CHABROS INTERNATIONAL GOOD: A WORLD OF WOOD

10 Pages   |   3,556 Words

INTRODUCTION

Chabros International Group is a Lebanese based wood manufacturer and trader, formed in early 1960s. It basically deals in two types of wood; lumber and veneer. The group had a very humble beginning as it was a small family business, but during late 1990s the company started expanding to nearby regions, in order to take the benefit of the increasing demand of the wood. In the year 1998, Chabros started exporting to Dubai, and after the success of its product there, the company formally opened a subsidiary there. Chabros International Group currently has eight subsidiaries in six countries, in Middle East & North African Region mainly. The largest subsidiary is Dubai based on sales. In 2008, it accounted for nearly 50% of the total revenue. Chabros International Group also has a production facility in Serbia, which it acquired in 2007 so as to increase the production capacity and meet the rising demand of the region. Due to the global economic recession, the largest subsidiary of Chabros International group, Dubai, took a considerable hit as a decline of 30% was witnessed in its sales, but remaining regions like Qatar, Saudi Arabia, Oman, Egypt etc. showed positive signs. The top management of the group has some serious concerns at the moment regarding the future of the company because the current strategy is not working well. Chabros group has used an aggressive expansion strategy during the last half a decade, but the top management is not sure if that is the right strategy for the future. Another concern of the top management is the inability of the company to absorb the complete production of its only manufacturing facility. The following write-up will analyse the strategy employed by Chabros International Group and will also provide reasonable recommendations for the future plan based on concerns of the top management of the company.

 

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FACTORS CONSIDERED IN INTERNATIONAL BUSINESS DEVELOPMENT

Initially, Chabros was in a practice of serving Lebanese customers located in Dubai. Gradually the size of shipment started increasing as a result, the company decided to formally export its products to Dubai. Based on the success, the company opened its first subsidiary in Dubai, UAE. So the Dubai market was selected purely on the basis of demand of the local people. The success of its first subsidiary motivated the company to ponder expansion in other regions, as well. Naturally the first choice for expansion was Saudi Arabia particularly because of its proximity to the home country and a huge demand of wood products in the country. Saudi Arabia, being one of the neighbouring country to Lebanon provided an advantage of similar cultural values, which made it easier for the company to expand without going through much hassle of understanding values and tradition of the country. Due to the shortage of financial resources, the Saudi Arabian venture was a joint venture between Chabros and two of its Italian suppliers, but because of the huge difference between Saudi Arabian and European cultural values, both partners decided to pull out of the joint venture hence Chabros was the sole owner, a couple of years later.
In early 2000, the demand for lumber and veneer boosted considerably in the Middle Eastern region, which motivated the company to further expand. As a result, after UAE and Saudi Arabia, Qatar became the third country of expansion for Chabros. During this period, Chabros witness a tremendous increase in its sales, in fact, it increased to the point that European suppliers failed to meet the demand of Chabros. To overcome this issue, Chabros initially invested approximately a million US dollars in Serbian suppliers, in order to increase their production capacity, but the because of the slow pace of increase in production capacity, Chabros was unsatisfied and ultimately it acquired the Serbian Supplier so as to have a greater control over the production process. This step of vertical integration was a risky step because of various factors like increasing exchange rate of European currency, high fixed cost of operation, ensuring production gets absorbed etc. Though, initially, the acquisition played a major role in supporting the aggressive expansion strategy of the Chabros International Group as during the period of four years 2004 – 2007, the group opened four additional subsidiaries, bringing the total count to eight. One factor that was mainly considered, besides the local demand of the country, for selecting the potential country of expansion was its proximity to the home country. All the countries where the group expanded its operation lie in the Middle Eastern region. This strategy allowed the company to easily adopt to the local cultural values and target customers effectively as the entire region has somewhat similar Arabic culture and demand for wood products.
One interesting business development strategy adopted by the group was the expansion of the company’s operation in Egypt. In all other regions, Chabros was selling it’s A and AB quality wood and the B quality wood was not being sold anywhere. The company used to derive the cost of B quality products from customers of A and AB quality. Egyptian wood market was significantly different from all other regions especially because of the fact that the demand of B quality wood products was considerably high. The decision to enter Egypt market turned out to be profitable one as the company was able to sell its entire shipment at 100% profit as the cost was already recovered from premium customers. So, as evident, Chabros International Group laid special emphasis on the local culture, and demand of wood products for formulating its International Expansion Strategy. The key idea was to build a stronghold in the Middle Eastern region first and then proceed to become a recognized global player.

