Central Azucarera de Tarlac (CAT) is a sugar mill and refinery located in Barrio San Miguel, Tarlac City. Its segments include sugar and its by-products (molasses, alcohol and carbon dioxide) and real estate. Sugar (raw and refined) and carbon dioxide are normally sold to industrial users while alcohol are sold to wine distillers and alcoholic beverage manufacturers.
Under the external environment analysis, the opportunities and threats identified relate to the increase in market demand, the company’s variation in product mix, the intensity of competition in the industry, the availability of suppliers and distributors, and the climate change. The increase in market demand is expected to benefit the sugar industry because of the growth of food processing industry and the population. CAT can attract more customers and generate higher profit with the different products and services offered. Another opportunity identified is the intensity of competition which can cause continuous development for the company as it strives to be at the top of the sugar industry in the Philippines. Having its raw materials produced in their own farms, suppliers and distributors are not a problem for the company. CAT also maximizes its crops by using scraps in other processes. Lastly, climate change most is a threat to its production since it will affect the growth of the sugar cane and in effect will increase the production costs. The quality of the sugar produced is dependent on the raw materials that are placed as inputs, mainly the crops harvested.
The strengths and weaknesses were obtained under the internal environment analysis using the Resource-Based View and the Porter’s Value Chain Model Analysis. Its physical, organizational, human resources and resource innovation are efficient in promoting sustainable competitive advantage. Research and development (R&D) is considered as its weakness. Upon further analysis, the company does not focus on this support activity as evidenced by its financing. The expenses related to R&D activities only reflect a small portion of the company’s budget.
The company is relatively stable with a few risks that need to be assessed and managed, which are the crop shortage, supply shortage, obsolete technology and employee strike. In order to mitigate these risks, strategic objectives are recommended to be implemented. These objectives are acquisition of raw materials from other suppliers, allotment of product safety stock, investment in research and development services, and boosting of employee morale.
Nature of the Business
Central Azucarera de Tarlac (CAT) was incorporated in 1927 to operate as a manufacturing facility that processes sugar and all its by-products. The plant is located in Barrio San Miguel, Tarlac City. CAT’s segments include sugar and its by-products and real estate. The sugar and by products segment pertains to the production of sugar (raw and refined) and sugar by-products, such as molasses, alcohol and carbon dioxide. The real estate segment pertains to development, leasing and selling of real properties and other ancillary services. The Company has interest in Luisita Land Corporation (LLC), a domestic corporation engaged in developing, leasing, and selling real properties and other ancillary services.
CAT’s sugar mill and refinery has a capacity of 7,200 tons cane and 8,000 50-kg bags per day respectively. The sugar cane is initially processed to produce sugar of which 31% represents the company’s mill share, 69% belongs to the planters. Most of the raw sugar produced is further processed in the refinery to produce refined sugar. In addition to raw and refined sugar, the mill and refinery produces molasses, a by-product.
The combined captive molasses of the mill and refinery is processed further in the distillery to produce alcohol. The distillery has a production capacity of about 65,000 gauge liters per day. The various types of alcohol regularly produced and sold are rectified spirits (purified alcohol), absolute alcohol and denatured alcohol.
The slops from the distillery are captured by the carbon dioxide plant to produce liquid carbon dioxide also in tandem with the distillery. The plant has a capacity of 30,000 kilos per day and normally operates for about 4 to 5 months of the year. Carbon dioxide sales account for about 3% of the total revenues in the last three years.
Table 1. Liquidity Ratios
2015 2016 2017
Current Ratio 2.23 2.45 1.98
Quick Asset Ratio 2.09 2.26 1.67
Solvency Ratio 1.68 1.86 1.82
The current ratio indicates a company’s ability to pay short-term and long-term obligations. The company’s current ratio has improved from 2015 to 2016 because of the increased in cash levels, receivables and inventory. While in 2017, the company’s current ratio slightly decreased because the increase in current liability exceeded the increase in current asset. The increase in liability in 2017 was due to accruals and intensified purchases in preparation for the repair season and to borrowing of short-term loan from a reputable local bank.
The quick asset ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The company’s quick asset ratio increased by 0.17 from 2015 to 2016. In 2017, there is a decrease of 0.59 because of the slight increase of inventories due to the increase in the finished products of alcohol.
The solvency ratio measures the ability of a company to pay its long-term debt and the interest on that debt. The company’s solvency ratio from 2015 to 2016 increased from 1.68 to 1.86. The increase is caused by the slightly decreased long-term notes payable dues to the scheduled payment of amortized principal obligation.
All three liquidity ratios of the company increased from 2015 to 2016 and decreased from 2016 to 2017. This indicates that the ability of CAT to pay-off its short-term finances is higher during the year 2016.
Table 2. Profitability Ratios
2015 2016 2017
Gross Profit Margin 41% 39% 37.12%
Net Margin 14% 15% 22%
Return on Asset 3% 3% 4.38%
Return on Equity 6% 6% 9.64%
The gross profit margin is a profitability ratio that calculates the percentage of sales that exceeds the cost of goods sold. The decrease in gross profit margin from 41% in 2015 to 39% in 2016 is caused by the increase in cost of goods sold by 31%. In 2016, the salaries and wages decreased while inventory cost, spare parts and supplies increased. The decrease in gross profit margin for the year 2017 is also caused by the increase in cost of goods sold. In 2017, repairs and maintenance, inventory cost, depreciation, outside services and power and steam increased while the taxes and licenses decreased by 69%. The net margin is the percentage of revenue left after all expenses have been deducted from sales. 2017 showed a net margin of 22 percent which has increased from 14 percent in the year 2015 and 15 percent in the year 2016. Based on the previous financial statements of CAT, the company started diminishing its operating expenses and interest expenses starting the year 2015. This explains why net margin increases despite the decrease in operating margin.
The return on asset is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. The company’s return on asset has been constant in 2015 and 2016 at 3 percent and increased to 4.38 percent in 2017. The return on equity is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. The company’s return on equity which is 6 percent for both years 2015 and 2016, increased to 9.64 percent in the year 2017. The profitability indices of 2017 as compared to prior years showed that the company’s profitability increased except for its gross profit margin which declined from 41 percent to 37.12 percent.
