The Enterprise Position via the 5 Forces Model of Porter

Pet Ecology Brands Inc. (Pet Ecology hereafter) has a strong competitive position with respect to its buyers (Montgomery and Porter, 1991), because it has proprietary products with clear health and conservation benefits for its customers. Since the country has an issue with respect to land fills, the company also has a strong position with respect to its key suppliers (Montgomery and Porter, 1991). This strength with respect to suppliers is reinforced by its use of technology developed and approved of by the U.S. Food and Drugs Agency (Petecology, 2005).

The likelihood of other entrants (Montgomery and Porter, 1991) in the litter niche of the pet products market is not known on the basis of the sources used for this document. However, even if new entities or competitors develop similar technologies for cat litter, Pet Ecology will continue to have the advantages of being a pioneer. New entrants in the cat litter market will help to expand demand, and thus act as a net benefit for Pet Ecology.

However, the health benefits of the company’s dog food could easily be copied, or even improved upon by competitors. Low fat diet ingredients are common in the field of human health, so the barriers for entry in to this important segment for Petecology are not significant. Overall, the strength of Petecology with respect to new entrants is relatively secure with respect to cat litter, but less so with respect to its dog food range.

Petecology is highly vulnerable to competition and substitutes. Mainstream veterinary suppliers, many of which have strong bonds with pharmaceutical research, can easily develop alternate litter products or substitutes for the diagnostic benefits which the company claims (Petecology, 2005).

The situation is even more unstable with respect to health foods for dogs, which is a technological area with many human health technologies to copy and extend. Landfills can also be managed by bacterial recycling methods. All the major technical benefits claimed by Petecology can be copied or substituted with relative ease. Companies with other lines of revenue could easily maneuver Petecology out of its developing niche.

Company Objectives

The company has two stated objectives (Petecology, 2005). One relates to providing a value-added and ecologically wise version of cat litter, and the other is to offer tasty but healthy alternatives to fatty foods for dogs. It therefore appears that Petecology wishes to cater to a segment of pet owners who care for the environment and who are also seized of health issues with respect to their cats and dogs. The testimonials available on the company web site (Petecology, 2005) indicate strong and distinct customer interest in the benefits claimed by the company.

The company also seems to chase a global market presence for its products. Its archives of news reports (Petecology, 2005) show extension to places as far apart as Hawaii, Turkey, South Korea, Japan, and Australia. All this has happened even before the North American market has been penetrated fully! The Sales function is amongst the fastest growing departments of the company, with recruitment of high-profile and experienced professionals from the industry at regular intervals (Petecology, 2005).

The company has reported record sales in May 2006, only to reach 50% of that figure in the first 10 days of the following month (Petecology, 2005). Some of this extraordinary growth has been due to the rapid appointment of new distributors. The company has invested $3 million in advertising, participates prominently in industry events, and sponsors national pet adoption programs even though it is yet to put its financial statements in order, to say nothing of showing a profit!

The company has no stated financial objectives, except to try and meet regulatory norms for full stock exchange listing (Petecology, 2005). There is a 2005 news report of a 50% gross margin as a result of a Chinese joint venture (Petecology, 2005) but there is no subsequent reporting on such a key development. It is evident that the company management is preoccupied with a narrow perspective of its technical achievements, that it is splurging on rapid and uncontrolled market expansion, even as ignores vital financial aspects of generating surpluses and towards accounting for all transactions in professional manner.

Overall, the references, on which this document is based indicates that the company has not drafted its objectives in a professional way. The goals are visionary but not specific. The company has expanded its top line rapidly, invested heavily in sales and branding, but with no sign of profitability on the horizon. There is no declared deadline for achieving financial closure, which implies that the company may not even have a full and detailed plan and budget.

Company History

Petecology started operations in 1996 (Petecology, 2005). It began trading on the stock market in 2004. It has only the cat litter and dog food brands to show for operations which now exceed a decade. Thus, its new product development track record is poor relative to its peers in the broader biotechnology sector.

Market acceptance and penetration by the company has been commendable (Petecology, 2005). It has added new distributors and world-wide territories at a rapid pace, and has built significant sales and distribution strengths and resources.

The company has a poor track record of fiduciary controls. Though it has publicly promised to report on monthly operations as far back as November 2005 (Petecology, 2005) it has failed to provide audited accounts and to provide minimal stock exchange returns two years later.

Petecology located a financial analyst, ostensibly specialized in ‘micro-finance’ to prepare a company analysis in early 2006 (Petecology, 2005). This expert predicted a stock price which has been proved to be entirely off the mark. Significantly, the report dwells on the ambitious growth plans of Petecology without any remarks on its non-existent financial control systems.

Overall, Petecology is at best a hobby conducted at the cost of hapless and gullible investors. It is far from the minimal standards expected of a professional organization.

Organization Structure

Petecology is top heavy with high turnover at the Board level, full of fancy designations, and highly biased in favor of selling at any cost (Petecology, 2005). There is a company secretary, but apparently without resources to meet statutory requirements and accounting norms. Fortunately, the company does have a stated plan to set its financial returns ‘in order’ (Petecology, 2005).

