Present Analysis of Palliser Furniture Ltd.

A joint venture is another option Palliser can consider.  This option has all the benefits of buying a new firm, with Palliser only assuming half the risk.  The downside to this is that Palliser will have to mutually agree on all business decisions with its venture partner.

Lastly, Palliser can subcontract its manufacturing to another company so it doesn’t have to take on a partner for its venture.  The downside of this is that Palliser will possess higher costs than producing the furniture itself and will make entry into the Latin America market much more difficult.  Palliser would not have as strong of a foothold within Mexico if it were to subcontract.

After analysing all these options, we recommend the building of a new facility.  This will give Palliser the most opportunity to establish itself in Mexico, and allow further expansion into Latin America and the southern US.

Palliser plays a defensive position in Canada as it holds a large market share and sells 85% of its products to Canadians.  Exports to the US make up the majority of the remaining sales.  With the development of a plant in Mexico, other markets will increasingly become more available; specifically the untapped Latin American markets, as well as a larger part of the competitive US market.  These new markets will require Palliser to adopt alternative strategies to compete and increase its market share.

In order to achieve greater market share in the US and enter the Latin American market, Palliser will need to decrease its costs, especially labour costs.  This is why the Mexican plant is recommended.  Current labour costs from Canadian and U.S. operations make up 20% of the final product price for leather furniture.  With a leather manufacturing plant in Mexico, these labour costs would be reduced to less than 4% of the final product cost.  Also, cheaper leather and limited competition for specific resources would benefit Palliser if they move first into this market.

With the reduction in costs obtained from building a plant in Mexico, there are still a number of problems that Palliser must overcome in order for the venture to be successful.  The most visible problem is the strategy that must be taken to succeed in the Latin American market.

The Latin American market is currently saturated with small-scale, family-run furniture manufacturers, employing limited numbers of people.  Palliser will be able to enter the market as one of the largest producers of furniture, as well as one of the largest employers in the industry.  Palliser must take an offensive position and target the weaknesses of the industry with economies of scale, production process efficiencies, marketing expertise, innovative offerings, and high quality furniture.

The Latin American market is different than the current Canadian and US markets that Palliser competes in.  Economies are still developing in most of these countries, and discretionary income per family is less than in the US and Canada.  As such, Palliser may have to market its leather furniture differently, from the traditional medium price range, yet still aggressively, since the market for these traditional products may be too small to be profitable.  Additionally, the current versions of Palliser’s products may be physically too large for some consumers in the Latin American market due to large family sizes and limited space.  Larger families and less discretionary income combined, may force Palliser to provide smaller, less expensive products to the Latin American market.  Since Palliser can achieve economies of scale through cheap labour, wider profit margins will allow Palliser to reduce certain products, and still be quite profitable.

In order to capitalize on the Mexican opportunity, Palliser will look to develop a niche strategy, still focusing on leather furniture in the broad middle range of the product category. Other Mexican firms are currently unable to produce leather furniture in this range at the price and quality that Palliser will be able to.  Also, a part of this niche is the focus on more contemporary fashions, rather than more traditional designs.  Palliser will be able to guarantee quick delivery times and will need to keep less inventory as compared to its competitors.

Palliser’s promotion strategy for Mexico and the Latin American market will differ from current promotion strategies in Canada and the US.  Within the Latin American market, Palliser will be a new entrant, and as such, must focus on a large advertising campaign targeting specific consumer segments.  This will help to increase brand awareness.  Palliser will also want to implement sales promotions to attract retail distributors.

A Mexico plant would give Palliser a distinctive advantage over its competitors by locating closer to customers as well as closer to raw materials, effectively shortening the channel of distribution.  

In the US market, Palliser is currently in the flanker position. Palliser has cited the contemporary, high quality, mid-range price, leather furniture market as an under represented segment. In order to better compete with other competitors in this segment, the Mexican plant will effectively lower costs of materials and labour, providing a cost advantage that can be used towards these other competitors. The benefit of shorter transportation routes into parts of the US, especially the western coast, will greatly reduce its transportation costs (see exhibit 6).

