C H A P T E R

1. 3 C H A P T E R Industry Analysis Key Issue: Analyzing a Market’s Trends and Attractiveness Assumption: Level of Competition is Set

2. Continuing from Ch. 2 • Choose the Level of Competition Ex) Product Category Level  Soft Drinks; Snack/Health Bar • Industry Analysis  (Product) Category Analysis

3. Bases for Category Analysis • Market Factors (at the Aggregate Level) • Competitive Factors • Environmental Factors • Michael Porter’s Framework

4. I. Market Factors for Industry Analysis • Category Size: Volume or $$ • http://www.beerinsights.com • http://www.npd.com • Growth Rate • Stage in Product Life Cycle* • Cyclicity & Seasonality • Marketing Mix (General Trends) • Profits & Financial Ratios

5. Sales Stage of product life cycle Time Decline Moderate Negative Low Introduction Small Low Low Maturity Large Low Low/high Growth Moderate High High Category size Category growth Category attractiveness Category Attractiveness over the Product Life Cycle

6. II. Competitive Factors for Industry Analysis • Industry Concentration* • Intensity of Rivalry* • Power of Buyers & Suppliers* • Pressure from Substitutes • Capacity Utilization • Threat of Entries and Exits

7. Industry Concentration Measures • The share of the largest firm • The combined shares of the three largest firms • The number of firms with at least x percent of the market (e.g., 1 percent) • The share of the largest firm divided by the share of the next three largest competitors • Herfindahl-Hirschman Index (HHI): -The Sum of Squared Shares of the Firms in the Industry • Use • Thresholds: below 1000; 1,000 to 1,800; above 1,800

8. Characteristics of Intensive Rivalry • Many or Balanced Competitors • Slow Growth • High Fixed Costs • Lack of Product Differentiation • Any Example?

9. Buyer Power Is Higher When • Buyer accounts for a large percentage of the industry’s output. • Product is undifferentiated. • Threat of backward integration. • Buyer has full information. • Example:

10. Supplier Power Is Higher When • Suppliers are concentrated. • No or few Substitute for the product. • Differentiated product/high switching cost. • Limited Supply. • Example:

11. Industry Attractiveness based on Market Factors Attractiveness Market Factors

12. Industry Attractiveness based on Competitive Factors Attractiveness Competitive Factors

13. III. (Macro) Environmental Factors • Technological* • Economic* • Social • Political • Regulatory*

14. Process Diffusion Innovation Invention Defense Energy Materials Technology Welfare Transportation Commercial Information Impetus Genetic* Typology of Technical Developments * Includes agronomic and biomedical developments.

15. Projected Change in U.S. Population 1995-2005 AGING BOOMERS will give a lift to industries related to financial services, travel and leisure, nutrition, and home furnishings. The coming bulge of TEENAGE “ECHO BOOMERS” will benefit the entertainment, casual apparel, and consumer electronics industries. ES:

16. U.S. Income Inequality

17. Business Implications of Social Changes • The Shrinking Day • Connected Individual • Body + Soul

18. Examples for EvaluatingCategory Attractiveness • Energy Bars (p. 70) • Personal Digital Assistants (p. 73)

19. Aggregate Market Analysis Attractiveness ++ Energy Bars: Category Attractiveness Summary Category Size • $504 mm energy bar category in 2001 Energy bar category contains four primary brands, plus their sub-brands and over 100 smaller players

20. Aggregate Market Analysis Attractiveness ++ Energy Bars: Attractiveness Summary (cont) • Average annual growth rate of 57% between 1997 and 2001 Category Growth U.S. energy bar category sales forecasted at $750 mm in 2003 for a continued expected growth of 22% • Industry reports suggest current annual growth for the energy bar market 25%-30% • Category expanding: new competitors are entering, existing brands are expanding with new products and flavors, market penetration and usage occasion is increasing

21. Aggregate Market Analysis Attractiveness ++ Energy Bars: Attractiveness Summary (cont) • Both the category and Odwalla Bars specifically are both securely in early stages of growth phase Product Life Cycle

22. Aggregate Market Analysis Attractiveness + Energy Bars: Attractiveness Summary (cont) • While energy bars are premium-priced for their convenience and nutrient level, the base dollar point of $1-$3 per bar is low such that they are not directly impacted by GDP variations Sales Cyclicity

23. Aggregate Market Analysis Attractiveness ++ Energy Bars: Attractiveness Summary (cont) • Year-round sales Seasonality • Category overall may experience a slight sales increase in the spring and summer month during “race season” and as users are engaged in more outdoor activities and desire quick, portable energy.

