Strategy Formulation

GUAJILOTE COOPERATIVO FORESTAL, HONDURAS

Nathan Nebbe and J. David Hunger

Guajilote (pronounced wa-hee-low-tay) Cooperativo Forestal was a
forestry cooperative that operated out of Chaparral, a small village
located in the buffer zone of La Muralla National Park in Honduras'
Olancho province. Olancho was one of 18 Honduran provinces and was
located inland bordering Nicaragua. The cooperative was one result of a
relatively new movement among international donor agencies promoting
sustainable economic development of developing countries' natural
resources. A cooperative in Honduras was similar to a cooperative in the
United States. It was an enterprise jointly owned and operated by
members who used its facilities and services.

Guajilote was founded in 1991 as a component of a USAID (United States
Agency for International Development) project. The project attempted to
develop La Muralla National Park as an administrative and socioeconomic
model that COHDEFOR (the

Honduran forestry development service) could transfer to Honduras' other
national parks. The Guajilote Cooperativo

Forestal was given the right to exploit naturally fallen (not chopped
down) mahogany trees in La Muralla's buffer zone. Thus far, it was the
only venture in Honduras with this right. A buffer zone was the
designated area within a park's boundaries, but outside its core
protected zone. People were allowed to live and engage in economically
sustainable activities within this buffer zone.

Guajilote in 1998 was facing some important issues and concerns which
could effect not only its future growth, but also its very survival.
For one thing, the amount of mahogany wood was limited and was
increasingly threatened by forest fires, illegal logging, and slash and
burn agriculture. If the total number of

mahogany trees continued to decline, trade in its wood could be
restricted internationally. For another, the cooperative had no way to
transport its wood to market and was thus forced accept low prices for
its wood from the only distributor in the area. What could be done to
guarantee the survival of the cooperative?

______________________________

This case was prepared by Nathan Nebbe and Professor J. David Hunger of
Iowa State University. Copyright ©1999 by Nathan Nebbe and J. David
Hunger. This case was edited for SMBP-8th edition. Reprinted by
permission. Presented to the Society for Case Research and published in
Annual Advances in Business Cases 1999.

OPERATIONS

Guajilote's work activities included three operations using very simple
technologies. First, members searched the area to locate appropriate
fallen trees. This, in itself, could be very difficult since mahogany
trees were naturally rare. These trees were found at elevations up to
1,800 meters (5,400 feet) and normally were found singly or in small
clusters of no-more-than four-to-eight trees per hectare (2.2 acres).

Finding fallen mahogany in La Muralla's buffer zone was hampered due to
the area's steep and sometimes treacherous terrain. (La Muralla means
steep wall of rock in Spanish.) The work was effected by the weather.
For example, more downed trees were available during the wet season due
to storms and higher soil moisture - leading to the uprooting of trees.

Second, the cooperative set up a temporary hand-sawmill as close as
possible to a fallen tree. Due to the steep terrain, it was often
difficult to find a suitable location nearby to operate the
hand-sawmill. Once a suitable work location was found, men used a large
cross-cut saw to disassemble the tree into various components. The
disassembling process was a long and arduous process that could take
weeks for an especially large tree. The length of time it took to
process a tree depended on a tree's size - mature mahogany trees could
be gigantic. Tree size thus affected how many trees Guajilote was able
to process in a year.

Third, after a tree was disassembled, the wood was either carried out of
the forest using a combination of mule and human power, or floated down
a stream or river. Even if a stream happened to be near a fallen tree,
it was typically only usable during the wet season. The wood was then
sold to a distributor who, in turn, transported it via trucks to the
cities to sell to furniture makers for a profit.

Guajilote's permit to use fallen mahogany was originally granted in 1991
for a ten-year period by COHDEFOR. The permit was simply written, and
stated that if Guajilote restricted itself to downed mahogany, its
permit renewal should be granted automatically. The administrator of
the area's COHDEFOR office indicated that if things remained as they
were, Guajilote should not have any problem obtaining renewal in 2001.
Given the mercurial nature of Honduran politics, however, nothing could
be completely assured.

In 1998, Guajilote's mahogany was still sold as a commodity. The
cooperative did very little to add value to its product. Nevertheless,
the continuing depletion of mahogany trees around the world meant that
the remaining wood should increase in value over time.

MANAGEMENT AND HUMAN RESOURCES

Santos Munguia, 29 years old, had been Guajilote's leader since 1995.
Although Munguia had only a primary school education, he was energetic,
intelligent, and had proven to be a very skillful politician. In
addition to directing Guajilote, Mr. Munguia farmed a small parcel of
land and raised a few head of cattle. He was also involved in local
politics.