  In order to be more competitive with larger US manufacturers, Palliser will have to increase promotion strategies, specifically stressing its strengths in the furniture industry: quick delivery times, better quality to cost ratio, and responsiveness to consumer tastes.

The Mexico plant will allow them to either lower prices in order to compete with other competitors, or provide more value added options into its products while maintaining the same price level.

There are many barriers to entry that have to be considered.  Government regulations exist on ownership of businesses, percentage of domestic workers within the business, and the importing and exporting of products within Mexico.  Tariffs on shipping items across the Mexican border can increase costs.  Also, border crossing can lead to big delays in the shipment of goods.

Palliser will have to overcome the threat of unionization.  According to Mexico’s federal law, if a minimum of 20 employees in a given company decided to form a union, Palliser would be required to recognize it.  Although companies are not required to have unions, in practice union organizers from outside the company will often work with company employees to organize a union or recruit them to affiliate with outside unions.  This is a threat that Palliser will undoubtedly come across when it opens up a manufacturing plant in Saltillo.  The Mexican work culture will strike if they feel that they are not receiving the benefits that they hope.  This could lead to major problems if Palliser invests considerable amounts of money in human resource training only to find discontent workers leave to work for other companies, or even their competitors.  As well, the Mexican culture is highly nuptial, meaning that family is core to their values.  Palliser must address this threat by offering a slightly higher wage to employees and create an atmosphere, which is highly commitment and family oriented.  Perhaps, inviting family members to work together will guarantee a nuptial feeling throughout organization.  

 The Mexico plant alternative is expected to be a highly valuable opportunity for Palliser if it is accepted (see exhibit 7).  The payback period for the capital investment is only 2.91 years, with profit margins from the plant increasing from 16% in Year 1 to 19.7% in Year 3 (see Exhibit 8).  These high profit margins are largely due to the low labour costs, and the ability to get cheaper leather materials.  Palliser can also expect an increase in Return on Assets (ROA) of the Mexican plant from 13.1% in Year 1 to 47% in Year 3.  This is a highly efficient use of productive assets, as Palliser currently has a 6.7% ROA through the rest of its operations.  These ratios as well as the associated activity ratios help determine that the Mexico plant alternative has the potential to be highly lucrative for Palliser.

Alternative #2 - Asian Joint Venture Opportunity:

Another alternative is a joint venture in the Asian market with Lacquer Craft Mfg., located in south China.  China’s potential is similar to Mexico in that they have an immense and inexpensive supply of workers, which would provide Palliser with a competitive cost advantage over competitors.

The main benefit of pursuing a joint venture with an Asian company is that it would open up the large Asian market to Palliser.  With the decline of Palliser World Trade, Palliser is losing its previous foothold it had in the Asian market.  This joint venture would allow Palliser to increase its product lines and introduce new dining room and kitchen lines.

The main concern with entering into a joint venture is that Palliser would be creating more product lines when the overall company strategy has been to reduce them.  Also important, is the concern regarding inferior woods that would have to be used due to China’s poor quality of lumber.  Palliser has a reputation of quality that could be harmed with the production of inferior, lower quality products.

Alternative #3 - Continuing Current Operations:

The final alternative is not to pursue any of these opportunities.  This is not a viable option for a few specific reasons.  First, competition in the market is very competitive, and remaining unchanged will result in Palliser falling behind its competitors.  Also, Palliser needs to have greater penetration into the US market and that is not possible without a plan of action that stresses growth.  Next, Palliser has to continually look for new and effective ways to reduce cost while maintaining and increasing its level of quality.  Cost reduction can be seen as a powerful competitive advantage against competitors and right now there are more cost effective ways for Palliser to pursue.  New ventures can lead to increasing revenues and ensure the financial future for Palliser.  Finally Palliser’s healthy financial standing shows that they can afford to pursue new ventures, while covering existing costs.

