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Differentiated Products

Differentiated Products. AG BM 102. Commodity Products. Consumer (or buyer) doesn’t care who made commodity products Commodity products are sold on price Quality matters but many sellers can provide a given quality Producers have very little customer loyalty

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Differentiated Products

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  1. Differentiated Products AG BM 102

  2. Commodity Products • Consumer (or buyer) doesn’t care who made commodity products • Commodity products are sold on price • Quality matters but many sellers can provide a given quality • Producers have very little customer loyalty • Barriers to entry low – at least in comparison

  3. Differentiated Products • These products have a distinct identity • The manufacturer has some control over the price • It need not sell for the same price as the competitor’s price • Keys to success are product characteristics • Entry very difficult

  4. Advertising • Backbone of differentiated products – remind consumer of the differences • Costs a lot of money • Lots of effort spent

  5. Growth • Hard to win customers from competitor • May raise prices for a while • Entering new markets can be difficult • New product strategy common

  6. Rationale for New Product Development • emerging demands • counter competitors • broaden product line • product life cycle

  7. Types of New Products • Innovative – Lite Beer • New to firm – Sprite for Coke copied 7Up • Product line extension – Vanilla Coke • Product improvements – new Cheer

  8. Leading Soft Drinks by Volume2009

  9. World Market

  10. The Economics of Cereal

  11. Top Cereal Producers

  12. Leading Brands 2008 GM Cheerios 12.6% K Special K 5.4% P Honey Bunches of Oats 4.9% K Frosted Flakes 3.8% K Frosted Mini Wheats 3.5% K Kellogg Raisin Bran 3.0% K Froot Loops 2.6% GM Cinnamon Toast Crunch 2.4% GM Lucky Charms 2.4% Q Cap’n Crunch 2.4% • Source: Topher's Breakfast Cereal Character Guide

  13. Inputs • Inputs are commodity products • Input supplier power is very low

  14. Cereal Company Power • Moderate • Sole source of branded products • Some essential to store • Yet Kellogg needs store just like store needs Kellogg • Store has more power for new products

  15. Supermarket’s Power • Supermarket’s power is medium • Is increased by supplier dependence on • Distribution channels • Shelf space • Consumers • Advertisements • Is decreased by buyer’s need for • Cereal products • Other food items produced by the companies

  16. Threat of Substitutes • Threat of substitutes is medium • The threat is increased by • Increased pace of life • Fast food alternatives • Fewer people eating breakfast • Fewer manual jobs • The threat is decreased by • Health Awareness • Company Diversification

  17. Threat of New Entrants • The threat of new entrants is very low • Barriers to entry include • Economies of scale • Product differentiation • Capital requirements • Buyer switching costs • Access to distribution channels • Brand proliferation

  18. Intensity of Rivalry • Rivalry is very intense • Rivalry is increased by • A few similar sized competitors • Slow industry growth • High fixed costs • High degree of differentiation • Low consumer switching costs

  19. General Mills • Largest market share in ready to eat cereal industry. • #1 in all but one out of the major product categories it has products • 1 out of every 11 boxes of cereal sold is Cheerios.

  20. Strengths • Brand Names • Cheerios, Trix, Total, Lucky Charms, Wheaties, Golden Grahams, Cocoa Puffs • Innovation • Hamburger Helper, Fruit Rollups • Industry Focused • Divested all non-food products • Acquired Pillsbury

  21. The Kellogg Company W.K. Kellogg ran a health resort where (Kellogg’s claims) cereal was invented Today, they are the world’s second largest producer of cereal

  22. Strengths • Knowledge • In 95th year of producing cereal commercially • Founded by the (claimed) creator of cereal • Invested a lot of resources in R&D • Brand Name • Great reputation • Tony the Tiger, Snap, Crackle, and Pop

  23. Post Cereal Company • Postum Cereal company started in 1895 by C.W. Post. • Grape-Nuts introduced in 1897 • Post now ranks 3rd in industry in market share. • Post took initiative in 1996 by lowering prices an average of 20 percent

  24. Strengths • Established Since 1901 • Diversified • Gatorade, Rice A Roni, Aunt Jemima • Nutrition • Late entrant to cold cereals • Part of PepsiCo since 2001

  25. Concluding Comments • Branded foods have special role in marketplace • Consumer loyalty • Grocer must carry strong brands • Gives manufacturer leverage • Requires investment in brand • Price competition rare

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