. Therefore, Zespri has controlled the majority of export activities of the New Zealand kiwifruit. The only New Zealand kiwifruit exporter will be Zespri.
Inimitability and Non-substitutability
Zespri is hard to imitate and substitute. In order to improve inimitability, Zespri is trying to build up barriers for competitors. The company put a lot of money in R&D and applies intellectual property right for their new invention to prevent imitation. Additionally, they create a global sourcing, which is able to ignore the effect of the season, to maintain year-round supply. What’s more, Zespri is strengthening the brand and marketing. Finally, the brand Zespri becomes the pronoun of the world’s finest kiwifruit. These self-improvements sustain inimitability for the company. On the other hand, Zespri’s competitor is planning to capture the market by using low price strategy. However, in order to meet different price level demand, Zespri is developing varying products such as; Zespri Green, Gold and Organic in response to the competition. The insistence on quality and understanding customers demand make Zespri differentiate from other competitors and also increases their non-substitutability.
Exploitability:
Zespri is good at using the resources and capabilities that they own. Zespri has created two-way communications with growers to support transparency, that will lead to long term relationships with customers, supplies and local distributors. They used varying marketing techniques such as; call centers, websites, monthly newspapers and monthly technical journals. By investing this much marketing shows Zespri is trying to raise profits within local markets. Zespri is also partnering with Italian, French, Japanese and Korean suppliers which will create a year round supply of kiwifruit.

External Analysis – Five Force Model
Threat of New Entrants: Weak
The kiwifruit market is competitive and has a small niche market for the global fruit market. Many potential investors may not be interested in this market. Also there are high barriers to entry because of Zespri’s matured business model: * Zespri has over 40 years of profound knowledge and experience with growing and promoting kiwifruit. * The brand of Zespri is well known by people all over the world. Large amount of existing customers, suppliers and distributors. * Zespri uses patents to protect their new kiwifruit cultivars to limit other companies to assess to latest technology.
Threat of Substitutes: Strong
Kiwifruit is easy to be substituted by other fruit because of its high price. Also many countries have their own kiwifruit products, and local products always have some advantages than imported goods.
Supplier Power: Weak
Zespri is owned by kiwi growers. Therefore, bargaining for the supply of kiwi is not possible. Another reason is because process of growing Zespri kiwi is highly standardized. There is not much room for suppliers to bargain with Zespri.
Buyer Power: Medium
The demand for kiwi is consistently increasing in many countries. The buyers who have high quality requirements need Zespri products. Hence, the bargaining power of these buyers is relatively weak. However, other producers are able to provide lower priced kiwi. The buyers have many alternative options to compare. In addition, there are many substitutes to replace the kiwi consuming. If selling Zespri is not profitable, the distributors as buyers still have bargaining power to negotiate with Zespri.
Degree of Rivalry: Medium
The fruit industry has faced a 5% decrease yearly so that the rivalry of the whole industry is expected to grow. In spite of all the barriers to be met, the competitors begin to follow Zespri’s step to raise their standard and quality of kiwi but keeping a lower price.

Financial Analysis
Asia and Europe are the major areas to which Zespri exports. Given by Exhibit 9, a graph showing the exports to Japan, East Asia, and Europe between 1999 and 2010, we estimated the average export growth rate of Green and Gold products. Zespri Gold has experienced a significant increase in Asia, with an estimated average increase of 25.78% in Japan and 39.23% in China, Hong Kong and Taiwan. The increase in Europe is steady, with an estimated growth rate of 3.02% and 6.59% in Green and Gold respectively (table1.1).
Zespri’s revenue has increased by over NZD 500,000 from 2006 to 2010. The company uses assets efficiently to generate the revenue, along with high asset turnover ratios ranging from 4.18 to 6.60. The debt-to-equity stayed steadily around 1.50 during 2006 to 2009, and then increased to 3.55 in 2009. The reason for it might be that Zespri was using the debt to finance the developments of new Zespri cultivar; and when the new technique is put into production, higher revenue could cover the debt. Besides the stable activity and leverage conditions, Zespri also maintains a healthy liquidity. From acid test ratio, the company is able to meet its financial obligation by using the most liquid assets (table 1.2).
In order to ameliorate the growth decline during 2008, Zespri decided to invest the development of new products which almost doubled its total assets. (Table 1.3) Either Return on Assets (ROA) or Return on Capital Employed (ROC) had a huge slump which decreased by 40% and 20% in 2009. Otherwise, Return on Equity (ROE) and profit margin benefited from the new product and increase considerably between 2009 and 2010. Compared with 2008, ROE and Profit Margin in 2010 had grown by more than 12%. Overall, Zespri maintains a sustained growth and will be more profitable in the future.