Table 3. Efficiency Ratios
2015 2016 2017
Receivable Turnover 1.70 2.01 1.84
Inventory Turnover 3.51 4.22 2.98
Asset Turnover 0.19 0.17 0.20
Payable Turnover 1.30 1.59 1.81
The receivable turnover ratio of the company reflects how well it can extend credit and collects debts from its credit customers. Central Azucarera de Tarlac has a receivable turnover of 1.7 in 2015 which increased to 2.01 by the end of 2016. However, the receivable turnover decreased to 1.84 in 2017. This shows that the company was more efficient in collecting receivables from its credit sales during the year 2016.
The inventory turnover ratio of the company measures the efficiency of turning its inventories into sales. In the year 2015, the inventory turnover of CAT is 3.51 which grew to 4.22 in the year 2016. The turnover declined to 2.98 in the year 2017. It can be inferred that the company was more efficient in converting its inventories into sale in the year 2016.
The asset turnover is the measurement of how efficient the company uses its assets in generating revenue for the company. As seen on the table, the company was most efficient in using its assets to generate income in the year 2017. Although the findings for receivable and inventory turnover were the complete opposite, it is assumed that all other assets aside from the two were used most efficiently in the year 2017.
In measuring the ability of the company to pay its supplier, the company uses the accounts payable ratio. This ratio assesses how the company can manage its outgoing payments. As shown in the table, the accounts payable turnover gradually increases from one year to another. It shows that CAT became more efficient in paying its suppliers from 2015 to 2017.
Table 4. Leverage Ratios
2015 2016 2017
Debt Ratio 0.6 0.54 0.55
Debt-to-Equity Ratio 1.47 1.16 1.21
Interest Coverage 3.32 3.17 3.77
Asset-to-Equity Ratio 2.47 2.16 2.21
The debt ratio is defined as the ratio of total debt to total assets. From 2015 to 2016, debt ratio decreased from 0.6 to 0.54. It indicates that the level of assets increased due to increased cash, inventory and receivables. From 2016 to 2017, debt ratio increased by 0.01 as a result of intensive purchases and short-term finances. The debt-to-equity ratio is the ratio of total debt over total equity. In the year 2015 to 2016, the ratio decreased from 1.47 to 1.16 because the total liabilities decreased by 5%. It increased from 1.16 to 1.21 in 2017.
The interest coverage ratio is used to determine how easily the company can pay their interest expenses on outstanding debt. Higher ratio indicates that the company is more capable of meeting its interest obligations from operating earnings. The asset-to-equity ratio is defined as the ratio of total assets and total liabilities. The ratio from 2015 to 2016 decreased by 0.36. It indicates that the increase in equity exceeded the increase in asset. On the other hand, in 2017 the ratio increased due to the rise in the amounts of advances, capital expenditures and cash.
Major Consumer Groups Served
Central Azucarera de Tarlac operates sugar mill and refinery, distillery and carbon dioxide plants. Raw and refined sugar produced is generally sold to industrial users through traders. Alcohol products are sold to various reputable distillers of wine and manufacturers of alcoholic beverages. The carbon dioxide produced is usually sold to industrial users.
Vision / Mission / Objectives
Since Central Azucarera de Tarlac currently has no vision statement, a vision statement is proposed:
Central Azucarera de Tarlac envisions itself to be the nation’s leading raw and refined sugar company.
Current Mission Statement
Central Azucarera de Tarlac upholds its values and objectives by its mission statement which states that:
“Bringing peace and prosperity to the countryside (6 & 8). Connecting Farmers to the rest of the world while connecting the world to our Farmers (9). One Farmer, One Hectare One Community at a time (7).”
Based on David’s Framework for the mission statement, components such as (6) Philosophy, (7) Self-Concept, (8) Concern for Public Image and (9) Concern for Employees.
The long history of Hacienda Luisita’s feud between the owners and its farmers has prompted the company, Central Azucarera de Tarlac, to have a goal of achieving peace and prosperity. It may be assumed that the company wants to change the image set forth by the Hacienda Luisita massacre last November 16, 2004. Spreading peace and prosperity through the entire nation is the self-concept the company adopted. In connection to this, the company started from their employees where they treat each of them as a family. “No farmer is too small”.
It is also inferred in the mission stated they are connecting the farmers to the whole world by providing high-class products and that they are including the farmers in all the achievements of the company. Technology is also implied in the mission statement where “they connect farmers to the rest of the world”. It means that they are using automated technologies to distribute their products around region III.
Central Azucarera de Tarlac dedicates itself to producing world-class quality raw and refined sugar. The company is in pursuit to be a more dynamic, globally competitive, profitable and growth-oriented company. It shall ensure a safe workplace environment for employees and provide them with opportunities for growth and development. Of equal importance, the company shall uphold and spread the values of peace and prosperity in the company.
A. General Environment
The general environment or the external environment are outside forces that may influence an organization’s performance. These are broad trends that affect all organizations and companies that operate in the same industry. Below are factors from the external environment that may potentially affect or have a significant impact on the performance and profitability of Central Azucarera de Tarlac.
Political Legal Frameworks
Summarized below are the political-legal factors that affect the Central Azucarera de Tarlac industry’s environment:
1. Political Inclination (Political History: Cojuangco Family)
2. Government Regulatory Bodies (Sugar Regulatory Administration)
2. Government Laws, Regulations and Taxes (R.A. 10659-VAT)
Central Azucarera de Tarlac was acquired by the Cojuangco Family in the year 1957. Jose Cojuangco, Sr., father of the late and former president Corazon Aquino and grandfather of former president Benigno Simeon Aquino Jr., received significant preferential treatment and assistance from the government to facilitate his takeover of Hacienda Luisita and Central Azucarera de Tarlac in 1957. Following the acquisition and grants of the government of loans to purchase the said sugar mill, and Hacienda Luisita as a whole, there was a condition set by GSIS, loan grantor, that “subdivided among the tenants who shall pay the cost thereof under reasonable terms and conditions”(GSIS Resolution No. 1085, May 7, 1957; GSIS Resolution No. 3202, November 25, 1957). With the land still partially undistributed and in dispute with some of the local farmers, and with the case against the owners still not dismissed, is a factor that may deeply affect the future profitability of the sugar mill.
