Analysis of Poter’s Five Forces
Subject: Business, Marketing | Topics:

Introduction

In order to find out weather the pasta industry is attractive or not, we have to go through a Porter’s five forces analysis.The Porter’s Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you’re considering moving into.

1. Rivalry within the industry:

 If the number of competitors is large in number and they are very powerful, than rivalry increases, market share of each company goes down, profitability decreases and attractiveness of the industry goes down.

In the pasta manufacturing industry we have seen the similar scenario, which is discussed below through analyzing several factors of Porter’s five forces.

Factors that affect the rivalry within the industry:

Price is an issue for undifferentiated products:

Pasta by nature is an undifferentiated or commodity product, and it is very difficult to differentiate among the features, quality, and price of these products. To sell such products the manufacturers need to lower their price to attract customers, because the consumers buy such products which have lower price. So it becomes difficult to make profit because the other manufacturers also reduce their price to sell their products. So attractiveness of the pasta industry goes down.

But is some manufactures take initiative to add some features and benefits to their product and differentiate it from others then they can make profit. Because consumers are willing to pay a higher price if they get benefit out of it. Many pasta manufacturers are differentiating their products and as a result earning revenue.

For example, in the case we have seen that the pasta which have some special characteristics like, shorter cooking time, ease of cleaning, easy to prepare and convenient to use have high demand among the customers. This is why, the private-label producers were gaining sales and market share because their product offerings had attractive attributes. American Italian Pasta Company (AIPC) is manufacturing all natural flavored pasta under brand name of Pasta labella. The Dakota Growers Pasta hired a plant breeder to develop durum wheat a variety that were not only resistant to scab disease but also had quality attributes desired by their customers. The organic pasta is also introduced by different companies.  In this way different pasta manufacturers are adding some attributes to their products to make it a bit different and earn more profit compared to others. But these product development and innovation increased their cost. But they can manage these costs through selling their pasta’s in high price.

From above scenario, it can be said that manufacturers which sell pasta with added attributes are differentiating their products and earn profit. And to them the price is not an issue and industry is attractive.

 

Number of competitors & size of competitors:

The competitors in the pasta industry are many in number and some of the competitors are also large in size. For example, there are many companies in the pasta industry which sells both under the private label and brand label. There are 141 pasta plants that manufacture dry pasta in United States, among them 67 accounted for the majority of sales in 1998.

In United States there are 6 main players in pasta producing, which are AIPC, Hershey Pasta Group, Borden Food Holdings, Dakota Growers Pasta, Primo Piatto and Barilla.  Hershey’s brand had approximately a 27 percent share of the branded segment of the retail pasta market, with three of the top six brands in the United States in 1998. Hershey Pasta Group’s brands held the highest retail market share in 22 of the top 64 markets, second-highest market share in another 25 markets and third highest market share in an additional 18 markets.

Not only the branded pasta plants dominate the industry, the private label pasta manufacturers also hold a large market share. Within the retail market segment, private label pasta is growing at a faster rate than brand label pasta. Private label pasta sales had been increased from 19 percent to almost 24 percent of the total pasta sales during the 1994 to 1998 time period.

In this way the pasta industry is dominated by both branded and private manufacturing companies. And not only the number of players are high, the size of players are also large. So the rivalry in the industry is high, and that’s why for the small companies the industry is not attractive. But for the large companies which are dominating the pasta industry, like the Dakota Growers Pasta (DGP), American Italian Pasta Company (AIPC), the industry is attractive.

 

If demand is growing slowly:

Even if the growth is slow, negative or stagnant, there is a natural tendency that the industry will grow. In the pasta industry the demand for pasta is growing. Pasta consumption in the United States was relatively stable between 1967 and 1984 at approximately six to seven pounds of durum wheat-based food products (pasta) per capita.  Since then, U.S pasta consumption had risen about one pound per year, reaching a maximum of 14 pounds perm capita in 1994 and then decreasing slightly. Five billion pounds of pasta were consumed in 1998 compared with about four billion pounds in 1992. Import of pasta from Italy has risen during 1990’s but after that it decreased.  But the export remained constant overtime.

Several companies are having high growth. Like the DGP is growing so fast that their Carrington plant was already running at maximum capacity, additional sales could be obtained if the production can be increased.

The organic pasta market was another possibility for future growth. Consumption of organic products was increasing at about 20% annually during 1990s.

