Cottage owners and recreational users of coastal property opposed aquaculture, because they saw them spoiling the beauty of nature. Environmentalist raised concerns about the possible toxic effects of fish waste buildups beneath cages of fish farms.
Lastly, a major problem that they have was that of the mussel toxin scare. It was reported that persons were becoming ill from Atlantic Canadian mussels. The illness was traced to mussels which were grown on the Prince Edward Island, because of this scare, the Federal Department of Fisheries, ordered that the sale of mussels and oysters grown on that side of the island was to come to an end. Because of this the shellfish market had been down for a whole year before the fear subsided. SAF lost money during this time as they were unable to obtained revenue from the sale of the mussels. This scare sparked the beginning of public opposition to aquaculture in Atlantic Canada, which in turn led the Nova Scotian government to reconsider its support for this industry.
All these problems are what put SAF into the position they are now, where the company’s financial position has deteriorated and have Gordon forced to reconsider both his personal and corporate goals.
Market Attractiveness and Business Position Assessment
To assess the attractiveness of the aquaculture, oyster, mussel and trout, the Boston Matrix will be used. The Boston Matrix consists of four cells, each of which indicates a different type of business cash using and different cash generating characteristics. These are the Dogs, Question Marks, Stars and Cash Cows. The dogs have a low market share, low market growth which means business that have a weak market share in a low growth market. In the product life cycle it is classified as a declining stage. Question Marks has low share and high growth, this means that business operating in high growth markets but with a low relative market share. This is the introductory stage in the product life cycle. Stars are those products which have moved to the position of leadership in a high growth market. This is classified as growth stage in the product life cycle. Cash cows have high shares and low growth. This is considered the maturity stage in the product life cycle.
DIAGRAM SHOWING GROWTH RATE MATRIX
Market Share
High Low
High
Market Growth Rate
Low
The attractiveness of the oysters can be seen as stars because they are projected to earn the highest amount of income for Scotia Aqua Farm (SAF). Oysters were projected to generate 32% of total revenue. The oysters are the leaders among the mussels and trout; this means that there is high market share and high growth. The cash needs of the oysters are high, as it is used to maintain their market share and keep competitors at bay. They also generate large amounts of cash.
Mussels are considered as Cash Cows; this is so as mussels were projected to generate the second largest amount of total revenue which is 26%. This means that blue mussels had a high share and low growth. A high share of the market is seen where SAF sold most of its mussel to a large seafood wholesaler in the Halifax, however blue mussels were unable to grow in the market as there was a number of mussel growers, and competition for blue mussels were expected to increase in the near future with larger growers setting a considerably lower price their products.
The trout is considered as the question mark, this is so as they are operating in a high growth market with a low market share. They are able to grow as there is not much competition for trout in the market place, but because of intense competition from Idaho imports, which limits the of market for frozen trout and competition from foreign producers who offer good quality low cost products, SAF is unable to have a large share of the market. SAF has to now decide whether to withdraw their trout from the market or continue to try to obtain a larger market share. Trout was expected to generate 22 percent of total revenue.
Other products which are sold by SAF can be classified as dogs these are primarily lobsters and scallops this is so because they have a week market share and low growth, these product typically generate either low profit or return a loss, they are expected to generate the smallest percentage of revenue which is 20%. These products are kept by the company because it may provide an obstacle to competitors.
The Boston Consulting Group (BCB) is capable of providing the strategist with an understanding of several important strategic relationships, including internal cash flows, and market share and growth trajectories. However, although it is of significant value, there are insufficiencies in investment decisions which will affect the future of the business. Abell and Hammond (1979, pp 211-12) has highlighted three major shortcomings of relying on growth share analysis:
- Factors other than relative market share and industry growth play a significant role in influencing cash flow
- Cash flow may be viewed as being less significant than rate of return on investment (ROI) as a means of comparing the attractiveness of investing in one business rather than another
- Portfolio charts provide little real insight into how one business unit compares with another in terms of investment opportunities
Recognizing these problems can lead to developing an approach referred to as ‘market attractiveness –business position assessment’, best known as the General Electric model. The Generic Electric model therefore takes the general approach a step further by introducing a greater number of variables against which the position of strategic business units (SBUs) might be plotted. As illustrated in the diagram
Competitive position
Strong Medium Weak
Low
Medium
High
The circles then represent not the size of the SBU, but rather the size of the market in question, with the shaded part of the circle representing the SBU’s market share. Industry attractiveness for example is determined to a very large extent by the market’s size, its rate of growth, the nature, the degree and basis of competition, the pace of technological change, the extent to which it is constrained by government or legislative regulations, the opportunities for profit that exist and so on. Business strength is influenced by factors such as market share, product quality, brand image and reputation, levels of management and operational capabilities, production capabilities, cost factors and the organization’s distribution reach and strength and the nature of the customer base and levels of loyalty. Competitive position, it is suggested, is influenced by the geographical scope of the industry and the specific product-market sectors in which the SBU operates.