Due to the history between the owners and farmers of Central Azucarera de Tarlac, there may be a high chance that conflicts may occur in the future. These conflicts that may arise can greatly affect CAT’s production efficiency and profitability. Aside from this, future costs and damages may result from the growing dispute which may lower the net income of Central Azucarera de Tarlac.
Being part of the sugar industry, Central Azucarera de Tarlac is governed by the mandate of the Sugar Regulatory Administration (SRA). SRA is a government-owned and controlled corporation which formulates responsive development and regulatory policies. It provides research development and employee services to ensure sufficient supply of sugarcane for a diversified, sustainable and competitive industry. The said services would improve productivity and profitability of sugarcane farmers and processing industries, and provides decent income for workers towards enhancing the quality of life of Filipinos. The legal mandate of SRA is embodied in Executive Order No. 18 dated May 28, 1986 creating the Sugar Regulatory Administration. It states that the policy of the State is to promote the growth ; development of the sugar industry through greater participation of the private sector and to improve the working conditions of the laborers. Thus, granting government specific control over CAT.
One factor that may affect Central Azucarera is the regulatory board instituted by the government, Sugar Regulatory Administration. The SRA does not necessarily control CAT. It, however, regulates it in a sense that any mandate that is issued by the SRA with respect to policies must be implemented in CAT. Change in policies can affect profitability and may increase cost with regards to the implementation of such.
Republic Act (R.A.) 10659 or the Sugarcane Industry Development Act of 2015 is a law governing the sugar industry. It determines the value added tax to be imposed on the sale of sugar by the sugar industry and thus determines the tax imposed on the sale made by Central Azucarera de Tarlac. As VAT is concerned, R.A. 10659 section 10 states that:
Value-Added Tax (VAT) Zero-Rated on Refined Sugar for Export.— Pursuant to Section 106(A)(2)(a)(1) of the National Internal Revenue Code, VAT zero-rated shall be imposed on refined sugar withdrawn from warehouses for actual physical export to the world market.
To differentiate refined sugar from raw sugar for VAT purposes, refined sugar refers to sugar whose content of sucrose, by weight, in the dry state corresponds to a polarimeter reading of 99.5° and above, and raw sugar means sugar whose content of sucrose by weight, in the dry state, corresponds to a polarimeter reading of less than 99.5°.
The Bureau of Internal Revenue, in consultation with the SRA and industry stakeholders, shall issue the necessary regulation to implement this section.
Although VAT is stated as a political-legal factor that affects Central Azucarera de Tarlac, it, in another sense, does not affect profitability at all since CAT produces raw sugar of which is subjected to zero-VAT.
Economic development is essential to the growth of the organization. The following are factors that affect the company’s economic growth: business unemployment, foreign exchange, interest rate and GDP.
From the last three years from 2015 to 2017 the unemployment rate decreased from 6.30% to 5.70%, which contributed to the economic growth of the country. The involvement of CAT in providing employment for its farmers helped lessen the unemployment rate in the region it is instituted. It has also an advantageous effect in the company because if it operates with full staffs, they generate an optimal level of products each day. This production efficiency means the company is able to meet customer demand and maintain good relationships with suppliers and buyers.
Foreign exchange rates vary daily, which is why it has a direct effect on the performance of CAT international operations mainly on imports and exports.
According to businessdictionary.com, socio-cultural trend is a set of beliefs, customs, practices, and behaviors that exists within the population. Companies include examining the socio-cultural trends prior to entering their target markets because it affects the buying decisions of the consumers.
Increasing ratio of people 40 years old and above wanting to take control of their health is one of the socio-cultural trends that can affect Central Azucarera de Tarlac. According to a Pulse Asia survey, Filipinos were found to be health-conscious at the end of 2015 with three out of five individuals citing staying healthy is an urgent personal concern.
Another factor is the increase of temporary workers in the sugar industry. The urge to cut down cost to increase competitive advantage can also have a negative effect on the business because it can lead to unscheduled turnover, low staff morale and low productivity.
The developments in sugar cane processing as stated by Rein (2013) in his study are cane cleaning, diffusion, juice clarification, filtration, syrup clarification, crystallization, sugar handling, and boilers. Utilization of new technology affected the Central Azucarera de Tarlac in the company’s production efficiency.
Analysis of the Impact of the Macro-environment on the Business:
Political -Legal Frameworks
Today, Central Azucarera de Tarlac has already been sold and is no longer under the property of the Cojuangco family. The turnover minimized the risk of having losses that may arise from the dispute between the farmers and the family. If the new owner manages CAT and its farmers and employees well, the performance as well as its profitability will continually grow positively.
Central Azucarera de Tarlac is still and will still be subjected to the Sugar Regulatory Administration policies, the Republic Act (R.A.) 10659 or the Sugarcane Industry Development Act of 2015, and Value Added Tax. Any significant amendment on such will greatly impact CAT.
Recently, another government law on taxes has been passed and is known as the Train Law or Republic Act (R.A.) 10963. The Train Law is a tax reform package that contains amendments which impose higher taxes on certain goods such as cars, fuel, tobacco, cosmetic surgery and sweetened beverages. The law indirectly affects Central Azucarera de Tarlac as well as the sugar industry as a whole. The Train law raises taxes imposed on sweetened beverages. In hopes of reducing consumption of such beverages, the demand on sugar may decrease. Thus, revenue of Central Azucarera de Tarlac will probably decrease in the near future as well.
Central Azucarera De Tarlac have been providing job opportunities to a lot of people, mainly the farmers. Such actions helped, although minimal, in the decrease of unemployment rate in the region. Low unemployment improves efficient use of equipment and resources, which is beneficial to companies.
Foreign exchange affects the business in terms of importation and exportation of the products internationally. It varies on the fluctuation of exchange rates of domestic and foreign currency. When the value of peso decreases as opposed to the foreign currency, the business is unfavorable because the transportation cost might increase.