Sales managers with territorial divisions have been recruited at frequent intervals after s Sales Director, separate from the Chief Executive officer, came on board. An independent Director has left (Petecology, 2005) and has been replaced. There is also a Product development function (Petecology, 2005) though it only has improved versions of the original brands of the company to show as results of all its efforts!

The overall company structure shows a strong bias for distribution and sales. The company is focused sharply on achieving short-term top line targets, growing at amazing speed, and in establishing a market presence all over the world.

Company Operations

Pet Ecology operates throughout North America and in various countries of the world as well. It has developed an electronic commerce option as well (Petecology, 2005). The company uses a mix of national veterinary distributors and specialty chains to distribute its products. It also maintains a high profile in the industry by participating in significant events related to its business and through an expensive advertising campaign (Petecology, 2005).

Though no audit confirmation is available, the company’s financial analyst reports a loss of over $300 thousand in 2004 (Petecology, 2005). This has happened on a gross revenue base of less than $100 thousand, and on the back of a published claim of a 50% gross margin. Only simple math is needed to deduce the scandalous extent of financial mismanagement in an enterprise which has been around for over a decade!

Future Outlook

The financial analyst chosen by Pet Ecology has published the company’s market capitalization at over $30 million with a forward looking Price: Equity ratio exceeding 5 (Petecology, 2005). However, the company on the basis of the references used for this document, would be hard pressed to even liquidate its existing liabilities of over $500 thousand (Petecology, 2005) by selling both of its flagship brands to professionally run competitors.

It need not be so. Though employees own 35% of the company, financiers have moved in of late (Petecology, 2005). It is possible to take emergency measures to stop loss-making transactions, and to tailor operating expenses to the actual realization of revenues. Naturally, reliable and comprehensive financial controls are a pre-requisite. Presumably, litter and pet food have relatively low value addition in proportion to bulk, so net price realizations from deliveries to far corners of the globe is a matter of concern for a Texas based company. There could be a host of North American and international distributorships from which the company should exit. However, the Chinese venture which was to yield a gross margin of 50% needs to be executed on priority.

A comprehensive plan with revolving budgets may nurse the company to financial health even at this late stage. This would also buttress any investor goodwill which the company can retain after its recent defaults on the stock exchange front. Reducing its enormous office and warehouse space of over 11 thousand square feet, and cutting back on its inventories which exceed annual sales (Petecology, 2005) is other pressing priorities.

Offerings

The company has two major brands and a significant technical service as well. It has a highly differentiated corporate brand with ecology and health values for pet owners, particularly those with cats and dogs.

The company offerings extend beyond customers. The implications for land fills means that regulators and citizens at large who may not even have cats of their own also have benefits from the business of Pet Ecology.

The concept of diagnosing and tracking a cat’s state of health and the advantage of combining low fat with great taste for dogs, each fill important spots in potential market segments.

The company web site (Petecology, 2005) offers a valuable range of technical services and useful information for cat owners. This will have additional branding advantages even if new competition enters the market space.

Overall, the company has a judicious blend of product benefits and service reinforcements, backed by favorable customer responses and distribution chain support for its offerings.

Market Status, Trends, and Segments

One in every 3 U.S. households includes a pet (Petecology, 2005). Spending on pets in the U.S. has doubled to $34 billion in the decade following 1994 (Petecology, 2005). Pet Ecology is a marginal and inconsequential player in this massive market, with sales of 2004 at less than $100 thousand, and substantial losses which exceed its gross revenues. The company’s operations do not have any commercial merit, and seem to amount to no more than amateurish attempts to bring some interesting technical innovations to market.

The company’s claims about concern for the environment and for the health of pets (Petecology, 2005) are true. The total market growth at a time of macro-economic uncertainty shows that upward trends will continue, and may even accelerate as the general economy fares better.

There are many ways in which the market can be segmented, and Pet Ecology has chosen to operate in multiple clusters. It started sales by appointing specialty and national distributors, but has added an electronic commerce option subsequently. It has chosen to service Hawaii, and a number of distant overseas markets as well. Though relatively light weight distinguishes its cat litter, it is not clear if the company can distribute such a product across the globe profitably.

Overall, the market for pets is growing and of interest, as are the technologies available with the company. However, Pet Ecology is not well positioned to take advantage of the business opportunity, and is in danger of bankruptcy as well.

SWOT

The company has a surprising number of strengths for an operation which loses cash. It has built corporate goodwill for environmental conservation and for pet health at the same time. Both of the flagship products fill unmet market needs in significant manner. Customers have responded enthusiastically to the main brands.The company’s technical service adds to its goodwill. Pet owners, who have emotional bonds with their cats and dogs, will appreciate the consistent efforts of Pet Ecology to provide a generous and caring service. The 50% gross margin which the company has estimated as a result of a joint venture with the Chinese also bodes well for Pet Ecology to turn the corner in cash flow terms.

