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Ateneo de Davao University

School of Business and Governance


Master in Business Administration

STANDARD FRUIT COMPANY IN NICARAGUA


A Case Analysis

In partial fulfillment of the requirements in


BA 911 – Strategic Management

Submitted by:
REA A. DIVINAGRACIA
MICHAEL P. OMAMBAT

Submitted to:
DR. STEPHEN A. ANTIG, CPA, MBM

September 13, 2018


A. COMPANY BACKGROUND

Standard Fruit Company started in 1899 when a small New Orleans partnership began

importing bananas from Honduras. By 1904, it owned plantations and had received concessions

from Honduras to build more than 300 kilometers of railroads and to open river mouths to

transport bananas more efficiently. It expanded into Nicaragua in 1922, Mexico in 1923,

Panama in 1926, and Haiti in 1934.

Nicaragua is the largest Central American republic with 148,000 square kilometers. It is

about the same size as England and Wales. Mountainous upland in its center divides the

Atlantic from the Pacific lowlands. The Pacific coastal region had over 20 active volcanoes

whose ash enriched the soil in agriculturally active Leon and Chinandega.

Standard Fruit establish its first Nicaraguan banana operations on the Atlantic coast in

1922. In return for a government concession of 50,000 acres, Standard invested more than $13

million in fixed assets, including more than 80 miles of railroad development, a wharf, port,

hospital, worker housing, and offices. During its lifetime, Standard Fruit was the largest

American enterprise ever established in Nicaragua and by 1932 bananas accounted for 49% of

Nicaragua’s exports.

Also, it formed uniformed limited partnerships with each of its growers: the landowner

held an 80% share and standard held the rest. It was stipulated in the agreement that the

company was to secure sources of financing for the heavy equipment in infrastructure and

would guarantee the partnerships’ loans. Until debts were paid off (five to seven years later),

Standard was given majority voting rights in the partnership.


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B. STATEMENT OF THE PROBLEM

How should Standard Fruit Company continue its operation in Nicaragua considering all the
factors that affect the company?

C. OBJECTIVES

The following are the objectives of the study. To wit:

1. To ascertain and evaluate the internal and external forces that affect the operations of

the company;
2. To evaluate the effectiveness of existing policies and agreement that were put in place

by the government; and


3. To formulate adaptive strategies that could help the company continue its operations in

Nicaragua and expand its business

C. AREAS OF CONSIDERATION

SWOT ANALYSIS

1. North American market leader in 1973 with 40% share


2. Largest single contributor to Castle & Cooke’s earnings in 1973, 1975, 1976 & 1980
3. Previous experience in Nicaragua
4. Unique structure of new organization
5. Quality of its management group
6. Incentives for foreign investment including duty-free imports and partial exemption from municipal taxes
7. Refusal to pay any bribes to public officials
8. Decreased worker turnover because of free housing
9. Largest American enterprise ever established in Nicaragua
10. Banana production is considered to be extremely important because it is unseasonal
1. Bananas are susceptible to diseases (i.e. Black Sigatoka)
2. Chinandega is very inhospitable area in which to grow a good-quality banana
3. Unexpected costs
4. Worker turnover was enormous
5. Seasonal employment often left banana farms
6. Lost 15-20% of production through deficient agricultural practices and worker efficiency
7. The fruit can be easily replaced at an equal or lower cost
8. Government poorly understood the industry’s economics
9. Banana’s delicacy and perishability present unique demands in cultivation and handling
10. Banana industry needs a large, dependable labor supply and major capital investment in infrastructure.

1. Nicaraguan economy is predominantly agricultural


2. Concentrated production and heavy investment in infrastructure
3. Provides employment in an underemployed area
4. Transferring managerial skills to native Nicaraguans
5. Protection on Nicaraguan growers’ property and contractual rights
6. United limited partnership with the growers
7. Good infrastructure and communication network
8. New government in Nicaragua
9. Future expansion
10. Increase demand in the market

1. Several natural hazards such as drought, chill, flood from hurricane or seasonal rains etc.
2. Widespread of diseases in the plantation
3. Nicaragua’s uncertain political future
4. Scarcity of water in Chinandega
5. Labor market was extremely tight during the cotton harvest
6. Unions vied for control of the farmers’ workers
7. Upcoming revolution
8. Workers lifestyle
9. National strikes
10. Inflation and foreign exchange

D. INTERNAL / EXTERNAL (IE) ANALYSIS

INTERNAL ANALYSIS
Ratin Weighted
Strengths Weight
g Score
1 North American market leader in 1973 with 40% share 0.04 4 0.16
2 Largest single contributor to Castle & Cooke’s earnings in
0.06 4
1973, 1975, 1976 & 1980 0.24
3 Previous experience in Nicaragua 0.05 3 0.15
4 Unique structure of new organization 0.05 3 0.15
5 Quality of its management group 0.05 3 0.15
6 Incentives for foreign investment including duty-free imports
and partial exemption from municipal taxes 0.04 3
0.12
7 Refusal to pay any bribes to public officials 0.03 3 0.09
8 Decreased worker turnover because of free housing 0.05 3 0.15
9 Largest American enterprise ever established in Nicaragua 0.07 4 0.28
1 Banana production is considered to be extremely important
0.04 3
0 because it is unseasonal 0.12
Ratin Weighted
Weaknesses Weight
g Score
1 Bananas are susceptible to diseases (i.e. Black Sigatoka) 0.06 1 0.06
2 Chinandega is very inhospitable area in which to grow a
good-quality banana 0.06 1
0.06
3 Unexpected costs 0.03 2 0.06
4 Worker turnover was enormous 0.03 2 0.06
5 Seasonal employment often left banana farms 0.05 1 0.05
6 Lost 15-20% of production through deficient agricultural
practices and worker efficiency 0.06 1
0.06
7 The fruit can be easily replaced at an equal or lower cost 0.05 1 0.05
8 Government poorly understood the industry’s economics 0.08 1 0.08
9 Banana’s delicacy and perishability present unique demands in
cultivation and handling 0.05 2
0.10
1 Banana industry needs a large, dependable labor supply
0 and major capital investment in infrastructure. 0.05 1
0.05
Total IFE Score 1.00 2.24

According to the analysis of IFE, Standard Fruit Company has a score of 2.24. The company

has an average internal position. Also, it shows that the company is internally strong and good

enough. Thus, the company can overcome its weaknesses by using its strengths effectively.