Munguia had joined the cooperative in 1994. Although he had not been
one of Guajilote's original members, he quickly became its de facto
leader in 1995 when he renegotiated a better price for the sale of the
cooperative's wood.

Before Munguia joined the cooperative, Guajilote had been receiving
between three and four Lempiras ($0.37 or 11 Lempiras to the dollar) per
foot of cut mahogany from its sole distributor, Senior Suazo. No other
distributors were available in this remote location. The distributor
transported the wood to Tegucigalpa or San Pedro Sula and sold it for
16-to-18 Lempiras per foot. Believing that Suazo was taking advantage
of the cooperative, Munguia negotiated a price increase to 7 to 8
Lempiras ($0.60 to $0.62 per foot at the July 15, 1998 exchange rate)
per foot by putting political pressure on Sr. Suazo. The distributor
agreed to the price increase only after a police investigation had been
launched to investigate his business dealings. (Rumors circulated that
Suazo was transporting and selling illegally logged mahogany by mixing
it with that purchased from Guajilote.)

MUNGUIA: EL CAUDILLO

After renegotiating successfully with the cooperative's distributor,
Santos Munguia quickly become the group's caudillo (strong man). The
caudillo was a Latin American political and social institution. A
caudillo was a (typically male) purveyor of patronage. All decisions
went through, and were usually made by, him. A caudillo was often
revered, feared, and hated at the same time because of the power he
wielded. Munguia was viewed by many in the area as an ascending
caudillo because of his leadership of Guajilote.

Guajilote did not operate in a democratic fashion. Munguia made all of
the decisions - sometimes with input from his second in command and
nephew, Miguel Flores Munguia - and handled all of Guajilote's financial
matters. Guajilote's members did not seem to have a problem with this
management style. The prevailing opinion seemed to be that Guajilote
was a lot better off with Munguia running the show by himself than with
more involvement for the members. One man put the members' view very
succinctly: "Santos, he saved us (from Suazo, from CHHDEFOR, from
ourselves)."

Guajilote's organizational structure emphasized Munguia's importance.
He was alone at the top in his role as decision maker. If, in the
future, Munguia became more involved in politics and other ventures that
could take him out of Chaparral (possibly for long periods of time), he
would very likely be forced to spend less time with Guajilote's
operations.

Munguia's leadership has been of key importance to Guajilote's maturing
as both a work group and as a business. In 1998, there did not seem to
be another person in the cooperative that could take Munguia's place.

GUAJILOTE'S MEMBERS

When founded, the cooperative had been composed of 15 members. Members
were initially selected for the cooperative by employees of USAID and
COHDEFOR. The number of employees has held steady over time. Since the
cooperative's founding, three original members have quit; four others
were allowed to join. Although no specific reasons were given for
members leaving, they appeared to be because of personality differences,
family problems, or differences of opinion. No money had been paid to
them when they left the cooperative. In 1998 there were 16 members in
the cooperative.

None of Guajilote's members had any education beyond primary school.
Many of the members had no schooling at all and were illiterate. As a
whole, the group knew little of markets or business practices.

Guajilote's existence has had an important impact on its members. One
member stated that before he had joined Guajilote, he was lucky to have
made 2,000 Lempiras in a year; whereas, he made around 1,000 to 1,500 in
one month as a member of the cooperative. He stated that all five of
his children were in school, something that he could not have afforded
previously. Before joining the cooperative, he had been involved in
subsistence farming and other activities that brought in a small amount
of money and food. He said that his children had been required
previously to work as soon as they were able. As a simple farmer, he
often had to leave his family to find work, mostly migrant farm work, to
help his family survive. Because of Guajilote, his family now had
enough to eat and he was able to be home with his family.

This was a common story among Guajilote's members. The general
improvement in its members' quality of life also appeared to have
strengthened the cooperative members' personal bonds with each other.

FINANCIAL SITUATION

No formal public financial records were available. As head of the
cooperative, Santos Munguia kept informal records. Guajilote's 1997
revenues were approximately 288,000 Lempiras ($22,153 U.S.). (Revenues
for 1996 were not available.) Guajilote processed around 36,000 feet of
wood during 1997. Very little of the money was held back for capital
improvement purchases due to the operation's simple material needs.
Capital expenditures for 1997 included a mule plus materials needed to
maintain Guajilote's large cross-cut saws.

Each of Guajilote's 16 members was paid an average of about 1,500
Lempiras ($113 U.S.) per month in 1997 and 1,300 Lempiras ($100 U.S.)
per month in 1996. 1998 payments per month had been similar to 1997's
payments, according to Guajilote's members. Money was paid to members
based on their participation in Guajilote's operations.

