Royal Greenland
A/S
Gitte Grove Poulsen
CPR number: 291190-1482
Case Exam
Shanghai Finance
University
Class: Tricon
Characters:19,743
6/20/2012
Gitte Grove Poulsen
Case Exam
20/6/2012
Table of Contents
Introduction ..............................................................................................................................................................2
Outline ......................................................................................................................................................................2
Delimitations ........................................................................................................................................................3
PESTEL analysis .........................................................................................................................................................3
Political factors .....................................................................................................................................................3
Economic factors ..................................................................................................................................................4
Socio-cultural factors ............................................................................................................................................4
Geert Hofstede .................................................................................................................................................5
Technological factors ............................................................................................................................................6
Ecological factors ..................................................................................................................................................6
Legal factors..........................................................................................................................................................7
Micro environment...................................................................................................................................................7
Market ..................................................................................................................................................................7
Competitors ..........................................................................................................................................................8
Consumers ............................................................................................................................................................8
Internal factors .........................................................................................................................................................8
Operating results ..................................................................................................................................................8
Core competences and competitive advantage ...................................................................................................9
SWOT analysis ..........................................................................................................................................................9
TOWS ................................................................................................................................................................. 10
Threats ........................................................................................................................................................... 10
Opportunities ................................................................................................................................................ 10
Growth strategy..................................................................................................................................................... 11
Question 2 ............................................................................................................................................................. 12
Conclusion ............................................................................................................................................................. 12
Appendix ................................................................................................................................................................ 13
Internet sources: ............................................................................................................................................... 13
Reports: ......................................................................................................................................................... 14
Books: ............................................................................................................................................................ 14
Gitte Grove Poulsen
Case Exam
20/6/2012
Introduction
Royal Greenland A/S is a government owned company operating in the food industry. They are
engaged in fishing, processing and distributing seafood products. They offer a great variety of
products, both unprocessed and processed frozen seafood, canned seafood and chilled seafood, also
processed and unprocessed. The company has implemented the Naleraq 2013 strategy in order to
attain growth in their two business areas: the European and the North Atlantic. This assignment will
determine how the business can attain further growth in the Russian seafood market.
Outline
This assignment uses an interdisciplinary approach and includes models and theories from all four
subject areas.
The assignment will first assess the political-, economic-, socio-cultural-, technological-, ecological and
legal factors in order to determine the macro environmental factors influencing the presence of Royal
Greenland A/S in the Russian seafood market. Within this PESTEL analysis, theory about managed
floating exchange rates, GDP and gini-coefficient from the subject area Economics will analyze the
economic factors affecting the company. Theory from Business Law about copyright and patent right
will explain the legal factors, and determining the cultural factors involves an analysis of Hofstede’s 4
dimensions from the subject Cultural Analysis.
Hereafter follows an assessment of the micro environment with theory on integration from Supply
Chain Management.
In the following analysis of the internal factors influencing the company, interpretation of various
ratios and financial measures will be carried out, and a determination of core competencies and
competitive advantage will take place.
Gitte Grove Poulsen
Case Exam
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This will lead to a SWOT analysis outlining the strategic situation for Royal Greenland A/S. Combining
the points in a TOWS analysis, the assignment will seek to determine how the company might
overcome potential obstacles in the Russian market.
Finally, a discussion about the ideal growth strategy will conclude question 1.
To answer question 2, several financial measures from capital budgeting has been used to assess the
profitability of the proposed investment.
Delimitations
The PESTEL is focusing on the Russian seafood market only in order to concentrate on determining
the right strategy for Royal Greenland A/S in Russia. In the analysis of the micro environment, the
assignment will exclude suppliers and distributors, due to complexity and lack of information and
time.
