Substitutability by buyers and suppliers defines the boundaries of RET cereal industry from a demand-side perspective and a supply-side perspective respectively. The boundaries from a demand-side perspective In this case are the fact that buyers have low switching costs. The cereal Industry has a diversified range of products so consumers can easily substitute one type of cereal for another or one brand for another. From the supply-side perspective, boundaries are technological in nature such that larger firms can produce many different types of cereals in large reduction lines as they can sustain the large capital requirements.
Smaller firms are unable to diversify products in this way, as they do not have the required technology or capital to produce a large range. Furthermore, the Big Three also faced a trade-off with regards to which cereals would be allowed the limited shelf-space they were allocated at supermarkets. 2) The Industry significant segment markets are aimed at different types of consumers or those with different lifestyles. For example Kellogg makes Front Loops, which Is aimed at children rather than adults and Special K. Aimed at the more lath conscious consumers.
Quaker Oats also produced hot cereals. A segment that was expected to grow during the ass was the ‘Co-branded’ cereals. “Co-branded cereals were produced and distributed by one of the Big Three, but relied on another company’s brand name for the product’s distinctiveness. ” (Harvard Business School, 1995. PA). This is a way of targeting consumers who are brand loyal. It is evident that companies attempted to diversify into the snack foods market as well. Here they are targeting consumers who are ‘on-the-go. General Mills introduced a cereal called ‘Hongs’ that could be eaten with fingers. The Industry has been successful because It Is the most concentrated out of all U. S Industries. Cooperative competition Increased their bargaining power so that buyers would have to pay the prices set by these three major firms. They initially did not need to worry about using pricing strategies as the cereal industry was concentrated and not subject to significant entry threats. Moreover, long-established brands have had the advantage of longer presence in the industry thereby benefiting from brand loyalty. The major brands have also been implementing strategies to keep in line tit trends.
E. G. Vitamin fortification, pre-sweetening and a surge of interest in granola and natural cereals have all spurred growth in the industry. In general, the Big Three possessed the resources and had the capabilities to effectively manage those resources. 4) The Big Three had the advantage of economies of scale, which meant that they could sustain the large capital requirements of more than $100 million. (Harvard Business School, 1995. PA). Private labels would find this a deterrent to entering the channel so access to shelf-space was easier than for private labels. (Harvard
Business School, 1995. PA). It is also worth noting that even if private labels were able to gain market share by proliferation with the surge in demand for natural cereals, the benefits would only be short-term. This was because incumbent firms soon introduced cereals in line with this new trend forcing all but one of the new entrants to withdraw. According to Grant, “establishing alliances and agreements with competitors can increase value of the (competitive) game by increasing the size of the market and building Joint strength against possible entrants” (Grant, 2009. IPPP).
This s evident in the RET cereal industry; “the Big Three had restrained competition among themselves by achieving effective unwritten agreements to limit in-pack premiums” (Harvard Business School, 1995. PA). 5) Prior to 1994 the key to success lay in the concentration of the cereal industry and having few challenger firms. The Big Three also invested heavily in advertising; the advertising/sales ratio was 10. 2% by 1993 (Harvard Business School, 1995 . PA). They did not initially need to resort to pricing strategies however, as buyers had low- switching costs, the threat of private labels increased.
Private labels had the advantage of consistently lower prices than major incumbent firms. As the RET industry was characterized by “regular rounds of price increases”, the major firms resorted to using coupons as a promotions strategy. However, this only swayed the most price-sensitive buyers, proved costly to the issuers and diminished brand loyalty. Private labels managed to benefit from this situation. “The high prices and ubiquitous coupons of branded cereals were blamed by many for the market share of private labels. ” (Harvard Business School, 1995.
PA). General Mills identified the robber that their cereals division was declining, so in 1994 they changed their strategy in order to add clarity to their positioning in the industry. They decided to cut $17 million out of its promotions and coupling budget and simultaneously reduce prices on its biggest brands by an average of 11 percent. (Harvard Business School, 1995. Pl 1). As a result, smaller firms were gaining some of General Mills’ and Kellogg market share. The success factors are changing in the sense that firms have changed their game strategy.