Ganong David Ganong Must Determine

Ganong David Ganong must determine a course for the future of his company. The industry environment is challenging. The company has a relatively strong financial position, but only has a few good markets and products with which to work. In addition, Ganong appears to lack a clear sense of strategic focus, competing in a wide range of products and dabbling in a plant in Thailand. The company's path going forward should take into account its relative strengths, and should also shore up some of the company's weaknesses.

The company has a number of alternatives from which to choose. Internally, Ganong has a few strengths and several weaknesses. Among the strengths are its boxed chocolate sales, its Atlantic Canada presence. Factors that could be strengths such as the sales force and the brand are not as strong as perhaps they should be. The company is known primarily for the chicken bone and its boxed chocolates. Boxed chocolates account for around half of the company's sales.

Unfortunately, this is not Ganong's highest margin product, despite it being a gift product. The company earns around a third of its sales in Atlantic Canada, a relatively small market. If it was as strong elsewhere, there would be no concerns for Ganong. The company views its workforce as a source of strength, but this is not supported by any evidence.

In fact, while its loyalty to its employees in admirable, the economy in rural New Brunswick is not setting the world on fire, so it tends to be a buyer's market for workers. In addition, top management personnel are not typically attracted to locations as isolated at St. Stephen. At present, Ganong has several weaknesses. The first is its scale. The industry is dominated by multinational companies with economies of scale in production. This puts Ganong at a competitive disadvantage in terms of its unit production cost.

The second disadvantage is its reliance on boxed chocolates. Although Ganong produces a wide range of products, it is only found success with its boxed chocolates, while other products have failed to make inroads. The Thailand plant is profitable, but it is a distraction for the company and is not generating strong sales at present. Lastly, Ganong's products are poor.

Anybody who has ever tasted a Ganong chocolate would find the notion that the company produces high-quality premium chocolates to be silly -- and the failure to "extract customer support" during their recent U.S. drive is evidence that the company is deluding itself with respect to the quality of their products. They are a low cost provider in terms of quality and price, but lack the economies of scale to compete as such. This is the crux of the company's current woes.

There is one major threat that Ganong currently faces - international competition. The chocolate market in Canada -- and elsewhere -- is dominated by multinational firms. Compared to Ganong, these firms have better economies of scale, better-known brands and stronger marketing capabilities. That trade agreements have opened up the Canadian market to more foreign competition in recent years has only exacerbated this situation. This threat, however, could of itself be enough to ruin Ganong outside the Maritimes. There are a number of opportunities.

As a company that has largely flown under the radar, Ganong is not in the crosshairs of any of its major competitors, and this will allow it to change its competitive posture. The first major opportunity is with respect to export markets. The dollar is low, at just 71.45 cents as of March 30, 1995. This means that Ganong -- for as long as these rates hold -- may have a cost advantage over U.S. And international competitors with respect to some of its production costs.

Labour costs in New Brunswick are among the lowest in Canada as well. Unfortunately, cacao and sugar are traded on global commodities markets in U.S. dollars, so with respect to those particular inputs the company is at a competitive disadvantage in purchasing with Canadian dollars. Another of other opportunities has also been identified. Among them are private label products. Stores are attracted to private label because they earn higher margins. Manufacturers are attracted to them for the volume that they provide, using up excess capacity.

Ganong's relatively weak brand and low quality product make the company well suited for this type of work, if the company has the capacity at its new plant. New products may help the company to compete outside of boxed chocolates. However, the company cannot earn the margins of multinational competitors and faces an intensely competitive market. It already has dozens of products that sell poorly. A partnership could provide the financing Ganong feels the firm needs, but at the cost of control.

If more money is needed later, the partner could provide it but would eventually take over majority equity in the firm. Lastly, the export market could be revisited. The exchange rate is favourable, and the large U.S. Northeast markets are closer to St. Stephen than the large Canadian markets in Montreal and Ontario. Two further options are to join with two other small firms in a consolidated operation that might have the economies of scale to compete; and to build a new factory.

Financial Situation Ganong has suffered a heavy loss in 1994. Sales were down 6.1% on the year and the gross margin declined significantly. While the company reduced administration and selling costs, this was not enough to keep the company in the black. The company's balance sheet is still acceptable -- the firm's liquidity has not changed much over the past year. It has tightened receivables and there remains significant room for further tightening of receivables. The firm does not have an abnormal degree of leverage.

Long-term debt has been reduced in each of the past two years. However, equity decreased last year as a result of the loss. All told, however, Ganong is not dire financial straits. It has no immediate need for financing, especially if it continues to tighten its receivables turnover. If the company can restore profitability, it will be able to continue without taking on more debt and without selling equity to a minority partner.

Thus, from a financial perspective the critical change has to be to examine why the firm's profitability is down. The strong competition from multinationals - all of whom have a cost advantage with their economies of scale -- is putting pricing pressure on all firms in the industry, Ganong included. This trend can be expected to increase. Therefore, Ganong must adopt a strategy with this in mind. The current positioning of the firm within the market is troublesome.

Ganong has only one feature product, the boxed chocolates, and is weak with all other products. It does not have the ability to compete with the multinationals on price, but the quality of its product is poor, and that is inhibiting its ability to expand. Consider that boxed chocolates are typically an impulse purchase, for holidays like Valentine's and for special occasions. This highlights distribution as a key success factor -- being in the right place at the right time is essential to generating sales.

This also makes it difficult to drive repeat business and brand loyalty, especially in the absence of splashy advertising campaigns. The multinationals can beat Ganong at both advertising reach and distribution, so even Ganong's core business is under threat. That it is a seasonal business and that Atlantic Canada is a minor market are probably the only reasons why Ganong has not been run out of the market by the multinationals already.

Recommendations There is no need for capital at present, so taking on a minority partner is not necessary, especially not given the likelihood that the partner would likely seek a majority stake at some point in the future. The company should not be interested in building a new plant in the face of declining sales, unless the new plant will solve the firm's problems.

Shipping is not a major problem for the firm right now, and until the company demonstrates that it can sell more product, it should not focus on making more product. Thus, it is recommended that Ganong seek out private label business. The company should also explore consolidating production with the two other firms. This strategy is putting basic comparative advantage theory to work, and would allow for two things to occur.

The first is that the firms would be able to have a lower cost of production for their goods overall, allowing them to better compete with the multinationals. In addition, the lower cost production would also allow the firms to offer a greater.