The changing lifestyle of customers, increased availability of pasta sauces, increased attention to healthy eating, increased income of customers and increased number of Italian restaurant are the main reasons for per capita increase in demand for pasta. Production of pasta has increased as the demand and consumption of the pasta increased. The situation become such that there is high demand for pasta but the manufacturers can’t supply adequate amount of pasta due to the unavailability of durum wheat and the lack of milling and manufacturing capacity.

Measurement problems due to using older conversion factors for new processes of developing pasta, innovation of substitute products, the scab disease of the durum wheat all these factors slightly declined the consumption of the pasta.

Analyzing all the evidence it can be said that the demand for pasta is growing and the competition is also growing, level of rivalry increasing which makes the industry less attractive for small companies. But for large companies the industry is still attractive because they are growing in a faster pace and their sales are also increasing.

 

If players use price to sale volume:

For perishable products the manufacturers try to sell in volume to make as much profit as possible, other wise the product will be rotten or expired. To sell in large amount the manufacturers need to reduce their price. As a result the profitability declines and the industry becomes unattractive.

But pasta is not a perishable product because it doesn’t decay quickly. So the manufacturers are not forced to sell in volume or in large amount.

But as the pasta has become the main food for many countries like Italy, the consumers buy them in bulk. A study constructed by National Pasta Association found that consumers usually have three to five packages of dry pasta products on their kitchen shelves at any time. So the pasta manufacturers don’t need to reduce their price to sell their products in volume. The products are sold in large volume automatically due to its demand. From this point of view the industry is attractive for the pasta manufactures.

 

If brand loyalty does not exist:

As pasta is a commodity product the consumers most of the times may not have specific brand preferences. There are many companies and the consumers may choose any one brand at any time.

But the pasta industry is dominated by both private label companies and the branded companies. In the case it has seen that in ingredient and retail market segment the private label companies are dominating, where as the government market segment is considered as brand label.

The private label pasta manufacturers hold a large market share. Most of the companies enter the pasta industry through the private label, because it requires lower amount of capital and technological sophistication and it is the quickest way to enter in the pasta industry.

Many large companies Like DGP, APIC, which use to sell their pasta under private label, shifted to brand label by upgrading their product and technology.

So there is demand for both the private label and branded products. But there is no evidence which reveals that the consumers are brand loyal, because other wise the private label pastas wouldn’t gave gain so much popularity. Moreover, pasta is a commodity product which consumers have to buy in daily basis, so if the don’t get any brand in any shop, they don’t wait to buy any particular brand, they buy what ever is available.   This is why it can be said that, as the consumers are not brand loyal, to attract them to buy their products the manufacturers need to promote their product and give lot of incentives, which incurs their cost. So the profitability goes down and the industry becomes unattractive.

 

If exit cost is higher then staying in the industry:

If any company is making a loss and want to shut down the company but can’t exit from the business because the company need to spend huge amount to get out of the business then the company decides to stay in the industry. As a result of the high exit cost the competitors in the industry increases, rivalry increases, profitability decreases and attractiveness of the industry goes down.

But in pasta manufacturing industry it has been seen that there is no high exit barrier. Many companies shut down their business or sold their plants to other companies. It is easy to exit from this business because the companies can sell their plants easily to other companies with all the modern technologies and equipments. So they don’t need to stay in the industry. For example, The Borden Foods announced that it would close about 5 to 10 of their pasta plants in North America, as they want to concentrate their business in producing pasta sauce. They could easily decide to sell their 5 to 10 pasta plants and exit from pasta manufacturing industry because the exit cost is not higher.

This is why as the exit cost is not high; the competitors in the industry decreases, the industry thus becomes attractive for the existing players.

 

2. Threat of entry from new competitors:

 

If the new companies can easily enter in the industry then the competitors increase, the rivalry within the industry also raise and the attractiveness of the industry goes down for the existing companies in the industry. To find out, weather the new competitors can easily enter in the pasta industry or not, weather there is any threat from them to the existing players, we need to analyze few factors.

 

Threat of entry from new competitors depends on:

 

A) Existing entry barriers:

If the existing barriers are high, then the threat of entry from new competitors is low, rivalry within the industry is also low and thus the attractiveness of the industry goes up.

The following factors works as entry barrier to new competitors.    

 

Economies of scale:

In order to distribute the fixed cost among units produced, the manufacturers need to achieve economies of scale. Which means if the manufacturers produce more, the fixed cost will be shared among the units produced and thus reduce the fixed cost.

