AJAX Corporation - Michael Porter's

AJAX Corporation - Michael Porter's five-forces model This paper is an analysis of the Ajax Corporation. It will analyze the business according to Michael Porter's five-forces model, including comments on the industry/industries as a whole. It will then discuss the business-level strategy which Ajax uses, which is significantly different than other competitors in its field. Thirdly, the company's sources of competitive advantage will be discussed, which includes an evaluation of whether these competitive advantages can continue into the future.

Finally, it will make a recommendation to Joseph Gaziano, Ajax' President, on how the company should proceed in the future. Porter's Five Forces Analysis and Ajax' Business-Level Strategy Supplier Power The suppliers can be analyzed on two levels: those who supply the wholesalers, and the wholesalers who supply retailers, including retail fish outlets and restaurants, the two most important 'takers' of lobster and other fish products. Supplier concentration is low on the fishing side.

With 92 deep-canyon lobster boats, and thousands of shallow-water trap boats, there is an enormous variety in the types and suppliers of the basic product. In order to better understand the supply, one should differentiate the inputs into two important segments: shallow-water suppliers tend to bring "chicken" and lower-poundage lobsters, with widely varying supply depending on the degree of overfishing. Deep-water fishermen bring in higher-poundage lobsters, which are of greater appeal for restaurants and fish retailers.

Thus, though both supplier types bring lobsters to wholesalers, the deep-water suppliers have a more steady supply, holding tanks to overcome momentary drops in demand, and larger (and therefore more desirable and more expensive) lobsters. Ajax is the first to forward-integrate, buying two wholesalers and thus allowing it to "trade internally." In times of lobster shortage, there is a premium placed on lobster supply, which the "internal trade" can be advantageous to Ajax' two wholesale operations. That means that Ajax' internal wholesalers have competitive advantages in times of lobster shortage.

In times of plentiful lobster supply, the 50,000 pound holding tanks at the two distributors, plus Ajax' 125,000 pound capacity, help to assure a more steady (as opposed to spot) price for their goods. Barriers to Entry There are few barriers to entry for shallow-water fishermen, but higher barriers for deep-water boats. Reverend Whipple's inventions helped to increase productivity, but also require technical expertise and a larger capital investment in order to follow his inventions.

Although most of the 92 deep-water boats have been converted from other uses, they have not automated or mechanized in the same way as Ajax' boats, and therefore don't have the same productivity advantages. Threat of Substitutes In the current supply environment, there are few threats of substitutes as compared to other fisheries businesses. The quality of Northeastern lobsters is such that competing product (such as Caribbean lobster tails or European lobsters) is not as highly-valued. U.S. consumers, including restaurants and fish markets, have a clear preference for the product.

The in-shore fishermen could theoretically substitute their product for the deep-fished lobster, but the product is smaller. In times of plentiful supply, the in-shore product can be taken up by price-sensitive supermarkets, but not replace the product in restaurants and retail establishments. Buyer Power The retail buyer (supermarkets, restaurants and retailers) is limited in its choice of suppliers. The two major small-lobster suppliers in Massachusetts have their established accounts, as do Wickford and Deep, which sell primarily to the price-insensitive, quality-sensitive segments of the market.

The buyers exist on two levels: those who buy the in-shore product, dominated by two major wholesalers in Massachusetts who have substantial control over how much is paid for in-shore lobsters. Thus the predominant buyers of price-insensitive product are largely within Ajax' hands. Rivalry As a low-cost lobster catcher, Ajax is in a position to benefit when lobster becomes more scarce, and when lobster is more abundant.

That is because Ajax can bring in more volume during lean times -- it accounted for most of the 1.5 million pounds of deep water lobster caught, despite having only 5% of the boats in the water -- and use its ability to haul in vast volumes at a low cost per pound when the supply is plentiful. Its competitors tend to be thinly-capitalized, high fixed-cost operations which can suffer from lack of supply or low prices.

Graziano is probably right in his assessment that competitors will be likely to exit the business, moving to other types of fishing or exiting the business entirely. It makes less sense for Ajax to buy their boats, as the company has specific technical requirements that make it difficult to adapt other boats cheaply. Summary of Ajax' Business-Level Strategy Ajax has exploited an advantage in the cost and quantity of lobster caught, by focusing on better technology and pioneering deep-water techniques.

Its strategy of expanding in the more steady deep-water lobster areas appears to make sense. By acquiring two major wholesalers in the price-insensitive, quality-sensitive portion of the market, Ajax has created buyer power to complement its supplier power. Note that Ajax needed to assure that its vertical integration made sense, that the quality of product supplied met with the expectations of retail fish markets and restaurants -- which is the case. Reverend Whipple and the new marine biologist represent a use by Ajax of its scale.

With 16% of the total lobster catch, the company is in a position to develop future technologies to improve its productivity and storage. While Whipple's expertise has proven itself in developing industry-leading technology for fishing, the marine biologists' contribution has yet to be made. At present, Graziano appears to be using the biologist in a haphazard way. It may make more sense for the company to exploit this competitive advantage by extending the ability of the company to store lobsters alive for longer periods of time.

This would both increase supplier power (allowing the company to hold the lobsters for a period of higher pricing) and increase its average price through holding from the winter season to the summer season. Can Ajax' Competitive Advantages Continue into the Future? Ajax competes in a cyclical business with many risks. Its thinly-capitalized structure means that the company has little margin for error.

A failure in its tanks, in one of its fishing boats, or a fall in the number of lobster caught can each, individually, cause a failure of the entire enterprise. Ajax has made a bet that its superior technology can overcome the vagaries of the lobster harvest, riding supply insufficiency and variations in lobster pricing which plague its competitors. Although its financial degrees of freedom are relatively low, the financial projections demonstrate that the company can move significantly into the black with further financing and growth.

Since Ajax is running two businesses -- wholesale and "manufacturing," or supply, the risks of both businesses are different. The two wholesale operations are growing quickly, but the cash flow generation is hurt by high accounts receivable. Given the high supplier power on the part of the wholesalers, the company will either have to tighten its sales conditions (cash up front) and/or come up with accounts receivable and inventory financing which could improve its cash flow.

Accounts receivable is not broken out by profit center, but from the facts of the case, it.