PESTEL analysis
Political factors
In the Transparency International’s Corruption Perception Index from 2009 Russia was ranked 146 out
of 180 countries1, which shows that the political environment in Russia is subject to a great deal of
corruption. Russia also suffers from a high level of bureaucracy which expresses itself in the
complexity of the taxation system. Additionally, the lack of reforms in connection with time and
number of procedures when doing business makes it a time and money consuming process to start a
business in Russia. 2 All these influences and the fact that the government favors national companies 3
will have a negative impact on Royal Greenland A/S in the Russian market and make it harder to do
business there. With a Gini coefficient of 42.3% in 2010 the gap between rich and poor is huge4 and
this has resulted in increasing political risk.5 Putin’s re-election is said to reduce the political risk in
1
Euromonitor International, Business Environment: Russia, 2010, page 3
Euromonitor International, Risks and vulnerabilities:Russia, 2011, page 2
3
Euromonitor International: BRIICS economies facing different challenges amid a global economic recovery, 2010, page 4
4
Euromonitor International, Russian consumers in 2020: A look into the future, 2009, page 5
5
http://themoscownews.com/finance/20120206/189433038.html
2
Gitte Grove Poulsen
Case Exam
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Russia, but it still remains uncertain whether he will address the opposition’s primary concerns and
tackle the high level of corruption.6
Economic factors
As a large exporter of oil, Russia’s economy is very sensitive to oil-price volatility. However the high
prices on oil during the past years have been highly beneficial for Russia. As an emerging market
Russia is experiencing high economic growth. The growth in GDP was 4.5 % in 2011 due to healthy oil
prices and strong domestic demand7. Also Russia is expected to become the 5th largest consumer
market by 20208. This provides Royal Greenland A/S with many opportunities for gaining revenue,
especially since labor costs are low in Russia. However, the unemployment rate in 2009 was 8.3% with
unemployment growing among the youth, which indicates the remaining underdevelopment of
Russia.9
Using a managed floating exchange rate system10, a system where the exchange rate is determined by
market forces of the Ruble’s supply and demand with occasional intervention from the Central Bank,
means that Russia enjoys the advantages of a free-floating exchange rate system, but without
excessive fluctuations of the Ruble rate. This leaves the Russian government with the flexibility of
determining interest rate and for example be able to minimize the effect of a recession by a sharp cut
in the interest rates.
With Europe as the largest trading partner, Russia is likely to be affected by a potential economic
turndown in the European market. This will also affect Royal Greenland A/S as their main market is
Europe.
Socio-cultural factors
6
http://www.edc.ca/EN/country-info/Documents/russia.pdf
Ibid
8
Euromonitor International, Russian consumers in 2020: A look into the future, 2009, page 2
9
Euromonitor International, Business Environment: Russia, 2010
10
http://www.edc.ca/EN/country-info/Documents/russia.pdf
7
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Russia is the world’s largest country by area and the 9th largest by population with 138.7 million
citizens in 201111. Yet, there has been a declining tendency in the size and age of the population
which is very concerning about the future of the country. As seen in Chart 1, by 2020 the population
between 15 and 64 will be down to 94 million compared to 102 in 2010. Also a shortage of skills in
business management creates some
unease of doing business12. This would
mean that Royal Greenland A/S would
have a harder time finding qualified staff
for potential operation plants.
The latest years have seen an increase in
the hectic life style, as Russia is more and
more adapting the Western way of
living13. This creates an opportunity for
Royal Greenland A/S to sell their processed products in Russia. Finally, the increasing incomes is
resulting in a rising restaurant industry, which provides Royal Greenland A/S with another opportunity
of attaining further growth.
Geert Hofstede
Looking at Hofstede’s cultural dimensions, Russia score 93 out of 100 in power distance, which
indicates that Russians believe status has great importance and
expect that power is distributed unequally. Royal Greenland
A/S should take this into account when deciding on the
organisational structure in a potential production plant in
Russia.
11
http://www.internetworldstats.com/stats8.htm
Euromonitor International, Business Environment: Russia, 2010, page 5
13
Euromonitor International: Top 10 consumer trends: Russia
12
Figure 1. Source: geert-hofstede.com/russia.html.
Gitte Grove Poulsen
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A relatively low score on the individualism index signifies that Russians belong in groups and that
relationships are important to them. With 36 in the dimension of masculinity, Russia is controlled by
feminine values such as caring for each other and quality of life. They talk modestly about themselves
and dominant behaviour might be accepted from the boss but not from peers. 14 Information about
these two dimensions is especially useful for Royal Greenland A/S when creating business realtions.
On the uncertainty avoidance index Russia scores 95. Having a high level of uncertainty avoidance
means that Russians fell very threatened by ambiguous situations, which comes to expression in their
complex system of rules and regulations15. In regards to long term orientation, no score was available
for Russia.