There are some industries, where the manufacturers need to achieve economies of scale to earn profit. But in the pasta industry there is no evidence that the manufacturers need to achieve economies of scale.

Some of the companies like the Dakota Growers Pasta, which achieve economies of scale, enable them to reduce their fixed cost and thus help them to earn more profit but it is not mandatory to achieve economies of scale to gain profit in pasta industry.

The new competitors will enter more in the industry as they don’t need to produce in bulk, which is very difficult for a new company. Thus as the threat from new competitors increases, the rivalry raises within the industry and attractiveness of industry goes down for existing companies.

Learning curve effect:

The more one company get experienced the less mistakes it will do, efficiency will increase, and as a result their cost will go down, profitability raise. The industries which have learning curve effect, acts as a barrier to the new competitors. This is because for a new company it requires time to get experienced and efficient. So if the industry has learning curve effect, the threat of new entrance goes down, the attractiveness of the industry goes up for existing companies.

But manufacturing pasta does not require a long time experience. It is true that the companies which are old and experienced can produce high quality pasta, like the Italian pasta manufacturers. Some of the branded labels also give importance to produce high quality pastas and they also have demand in some market segments.

But new competitors can also enter the market and produce the pasta because many of the customers prefer pastas which are ordinary in quality and also cheap. So it doesn’t require long time experience and efficiency to produce them.

This is why, as there is no learning curve effect in the pasta industry, the threat of new entrance goes up, the competition increases and the attractiveness of the industry goes down for existing companies.

 

Brand preference/ customer loyalty:

If the customers are brand loyal, than even if new companies come up with new products, the customers will stick to their old brand. So the new competitors find it difficult to achieve a market share in that market. So if Brand loyalty exists, the threat of new entrance goes down, the competition decreases and the attractiveness of the industry goes up for existing companies.

As the pasta is an undifferentiated product, the customers don’t have any strong brand loyalty regarding this product though there are many brand of pastas are in the market. This is why many companies’ pastas including the private label are sold in the industry.

The branded companies also accounted for large sales, like the Hershey Pasta Group, Dakota Growers Pasta.

Though there is no direct evidence, but the pasta manufacturers and retailers believed that the consumers prefer the Italian brand names and perceives that the Italian pastas are high quality. This is why companies like AIPC, are building their plants in Italy and importing Italian pasta into United States for customers who wanted Italian pasta. DGP also planned to do joint venture or similar alliance with Italian manufacturers to present an Italian image in their pasta.

It has been seen in the case that the customers sometimes prefer Italian brand of pastas but very few of them are brand loyal, otherwise such private label and new companies wouldn’t be able to sell their products.

This is why if Brand loyalty doesn’t exist, the threat of new entrance goes up, the competition increases and the attractiveness of the industry goes down for existing companies.

 

Capital requirement:

The industries in which it requires high investment, the new competitors face problem to enter in the industry. Thus, if the capital requirement is high, the threat of new entrance goes down, the competition decreases and the attractiveness of the industry goes up for existing companies.

In the pasta industry we have seen that the new competitors can easily enter in the industry because initially it doesn’t require high capital investment in pasta plants, which produce private label pastas.

But the companies, which want to concentrate their business in the branded segment, require high investment in the product development, advanced technology; increase the capacity of the plants. All these require high investments. For example, acquiring the Primo Piatto plant, the Dakota Growers Pasta required to pay $13.3 million, $11 million of it in cash, and another $1.5 million would be needed to update the soft ware and link with other plants. It also require some other investments to increase the production and storage capacity, which is about another $ 11 million, as a whole the total acquisition investment would be 25.8 million plus storage cost.

The statement given by Tim Dodd, the general manager of Dakota growers’ pasta also reveals that to produce branded pasta and to increase its presence in different market segment requires a lot of capital investment. They companies have to have a deep pocket to compete in the branded segment.

From the above circumstances it can be seen that to enter in the pasta industry through  offering a branded product the capital requirement is high, the threat of new entrance goes down, the competition decreases and the attractiveness of the industry goes up for existing companies.

 

Access to distribution channels:

The whole sellers, distributors and retailers are the distributors who place the manufacturer’s product in an accessible position. If the new companies get proper access to the distribution channels after entering the industry, than the threat of entry from new competitors goes up, the competition increases and the attractiveness of the industry goes down for existing companies.