The steady market growth for pet products in the United States is an important opportunity for Pet Ecology. The total potential of over $30 billion is interesting and financially attractive for a company which has not topped $100 thousand sales in a calendar year.

Though the company’s revenues are miniscule, it has recorded rapid sales growth by appointing new distributors. It can leverage such distribution strengths for achieving critical sales mass quickly. The main brands of the company meet important health and ecology concerns of important stake holders. The opportunities are amplified by the fact that the company has proprietary technology, though it is unclear whether the company holds patents.

Incompetent management practices weaken the company’s prospects. It suffers from inadequate financial controls with the result that it has entered in to extravagant leases, and has purchased raw materials to build up unnecessary stock levels. These issues are exacerbated by weak accounting systems: the company’s accounts have not been audited though accumulated losses top $3 million (Petecology, 2005)

The Company is also weakened by spreading its resources too thinly across a large number of markets, some of which are distant from Texas. It has an incomplete product range, the innovativeness notwithstanding, and has not kept pace with industry standards in terms of new product launches.

The company faces the threat of being unable to meet its commitments. Directors, other employees, and suppliers, are all owed substantial sums of money. Specific actions and returns from the joint venture in China are unclear. Losses may therefore be higher. The financial validity of sums due to the company is unclear. Accounts receivable are about a third of annual sales (Petecology, 2005). The commercial terms of trade with distributors are unclear. This is an especially serious matter if goods have been shipped on credit to customers overseas.

The company’s threats are not financial alone. Competitors may launch equivalent or even superior products in the course of time. This is especially likely with respect to fat-free dog food. Other service providers may find options for the diagnostic properties of the company’s cat litter. Overall, the company’s business model is unstable and subject to attack.

Value

Pet health and environmental conservation are the major values conveyed by the company’s products. The cat litter can be used for easy diagnosis if a cat falls ill. The litter can also track the cat’s response to treatment, and the course of disease, as it changes color with each new status of health. The dog food is free of fat, which is a major problem with canines which are highly indulged by their owners. Though the dog food is healthy for consumption, it is also tasty for dogs, so pets need no persuasion to have their meals. Overall, the company’s products convey important values for common owners of cats and dogs. However, there is an additional benefit for public health officials because the cat litter ameliorates the problems of land fills which are nearly used up to full capacities.

Cost to Produce

The only specific information available on this matter is that a joint venture between Pet Ecology and a Chinese entity will yield a Gross Margin of 50%. It is also evident from the accounts, though they have not been audited, that the company makes losses. The losses are more than 4 times the gross revenue. Therefore, the Gross Margin is only of academic interest at this time. It is possible to guess that this figure may be less than 25% since the company has chosen to move across the globe for a joint venture to yield twice that amount.

Support

Pet Ecology has a strong support function. This is largely by offering comprehensive technical advice for potential customers. The company is even willing to address questions which are not directly related to its commercial enterprise. Pet Ecology is receptive to customer feedback and always makes the effort to absorb what potential customers have to say. The company is also an active participant in trade and scientific events.

Product Curve Analysis

The company’s major product lines are about 10 years old. They are therefore mature by biotechnology norms. Pet Ecology has launched some improved versions of the original brands but the extent of innovation and new features are relatively low and few. Though the company’s products are mature, their demand levels grow rapidly, largely because of new market penetration, and arrangements for stocking by new trade channels. The electronic shopping option has modernized the product offering and put it back in the growth phase for some market segments. The products are also in the introduction phase for some new territories which the company has entered of late.

Competitive Advantage/Disadvantages

The products have the advantages of unique health and safety benefits for pet owners. Cat owners can safeguard the wellness of their animals in comprehensive ways using the differentiated litter of Pet Ecology. Dog owners can enjoy serving their pets’ tasty food without clogging their arteries with cholesterol-laden food. The cat litter is also advantageous for city administrations because it addresses the problems of land fills. Overall, the company’s products have outstanding strengths in terms of health and environmental consciousness.

Healthy dog food can be made and marketed by competitors. Some of them may exceed the nutrition and taste values of Pet Ecology. The disadvantage of this company’s dog food product is that it can be copied or even improved upon by competitors. The disadvantage of the cat litter is that it may not appeal to economy-minded owners, and those who do not visit the specialty stores where the products of Pet Ecology are stocked. Further, competing products may be better at odor control and may be easier to dispose off.

Conclusions

Pet Ecology is in a sorry state. The best course of action would be to sell its brands, and use the proceeds to pay off as much of the liabilities as possible. The technologists in the company would be best off serving as employees in an academic institution or in a professionally managed firm.

The other option is to introduce financial controls, cut back recurring expenses to affordable levels, and to recast arrangements with the distribution chain so that all transactions make some positive financial contribution. One way to do this would be to stop physical and international distribution, and to focus on filling Internet orders instead, ensuring timely receipt of payments, and pricing products to cover costs with reasonable margins.

References

Montgomery, C, A, and Porter, M, E, 1991, Strategy: Seeking and Securing Competitive Advantage, Harvard Business Review Press

Petecology, 2005, company web site, accessed June 2007 from: http://www.petecology.com/