Technological factors
The internet penetration in Russia is lower than in Western countries. This will effect Royal Greenland
A/S’s operations as pretty much everything works through the internet these days. Poor
infrastructure in some areas will affect transport and delivery of products, as well as potential
powercuts will affect production. Also obsolete manufacturing is a major concern for Russia. This will
mean that heavy investments and import of new equipment is necessesary for Royal Greenland A/S, if
they decide to locate a production plant in Russia. Additionnally, heavy investment in technology have
proven to be very beneficial for the company. Royal Greenland A/S has invested in a more
environmentally sound prawn peeling technique16, which gives them the most modern and efficient
prawn processing plant in the world.17
Ecological factors
For a company like Royal Greenland A/S the environment is a huge factor to take into account. Since
they rely on natural resources, it is important that they cherish and protect the environment to be
14
http://geert-hofstede.com/russia.html
Ibid
16
Marketline: Company Profile Royal Greenland A/S, page 5
17
http://innovisio.ipapercms.dk/RoyalGreenland/Div/AnnualReport20102011/
15
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able to retain their raw material sources. Allthough the political will in Russia to make climate change
policies is small18, and it’s therefore not a requirement for Royal Greenland to protect the
environment, being a leader in environmentally friendly fishing with world wide recognised
certificates such as the MSC19, could attract consumers who puts great value into the environmental
issues. Finally, Russia has scarce resources, and this will mean that the competition for these is great.
Legal factors
Russia has a poor protection of intellectual property, which means that infringements are widespread
in the country. Copyright protects artistic work expressed in writing, pictures, speech or musically.
Patent right is meant to protect an invention’s technological design. Design right is protecting a
product’s external design and appearance. Utility model right is for small inventions and other
technical creations and trademark right protects a distinctive feature- that can be reproduced
graphically- of a service or good.20 Making sure that their products and designs are protected will be
essential to Royal Greenland A/S to avoid using revenue on unnecessary infringements. Also heavy
regulations remain a problem in Russia for many businesses and foreign investment is limited in some
sectors that are considered strategic.21
Micro environment
Market
Russia is one of the largest producers, importers and exporters of seafood in the world. The Russian
frozen processed seafood market is dominated by domestic companies and import; multinationals
have only a minor share in the market. The market is divided into two segments: the inexpensive
segment and the high-price segment. The inexpensive segment contains shrimps, squid, mussels and
seafood cocktails and is 100% satisfied by local production and is characterized by slow growth (1% in
18
Euromonitor International, Risks and vulnerabilities:Russia, 2011
http://www.msc.org/?i18nredirect=true&set_language=en
20
An introduction to Danish Law, chapter 7
21
Euromonitor International, Business Environment: Russia, 2010, page 5
19
Gitte Grove Poulsen
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2010). The high price segment contains exclusive seafood such as tiger and king prawns, lobster,
octopus and other crustaceans and this market is still undeveloped and showing higher growth rates
(12% in 2010).22 Russia is one of the world’s largest consumers of shrimp and there’s a big market
potential here.
Competitors
Royal Greenland A/S will experience fierce competition from chilled processed food companies,
because in Russia this is perceived as healthier than frozen processed food. Top competitors are
Ocean Beauty Seafoods LLC, Peter Pan Seafoods, Inc., Young's Seafood Ltd., Icelandic UK, Ltd. The
competition is characterized by wide product portfolios, lots of flavors, ways of processing and
combinations. Within the Russian seafood market Agama group is the biggest competitor with 40% of
the market share for prawn. But through horizontal integration, Royal Greenland A/S entered a joint
venture and made a clever strategic move by making Agama a partner.
Consumers
The Russian consumer wants quick food preparation in order to save time and money. Another
consumer trend is to buy more sophisticated and exclusive products; this tendency is seen in the
increased sales in crustaceans. In recent years Russia has seen an increase in the awareness of health,
which implies that the Russian consumers want healthier products. In Russia, chilled seafood is
perceived as being healthier than frozen seafood. Also the Russian consumer is experiencing
increasing disposable income, which will lead to higher expenditure on food.
Internal factors
Operating results
Until 2010 the company experienced negative profits, but turned it around to a 79 million DKK profit
in 2011 primarily due to an increase in revenue. The Return on Invested Capital ratio went up to 6.8 in
2011 from 2.9 in 2010, which indicates that the company is getting better at turning their investments
into profit. The net interest bearing/EBITDA ratio is 4.9 compared to 8.0 in 2010. This means that if
22
Euromonitor International: Fish and Seafood in Russia, 2011
Gitte Grove Poulsen
Case Exam
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assets were held constant it would take Royal Greenland A/S 4.9 years to pay back their net interest
bearing debt. This reduction is mainly due to a reduction in working capital and is a good tendency, as
it is not advantageous to finance operations through interest bearing debt.