Changes in interest rates can affect the fair value of the financial instruments. When the interest is low, the company can buy more materials unlike when it is high, because the expenses are limited.
When the gross domestic product (GDP) of the country is stable or slowly increasing, the economy of the country is growing. As a result, Central Azucarera De Tarlac can increase the amount of production.
In line with the increasing ratio of health-conscious Filipino, Philippines just passed new tax revisions on sugar-sweetened beverages (SSB). The act was commended by the World Health Organization (WHO). The health organization disclosed that evidence has shown that SSB tax can reduce consumption of sugars and help prevent overweight, obesity and non-communicable diseases such as diabetes and cardiovascular disease. Since many are switching to healthy lifestyle sugar, people are finding new alternatives for sweetening beverages. For this reason, the sale of raw and refined sugar might decrease and can affect Central Azucarera de Tarlac.
Researchers in the sugar industry have been persistent in developing technology that concerns sustainability alongside the efficiency and cost reduction.
Technological advances in the sugar industry will affect the production efficiency and sustainability, the quality of the products, and the expenditure of costs. If the company utilizes the latest technology and production techniques, the production efficiency and product quality will improve while the manufacturing costs will decrease. The company will gain a competitive advantage and acquire a larger market share. Therefore, technological developments have a substantial effect to the company since it will affect both the company’s profitability and competitive position.
B. Industry and Competitor Analysis
Porter’s Five Forces Model:
Bargaining power of suppliers (HIGH)
The bargaining power of suppliers is incredibly high because the government allocates the realm of procurement and announces the acquisition value from farmers statutory minimum value and state suggested value. The government protects the interest of the farmers by implementing the higher than purchase cost.
Bargaining power of consumers (LOW)
The government regulates the price of sugar and therefore, buyers and consumers cannot negotiate the price set for sugar. Aside from the bulk or trade discounts offered, CAT cannot provide the discounts demanded by big firms. The government influences the worth of levy sugar 10% of mills manufacture should be sold at levy value to the public distribution system the quota releases of free sale sugar.
New Entrants (LOW)
New entrants will not have a significant effect in the business because starting up a sugar industry will require huge amount of capital. Government laws are also an issue since most of the owners of sugar mills are corporations. Other than Bureau of Internal Revenue (BIR) and Securities and Exchange Commission (SEC), the Sugar Regulatory Administration (SRA) is the government regulatory arm that oversees the operation and administration of the sugar industry. For this reason, people who would want to open and compete with the existing sugar mills corporation will encounter a tough challenge.
Intensity of the Rivalry among Competitors (HIGH)
Competitors in the industry will have a substantial effect in the company since it will affect the market share and profitability. Intense price competition exists among the sugar mills since the main product is a commodity. For the sugar by-products, the company can seek for and apply techniques in order to gain a competitive advantage.
Threat of Substitutes (HIGH)
Central Azucarera de Tarlac is only one among the many the sugar producers in the Philippines. Sugar produced by different companies in the sector are substitutes to each other. Thus competitiveness amongst each is high, as stated above. Aside from that artificial sweeteners have already emerged in the market appealing to health-conscious individuals, gaining them as their patrons. The introduction of these substitute pose a great threat to Central Azucarera de Tarlac. Demand for sugar may drastically fall since people ever so often change preferences and lean more towards being health-conscious. In order to minimize, if not completely remove possible damages with regards to the decline in demand, it would best for CAT to open a new product line of sugar (less calories) that would appeal to individuals. This may incur cost of implementation but such cost may be recovered and revenue will increase.
Aside from artificial sweeteners, there are other substitutes to sugar such as honey, maple syrup, lemon, and other natural sweeteners. Although there may be a possible decline in the demand of sugar, it remains as a widely used ingredient in manufacturing a lot of food products such as sweets, snacks, biscuits, and pastries.
Current Situation of the Industry:
Market Size and Growth Rate
Central Azucarera de Tarlac has a current sales growth rate of 7.48% and has a current estimated market size of 9.88% in the Philippines. As the industry continues growing, the market size and growth rate of CAT will also continue to expand. CAT manufactures refined sugars and distributes to many industrial partners the commodity used as food ingredients or can be repacked for resale to other retailers. CAT can gain more industrial partners, buyers and customers as the market size increases.
Current Buyers and Suppliers
The bargaining power of consumers is low because the buyers always prefer a cheaper price but with high quality products. Low buyer bargaining power makes the business more attractive and increases profit potential for the seller.
Central Azucarera de Tarlac, is one of the leading distributor of sugars to industrial users and large companies. The bargaining power of suppliers is high because even though the company has been producing and supplying its own products, the government is the one monitoring the price of their products. High supplier power makes the business less attractive and decreases profit potential for the buyer.
Developments in the production of sugar in the industry are steadily progressing because of the improved technology today. The studies in the processes are becoming more concerned in environmental issues and sustainability rather than focusing solely on the reduction of costs.
The selling price of the sugar will have a minimal effect on the company because the company’s main product is sugar, which is a commodity. Commodity products are sold freely on the market and for this reason the prices are closely similar to each other.
Critical Success Factors in the Industry
The sugar industry, as an industry involved with a commodity widely used in most consumables, has buyers that are not price sensitive. However, the least expensive sugar appeals the most to the consumers.
On the other hand, the quality of raw materials used in the production of other products, especially for food products that require much attention to health risks and taste, is vital. Cost and quality are the two critical success factors important in the sugarcane industry.
Other Issues That May Affect the Business:
1. Climate Change (El Nino and La Nina)
Although sugar is a crop cheaper and easier to grow, the possible effects of climate change are still imminent. Extreme heat cause droughts as well as typhoons cause flood, both of which results to almost 50% of wilted crops. Moreover, the quality as well as the quantity of the sugar produced may drastically drop due to these fortuitous events. This poses danger on the revenue as well as increases plantation cost.
2. Pest Infestations
Just like climate change, pest infestations are unforeseen events of which affect the quality and quantity of the crops as well as the sugar production.
