[Case Study] Environmental Analysis – Techniques | Strategies | Forecasting Methods

Table of Contents

1. Case: EID Parry India Ltd—Management of the Environment
2. Concept of Organizational Environment, Its Characteristics and Dimensions
3. External Environment

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“In a time of exploding change—with personal lives being torn apart, the existing social order crumbling, and a fantastic new way of life emerging on the horizon — asking the largest of questions about our future is not merely a matter of intellectual curiosity. It is a matter of survival.”

— Alvin Toffler in The Third Wave

1. Case: EID Parry India Ltd—Management of the Environment

EID Parry is about two hundred thirty-five years old, starting in 1788. The company has become an icon in the sugar industry in India for more than 175 years, surviving wars, famines, epidemics, industrial and technological revolutions, evolving agrarian trends and patterns, and other seemingly insurmountable upheavals. EID Parry always looks forward to opportunities that come as challenges.

The legend of EID Parry dates back to 17 July 1788, when Welsh trader Thomas Parry first set foot on Indian soil. He foresaw tremendous prospects in India and established a piece goods and banking business. In 1819, Parry and John William Dare became partners.

After India gained independence in 1947, there was a strong impetus to Indianize the company. In 1972, the company’s board resolved to apply to the government of India for conversion into an Indian company.

EID Parry has always been a forward-looking company. It plans to bring large-scale investments in the sugar business by leveraging its strengths in this sector in the following directions:

1.1 Sugar Units

EID Parry has six sugar factories with a throughput capacity of 40,300 tons crushed per day across its sugar mills. The company has focused on optimizing the crushing period by the increase in throughput, with improvements in process efficiencies, sugar recovery gains, and reduced energy consumption. Table 1 provides the capacity and the rationalization achieved by the company.

Table 1: Capacity and Rationalization achieved by EID Parry

Note: Assets of Pudukottai, Tamil Nadu, were transferred to Haliyal plant in Karnataka as the surplus cane is available and higher recovery in this region.

It may be noted here that in the earlier period EID Parry was predominantly in sugar in Tamil Nadu. In the last two decades, quite a change has happened in restructuring the location of plants and the business geography. It started focusing growth opportunities in Andhra Pradesh and Karnataka. However, Karnataka has become the lead state and interestingly instead of Mandaya district of Cauvery belt, the company has set-up in North Karnataka districts and the biggest plant in Hariyal which is part of Uttar Kanara district. This may have a lot relationship with changing water resources across states and yield of sugar from sugarcane in factory zones.

In addition, EID Parry has been exploiting the value from bagasse by co-generating to meet the country’s growing energy demand. Table 2 below provides an overview of this initiative.

Table 2: Capacity of Cogeneration of Power and Distillery Across Plants

Note: Addition of 120 KLPD at Sankili is in progress.

1.2 Value-added products

The company has been adding manufacturing units across the entire value chain, from distilleries to industrial alcohol and rectified spirit to extra neutral alcohol (ENA) and fuel ethanol production. The government of India has decreed the 5 percent blending of ethanol with petrol, a regulation that is in the process of being implemented across all states. In India’s major sugar-producing states, it is proposed that this percentage be increased to 10 percent. According to published reports, the target of supplying petrol mixed with 10% ethanol (10% ethanol, 90% petrol) was achieved in June, ahead of the original schedule of November 2022 (The Hindu, 15 August 2022). It is expected that the Government, encouraged by the success, may target making petrol with 20% ethanol by five years to 2025.

It may be observed from the Table above that the company has a high distillery production capacity in Karnataka and Tamil Nadu sugar plants. Further, it also has larger capacity than based on molasses from the plant at a few locations like Bagalkot, and Sankili and Sivagangai plant is a stand-alone distillery. It shows the focus in value-added business, the ability to leverage industry opportunities and cross-subsidize operations across businesses.

