Also these companies usually use promotions such as discount in order to Increase the demand. At the beginning this type of product was more inelastic because Just a few companies with less differentiated products were playing in the market. Despite still this market is highly concentrated, through the time new companies enter to the market and actually there are private labels that are obtaining more participation in it. And not Just the Increase in competitors, also the wide variety of brands have helped to increase the elasticity of its. 2.
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Market Growth Since the beginning this market showed an Interesting and steadily annual volume Roth rate of 3% between 1950 and 1993, and It made this market extremely profitable. But after experiencing decades of continue growth, the demand is slowing its growth; industry sales growth had slowed to under 2%, and it is threatened to the biggest companies. Supply 1. Technology Technology plays two important roles in the supply side: Differentiation and Innovation: despite the production process Is general, the differentiation between brands Is very Important.
Capacity: technology is crucial to achieve the market share targeted for every single firm, because the demand is big and if one company does not have the opacity to satisfy the demand soon could be out of the market. Cost: more efficient technology helps to the different firm to have lower costs and obtain higher profits. Considering that this is a highly concentrated market, where the biggest companies had been able to set the price; maintain lower costs allow them to increase their profitability, and invest more in order to obtain a higher market share.
Also there are a lot of buyers that are still growing, at a smaller rate than before. Due to the big and widespread demand there are a lot of channel of distribution. Major RET cereal manufacturers owned national distributions systems in each region; those distribute the product to supermarkets and other stores. At the beginning the main distributors were the supermarkets but then along the time stores such as drug stores, convenience stores and discount retailers became more important.
The cost structure was low for the general process, but to achieve a competitive advantage through differentiation also means a higher cost. The biggest companies have higher costs than the small and private label, because to differentiate their products the use special package or new ingredients, that also improve quality; but it means higher costs. Is absolutely necessary in this market to add or create new value to differentiate the products, wrought the time it allow to the biggest companies to acquired higher market share, because they were always innovating and creating different brands.
The biggest firm in this market is Kellogg and it has 40 brands, and this allow it to reach different market segments. Conduct The three biggest companies had been able to increase the price when they want and the amount that they want, increasing the gap with private labels. At the beginning they were able to do it because there were few competitors in the market; but then to continue setting the price they had to invest a lot in promotions, R&D and genealogy in order to differentiate their products.
Also they use some promotion strategies such as discount to retailers and cash payments for especial in-store promotions, cooperative advertising, large sales staff, and these firms also encouraged supermarkets and other retailers to adopt a shelf space plan that ensure that their products will obtain the better position. Media expenditure in RET cereals had been always among the most advertising intensive of all industries. Through these actions those companies achieved high awareness in the demand, but loyalty is official to have because of the diversity of brands and the intensive promotion.
Other action that has been common in this market is Co-branded, some of the biggest companies are producing and distributing new products but with another company brand name in order to achieve distinctiveness. All these tactics are necessary in order to achieve differentiation, because there are huge amounts of brands. This is one of the most important reason why is difficult to enter to this market, because fewer companies with the highest market share have so many brands that are almost covering all the segments.
Innovate and create new products is a real challenge because the amount of different products. Another barrier is the relationship that these firms have with the distributors; obviously the distributors prefer give preferential treat to those firms that during years have had big volume sales. Finally other important barrier is the capacity of these companies to increase the market, will have to invest a lot if it want to achieve the market share wished. All the market power that those few companies have allowed them to practices collusion.
Over time when one of them increases the price the others firms increase he price; and they used it practice to set other strategies such as promotion too. It has been change in the last year, and due to the new conditions of the market: slowing demand and enter of private labels, the biggest companies will have to change their strategies. Performance The largest cereal manufacturer were extremely profitable, their obtain ROAST between 15 and 30%. The high prices that were charge to consumers, and the increasing demand over years help to this companies to achieve such profitability.
Generally to satisfy the demand and reduce cost a single plant produce many brands f cereal and the production process is relatively similar for all cereals; so the main source of scale economies was bagging. But due to the necessity of differentiate the products, new products had been developed and by the way new technology. Because the keys to success in this market are differentiation and it Just could be achieve through improvements in technology, and satisfy the demanded volume that also is related to the technology that is used.