Opportunities and Threats:
The consumption of sugar and its by-products is measured by their withdrawal from the mills by the firms, retailers and other consumers. A recent report by the Sugar Regulatory Administration showed that withdrawals of the product remained constant at 2.140 million metric tons from 2015 to 2016. Consumption in the year 2017 rose but not as high as expected due to the presence of lower-priced sugar substitutes that are used by manufacturers of carbonated drinks. Prices of sugar contribute to the demand of the product. Due to restrictions on the importation of sugar substitutes, the consumption of sugar will increase as compared to last year. Demand for sugar is expected to continue rising due to an expanding food processing and beverage manufacturing sector and a growing population.
Product and Services Offered
Central Azucarera de Tarlac produces and sells sugar and sugar by-products primarily in the Philippines. The company offers raw and refined sugar, molasses, rectified spirits, absolute alcohol, and denatured alcohol, and liquid carbon dioxide. It also develops, leases, and sells real properties, and provides property management, water distribution, and wastewater treatment services.
Intensity of Competition
There are 27 sugar mills in the Philippines and the only competitor of Central Azucarera de Tarlac in the Region III is the Sweet Crystals Integrated Sugar Mill Corporation. The presence of competitors will result to the continuous improvement of every company’s aspect and determination to be the leading sugar mill and refinery in the region and Luzon. However, the intensity of competition may adversely affect the company’s market share and profitability.
Suppliers and Distributors
Raw materials are readily available since Central Azucarera de Tarlac grows its own sugar cane. There are no wasted products after producing their main product, raw sugar, because they further process it in the refinery to produce refined sugar. They also produce alcohol from the combined captive molasses of the mill and refinery is processed further in the distillery to produce alcohol. Climate change will be one of the company’s threats because it could make it more difficult to grow crops unlike it the past and thus an increase production cost.
Internal Environment Analysis
ASSESSMENT OF RESOURCES
In a resource-based view, a company or firm is emphasized to utilize its resources to create a competitive advantage which results to value creation. These resources are specific assets useful of the firm which is superior against its competitors’ and creates a competitive edge for the company. Such resources are divided into two: tangible and intangible resources.
Tangible resources are physical assets used by the firm when performing value-creating activities. These resources include:
Financial resources are valuable funds which put the operations of a company to work. It is neither rare nor inimitable, and thus can be substitutable due to numerous ways of acquiring finance, such as through loans and stock issuance or even donation. The current resources of Central Azucarera de Tarlac, based on the financial analysis within the chapter is quite high of which indicates that the company has the ability to pay off its short-term finances.
Physical resources such as raw materials, machineries and equipment are essential in the company’s production. Competitive advantage can be achieved through effective and efficient production process. The raw materials, sugar cane, are harvested within the Tarlac district and nearby towns of Pampanga. Central Azucarera de Tarlac may surpass its competitors by using crops with better quality.
Using of intense mechanization involving traffic of heavy machinery from planting to harvesting and transporting to the sugar mill or distillery.
In sugarcane weeds have been estimated to cause 12 to 72 % reduction in cane yield depending upon the severity of infestation.
This is the distribution of plant nutrients more evenly throughout the wetted root zone resulting in increased nutrient availability ; uptake contributing to higher crop growth rates and cane yields.
Harvesting of sugarcane at a proper time i.e., peak maturity, by adopting right technique is necessary to realize maximum weight of the millable canes (thus sugar) produced with least possible field losses under the given growing environment. On the other hand, harvesting either under-aged or over-aged cane with improper method of harvesting may lead to loss in cane yield, sugar recovery, poor juice quality and problems in milling due to extraneous matter.
Central Azucarera de Tarlac is a corporation duly organized and existing under and by virtue of the laws of the Philippines. The company believes that corporate governance is a necessary component of what constitutes sound strategic business management and will therefore undertake every effort necessary to create awareness within the organization as soon as possible.
Corporate governance is the framework of rules, systems and processes in the company that governs the performance of the Board of Directors, management, employees and shareholders. It is also a system of direction, feedback and control using regulations, performance standards and ethical guidelines which aims to maximize the organization’s long-term success. To pursue their organization-wide objective the Board of Directors and management of Central Azucarera de Tarlac commit themselves to the principles and best practices of their company.
Intangible resources are skills and knowledge the company has employed that hosts a competitive edge in the production and managerial processes. Intangible resources of the company include:
1. Human Resource
The company shall be headed by a competent, working board to achieve the long-term success of the company and sustain competitiveness and profitability. Aside from the board, Central Azucarera de Tarlac is managed by 6 officers, namely the Chief Executive Officer (CEO), President and Chief Operating Officer (COO), Treasurer, Vice President for Finance, Corporate Secretary, and Assistant Corporate Secretary.
As of June 30, 2017, 321 employees and over 6,000 farmers also serve the company. CAT treats their employees as their most valuable and unique assets. Thus, they are provided with dental, parking, life insurance, medical, loans, and miscellaneous allowance benefits.
Product differentiation is virtually non-existent in a commodity industry. Buyers often patronize products that cost less but are of high quality. Such quality and efficiency could be improved and met through conducting research and development techniques. Envisioning itself as a globally competitive company, Central Azucarera de Tarlac must engage in activities that promotes such vision.
Table 5. Assessment of Resources & Sources of Competitive Advantage
Valuable Rare Difficult to Imitate Difficult to Substitute Implication for Competitive Advantage
Financial Yes No No No Competitive Parity
Physical Yes Yes Yes Yes Sustainable
Technological Yes Yes Yes Yes Temporary
Organizational Yes Yes Yes Yes Sustainable Competitive Advantage
Human Resource Yes Yes Yes Yes Sustainable
Innovation Yes Yes Yes Yes Sustainable
The physical, organizational, human resources and resource innovation of Central Azucarera de Tarlac are capable of promoting sustainable competitive advantage since these resources are rare, valuable, difficult to imitate and difficult to substitute. The financial resources of CAT is at competitive parity with its competitors since there are different mode of acquiring short and long term finances offered to any company and is not unique in favor of the company. Although technology of the company may be deemed as rare and difficult to imitate, technology is only said to be temporary competitive advantage since these assets of the company diminishes in such that it can only be used for a specific period of time or its useful life. Overall, the company’s tangible and intangible resources offer a competitive edge against its competitors.
