Surya Nepal Private Limited

Section 1

Profile of Surya Nepal Pvt. Ltd.

1.1             Introduction of Surya Nepal Pvt. Ltd.

Surya Nepal Private Ltd. was established in 1986 with a Vision of "Growth through Quality and Excellent". It is formally known as Surya Tobacco Company. It is a joint venture between British American Tobacco (BAT) holding 2%, ITC Limited with 59% and Nepalese entrepreneurs holding 39% shares. It has its factory in Simra, with the head office located in Kathmandu.

SNPL has given a new shape to the domestic cigarette market. The company initially started its production with two brands of cigarette, Naulo and Bijuli of which Naulo was later dropped. At present the brand under its wings are Surya, Shikhar, Khukuri, Bijuli and Chautari each of which has their own brand extensions. Surya is the highest selling brand in Nepal at the premium segment where as Khukuri is general segment brand.

SNPL has over 70% to 75% of the total market share of the cigarette industry in Nepal in terms of value. In the premium segment it commands about 95% of the total market share. In the high segment sales is about 82% to 85% while in the lower segment it's about 60%. In terms of brands and sales, its brands are the most sellable brands in Nepal. SNPL has the largest and strongest distribution network coverage among all the FMCG companies in Nepal, covering all over Nepal. 75000 retailers are served through 6000 secondary wholesalers and 60 whole distributors.

Mission

·         To create sustainable competitive advantage for the buyers by providing a superior sourcing solution.

·         To provide a superior smoking experience to all smokers of our brands as well as consumers of other tobacco products.

Vision

·         To be an internationally bench-marked multi-business corporation in Nepal, delighting global and domestic customer with a proud “Made in Nepal” label and accounting for the 2% of country’s GDP.

·         To be a partner in national building and create enduring value for all stakeholder.

Objectives

·         To enhance the quality of cigarettes

·         To be a market leader in cigarette industry of Nepal.

·         To expand the business and increase the profitability.

1.2             Major products and services

The business includes manufacturing and marketing of cigarettes and readymade garments in Nepal as well as exports of ready-made garments with a total turnover of over US $100 million.

•     Cigarette

The various cigarette products of Surya Nepal are:

 Surya Classic

Surya Luxury Kings

Surya Lights

Shikhar

Shikhar Lights

Khukuri Filter

Bijuli and

Chautari

These cater to a wide spectrum of consumer tastes and preferences. It has superior internationally benchmarked quality, strategic and consistent positioning. The largest distribution networks of Surya Nepal in the country comprise over 5,000 wholesalers, and over 85,000 retailers. These contribute towards making Surya Nepal one of the most efficient and effective marketing companies in Nepal. Today, it is the key player in the cigarette tobacco production in the country.

•     Garment

The various garment products of SNPL are:

John Players

Springwood

Surya Nepal’s garments division is the first facility operating on 100% automated cutting for yarn-dyed fabric in the entire SAARC region. After the success of the John Players range of branded men's wear, the company now introduces the Springwood range of branded men's wear.

1.3             Capital Structure

The capital structure of SNPL is as follows:

Heading	Amount (Rs.)
Authorized capital	65,000,000
Issued capital, subscribed & paid up	20,160,000

Capital share of the shareholders can be summarized as

Shareholders	Share (%)
British American Tobacco (BAT)	2%
ITC	59%
Nepalese entrepreneurs	39%

           

1.4 Company Structure

1.5  Recent news and events

1.      ITC arm Surya Nepal to open new factory in the west Nepal

On Jan 27^th 2011, SNPL declared to establish a new cigarette plant in Tanahun district in western Nepal in an attempt to expand its business. It planned to start the new manufacturing plant with an initial investment of Rs 15 crore which is said to be operational in two year’s period, according to sources.

