04-75-498-30
Strategic Management
Summer 2015

Instructor : Prof. Lucas Wang

Case Analysis # 1: Zespri
Group # 2:
Peida Yang, 103613868
Yaan Zhu, 104126891
Yongxin Pu, 104108802
Colton Boros, 103953326
Tatiana Tuzlova, 103084152

Introduction Zespri is a grower-owned corporatized cooperative based out of New Zealand. The company, which was introduced in 1997, is focused solely on delivering and marketing Kiwifruit. Zespri was founded out of necessity by New Zealand's Kiwifruit growers after the price of kiwifruit declined and the industry faced a disaster. Zespri is owned by 2,700 current and former kiwifruit growers, and is governed by an eight member board elected by the shareholders. In 2008, Lain Jager was elected CEO of Zespri, the first person from inside the kiwifruit industry to be elected as CEO by the board of directors. The focus of this case is the CEO of Zespri Group Limited, Lain Jager, wanting Zespri to increase New Zealand kiwifruit exports to $3 billion by 2025, and how Zespri plans to achieve this. On the way to realizing this commitment, Zespri faces many challenges. From maintaining its position as the leader in the industry which has seen a huge growth globally, especially in China, Italy, and Chile, to the business side of developing strong brands that differentiate from the competition and establish recognition of Zespri's products. We will look in depth at these challenges, and offer possible solutions for Zespri to pursue. Through the use of analysis models, including the VRINE and 5 Forces models, we will look at internal, external, and financial factors that have an impact on Zespri and the kiwifruit industry, both currently and in the future. As we can see from the financial statements provided in the case, the global kiwifruit industry is in great shape going forward, we will extrapolate and project the financial reports and make an educated assessment of the possibility that the commitment to reach $3 billion in exports by 2025 will be reached.

Internal Analysis – VRINE
Using the V.R.I.N.E model we are able to assess the internal environment of Zespri. This approach assesses the company’s resources and capabilities by means of using their attributes to determine which of them provide the basis for a competitive advantage.
Value: Zespri’s sufficient resources enable the firm to create market demand. Due to the nutritional properties and exotic taste of the kiwi, a global demand has been build up for kiwifruit. As a result, in the global market, the value of Zespri has increased significantly. Secondly, the environment in New Zealand has always been favorable to growers and enabled them to grow kiwifruit with the best quality. Hence, the growers have an advantage over other locations in terms of producing the highest quality fruits. As kiwifruit is Zespri’s only product, the firm is able to concentrate on the strict growing standard and quality control.
Rarity: In the global fruit market, kiwifruit is a small niche product. The market accounts for less than a quarter per cent of the entire global fruit production. The geographic location of Zespri is unique to the other firms, which increases the rarity of Kiwi. The New Zealand government authorized the Marketing Authority to regulate the kiwifruit market by limiting the initial number of exporters to six. They are also putting regulation on export activities, and eliminating competition among growers in New-Zealand. Therefore, Zespri has an advantage until the authorization gets cancelled.
Inimitability: To prove its inimitability, Zespri took precautions and legal initiatives. They have intellectual property-protected varieties of kiwifruits and have created a global sourcing to maintain supply year round. Kiwifruit, however, is not a trademarked product, so it is imitable. The ability of competitors to imitate Zespri is hindered by their marketing efforts. Zespri spent over 6% of revenues on promotion to market Zespris kiwifruit as the “World’s finest”. On average fruit industry spends only 0.7%. The inimitability of Zespri's trademark and the promotion of a unique brand create sustainable competitive advantage for the company.
Non-Substitutability: To compete with Zespri, competitors are cultivating their own types of kiwifruit, which is different from Zespri’s types of kiwi, such as red flesh kiwifruit. What’s more, the competitors in Italy and Chile are competing with New Zealand. These competitors supply cheaper kiwifruit than Zespri. The firm developed several varieties of products such as Zespri Green, Gold, and Organic in response to the competition. Also, Zespri encouraged maintaining the strict growing standards, high standards of quality, food safety, traceability and sustainability to differentiate themselves from other producers.
Exploitability: In terms of exploitability, Zespri is doing well using their resources, and capabilities. Zespri promoted two-way communications with growers to support transparency and to build a long-term positive relationship with its consumers, suppliers and local distributors. They used different mediums such as call centers, websites, monthly newspapers, and monthly technical journals to market their products. They are also focusing on improving diets. In addition, Zespri is successful in raising sales on local markets. Zezpri is partnering with Italian, French, Japanese and Korean suppliers to create a year round supply of kiwifruit.
External Analysis – Five Forces Model
Degree of threat of new entrants is weak because of the high barriers to entry to the industry. Firstly, Zespri has a large advantage of its long exporting experience, which it has been doing since 1952. Secondly, Zespri has the title of the patents on new kiwifruit cultivars which hinder other companies’ access to newer technologies. In addition, the brand “Zespri” shares a great population for high quality kiwifruit. What’s more, kiwifruit market is still a fiercely competitive niche market. Therefore few newcomers are interested to enter the industry.