PRODUCTION STRATEGIES AND MARKETING STRATEGIES

The production and distribution strategy employed by Chabros International Group was the main source of its competitive advantage in almost every region. First of all, the group invest more than US$11 million to acquire one of its suppliers so as to have a greater control over the production of products. The Serbian Sawmill, which the group acquired became the European subsidiary of the group. The entire production of the facility was used to fulfil the demand of all of the group’s subsidiaries across the Middle Eastern Region. Second strategy of the group was completely different from its main competitors. Chabros International did not focus on few product lines instead its differentiating point was its wide variety of products. Most of Chabros’ competitors were offering at most 10 to 12 kinds of wood whereas, Chabros was offering more than three dozen kinds. In addition to this, each company in the market offered only one or two qualities of each kind of wood; however, Chabros offered four qualities of each kind. So, where a normal wood trader was offering twenty to twenty five varieties, Chabros International Group was offering more than 125 varieties. This was a major reason behind Chabros becoming a popular choice for customers. Chabros was able to maintain such variety of products mainly because of the diversity of its suppliers. The company was sourcing its raw materials from around the world. Countries like Italy, United States, Australia, Germany, and many Asian countries. The European dice produced by the group was one of the most popular among the Middle Eastern Clients.
Chabros International Group lagged significantly behind in implementing a comprehensive marketing strategy, which was the core reason behind its inability to become the top player of the region. Despite, reaching a US$100 million mark in its revenue, the company never felt the need of employing a sophisticated marketing team instead it relied on traditional tools of developing business like offering discounts and payment flexibility etc. According to the management of Chabros International, flexible payment mechanism was one of the key strategies to attract customers. Many clients were given the facility to pay even after the pre-determined period of three months, though it was considered as a recognized strategy to attract clients, but it was one of the many reasons behind cash flow issues.   

CHALLENGES FACED BY CHAMBROS INTERNATIONAL GROUP

Global Economic Crisis

Till mid-2007, Chabros International Group was performing exceedingly well, but because of the global economic recession of 2008, many international markets were severely affected resulting in a decrease in the profit margin for companies depending on those markets. Chabros had a similar case as nearly 50% of the total revenue was derived from the Dubai subsidiary. In 2008, Dubai received a setback of 30%, which ultimately affected the income of the entire company. Therefore, this reliance of Chabros International Group on a single market turned out to be a great issue for the company. The second challenge for Chabros International was to absorb the entire production of its Serbian Manufacturing facility. Since, the facility was acquired to control the demand in an efficient manner; therefore, it was necessary for the company to manage the facility effectively and not make it an additional burden. In 2009, all regional subsidiaries combined were only able to exhaust 50% of the production of the Serbian facility, which was certainly not enough to generate a reasonable profit as only the salaries of workers was around US$400,000.

Increasing Exchange Rate

In addition to this, another challenge faced by the company was the increasing exchange rate of Euro vs. dollar. In 2008, Euro reached $1.55 because of which sourcing products from Russian suppliers became more feasible to the company than from its own Serbian facility. The difference in price was so significant that Chabros International Group had to cut down its production by a considerable margin in Serbian production facility and rely majorly on non-European suppliers. Because of this factor, many workers were idle in Serbian facility and their presence was not justified. The top management of the company was facing a dilemma of whether to cut down the labour in Serbian facility or to use a different tactic for utilizing the remaining production.

