Bunge Corp Analysis: Decentralization does not Necessarily Mean Lack of Integration

Analysis

The first issue could be rephrased as follows: “Is decentralization with integration possible or do they contradict each other for Bunge? To have decentralized organizational structure but its value chain managed in an integrated fashion can be a plausible in reality because decentralization does not necessarily mean lack of integration. In the same way that a human body may have decentralized systems as each system (i.e, circulatory system, nervous system, etc) since each has its own function to perform yet each system is being integrated by the brain or the nervous system as the one controlling everything, so with main office located in New York but controls every business around the world. Since it is the decentralization that is the source of the competitive advantage for Bunge, it cannot be disregarded. The key to decentralization was in its having its local managers to have familiarity of the people in every region although each group of people in every region may be different. Integrating the new businesses worldwide into the global supply chain is indeed admitted as a challenge because their offices were located in While Plains, New York. The issue here is whether integration is possible and it appears to have been done successfully by the company. Case facts say Bunge has adopted a hybrid development model where it was able to supply commodities to its residual customers while being able to build an on-the-ground processing presence in many areas. Moreover, given the level of information technology in the global arena, the issue of decentralization with integration could be handled well by the present management of Bunge although challenging.

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The second issue could be restated as follows: “Should Bunge go into biofuels by investing more?” The fact the future is seen to favorable for Bunge based on existing data and on its previous performance, it would appeal to reason that the company must be able to take advantage of its opportunities, make use of its strengths, avoid or correct its weaknesses, and prevent the threats from affecting the profitability of the company. The fact the Brazil has the lowest cost of production as strength based Ethanol Supply Curve or Exhibit 12 of the case study as compared to other countries, there is basis to capitalize on said company’s strength on what have been invested by the company in Brazil over the years. To forego this big change this opportunity is to forego higher profitability that would affect wealth maximization objective of the company.

To miss the chance in Brazil when the company was in the best cost-position to go to biofuel as the same was related to its main business of agribusiness is to forfeit the chance to grow from opportunities provided by the external environment. The company has been there in Brazil ahead of the competitors already and it should not let the chance to be lost. Its competitors may take advantage of the same if Bunge will not do it. Brazil which depended in the fast from foreign sources to supply its energy requirements eventually became independent because of biofuel. Given the projected increase in energy consumption, there seems to be no valid reason to fear overcapacity of biofuel since the present world biofuel production cannot yet match that world fuel requirements which basically rely still on natural resources like crude oil and petroleum. The real challenge is the competing demand for energy and food because of the seeming tradeoff between the two. Although waste matters from plants and animals can be used to produce bio-fuel, any increased production of biofuel as an alternative to present sources of energy may necessarily reduce available land for food production.

Resolving the second issue would ask whether Bunge should continue in sugar production in Brazil. Case facts provide that Bunge recently created the Sugar and Ethanol division in Brazil as part the company’s regional operations, and the division had just started trading sugar. It was further provided that despite the interesting opportunities in sugar, Bunge was entering the market late. Indeed assets were found overpriced and competition was increasing, so it was difficult for the company to get the business started. In fact, Bunge has been unsuccessful recently in three bids for some mills. Instead of pursuing sugar production which requires getting involved directly in the production of sugarcane as with palm oil when entering the business, Bunge may just consider concentrating on ethanol production to take advantage of low cost of production compared to sugar production. Lower cost production would therefore mean higher profitability.

Given this analysis, there is therefore no question now whether or not the company should invest for more ethanol production because the demand is expected to grow in the future. The next real issue is the amount or level of investment that must be made in ethanol production which is discussed next.

The third issue could be restated as follows: Should it invest in Biofuel? How would it define its unique position leveraging Bunge’s core business model and strengths? How will it address high petroleum prices that have increased the volatility and uncertainty of the agribusiness sector?

The nature and extent of investments to be made on biofuel must be based on the strategic direction chosen. If Bunge has decided to eventually directly compete on biofuel because of its competitive cost advantage, then it should project a growth that is compatible with its present resources and potential sources of capitalization in relation to expected demand for biofuels. Like any other kind of business, plans for growth must be realistic and must be within what the economy can sustain so that it may not unnecessarily go into overexpansion which could cause the company to suffer losses. The company felt to be affected by the high petroleum prices that could be affecting the uncertainty of the business sector, but it can do something.

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There appear to be a trade-off between the need for food and biofuel at one point and there is pressure to address the issue of global warming on the other hand. It is a choice of which should be given priority. Will not the biofuel production result to “crowding out” spaces for land that could have b been used for rice production? If yes then the issue will need a global solution because the tendency to relay more on one and sacrifice the other could result to a bigger problem. The policy therefore must be to have a balance.

The climate change due to global warming must be seen as opportunity for Bunge in production of bio-fuel but without neglecting agribusiness as it main focus. The company’s two time-period goals should be considered in evaluating the wisdom of the making investment. They are the short term goal and long term goal. It is assumed that both goals are important because the business is presumed continuously operate as going concern. The life of the company today is as important as in the coming future because its existence must be preserved or sustained in the coming years after operating for about 2 centuries already. To argue therefore for the immediate accomplishment of the first goal while neglecting the second would be fallacious since may not be sustainable and would not be fair to investors since the some of the investments are meant to be recovered over a long period of time. To value the second more than first or by sacrificing the first may cause the company to go bankrupt and would not be able to meet its currently maturing obligations including the payment of salaries of employees who must be paid their salaries on time. There is need then to look at the decision in terms of the cash flow requirements of the company. If investing more for expansion could result to poor management of working capital due to more focus on the long-term. The argument therefore is to keep both short term and long-term goals balance with what cash flow could sustain.

The amount of investment therefore in ethanol production should go with normal increase in the demand for ethanol without worrying of course for overcapacity. Given the expected demand of biofuel, Bunge should restructure its expansion and development plans to take advantage at lower cost of production in Brazil from sugar cane. This would do good for Bunge, since the higher cost of production for biofuel in the US and Europe would eventually result to Brazil exporting more biofuel to these latter countries and Bunge would be one of those which could participate globally well because of its roots in Brazil. The US and Europe, after finally realizing the competitive advantage of Brazil in cost would instead use their land for agribusiness or food production and Bunge would be in a very strategic position in relation to competitors.

Conclusion

In conclusion, Bunge should take advantage of the technology to continue it obviously success decentralization with integration. The two concepts need not contradict each other as the company has applied them. Bunge should pursue investment in Biofuel since it would the much needed product in the years to come as a result of increasing global warming because of the continued use of petroleum and coal in energy production. The fact that biofuel can be extracted from waste material, its use can convincingly contribute to waste management which in effect is a way to help prevent further global warming while providing alternative sources of energy that could eventually result to fuel security. Biofuel may not address all the problems related to the environment but it was the result of painstaking effort of the scientific community to find solutions to the many problems of this world.

As to the strategic position that it wants to position the company, Bunge management should only plan for expansion in biofuel production from sugarcane that could be sustained from its sources of materials. It should not make more investments in sugar production for being less competitive in the market.

Work Cited

Case Study Bunge: Food, Fuel and World Markets.

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