TASK

The following case study has been developed to provide you with a realistic business scenario from which you can develop the necessary decision making skills to meet the learning outcomes of this subject. The case study will form the basis for Assessment Item 2 and 3.

Introduction:

It is April 2020 and one year since Pork Bellies Pty Ltd acquired competitor Casserole Steaks in a goal to improve economies of scale and reinforce its position as the fourth largest company producing pork in Australia. The pork farming and processing industry has undergone significant changes in the last decade and it appeared to Pork Bellies that the competition from the other two major competitors would start to deteriorate Pork Bellies traditional stronghold of value added processed products. There were also indications that a major international company had been investigating the Australian market to identify potential alliance partners or takeover targets. Given Pork Bellies strong growth and performance over the last 10 years, the company’s board now needs to analysis the future of the industry and how it can position Pork Bellies to ensure its long-tern sustainability and to progress towards their goal of being the major pork producer in Australia.

PORK BELLIES Pty Ltd – Background

Pork Bellies was established in 1930 by Shawn Lamb in Walgett; Shawn’s granddaughter Brooke River took over as managing director in 2011. The company is currently ranked 185 in the top 500 privately owned companies in Australia.

In 2019 Pork Bellies employed over 800 staff, with major operating centres located in Melbourne, Sydney and the Albury/Wodonga region. Pork Bellies is the fourth largest company in Australia that farms and processes pork with sales of $462.7 million. Major customers include supermarkets, butchers and caterers.

Quality is something Pork Bellies is very particular about and in 2001 it was accredited with ISO 9002 across all farming and processing functions, including processing, distribution and feeding of livestock. ISO 9002 certification was also accredited for administration processes of purchasing, training product control, product traceability and process improvement. The Hazard Analysis Critical Control Points (HACCP) food safety system was also adopted, further highlighting Pork Bellies commitment to quality control and safety.

Pork Bellies strong growth has been attributed to product development, with a focus on supplying to butchers, restaurants, caterers and function venues. All products are portion controlled; it is provided in set portions and individually packaged, which customers prefer for ensuring consistency in cooking and serving.

Global rationalisation has impacted on the Australian industry in recent years however.

Achieving economies of scale for farming and processing is considered to be more important for the long term viability than product development. As part of their growth strategy Pork Bellies acquired Casserole Steaks in April 2019 to further expand processing activities, gain access to additional distribution outlets and achieve greater economies of scale.

Complementing the current Pork Bellies business, Casserole Steaks produces a range of fully cooked small goods and smoked pork for Pork Bellies under their own label, as well as under Farm Fresh label for Holes and Dangerway Supermarkets. Casserole Steaks has established a strong export market into China.

Pork Bellies have developed close working relationships with Meat Delights and Power Pork, two of Pork Bellies competitors. This strategic alliance was established to achieve further economies of scale in production of pork products designated for the overseas markets.

The global pork meat farming and processing industry

Pork consumption has consistently increased upwards in recent years in Australia and internationally. On a global basis, pork meat accounts for about 25% of total meat consumption, third only to chicken and beef. The table below summaries pork consumption over the last few years.

Table 1

Pork meat consumption per capita in selected locations (kg/per capita)

With the consumption of pork rising around the world, it has resulted in the need for production to increase at the same rate. Recent years trends are showing that countries are working towards becoming more self-sufficient in providing meat for their own consumption. More recently, China and Brazil have enjoyed enormous growth in pork production and overtaken the US which had traditionally been the highest producer of pork.

Size and growth

In 2019, about 955,000 tonnes of pork with a retail value of approximately $4.2 billion was consumed. Historically, the industry has not been responsive to changes in demand, with production generally constant with a minor peak around Christmas time. There have been limited fluctuations in price and profitability. In addition, unlike other livestock producers, pork farmers were unable to change to alternative livestock when demand declined due to the specialised nature of pork farming and the equipment required for housing the pigs. As a result, a high focus on efficiency throughout the industry has resulted in intensive animal rearing operations through efficient feed utilisation and optimised productivity. This has enabled lower price rises at the retail end than for other livestock, with pork prices increasing by only 147 % from 1972 to 2014, compared with 230% for most other meats.