Lack of Marketing Strategy

Moreover, another concern for the Chabros group was poor brand equity. Despite the company’s presence in the region for years, many few people apart from core clients were able to recognize its brand name. Chabros International had made no significant efforts related to marketing and promotion of its brand name and products. So, a key challenge for the company was to establish its brand name through comprehensive marketing strategies. Furthermore, Chabros International had failed to define its core target market. In each country, the company was targeting different set of customers because of which the quality and quantity of the consignment differed to a great extent. For example, in countries like Saudi Arabia, Qatar, Oman etc., the company was targeting contractors whereas, in Lebanon, Egypt etc., the company was focusing on wholesalers, retailers, and individual customers, and in Europe, only the retailers were the target market. This difference in the target customer was a cause of confusion for sales division people. In fact, even end users were not aware of how to access the company’s products.  

Failure of Current Strategy

Last but not the least, a new challenge that emerged during the global financial crisis was of reformulating the entire organizational strategy of the company. The profit margin of the company has been decreasing during the last couple of years. At present the profit margin has dropped to 4.2 percent from high of 6.8 percent. The top management is concerned regarding the future plans as the current strategy is not feasible anymore because of poor economic situation. Either the company could enter new markets, in order to diversify the risk, or it could develop its products and reduce the variety so as to become competitive again. Both of these strategies had significant consequences; therefore, it was essential to plan properly so as to avoid future pitfalls.    

SWOT ANALYSIS

To develop a strategic plan for the future, it is necessary to understand the current standing of the company. In this regard, SWOT analysis will assist in evaluating strengths, weaknesses, opportunities, and threats of the company. This tool will provide a perspective of both internal and external situation of the company (Humphrey, 2005).

Strengths

The biggest strength of the company, at present, is its expertise in recognizing the best quality of the wood from the lot. The owner, as well as the top management, takes a great pride in this regard. Their product is also recognized as one of the best, in every market, giving them a substantial competitive advantage. In addition to this, currently, the group is operating in seven countries and is recognized as a major regional player because of its capability to source goods from various countries, around the world. Moreover, having its own production facility has allowed the company to control the demand and supply of the wood to a great extent. Now, the company is not only a trader, but also a manufacturer and a distributor, which gives the company a considerable edge over its competitors.

Weaknesses

Though, the company was performing well till recently, but because of some short-sighted decisions, and major global economic recession, some key weaknesses of the company have been terribly exposed in front of the industry. First of all, the decision to acquire the entire production facility just to fulfil the demand of regional subsidiaries has backfired as the demand has decreased significantly because of the recession. Secondly, poor performance of the Dubai subsidiary has resulted in a major negative effect on the entire company. Third, the company has also failed to carry out a proper marketing strategy because of which the brand equity is weak. Despite the presence of the company in seven countries, even then clients have a hard time in recognizing the brand.

Opportunities

Considering the current strengths of Chabros International Group, it has various opportunities available. For example, the company can expand to other regions of the Middle Eastern, North African and European community like Morocco, Algeria, Turkey, Spain, Denmark etc. Chabros International is already exporting to all of these regions, and they have a huge demand for wood products. In addition to this, Chabros International can implement a comprehensive marketing plan, which will assist the company during the upcoming years. Once the brand equity is established, the company can improve its sales to a great extent.

Threats

The decreasing profit margin is one of the major threats for the company. The cost of production has increased in Serbian production facility because of the increasing exchange rate of euro; therefore, the company is left with no option other than to source its products from other suppliers. Another threat of the company is that it has failed to benefit from its recent vertical integration strategy. At present, Chabros International is not only a trader, but also a manufacturer; therefore, it is essential to establish a harmony between both of these roles so as to profit from the entire operation.     

