Ready to Eat Cereal Case Study Essay

The value chain, App extirpateix B, in the RTE food grain attention consists of target manufactures and common soldier labels that receive their raw materials from suppliers and then distribute their product to diet keeps, drug stores, and mass merchandisers where the quit consumer crumb eventually purchase the grain product. tete-a-tete labels rely on wholesalers and third-party distributors to get their product on the store shelves where the end consumer flowerpot purchase these items. In the RTE texture industry, there were tether large manufacturers, world-wide mill ab out(a), Kellogg and Philip Morris that had a strong presence in the foodstuff. They were extremely profitable with pricing power and dominated the whole securities industry with keen market division all this do it unattractive for potential unseasoned companies participateing the RTE food grain grass industry.According to Appendix 2, Kellogg was one of the cosmic third companies in the RTE texture industry with an average market sh be of 40.25 from 1950 to 1993 in the whole industry. The industry was concentrated and the market structure for the industry was an oligopoly. The return of RTE cereal requires booty as the raw materials. Due to the fact that dough is a very common material, the power of the suppliers is low. Buyers work shift bes were low because customers can freely choose different brands and products. Companies, in order to increase their customers brand loyalty to legitimate products, are catering coupons and promotions, which subsequently increase the buyers switching follow and relegate buyers bargaining power.There is high competition breathing among RTE cereal companies the giving third companies had strong position and market share in the industry and are continuously introducing bare-ass brands and products causing increase competition in the industry. The high penetration barrier in the RTE cereal industry was another factor that contributed to its high profitability and make the industry even more(prenominal)(prenominal) concentrated over time. The toll to manufacture RTE cereal was high to achieve a minimum efficient scale. The high cost for building a cereal conceptiont and labor requirement made the capital requirements enormous for a hot entry, contributing to our argument that the entry barriers are high. Existing Big trio companies were believed to restrain competition and new entry among themselves.They owned strong distribution channels and focused on the proper stocking, display, and promotion with supermarket chains and food stores, leaving little style for new companies to enter the industry. They emphasized the prime shelf space situation in supermarket chains and food stores because the wide brand selection for customers can decrease their companies competitive advantage with no name brands. By guaranteeing their products prevent at the most valued center-aisle positions, providing di scounts and cash payments to sellers, major companies made new entry to the industry unprofitable. In addition, existing major companies promoted coupons and in-pack premiums such as free toys and gifts to increase product sales and build brand loyalty.They withal offered discounts to retailers for special treatment and promotions. This combined effort increased major companies sureness in the market share and the whole industry. Existing major companies withal introduced a majority of new products and brands, making potential companies unable to enter the industry. At this point it looks as if the Big 3s control condition over the RTE Cereal Industry will be everlasting until now it is hard to guarantee that a company will have sustainable competitive advantage over the industry.The industry crisis began when consumers started buying natural cereals. The Big Three did not prepare for this consumer demand, allowing other competitors to gain part of the market share. The threa t of a substitute product, natural cereals, was increasing rivalry among competing firms in the RTE Cereal Industry. Although it was hard to imitate the Big Three, competitors found a track around this and found substitutes that consumers were interested in.Once common soldier label competitors entered the market they were able to be successful in the industry by averaging totally $1.90 per pound, which is significantly less expensive than the Big Three, who were charging $3.20 per pound. Private labels also had a better relationship with the grocers because of the better margins they offered to them. This was a bargaining tool Private Labels used to their advantage. Now their product was being placed in more strategically placed locations throughout the grocery store, which increased their sales and lessen the Big Threes sales. In addition to allowing competitors into the industry, the Big Three hurt themselves by spending millions of dollars on coupons and publicise. There wa s little to no results that proved these methods were effective in gaining market share.For example, the RTE cereal industry spend $800 million in advertisements and condescension promotions, but did not see overmuch reward other than non-loyal consumers switching their products based on current avocation promotions. Another factor of the industry crisis was due to the fact that the Big Three stopped their united front of raising wrongs together. The Big Three no longer made strategic moves together and in return made it easier for others to enter the industry.At the start of the RTE Cereal Industry the Big Three offered value to their customers, however over