Degree of threat of substitutes are strong because many people know little about kiwifruit. Other fruits have their own competitive advantage and the price often lower than kiwifruits. Kiwifruit can be directly substituted by other fruit options.

Degree of bargaining power of suppliers is weak for several reasons. Zespri is owned by kiwi growers. Therefore Zespri has no bargaining for supply of kiwi. Growers also suffer weak bargaining power for kiwi inputs.

Degree of bargaining power of buyers is medium. Although Zespri is a large exporter to many countries, there are still two big competitors: China and Italy (see exhibit 2). Buyers can choose to buy from other companies if they think the price offering from Zespri is high.

Degree of rivalry is medium. Firstly, Zespri doesn’t compete for the lowest price. Secondly, Zespri strives to constantly improve quality. In addition, the firm uses billboards, print, and other forms of advertising to promote sales. In this way, Zespri raises awareness of kiwifruit and positioning itself as a producer of premium product.

The Strategic Positioning Model

Zespri is focusing on the differentiation strategic position. Michael Porter's generic strategies states that a strategic position of differentiation offers products or services with quality or distinction creating a luxury image for customers who are willing to pay higher price over their competitors. The differentiation strategy is based on an industry-wide market and product uniqueness. In order to have success using the differentiation position, some basic criteria have to met by the company: satisfying the needs that are unique and has value to buyers, and they are willing to pay more on the additional points of differentiation.

Zespri is gaining a competitive advantage by implementing different strategies to create unique product and satisfy needs of global customers in order to set a premium price. According to the case, Zespri was the main global markets exporter around 60 countries of New Zealand kiwifruit indicating that the company was operating on a broad or industry-wide market. Zespri is choosing which customers to reach and how broadly the company will compete in a certain areas. Zespri was choosing to reach worldwide customers to sell its kiwifruits.

Zespri was also engaging in the development of the new premium brand for its customers and targeting on protecting the patent for development of new kiwifruit cultivars. The innovation investment on new cultivars spent by Zespri counted to be the largest amount over other activities (Figure A). In addition, Zespri was working on the taste improvement program for a sweeter kiwifruit because customers were willing to pay higher price for sweeter fruit. The company believed that sweeter fruit would lead to higher consumption and create a barrier for competitors with the taste differentiation. These activities met the criteria of satisfying taste needs that customers valued and they are willing to pay higher amounts for.

The main markets for Zespri are Japan, East Asia and Europe. The Japanese market is growing stable on selling revenue as well as volume for green kiwifruit and a rapid increase for gold kiwifruit. East Asia is growing steadily both on green and gold over the years. However, for the European market, people preferred the green kiwifruit to the gold with a higher selling volume on green but low on gold (Exhibit 9). In order to market Zespri's brand name to the global market, it promoted the product in-store by including special retail store displays and in-store tasting as well as out-of -store activities including TV advertising, bus paintings and billboards. Those activities helped to promote Zespri's premium brand name to potential customers and create an impressive product image from their competitors in order to achieve success in the differentiation strategic position.