-          (Source: http://net2nepal.com/2011/01/28/itc-arm-surya-nepal-to-open�new-factory-in-the-west-nepal-7487/)

2.      Surya Nepal awards five social entrepreneurs

On 21^st November 2011, SNPL conferred the Surya Nepal Asha Social Entrepreneurship Award 2011 on five social entrepreneurs. According to the jury, the winners were recognized for their contribution to the social, economical, educational, and vocational and health sectors, among others. The award was presented by Surya Nepal MD Sanjeev Keshawa, industrialist Padma Jyoti and Luna Shrestha, founding director of ChangeFusion Nepal. The Recipients of the award are Ram Sapkota from Mountain Delights Treks and Expeditions and Tukee Nepal Society; Sabita Maharjan from Kirtipur Hosiery Industries; Shyam Badan Yadav from Kalash Milk Industry; Viajaya Development Resource Centre; and Chhahari Services.

-          (Source: http://www.ekantipur.com/the-kathmandu-post/2011/11/21/money/surya-nepal-awards-five-social-entrepreneurs/228503.html)

3.      Surya Nepal shuts down garment factory

On 17^th August - SNPL shut down its garment unit permanently due to labour unrest and cancellation of orders by importers.

-          (Source: http://www.ekantipur.com/2011/08/17/headlines/Surya-Nepal-shuts-down-garment-factory/339277/)

4.      Surya Nepal plans switchover to FMCG

On 9^th September, 2011, Ravi KC, corporate vice president of SNPL has hinted that it could jump into the manufacturing of fast moving consumer goods (FMCG), like noodles, in the same place where it operated garment factory. “Once the workers cooperate and all the liabilities are settled, we will formally disclose about our next venture, the size of the investment and employment opportunities,” said KC.

-          (Source:http://www.myrepublica.com/portal/index.php?action=news_details&news_id=35771)

Section 2

Analysis of Environment

2.1 Assessment of Internal Environment

Since, Surya Nepal came into operation in 1986 as a tobacco industry (manufacturing and distribution) and diversified into Garments in 2004 (now permanently closed) and Safety Matches in 2007, It has been planning to manufacture fast moving consumer goods (FMCG), like noodles, biscuits and others. Likewise, it has already decided to establish new manufacturing plant in Tanahun district.

The internal environment analysis seeks to identify the strengths and weakness in business.  Factors those are internal to the business, some of which can be easily changed or improved upon are:

1. Human Resource
2. Finance
3. Technology
4. Raw Material Source
5. Brand Image

Human Resource

Surya Nepal philosophy affirms the Company's belief that people are its major assets, and that together they will sustain Surya Nepal as an institution with vitality and perpetuity.

·         Respect for People: It is result –focused, sets high performance standards, respects and value people and uphold humanness and human dignity. It believes in acknowledge that every individual brings different perspectives and capabilities to the team.

·         Capability Building: It conducts capability building programs as

·         Recruitment /Induction of new entrants

·         Exposure to skills/operatives on new technology & best work practices

·         Introduction of quality circle/SGA/5-S.

·         Productivity /Quality month

·         Attendance award

·         Communication: To enhance the communication inside organization, it follows:

·         One to one interaction with employees

·         Daily cross functional team meeting

·         News bulletin “Surya Kiran”

·         Training & Development: Under training and development programs, it includes:

·         Competency mapping & training as per gap identified.

·         Training on Product knowledge to new entrant.

·         Training on SGA/5-S through expert

·         Outbound training program for all employees

·         Employee Engagement:

·         Children painting

·         Women empowerment through vocational training (Sewing, candlle making at Surya Niwas.

·         Training on vermi composting for household waste management at SuryaNiwas.

·         Stress management through Yoga classes

·         Fitness club at Surya Niwas.

Finance:

The SNPL depends upon various financial institutions like commercial banks, development banks, finance companies, insurance companies, capital market institutions etc for supply of funds and insurance companies. The major suppliers of funds to SNPL are Nabil bank ltd, Standard Chartered bank ltd. SNPL has taken insurance policy from National Insurance Company, Oriental insurance company and Himalayan General Insurance Company.

Technology:

SNPL uses statistical analytical tools and enhances process capability through NV study/Cp & Cpk. It uses highly specialized and automated plant and machinery for the production of cigarettes. It relies on both the capital intensive and labor intensive technologies but it focuses more on automation/online monitoring system to avert human intervention.  It believes in culture of building continual improvement through encouragement of innovation/creativity. It timely update technology to leverage Quality/Productivity/Energy saving.