In the pasta industry the large companies have achieved good relationship with the distributors and have adequate access to distribution system.  The American Italian Pasta Company sell their natural flavored pasta through the SYSCO Corporation, the largest marketer and distributor of food service products, 27 percent of AIPC’s sales were done by this company and another 20 percent of their sales done through Wall Mart’s Sam’s Club stores. AIPC has a very good relationship with Wall Mart.

Access to favorable rain transportation had helped AIPC and DGP to achieve low distribution costs. The DGP sells 50 percent of their pasta through retailers.

In this case we have not seen any evidence which says that the new entrants don’t get access to distribution channels. But the large distributors like the Wall Mart, SYSCO are engaged in positioning the reputed and branded companies’ products. So it can happen that, because of their good relation with the big companies, the distributors may not want to distribute the new entrants’ product. So it may create problem to the new companies to enter in the industry.

As the new entrants may not get access to distribution system, the threat of new entrance goes down, the competition decreases and the attractiveness of the industry goes up for existing companies.

 

Regulatory policies:

If the governments introduce any regulation which hamper the entrance of new competitors in the industry than the threat of entry from new competitors goes down, industry become attractive for existing companies.  

But in pasta industry USA government doesn’t introduce any rule which may hamper the entrance of new competitors in the industry. More over, a rule introduced by the government to reduce the import of Italian pasta to USA, helped the local companies to achieve more market share, because the pasta import has started to increase in 1990’s and after introduction of  this regulation the import started to decline.

All these evidences reveals that there is no government regulations against the new competitors, so the threat of entry from new competitors goes up, the competition increases and the attractiveness of the industry goes down for existing companies.

 

B) Reaction from existing players:   

If the existing players of the industry severely protest the entrance of the new companies than the industry becomes unattractive for the new competitors. The threat of entry from new competitors goes down, industry become attractive for existing companies.  

In the case, we haven’t seen any evidence which says that the existing players of pasta industry are protesting the new companies. More over, many times the new companies sell their products under existing companies’ brand name. Thus the existing companies sometimes help them to enter the market.

So the new competitors don’t face any problem to enter in the industry. As a result the threat of entry from new competitors goes up, industry become unattractive for existing companies.  

3. Pressures from substitute product:

 

In Pasta industry of U.S.A has specific pressure for substitute product. Substitute product mean products which are not at all similar but serves the same purpose. The substitutes of pasta are also perceived as healthy food and they are also easy to prepare. As pasta is a very cheap commodity product consumer may switch to the substitute product.

One of the main reasons of declining the consumption of pasta in the US was, the food industry had developed other such food like as pasta and consumer might have substituted away from pasta.

The pressure from substitute products depends on the following factors:

 

Whether price of substitute is attractive:

Though pasta is a commodity product so consumer are price sensitive towards pasta. As the food industry had developed such food like pasta, so there is a threat of substitute product and if the substitute product’s price is a bit lower then customer will shift to that substitute product more quickly and industry become unattractive for existing product. But there is no clear evidence in the case that substitute product price is attractive or lower than the pasta. So from this point of view the industry is attractive.

 

Whether buyer view the substitutes in equal terms:

Pasta is an undifferentiated product for the people of US as they consume it as a regular basis. The consumers eat pasta as they perceive it as a healthy product and it is easy to prepare. As the food industry is coming up with other substitutes which are also healthy and easy to prepare, the buyers started to consider the substitute in equal terms. So pressure from substitute product is high and the overall industry becomes unattractive for the existing companies.

 

Whether buyers can switch to substitute easily:

Pasta is a low priced commodity product, so customer can switch to substitute product easily. Per pound pasta is sold at retail for about $ 1.25 which is not expensive for the customers. Even if sometimes the buyers sell the pastas in volume but they don’t add up much money. Not only that the customers buy pasta in regular basis, so if they want to try a different product or substitute of pasta the customers don’t need to think that much. They can easily switch to that substitute any time because the switching cost is low for pasta. As a result the pressure from substitute product is high for the pasta industry and attractiveness of the pasta industry is declining.

 

4. Pressure from supplier bargaining power:

 

If there is pressure from supplier bargaining power then they can charge high price for the input product, so manufacturing cost goes up and profitability of manufacturer goes down. So industry will be unattractive.

In this case we have found that the suppliers have their bargaining power because number of suppliers is small. The evidence says that there are 13 measure companies that milled durum wheat in the United States and many company needed to buy maximum percentage of flour from a single company, like Hershey Pasta group bought 70 % of semolina from Miller Milling Company, which increase the supplier bargaining power.

