Current Business Problems and Possible Solutions
Abstract
The Sugar industry in Pakistan has been forced to face a number of problems in the recent years, especially for those people who are stake holders in them, most notably those of the raw material suppliers, the employees and the mill owners. Government intervention in the form of price flooring and the inability of some sugar mills such as Kohinoor Sugar mills limited in keeping up the technology pace with other larger, more technology suave sugar mills has resulted in numerous problems for the management. This paper explores some of the current problems being faced by Kohinoor Sugar Mills limited in light of the changing industry structure and its inability to conform to the new age developments and innovations that act as a major deterrent to its competitiveness and success in the industry. The business concept of strategic implementation and the importance of management for implementing, managing and controlling change will be highlighted.
In understanding the origin of the problems faced by Kohinoor Sugar Mills Limited, a short assessment of the structure of the sugar industry and the current progresses that have been commenced needs to be studied. A brief interview with Kohinoor Sugar Mills Limited’s General Manager Finance has sketched the evolving trends in the industry and the company’s response or (lack of) thereof to such developments.
Traditionally, the sugar industry has been concentrated in the Upper Punjab, in areas such as Sargodha, Bahawalnagar, Bahawalpur etc. Previously, there was a Zoning system in place, a system whereby the growers were obliged to deliver sugarcane to a mill within a certain area (Chullen, 2002). The sugar cane growers within 40 km radius of a particular sugar mill thus supplied to that mill only. However, with the abolition of the zoning system by the Government of Pakistan and the introduction of a new voluntary contract system that enabled the growers to decide by themselves what mill to supply their cane to, the circumstances changed radically (Chullen , 2002).
When the Sharif Group of Companies launched several huge ventures such as Ittefaq Foundries which were launched nationalized in Bhutto’s era, a mill with 4000 tones crushing per day’s capacity was considered a large scale mill. In Zia’s era, when the foundries were denationalized, even bigger plants were developed with a capacity of 8000 tones crushing per day’s capacity. This development, coupled with the removal of the zoning system, meant that the mills could procure the sugar cane from as far as 200 km.
This new development brought about stiff competition among the sugar mills for the procurement of the sugar cane, often resulting in the larger firms ousting the smaller mills of their share of the raw material. Previously, under the zoning system, the sugar mills used to help the sugar cane growers in their vicinity by providing them with financial help and helping them develop better and improved varieties of sugar cane. However, with the abolition of this system, the focus of the mills turned to assessing the sugar cane by its weight rather than by judging it by the sucrose content in it. Kohinoor Sugar Mills Limited was one such mill that developed and continued with this practice. This can be a deemed a bad business move in the sense that in the 90’s more and more sugar mills were set up in areas like Ghotki in Sindh and in Rahim Yar Khan and these mills focused on the new varieties of sugar cane with high sucrose content rather than on prioritizing sugar cane on the basis of weight alone. These large scale mills with the capacity of 8000- 12000 TCD ( tonnes crushing per day ) worked on the basis of latest scientific trends and invested heavily in new and better varieties of sugar cane, called in foreign experts and developed a proper corporate culture. They developed new technology and also worked on improving the sugar cane yield as well.
In this region, the sugarcane yield came to around 1200 mounds / acre, with a rate of return above 11%. The sucrose content of the sugarcane yield in this particular region is high, owing to the favorable climate and improved farming techniques. In addition to all the factors listed above, the improved road networks also helped these recently set up mills to increase efficiency. However, the biggest contributor to the efficient production was the investment in innovative technology. The sugar mills that could not anticipate the change- the move towards bigger and better technology and sugarcane varieties and improved farming methods – and still relied on weight rather than sucrose content in the sugar cane are currently facing hardships. Kohinoor Sugar Mill is one such mill that is embroiled in this situation where it is lagging behind mills that are technology driven and have properly defined business objectives and a vision to achieve the goals set in both the short and long run.