Consumption Trends

The growth in production mirrored increasing domestic consumption trends, with Australian consumption at 29 kg per capita per annum in 2019. However, this was still a long way behind countries such as China as shown in table 1, which has an annual consumption in excess of 44kg per capita. Consumption demands in Australia have also increased as a result of price reductions that are able to be achieved through technological development and economies of scale within the industry. However, consumers are increasingly shopping for meal solutions rather than for set weights of meat and vegetables as they were once doing. In fact, all meats are facing increasing competition from rice, pasta and prepared foods. Key drivers of future growth in domestic pork consumption are as follows:

• A continued strong domestic economy – pork consumption is directly related to available disposable income. Australia is enjoying the lowest interest rates for the last 30 years and this has seen a substantial rise in disposable income. However, personal debt is at record levels, largely due to the buoyant housing market and any rise in interest rates will have a negative impact on demand due to a tightening of disposable income levels.

• Changing lifestyle trends – an increase in health consciousness has seen a shift in favour of white meat and fish over traditional red meats. Pork meat is low in fat and high in protein, fitting well with changing consumer levels.

• Culture – Australia is a multicultural society and most national cooking styles incorporate pork dishes.

• Convenience and fast food – Convenience products and fast-food outlets have proliferated over recent years as time-poor consumers demand products that can be prepared in less time. This is being driven by more people in the workforce and smaller family units that favour convenience food products. Pork has become more prevalent in menus as consumers seek fast and healthy options. In addition, increasing average weekly household disposable income has meant people are increasingly eating out, with pork being a prominent part of most restaurant menus.

A key issue facing the industry in the future is consumer perception of the use of hormones and growth proponents in piggery pork production, with the industry safeguarding against such use by enforcing testing programs through the National Residue Survey (NRS) conducted by the Australian Federal Government Department of Agriculture, Fisheries and Forestry. This has helped to allay consumer concern in this area, and to date no residues have been detected in batches tested.

In addition, the increasing demand for organic produce is impacting on the industry. Free range pork accounts for a small amount of total production; however, it is the fastest growing segment. With growing consumer trends for organic produce, several industry participants have recently gone into production with ‘free range’ accredited growing.

Pork Bellies and International breeding stock alliances.

Pork meat production in Australia is carried out mainly using breeding stock from one of a small number of large international pig breeding companies. Australia is dominated by breeding stock from two major companies:

• Piggie Smalls (a wholly owned subsidiary of Cape Foods Inc. in the United States) supplies Hamlet and Gropork Breeding, a joint venture between Pork Bellies and Hogwarts

• Porky Group (a UK-based company) which supplies Swapmeat Enterprises.

The international breeding companies focus on improving their pork breeds to deliver enhanced performance in terms of feed to meat conversion and growth rates. Breeding farms follow the management program prescribed by international breeders. This, however, does make Australian producers reliant on international breeders or local organisations with breed franchises for breeding stock. This also enables them to be internationally competitive and maintain quality. Pork Bellies recognises the importance of being part of such alliances and has entered the GroPork Breeding alliance to ensure access to the Piggie Smalls breed and maintain competitiveness with the major local producers such as Hamlet and Swapmeat.

The cost of production

The pork industry in a large consumer of wheat, absorbing more than one-third of all feed wheat available in Australia. It also used 75% of meat meal produced in Australia. One of the key issues for the industry is that local feed costs are higher than the feed costs of other major pork producing countries. Should import regulations on pork be relaxed, this relative cost disadvantage could pose a significant threat to domestic production.