 

Durum wheat was particularly well suited for making pasta due to its high protein percentage, which is higher than any other type of wheat and that wheat is ground, shifted and purified into high quality semolina flour which is the main ingredient of pasta. A 60 pound bushel of wheat was milled into approximately 36 pounds of semolina product.

More over durum wheat is not produce every where; it’s only available in North Dakota, eastern Montana, northwest Minnesota, southern Alberta and Saskatchewan. Those are the primary production regions due to cool nights and warm summers. So it also increases the supplier’s bargaining power as durum wheat doesn’t produce every where.

Again the supplier bargaining power has increased because the milling capacity of durum wheat began to decline as older and higher cost plants began to be shutdown. More over lower production yields in North Dakota due to scab disease problem of durum wheat decrease the supply of wheat. Over the past decade, wet summers had led to mold forming in the wheat, which had reduced yields. All these things increased the suppliers’ bargaining power.

 

To manufacture pasta there is no need of high technology and also the packaging is not that much important for pasta industry. So there is no pressure from the suppliers of   packaging and technical equipments. But the main ingredient of pasta is durum wheat and special quality semolina flour. The shortage of this ingredient’s supply increases the durum wheat suppliers’ bargaining power which makes the industry unattractive.

 

Collaborative partnership between supplier & firm:

Firms can reduce supplier bargaining power through the collaborative partnership between them and the suppliers.

Cooperative between the suppliers and manufacturers are common in agriculture related industries. Essentially, cooperatives were business organizations whose members were also the users of the cooperative’s business. Dakota Growers pasta was organized in late 1991 as a close membership cooperative. Producers paid $125 to join the cooperative as a member and paid$3.85 per share, which represents an obligation to deliver one bushel of durum wheat.  Members were required to purchase one share of stock for each bushel of durum wheat they wanted to sell annually to DGP.

 

The DGP members “Growers Agreement” obligated each member to deliver a set amount of durum wheat to the company from their own production, based on the number of shares they had purchased. If the member couldn’t supply the wheat with the desired quality, DGP would purchase the wheat on behalf of the member and charge them the current market price.

 

A grower agreement and the cost saving from integration gave DGP a competitive advantage because it allowed them to source high quality durum wheat from their members and thus reduce the supplier bargaining power.

 

This integration made DGP a highly efficient pasta plant because they work directly with growers, keeping them informed about what they need and integrating them in the milling and manufacturing.

 

The collaborative partnership between supplier and firm can reduce the supplier bargaining power, but it’s not so easy for the small and medium manufacturer to do collaborative partnership. Only few pasta manufacturers like DGP and American Italian Pasta Company (AIPC) can do it. For example, 1084 members of DGP were durum wheat producers. So we found that the overall pasta industry is attractive for the large companies because of their collaborative partnership with the suppliers. But for the small or new companies the industry is not attractive due to the supplier bargaining power.

 

5. Pressure from buyer bargaining power:

Wholesaler, distributor and the retailer are the buyer of pasta manufacturer, because most of the companies’ pasta is sold through the retailers and distributors. If the bargaining power of buyer is high then it creates pressure and it’s a threat to manufacturer. So industry will be unattractive for them.

 

Factors that consider buyer bargaining power:

 

Buyer is very large or numbers of buyers are small:

In this case we have found that the size of buyers in pasta industry is very large and the numbers of buyers is also large. Pasta manufacturer sell their product mainly to four segment of the market. Government, food service sector, ingredient segment and the retailer are the different type of buyers of pasta. Pasta manufacturer sell their product as a bulk to retailer and those company who use pasta as ingredients. DGP also markets pasta in the food service sector. They are interested in very high quality pasta at a very reasonable price. DGP also sell pasta in ingredient sector, which use their product as an ingredient in food processing. Approximately 50% of DGP’s business in 1997 was retail, followed by 25% in food service and 25% in ingredient market segment.

AIPC also sell most of their product as a bulk to their customer. They sell 25% of their product to Mueller’s. Mueller’s accounted for almost 200 million pounds and was the best selling brand in the United States. AIPC also sell branded pasta to retailer and through SYSCO corporation which was measured 27%, their other customer was Wal-Mart’s Sam’s Club stores and sold 20%. All those things mean that the size of the buyers is very large in pasta industry as they buy in large amount from the manufacturers.

Number of buyers in pasta industry is also large.

The evidence says that the increase of Italian style restaurants fueled the growth in the food service sector of the pasta industry.