According to Stimpson and Farquharson ( 2010), Change is defined as “the continuous adoption of business strategies and structure in response to changing internal pressures or external forces. Change happens whether we encourage and welcome it or net. To take control of it and to ensure that it is a positive and not a negative process, businesses must have a vision, a strategy and a proven and adaptable process for managing change”. Change management requires firms to be able to cope with dramatic changes in order to stay efficient and maintain their competitiveness in the market.
One of the biggest problems an organization may face is a resistance to strategic change. The workforce may be resistant to change due to a number of failures such as the fear of failing, false beliefs about the need for change and general inertia (Stimpson and Farquharson 2010). A fear of the unknown can be understood to mean that change may represent an uncertainty and this is uncomfortable for some people. Not knowing how the proposed change would affect the working environment leads to increased anxiety and this results in resistance. A fear of failure can stem from the fact that the changes may require new skills and abilities that, despite training, may be beyond a worker’s capabilities. People may be very comfortable with the present system and might be fearful of coping with a new one. False beliefs about the need for change can be understood to mean that managers, to put themselves at ease and to avoid the risks of change, may fool themselves into believing that the existing system will ‘ work out someday’ without the need for radical change. A general inertia means that many people are reluctant to change and try to maintain the status quo. Change often requires considerable effort, so the fear of having to work harder to introduce it may cause resistance (Stimpson and Farquharson 2010).
Kohinoor Sugar Mills Limited, is a widely known sugar mill that has been in existence since Pakistan was made, is a PLC that is listed on the Karachi and Lahore stock exchange, is currently facing a dilemma. It has become financially weak and is suffering continuous losses owing to the old approach towards management and assessing the sugarcane (the most important raw material) on the basis of weight rather than the sucrose content. It was not able to introduce strategic change owing to the factors discussed above. This hesitancy and resistance to improved technology and better sugarcane varieties resulted in the company losing competiveness and inculcating several losses ( the quarterly report for the period ended 31 December 2012 shows a net loss of Rs 604,054,000) (http://www.ksugar.com/reports.html) and borrowing heavily from several banks and other financial institutions. To add to its troubles, the Trading Corporation of Pakistan (TCP) has forfeited the performance guarantee of Kohinoor Sugar Mill for its failure to supply sugar to the state-run grain trader as per business agreement (Bhatti, March 2013).
“M/s Kohinoor Sugar Mill signed an agreement with TCP for supply of 2,460 tons of sugar in January this year, when federal government asked TCP to procure sugar from domestic sugar mills as they were facing some financial crisis followed by bumper sugarcane crop and slow sales in the domestic market. M/s Kohinoor Sugar mills was among the mills, which agreed to supply sugar at Rs 52,800 per ton. However, when TCP's surveyor visited the mill for inspection of stock, it revealed that sugar stock was not maintained properly as per term and condition prescribed by the Corporation for procurement of the commodity. On surveyor report, TCP refused to accept the sugar stock and asked the mill for other sugar lots, which should be maintained properly, for inspection and laboratory testing. Initially, the sugar mill agreed to offer new stock, but later the mill refused to supply sugar to TCP. After receiving a formal regret from the mill the Corporation forfeited 5 percent performance guarantee, deposited by the supplier after sale/purchase agreement with the TCP” ( Bhatti, March 2013).
A brief SWOT analysis of the company can be helpful in assessing the current situation. The biggest strength of the company is that it is owned by the Saigol Group, a very industrious and renowned group in the business sector. It can bank on its owner’s credibility and good image to procure funds from banks and other financial institutions. Due to the weaknesses pointed above, the company is facing financial and managerial problems. The chief weakness is the technology lag and the face that the company’s resources to their full capacity. Failure to innovate and reliance on old management techniques have seriously jeopardized the financial health and image of the company. Because of this, Kohinoor Mill is unable to procure loans from banks, is unable to provide adequate financial rewards to its employees and timely pay off its liabilities. Possible Opportunities for the company can be in the form of targeting international markets. The demand for sugar, a basic staple commodity, is continuously on the rise and Kohinoor Sugar Mills can explore potential new markets abroad. With regards to the Threats, the more technologically suave mills cold easily out maneuver Kohinoor mills in sugar cane procurement and producing high quality sugar because of their new technology and extensive research and development.