24. Aggregate Market Analysis Attractiveness + Energy Bars: Attractiveness Summary (cont) • As most major competitors are within the product portfolios of larger consumer goods companies, it is difficult to benchmark profitability within the energy bar category specifically. Nevertheless, the recent acquisition of the leading competitors reflects an expectation for strong profit potential. Profits Increased category competitiveness may lead to lower pricing and profits

25. Analysis Attractiveness - Energy Bars: Attractiveness Summary (cont) Category • Strong potential for new competitors given that the category is profitable, fairly easy to enter, and increasingly relevant to consumers. Threat of New Entrants/Exits • Further, with the “big three” brands strongly in place [PowerBar, Clif (including Luna), and Balance], it is most likely that small competitors will enter through the natural foods channel, creating more direct competition with Odwalla bars.

26. Analysis Attractiveness - Energy Bars: Attractiveness Summary (cont) Category • Competitors within the broader category of snack bars would likely experience economies of scale with a relatively easy entry into the energy bar market Economies of Scale

27. Analysis Attractiveness - Energy Bars: Attractiveness Summary (cont) Category • Within the mainstream energy bars, differentiation is largely through brand, taste, and flavor variety. With the exception of targeted nutrition products like protein- or carbohydrate-specific products, nutritional levels are largely at parity. Capital Requirements

28. Analysis Attractiveness - Energy Bars: Attractiveness Summary (cont) Category • Switching costs are very low, opening the door to potential competitors Switching Costs

29. Analysis Attractiveness - Energy Bars: Attractiveness Summary(cont) Aggregate Market • As there are not specialty requirements for distribution (refrigeration, etc.), it would be very easy for any of the “center of the store” consumer food companies to enter the category and add on to their existing distribution structure. This is particularly true for companies that have an established relationship with the category buyer. Distribution Shelf life

30. Analysis Attractiveness - Energy Bars: Attractiveness Summary(cont) Aggregate Market • Lots of competitors with relatively similar options distinguished by brand and taste keeps retailer power strong Bargaining Power of Buyers

31. Analysis Attractiveness + Energy Bars: Attractiveness Summary(cont) Aggregate Market • As the suppliers of raw inputs for energy bars are largely agricultural, the commodity nature of agriculture keeps prices and supplier power low. While still relatively low, supplier power will be higher for nutrient supplement suppliers Bargaining Power of Suppliers

32. Analysis Attractiveness - Energy Bars: Attractiveness Summary(cont) Aggregate Market • Considerable Pressure from Substitutes • Fresh fruit, cereal bars, smoothies, candy bars, etc. are all suitable portable substitutes for the mainstream energy bar consumer. True athletes are most likely to substitute with higher nutrient level energy bars

33. Analysis Attractiveness + Energy Bars: Attractiveness Summary(cont) Aggregate Market • Appears to be high given current scenario of more than 100 manufacturers and many more products. But, still, it is too early to determine true capacity Category Capacity

34. Analysis Attractiveness - Energy Bars: Attractiveness Summary(cont) Aggregate Market • Very high. Differentiation largely by taste and flavor variety, and by targeting unique market segments Current Category Rivalry

35. Analysis Attractiveness + Energy Bars: Attractiveness Summary(cont) Environmental • Technology could play a significant role with respect to manufacturing efficiencies and taste profiles Technological

36. Analysis Attractiveness + Energy Bars: Attractiveness Summary(cont) Environmental • While premium priced, energy bars have so far seemed to fair the recession well. Still, however, if economic conditions persist, consumers may opt for less expensive alternatives like fresh fruit or non-energy snack bars Economic

37. Analysis Attractiveness 0 Energy Bars: Attractiveness Summary(cont) Environmental • The energy bar category is regulated by the FDA as are other food products. There are not to our knowledge, however, additional regulations directed toward the energy bar category. Political/ Regulatory

38. Analysis Attractiveness ++ Energy Bars: Attractiveness Summary(cont) Environmental • As lives get busier and mealtimes shrink, energy bars will continue to be an acceptable meal replacement. Social