Assignment On Business Policy and Strategy PART C

FECTO Sugar Mills Ltd

Submitted to Prof. Nasir Riaz Submitted By Hammad Arshed Asad Bhatti Rabia Tariq L1S10MBAM0098 L1S10MBAM0118 L1S10MBAM0097

University of Central Punjab

Introduction
Fecto Sugar Mills Limited was the Groups first Sugar Mill, It was incorporated as a Public Limited Company and is listed at Karachi, Lahore and Islamabad Stock Exchanges. The Project was acquired in 1975 by the Group and the dedicated efforts of the management along with the personal interest of the Chairman, Chief Executive and Directors has resulted in tremendous improvement in the results over a very short period of time. The Company achieved a turnaround by not only posting profits but also started declaring dividends consistently. It received Award of Top Companies of 1982 by The Karachi Stock Exchange Ltd. The Mill is located in Darya Khan, Distt Bhakkar. It is spread over an area of 200 acres. Initially the production capacity was 20728 tons which was later enhanced through BMR in 1996 to 40800 tons. Member of Karachi, Lahore and Islamabad Chamber of Commerce & Industry.

Fecto Sugar Mills Limited is ISO 9001:2000 Certified Company. Fecto Sugar Mills Limited is a Member of Pakistan Sugar Mills Association.

Current Performance
In the annual report of Fecto the auditors have raised doubts about the ability of the company to continue on a going concern basis. Fecto and other sugar mills have been facing these conditions due higher sugar cane price multiplied by the maneuvering of middle men and decline in sucrose recovery, contributing towards the high production cost of sugar which have affected the companys profitability This situation is watched carefully and all events are under constant review for which the management has taken several measures to strengthen the financial position of the company. Continued support of sponsoring director through mark-up free finances has helped the company to reduce incurring of losses. These facts evidence that the management is sincere and rational for the growth and high production levels, and the management is anticipation to maintain the same spirit in future as well. In view of these facts, the management does not have any doubt about the companys ability to continue as a going concern. Further, the

company has met all its financial obligations to Banks and Domestic Financial Institutions falling due in the period.

Future Prospects
Initial estimates about sugar cane crop for the season 2009-10 are not very encouraging and indicate a drop of 30 to 35% in the cane crop cultivated area over last year. Despite increase in sugar cane minimum support price to Rs.100 per 40kg from Rs.80 per 40kg, growers are still demanding higher prices. Although Fecto is paying currently (season 2009-10) Rs.170/- per 40kg of sugar cane. Neighboring mills and middle men have also started unhealthy competition resulting in price hike and disturbed cane supply to the mills. The management has taken some positive measures to improve cane supply to mill. It is very important for the industry that sugar cane price is contained at the government support price and the role of middle be eliminated by introducing previously practiced zone based procurement system. Research and development is also long overdue in the cultivation of good quality sugar cane to increase existing rather static average yield per hectare of 43-50 tons/ hectare plus average sugar recovery of 8% to 8.5%. This vital work needs to be undertaken expeditiously at every level. Presently, company is operating in a highly challenging environment with high sugar cane support price and inconsistent government policies towards industry, couple with global economic slowdown. The management of the company is anticipating a tough and challenging season for the sugar industry and is doing its utmost efforts to improve the profitability of the company by focusing on reduction of production cost especially financial cost and improvement in production efficiencies. We have devised a long term strategy to cope with the situation to reduce our dependence on the borrowing in the coming years.

Vision and Mission Statement

We, at Fecto Sugar Mills Limited, always strive hard to stimulate collective efforts of all segments of the company to achieve desired goals by: Satisfying the customer needs, providing high quality product. Fulfilling our commitments towards all the stakeholders. Providing an environment, which is conducive for the work force where they can work with highest degree of honesty, dedication & motivation. Steady growth in earning based on performance through strong returns for our shareholders. Becoming a good corporate citizen complying with all rules and regulations.

Evaluation Matrix

Mission Statement Components

Product/Service

Customers

Markets

Technology

Concern for survival, growth and profitability

Philosophy

Self-Concept

Concern for public image

Concern for employees

Evaluation of mission statement

The mission statement of Fecto Sugar Mills Limited comprises of following elements: Customer. Products or services. Concern for survival, growth and profitability. Philosophy. Concern for public image. Concern for employees.

Fecto Sugar Mills has a comprehensive and effective mission statement which highlights the important aspects like customer satisfaction, high quality products, sustainable growth, social responsiveness, treating employees as valuable assets and commitment towards stakeholders.

