Table 1
Decision
States of Nature
Other firm retain 11 GBP
Other firm cut to 10 GBP
Maintain 11 GBP
4,500 GBP
1,800 GBP
Reduce 10 GBP
6,400 GBP
3,920 GBP
Table 1 shows the options of the concerned companies and possible profits that may arise from their decisions and succeeding states of nature (e.g. the reaction of the other firm). As observed, the decision to reduce the CD price to 10 GBP is relatively dominating strategy than the decision to maintain at 11 GBP. However, pre-commitment to collude prices with the other firm does not necessarily results to maximum profits. Therefore, the most effective decision is to reduce price to 10 GBP and maximizing the profits until the other company noticed its loss or know the pricing difference.
Table 2
Decision
States of Nature
Other firm also begins
Other firm begins later
Begin operations
100,000 GBP p.a.
250,000 GBP p.a.
Table 2 shows that one of the firms should begin operations as soon as possible to obtain the first mover advantage. This advantage can be obtained by establishing a group of customers which can lead to loyalty. Upon entry or opening of the other firm, this loyalty factor will disenable the newly opened firm to get the market base already secured by the first-mover. Another is the location benefits that the first mover can get if the company is the first one who will select the location for operation. The location can afford strategic attributes like high people density, high visibility and near to suppliers.
Porter’s Five Forces
An attractive industry is one that can provide the platform for a firm to earn above average returns from its invested capital (2001 ). An attractive industry has high entry barriers, low bargaining power of suppliers and buyers, low threats of substitute products, and not-so-fierce rivalry among competitors. The selected industry is the French specialty-preserved foods/ condiments.
Threat of New Entrants
The industry creates moderate to high barriers to entry. Economies of scale are not a significant barrier for both aspiring local and foreign players where mass production on food could even trigger perception in loss of quality. If any, an aspirant is required to provide a diverse line of products with unique qualities. In doing so, capital requirements could be high especially on foreign players since they can be restricted entry due to conventions in which local alliance is necessary. Transaction costs and relationship maintenance added on the cost burden. Switching costs to middlemen is seasonal depending on the agricultural situation in France and EU trade. If the country and EU do not have enough supply of the required agro-input, switching cost is less costly otherwise middlemen may put their supplier relationship and benefits of such at stake leading to high switching cost.
Aspirants’ access to middlemen is restricted by the latter relationship to current suppliers (for gourmet outlets) and quality controls (for retail stores). In effect, the former should prove that its products as well as contracts are better-off than the current suppliers. Cost advantages independent of scale are high for current players especially in the industry where distinct operational and branding attributes contribute to middlemen success. In addition, France has comparative advantage in the industry that intensifies such advantages with political and financial support to local producers (like French conventions and subsidy). At present, however, government is moving towards free-market structure that minimizes the shield of local producers to foreign competition. In the contrary, expected retaliation from the latter is high. The country is a world player in agro-products and this would not be attained if people are not “ingrained” into the industry. But aspirants could prevent this adverse reaction when they use niche marketing (e.g. EP targeting the high-end market).
Bargaining Power of Suppliers
The industry has also moderate to high bargaining power of suppliers. As cited, the French agriculture is dominated by small businessmen making it easy for middlemen to replace overly distorted contracts from suppliers. Supplier’s power increase when the relationship lasts for a considerable time that the operations of middlemen are adjusted to supplier’s contracts. The industry, aside from local agro-abundance, receives almost the same level of imports making numerous available product substitutes. However, the power is redeemed when local producers is able to capitalize the importance of natural/ localized foods in terms of freshness, safety and palatability to middlemen and end-users. To highlight this importance, (2006) reported that French activists tore hectares of genetically modified corn in southwestern France. This connotes the continuing drive of active groups (thus, supporting the power of local suppliers) to retain traditional way of plant growing.