One of the possible remedies for improving the liquidity position of the company can be an injection of new capital. The company should also make towards value addition by diversifying its activities and going into more ethanol production. Sugarcane in an important industrial cash crop in Pakistan and it produces numerous valuable by products like molasses which be used in ethanol production. According to James Jacobs, an agricultural economist,
“More than half of world ethanol production is produced from sugar and sugar byproducts, with Brazil being by far the world leader. Technologically, the process of producing ethanol from sugar is simpler than converting corn into ethanol. Converting corn into ethanol requires additional cooking and the application of enzymes, whereas the conversion of sugar requires only a yeast fermentation process. The energy requirement for converting sugar into ethanol is about half that for corn” (Jacobs).
“Pakistan’s sugar industry produces more than a half a million tones of ethanol per annum from cane molasses, over 50 % of which is exported at an average price of $ 500/ MT. The main destinations of Ethanol export include Europe, Far East (Korea, Japan, Taiwan and the Phillipines ) and the Middle East ( Dubai and Saudi Arabia)” (Chullen, 2002). Pakistan sugar industry thus has a great potential for ethanol production and a demand for this important environmentally friendly fuel is increasing day by day. Ethanol constitutes as 10 % of America’s fuel supply and the foreign demand for this fuel is high (White , 2012).
Kohinoor Sugar Mill should thus focus on value addition of its final product and should set up more distilleries. It should carefully study the strategies of its competitors and invest in new technological advances to increase the efficiency and profitability of the business. A failure to modify its current business practices and resistance to the new methods can cause further damage to the firm’s finances and liquidity position, what with the firm being already beset with heavy debts and deteriorating image in the market.
The Government intervention in the sugar industry has also posed several problems for the sugar mills. The Government fixes the price of the raw material (sugarcane) and thus, for the Sugar mill, the cost of production is greater than the international market. Until and unless the government provides a subsidy, the sugar mills will find it to export sugar given the existing glut in the international sugar market. According to the General Manager Finance of Kohinoor Sugar Mills Limited, the agricultural pattern in Pakistan is such that either sugarcane and rice are planted at a specific time or sugar cane and wheat or rice and cotton. Recently, the trend has been towards planting more and more sugar cane since the yield of rice and cotton wasn’t yielding a high monetary turnover. Because of an abundant sugar cane supply and the need to have continuous crushing as stipulated by the law, the Sugar Mills are forced to carry out sugar production. This poses a certain problem since the government fixes the price of the sugar cane and thus, for the domestic sugar mills, the cost of production is greater than the international market and unless the government provides a subsidy, the Sugar Mills are forced to sell at a price lesser than the production cost in an global market which is previously fronting a glut in this basic product.
In light of all the problems listed above and the current market situation, it is imperative for Kohinoor sugar mills to manage their finances efficiently and to invest in new technological improvements like their contemporaries in order to increase their competitiveness.
References
Bhatti, Rizwan ( 18 March 2013). Failure to supply sugar as per agreement: TCP forfeits performance guarantee of a sugar mill. Business Recorder. Retrieved from :
http://www.brecorder.com/agriculture-a-allied/183/1164455/
Chullén, Jorge (2002). The Sugar Industry in Pakistan – An Overview National Sugar Workers Conference . IUF- Asia/Pacific. Retrieved from :
http://www.iuf.org/sugarworkers/wp-content/uploads/2012/07/Pakistan-Overview-2002.pdf
James, Jacobs. Ethanol from Sugar. What are the prospects for U.S. sugar co-ops? Retrieved from:
http://www.rurdev.usda.gov/rbs/pub/sep06/ethanol.htm
Kohinoor Sugar Mills Limited. Retrieved from:
http://www.ksugar.com/
Stimpson, Peter & Farquharson, Alastair. Business Studies. Second addition. Pg 650-657.
White, Robert (November 19, 2012). The importance of ethanol fuel. Retrieved from:
http://carsofchange.com/industry-perspective/the-importance-of-ethanol-fuel/