Internal Audit 1) Marketing Audit

Fecto Sugar Mills has followed an effective market segmentation approach. They are focusing on undifferentiated marketing. The target markets are clearly specified. Fecto is well positioned among its competitors as they provide high quality product and good customer service. The current channels of distribution are costly and unreliable as the growers are demanding high prices for the sugar cane and the neighboring sugar mills and middle men have also started unhealthy competition which have also resulted in price hike and disturbed sugar cane supply to the mills. The firm paying less attention to market analysis which include market research and other marketing activities which are conversely affecting the sales growth and market share of the company. Price of the product is beyond the control of the firm, as it is being influenced by government policies and the member of the distribution channels.

2) Financial Audit
Following are the main types of ratios to access the financial position of the firm. Liquidity Ratios Leverage Ratios Activity Ratios Profitability Ratios

A) Liquidity Ratios
Liquidity ratios are used to measure a firms ability & solvency of the firm to meet short-term obligations. They compare short-term obligations to short-term resources available to meet these obligations. It consists of two ratios current & acid test ratio. Two types of liquidity ratios are: a) Current Ratio b) Quick Ratio/ Acid Test Ratio

Current Ratio
Current ratio is the relationship between current assets and current liabilities. It is calculated as Current ratio = Current Assets/ Current Liabilities 2009 Current ratio 0.43 2008 0.56

Interpretation
The current ratios of the company are not very impressive. The acceptable current ratio is 2:1 but the company has never been able to maintain the acceptable level of the current ratio. Having a 1:1 current ratio means that the company has one rupee for the discharge of each one rupee of the

current liabilities. The company is not in a good position to meet its current obligations as they will fall due in the recent period of time. The company has a current ratio of less than one in each of the years which shows that the companies short term obligations will not be fulfilled by its current assets rather some of the long term assets will also be needed for the discharge of the current liabilities. The other thing which this ratio signifies is that some of the fixed assets of the company have also been financed through the short term liabilities.

Quick/Acid Test Ratio

Quick or Acid Test Ratio is the ratio of liquid assets to current Liabilities. True Liquidity refers to the ability of a firm to pay its short-term obligations as when they become due. Quick or Acid test ratio = Quick Assets/ Current liabilities 2009 Quick Ratio 0.40 2008 0.47

Interpretation
This ratio basically shows the ability of the company to pay off its short term obligations as they become due without going for anything else. For this ratio, the current assets are reduced by the amount of the slow moving items like the stocks and the prepayments. The acceptable or the ideal ratio is 1:1 which means that the firm must have one rupee in quick assets to pay off its current liabilities as they become due. Like the current ratio, the company has never been able to achieve the desirable figure in this area also. As shown in the above table, the average ratio maintained by the company in the last five years is less than 1 which means that the company will be forced to do something else to pay off its current obligations.

B) Leverage Ratios
Leverage ratios can be defined as, The ratios which show the extent to which the firm has been financed by the debts. These include a) Debt to equity ratio b) Debt to total assets ratio

a) Debt to Equity Ratio

Debt to equity ratio indicates the relationship between the external equities or outsider finds and the internal equities or shareholder fund. It is calculated to assess the extent to which the firm is using borrowed money.

Debt to equity ratio = Total Debts / Shareholders equity 2009 Debt/Equity Ratio Interpretation We can see that the company has been consistently relying on the external debts to finance its operations. The ratio has an increasing trend since the previous years. 1.40 2008 1.25

b) Debts to Total Assets Ratio

The Debts to total assets Ratio tells us how much portion of assets is a debt. This ratio serves a similar purpose to debts to equity ratio. It highlights relative importance of debt financing to the firm by showing the percentage of the firms that is supported by debts financing.

Debts to Total Assets ratio = Total Debts / Total Assets 2009 Debts to Total Assets ratio 1.33 2008 1.09

Interpretation
This ratio gives us the view about the amount invested in the total assets of the company. The above figures of the company are not very good. For the past few years, the companys assets have been predominantly financed by the external debts. This shows that the each rupee of the shareholders had been accompanied by more than one rupee of the external lenders.

c) Activity Ratios
Activity ratios are also known as efficiency or turnover ratios. They measure how actively the company is utilizing its resources to generate revenue. a) b) c) d) Receivable Turnover Ratio Payables Turnover Ratio Inventory Turnover Ratio Total Asset Turnover Ratio

Receivable Turnover Ratio

Debtor turnover ratio indicates the velocity of debts collection of a firm. It indicates the number of times average debts are turned over during a year. Higher the value of debts turnover, more efficient is the management of debts or more liquid the debtors are and vice versa. Receivable/debtors turnover ratio = Annual credit sale / Trade debtors 2009 Receivable/debtors turnover ratio 17.67

Interpretation
There less trade debts in the company for the past few years, probably because of the low performance of the company or because of the strict credit policy of the company.