EXTERNAL ANALYSIS

Weigh Ratin Weighted


Opportunities
t g Score
1 Nicaraguan economy is predominantly agricultural 0.06 4 0.24
2 Concentrated production and heavy investment in
0.06 4
infrastructure 0.24
3 Provides employment in an underemployed area 0.04 3 0.12
4 Transferring managerial skills to native Nicaraguans 0.05 3 0.15
5 Protection on Nicaraguan growers’ property and contractual rights 0.06 2 0.12
6 United limited partnership with the growers 0.05 4 0.20
7 Good infrastructure and communication network 0.06 4 0.24
8 New government in Nicaragua 0.06 1 0.06
9 Future expansion 0.05 4 0.20
1 Increase demand in the market
0.04 4
0 0.16
Weigh Ratin Weighted
Threats
t g Score
1 Several natural hazards such as drought, chill, flood from
0.05 4
hurricane or seasonal rains etc. 0.20
2 Widespread of diseases in the plantation 0.06 3 0.18
3 Nicaragua’s uncertain political future 0.06 1 0.06
4 Scarcity of water in Chinandega 0.04 4 0.16
5 Labor market was extremely tight during the cotton harvest 0.04 3 0.12
6 Unions vied for control of the farmers’ workers 0.05 2 0.10
7 Upcoming revolution 0.05 3 0.15
8 Workers lifestyle 0.04 4 0.16
9 National strikes 0.04 2 0.08
1 Inflation and foreign exchange
0.04 3
0 0.12
Total EFE Score 1.00 3.06

According to the analysis of EFE, Standard Fruit Company has a score of 3.06. The company

has a high external position. The company should take advantage the opportunities to address

and minimize or prevent future threats.

Based on the internal and external factors evaluation, the results show that Standard Fruit
Company should focus on GROW and BUILD region. This means that the company should use
Intensive (Market Penetration, Market Development and Product Development) or Integrative
(Backward Integration, Forward Integration, and Horizontal Integration) strategies which ever is
most appropriate.

E. ALTERNATIVE COURSES OF ACTION

1. Strengthen and upgrade the role and level of involvement of Nicaragua’s new

government in terms of providing support to the banana sector in general and the

export of bananas in particular.


Pros:

1. To increase efficiency and competitiveness for adequate development of the

banana sector

2. Nicaraguan grower’s property and contractual rights will be protected.

3. The government will have the time to understand the industry’s economics.

4. To build long-term commitment between the government and the company.

5. Fair trade

6. To amend the sharing agreement / contract between the parties involved.

Cons:

1. Time-consuming because it will undergo series of negotiations

2. Modernize agriculture to optimize productivity within limited resources, improve

quality of logistics and communication, offer product at competitive prices and

provide market intelligence and market information

Pros:

1. Reduce costs through investments in the modernization of the plantation


2. Better marketing and improved production technology
3. Provide services in exporting, importing and trade regulations
4. Identifies opportunities to improve cost efficiencies
5. To shield from any calamities and diseases

Cons:

1. It will require large amount of financing.


2. Time-consuming.

3. Terminate Standard Fruit Company’s operations in Nicaragua and increase its

production in Honduras and Costa Rica

Pros:
1. To avoid impending problem in politics and its effect in the economy and the

business’ operations.
2. To meet the demand in some other countries in Central America

Cons:

1. Decrease in revenue
2. It needs additional manpower
3. Increase in unemployment rate
4. Breach-of-contract

F. CONCLUSION

In order to address the objectives stated above, it is necessary for Standard Fruit

Company to do the alternative courses of action 1 and 2 as these will give the company the

opportunity to continue its operations and build positive relationships in Nicaragua and to

improve its market share. Though the company experienced a lot of difficulties therein, it is not

the best strategy to simply terminate its operation because they already have established its

core and it only needs for some improvements. Thus, the best strategy in order to address the

issues faced by the company is to strengthen and upgrade the role and level of involvement of

Nicaragua’s new government in terms of providing support to the banana sector in general and

the export of bananas in particular. And also, by modernizing agriculture to optimize productivity

within limited resources, improve quality of logistics and communication, offer product at

competitive prices and provide market intelligence and market information

G. RECOMMENDATION

To further the improvements of the Standard Fruit Company, we suggest the following:

1. Invest in upgrading access roads and post-harvest handling systems and infrastructure to

foster increased productivity and better fruit quality.


2. Conduct a research and training extension training on better agronomic management

practices and post-harvest operations.

3. Improve agricultural extension systems to promote increased technical efficiency and greater

productivity.

4. Invest in research to combat diseases such as Black Sigatoka and in irrigation to improve

productivity.

5. Secure risk management tools, including insurance to mitigate the risk that the company will

face from “acts of God” such as hurricanes and inclement weather.

6. Develop potential revenues with an emphasis on improved marketing through market

differentiation and promotion of added-value products for niche markets.

7. Optimize the utilization of resources to create better framework conditions for the production

and marketing of value-added product.

8. Establish joint partnerships and relationships with importers and wholesalers.