Joseph’s Gourmet Pasta Case Analysis

Introduction: Key Facts Presentation

Faro is the protagonist of Joseph's Gourmet Pasta company, which commenced operations two decades ago. The company carries a long history of performance, from being a small-scale local distributor, to the level of acquiring a significant competitor in the market. The company's growth can be cross-checked from say 2006, where its net sales amounted to $13,125,000 to $40,841,00 by the end of 2010. Despite this growth, the company seems to be experiencing challenges from competition, thus in need of strategies to overcome. The CEO, Mr. Faro, is contemplating on the strategies he has to undertake to raise sales revenue to $70m and further to $100m. This, however, calls him to be more strategic, unlike being operational. He outlines strategic options relating to establishing internal expansion of product line, building a stronger management team, considering selling off the company, or exploring a move to take additional equity investment. Strictly speaking, the CEO needs an effective strategy, for he has neither the exit strategy nor the diversification strategy, though determined that an additional $15m to about $20m in debt or equity would serve to raise the company's operations to $100m.

Situation Analysis

The company employs a set of business models that give it a competitive edge in the market. It focuses on technological production, which is steered slowly by the Research and Development Department. This model has automated the manufacturing process, that combines different production practices and procedures from several industries. Customers’ preference could be associated with the company’s choice of high end frozen stuffed pasta and frozen appetizers. Customers seem to be moved with the unique pasta shells from Joseph's. The idea of the lab has moved customers as well as the profitability levels. Other than the use of lobster, other additional ingredients like cheese, mushrooms, chicken, and shrimp do contribute to the company’s customer value proposition. 

Get Help With Your Assignment

If you need assistance with writing your assignment, our professional assignment writing service is here to help!
Find out more about our Assignment Writing Service

The company’s choice to use independent food distributors who have significant access to the market expands its customer outreach. The distributors are its strength in capturing a larger market share. Also, the acquisition of organic food production has promoted Joseph’s sales, considering the market’s appreciation of organic production. This idea provides a further opportunity for the company, given that other big food production companies like Nestle have been caught off gourd. Considering low carbohydrate diets, in addition to organic production, prove much more customer satisfaction. A step that has led to the emergent of small innovation companies to have their products at restaurants’ menus.

Moreover, these small companies have integrated production styles that suit local customers' tastes. This represents a threat to the company, as other companies are figuring out to outshine the market. The second threat the company faces to secure a large client base for its Stuffed pasta, arises from large food production companies that seem to compete on cost and market share. As such, a strategy of acquiring extra finance would propel Joseph’s competition against these established companies. To comment on the competitive edge of Joseph’s; they are slightly above average, but soon losing out if no serious plans are undertaken. The company faces a creeping level of costs, considering a rise in the cost of goods sold from $8.2m in 2006 to 18.6m in 2010, which is more than 100% increase. Gluten-free food options have started to be appreciated by the market, thus a new production niche, yet Faro and Robinson still believe in maintaining high end frozen specialty pasta with very fewer diversities.

Identification of critical issues

The first issue pressing the CEO, is the emerging competition, both from small and innovative companies that compete on gluten-free foods and low carbohydrate diets; and the already established food companies.  Secondly, the protagonist is worried about the increasing costs; the company has been experiencing its costs creep over the years. To address these issues, the CEO and the top management have to prioritize the strategies to undertake before time expires on their end and are left to be caught up with the growing competition. The strategy to consider private equity investment might serve to be the best considering an estimated $15M to $20m that the CEO believes would get them to the toes for the knocking challenge. However, the step will suggest forgoing some level of control for the company, since the current shareholders’ equity stands at $9.5m.