Another important joint product while processing sugarcane in sugar manufacture is bagasse which is used for the co-generation of power. Sugar plants utilize steam for processing juice and make crystals using vacuum pans. Milling sections used to have steam drivers for milling. Now largely power is used. The plant uses a low volume of steam and power. However, by using high power boiler and at times making it fired by bio-fuels and coal. Nellikuppam plant was one of the earliest to start co-generation across the industry and thus a pioneer. Now, a sugar plant of the normal average size of 3750 TCD couples with a co-generation plant of matching capacity as long as power export to the grid is feasible.

1.3 Carbon credits

Under the Kyoto Protocol, signatories have committed to contain the emission of greenhouse gases. Developed countries are increasingly looking towards the use of renewable energy sources. The opportunity for India arises from the demand for carbon credits that developed countries can buy, to honour their commitments under the Kyoto Protocol.

1.4 Investment in nutraceuticals

The nutraceuticals division, which became a part of EID Parry on 1 September 2006, continues to grow in all markets. Its products are currently exported to 35 countries. Spirulina continues to be in the forefront in the nutraceuticals business. ‘Organic Spirulina’ has the highest number of certifications in the world. EID Parry, the only company in the world with dedicated research and development for all the three types of algae, is expected to outperform competition in the business for the years to come. With increasing medical care costs and an aging population in the West, the nutraceuticals market is estimated to be well over $375 billion per annum, as a category of preventive health care is bound to grow at a steady pace. Table 3 below provides the company’s nutraceuticals product mix.

Table 3: EID Parry’s Nutraceuticals Product Mix

EID Parry has always been an eco-friendly company. Its environmental management system policy commits the business to prevention of pollution, optimal utilization of resources and reduction in generation of wastes. Be it in the production of sugar, bioproducts or nutraceuticals, the company uses all renewable resources of nature, thus, maintaining the equilibrium in the ecosystem.

1.5 Risk management

The company must have deployed risk management practices to increase the probability of achieving its set goals and objectives.

The following are the major risks associated with the sugar business:

1.5.1 Raw material risk

Sugarcane is the main raw material for sugar and any disturbance in its timely availability will have a substantial impact on operational cost. This is likely to be caused by the following reasons:

Climatic condition: The crop and availability of cane in the southern Indian states namely Karnataka, Andhra Pradesh and Tamil Nadu are influenced by both southwest and northeast monsoons. Local weather conditions over the crop cycle affect the quantity and quality of cane.

Cane economics: The profitability of alternative crops will influence the planting area under cane. Pests, crop disease, and availability of farm labour also have impacts on the costs incurred by the cane grower. It is also influenced by cane procurement price and group decision of farmers who involve in contiguous farming.

Mitigation measures

The company has always maintained an amicable relationship with its farmers. It has paid up all dues on time, despite arrears having been on the rise in the industry as a whole. With its goodwill and the time-tested policy of ethical dealing, the company manages the risk of a short supply of raw material with the farmers in the addressable area where they continue to plant sugar cane. Further, with experiments in farm mechanization, drip irrigation, improved cane varieties developed by the research and development facility, and carefully monitored scheduling of cane planting, and harvesting, the company is confident of mitigating the risks it faces.

1.5.2 Policy Risks

Both the central and state governments regulate the policies on cane. They currently have a considerable hold on this industry as they are able to fix the raw material price and to influence the sales price of sugar.

Further controls imposed on the industry by the government are in the following areas:

• Exports (permission/incentives)
• Imports (permission/tariffs)
• Sugar pricing
• Command area demarcation from time to time
• Molasses movement control

Mitigation measures

The company works closely with ISMA and SISMA towards developing an industry point of view and facilitate appropriate policy recommendations to have dialogue with the government. These include formulation of policy on ethanol doping, review of cogeneration policy, de-control of sugar, review of sugar weightage in WPI etc.

1.5.3 Price Risk

The cyclicality of the sugar business does have a final call on prices and thus affects profitability. Figure 1 shows the sugar price cycle.

Mitigation measures

The company has taken the following two measures to insulate itself against price risk:

• Focusing on value-added products like pharma-grade refined sugar, high-quality plantation white sugar, and retail packs to derive a better margin.
• Direct supplies to large institutions and retail chains.

We note that the Indian sugar industry would go through a very critical phase where within a short period of time the situation can turn from one of short supply and high prices to one of excess supply and low prices.

