Ganong Bros. Strategic Analysis: Private Label and Cost Focus

Introduction and Strategic Overview

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 a few good markets and products with which to work. In addition, Ganong appears to lack a clear sense of strategic focus, competing across a wide range of products and maintaining a plant in Thailand that functions more as a distraction than a strategic asset. The company's path forward should take into account its relative strengths while also addressing several key weaknesses. Fortunately, the company has a number of alternatives from which to choose.

Internal Strengths and Weaknesses

Internally, Ganong has a few strengths and several weaknesses. Among the strengths are its boxed chocolate sales and its Atlantic Canada presence. Factors that could be strengths—such as the sales force and the brand—are not as strong as they should be. The company is known primarily for the chicken bone candy and its boxed chocolates, with boxed chocolates accounting for around half of company sales. Unfortunately, this is not Ganong's highest-margin product, despite being a gift item. The company earns around a third of its sales in Atlantic Canada, a relatively small market. If it were equally strong elsewhere, there would be far fewer concerns. The company views its workforce as a source of strength, but this is not supported by evidence. While its loyalty to employees is admirable, the economy in rural New Brunswick is not especially robust, making it a buyer's market for labor. Furthermore, top management personnel are not typically attracted to locations as isolated as St. Stephen.

Ganong currently faces several significant weaknesses. The first is scale. The industry is dominated by multinational companies with substantial economies of scale in production, putting Ganong at a competitive disadvantage in unit production costs. The second disadvantage is its reliance on boxed chocolates. Although Ganong produces a wide range of products, it has only found success with boxed chocolates, while other products have failed to gain traction. The Thailand plant is profitable, but it is a distraction and is not generating strong sales at present. Lastly, product quality is a concern. The company's failure to gain customer support during its recent U.S. expansion is evidence that it may be overestimating the quality of its products. Ganong functions as a low-cost provider in terms of both quality and price, yet lacks the economies of scale necessary to compete effectively on that basis. This is the crux of the company's current difficulties.

External Threats and Opportunities

The most significant threat Ganong currently faces is international competition. The chocolate market in Canada—and globally—is dominated by multinational firms that possess superior economies of scale, better-known brands, and stronger marketing capabilities. Trade agreements that have opened the Canadian market to more foreign competition in recent years have only exacerbated this situation. This competitive pressure, by itself, could be sufficient to undermine Ganong's position outside the Maritimes.

There are, however, a number of opportunities available. Because Ganong has largely operated under the radar, it is not in the crosshairs of any major competitor, which allows it room to shift its competitive posture. One major opportunity involves export markets. The Canadian dollar was trading at just 71.45 cents as of March 30, 1995, potentially giving Ganong a cost advantage over U.S. and international competitors with respect to some production costs. Labour costs in New Brunswick are also among the lowest in Canada. However, cacao and sugar are traded on global commodities markets in U.S. dollars, which means the company faces a competitive disadvantage on those particular inputs when purchasing with Canadian dollars.

Several additional opportunities have been identified. Private label production is one: retailers are attracted to private label because it generates higher margins, while manufacturers benefit from the volume it provides, using up excess capacity. Ganong's relatively weak brand and value-oriented product quality make it well suited for this type of work, provided the company has sufficient capacity at its new plant. New products may help the company compete beyond boxed chocolates, though Ganong cannot earn the margins of multinational competitors and already faces an intensely competitive market with dozens of poorly selling items. A partnership could provide financing, but at the cost of control, with the risk that a partner could eventually seek a majority equity stake. The export market also warrants revisiting, given the favorable exchange rate and the geographic advantage of St. Stephen being closer to the large U.S. Northeast markets than to Montreal or Ontario. Two further options include joining with two other small firms in a consolidated operation that might achieve competitive economies of scale, and constructing a new factory.