Recommendations:

        

It is our recommendation that Palliser pursues the Mexico plant opportunity to maximize profitability and growth into the United States and Latin America.  Palliser can continue its corporate strategy of focusing on increasing competitiveness by redefining its markets, rationalising distribution channels, and shifting manufacturing locations, with an aim to increasing overall efficiency of production.  With the Mexico alternative, Palliser will be able to lower its cost structure and develop a competitive advantage against competing firms.  NAFTA has and will play an increasingly important role in Palliser’s production strategy, with cheaper labour rates and raw materials such as local leather being available in Mexico.  Palliser continually needs to focus on its product line and make appropriate changes in order to maximize the effectiveness of the product mix.  This may include introducing lower cost products in order to attract a larger market in Latin America.  Competition for resources is limited in Mexico and will allow the first firm a definite competitive advantage over late entries into the market. A major priority of Palliser entering the Mexican furniture industry is to protect Canadian sales and continue growth through U.S. exports.  Palliser needs to increase investment outside of Canada, where a majority of its investments are located.

(See Exhibit 9; Action Plan)

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Exhibit 1

SWOT Analysis

Internal Strengths

• Many Product Lines:  Even though some product lines were discontinued, the product lines remaining provide a diverse mix of choices for consumers, focusing on innovative contemporary styles that competed on quality, value and delivery in the medium price range.
• Narrowing of product lines maximizes the production efficiency of the product mix.  (Could also be seen as a threat).
• Research and Development:  The introduction of the leather furniture line proves that Palliser is on top of research and development.  Palliser was able to foresee the increased demand in this untapped market and flourish on its growth and opportunities.  This also allowed Palliser to move away from traditional designs into lighter  “life style” fashions.

• Well-Developed Corporate Strategy:  Roger Friesen’s strategy is to not just focus within Winnipeg, but also to pursue new venture in foreign markets, with targets concerning new potential profits. Involving the company in Palliser World Trade Taipei supports this corporate strategy.
• Broad Market Coverage:  Palliser is dominant in the Canadian market currently, with over 85% of its revenues generated from Canadian operations.
• Brand Name Reputation:  Palliser is a domestically reputable company, by manufacturing furniture of high quality, innovative contemporary designs.  

• Strong marketing foundation:  Despite widespread beliefs that Canadian manufactures focus primarily on manufacturing and production aspects of the furniture industry, we believe that Palliser has a strong marketing foundation.  Decisions pertaining to additions (leather couches) and dissolutions of product lines and the realization of changing consumer preferences support this conclusion.  
• State of the art technology in manufacturing process:  Larger firms in the furniture industry have adopted various quality control techniques, and more sophisticated production procedures to correct rather than reduce errors.
• Family run business:  The siblings have more invested in Palliser than other outside managers may have.
• Manufacturing efficiency:  Palliser is able to provide shorter delivery times, and can hold less inventory compared to other Italian manufacturers.
• Strong sales growth:  Since 1964, Palliser has experienced strong sales growth and has a reputation in the industry (see exhibit 1a).

Palliser already has a foothold in the Latin American market, with CDN$2 million exported

Internal Weaknesses

• Inexperience with ventures into foreign markets other than the United States:  Palliser has never tried to pursue the Mexican market before, and instead of entering the Asian market, Palliser became a trade organization.  

• Infighting between factions in the organization:  Palliser, like many Canadian furniture manufacturers, is a family-run firm.  As such, throughout its history, tension and infighting between siblings has focused attention on internal rather than external problems.
• Weak depth in management expertise:  As a family run business, Palliser has relied on the management abilities of the family rather than looking at outside sources with greater management experience.
• Narrowing of product lines:  The elimination of the dining room, and the kitchen line, with concentration on the bedroom and living room lines may have reduced segments of the market.  However, we do not know whether the benefits outweighed the costs without further financial support.