While part of the problem could be due to government interventions, some are due to increased alignment with the world market. While in the short-term, relief measures have been announced to bring back stability in sugar prices, the long-term outlook for the sugar industry remains positive and promising for the following reasons:

• Growing demand for sugar, especially internal consumption, led to strong GDP growth and changing food habits
• Opportunity from fuel ethanol blending program
• Opportunity from co-generation of power
• Opportunities for India to become a structural sugar exporter and participate in the South Asian sugar market, provided an enabling conducive policy framework is put in place by the government
• Important developments in the world ethanol program and its impact on world sugar availability

2. Concept of Organizational Environment, Its Characteristics and Dimensions

In general, an object’s environment refers to its surroundings. In science and engineering terminology, a system is the part of the universe being studied, while the environment is the remainder of the universe that lies outside the boundaries of the system. It is also known as the surroundings, and in thermodynamics, as the reservoir. Depending on the type of system, it may interact with the environment by exchanging mass, energy (including heat and work), linear momentum, angular momentum, electric charge, or other conserved properties. In some disciplines, such as information theory, information may also be exchanged.

In the managerial universe also, the environment plays an important role in strategy formulation and performance. Depending on the type of business, it may interact with the environment by exchanging resources, get impacted by attributes of people, politics of the government, and cross-border events, leading to linear momentum as well as angular momentum.

Figure 2 shows the environmental forces that impact a firm.

The external environment can be generally divided into five major divisions—natural, political, technological, economic, and social. The task environment relates to the industry and competitive forces in which the firm is operating. These include suppliers, investors, employees, competitors, trade associations, special interest groups, and governments. The internal environment comprises a company’s resources, capabilities, and distinctive competencies.

3. External Environment

The external environment influences the behavior and performance of a firm. To be successful in its business, a firm needs to handle external factors judiciously and proactively. Here, we will discuss some external environmental forces that could influence a business.

The natural environment, commonly referred to as the environment, encompasses all living and non-living things occurring naturally on Earth and some regions thereof.

The following components can identify the concept of the natural environment:

• Complete ecological units that function as natural systems without massive human intervention, including all vegetation, animals, microorganisms, soil, rocks, atmosphere, and natural phenomena that occur within their boundaries
• Universal natural resources and physical phenomena that lack clear-cut boundaries, such as air, water, and climate, as well as energy, radiation, electric charge, and magnetism, not originating from human activity

3.1 Environmental Sustainability

In this context, environmental sustainability becomes significant. Environmental sustainability is the process of making interactions between a firm’s business-related activities with the environment and is pursued with the objective of keeping the environment as pure as naturally possible based on ideal- seeking behavior to ensure sustainability.

An ‘unsustainable situation’ happens when natural capital is used up faster than it can be replenished. Sustainability requires that human activity only utilizes nature’s resources at a rate at which they can be replenished naturally. Inherently the concept of sustainable development is interrelated with the concept of what traffic can bear. Theoretically, the long-term result of environmental degradation is the inability to sustain human life. Such degradation on a global scale could lead to extinction for humanity. Table 4 gives the consumption of resources and their sustainability.

Table 4: Resources and Sustainability

Business should be transacted so that the natural environment is preserved. Fundamentally it is necessary that a good business responds to the following factors:

1. Society has become aggressively aware of pollution of environment and has started resisting it.
2. This resistance has been channelized all over the world into specific troops for environmental advocacy.
3. Consumers have started demanding environmentally safe products.
4. Companies seeking loans from financial institutions must identify liabilities arising from environmental impact by insisting on social benefit analysis for any funding.
5. Environmental law has become more stringent, and pollution control procedures have been laid down through statutory regulations.
6. Many companies have opted for an environmentally friendly approach in order to avoid ecology-based lawsuits.
7. Business transactions take place between companies and stakeholders only if they adhere to a well-laid-out eco strategy. This is specifically required where there could be the use of local resources which need to be recreated, or those which would be depleted by nature and the local community need to be compensated.