SWOT Analysis of Scotia Aqua Farms
SWOT is a key analytical tool for understanding the manager’s environment. SWOT analysis is one of the best known and the most frequently used tools within the marketing planning process. There are several ways in which SWOT analysis can be made more rigorous and therefore more significantly useful. The acronym SWOT stands for Strength, Weakness, Opportunity and Threat. Strength speaks to the area of distinctive competence that must always be looked at relative to the competition, if managed properly can be used as the basis for competitive advantage and it is derived from the marketing asset base. Weakness speaks to the area of relative disadvantage that indicate priorities for marketing improvement and highlight the areas and strategies that the planner should avoid. Opportunity speaks to the environment trends with positive outcomes that offer scope for higher level performance if pursued effectively. It highlights new areas for competitive advantage. Last but not threat which speaks to the trends within the environment with potentially negative impacts that increase the risk of a strategy, hinder the implementation of strategy, increase the resources required and reduce the performance expected.
After analyzing the case a vast number of strengths were identified. The aquaculture industry in comparison to wild products is always producing a supply of fresh year round goods, is normally higher in quality and offers a more consistent product in terms of size and presentation. Scotia Aqua Farm (SAF) had a major advantage in the Halifax market because it grew European Oysters, mussels, trout and inventoried North American oysters harvested in Cape Brown, all within 30 kilometers of the metropolitan area. This is good because deliveries to local restaurants, grocery stores, food service operations and caterers could be made with shorter lead time; this helped to guarantee the freshness.
There were several other Nova Scotia aqua culturists supported by the Dalhousie University project, attempting to introduce the European oyster to Nova Scotia, but SAF was in the lead and four to five years required to grow European oysters to market size, would give SAF time to and consolidate a market position.
Scotia Aqua Farm weaknesses are evident in that the company’s financial position is poor as SAF is projected to lose $ 257,000 on sales of $158,000 for the year which would wipe out the little equity the company has. The firm was out of cash hence it was not able to pay employees. Seeing that the company has been struggling for quite some time indicates that the company has poor management. The morale and commitment of employees is low and likelihood of them moved forward.
The small independent growers were typically unable to develop the brands awareness for their product or even to guarantee continuous supply to larger volumes of buyers. Another weakness is that the wild products are offered seasonally in much larger quantities and often at lower prices. Even though Gordon hired qualified workers (all with degrees in the field), there was not a good mixture, as there was no one to handle the income and expenditure of the company and the marketing of the products. This was another weakness that SF had.
There was opportunity for developing the US market for Canadian cultured mussels, and this export market could take 25 to 50 percent of SAF’s production in five (5) years. Other large mussel consuming markets such ad Holland, Belgium and France, also offered opportunities for SAF. The United States offered the best sales potential for the Canadian aquaculture industry because of the U.S. market size, and it’s primarily lower transportation cost than European competitors and relatively easy market access. Gordon started growing mussels on an experimental basis that summer for a number of reasons: Growing techniques were similar to that of the oyster and he knew it well, they needed very little capital outlay, they matured quickly and they grew very well on the Nova Scotia shores where already possessed under utilitized water leases.
Secondly the North American market in general offered similar opportunities to those discussed previously but necessitated the use of brothers of wholesalers to reach markets beyond Atlantic Canada. Thirdly in particular, European buyers would probably buy all the European oysters SAF could supply if they could be delivered fresh, because the European demand exceeded local supply. On the other hand, producing European oysters offered major opportunities. There were little competitors, as no one was successful in growing European oysters in North America on a large commercial scale. In addition, demand in Europe for European oysters had stripped supply, creating a tempting market opportunity for SAF if they could deliver healthy live oysters.