Recommendations and options Since the goal for Zespri is increasing their export earnings to $3 billion in 2025, the company should try their best to increase market share and develop the oversea market. Some options for Zespri to achieve this goal are as followed. Option 1
Zespri is dominant in the kiwifruit industry in New Zealand, which is also the world leader for kiwi exports. It is very important for Zespri to promote their product and brand to the world. In other words, it means Zespri needs to strengthen the expansion of the oversea market. The advantages of this option are obvious. Firstly, Zespri only needs to focus on one thing, which is the kiwifruit industry, so they are the most professional company of producing kiwifruit in the world. As a result, Zespri can easily capture some kiwifruit market share in a new market if they are offering a comparative low price. Besides, because of the brand effect, the famous brand of producing kiwifruit can easily attract new customers to try to buy their products. Moreover, with the increasing number of customers who want to try or buy the product of Zespri, the profit will be also improved. However, there are also some risks for this option. Keeping the kiwifruit fresh is the most important thing. As the raw materials of Zespri are mainly produced in New Zealand, the company needs to consider how to transport their product to the oversea market as fast as possible and try to keep their product fresh during the supply chain. As a result, the cost will also be increased.

Option 2
Zespri can try to develop more types of products based on the kiwifruit to satisfy and attract the existing and potential customers. One way to increase the product diversification for Zespri is to cultivate different types of kiwifruit with different characters. Another way is developing more derivative product base on the kiwifruit like kiwi juice or kiwi salad. This option also has some risks, and will also increase the cost of research and promotion.

Option 3
Zespri have a mature supply chain and experience of supplying and processing kiwifruit. As a result, it is quite easy for them to supply different types of fruit if they have appropriate high quality raw material. Once they succeed, the brand effect of Zespri could help them invading the new market effectively. They can keep the market share of kiwifruit and gain more profit from other fruit markets. Another benefit of this option is the company can obtain revenue during the whole year. As we know, most fruit are seasonal products. If Zespri focuses only on kiwifruit, they might have a period with nearly no revenue during a year. However, after they produce different types of fruit, the mature period of these fruit could be different. Thus, the company could obtain profit during the whole year. But every coin has two sides, the potential risks of this option are very high. Firstly, they do not have that much experience of producing different types of fruit. Secondly, it might have some negative effect on their brand if they can not achieve the same quality on the other fruit as kiwi. Decision Criteria
The main goal for Zespri is to increase their profit and expand their market share. Thus, the following criteria can be evaluated in these options: market share, revenue, risk, customer loyalty and brand effect. The following table will compare these options. +1 Positive Effect; -1 Negative Effect; 0 Not Sure Options | Market Share | Revenue | Risk | Customer Royalty | Brand Effect | Total | 1 | +1 | +1 | 0 | +1 | +1 | 4 | 2 | +1 | +1 | 0 | +1 | +1 | 4 | 3 | +1 | +1 | -1 | 0 | 0 | 1 |
According to the result of the comparison table, option 1 and option 2 are more appropriate for Zespri in further development. Although the return for option 3 could be very high if Zespri achieve it successfully, the risks and cost are also much higher. To compare with option 3, option 1 and 2 have less risks and also have considerable benefits. Therefore, we suggest Zespri to take option 1 and 2.