PORTER’S VALUE CHAIN MODEL ANALYSIS
Every firm is a collection of activities that are performed to design, produce, market, deliver, and support its products (Porter, 1985). The company creates value by performing activities identified by Porter as primary and support. Each activity has a significant role in achieving competitive advantage as well as attaining success of the company.
The primary activities within Michael Porter’s value chain provide the firm a competitive advantage against competitors. The following are the primary activities involved in Central Azucarera de Tarlac’s value chain:
The company does not practice inbound logistics. Rather than importing crops needed for its production, the Central Azucarera de Tarlac plants and harvests its raw materials, sugarcane, which shall be refined into its final product to be distributed to firms, dealers and retailers associated with the company.
The production processes of the company are essential to its growth and profitability as it affects the product quality. CAT uses its resources efficiently by producing several products and by-products. Initially, sugar cane is processed to produce sugar. Most of which are processed in the refinery into refined sugar. Molasses are produced as a by-product in the refinery. The combined captive molasses of the mill and refinery is processed further in the distillery to produce alcohol. Finally, slops from the distillery are utilized by the carbon dioxide plant to produce liquid carbon dioxide.
Central Azucarera de Tarlac values its labor force as much as its processes. The company considers the human resource as its most valuable assets and a source of competitive advantage. Training, coaching and counseling are provided for the employees to attain individual growth in their career.
Teamwork and communication are exercised in every part of the business operations. The employees uphold and adhere to the organizational goals, rules and regulations, and code of conduct. Additionally, it is ensured that no resource is put into waste. Through these practices, Central Azucarera de Tarlac executes efficient and effective business operations.
Support activities make sure that the primary activities of the value chain are efficiently performed. The following are the support activities in the value chain of Central Azucarera de Tarlac:
Technology plays one of the most crucial roles in the production and refining of sugar. Central Azucarera de Tarlac uses equipment in order to supply the amount of its products to the demands of its partner firms, dealers and retailers. In order for Central Azucarera to meet the world-class quality it aims to attain, the company must continuously update and upgrade its technology to further automate its processes in order to be at par with international companies of the same industry.
Human Resource Management
Human Resource Management (HRM) is responsible for recruiting people, training them, performance appraisals and motivating employees. The purpose of HRM is to improve the employee existence which in turn will help the company in achieving their goals. The company’s performance will be based mainly on their human resource. If employees’ motivation decreases too much, turnover rates will increase. High turnover can have negative effect on company’s profit. Hence, it is important to have an effective HRM to minimize these happenings.
In CAT, employees and farmers are treated as one of the most important aspect of the company. Human resource is the foundation of the company so it is their responsibility to provide the employees and farmers with a safe, humane, and stimulating work environment. CAT also gives the employees and the farmers opportunities to explore and develop their skills and share with them rewards when they do well.
Infrastructure is the fundamental facilities and systems serving the business, including the services and facilities necessary for its business to function. Central Azucarera de Tarlac plant is located at Barrio San Miguel, Tarlac City. They have their own land where the farmers plant the sugar canes. It also has a warehouse where they process the raw sugar and store their products.
The Company owns a 100% stake in Luisita Land Corporation (LLC), a domestic corporation engaged in developing, leasing, and selling real properties and other ancillary services. CAT, thru LLC, provides water distribution and wastewater treatment series to locators of Luisita Industrial Park and residents of Las Haciendas de Luisita.
CAT strives for continuous improvement of sustainable development by developing, placing and continuously improving effective controls and procedures to conserve energy, water and other raw materials. Implementation of reduce water consumption and other supporting programs has been spearheaded to prevent depletion of water resources. CAT encourages the implementation of reusing and recycling materials to reduce environmental impact down to a minimum.
Performance Evaluation: Strengths and Weaknesses
The employees of CAT are being trained to be knowledgeable about their respective jobs, for them to do their work correctly. They are also provided with some benefits that they can use. The management are strictly implementing their company policies to attain their ethical leadership.
2. Production and Operation
The total revenues in the second quarter of the year 2017 increased by 121% from the preceding year. All revenue centers, apart from the carbon dioxide sales, generated an increase in volume sales. The cost of goods sold went up by P204.7M due to increases in repairs and maintenance, inventory cost, depreciation, outside services, and power and steam. Lastly, the level of operating expenses moderately increased by 2% due to increases in the salaries, wages and bonuses, and the security and outside services.
3. Research and Development
CAT spent approximately 0.05-0.10% for product research and development over the last three (3) years. The company adheres to its core product, sugar, and finds no need to further conduct product research and development. However, it continuously adopts new production technology to which spending is through capital expenditure amounting to P100-120M annually.
Key Findings, Issues, Challenges, and Problems
Raw Material Shortage
Due to recent damage left by typhoons and other calamities in the previous years, there has been a shortage of sugarcane for refinement and production of ethanol and sugar. Because of the shortage, sugar industry was relentlessly failing to meet expectations in the sugar business and a large portion of its pieces of the overall industry were lost. Since most occurrences of these calamities impacted Visayas and Mindanao region, the CAT was not gravely affected. However, the possible calamities that might hit Luzon will impact the company significantly.
Central Azucarera de Tarlac may often deal with product supply shortage. This may be linked to two reasons: crop shortage and obsolete technology. CAT is a company known to harvest and convert its raw materials into the product they are distributing. But during seasonal changes or fortuitous events, the supply of these crops may fall short resulting to a decrease in the amount of products produced. Another reason for product shortage is the obsolete technology. Equipment and machineries with obsolete technology may often undergo downtime making production inefficient, thus the quota amount or the budgeted level of production may not possibly met.
Updated and Obsolete Technology
Updating facilities, equipment and machinery of Central Azucarera de Tarlac is a one of the best leap forward to conduct in order to improve the efficiency of its production. Updating such assets will improve the quality of product which the company seeks to achieve. Machineries or equipment that will remain outdated may possibly result to downtimes which will cause production inefficiency. Obsolete technology may lead to deterioration of the quality of the products.