In past it used to depend upon technician wise tool boxes which were pretty difficult to locate but now-a-days, it uses centralized shadow board which are easy to locate.

Raw Materials

The tobacco is homegrown in the terai region for i.e. in Bara, Parsa, Sarlahi, Dang and Chitwan which has the weather- wet, hot and humid and topography plains, suitable for the cultivation of tobacco. The raw materials for making cigarettes for SNPL are imported from the Virginia on regular basis which are of the best quality.

Suppliers

Suppliers are individual or organizations who supply inputs and resources to the business organizations. Supplier environment that influence the business activities are cost availability and continuity of supply of raw material needed in the production. cost and availability of finance, energy, human resources and cost availability and the existence of sources and means for supply of plants and machinery, spare parts and after sale service and the existence of substitute materials, bargaining power of suppliers and infrastructural support for the availability
of different factors of production. The major supplier of raw material (tobacco) in SNPL is India. The simple packaging is done in Dhankuta whereas the sophisticated packing is done in third countries and the cigarette paper used for this packaging is also of the foreign countries where the packaging is done.

2.2 Assessment of External Environment

General Environment affects the organization and its task environment. It is also called the remote environment. It is composed of a set of forces that are outside the organization's operating system i.e. political, economical, social, legal and technological factors. These factors are uncontrollable. It is presents the opportunities, threats and constraint for the organization.

Political Environment

Political factors define the legal and regularity parameters within which firms must operate. The direction and stability of the political factors are a major consideration for managers for formulating company strategy. The SNPL has also been affected by the political factors of Nepal. The political factors have determined the following constraints in the smooth functioning of the SNPL.

·         The political instability in Nepal has also affected the SNPL.

·          The government of Nepal has placed different tax regulation on the cigarettes   

 sales in Nepal.

·         The cigarettes are not allowed to be advertised in the electronic media like  television and radio. They lead to lower coverage towards the consumers of its products.

·         The government decision regarding the tax rate, interest rate, minimum wage legislation affects the pricing policy of the company.

·         The government awareness programs on injuries caused due to smoking of  cigarettes has also been problem for SNPL.

Economic environment

Economic factors concern the nature and direction in which the firm operates. Because the consumption patterns are affected by the relative affluence of various market segments, each firm must consider economic trends in the segments that affect its industry. The economic factors affect on the SPNL are as follow:

·         The existing market rate affects the pricing policy and the economy of the SPNL.

·         The inflation rate and recession also affect the company.

·         The level of disposal income of the costumers also affects the company growth and strategy formulation

·         The propensities of the people to spend on cigarettes also affect the economic decision of the company.

·         The import duties are high in Nepal which restricts the company from importing more and it tern affect the economy of the SNPL.

Social Environment

Social factors that affect a firm involve the belief, values, attitudes, opinion and lifestyle of persons in the firm's external environment as developed from cultural, ecological, demographical, and educational and ethical conditioning. Social, cultural, demographic and environmental changes have a major affect upon all products, services, markets and customers. The social forces are more or less dynamic. The SNPL is also affected by the social changes and the factors. The social factors that have placed constraint on the SNPL are as:

·         As cigarette is not assumed as a favorable product by the society, there is hesitance to talk about it and consume it.

·         The smoking in Nepal has not yet been so freely adopted and the people often hide while smoking.

·         Company's social and moral ethics are also causing promotional difficulties for its sales i.e. as good corporate citizens; the company doesn't prefer smoking to the citizen below 18 years.

·         Due to the demographic changes in the population most of people use cheaper brands for which the market for premium brands is very low in terms of value.

·         There are some businessmen who do not like to make profit from selling cigarettes brands which destroy the company opportunity of creating the new market.

·         Women smoking cigarettes in Nepal are also not accepted by the society hence the SNPL has the disadvantages of creating new consumers.

