Gunns Australia Business Report

University Degree Business and Administrative studies

Ben Fitzpatrick, Omer Konacki, 9am Friday 311242847

Executive Summary

Gunns Limited are a forestry enterprise based in Tasmania, with market capitalization of $204 million. Gunns undertook a pronounced change of strategic direction in 2010, attempting to revitalize itself and ensure future success after poor recent social and financial performance. This strategic direction was not allayed into financial success in the following year, 2011, with a loss reported of $355.5m.

The purpose of this report is to examine the external business environment and its subsequent impact on the future performance of Gunns Limited through an analysis of each of the elements of the PEST model (political/ regulatory, economic, sociocultural and technological). Furthermore, this report will attempt to outline how Gunns Limited can use corporate social responsibility policies to increase the attractiveness of investment in the company.

The overall conclusion is that though past environmental factors have weakened the performance of Gunns, the moves to address these issues through a strategic rework are a positive step towards improved performance in the future.

Some limitations of the report include:

Quality of sources.
Historical data limitations.
The inherent inaccuracy when predicting future performance.

Economic

The weakened financial performance recorded by Gunns in the past two years has been heavily predicated by the difficult economic conditions in which the business has been operating. The global financial crisis (GFC), coupled with an appreciating Australian dollar and the March Japanese earthquake, have all negatively impacted on the competitive position of Gunns, reflected in the $355.5m loss recorded in the 2011 financial year (Gunns Limited 2011a).

The growth of globalisation has the entry into foreign markets by transnational corporations has been allayed into a greater risk factor come times of financial crisis (Lynch, Johnston and Ker 2011). The GFC softened demand throughout world markets, hurting export-based industries (Forestry Tasmania 2011, Gunns Limited 2010). Furthermore, the collapse of the demand for managed investment products as a realist of the GFC caused the divestment of the initiative by the same name directed by Gunns, spurring further financial losses (Gunns Limited 2010, Gunns Limited 2011a).

Post-GFC, the Japanese market in particular was showing signs of recovery, an important revelation due to the position of Japan as the largest export market for Gunns, accounting for 60% of volume of export sales (Gunns Limited 2011a). However, the March occurrence of a large-scale earthquake in Japan offset this positive development. The operations of two large Japanese customers were adversely affected, decreasing the potential for export revenue for Gunns (Denslow, Longid and Sam Cho 2011, Gunns Limited 2011a, RISI 2011). An estimated 7% of sales were lost to the Japanese earthquake effects (Clark 2011).

Amidst the continuing GFC, the Australian dollar continued to appreciate as a result of the relative strong performance of the domestic economy as compared to other developed economies (Australian Government 2008). Demand for the Australian dollar was strong as Chinese demand for Australian exported minerals continued to grow. As such, the dollar increased to above parity with the US dollar, causing competitiveness issues for Gunns (Gunns Limited 2010, Gunns Limited 2011a). Though the Yen and Australian dollar remained relatively stable in terms of each other, most of the customers Gunns exports to deal in American dollars. Furthermore, the strong domestic currency increased the attractiveness of imports, softening domestic demand for Gunns products as the competitiveness of such products was adversely affected (Gunns Limited 2011a).

Despite the past turbulence experienced within the economic environment, however, all of these issues are not likely to continue into the future, presenting the opportunity for Gunns to capitalise on the strength and stability of the Australian economy and guarantee future success. The GFC has mostly subsided, and world growth figures, especially in the burgeoning Asian region into which Gunns delivers the majority of its exports, have been positive. The potential of China to become a long-term source of revenue for Gunns, and to potentially overtake Japan as the largest customer of Gunns is a very realistic opportunity that Gunns can capitalise on (Gunns Limited 2011a, Plourde 2011).

Furthermore, it is likely that the Australian dollar will depreciate for two reasons. Firstly, an expected interest rate cut by the Reserve Bank of Australia on the 1st of November 2011 will result in decreased demand for the Australian dollar due to decreased levels of return on foreign investment into Australia. Also, the planned imposition of the carbon tax will hurt the competitiveness of the mining companies whose business is currently propping up the inflated Australian dollar (Maher 2011). As a result, there will be a decreased Chinese demand for Australian exports, also decreasing the value of the Australian dollar. This depreciation will enhance the competitive position of Gunns, allowing greater profit margins and increased revenue from exports.