The fact that the country is known for conducting frequent strikes not only result to supplier importance but also result to high switching costs for middlemen. The psychic costs as well as loss of customers are likely in a country that has several public servants and high product conservatism. Middlemen would likely sustain local producer relationships although subject to seasonal specific agro-abundance, changing UE and national policies, and quality of foreign products. Finally, the threat of forward integration is likely due to increasing demand of natural foods in the country. Further processing of inputs by local producers will not be conducted instead raw products will be readily sold. The threat would then be countered by numerous industry players that cannot simply drop the contracts with business customers (the middlemen).
Bargaining Power of Buyers
Middlemen are significant to the industry players especially the latter is supplying products that have its intended use (customized) although this can be taken the other way around depending on the sector of where the former belong. For gourmet and specialty outlets, the bargaining power of current buyers is high as their demand for the supplier’s products tends to be continuous especially when the outlet is a familiar destination for high-end markets and tourists. On the other hand, the second biggest world retailer Carrefour derives almost 50% of its sales in the country (2006). The firm competes for price and quality which forms a hybrid of cost-leadership and product differentiation strategy (2003). However, such attainment is difficult to sustain (). In the long-run, such retailer would eventually defeat the purpose and appeal of specialty products due to the need of high differentiation (making the product more prone to shelf substitution) and price war (making the product lost its perceived value) in the retailer’s shelves. In the contrary, middlemen in specialty groceries may resemble high bargaining of specialty restaurants.
Threat of Substitute Products
With soaring agricultural figures of the country, the industry is deeply threatened especially the market for preserved foods. Middlemen can continuously outsource to local suppliers with raw (rather preserved) materials while end users increasingly demand for healthy products derived from French conventions would prefer naturally harvested foods. In both cases, the threat for substitute products is high. The threat eases during seasonal fluctuations and partly foreign visitor infiltration where differences in cultures and conventions make imported products within the specialty industry buyable. These scenarios relieve root conventions and allow French market indulge to imports especially those that are branded. Since the country does not report population by ethnicity ( 2005), it is suffice to acknowledge that it is highly multi-cultured with one fourth of population increase in 2005 came from immigration (). This makes the product substitutes less of threat, however, national laws on imports must initially be bypassed otherwise conventions will hold footing and middlemen/ end-users will be barred on access and selection.
Intensity of Rivalry among Competitors
According (2005), French trade on processed food and food complements including imports from non-EU countries continue to increase. Numerous competitors make rivalry and the probability of retaliation higher. Industry products both local and foreign (but so much with the latter) require proportionate increase in differentiation. This induces each player to re-evaluate visible dimensions such as pricing, quality and innovation. In general, the French specialty-preserved foods/ condiments belong to fast industry growth. This is because food is a basic and daily need. With diminishing share of agricultural sector as a country reaches its industrial and post-industrial development, the preceding statement becomes substantial. There is also minimal pressure for competitors to sell their products on bargain prices in view of the pressure of in high fixed costs and storage costs. Aside from value-orientation on selling and focus on high-end market, their competitiveness arise from organic aspects of their products that makes investments in machinery and warehouses unnecessary. If any, research and development including preserving of national heritage on traditional ways of food preparation is the primary key.
Industry players have differentiated products because they tend to specialize and address specific needs. They are not commodities preventing rivalry from raw producers. They are branded and have premium quality. However, using raw materials and converting them to highly differentiated processed foods should infuse organic requirements in the cultivation and harvest of raw materials themselves. This is another evidence of French conventions. In the same Gain Report 2005, many French consumers favor organic farming because it has health and environmental merits. As illustration, 2004 demand rose to 44% from the previous year level of 37%. More importantly, the best selling organic products include harvests in fruits and vegetables. However, there exists high strategic stakes among players because shelf spaces in retail stores are limited and the same as the number of restaurants (both catering high-end markets). In relation to this, the players also have high exit barriers since their (farm-based/ traditional) assets are located in a single location away from the end-users, strategic relationships being maintained with their laborers as well as middlemen and emotional barriers from lost of pride due to business failure that runs counter with typical French arrogance.
Credit:ivythesis.typepad.com
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