Implementation
Short-Term Ideas:
Market Penetration is what Zespri needs to accomplish very early if they want to achieve their goal of $3 billion by 2025. The first five years (2011-2015) will be targeted to penetrate further into the Asian and European markets.
Multi-Segment Strategy: Zespri can attend to different customer preferences in separate markets. If Zespri is able to find out where specific products sell more effectively they can cater to the customers’ demands. This is a relatively easy fix and can be done within 1 year. (2011-2012)
Differentiation: Although Zespri has done well to expand its market selection with the Gold and Green products, Zespri could also benefit by investing more into R&D. By doing so Zespri may be able to innovate a way to harvest their high quality kiwi at a lower cost, which ultimately will mean they will be able to price match better against other competitors, all the while keeping their product the same. This should be a consistent approach meaning all years (2011-2015) will be used.
Branding: Zespri should choose adequately where they sell their kiwis. Selling them in a conglomerate of a store like Wal-Mart generally doesn’t appeal to high quality products, instead they should choose shelf space in more respected stores. (Natural Health Food Stores) etc. . . Choosing appropriate shelf placement should be implemented and used throughout the five years. (2011-2015)

Long-Term Ideas:
Customer Feedback: By getting appropriate customer feedback they will be able to meet their customer's demands more adequately. The information received will allow them to make appropriate decisions in regards to what country is more likely to purchase mass amounts of products.
Using Global Resources: The company should investigate what parts of the world has similar agriculture benefits and expand. Although this may be difficult to find, if it works out they will be able to expand their business to other countries which would reduce exporting costs significantly.
Contingency Plan: If expanding internationally is not possible, Zespri should continue developing products to diversify their product selection. This would be beneficial because they would be attracting more potential customers and generating more profit. Although the speed of expansion is slow, it is ideal for Zespri to diversify.

Conclusion
In conclusion, with all of the evidence and analysis completed for the Zespri Case, we have concluded that Zespri’s CEO Jager’s idea to reach $3 billion in exports by 2025 is completely possible. The competitive advantages that Zespri hold both internally and externally, along with the strong financial statements leads us to believe Zespri is going to keep growing. In order to make Jager’s idea become a reality will be by increasing the branding and marketing, new cultivars, expanding its exports to different marks and growing within the market they already control.

Table 1.1a Table 1.1b

Table 1.1c Table 1.2

Table 1.3 Zespri Group Profitability Indicator (in $ thousands NZ)

| 2006 | 2007 | 2008 | 2009 | 2010 | Income Statement: | | | | | | Net sales of New Zealand-grown kiwifruit | $933,875 | $1,035,022 | $1,071,729 | $1,287,281 | $1,247,090 | Interest | $6,644 | $3,457 | $5,409 | $5,028 | $4,238 | EBIT | $44,507 | $50,483 | $35,544 | $50,142 | $52,535 | ZESPRI Group profit after taxation | $26,446 | $22,099 | $19,730 | $23,934 | $25,890 | Balance Sheet: | | | | | | Current Assets | $133,971 | $154,612 | $157,297 | $299,964 | $294,466 | Non-current Assets | $152,653 | $175,187 | $172,547 | $336,642 | $370,626 | Total Assets | $286,624 | $329,799 | $329,844 | $636,606 | $665,092 | Current Liabilities | $73,881 | $98,766 | $99,229 | $232,957 | $226,313 | Equity | $72,758 | $67,845 | $68,318 | $74,025 | $77,920 | Profit Margin | 2.832% | 2.135% | 1.841% | 1.859% | 2.076% | | | -24.603% | -13.778% | 0.995% | 11.659% | Return on Assets (ROA) | 11.545% | 7.749% | 7.621% | 4.549% | 4.530% | | | -32.879% | -1.645% | -40.308% | -0.429% | Return on Capital Employed (ROC) | 20.921% | 21.851% | 15.413% | 12.422% | 11.973% | | | 4.448% | -29.465% | -19.403% | -3.616% | Return on Equity (ROE) | 36.348% | 32.573% | 28.880% | 32.332% | 33.226% | | | -10.386% | -11.338% | 11.955% | 2.765% |