Technological Environment

The technological factors involve the technological changes that help to avoid obsolescence and promote innovation. The technological factors suggest the adoption of creative technology that creates the possibilities for new products, for improvement in the existing products or in manufacturing and marketing techniques. The SNPL is also one the organization in Nepal that adapts and uses the latest technology for marketing and manufacturing the product. The SNPL invest lots of amount on the R&D activities to find out the customer’s needs and preferences and also determines the latest and possible technology to make the product. The SNPL has been launching new products in regular interval of time to satisfy the different customer's requirement. The brands like Surya light, Shikhar light and menthol are the outcome of the creative technological wok of the SNPL. The SNPL has adopted all the latest technology for the smooth functioning of its business. From marketing to finance, from manufacturing to distribution the SNPL has all the latest technology use. The SNPL also have the linkage of its Kathmandu head office with its Simra factory. The order placed in the Kathmandu office are directly send to the Simra factory for the dispatch due the networking between the factory and the office.

Legal Environment

Laws protect business firms from unfair means. On the one hand, this helps to protect the copy right, patent right and other issues. Legislative framework thus creates both opportunities and threats for business. However, in case of tobacco companies i.e. Surya Nepal, government has prohibited for advertisement on public media. Government of Nepal, Ministry of Health and Population, has given high priority to promotive health services by specifying education and information about the dangerous of smoking.

The National Health Education, Information and Communication Centre, Ministry of Health and Population, has drafted The Smoking (Prohibition & Control) Act, 2058.

In order to reduce the consumption of tobacco products the National Health Education Information and Communication sector (NHEICC) has been carrying out several anti-tobacco mass media activities. These activities have been reducing the domestic market.

Legal action against tobacco:

·         Excise tax on tobacco products: Tobacco products are levied excise tax for two reasons. One is to raise revenue and the other is to discourage consumption.

·         Health warning: Requirement of putting warning labels on tobacco-product packaging and advertising as "Smoking is injurious to health".

·         Health tax on tobacco products: Two paisa per stick of cigarette from July 15, 1994.

·         Mass information: The NHEICC, MoHP is primarily responsible for anti tobacco IEC activities. It produces print, audio and audiovisual materials with the objective of educating the audience about the harmful effects of tobacco use.

·         Every year on 31st May World No-Tobacco Day is observed.

·         Ban on smoking in public places

·         Ban on advertising and promotion of tobacco products since 14 December 1998

·         The Smoking (Prohibition & Control) Act, 2058 (2001/02)

Likewise, international pressure on tobacco control is raising with the initiation of WHO, and other NGOs/INGOs. Prohibition of all forms of advertisement, promotion and sponsorship is growing worldwide. These shows, the Surya Nepal Company Limited have to face with so many threats in the future.

Environmental Analysis

Evidence indicates irreparable environmental damage from tobacco agriculture, particularly when associated with the deforestation necessary to increase farmland for tobacco growth and cure tobacco plants. 

Environmental degradation also results from the tobacco plant leaching nutrients from the soil, as well as pollution from pesticides and fertilizers. The manufacturing of tobacco products also produces an immense amount of waste.

Tobacco Company produces millions of kilograms of chemical waste and manufacturing waste which litters in streets and waterways.

Hence, from the environmental view, Tobacco industry is taken as a cost to government rather than income source.

2.3 Competitive Analysis: Porter’s Five Force Model

Five- forces model is developed by Michel Porter, a Harvard professor. According to him successful manager do more than simply react to the environment. Porter’s five forces model of competitive analysis is a widely used approach for developing strategies in industries.
The intensity of the competition among firm varies widely across industries. The five forces in the cigarette industry are:

 

                                                                                                                    

Fig: Porter’s five forces model of competitive analysis

Rivalry among existing firms

Rivalry among competing firms is usually the most powerful of the five competitive forces in terms of capital, sales, distribution channel and quality. The strategies pursued by one firm can be successful only if they provide competitive advantage over the strategies pursued by rival firms. The rivalry among the cigarette industry in Nepal is very high. There are major competitors of SNPL in the cigarettes industry in Nepal. They are:

Janakpur Cigarette Factory: A government owned company producing Yak, Gaida, Deaurali and Laliguras (Laliguras was later discontinued).

Nepal Tobacco Company: backed up by GTC (Golden Tobacco Company), India producing Gorkha, Nepal Gold Flake and Shangri-la, Yeti etc.