There was conjecture, among some workers, that Santos Munguia and his
second in charge were paying themselves more than the other members were
receiving. When Munguia was asked if he received a higher wage than the
others because of his administrative position in the group, he responded
that everything was distributed evenly. An employee of COHDEFOR
indicated, however, that Munguia had purchased a house in La Union - the
largest town in the area. That person conjectured, based on this
evidence, that Munguia was likely receiving more from the cooperative
than were the other members.

ISSUES FACING THE COOPERATIVE

Guajilote's size and growth potential was limited by the amount of
mahogany it could produce in a year. Mahogany was fairly rare in a
forest and Guajilote was legally restricted to downed trees. Moreover,
with the difficulties of finding, processing by hand, and then moving
the wood out of the forest, Guajilote was further restricted in the
quantity of wood it could handle.

Lack of transportation was a major problem for Guajilote. The
cooperative had been unable to secure the capital needed to buy its own
truck - lending through legitimate sources was very tight in Honduras
and enterprises like Guajilote did not typically have access to lines of
credit. Although the prices the cooperative was receiving for its wood
had improved, the men still thought that the distributor, Sr. Suazo, was
not paying them what the wood was worth. It was argued that when demand
was high for mahogany, the cooperative gave up as much as 10 Lempiras
per foot in sales to Suazo. Guajilote could conceivably double its
revenues, if it could somehow haul its wood to Honduras' major market
centers and sell it without use of a distributor. The closest market
center was Tegucigalpa - three to four hours from Chaparral on
dangerous, often rain soaked, mountain roads.

A POSSIBILITY

Some of the members of Guajilote wondered if the cooperative could do
better financially by skipping the distributor completely. It was
possible that some specialty shops (chains and independents) and
catalogs, throughout the world, might be interested in selling high
quality mahogany furniture - i.e. chests or chairs - that were produced
in an environmentally friendly manner. Guajilote, unfortunately, had no
highly skilled carpenters or furniture makers in its membership. There
were, however, a couple towns in Honduras with highly skilled furniture
makers who worked on a contract basis.

A U.S. citizen with a furniture export business in Honduras worked with
a number of independent furniture makers on contract to make miniature
ornamental chairs. This exporter reviewed Guajilote's situation and
concluded that the cooperative might be able to make and market
furniture very profitably - even if it had to go through an exporter to
find suitable markets. Upon studying Guajilote's operations, he
estimated that Guajilote might be able to more than treble its revenues.
In order to do this, however, the exporter felt that Guajilote would
have to overcome problems with transportation and upgrade its
administrative competence. Guajilote would need to utilize the talents
of its members more if it were to widen its operational scope. It would
have to purchase trucks and hire drivers to transport the wood over
treacherous mountain roads. The role of administrator would become much
more demanding, thus forcing Munguia to delegate some authority to
others in the cooperative.

CONCERNS

In spite of Guajilote's improved outlook, there were many concerns that
could effect the cooperative's future. A serious concern was the threat
of deforestation through fires, illegal logging (i.e. poaching of
mahogany as well as clear cutting), and slash and burn agriculture.

Small fires were typically set to prepare soils for planting and to help
clear new areas for cultivation. Often these fires were either not well
supervised or burned out of the control of the people starting them.
Due to the 1998 drought, the number of out-of-control forest fires had
been far greater than normal. There seemed to be a consensus among
Hondurans that 1998 would be one of the worst years for forest fires.
Mahogany and tropical deciduous forests are not fire resistant. Fires
not only kill adult and young mahogany trees, but also destroy their
seeds. Mahogany could therefore be quickly eliminated from a site.
Each year, Guajilote lost more area from which it could take mahogany.

To make matters worse, many Hondurans considered the area around La
Muralla National Park to be a frontier open to settlement by landless
campesinos (peasant farmers). In fleeing poverty and desertification,
people were migrating to the Olancho province in large numbers. Not only
did they clear the forests for cultivation, but they also cut wood for
fuel and for use in building their homes. Most of the new settlements
were being established in the area's best mahogany growing habitats.

Another concern was that of potential restrictions by CITIES (the
international convention on trade in endangered species). Although
trade in mahogany was still permitted, it was supposed to be monitored
very closely. If the populations of the twelve mahogany species
continued to decrease, it was possible that mahogany would be given even
greater protection under the CITIES framework. This could include even
tighter restrictions on the trade in mahogany, or could even result in
an outright ban similar to the worldwide ban on ivory trading.

NOTES

PAGE

PAGE 7

.Kent Norsworthy, Inside Honduras (Albuquerque: Inter-Hemispheric
Education Resource, 1993), pp. 133-138.

.Hans Lamprecht, Silviculture in the Tropics (Hamburg: Verlag, 1989),
pp. 245-246.

.Lamprecht.

.Norsworthy.