Imports

Less than 5% of the product is imported due to concerns about disease. In November 1997, the government announced that limited imports on cooked pork meat would be allowed into Australia. However, strict guidelines were put in place such that imports had to be cooked at 70°C for 143 minutes which was the level at which disease was determined to be unable to survive. In addition, the Australian Quarantine Inspection Service (AQIS) introduced stringent tests on imported pork meat and as a consequence, imports have not increased significantly. It is anticipated that this trend will continue.

Pork Bellies’ corporate strategy

Pork Bellies regards itself as a major Australian pork meat production and processing company. Its stated strategic goals are as follows:

• To be recognised as the leading pork meat brand in the Australian food industry;

• To provide customers with high-quality products and excellent service;

• To be the leading company in the industry, continuing to grow at rates higher than the industry average; and

• To be the leading supplier of further processed pork products.

It plans to achieve these objectives by:

• Being an accredited supplier to the major supermarket chains and speciality pork outlets;

• Expanding by acquisition, where appropriate;

• Sustaining superior performance; understanding and satisfying customer needs; and • Investing in state-of-the-art equipment to enable product innovation and efficiencies.

Pork Bellies is already recognised as having a differentiated offering compared with its major rivals, Swapmeat and Hamlet, due to its value product range, well established relationships with key retails outlets and the achievement of quality accreditation across a wide range of aspects of its operations. Pork Bellies is focused on its direct customers (ie the retailers) and the end customer (ie the customer) - planning to be the supplier of choice.

The company recognises that they need to sustain their growth rate and profitability to prevent takeovers from one of the two major companies (Hamlet and Swapmeat). For this reason, Leghorn was acquired in 2016 to achieve production and processing economies of scale and gain access to additional markets through Leghorn’s accreditation and speciality store relationships, as well their export focus and AQIS export approval status. Further acquisitions are possible; however, they would need to be good strategic fit from operational and cultural perspectives.

The company has strong family values, and the ongoing sustainability of the business is more important than short-term profitability. In 1999, Hamlet unsuccessfully approached Brooke River about the prospect of buying Pork Bellies’ operation for $250 million. River was offered a seat on the board; however, under the terms of the deal, she would lose control over the Pork Bellies operations. In addition, a large proportion of the purchase synergies would arise from the removal of duplicate functions across the combined business group. This would have resulted in the retrenchment of many of Pork Bellies loyal employee base, some of whom had been with the company since Brooke River’s grandfather established the business over 50 years ago.

Pork Bellies’ recent performance Operations and production

Pork Bellies have demonstrated a strategic approach to its operations by covering all aspects of the value chain. Business operations include breeder farms, processing plants and feed milling. Products include sales of live pork (including breeding stock), pork feed, primary processed pork (raw) and further processed pork. Based in Victoria, the newly acquired Leghorn is also vertically integrated pork producer in its own right.

Breeding and farming

As a partner in the Gropork Breeding joint venture with Hogwarts and Avian Porks, Pork Bellies is the sole distributor in Australia of Piggie Smalls, the major international breeding company owned by Cape Foods.

The principal farming areas for Pork Bellies breeder operations are in Northern NSW, South Australia and the Sydney region. Pork Bellies has a number of company-owned and operated piggery farms as well as nearly 50 independent contract farmers, including Leghorn’s contract growing farms to which they deliver young stock. Leghorn is the first firm in Victoria to satisfy the Victorian Meat Authority’s quality accreditation (QA) system and has ISO9002 certification for all its operations. Contract growers who provide Leghorn with pigs have their own accredited system, several of which have also obtained free range pork status.

The company also owns and operates a feed mill located in country NSW. Pork Bellies’s total requirement for feed at all the company locations throughout Australia is in excess of 130,000 tonnes per year.

Distribution

The company focuses mainly on the domestic market, selling to major supermarkets, pork shops and manufacturers of frozen foods and meals. Industrial customers use its pork in frozen meals for export, and a small percentage of its products are exported directly.

Distribution throughout Australia is undertaken by refrigerated transport using distributors in most states, leveraging from Leghorn’s existing distribution network.