The future outlook for the economic environment appears to be positive, a sentiment shared by investors who were quick to purchase the forestry assets divested by Gunns in 2010 (Gunns Limited 2011a). The advantages of operating in a stable domestic economy will be realised once the Australian dollar appreciates to pre-GFC levels and the ill effects of the GFC itself have subsided.

Political and Regulatory

Government regulation of all industries across the Australian economy has increased markedly in the wake of World War II (Carlin 2011). In the forestry industry alone, there are over 20 separate laws drafted in relation to forest practices (IRIS 2011, Gunns Limited 2011b). The political and regulatory environment is extremely important to evaluate and analyse, as it has major effects on the profitability and sustainability of Gunns.

Though regulation generally carries with it a negative tone, caused by free-market economic thinking that aims to keep government intervention to a minimum, the regulatory stance imposed by the Tasmanian government on Gunns is not entirely negative. According to the Department of Fisheries, Forestry and Agriculture (2011), the forestry industry accounts for 1% of total GDP, a substantial amount. As such, it can be seen that the relationship between Gunns and the state and federal governments is one of interdependence - each relies on the other (Piggott 2011). Mutually beneficial regulations and policies, thus, are a desirable occurrence.

This is reflected in the approval of the Bell Bay Pulp Mill, which Gunns has identified as the foundation of its future business (Gunns Limited 2010, Gunns Limited 2011a, Gunns Limited 2011b). The benefits to the Tasmanian economy through job creation, value added to GDP, and the collection of tax revenue (estimated at $597m) are high (Gunns Limited 2011a, Gunns Limited 2011b, Gunns Limited 2011c), whilst the benefits of the new mill for Gunns are obvious as a source of revenue and profit. The governmental support for this project is indicative of a stable political environment that welcomes positive ...

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Another example of the positive relationship between the government and Gunns Limited is the termination of the rights to logging native wood in Tasmania, from which Gunns received a $23m payout. This allowed the government to fulfill its commitment to the wider Tasmanian community who wished for sounder environmental practices throughout Tasmania. However, this decision by the government does reveal a potential risk in the political environment that could adversely affect Gunns in the future - though Gunns has great bargaining power, the wider community has more sway over the government. The potential for social backlash causing government regulation to negatively affect Gunns is low due to the increased commitment Gunns is showing to wider society as discussed in the next section, but the chance still does exist that a problem could arise.

For this reason, the outlook for the political and regulatory environment in which Gunns is operating in is neutral with a leaning towards a more likely, but not certain, positive outcome. Correctly managing relations with all regulatory and political bodies is of the utmost importance for Gunns heading into the future.

Sociocultural

The sociocultural environment has been of utmost importance to Gunns Limited, with operations interrupted and protested against as a result of 30 years of conflict between the company and wider society. Precedent has shown that companies can be shut down, or at least highly adversely affected because of social pressures (O’Brien 2011).

In the last decade, social awareness of the impact of business on the environment has strongly increased (Golds 2011, Panwar et. al 2006). This sociocultural trend has become an important concern for businesses looking to maximise productivity and competitiveness (Shrivastava and Scott 2007). The significance of this trend in social values is exemplified in the construction of purpose built bodies including the ‘Australian Forestry Standard’ and ‘Private Forests Australia’ which aim to secure a sustainable, environmentally sound future for the Australian forestry industry (Forestry Tasmania 2011).

Previous to the strategic realignment in 2010, Gunns typically ignored social pressures in favour of chasing productivity and profitability gains (Forestry Tasmania 2011, Gunns Limited 2010). This resulted in extensive conflict and climaxed with Gunns decision to withdraw from the native forest industry and instead use certified plantation resources to supply the pulp mill. This decision resulted from extensive discussion with community and environmental groups, and predicated the signing of the Statement of Forest Principles by both parties in September 2010 (Gunns Limited 2011a). This significant increase in the stakeholder engagement of Gunns is a result of the positive consequences that arise from a strategic change that identifies weak points and transforms them into strengths that complement the other core competencies of the business (Astrom et. al 2010)

The decision to attempt to cater more sufficiently to social stakeholders can only reap positive consequences if it is implemented correctly and the sociocultural environment is thus manipulated in a way that Gunns is seen in a more positive light. Gunns commissioned Pox Populous (2011) to conduct a report into the social viability of the planned Bell Bay Pulp Mill that will form the base of the entire Gunns operations. The report found that overall community sentiment was positive based on the opportunities for economic benefits in the form of job creation and value added to the local economy, but there were some concerns that related to custodianship of the environment and greater ethical and social responsibility. In response, Gunns has set up a means of independent monitoring and reporting of social and environmental performance through the multi-stakeholder Project Oversight Comittee (Gunns Limited 2011b, Gunns Limited 2011d).