FUTURE GROWTH OPTIONS

Since, many international markets are going through global economic crisis up till now; therefore, it will be a great risk to enter new markets, at this moment. Though, markets like Morocco, Algeria, Iraq, Libya etc. have great potential based on their demand for wood and consumer buying power, but it would be wise to focus on stabilising current markets rather than entering new ones. In addition to this, the current strategy of Chabros International is also not feasible in new countries as the group has little knowledge of credit ratings of customers and with the current method of payment might result in creating issues for the company. Moreover, Chabros International brand is little known in countries outside of its operation; therefore, entering a new market without proper marketing would not be a good idea as there is already a tough competition, in those regions.
So, at present, an ideal strategy would be to penetrate existing markets rather than developing new markets (Farris, et al., 2010). The company has succeeded in capturing a significant market share in veneer category as it has a greater than fifty percent market share in five regions, but in lumber wood category, there is still a great potential. Countries like Saudi Arabia, Lebanon, Oman, Egypt etc. have a single digit market share in lumber category. So, if the company can focus on increasing its market share in this category then it would be able to stabilize its current operation, which is also the need of time. Once, Chabros International start improving it performance in regional subsidiaries and signs of recessing start fading then it can certainly ponder upon expanding in new markets.  
Apart from this, another growth option would be to increase exports to potential markets. Entering a new market require substantial investment from the company, but by building partnerships with any local distributor in foreign countries, Chabros International would have an opportunity to absorb the excess production of its Serbian facility. In addition to this, Chabros International can also consider making a joint venture with any local or foreign firm to enter a new market. This strategy would not only reduce the risk to half, but would also increase the expertise by sharing resources.

RECOMMENDATIONS

First of all, the need of a marketing plan cannot be emphasized enough. Any company, irrespective of its nature of the industry and type of target market, requires a proper marketing plan, in order to promote its products. Without communicating to customers about offerings of the company, it can never tap the complete potential target market. So, first priority of the company should be to prepare a marketing team and assign them the task of promoting the company’s products by using modern advertising techniques.
Secondly, one of the key competitive advantage of the company was its role as a trader. As evident from the case study, that funds of a manufacturer get stuck in the supply chain for three to four months before the product is even sold. So, by offering the facility of flexible payments to its clients, the company is forgoing its competitive advantage as the rolling of cash takes longer than usual. Managing cash flows effectively is one of the key role of the management, particularly in times of global financial crisis. So it is necessary for the company to change its payment mechanism and move towards an organized method. Apart from this, once, the company will have a proper marketing plan, it will not be needing any such mechanism to attract customers.
Third, Chabros International has decreased its reliance on Serbian production facility because of its high prices without realizing that the entire saving is lost in bearing the additional expenses of Serbian facility. The company should reassess its production strategy for Serbian facility as there is huge fixed cost involved in it. In addition to this, the acquisition of the Serbian facility was made, in 2007, and the group is yet to derive a substantial benefit from this facility. Therefore, it is crucial to bring a right balance between sourcing from Serbian facility and other Russian facilities.

CONCLUSION

There is absolutely no doubt that Chabros International Group has emerged as a major regional player during the last decade. It has captured a significant market share in many countries, but there are still many areas where there is a room for improvement. There are certain areas, which are of top priority for the company as they will have an immediate effect on it performance. First of all, there is an urgent need of a marketing team, which should be responsible for formulating a strategy based on the profile and needs of target customers. This team will promote products of the company, which will ultimately allow to tap as many potential customers as possible. Apart from this, it will also spread the brand name in neighbouring markets, which will ease up the entry whenever the company decides to enter those regions. Second area, which requires immediate action is the payment mechanism. Considering the financial crisis, the best method of moving forward would be to manage cash flows effectively. At present, clients are taking full benefit of the flexible payment method and payments are made months after the delivery of the consignment. By organizing its payment mechanism, the company can use the cash flow for marketing and promotional activities.
Apart from these short term actions, Chabros International need to make some changes for its long term progress, which would require evaluating the current strategy and formulating a new one. First of all, the group, over the years, has relied heavily on its Dubai Subsidiary. Ideally, the company should diversify its risk by investing in multiple markets so for long term, the company should increase its exposure in other MENA countries and can also consider investing in new regions. Other than this, Chabros has a wide variety of product line, which is uncommon in the wood industry. Carrying such a wide variety requires huge stock keeping, which blocks the funding power of the company; therefore, Chabros should narrow down its focus on fewer product lines so that it can benefit from economies of scale.
 

References

Farris, P. W., Neil, T. B., Philip, E. P. & David, J. R., 2010. Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. New Jersey: Pearson Education Inc..
Humphrey, A., 2005. SWOT Analysis for Management Consulting, s.l.: SRI International.

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