Marketing and new product development

Pork Bellies has a focus on product development for the food service market, with an extensive food service product range for fast-food outlets, schools, clubs restaurants, caterers and function venues. New product development has introduced a number of snack and meal solutions, including a variety of pork products such as nuggets, burgers, wedges, fingers and a wide range of cooked and smoked lines. The company has been accredited by both major supermarkets, Dangerway and Holes and it is seen in the industry as a leader in quality control.

People and management

Privately owned by the Pork Bellies family since formation in 1954, Pork Bellies is proud of its family tradition. It values its people and sees itself as trying to grow the business through its employees. Its team of experienced, professional and committed people provide a strategic advantage in offering high standards of quality and service to its customers.

The company is proud of its employees at all levels and believes that their commitment is paramount to its marketplace performance. The consistent emphasis on quality is epitomised by the achievement of ISO 9002 and HACCP accreditation. Tight controls are maintained on the value chain. Head office management also maintain rigid reporting and measurement requirements, with senior management employing a ‘hands-on’ approach in the day-to-day running of the business. Due to the strong family values of the company, staff turnover is very low.

The six member executive team includes three family members and also Justin Case, the founder of Leghorn and deputy chairman of the Pork Bellies board, thus indicating the strategic nature of the Leghorn acquisition and the value that Pork Bellies places on Leghorn’s expertise and capabilities.

The company is actively involved in various industry bodies, including the Australian Pork Growers Council, of which Brooke River is the Chairman, ensuring that the company has the capacity to influence the shape of the industry’s future and stay abreast of future developments.

Back to the future…

At the April 2020 board meeting, Justin Case reported that the integration of the Leghorn acquisition was ahead of plan and has been highly successful largely due to a good strategic fit between the to businesses. Pork Bellies has secured its place as the number three producer in the industry and most importantly was the clear leader in the value added segment where high profitability was still being enjoyed and competition was only just starting to occur. This contrasted with the low margin fresh segment where two major participants had entered a price war to win market share.

In addressing the board, Brooke River noted that there were signs that another approach by Hamlet was likely to be received in the near future, as the Australian companies grappled for market share and increased penetration into the more profitable value added segment. Pork Bellies has the major share of this segment, with an advantage over its competitors through its investment in technology and infrastructure in recent years. In addition, the outbreak of the Hendra virus is now contained and Australia's export status has been renewed by key Asian markets. With some ideas already apparent, the board charged River with preparing a discussion paper outlining Pork Bellies’ main strategic options for consideration at the next board meeting.

Question 2 - Decision Analysis 

The board of directors (BOD) is considering whether or not to construct a processing plant in Darwin, Northern Territory. Pork Bellies will have an arrangement with the council to use the port for 5 years at a rate of 50% on normal cost and after that the cost will increase 175%. If demand is favourable, Pork Bellies will realise a net profit of $2,000,000 after the 5 years. If the market is not favourable, then they could lose $800,000. At this stage there is no reliable data on how successful the project could be. The board of directors are working on a 50-50 chance that the processing plant will be successful.

1. Construct a decision tree to analyse the problem.

What should the BOD do, justify your answer?

2. The BOD are not confident with a 50-50 approach and have decided to employ a research firm who specialise in Bayesian Theorem to conduct a study on the viability of constructing a processing plant. The study will cost $10,000 and will work on the following statements of probability:

Probability of a favourable market given a favourable study = 0.72

Probability of an unfavourable market given a favourable study = 0.28

Probability of a favourable market given an unfavourable study = 0.21

Probability of unfavourable market given an unfavourable study = 0.79

Probability of a favourable research study = 0.55

Probability of an unfavourable research study = 0.45

a. Develop a decision tree to reflect the new alternatives.

b. Using the EMV approach, recommend a strategy that BOD should take. In your response discuss the alternatives.

c. Using the expected value of sample information, how much would the BOD be prepared to pay for the study?

d. What other information would the BOD want to help in making their decision?