The increased international demand for Forest Stewardship Council status on all purchases further places Gunns addressing of sociocultural issues as an effective approach, in that it appeases a range of stakeholders.

Gunns has effectively addressed the sociocultural myopia that was damaging the reputation and performance of the company by engaging more openly with the community. This management of the demographic changes the company has undergone has the potential to give the company a strategic advantage (Strack et. al 2008). The company must be careful, however, to not allow future sociocultural forces that are not commercially viable influence the company to the extent that any competitive advantage is lost. The current situation and the addressing of the problem by Gunns exhibits a positive management of this element of the PEST environment, though there is uncertainty in the future. As such, the outlook for this element of the business environment can only be deemed as neutral.

Technological

The Australian forestry industry has the potential to increase its global competitiveness through innovation and transformation within the industry (Ernst and Young 2010, Lazar 2011). The technological environment presents one such opportunity (Croteau and Bergeron 2001). However, this environment is dynamic, volatile, and ever-changing. As such, it is not prudent to attempt to predict any future technological developments that may affect Gunns, as the scope is too wide to make any sort of accurate estimation. However, it is possible to examine recent technological developments and the impact these developments may have on the future profitability and performance of Gunns Limited.

The most important technological innovation embraced by Gunns is the choice to incorporate Elemental Chlorine Free Light (ECF) bleaching technology into the planned Bell Bay Pulp Mill, as a result of an agreement between Gunns and the Tasmanian Environmental Protection Agency (Gunns Limited 2011a). This technology is an environmentally superior option that will facilitate a reduction of chlorine dioxide by up to 40% (Gunns Limited 2011c).

The use of this technology holds many benefits and thus places Gunns as a positive future investment. The Orion mill in Uruguay commissioned and constructed in 2004 was the first mill to utilize the ECF technology, and the chlorine dioxide emissions recorded by the mill, which is of a similar size to the propsed Bell Bay Pulp Mill, were well within the planned Commonwealth permit conditions to be placed upon the Bell Bay Pulp Mill (HCG Environment 2004, International Finance Corporation 2010). The benefits of implementing an environmentally-sound technology are two fold. As will be discussed in the Corporate Social Responsibility section of this report, companies that adhere to social environmental expectations can increase social capital with their stakeholders (Savitz 2006, Vogel 2005). Furthermore, compliance to government regulation will always hold positive benefits for a company in the form of greater governmental favour towards the company (Moon 2004, Siebert 2008).

Other technological advancements within the forestry industry applicable to Gunns are also aimed at increasing the level of environmental responsibility and performance within the industry. Forestry Tasmania funds a division dedicated to the research and development of technology and processes that will allow for a more efficient, more environmentally responsible harvesting and regeneration of forests (Forestry Tasmania 2011), whilst the Victorian government also identifies investment into technological advancements within the forestry industry as having a high rate of return (Department of Primary Industries 2011).

A further technology set to aid in increasing the global competitiveness of Australian forestry companies, Gunns included, is the advent of a 3D technology that allows for the virtual presentation of forests and will allow for strategic planning and scenario plotting to be more effective and realistic (‘3D Forests Show the Way for Sustainable Future’ 2011).

Thus it can be seen that the advent of new technological processes funded by both governments and companies within the industry presents major opportunities for Gunns to capitalise on, therefore accentuating the attractiveness of investment in Gunns Limited.

Corporate Social Responsibility

Modern societal trends gravitating towards greater awareness of the need for social responsibility has predicated the growing importance of corporate social responsibility (CSR) to a business (Moir 2001, Orlitzky et. al 2003). Examining CSR policies and how they influence each area of the PEST environment is useful to determine the ability of Gunns to influence its external operating environment and thus provide a clear determination of the viability of Gunns as an investment opportunity.

