Diamond E Analysis
- Pages: 7
- Word count: 1737
- Category: Trade
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The following report is an analysis on the current business conditions facing the Ganong Bros. Limited (GBL) confectionery company. The report will include a Diamond-E Analysis as well as an examination of the variety of different business alternatives available to the company complete with a recommended action plan regarding the most suitable alternative for the firm. Diamond-E Analysis
When analyzing the current environment, numerous tools can be used. In this report, the tools that will be used are Porter’s Five Forces and PEST. Porters Five Forces
Threat of Substitute Products: High.
The threat of substitute products is high for a few reasons. The first is the number of substitutes readily available to consumers. There are many substitutes available for confectionary products that all pose a threat to GBL, including potato chips, cookies and cupcakes. The low cost of switching to these substitutes is another reason for the high threat of substitute products. Chocolate is a relatively inexpensive item and it is not difficult for customers to switch to one of these substitutes. Although there may be high brand loyalty exhibited by customers, the low cost of the products cause the threat of substitute products to be high. The above reasons cause the threat of substitute products to be a high risk. Threat of New Entrants: Medium.
The threat of new entrants is medium for the following reasons. First, there are very high capital requirements to get into the industry lowers the threat of new entrants. There are high costs involved with purchasing equipment, purchasing a factory as well as the initial marketing of the product. Secondly, the difficulty to obtain distribution channels is another reason that lowers the threat of new entrants. Competitors that are already established have the advantage of having distribution channels locked up whereas new entrants will have trouble to get distribution. One of the things that raises the threat of the new entrants is the low switching costs. As discussed earlier, the costs of switching to a competitor or substitute product is not very high despite brand loyalty playing a role. Due to all the above factors, the threat of new entrants is seen as a medium risk. Bargaining Power of Buyers: Low.
The bargaining power of buyers is low for a variety of reasons. There are a large number of buyers in the market and no buyer in particular has any real influence on the product or price, which lowers the power of buyers. Another reason buyer power is low is because of the fact that buyers do not pose a credible risk to backwards integration. None of the buyers in the market would have enough financial resources to backwards integrate and produce their own confectionery products, which also lowers buyer power. These above reasons are why the bargaining power is seen as a low risk to the confectionary industry. Bargaining Power of Suppliers: Low to Medium.
It is tough to gauge the bargaining power of suppliers as not much is mentioned in the case; however there are a few factors that lead it to likely be a low to medium threat. One of the reasons it would be a low threat is because of the difficulty for suppliers to forward integrate into the market. Much like buyers backwards integrating, it would be very difficult for suppliers to forward integrate due to the very high capital costs. One of the reasons the bargaining power of suppliers may be seen as a medium threat is due to the likely fact that buyers have only a limited number of suppliers that they prefer. This gives the cocoa suppliers a bit of power in the sense that they have the chocolate manufacturers somewhat dependent on them for their supply of cocoa. These reasons are why the bargaining power of suppliers is seen as a low to medium risk. Intensity of Competitive Rivalry: High
The intensity of competitive rivalry is seen as high for a number of reasons. One of the reasons is due to the large amount of equally sized competitors in the industry. There is not just one firm dominating the industry, which increases the rivalry overall. There are also a large number of smaller independent firms in the industry. Although this number is dwindling, it still contributes to a higher competitive rivalry in the industry. Another reason for the high competitive rivalry is the high fixed costs associated to being in the business. This could cause firms to overproduce to increase volume and margins, which could lead to a price war which would ultimately hurt profitability. A final reason why the competitive rivalry is high is because of the aggressive growth strategies being perused by companies in the industry. The companies are not just looking to milk profits, rather they are looking to expand and fight for market share. This can be seen by the numerous acquisitions going on in the industry. The above reasons are why the intensity of competitive rivalry is seen as a high risk. Overall, the risk of Porters Five Forces on the confectionery industry can be seen as a medium to high risk. On a scale of 1 to 10, the risk can be seen as 7 out of 10. PEST Analysis
When analyzing the political factors that affect the industry, there is one thing that stands out in particular. This is the free trade agreement between Canada and U.S.A. This is an important factor because it has eliminated the tariffs on confectionery products between the two countries. Before the free trade agreement, Canada was protected by a 15% tariff on imported foreign products. When Canadian firms exported to the United States, they only had to pay a 5 to 7.5% tariff on confectionery products. This means that they enjoyed a 7.5% tariff differential. With the free trade agreement, this tariff differential is gone and Canadian companies are no longer protected. This is a big threat to GBL because now American companies can enter Canada and not have to pay tariffs, which will further intensify the competitive rivalry. Although Canadian companies no longer have to pay a tariff to export to the United States, the protection they received before the free trade agreement was much more beneficial given the fact that they have struggled mightily to penetrate the U.S. market. There are several key economic factors affecting the industry.
The first one is the consistent growth the industry has seen since the 1980s. This is beneficial to GBL because it gives them more opportunities to expand which would increase their sales and profitability. Another key economic aspect is the numerous acquisitions that have been occurring within the industry. There have been many brand name identities being purchased by American parent companies in an attempt to stabilize their domestic market share. Although GBL has stated they do not plan on selling the company, there is likely to be numerous offers from American firms to buy the company in which they will need to take into consideration. One of the final economic aspects that is affecting the industry is under capacity. Some firms in the industry, such as GBL are currently not producing at full capacity. In GBL’s case, they are only producing at 50% capacity. This could be a problem for the company as it will lead to lower profit margins. When analyzing the social environment, there are two key factors that stand out.
One is an opportunity to GBL whereas the other one is a threat. The fact that there is a growing trend towards higher quality products in the industry is an opportunity. GBL is known for their high quality products and if this trend continues they may be able to capitalize on it and increase their overall profitability. One of the major social threats to the industry is the fact that consumers are becoming more health conscious. This is a threat because it may lead consumers to look for healthier alternative snacks to confectionery products which will lead to a loss in sales for GBL. There is one major factor affecting the technological environment in this industry. It is the recent trend towards more automated machines being used by companies. The increased automation has lead to more efficient operations. GBL has recently built a new plant in St. Stephen, which has allowed the firm to lower unit costs and become more competitive with U.S. companies. Resources
Ganong Bros. Limited has strong marketing resources. This can be seen by their strong 29 person sales force that is employed throughout the country. This has led to a strong brand name in Canada, in particular Atlantic Canada, which accounts for about 1/3 of domestic sales. The strong sales force has also lead to a high market share in the packaged chocolate sector of the industry. When analyzing the operational resources a couple factors stand out. One is the fact that the company is only operating at 50% capacity. This has lead to high fixed costs which is in turn hurting the company’s profit margins. Also, the plant location is also questionable and there have been talks to move to a place with a higher population such has Ontario, but the firm is committed to helping the community of St. Stephen. The biggest concern for GBL is their financial resources. The company has had two consecutive years of financial losses which is a major concern.
This has made it difficult for GBL to obtain the additional financing it needs to help return the company to profitability. Also, the fact that the company is not operating at full capacity has made it difficult to obtain economies of scale, which is another concern. Perhaps the strongest of the company’s resources is their HR and Corporate Responsibility. The company is privately owned and committed to staying that way. They also have a strong community presence in St. Stephen and are committed to staying there and helping employ the citizens of the town, even if it means a lower profitability. Other than the financial resource problem, it appears that GBL has the resources required to return the company back to profitability. They have strong marketing resources, decent operational resources and a very strong corporate culture. If they can overcome their financial problems and secure additional financing they will be able to effectively carry out any alternative plans that will help improve the bottom line.