The threats SAF faced are it sold most of its mussels to a large seafood wholesaler in Halifax at $0.80 per pound, However the number of mussels being produced in Nova Scotia had increased greatly during 1989, and competition was expected to be fierce in 1990, with the large growers setting a considerably lower price for the product.
Another threat faced by SAF was that, they were selling trout off the wharf to a grocery chain in Halifax for 4$ and $3.50 respectively, because of an algae bloom, British Columbian producers liquidated there stock of trout and salmon which flooded the market. This caused the price of the fish to drop and SAF had to sell their fish for $2.66 per pound.
Situational Analysis
Since marketing strategy is concerned with matching the organization’s capabilities with the demands of the environment, marketers must continuously analyze their situation and monitor the micro and macro environments which are constantly changing. The micro environment consists mainly of customers, suppliers, distributors, competitors and supply chain while the macro environment consists of political, economic, legislative, technological and social/cultural environments. In analyzing the environmental aspects of Scotia Aqua Farms, an assessment of the environmental elements will be discussed.
Micro Environment:
Customers - SAF sales had been to a varied group of customers, this was through direct and indirect channels. They sold primarily to supermarket chains and local restaurants, these were their primary customers. SAF had identified potential customers for possible development- restaurants, supermarket chains, institutions and caterers. Local restaurants sold a vide variety of seafood, including trout, oysters and mussels. Restaurants could be segmented into tow categories, medium priced and high priced. Medium priced restaurants bought mainly form wholesalers and were price sensitive. High price restaurants were more concerned with product quality than price; they were therefore willing to pay premium price for fresh, high quality seafood delivered two to three times a week. SAF had been selling oysters to some local restaurants, but to develop this market significantly, it would likely have to ensure year round supply.
Supermarket chains and independent grocers were considered hard to break into because large fulltime distributors were supplying them, but the fresh-fish departments of supermarket were thought to provide the best year round opportunity. SAF had broken into superstore, a local supermarket chain, but sales were sporadic and centered in fresh trout and lower margin trout. Sobeys, the largest supermarket chain, had expressed interest in buying trout and mussels directly from small local producers, but oysters were only stocked seasonally and mussels were fairly slow movers. On the other hand they sold a large quantity of trout.
Institutional food service operations used little seafood citing high prices, lack of seafood preparation, and inadequate consumer acceptance. Tapping into this market however, would require substantial promotion, product development and marketing. Potential for this market depended upon the success of promotional activities. This market would however yield high margins.
Caterers were also thought to offer potential for high- quality seafood, because 38% of fresh oysters sold in Canada were consumed in clubs and private parties. Mussels were also a popular appetizer. The European oyster with its premium quality and relative scarcity seemed ideal for this market.
If SAF was able to get these potential customers, it would help to bring in revenue for the company.
Suppliers- SAF bought North American oysters from its suppliers for $50 a box. Each year SAF bought more oysters from local leaseholders.
Distribution- in Ontario and the United states, sales had been made through brokers who typically charged 2% to 7% for their services. Local and international brokers, often contacted SAF seeking quality products, especially that of oysters.
Although the principal U.S brokers were in Boston and New York, there were significant local distributors in most large US cities. SAF had been successful in selling North American oysters to a wholesaler in Maine who distributed them primarily in the New York area.
Competition- There was little competition as no one was successfully growing European oysters in North America on a large commercial scale.
In the trout industry there is intense competition from Idaho imports. While this factor may help to limit the growth of the market for frozen domestic trout, there appears to be some potential for increase in the volume of fresh product sale. However, there will be strong competition in the fresh trout market from some foreign producers of good quality low cost products. Competition was expected to be fierce in 1990 with the large growers setting a considerable lower price for their product. This may cause the company to loose revenue as customers will we buying the competitors product because it is significantly cheaper.
Supply chain- the supply chain used was that of supermarket chains and restaurants for the local market and brokers for international markets who sold the items to wholesalers, who then distributed them to different areas. We can see that the principal US brokers were in Boston and New York, but they were successfully selling North American Oysters to a wholesaler in Maine who distributed them primarily in the New York area.
Macro Environment:
Political- After analyzing the case no political factors was encountered.
Economic- Some traditional fishing operations opposed aquaculture development, as they feared that aquaculture would damage their fisheries or interfere with navigation. Cottage owners and recreational users of coastal property opposed aquaculture operations because they believed that the operations would spoil the beauty of nature. Environmentalists raised concerns about the toxic effects from the buildup of fish waste beneath cages of fish farms.