time their capabilities were possessed by some competitors, not making their organizations rare. This hurt their competitive advantage among the market. In the end the Big Three were not able to compete on cost and the willingness to pay from the consumer was declining as more substitutes came into play. Private labels fa ced relatively few entry barriers to become a potential threat to the branded manufacturers within the industry.The lack of product differentiation between the products of branded cereal manufacturers and private labels and the ability of private labels to offer their product at a cheaper hurt contributed to much of their success, Private labels success can also be attributed to the declining brand loyalty of popular branded manufacturers. Branded manufacturers relied heavily upon the distribution of promotional coupons to their consumer base, but as a result this tactic forced many customers to become price switching and brand switching sensitive that in conclusion worked to the private labels favor.Furthermore, private labels success really was impacted by the high margins their products offered to retailers, which were higher by 3% in comparison to branded manufacturers. The cost structures of private labels and branded cereal manufacturers have distinct differences, which ha s given private labels a strong competitive advantage in the industry. Private labels advertizement and R&D expenses were less than branded manufacturers, which allowed the private labels to offer their product at a cheaper price.A typical cost disruption per pound of cereal product for the Big Three cereal firms shows that 23.43% of the retail price accounted towards their advertising expenses which is about 40% less than what private labels contributed towards advertising expenditures. Ralstons advertising expenses, the firm that dominated the private label cereal market, totaled to $0.15 per pound which about half of what other is branded cereal manufacturers contributed towards advertising. Private labels also relied on third-party distributors to deliver their product to stores. This assisted in cutting expenses by not requiring capital to create an independent distribution channel. Many private labels veerd forwarding costs by packaging their cereal product in large pla stic bags that proved to be a more cost-effected solution than using cardboard boxes.There are a number of things that worldwide mill about may have been act to accomplish when they decided to reduce prices and traffic promotions in 1994, with the main campaign being to improve the overall profit performance of their cereal division, Big G. Big G was the most profitable division of normal Mills representing 30% of the companys total profit. By cutting $clxxv million out of trade promotions and reducing the prices of their biggest brands by an average of 11%, general Mills hoped to become a more efficient firm. normal Mills president Stephan Sanger backed up his plan for trade promotions by claiming the 50 cents that the consumer saves by clipping a coupon can cost manufacturers as much as 75 cents. When General Mills announced this plan to cut pricing and promotion, they believed they would be the industry draw with all other firms following suit. However, Kellogg decided to stick with their price up and spend back line.The industry was split between the two market strategies and bound to follow whichever approach generated more profit. By cutting $clxxv million from their promotion and couponing budget and reducing the prices of their biggest brands by 11%, General Mills was taking incredible risk. Cutting the promotion and couponing budget is the superlative source of the risk. The most obvious aspect of that is the loss of visibility. Customers find out about products through promotions or coupons and if those promotions and coupons are not as readily available as those of the competitor, it is hard for General Mills product to be as visible. Competition within breakfast cereal brands is high.Several people, frequently times referred to as savers, shop primarily based on coupons available. If coupons for General Mills brands are no available, these people will purchase cereal brands where coupons are available. The benefit of this termination, h owever, is that coupons in this industry are actually be the company money. That being said, it is also difficult to put a price on the visibility that the coupon provides. General Mills decision to reduce the price of their major brands comes at a risk as well. This could be perceived by competitors as price-cutting and could start a price battle, which would end up poor for both General Mills and theircompetitors.As a competitor of General Mills, our expectation would be for them to have an almost expect and see scheme. We would not rush into any decision. Instead, we would see how this works for General Mills and then make a decision. By cutting promotions and coupons, General Mills is losing visibility but by cutting their prices, they are more attractive to the consumer who is already in the store. It is difficult to judge the benefit of that trade off so waiting to see what happens with General Mills is the strategy that is most appropriate for competitors. On the other han d, as General Mills, this decision has been made and they should stick to it. It boils down to the tradeoff discussed above. This seems to be a perilous business decision for several reasons however this strategy should be monitored fast and reevaluated after a several months to determine the effectiveness and a plan to move forward from there.