The economic environment - in particular, the expansion of demand for Gunns products from Asian countries - can be capitalised on through the use of CSR policies to ensure that Gunns reaches full Forestry Stewardship Council status (Gunns Limited 2011a). An increase in demand for products carrying this certification presents an opportunity for Gunns to gain a competitive advantage and increase the attractiveness of their product in what is a relatively homogenous product market.

Opportunity also exists in the rebuilding efforts required post-Japanese earthquake. If Gunns can implement a range of strategies to aid their major customers in Japan in their rebuilding efforts, it will build positive relations and could ensure a stronger business relationship in the future, guaranteeing a strong source of revenue.

As mentioned previously, sociocultural trends have been towards greater care over the environment and sustainability (Golds 2011, Panwar et. al 2006). Gunns has worked hard to implement a range of CSR policies to foster a mutually beneficial relationship between the organisation and the society within which it operates. It has identified that correctly implemented CSR issues can be extremely useful in creating social capital with stakeholders (Savitz 2006, Vogel 2005).

The range of CSR policies implemented to respond to social pressures and appease communites include the Project Oversight Committee, the creation of a Social Sustainability Framework, the signing of the Statement of Forest Principles and the creation of forums including the Bell Bay Community Liaison Committee (Gunns Limited 2011a, Gunns Limited 2011b). All of these policies effectively address social issues surrounding Gunns and thus show that Gunns is able to adapt to its external environment successfully.

The CSR policies initiated in response to the growing sociocultural awareness of environmental issues will act dualistically to both mitigate any social concern and also to fulfill government requirements of adherence to environmental policies. Carroll (1999) identifies that businesses have four responsibilities - economic, legal, ethical and discretionary. The environmental regulations to be imposed on Gunns act to align legal and ethical fulfillment, whilst the positive benefits of CSR policies will ensure that these two responsibilities are further aligned with economic achievement. The government is attempting to shift the responsibility of environmental management away from the government and towards businesses (Lyon and Maxwell 2008).

Furthermore, it can be seen that the imposition of these environmental regulations have led to the creation of technology that more efficiently uses the resources at Gunns disposal. The ECF technology is a positive development into the future, and allow the fostering of further positive relations with the state and federal governments.

Wider technological environmental trends have also been strongly in favour of CSR. All of the advancements within the forestry industry in Australia have been targeted towards creating a more socially and environmentally responsible industry, exhibited through the extensive funding and research undertaken by both the Victorian and Tasmanian state governments (Department of Primary Industries 2011, Forestry Tasmania 2011)

Decisions that positively affect the community will have a congruent effect on business (Wood 1991). Empirical research has shown a documented link between the use of CSR policies and positive financial performance. (Anderson and Frankle 1980; Aupperle et al. 1985; Bowman and Haire 1975; Bragdon and Marlin 1972; Cochran and Wood 1984; Frooman 1997; Heinze 1976; Ingram 1978; McGuire et al. 1990; Moskowitz 1972; Orlitzky et al. 2003; Preston 1978; Spicer 1978; Sturdivant and Ginter 1977; Waddock and Graves 1997). If Gunns can effectively utilizes CSR policies to mitigate the issues in each of the elements of the wider business environment, then it will help to ensure its future success.

Outlook

Turbulence in the economic environment, coupled with clashes with sociocultural groups and regulatory bodies, has directly influenced the recent poor performance of Gunns Limited. However, the strategic realignment of Gunns aimed at mitigating the conflict experienced between Gunns and wider society whilst simultaneously fulfilling government regulations through effective CSR policies, set amongst a positive technological environment and an improving economic outlook, make it obvious that investment in Gunns in the next three to five years will have a good return.

Increasing international competitiveness and regulatory and social adherence position Gunns as a company primed to recover from its current slump. The stable nature of the Australian economy coupled with positive developments in the technological environment strengthen this sentiment.

The four elements of the business environment are all very different in nature, but a business must hope for each of the environments to have a positive effect in order to facilitate the creation of a long-term competitive advantage that will ensure future financial success. This appears to be the case with Gunns Limited, exemplified by the recent surge in the share price of the company from $0.18 to $0.30, an extremely high increase.

Final conclusion: Invest

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Appendix A: Powerpoint Presentation to Directors