Break the competitive roadblock: Three Canadian success stories

How Magnotta Winery, Interfor and C-Vision got it right.

Gabe and Rossana Magnotta of Magnotta Winery Corp. (TSX: MGN) had to think fast back in 1990, when the Liquor Control Board of Ontario (LCBO) decided not to carry their wines in its stores, citing lack of shelf space. Shut out of the only retail distribution system for wine in the province, and with their first vintage ready for market, the Magnottas had no choice but to sell it on-site at their winery.

Today, Magnotta is one of Ontario's biggest vintners. But the question then was how its founders would get anyone to come to their shop in tiny Vaughan, Ont., outside Toronto. “We were out in the sticks and we had to either close down or try something different,” says Rossana, president and CEO of Magnotta. “We needed a marketing strategy to survive.”

Most often, we associate innovation with software, consumer electronics, biomedics and other industries characterized by the race to produce new products with more and better features. But innovation is equally important in traditional industries like winemaking. It's frequently the decisive factor when companies like Magnotta hit a competitive roadblock, whether it be lack of access to markets, regulatory impediments, negative consumer perceptions or an entrenched, dominant rival. What counts under such circumstances is the ability to use a new approach to go over or around the obstacle.

Magnotta overcame its lack of access to LCBO distribution using innovative marketing strategies. Gabe and Rossana launched their wine at $3.95 a bottle — several dollars less than a bottle of comparable quality then cost at the LCBO — in hopes of building volume. Their reverse sticker-shock strategy caught the fancy of the media, providing publicity the fledgling company could not have purchased, and soon bargain-hunting wine drinkers were flocking to Vaughan.

“Magnotta was very aggressive in its public lament of its situation: 'We don't have access to the distribution system, and here's how we're going to get around it: with a low-cost business model,'” says Joel Baum, professor of sociology at UofT's Rotman School of Management.

It worked. Magnotta is now Ontario's third-largest winery, with 2006 net earnings of $2.8 million on net sales of $23 million. Its stock has traded between $1.95 and $2.55 over the last 12 months. It has diversified into brewing and distilling, owns vineyards in Chile and Ontario, and operates seven stores as well as thriving online and export businesses. But the value pricing strategy the business was built on hasn't changed.

“We still pass on our savings on distribution to our customers,” says Rossana. “That makes us unique in the marketplace.”

Vancouver-based International Forest Products Ltd. (TSX: IFP.A) is another Canadian company that responded to a competitive roadblock with an innovative strategy. For years, environmentalists' high-profile attempts to halt logging in British Columbia's coastal forest caused work stoppages and legal challenges that raised the company's operating costs, created negative consumer sentiment about its products and caused long-term uncertainty about its logging operations and supply. Meanwhile, the industry was suffering the effects of surging energy costs, a strong Canadian dollar and the softwood lumber trade dispute.

There wasn't much Interfor could do about the structural problems. But it could make peace with the environmentalists who had targeted it. It collaborated with them on a ground-breaking land-use plan, finalized last year, that balances conservation and development in B.C.'s coastal forest and protects large tracts of forest land. The company also implemented ecosystem-based forest management, which maintains the diversity of forest life, and replaces clear cutting. These moves have helped it overcome opposition that raised its costs of doing business and has also translated into tangible benefits, such as much-needed certainty about where the company can log, says Rick Slaco, VP and chief forester.

“Their adoption of green practices has definitely helped them operationally,” says Kevin Mason, managing director for paper and forest products at Equity Research Associates. “Interfor is targeted less in the media headlines and can focus on operations, not disputes — a savings in terms of money, but it also results in a more focused management team. Also, through land use decisions, there is more harvesting certainty.”

Interfor, which in 2006 reported net earnings of $95 million on net sales of $824 million and is the world's leading producer of Western Red Cedar, is Equity Research's top pick for the sector. The company has traded between $5.91 and $9.84 in the past year, and was recently fetching $9.00.

It plans to capitalize on its new-found environmental respectability by promoting West Coast cedar building materials — once the target of a consumer boycott — as green alternatives to less expensive substitutes. “We want consumers to understand the benefits of using cedar siding, so they can feel good about paying more for it than they would for vinyl,” Slaco says. “Making cedar siding takes less energy and creates less pollution, so it's an environmentally sound choice.”

At the other side of the country and the other end of the size spectrum, tiny C-Vision Ltd. of Amherst, N.S., has also overcome competitive obstacles through environmentally beneficial innovation. C-Vision is a private, 100-employee custom electronics manufacturing and design firm that offers a wide range of services, of which printed circuit board assembly is the largest and most important.

When Chuck Cartmill founded C-Vision in 2002, the company faced two daunting competitive challenges: differentiating itself from, and competing against, established high-volume, low-cost offshore contractors; and complying with the looming European Community ban on imported products containing lead and other contaminants, which was implemented last year.

C-Vision decided the best way to tackle the competition was to make its processes, in particular soldering circuit-boards, comply with the incoming EC regulations. In 2004, it set up a low-volume, parallel, lead-free manufacturing line, at a cost of about $1.9 million, exclusive of training. Learning to handle lead-free solder alloys, which perform differently and are relatively unforgiving, took time. But in May 2006, C-Vision began full-scale lead-free production. Today, lead-free circuit boards account for more than 50% of its production.

Since more inspection and rework are necessary and yields are lower, lead-free circuit-board manufacturing remains more costly and time-consuming than the traditional method. “But it's driven all our growth in the last couple of years,” Cartmill says. “We're competing with companies in Asia and India, and lead-free is something different that's opened doors for us.

“Supplying companies in Europe has opened doors in North America, even though lead hasn't been banned here as yet, because electronics companies aren't going to make two products for the two markets.”

C-Vision doesn't publish its financial results, but Cartmill says sales and profits have doubled two years running. Moreover, the company is positioned to become a circuit-board supplier of choice as more jurisdictions implement lead-free standards. It plans to exploit its green-supplier status by manufacturing plastic housings for electronics using environmentally friendly substitutes for flame retardants, in compliance with European standards.

Facing significantly different challenges, all three of these Canadian firms — Magnotta, Interfor and C-Vision — found solutions through innovative strategies. In the process, they've benefited their customers, bettered their bottom lines and proven that success comes not necessarily to those who work harder, but to those who work smarter.