Inventory Turnover Ratio

Inventory Turnover ratio is the relationship between Cost of Goods Sold during the period and average inventories. It measures the velocity of conversion of stock into sales. Usually higher inventory turnover, stock velocity, indicates efficient management because more frequently stocks are sold lesser the amount of money required to finance the inventory.

Inventory Turnover = Cost of Goods Sold / Average Inventory 2009 Receivable/debtors turnover ratio 19.53

Interpretation
Inventory turnover ratio of the company is satisfactory as more times the stock is converted into sales. This implies that firm has a effective inventory management system.

Total Asset Turnover Ratio

This ratio shows how effectively the company is generating sales by utilizing its total assets. Total Asset Turnover Ratio = Sales/ Total Assets 2009 TAT Ratio 0.76 2008 1.07

Interpretation
The decreasing trend in assets turnover ratio of Fecto Sugar Mills Limited is due to the decrease in sales during the past few years.

D) Profitability Ratios
a) Net profit Margin Net Profit Margin = Net Income (Loss)/ Sales 2009 Net Income (Loss) Margin (6.58%) 2008 (2.2%)

b) Return on Assets Return on Assets = Net Income (loss)/ Total assets 2009 Return on Assets (Loss) (5.03%) 2008 (2.37%)

Interpretation
The company is going through losses during the past few years due to which the profitability ratios are showing a negative trend.

3) Production/Operations Audit
The current suppliers are costly and unreliable. Growers are demanding high prices for the sugar cane and the middlemen have also started unhealthy competition resulting in price hike and disturbed cane supply to mills. The infrastructure of the company is in good condition. Highly advanced machinery was imported from Japan, Germany and other countries. Currently the plants are working at 40% less than full capacity. The inventory management system of the company is effective. Enough stocks of sugarcane are maintained so that the production is not hampered during seasons of non availability of raw material. Inventory turnover is good. As the inventory is converted into sales within short time period, because the demand for refined sugar is high in local as well as foreign markets. The quality assurance section is performing satisfactorily. The company is certified by ISO 9001 and 9002 which is a signal of companys quality. The firm is technologically current.

4) Management Audit
Effective goals and objectives are set by the management as reflected in the mission statement which is very comprehensive. There is high collaboration and coordination between managers of different department which allows them to plan in most effective manner. The culture of the organization is flexible which involves employees from different levels of the organization to involve in decision making. A formal organizational structure exists in the Fecto Sugar Mills Limited. Every employee is assigned with clear roles and responsibilities. The motivational level of the employees is high. They are committed towards their job responsibility and organization.

VALUE CHAIN ANALYSIS

Value Chain Analysis helped identify a firm's core competencies and distinguish those activities that drive competitive advantage. The cost structure of an organization can be subdivided into separate processes or functions assuming that the cost drivers for each of these activities behave differently. Value chain framework highlights where competitive strategies can best be applied in the organization.

Primary Business Processes Inbound Logistics

Materials handling Just-in-time Warehousing Inventory control Transportation

Operations
Machine operating Assembly Packaging, Testing and Maintenance

Outbound logistics
Order Processing Warehousing Transportation Distribution

Marketing and Sales Advertising Promotion Selling Targeted Marketing Pricing Channel Management

Customer Service
Customer Relationship Management.

Support Activities Firm Infrastructure

General Management Planning Finance Legal Investor Relations

Human Resource Management

Recruitment Education Promotion Reward Systems

Technology Development
Research & Development Information Technology Product and Process Development

Procurement
Purchasing Raw Materials Lease Properties Supplier Contract Negotiations

Strengths & Weaknesses Analysis Strengths

Well positioned among competitors. High quality product and good customer service. Effective Inventory Management System. Company certified by ISO 9001 and 9002.

Committed Management.
Plants working at less than full capacity.

High motivation level of the employees. Clear roles and responsibilities within the organization.
Company is technological advanced with good infrastructure.

Weaknesses
Unreliable and costly channels of distribution. Declining sales growth and market share. Company facing continuous losses during past few years. Lack of attention towards Research and Development activities.

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Strengths Well positioned among competitors. High quality product and good customer service Effective Inventory Management System.
Company certified by ISO 9001 and 9002.

Weight Rating Weighted Score 0.07 0.10 0.15 0.09 0.13 0.16 3 3 4 3 4 4 0.21 0.30 0.60 027 0.39 0.64

Committed Management.
Company is technological advanced with good infrastructure.

Weaknesses
Unreliable and costly channels of distribution.

0.12 0.04 0.03 0.11 1.00

1 2 2 1

0.12 0.08 0.06 0.11 2.78

Declining sales growth and market share. Company facing continuous losses during past few years
Lack of attention towards Research and Development activities.

Total