Perfect Blends Pvt. Ltd - A new entrant in the market is an initiative of Chaudhary Group of industries with brand like Gaurav, Sahasi & Pine.

Seti Cigarette Factory has a technical tie up with PMI who is the major distributors for Marlboro and L & M.

Gorkha Lahari Pvt. Ltd: The Company manufactures different brands of plain as well as filter cigarettes. About 20% market share is covered by this company and brands are available all over Nepal. Nepal Gold Flake and Sahara filter are the main brands of the company and others brands are: Bahar Special plain, Bigul plain, Brown filter kings, Gorkha filter, Style filter, Winner filter and Action kings.

SNPL has to compete with above companies in the market. The strategies adopted by SNPL include retaliatory countermoves, such as lowering prices, enchasing quality, adding new products and increasing advertising. The SNPL has been the strongest cigarette company of Nepal.

Potential entry of new competitors

When a new firm easily enter into a particular industry, the intensity of competitiveness increases. The potential entry of the new firm in the cigarettes industry of Nepal is low because of the following reason.

·          The capital requirement to establish a cigarette company is very high.

·         The government rules and regulation regarding opening a new cigarette company is very tough and time consuming.

·         The new firm need to be well equipped and should be able to compete with the SNPL quality and its strong distribution network.

·         The consumers of the cigarettes do not switch to new brand easily.

·         The country infrastructure and political instability also restrict the investor to launch a new cigarettes firm.

·         The new firm might not have the access of the required raw material and might also lack the required experience.

Potential development of substitute product

In many industries, firms are in close competition with producers of substitute products in other industries. In the cigarettes industries of Nepal the SNPL has also got to compete with the substitute products of its brands. The substitute products for the SNPL brands are the products like Khaini, Gutka and Chewing gum. The presence of substitute product has put a ceiling on the price that can be charged before consumers will switch to the substitute product. The market share of the substitute products of the cigarettes is not very high. SNPL has not yet got to work hard to kill the substitute product because the substitute product has not yet captured the market and is also not able to attract the consumers of the cigarettes.

Bargaining power of suppliers

The bargaining power of the suppliers affects the intensity of the competition in an industry, especially when there are few suppliers who sell too many, when substitute product are not easily available of the switching cost of raw material is costly. The bargaining power of the SNPL is high in the cigarettes industry because of the following reason.

·         SNPL has a huge distribution network all over Nepal.

·         The demand for the SNPL brands is very high

·         The quality and taste of the SNPL brands are of international class with low and reasonable price.

·         The SNPL has its products extension to satisfy consumer off different need and preferences.

·         The organization selling the SNPL brands earn high amount of profit from the SNPL brands.

·         The SNPL has been able to deliver its product to the distributors and wholesalers as and when required.

Bargaining power of buyers

When the customers are concentrated or large, or buys in volume, their bargaining power represents a major force affecting the intensity of competition in an industry. The bargaining power of the buyers of the SNPL brands is medium because of the following reasons:

·         Buyers purchase large proportions of the SNPL products also earn profit in same proportion.

·         Alternatives suppliers available but do not have the strong market demand and has also not been able to attract the customers.

·         The competitors of SNPL brands are growing rapidly and are trying to cover the market of SNPL.

·         The changing the supplier from SNPL to other company cost very little for the buyers.

2.4 SWOT analysis of SNPL

SWOT analysis is an exercise in which managers identify the organizational strength (S), and weakness (W) and environmental opportunities (O) and threat (T). Once the organization has identified its resources, its need to find out which of its resource are valuable and represent the strength and weakness for the organization.

Strengths:

Old Company Being the nation's one of the oldest company in this field. It is producer of the most popular brands of cigarettes in Nepal. Its popularity in the market has helped it gain the largest share in the market.

Brand Loyalty

As earlier mentioned about its market leadership, its quality has increased its popularity is a tremendous consent which has boosted its brand loyalty to the greatest event in Nepal. Smoker of other brands may shift to its products but it's rarely seen that its consumers shift to other products. Habits die hard, like many of the consumers had said that they have health problems with switching brand too.

Price
It is seen that generally cigarette's price rise with time and quality. Satisfied consumers can pay higher prices to the product. Surya is though gradually changing its prices but the sales is still growing as it has the products for all the segments of the market.