Environmental Opportunities

• Expansion into Mexico:  Mexico can be seen as a potential opportunity for Palliser in the fact that Mexican labour is considerably cheaper than Canadian labour.  As well, there is a lower cost of leather and less competition for raw materials.
• Leather manufacturers already in place: In Mexico leather production is already in place for Palliser if they wish to secure leather from other manufacturers.
• Rustic furniture segment:  Total production of rustic furniture in Mexico was over US$100 million in 1997, with expected 15 % sales increase annually.  This segment has a potentially high profit opportunity.
• Mexico can be used as a platform:  Palliser can use Mexico as a foothold to grow through exports in Latin America and the lower states of the U.S.

• China: cheap labour, great manufacturing efficiency, and a large domestic population provide an opportunity for Palliser to look at development into this market.
• Greater increase in demand for leather furniture: This sector of the furniture industry has experienced huge growth increases as a result from changing consumer tastes and demands.
• Location of plant in Mexico:  The city of Saltillo already has a large manufacturing sector, with various manufacturers already present to potentially produce materials for Palliser’s products.

Upholstery – Fruit of the Loom, Leather Cutting – Garden State Tanning Limited, Furniture manufacturing – Lear Seating, Furniture suppliers – Woodbridge

• Opportunities near Palliser plant:  Adjacent to Saltillo is Monterey, a major center of three million inhabitants.  This population constitutes potential new customers.
• Entrance into the Mexican market – Palliser could be the controlling force in the Mexican leather industry in 10 years.

Environmental Threats

• Changing Consumer Tastes:  With a narrowing product line combined with weak marketing skills, Palliser could miss out on changing consumer preferences.  Right now this is not a problem, but future changes could be possibly detrimental.
• Increase in Foreign Competition:  Due to government deregulation, namely GATT, NAFTA, and FTA, has allowed for foreign competition (U.S and Asia) to increase.  This is a potential threat to Canadian market share.  
• Other competitors in the Mexican furniture industry:  Segusino already employs 1,400 people in its factory, producing Rustic furniture, with sales of US$35 million in shipments throughout North America.
• Although trade barriers have been lifted, historical attempts to move into the U.S have proved somewhat unsuccessful, despite one U.S manufacturing location that still remains. This is because established companies in the U.S are already dominant in their home markets.  
• Canadian Unionization:  Because Palliser is the second largest employer in Manitoba; it is continually a target for union recruitment drives.
• Weak Canadian currency:  Canadian currency is low relative to the U.S dollar, resulting in reduced purchase power.
• Knowledge of technology by workers when entering new market:  There is a potential threat of new workers in Mexico not knowing the state of the art technology that Palliser would implement in the factory.  This could present problems in the training aspect of new workers.
• Political and economic unrest:  The Mexican economy is highly unstable compared to Canadian or U.S. economies, and as such can present problems similar to the near collapse of Mexican banks, known as the Tequila Crisis, in 1994.
• Local population rejecting products manufactured by large-scale furniture firm:  The current furniture industry primarily consists of small firms employing less than 5 people.  As such, the local population may have negative feelings toward big industry taking over small-scale operations.

• Threat to Palliser World Trade:  The decrease in the effectiveness as intermediaries between wholesalers and retailers has posed a threat to this aspect of the firm.  It has become increasingly difficult to remain as a pure trading business in China, and Asian manufacturers were a force to be reckoned with.

Palliser Furniture’s Distinctive Competencies

It is through these distinctive competencies that Palliser will be able to break easily into new markets, and continue its successes with the introduction of new products. Continuance in achieving new distinctive competencies will allow Palliser to add more value to its products, achieve more market leverage and margin performance in its future endeavours.  

• Product development.  Palliser, through continual research and development is able to meet changing consumer preferences, as realized with the introduction of their leather furniture line.  This demonstrates that Palliser is able to use its manufacturing practices, design, product innovation, and marketing practices to stay ahead of its continually changing external environment.  
• Customer loyalty.  A strong reputation has enabled Palliser to maintain its customer base and create and sustain customer loyalty.  
• Supply Chain.  Palliser, relative to its competition has a strong supply chain, noted by its strong technological foundation, transportation efficiencies and speed of delivery.