The following are some of the further studies that are being conducted to quantify the impact of industrial activity on the environment:

a. To search for resources in the natural environment that affect the sustainability and challenges of activities in the industry

b. Rio Convention introduced to the world the idea that development should consider not only the economic but also environmental and social aspects.

Moreover, the growing demand for ‘green’ products has created major new markets in which precocious eco-entrepreneurs are reaping material rewards.

Continuing our discussion on the environment and business, we want to show the importance of environmental determinism. According to environmental theorists, culture is determined by the physical environment rather than social conditions. The basis of such an argument is that physical geography mainly influences climate, which further affects the individual’s response to the environment and, thus, their mindset, attitude, and behavior. This means that the physical environment has a bearing on social culture, in contrast with the belief that social culture is a manifestation of the behavior of a group of people in society. Such theorists also believed that a tropical climate encourages laziness and a relaxed attitude, while the varying climatic conditions in middle latitudes built up a more social work ethic. For these environmental influences to operate slowly on human biology, it became essential to track the migrations of groups to find out the environment from which they had evolved.

Another version of environmental determinism was popular among Marxists, and was based on employing the dialectical materialism concept of history. Besides, Marx’s fundamental model of the ideological and cultural superstructure being determined by the economic base, economic base is also determined by environmental conditions according to communism. This brings out bi-directional relationship between economic base and environment, one influencing the other. For example, Russian geographer Georgi Plekhanov argued that the cause of his country continuing to be in the feudal age was that the wide plains of Russia permitted class conflicts to be easily diffused.

3.2 Climatic Determinism

Climatic determinism is another aspect of economic geography. It is also sometimes called the equatorial paradox. According to this theory, about 70 percent of the economic development of a country can be predicted from the distance between that country and the equator. In other words, the farther it is from the equator, the more developed a country tends to be. The paradox applies equally well to both north and south of the equator. Australia, for example, has a higher level of economic development than Indonesia. The paradox also applies within countries—the northern US states are more developed than the southern US states.

Singapore is a notable departure—it is located at 1.22° N and is one of the world’s most prosperous countries. This prosperity is based on its position as a port. Other exceptions to the paradox tend to have large natural resources. Middle East countries are a good exception.

One popular theory to explain this phenomenon is that the development of an economy is less necessary in tropical regions—‘you can lie in a hammock and pick bananas,’ as opposed to the need to invent agriculture and economy in order to prosper and survive. This explanation, while convenient, may not be sufficiently adequate to explain the equatorial paradox truly.

Another aspect of the natural environment that has gained momentum and is becoming a matter of concern for the entire world where they continue to experience increased global warming due to the excessive use of fossil fuels – coal, oil, and natural gas. This was a result of advances in industrialization and civilization, and as people demanded more goods of comfort and luxury. Unfortunately, this has led to an increase in global temperature to 0.74 6 0.18 °C between the start and the end of the 20th century. This is also likely to continue in the 21st century where the global surface temperature could go up by
1.1 °C to 6.4 °C. This leads to a faster rate of depletion of natural resources as desert regions expand and glaciers melt.

As the earth gets warmer, society comes under stress and so do business conditions. The demand and supply of goods under such conditions may not be the same as what is being now. Fossil fuel is the key to industrialization and consumption, as energy is one of the main inputs in production. Fossil fuels are also needed for society to derive utility from many consumer products such as fans, televisions, cars, air conditioners, air travel, etc.
World leaders met at Copenhagen in 2009 to discuss various aspects of managing global climate change. The World Wildlife Fund (WWF) suggested some changes in the policy to be adopted in the new climate treaty among 193 participating nations. One of the main objectives was to create a fund for communities vulnerable to global climate change. It also observed that though there is a political commitment to reduce global warming by below two degrees, it was felt that a reduction below three degrees would bring meaningful impacts. However, the summit proceedings created more differences between developed and developing nations as the latter had to give up more compromising their development initiatives. Countries such as Brazil, China, India and South Africa also took strong exceptions to the proposed treaty on the grounds that it will affect their economic growth. This led to an embargo on the proceedings.