Recommendations
Option 1
In order to increase their market shares, Zespri can improve their market penetration to this market. The common efficient solutions of market penetration are product promotion and sales channels expansion. The advantages of this option are the following: the products’ promotion will attract more new customers; customers’ loyalty will increase; Zespri's sales will increase since the number of customers increases. The disadvantages of this option are the following: the cost of sales will rise due to heavy spending on promotion and improving distribution channels. Also Zespri's promotion activities may lead to the price war on the market.

Option 2
Zespri can improve their research of new cultivars of kiwifruit. Turners&Growers had introduced a new cultivar of kiwifruit called red kiwifruit which is based on Chinese variety and sources from some other countries. The advantages of this option are the following: the different cultivars will attract more customers and increase the sales and market share; Zespri can ensure its competitive advantage with new cultivars by using patent-protecting law. The disadvantage of this option is that R&D expenses will increase the overall cost of kiwi production.

Option 3
Zespri can use differentiation strategy by carrying different kinds of fruits but not just only the kiwifruit. The advantages are the following: Zespri can use their brand more efficiently; the overall sales will be increased and Zespri will have cash flow when kiwi season has ended. The disadvantages are the following: Zespri don’t have experience selling other kinds of fruits; Zespri may cannibalize sales of kiwi by selling other fruits; also Zespri have high risk to give their kiwi market a negative influence since they are getting in some unfamiliar markets.

Decision Criteria

The most important goal of Zespri is to increase their revenue and expand their market share. Therefore, the following criteria can evaluate these options: Sales increase, Market Share Increase, Risk, and Customer loyalty. The following table will compare and contrast all three options.

Table Options Comparison and Contrast
1*-Positive Effect; -1* Negative Effect

Option | Sales | Risk | Market Share | Customer Loyalty | Total | 1 | 1 | | 1 | 1 | 3 | 2 | 1 | | 1 | 1 | 3 | 3 | 1 | -1 | | | 0 |
Recommendation
According to the table, option 1 and option 2 are recommended. Either market penetration improvement or cultivars innovation are in line with Zespri’s requirements. Both options have some disadvantage, but it will be worth if these options can offer Zespri what they want. However, the kiwi market is a very limited, Zespri also needs to figure out how to attract more customers get in this market.

Implementation

Short-Term:

Zespri can do Market Penetration in the market from 2011 to 2015. The company can use different penetration strategies to gain more shares from Asian and European countries. The following strategies are suggested:

1. Multi-Segment Strategy
Zespri can ingratiate different customers’ preference in each specific market, then the company can supply the right amount of products for different markets to maximize their sales. For example, they can offer more Gold Kiwi to Asian market and more Green Kiwi to European countries. Since this strategy is not very difficult, they can implement it during two years which from 2011 to 2013.

2. Differentiation Strategy& Patent Protection
This strategy can be achieved by increasing investment in R&D. This will help Zespri to differentiate their products from other competitors in this industry. Most people in developed and some developing countries which have strong economic power are not concerned about the price but value the nourishment characteristics and taste of kiwi. Once Zespri can innovate and present some new high quality products, the company can match it with high price, and people will buy it. Zespri also need to manage their patent protection in order to keep their competitive advantage. The time settlement of this strategy will be 2011 to 2015.

Long- Term:

1. Interacting with Customers
Zespri needs more information from customers for the purpose of understanding their needs. These information will help to direct the long term development.

2. Global Recourses
Zespri can expand their company by growing kiwi in different countries in order to maximize their profit. Zespri can grow kiwi in South America or China due to low labor costs in both countries.

Contingency Plan
If Zespri don’t do well in expanding globally, they may consider producing other kiwi based products. For example, Zespri can use its brand to expand their kiwi line to kiwi drinks, kiwi biscuits, kiwi cakes, kiwi fudge. Introducing these products will help Zespri to leverage their brand and increase sales if kiwi sales expanding slows down.