The company has a solvency ratio of 4.97(see calculations in appendix) and indicates that almost half
of the assets are funded by equity. However this is acceptable for a company in a capital intensive
industry.
Core competences and competitive advantage
Royal Greenland A/S has achieved a strong and effective supply chain through the joint venture with
Agama group and the acquisition of Cuxhaven. The company is self-sufficient in some product areas
and has strong relationships with its suppliers. Frozen seafood is also a core competence of the
company and represents the main part of their revenue. These competences support the objectives
for producing the high quality products that differentiate Royal Greenland A/S from other seafood
companies. The Russian seafood market is a broad market, and Royal Greenland A/S’s competitive
base is differentiation, which puts them in the position as differentiation leader in Porter’s generic
strategy matrix.
SWOT analysis
Gitte Grove Poulsen
Case Exam
20/6/2012
TOWS
Threats
The potential economic turndown in EU is a significant threat for Royal Greenland A/S, and a
weakness such as geographic concentration in European countries is a factor that inhibits the
company from avoiding the impact the potential turndown will have. Yet, having a strong supply chain
because of vertical and horizontal integration may help the company to overcome the turndown.
Strong competition in the seafood market can be overcome as Royal Greenland A/S has the leading
position in the market with a wide product portfolio of high quality products as their competitive
advantage. However, declining financial revenue until 2010 has weakened their position a little.
The high political risks of corruption, favoritism and lack of transparency in Russia are a major concern
for Royal Greenland A/S. All though they had a bad start with the Russian distributor, Agama, this
joint venture can prove to be strength to help overcome the political risks.
Even though Royal Greenland A/S has a strong an effective supply chain, they are quite vulnerable to
issues occurring. With the joint venture in Russia they lost 5 million DKK23 and problems like these can
occur again.
Reductions in quotas are a big concern to Royal Greenland A/S. If governments decide to cut down in
the allowed amounts, the competition for raw materials will be even greater and provide suppliers
with even greater bargaining power. However, having such a strong supply chain, where they are
even self-sufficient in some product areas, Royal Greenland A/S will be able to respond to cut downs
in quotas.
Opportunities
The huge and underdeveloped market has a lot of potential. Russia is the largest consumer of prawn
in the world, which provides Royal Greenland with a great opportunity. Yet, rising quotas for prawn
fishing24 may inhibit the company from exploiting the full market potential for prawns. Still, their
23
24
http://innovisio.ipapercms.dk/RoyalGreenland/Div/AnnualReport20102011/, page 23
Ibid, page 30
Gitte Grove Poulsen
Case Exam
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investments in technology mean that they are very efficient when it comes to prawn processing and
this can minimize waste as much as possible.
Because of the rapid economic growth in Russia, consumer expenditure will rise and open up
opportunities for Royal Greenland A/S. They have a lot of revenue to attain in the high-price segment
in the Russian seafood market. Using their competitive advantage of high quality products to attain
growth in this underdeveloped segment will put them in an even further leading position in the
market.
So far Royal Greenland A/S has only been selling unprocessed frozen and chilled seafood in the
Russian market; however an increase in hectic lifestyle may create a rise in demand for processed
seafood, as people will have less time prepare the food themselves. With the broad product portfolio
Royal Greenland A/S will be able to take advantage of this opportunity.
Finally, Royal Greenland can take advantage of the rising restaurant industry in Russia due to their
competitive advantage.
Growth strategy
Royal Greenland A/S is already making use of product development as a strategy, but to take
advantage of the many opportunities in the Russian seafood market it would be beneficial to employ
a market development strategy. As earlier stated, the company is not providing the Russian seafood
market with processed seafood yet. Therefore, exploiting the rising market potential in processed
food by promoting their already existing processed products in this new market would be an ideal
strategy. But, the trend among the Russian population to become more health conscious will have to
be taken into account when marketing the products. This strategy will require investments in
marketing and sales, but also investments in operations since establishing production plants in Russia
would be the best way to take advantage of low labor costs and would make delivery time to Russian
consumers shorter.
Gitte Grove Poulsen
Case Exam
20/6/2012
Also market penetration would be ideal for attaining growth in the high-price segment an restaurant
industry. Using their differential advantage and promoting the high quality products as sophisticated
and exclusive products will draw the attention of the wealthy Russian consumers, who are more
willing to spend than those below the poverty line.