At public hearings, residents concerns were raised. They were afraid of increased traffic on the local roads and unsightly buoys in the bay. Residents felt that their property value would be reduced and the expansion of aquaculture would destroy the traditional way of life.
Social/cultural- it was culture for oysters to be consumed at bars and private parties as 38% of fresh oysters sold for this reason.
Technological- SAF did not have the necessary mussel producing equipment which costs $25000 to separate and clean mussels when they were ready to be harvested; instead this work was done by a nearby mussel processor, which costs the company $4 per bag.
Legislative- due to the effect of public opposition new legislations was put into place. The first change was the requirement of public hearings before the granting of water leases. In order to get new water leases, SAF has to hold public hearings chaired by government representatives. Previously unexpressed concerns lead to their permit to construct a new facility to be revoked.
Aquaculture can be a viable business as catches were estimated to increase annually by 1% to 2% at the same time world demand for seafood would grow annually by 3%. Worldwide production was projected to reach 16 to 22 million tons in 2000. This means that in the future the seafood industry may be a very profitable industry.
Michael Porters Five Forces Model
Porter (1979) suggests that these are the five most significant factors to consider when identifying a clear and meaningful selling proposition for the organization:
- The threat of new entrants to the industry
- The bargaining power of buyers
- The bargaining power of sellers
- The threat of substitute products or services
- The rivalry among current competitors
The threat to new entrants to the industry indicates that if there is a low barrier to entry this may encourage more entrants because of lower start-up expenses, see an opportunity to capture the market share by offering a product or service more efficiently than its competitors. The threat of new entrants is high when economies of scale, product differentiation, capital requirement and switching costs are low. SAF did not have to worry about any new entrants into the market for European oysters, as there was little competition and no one was successful in growing the oysters in North America on a large scale. SAF was in the lead for the time required to cultivate the European oysters.
The bargaining power of buyers is when a buyer power may increase by providing customers with more information to make buying decisions and by lowering switching costs. There are two types of buyers: end users and buyer channel intermediaries. The end users are the final customers in a distribution channel, they are the consumers who actually buy a product and put it to use. While, the buyer channel intermediaries are wholesalers, distributors and retailers who serve as intermediaries between manufacturers and end users. As it relates to the case, the Scotia Aqua Farms Limited buyers were mainly the buyer channel intermediaries as they sold directly to supermarket chains and restaurants within the local market and brokers for international markets. The buyer power varies as the local restaurants were in two categories as it pertains to price: medium priced and high priced, specialty restaurants. The medium priced restaurants bought from wholesalers and were price sensitive however, the high priced, specialty restaurants were more concerned on quality thus would pay the premium prices for fresh, high quality seafood delivered two or three times a week.
The bargaining power of suppliers- Sobeys, the largest supermarket chain had a great deal of bargaining power as they sold large quantity of trout for SAF hence were price takers. Although, independent grocers were more willing to accept high quality competitively priced local seafood but they purchased small quantities. The supplier power would be reduced with the construction of the hatchery and packaging facility however, the failed permit for these facilities indicate that the SAF is subjected to supplier power for its new stocks.
The threat of substitutes is when consumers will generally choose to use a product or service until a substitute that meets the same need becomes available at a lower cost. With the SAF aquaculture products specifically oysters, trout and mussels has high quality, available fresh all year round and offer more consistency in terms of size and presentation. However, with the substitute of wild products that are offered seasonally in larger quantities at lower prices, SAF needs to create brand awareness for its products to eliminate this threat.
The intensity of competitive rivalry is when rivalry is more intense when switching costs are low and product or service differentiation is minimized. Also, if there is quite a number of competitors, high exit barriers and fixed costs and or when the industry growth rate is low. Scotia Aqua Farms Limited has intense competition in the trout market from Idaho imports because they offer high quality low cost products. However, this may be considered as a low rivalry because SAF can minimize the impact of competition for instance, control supply, focus on niche buyers and participate in marketing groups.
Recommendations
To address the issue of their financial standing, we recommend that SAF issue more shares to the public, this is in order to finance the company. They should also try to persuade investors to invest in the business by telling them of the potential that seafood has and how good a business it can be in the future as it was projected that worldwide production was to reach 16 to 22 million tones by the year 2000.
