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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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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


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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


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Advertising

  • Backbone of differentiated products – remind consumer of the differences

  • Costs a lot of money

  • Lots of effort spent


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Growth

  • Hard to win customers from competitor

  • May raise prices for a while

  • Entering new markets can be difficult

  • New product strategy common


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Rationale for New Product Development

  • emerging demands

  • counter competitors

  • broaden product line

  • product life cycle


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Types of New Products

  • Innovative – Lite Beer

  • New to firm – Sprite for Coke copied 7Up

  • Product line extension – Vanilla Coke

  • Product improvements – new Cheer






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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


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Inputs

  • Inputs are commodity products

  • Input supplier power is very low


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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


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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


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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


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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


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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


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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.


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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


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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


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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


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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


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Strengths

  • Established Since 1901

  • Diversified

    • Gatorade, Rice A Roni, Aunt Jemima

  • Nutrition

  • Late entrant to cold cereals

  • Part of PepsiCo since 2001


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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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