Employment relationships between the management and the labor force could become strained and affect teamwork and profitability. Whether a strike is legal or illegal, the business is affected and it is imperative for employers to know their rights and to keep up to date with current labour laws and legislation. As a result, the company may opt to hire workers to replace the striking employees.
Identification and Assessment of Risks
The impact of crop shortage is significant because any assembling procedure basically requires that there is satisfactory measure of materials to be handled, generally target levels of generation won’t be met. The likely occurrence is medium because in spite of the fact that the danger of deficiency has been managed by CAT by getting factories inside and past the nation, the harms realized by catastrophic events contribute much to the underperformance of agribusiness along these lines seriously reducing the supply of sugar cane to be prepared.
Supply shortage occurs when the demand of goods at the marketplace is greater than supply provided. The impact of it is mild because the company will also benefit from its occurrence since the price will be set higher as the demand increases. The likelihood is medium-high because the occurrence of crop shortage is medium.
The impact of it is significant because the inefficient operations of machineries and other processing facilities may lead to wastes, defects and losses for CAT and such inefficiency may also be caused by poor maintenance and may lead to hazardous situations for the operators. The likelihood of it is low-medium because the machine down time or interruption seldom happens.
Employee strike is a work stoppage caused by mass refusal of employees to work. It usually takes place in response to employee grievances. The impact of it is moderate because this risk does not affect the total production of the business. The likelihood of it is medium because the employee strike only happens when there is inequality treatment among their company.
Table 6. Oregon State University (OSU) Risk Assessment Tool
RISK Impact Likelyhood Risk Score
Employee Strike (Farmers) Moderate 3 Medium 3 9
Obsolete Technology Significant 4 Low-Medium 2 8
Crop Shortage Significant 4 Medium 3 12
Product Shortage Mild 2 Medium-High 4 8
The identified risks stated above are assessed using the Oregon State University’s Risk Assessment Tool. The risks were scored according to its possible impact on Central Azucarera as well as how likely the risks are to occur. After assessment, the tool computed the overall risk score of each risk and was plotted in the heat map shown below.
Figure 1. OSU Risk Assessment Tool: Heat Map
Strategy Formulation and Recommendation
A. Strategy Formulation
Strategic Objectives to be Employed
Raw Materials Safety Assurance
Fortuitous events such as flood and drought may damage the crops and may cause shortage of raw materials for the company. Since the occurrence of crop shortage will crucially affect the production, CAT must have an alternative source of sugar cane. In effect, the level of inventory will still be sufficient even after an emergency.
Product Safety Stock
Safety stock is a supply of outputs held as a reserve to safeguard against fluctuating markets, warehouse mistakes and supplier problems. Safety inventory is especially helpful when customer demand is much higher than expected. CAT must have buffer stocks in order to be able to meet the incremental demand of the market or other firms.
Operational facilities, especially those involved in the production, are a critical factor in executing an efficient production and producing top-quality products. Technological advancements, which are progressively increasing in number and caliber, cause improvements to equipment and machineries. In order to be at par with big, international companies with the latest innovations, Central Azucarera de Tarlac must also update its technology.
Prevent Employee Strike
Mass refusal of employees to work or labor strike will affect both the company and the employees. The company is likely to lose money due to delayed service to clients or to lose production time. The employees will lose their pay due to the “No work; No pay” principle and they might even be dismissed from their jobs. CAT must be able to eliminate the possibility of such act to avoid inconvenience to the production.
Proposed Strategic Alternatives
Outside suppliers can ensure an alternative source of raw materials for CAT in case a crop shortage takes place because of unfortunate events. In the event that it is not possible for the company to buy crops from local suppliers, Central Azucarera de Tarlac may consider importing from suppliers in the country or from other countries.
Allot Safety Stock
CAT must allot certain supply of sugar to prevent shortage due to foreseen and unforeseen events. The company should have a safety stock but it must have better inventory management. CAT should prevent piling up unnecessary outputs to avoid loss from infestations and moisture out. In effect, CAT will not only ensure the supply of sugar but will also prevent stock outs and will keep customer service and satisfaction level high.
Technology Bench Marking
In order to be a globally competitive company, production efficiency must be attained through the effective use of technology. The CAT must be aware of the technological innovations within the industry. The company should allocate budget for the research and development of facilities that will improve the efficiency of the productions.
Increase Employee Benefits
CAT should focus on increasing incentives and rewards system to motivate employees. Since CAT greatly values its employees, the company must ensure a safe and healthy work environment. Also, one of CAT’s missions is to provide them with opportunities for growth and development, the company should provide trainings and seminars to do so.
Purchase Raw Material from Other Suppliers
It has become common for companies to outsource raw material supply. Outsourcing will help the company grow and save money when it is done correctly. It can also allow the company to focus on other resources. In outsourcing raw materials, specifically sugar cane, CAT should prioritize finding low cost raw materials without sacrificing its quality.
Invest in Research and Development Services
Since the company aims to be globally competitive, updating the facilities is essential. This is also to ensure that the products are of high quality and that the production is efficient. Extensive research is needed in adopting technology to determine whether a specific advancement will yield a positive effect to the overall operations of the company.
Ensure Production to meet Incremental Demand
Normally, it is required by companies to guarantee that they have sufficient outputs in stock. Due to uncertainties in supply and demand of products, CAT should produce products in excess of its standard or budgeted production units to mitigate risk.
Boost Employee Morale
Trainings are provided in order to maintain and develop a competitive workforce. It should focus on the development of the alignment of purpose and performance across the company, particularly on the individual employee, team and the total organization. Seminars will be provided to refresh employees on what they already know about their job. Lastly, providing non-monetary or monetary incentives can also boost employees’ morale and motivation. In effect, CAT will not only increase their productivity but will also maintain harmonious relationship on their workplace.
B. Strategy Recommendations
Due to budget constraints, Central Azucarera de Tarlac should implement the recommendations in order of priority. Based on the risk assessment, raw materials stock safety assurance and adaption of new technology should be implemented first during the year 2018.