According to exhibit 3, salmon has an equal or higher value than blue mussel. SAF can therefore do further research and experiments on producing and distributing salmon as it has good value. It is therefore recommended that SFA try to produce salmon as it seems to be viable.
The seafood industry is and will later on be a very profitable business as it is projected that the world’s production would reach 16 to 22million tones by the year 2000. It would be harder to close the business since his liabilities more than double his assets (this is seen in the ROA and current ratios); this means that if he were to close the business and liquidate his assets, he would not have enough money to pay off loans, especially after paying preference shareholders first.
However instead of closing down, it would seem more appropriate for Mr. Gordon to merger with any other existing company. He can do this by going to a merger acquisition specialist. This is an individual who attempts to increase shareholders value through corporate realignment.
If Mr. Gordon does agree to a merger, he can work and try to make a comeback, by reanalyzing and reinvesting in his business. He can do this by attracting investors, issuing more shares in order to get working capital. He can market his products more and try to find a profitable market for them. By finding cheaper ways to operate (try to cut COGS) he may be able to save some money. Laying off staff may also be a good idea as too much is being spent on salaries and benefits. He should try to pay off loans quickly (current loans) and drop products that are causing them to loose money and invest in other that will generate revenue.
Lastly, it is important to reduce the company’s cost. One of the ways in which Mr. Gordon can do this is by hiring temporary employees (contractors) rather than permanent staff. This will help to reduce the amount the company has to pay out as salaries and benefits to his staff.
RATIOS FOR SCOTIA AQUA FARMS LIMITED
Profit Ratios measures the efficiency with which the company uses its resources. The more efficient the company, the greater its profitability. In addition, the change in a company’s profit ratios over time tells whether its performance is improving or declining. There are a number of different profit ratios used and each measure a different aspect of a company’s performance. The most commonly used profit ratios are gross profit margin, net profit margin, return on total assets and return on stockholders equity.
-
Gross Profit Margin simply gives the percentage of sales available to cover general and administrative expenses and other operating expenses.
= Sales Revenue – Cost of Goods Sold
Sales Revenue
1986 = $5,071 - $4,056 1987 = $13,162 - $5,265
$5,071 $13,162
= 20% = 59%
1988 = $101,390 - $66,562 1989 = $157,746 - $138,227
$101,390 $157,746
= 34% =12%
-
Net Profit Margin is the percentage of profit earned on sales and is important as businesses need to make a profit to survive in the long run.
=Net Income
Sales Revenue
1986 = ($36,640) 1987= ($160,861)
$5,071 $13,162
= -7.2% = -12.2%
1988 = ($201,799) 1989 = ($256,549)
$101,390 $157,746
= -1.9% = -1.6%
-
Return on total assets measures the profit earned on the employment of assets.
= Net Income Available to Common Stockholders
Total Assets
1989= ($256,549)
$157,746
= -86%
-
Return on stockholders’ equity measures the percentage of profit earned on common stockholders’ investment in the company.
= Net Income Available to Common Stockholders
Stockholders’ Equity
1989= ($256,549)
($143,375)
= 1.8%
Liquidity Ratios is when a company’s liquidity is a measure of its ability to meet short-term obligations. An asset is deemed liquid if it can be readily converted into cash. Two commonly used liquidity ratios are current ratio and quick ratio.
-
Current Ratio measures the extent to which the claims of short-term creditors are covered by assets that can be quickly converted to cash. Most companies should have a ratio of at least 1 because failure to meet commitments can lead to bankruptcy.
= Current Assets
Current Liabilities
1989= $236,824
$42,095
= 5.63
-
Quick Ratio measures a company’s ability to pay off the claims of short-term creditors without relying on the sales of its inventories.
= Current Assets – Inventory
Current Liabilities
1989= $236,824 - $138,227
$42,095
= 2.34
Leverage Ratios a company is said to be highly leveraged if it uses more debt than equity, including stock and retained earnings.
-
Debt to Assets Ratio is the most direct measure of the extent to which borrowed funds have been used to finance a company’s investments.
= Total Debt
Total Assets
1989= $441,746
$298,371
= 1.48
-
Debt to Equity Ratio indicates the balance between debt and equity in a company’s capital structure.
= Total Debt
Total Equity
1989= $441,746
($143,375)
= -3.08
Reference