The case will not be much different if the CEO resorts to financing the company from debt, given its creeping cost level. The company's debt ratio stands at 43.4% basing on its current total liabilities over total assets. Extra debt as finance intends to raise the ratio to a precarious position for the company. The step suggests that the CEO assumes the risk for a foreseeable success. For the case of small companies' competition on innovation, the company needs to focus on diversifying its high end frozen specialty pasta to other technologically demanded foods. This, however, will suggest the CEO's second options strategy of expanding the management to be put into action. Comprehensive management brings in a diverse set of ideas and problem-solving techniques that serve to promote the diversified production lines.

The CEO is not ready to retire; therefore, exploring to sell the company should be ruled out from being a viable strategy, despite its advantage to enable the investors of the company together with the management to cash out. Faro, holds the company’s dreams and vision, he lays hands to most of the operations running in the company, selling it would mean that the company would be left to investors who might not clearly share in the dream. Seeking additional finance and expanding the product line would be the best options or alternatives that need to be considered. On assessing Faro's critical and strategic ability, is slightly mismatching. He does not include top-level management's' ideas; he works his way and fails to notice some strategies like selling the firm would be more detrimental than the reasons he posits for it.

Statement of potential options for action

Out of the four strategies the CEO provides as options, that entail considering internal product line expansion and acquisitions, building a stronger management team, selling the company and going for additional private equity financing, three are presumed viable. The idea to sell the company does not fit to be an approach of consideration. He the CEO has other strategic actions that prove much more workable. Expanding its product line serve as the most vetted option of consideration given that Joseph’s has majored in frozen stuffed pasta and disregarded other products like low carbohydrate diets. This strategy goes in hand with acquisition of the small companies that sell identical products to him. The move will see the company gain deeper to the markets where Joseph’s isn’t strong.

Recommendations

The company's top management should consider multi-strategic plans. It has to embrace several strategies as opposed to a single one.  The state in which the company is in, in terms of the profit level, return on investment, and the working capital, support the idea to consider extra finances from equity. The company’s ROI stands at 37.1% in 2010 before income tax; this suggests that after-tax, the percentage is set to get lower. The assets accumulated by the company only serve to raise about less than a third of their investment. This value provides a suggestion to raise more capital for investments. Joseph's working capital stands to be less than enough to be plowed back into capital investments.  Unless otherwise, the company should not implement the approach to debt financing. Given its long-term debt to total assets ratio that stands at 22.9% as at the end of 2010, it suggests that the company can only serve its long-term debt for about four times its assets value. Borrowing 20 million dollars increases the ratio to a risky level. Only upon ultimate discretion should the loan be sought. The CEO has to lay every detail of the strategic plans to have the loan finance the real intended strategies that will promote the success of the company.

Secondly, the company should consider expanding its product lines. The available major, the frozen pasta, despite its acceptance in the market, its sales revenue level has not increased as could have been expected from 2009 to 2010, the profitability margin is about 15.2% which stands to below with the significant emerging competition. To communicate these strategies, it all begins with the top management. They first have to be in consensus with the plans, conduct research with the help of consultants and experts regarding market needs and technological requirements for the new diversified products. To Identify the specific specialty needed for the additional management team, the CEO needs to expand its management for more ideas and services to the company. Approach the investment firms to strike a better deal on the finances then direct the whole team into a new approach. And, most importantly, to proceed with discretion.

Exhibit: Horizontal Analysis of Joseph’s Performance

*Assumptions.

1. The Net Income used is Pre-tax.
2. The Value amounts are in thousands, (000)

The company shows a positive trajectory from the year 2006 through 2010. The company’s performance is relatively great, however, given the competitors financial statements, one will be able to tell if competition is the real mess in the industry. Considering financial options, from either debt or Equity, the analysis above provides an illustration of how risky it could be for Joseph’s to borrow or issue shares of value $20m given its Asset value, current shareholders value and the long-term debt of the company.

Reference

• Evans, C. J. (2016). Thinking Strategically. In Management and Leadership Skills for Medical Faculty (pp. 201-211). Springer, Cham. https://link.springer.com/chapter/10.1007/978-3-319-27781-3_20