CAT should have alternative suppliers such that if there will be unforeseen events, they will not worry about shortage of suppliers. It should also take into consideration seasonal changes and other predictable circumstances that may affect the demand and supply of such inputs before entering a contract of outsourcing.
CAT should invest into globally competitive technology and facilities utilized in the operations to achieve world-class level of performance. The company should also continue to seek innovative technologies that could modernize their business.
Since demand is expected to climb up in first half of the year 2019, the company should then implement its product safety stock. It is necessary to implement such recommendation in order to shelter the excess demand over the standard products produced.
It is the company’s mission to provide for the welfare of its employees. In order to cater to the mission, CAT should have enough budgets to provide trainings, seminars and incentives to the employees. These employee benefits are likely to incur a lot of cost but it will have a long-term effect especially on the employees’ performance and productivity. The best possible time for the recommendation to be employed is during the second half of 2019.
Central Azucarera de Tarlac face risks both from its external and internal environment. In order to reduce occurrence of such risk, the company conducts risk management. Risks are not that easy to be eliminated, rather the only option a company has is to minimize it.
Identified external critical success factors or the so called external risks possibly faced by Central Azucarera de Tarlac are climate change and pest infestations. To manage and minimize loss from such risks, CAT should implement expansion and intensification programs. CAT should also improve its facilities such as the irrigation system and pest control. In these ways, any adverse effects and environmental hazards are addressed.
Assessed internal risks such as crop shortage, product shortage, obsolete technology and employee strike have been traced to CAT. In order to manage crop shortage, it is best that the company enter into contracts with outside suppliers of which offer high quality raw materials at the lowest cost possible. The risk of having product shortage can be managed by assuring supply of the products to meet demands in excess of what have been forecasted. The risk of obsolete technology is the inefficiency-causing-downtime factor. Loss from the said risk can be minimized by updating and modernizing machinery used in production. Lastly, the risk of employee strike can be subdued by increasing incentives and by conducting trainings and seminars that would empower employees as well as enhance employee’s knowledge of their specific work.
The company will need contractual suppliers for the raw material safety assurance and the buffer stock of products. The quality of the sugar cane and sugar products to be outsourced must be at par with the company’s own. Additional facilities with updated technology should also be acquired for the improvement of the production efficiency and the company’s competitive position. Lastly, financial resources will be required for the purchase of raw materials and supply from other suppliers, conduct of research for technology developments, acquisition of new facilities, augmentation of labor incentives, and provision of trainings and seminars for employees.
Financial Statement Projections
Table 7. Projected Comprehensive Income: Unapplied Recommendations
• Revenue from sale of sugar and its by-products will decrease by 2% on the year 2018 due to train law and continue to grow by 7.48% annually for the next three years. All other revenue will increase by 7.48% annually.
• Cost of Goods Sold and cost of services will increase by 9.48% annually.
• Operating Expenses will increase by 14.5% annually based on the average increase in operating expenses of the years 2016 and 2017.
• Interest Expense shall increase by 11.23% annually based on last year’s growth rate.
• A tax rate of 30% is assumed.
• All other income and expenses increase by 10% annually.
The Train law is said to be effected by the year 2018 thus an assumption of a decrease of 2% in the revenue of Central Azucarera de Tarlac from sale of sugar and its by-products is assumed. It was explained in chapter 3, political-legal factors affecting the company, that the company is indirectly affected by the train law. Since sugar is a commodity and necessity, the drop in the demand of the product is only temporary. In order to reduce the loss of unsold goods, it is possible that the company would lower the price of the product and therefore lessen revenue earned. Revenue from other activities and for the succeeding years will increase by 7.48% annually based on the revenue growth from 2016 to 2017. The cost of goods sold of the company is assumed to increase by 9.48% annually. Cost of goods sold is not expected to decrease as a result from the Train law, because as discussed earlier, the company would rather sell the product at a lower price than incur a loss from unsold goods.
As a result from the specific assumptions mentioned above, the gross income declined from 2017 to 2018 but steadily increases form the year 2019 to the year 2021. The schedule of Central Azucarera de Tarlac’s net income, however, is down-sloping from 2017 onwards.
Table 8. Projected Balance Sheet: Unapplied Recommendations
• 5% growth rate
• AFS, Land, Investment property, Goodwill, Deposits, Capital stock will remain constant
Table 9. Projected Comprehensive Income: Applied Recommendations
• Revenue for Sale of sugar and by product for 2018 will decrease by 2% due to train law and will increase by 10% in the next three years. All other revenue will increase by 7.48% annually.
• Cost of Goods Sold will increase by 10.5% annually. Cost services will increase by 9.48% annually
• Operating Expenses for 2018 will increase by 14.5% based on last year’s operating expense growth rate and increase by 15% in 2019 onwards due to the increase in employee benefits for the next three years.
• Interest Expense will increase by 12% from the year 2018 onwards.
• A tax rate of 30% is assumed.
• All other income and expenses increase by 10% annually.
The Train law that has been implemented during 2017 is to be effective on the year 2018 thus an assumption of a decrease of 2% in the revenue from sale of sugar and its by-products has been made. As explained in chapter 3, the company is indirectly affected by the train law. The decline in the demand of the product is only deemed as temporary since sugar is a commodity and a necessity. If raw materials are to be outsourced or imported starting 2018, there will be an expected increase in the cost of raw materials and therefore increase the cost of goods sold. Also decreasing machine time through updating machinery is costly and therefore increasing cost of goods sold. Operating expenses of CAT are to increase in the year 2019 and in the succeeding years due to the implementation of the products’ safety stocks. Operating expenses would also increase in 2019 once it conducts trainings and seminars and increases employee incentives. An increase in interest expense starting 2018 is expected if the company will obtain short or long term financing that is to be used in updating facilities and machinery.
As seen on the projected comprehensive income, both the gross income and the net income declined from 2017 to 2018. The reason for the decline is the implementation of the strategies proposed. However, the net income gradually increases in the succeeding years.
Table 10. Projected Balance Sheet: Applied Recommendations
• 10% growth rate
• AFS, Land, Investment property, Goodwill, Deposits, Capital stock will remain constant