Question 2
As seen in the results below, the investment is not profitable. The net present value is negative and
the IRR is below the discount rate. Also the average annual profit only amounts to 300,000 DKK, which
is enough to cover the investment but not the interests. It will take 11.49 years for the investment to
be paid back, and since the expected life is only 10 years it would be very disadvantageous to make
this investment. The critical scrap value (see calculations in the appendix) is 6.094 million which
means that the scrap value must not be lower than this value if the investment has to be profitable.
Investment:
Annual cash flow:
Expected life:
Scrap value:
Cash flow:
Discount factor:
Present value:
NPV:
IRR:
PBP:
Average annual profit:
Critical scrap value:
-30
4.5
10
5
0
-30
million
million
years
million
1
2
3
4
5
6
7
8
9
10
4.5
4.5
4.5
4.5
4.5
4.5
4.5
4.5
4.5
9.5
0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 0.513158 0.466507 0.424098 0.385543
4.090909 3.719008 3.380917 3.073561 2.794146 2.540133 2.309212 2.099283 1.908439
-£1.74 million
10%
11.41619 years
£0.30 million
6.093856 million
Conclusion
The seafood market in Russia offers great opportunities for Royal Greenland A/S with rising demand
for processed frozen food due to an increase in hectic life style, increasing growth in the high-price
segment and a rising restaurant industry. With a strong supply chain and a core competence in frozen
seafood, the company has the potential to take advantage of these opportunities. The best way of
doing this is by market development and market penetration. This means investing in promotion and
Gitte Grove Poulsen
Case Exam
20/6/2012
marketing will be the major requirements. As a differential leader in the competitive seafood
business, Royal Greenland A/S’s chances of attaining further growth are relatively high.
Appendix
Solvency ratio calculation:
total equity/total assets
882/1773*100= 4.79
Critical value calculation:
0= -30+25.91561+(4.5+x)*(1,1)^-10
(30-25.91561)/(1.1)^-10=4.5+x
X=10.59386-4.5
X=6.09386
Note: 25.91561 is the sum of the present values from year 1 to 9
Internet sources:
http://innovisio.ipapercms.dk/RoyalGreenland/Div/AnnualReport20102011/
http://fis.com/fis/worldnews/worldnews.asp?l=e&ndb=1&id=36788
http://newfis.fis.com/fis/worldnews/worldnews.asp?l=e&id=35906&ndb=1
http://www.food-business-review.com/companies/royal_greenland_as
http://www.marel.com/resources/Files/newsletter/2007/Advantage-Fish-April-2007.pdf
http://www.food-business-review.com/companies/kyokuyo_co_ltd
http://www.royalgreenland.com/Default.aspx?ID=313&PID=1737&Action=1&NewsId=305
http://www.royalgreenland.com/uk/Fishery-and-processing/Production-facilities.aspx
Gitte Grove Poulsen
Case Exam
20/6/2012
http://geert-hofstede.com/russia.html
http://www.msc.org/?i18nredirect=true&set_language=en
http://www.edc.ca/EN/country-info/Documents/russia.pdf
http://www.internetworldstats.com/stats8.htm
http://themoscownews.com/finance/20120206/189433038.html
http://www.russiablog.org/2008/07/market_and_industry_report_rus.php
Reports:
Marketline: Company Profile Royal Greenland A/S, page 5
Euromonitor International: Top 10 consumer trends: Russia
Euromonitor International, Business Environment: Russia, 2010
Euromonitor International, Risks and vulnerabilities:Russia, 2011
Euromonitor International: BRIICS economies facing different challenges amid a global economic
recovery, 2010
Euromonitor International, Russian consumers in 2020: A look into the future, 2009
Books:
An Introduction to Danish business Law, Anne Lind Gleerup, Ulla Rosenkjær & Leif Rørbæk, 2008
Principles and practices of marketing management, David Jobber, 2009
Global marketing, Sven Hollensen, 2011
Economics, John Sloman & Allison Wride, 2009
Value-added logistics in supply chain management, Henriette Dinitzen & Dorthe Bohlbro, 2010
Management accounting, financial measurement and planning volume 1 & 2, Jette Lauritzen & Erik
Krogager, 2006 & 2008
Gitte Grove Poulsen
Case Exam
20/6/2012