Conclusion

In conclusion, based on the overall analysis we have conducted for Zespri Group Limited, we have concluded that Lain Jager and Zespris commitment to reach $3 Billion in New Zealand kiwifruit exports by 2025 is entirely possible. By combining our projected financial statements with the analysis of the environment and the position that we believe Zespri is currently is, and will be in going forward, we were able to make this decision. Zespri is able to reach this commitment through strong branding efforts, new cultivars, expanding its exports to different markets, and growing the current markets it is already in.

Financial Analysis for 2001-2010 years proving the achievability of $3 billon sales goal

Financial analysis includes Zespri's financial results during 2001-2014. Please see "Zespri Industry Performance during 2001-2014" below. As one can see from the table, Zespri experienced constant growth from 2001 to 2011 (except the decline of 5% in 2005. ) In 2000 Kiwifruit New Zealand was established and Zespris recognizable brand has emerged. Growth percentage from year to year was from 2% to 20%. The maximum sales level was achieved in 2011/12- two year after 2009/10 fiscal year presented in case financial data (page 31).
Please see dynamics of sales during 2001-2014 in the table below.

Justification of prognosis:
The favorable prognosis of $3 billion in sales by 2025 was based on average growth of $107,157 per year. This number is derived from the average sales growth during 2007-2011: Sales of ($1,500,357 in 2011/12- sales of $1,071,729)/4 yeas= $107,157 of average growth per year. Please see these numbers in a bold frame on "Zespri Industry Performance" table.

Controls including assumptions and calculation check:
The analysis uses the data available at the time of case publishing: 2012. The recalculation of data was done to comply with the case requirement to use only data from the case. Thus average growth during 2005-2009 is $103,304= (1,347,090-933,875)/4 * 15 years + 1,347,090 =$2,896,646, which is also very close to $3 billion in sales. To achieve the conservatism requirement to calculations, net sales amounts were used instead of gross sales.

Timeline:
In order to ensure that $3 billion goal is reached, Zespri should achieve $107,157 of growth per year starting from 2010. To monitor growth management should meet sales project for each year. Please see "Projected Timeline" table. The table starts from 2012-13. By adding $107,157 each year it reaches the amount of $2,893,398 in 2025 which is close to $3 billion.

Therefore $3 billion goal in sales by 2025 was a realistic and achievable based on the information available in 2010. Zespri had all the capabilities to achieve this goal.

Post case data financial analysis:
During 2010-2011 Zespri was working on achieving the goal of doubling the sales ($1,421,923 gross sales on 2009*2) and tripling the revenue ($957,173 *3) by 2025. The company was on track for 2 years during 2010/11 and 2011/12. However the growth was cut short by the consequences of the series of unfortunate events, which are out of Zespri's control. Several earthquakes in New Zealand and vast bacterial disease Psa dramatically reduced the production of kiwi especially of most profitable gold variety. Turners & Growers come forward as a strong competitor to Zespri. During 2010 Turners & Growers mounted a legal challenge to Zespri's structure.

Outlook:
In its annual 2013-2014 financial report Zespri is optimistic about its outlook: "While not without its challenges, the future is bright".
Zespri plans to regain its market share and sales volumes by introducing new, more realistic and shorter term goals: "As the industry recovers from Psa, we anticipate Gold volume will grow strongly over the next several seasons. We plan Gold3 volumes increase to 50 million trays by 2018".

References:
This assignment relies heavily on "Zespri, 9-511-001, Revised on January 13, 2012" developed by Harvard Business School, authors: Jose B. Alvares and Mary Shelman. Sources of financial data: | https://www.zespri.com/ZespriInvestorPublications/Annual-Report-2013-14.pdf, page 12 | https://www.zespri.com/ZespriInvestorPublications/annual-report-2003-04.pdf, page 30 | https://www.zespri.com/ZespriInvestorPublications/annual-report-2005-06.pdf, page 30 |