The then US President Obama proposed a compromise to end the embargo. The United Nations Framework Convention on Climate Change (http://unfccc.int/2860.php) and a number of open sources provide useful information for the corporate planner to understand environmental challenges due to global warming.

The World has moved forward a lot on global warming combat initiatives, demands and negotiations among different groups based on their long-term benefits and power. There are upward-moving goalposts, but interestingly, developments have been more understanding and accommodative as certain disasters like melting of glaciers, unpredictable monsoon changes, excessive heat waves and cold seasons pushing hard various factions into negotiation.

There is a natural environment within which humans live and perform economic activities including business for survival. The built environment refers to the interface of humans with the surrounding geographical area to facilitate economic activities. Under the field of urban and town planning, mankind tries to harmonize the natural and built environments through parks, afforestation, and management of waste disposal and so on. Humans need to balance the natural and built environments in order to ensure the sustainability of nature and the resources it provides for human survival.

3.3 Climate-Related Strategy

Companies all over the world have acknowledged the dangers of global warming and have started developing climate-related strategies. Developing such strategies requires four underlying criteria. These are as follows:

1. Strategic timing: While this varies between companies, management has to comply with various legislative and legal protocols, which usually are time-bound in nature. It is therefore important that companies develop products for the environmentally-conscious consumer.
2. Necessary level of commitment: Reducing the level of greenhouse gas emissions will require a high level of commitment and extensive expenditure. As corporate expenditures on this front will be both short-term and long-term it is important to establish cost/benefit relationships.
3. Monitoring the impact of government policies: New policies are on the anvil for regulating GHG emissions and arresting global warming. These will lead to adherence to new norms impacting the existing competitive advantage enjoyed by various companies. Companies need to participate in developing and deploying such policies to gain credibility and leverage participation.
4. Create new business opportunities: The field of climate-related strategy development has opened up pathways for a range of greener, cleaner and more efficient products. Companies that seize such opportunities early will naturally stand to gain.

Climate-related strategy can be developed in three stages as follows:

Stage I: Formulate climate strategy

(a) The first step is to assess the profile of emissions, which is done as follows:

(i) Identify direct and indirect GHG emissions and their sources.

(ii) Quantify such emissions and develop metrics for the same for the level of emissions.

(iii) Identify/develop technological techniques required for such a control for monitoring.

(b) The risks and opportunities then need to be measured as follows:

(i) Compare the risk of GHG emissions of the company with those of the competitors.

(ii) Check if there is a probability of reducing the levels to such an extent to clearly obtain a competitive advantage.

(iii) Check the response to the products in the marketplace.

(iv) Identify new products taking into consideration relevant norms.

(c) Then the options for action need to be analyzed:

(i) Reduction opportunities

(ii) Innovation opportunities

(iii) Short-term steps

(iv) Long-term steps

(v) Impact on bottom line

(d) Targets must be set as follows:

(i) Milestones for ultimate target must be identified.

(ii) The milestones must be linked to topline sales.

(iii) The milestones should also be linked to bottom-line profit.

(iv) An adaptation roadmap must be created.

Stage II: Evaluate and implement climate strategy

(a) Financial requirements and mechanisms must be developed as follows:

(i) Assess financial requirements—short-term and long-term

(ii) Available vehicles of finance

(iii) Cost of shadow pricing, i.e., the maximum price management is willing to pay for an extra unit of a limited resource

(b) The entire organization needs to be involved in the process:

(i) Create awareness in the entire organization.

(ii) Identify responsibilities across all levels.

(iii) Identify possible implementation problems.

(iv) Identify critical areas of implementation and move slowly from critical to non-critical areas during deployment.

Stage III: External assessment

This can be done by analyzing the following:

(a) Policy options

(b) Impact of such policy options on climate-related activities

(c) Extent of company participation in governmental policymaking

(d) Extent that the government can influence such policy development which depends upon support from different stakeholders

(e) External relations

(i) Develop external constraints

(ii) Develop contact programs

In conclusion, developing a climate-related strategy is a must, but the timing can vary for different companies. It is to be fully understood that there are both risks and opportunities and the corporate world necessarily has to wake up to this situation and act.