Few competitors

This Company is the market leader. However some of the competitor of its brands is JCF (YAK) and NCF (MARLBORO).

Innovation

SPNL constantly pursue newer and better processes, products, services and management practices. It will help the company to grab better and larger number of customers in the market.

Weaknesses:

Distribution
Distribution plays important role in the sales of products like cigarettes. Huge the distribution channel lead to higher sales. So the company must have a great distribution channel. The retailers of Surya receive the products from the whole sellers or the daily sales service. Though they are doing their work properly, there are creating constraints that are affecting the distributions. These can be overcome only by using wide distribution channel as well as effective daily sales services.

Opportunities

Launch of new brands

Surya has a great market share in the cigarette segment it can easily introduce new brands in the market according to the changing trends.

New filter brands

Since the people are becoming more health conscious and the increasing preference of filtered cigarettes, Surya can also launch different new quality cigarettes like cigar and international brands in the market.

Premium
Since it is the producer of the most sellable FMCG product in Nepal, it has high chance to earn premium in the products as well as other new segments against its

brand images.

Huge capital

It is a joint venture company of Nepal and India, it has huge capital capacity which can be very helpful in grabbing market opportunity.

Threats

Monetary and Fiscal Policy

With the change in tax slabs every year, each brand is placed under different tax slabs according to the cigarettes. So the prices of the brands are liable to increase and change every year. This might result the consumers to switch into cheaper brands or even quit smoking.

Competitors
Currently, the company enjoyed monopolistic leadership in the market, competing only with foreign brands. But due to the government's policy of liberalization and encouragement in the private participation during the 80's new company started coming into the market.

WHO
WHO has been working hard in increasing awareness to consumers about health hazard associated with cigarette smoking habits. This has decreased in the number of smokers to a large extent.

Employee resistance

Employees’ resistance and various trade unions’ activities can impose severe threat to SPNL. For e.g. - the employees of SPNL stood on hunger strike after the official shut down of garment factory of SPNL.

Section 3
Summary and Conclusions

3.1 Summary

SNPL is the number one cigarettes manufacturing and selling company in Nepal. The SNPL is totally consumer focused and manufactures cigarettes according to the need and want of its customer. It has different brands with different taste and quality under its belt. The SNPL has gained the competitive advantage over its competitors because of its brands extension like Surya light, Shikhar lights, mani packets. It has also different brands for price sensitive costumers. Brands like Surya are for the higher segment customer where as Khukuri and Bijuli are for people of the low segment. The joint venture with ITC Ltd. India and BAT has also helped SNPL gained the competitive superiority.

Garments produced by Surya Nepal under the brand name of John Players and Springwood were of premier quality and were being exported to foreign countries including different countries of Europe and domestic market as well. But recently Surya Nepal choose to shutdown their production unit which resulted in unemployment. Around 700 employees were affected by the shutdown and was a threat to Nepalese economy as a whole. Even though it appears as if the production was closed because of the labor problem in the factor but from our study we found that this shutdown was not due to the labor problems, they choose to shut their production so that they could concentrate on FMCG business.

3.2 Suggested Strategies

1.      It should conduct due analysis before starting its operation in FMCG products so that unwanted shut down could be avoided.

2.      It must develop its talent management and knowledge management strategy in order to retain, enhance the knowledge and expertise of staffs and reduce staffs strikes and resistance.

3.      It must concern about the labor issues, and their rights as stated by Ministry of Labor and Transportation.

4.      It may be logical to diversify the products rather than depending upon only tobacco. This is well known fact that tobacco industry has so many pressures from society though it is profitable sector.

5.      Though the Janakpur cigarette factory has been closed, so many companies are emerging in the producing and marketing tobacco like, CG, Nepal Tobacco Company, Perfect Blends Company, Gorkha Lohari and so on. This may lead rivalry and competition among these companies. One of the ways to maintain this leadership is concerning on the quality, cost and sound human capital.

6.      Try to delight its tobacco customers with variety of flavor.

7.      It should develop a healthy labor relationship and co-operate with them in order to establish favorable working climate and do promote a participative culture.