That is the reason why progressiveness is important and Justifies the 1% of gross sales that is spending on R&D; percentage hat is high compared with the 0,7% that is invested in the industry. Continuously development of new products with better characteristics increases the quality of the products that is usually used to segment the market. 1. What can you say about the market concentration of the companies in this industry? Few companies have the higher market share that gives them the market power to set prices; and it is persistent through the time, for example Kellogg continue being the firm with the higher market power.
It situation was generated because since the beginning they invest a lot in marketing, promotions strategies and R&D compare with other companies. Also they created strong relationship with some important actors in this market such as the retailers and distributors that ensure the better shelf space for their products. The increasing demand and the low cost of the general process, allow them to accumulate big profits and be able to offer huge discounts or implement aggressive campaigns.
With all this things in favor of these companies they were able to create high awareness in the market and control the market between them. Such as the demand was huge and increasing, one company as not able to satisfy all the volume demanded and that is one reason why they used collusion as a strategy. 2. Why has RET cereal been such a profitable business? What changes have led to the current industry crisis? There are three main reasons why this business is so profitable: 1. These companies are highly profitable because the process to produce cereals is simple and required high costs.
The higher cost in which this companies incurred were in those characteristic that differentiate their products such as the package or an additional ingredient for example. 2. Also the ability to collude and set high prices allowed them to increase their marginal contribution. When one company increase the price the others companies also do this. 3. The companies to recover fast some investment such as R&D, increase in capacity, new technology. Also these companies were always innovating and satisfying new segments market. That diversification of brands permitted them to obtain the high market share and by the way obtain high profits.
But with the current crisis they will need to differentiated more their products in order to maintain their market power; ND if the sales continue falling down then they will have to reduce the price in some brands in order to maintain the volume sold. Other aspect that could be affected is the relationship between these big companies (collusion), because with the reduction in sales due to the decrease in demand and the entry of new competitors (private labels) could do more difficult move together in the same direction. 3. Why have private labels been able to enter this industry successfully?
How do the cost structure of private label and branded cereal manufacturers differ? They were able to enter in his market because the process is simple, the basic technology needed is also available, and by the way this process is easy to be copy for others firms; also cost were low (in the general process). These characteristics allowed them to begin operation and enter to the market in a pacific way; for example, they compete with the biggest companies directly because they are oriented to different market segments, and their products are simple and cheaper with low quality raw materials.
These private label has lower cost than the biggest companies because invest huge amount of money in R&D, they are Just copying what once he bigger companies did. The unit cost is lower not Just because of the low quality raw material but also because they use simple package, they produce in less quantities, they invest a lot in marketing and promotion; and all these things make their cost structure totally different.
It means that they were able to satisfy low end segment market, that before satisfy for big companies due to the higher prices that these were charging. And this passive strategy allowed them to capture slowly that market share. 4. What does General Mills hope to accomplish with its April 1994 reduction in trade rumination and prices? They know that the demand is been decreasing and it will represent for them less sales revenues, so in order to maintain or improve the profitability they need to reduce cost.
Over years they had been investing a lot in promotion and marketing, and its brands have certain level of awareness in the market, so the reduction in the budget for strategy promotion in the short term could not affect its demand. Also the reduction in prices will allow them to attract new customers and preserve its actual costumers. In this way they can ensure the sales volume. With all these action they can expect an increase in market share that at the end means increase in profits. 5. What are the risks associated with these actions?
How do you expect General MillГ? competitors to respond? The main risk associated with this action is a price war, because considering the reduction in sales growth rate and the entry of competitor such as private labor, the other companies will try to reduce their prices too. And the problem for General is that the other competitors can that they will not be able to achieve its objective of improve profits. Decrease a lot the rises represent a hazard for it because a big company as Kellogg can implement an aggressive strategy to respond to it, and can have negative results for General Mills.
In this situation the demand will be beneficial because of the reduction in prices, but at the same time a high reduction in price could pressure some firms to get out of the markets, or the companies could lose the incentives to invest high amounts in R&D. 6. What should General Mills do? If they want to pull some firms out of the market they can reduce the price, but due to the risk associated is better continue with the reduction because in he future will be more difficult to increase the prices again.
Reduce cost is also important, but to maintain that policy with those promotion strategies could represent lose in awareness and by the end in market share too; so they need to balance it and try to be out of the standard of the industry. Another important point is continuing innovating and differentiating its products because that characteristic that defines the market competition over time is not going to change, at least in the short term. Despite the demand is decreasing, those companies who will be able to maintain competitive advantage will remain in the market.