So the size of buyer is large and also the pressure from buyer bargaining power is high.

In other hand the number of buyer is large as there are many customers in the pasta industry, so the pressure is low from buyer bargaining power. Considering this two things we can say that though the number of buyer is large but few buyers buy pasta at a high volume and they have more power to dominate. So here the size of the buyer is more important than the number of buyers. So the pressure from buyer bargaining power is moderately high.

But if we consider the large company like DGP, they have their fixed customer due to their good relation with them. So they don’t have any problem to get their buyers. So even if the pressure from buyer is high, the large companies don’t face problem to get their buyer, as most of the large company has good association with their customer.

 

Buyers are well informed about seller products and costs:

Distributor and retailer are in the close touch with manufacturer so they know a lot about the manufacturer’s product and cost. More over there is some company who left the manufacturing and now involve in retailing. So they have clear idea about seller’s product and cost. One of the customers of AIPC was Mueller’s owned by Best foods and AIPC sold 25% of pasta to Mueller’s, Best food were involved in pasta manufacturing but they had exited manufacturing and now involve in distribution. So they have clear idea about seller’s product and cost.

The AIPC’s another customer is Wal-Mart’s Sam’s Club Stores and they are the largest grocery retailers, all of whom had their own private label pasta brands. So they are also well informed about sellers’ product and price and it’s a threat for manufacturer due to the high pressure from buyers bargaining power that make the industry unattractive.

So manufacturer were contemplating building plant for the quality wheat because their customer want disease free and high quality pasta and it’s a result of distributor’s knowledge about sellers product. As a result AIPC had thought of building a plant in Italy to meet the customer’s specific demand of Italian pasta. Again Dakota Growers Pasta contemplating hiring a plant breeder to begin developing durum wheat varieties that were not only resistant to scab disease but also have quality attributes desired by their customers. All these steps were taken by the manufacturers because the buyers are well informed and they create pressure on the manufacturers.

 

If buyers threaten to backward link:

If the buyers threaten to backward link than the industry becomes unattractive to the manufacturers as the pressure from buyer become severe.

In pasta industry there is a possibility that the buyers can threat to back ward link. For example,   One of the customers of AIPC was Mueller’s owned by Best foods, Best food were involved in pasta manufacturing but they had exited manufacturing and now involve in distribution. But if they think of going back to the same old business of producing pasta, they can create pressure on AIPC, by selling their own products.

Attractiveness of the industry

 

  • For companies who sell differentiated pasta price is not an issue.
  • Though the number of competitors high but industry is dominated by few large companies.
  • Demand is growing slowly but the large companies are growing at a faster pace.
  • The manufacturers don’t need to sell their products in volume.
  • Brand loyalty doesn’t exist, which creates problem.
  • Exit cost is not higher than staying in the industry.
  • There are no economies of scale effect in the industry.
  • There is no learning curve effect in the industry.
  • Brand preference and customer loyalty doesn’t exist.
  • To produce high quality, branded pasta requires high capital investment.
  • The large companies have access to good distribution system.
  • There is no regulatory policy to obstruct the entrance in the industry.
  • No evidence is there which reveals that the substitute have attractive price.
  • Buyers view the substitute in equal terms.
  • Buyer can switch to substitute easily.
  • Pressure from suppliers’ bargaining power is high but can be reduced through collaborative partnership.
  • Buyer is very large and number of buyers is also large.
  • Buyers are well informed about sellers’ products and costs.
  • No evidence of buyer threatens to backward link.

 

So from above scenario it can be said that from the large companies point of view the industry is moderately attractive as they face less competition within the industry, threat of entry from new competitors is low due to high capital investment and lack of distribution channels, pressure from suppliers bargaining power is also low for them, but they had to face pressure from substitute and sometimes the buyers can also create pressure on them.

 

For small companies the industry is not attractive as they face intense rivalry in the industry especially from large competitors, pressure from substitutes, pressure from suppliers and pressure from buyers.

But as the Pasta industry is dominated by some large companies like DGP, AIPC and they are the main players in the industry; from this point of view it can be said that the industry is moderately attractive.

 

Recommendations

 

  1. There is a threat that the buyer view the substitute is in equal terms because pasta is a commodity and undifferentiated product. Manufacturer can reduce their threat by adding attractive attributes to the product, like- mineral and vitamin to differentiate pasta than other substitute product and make pasta more healthier food than those substitutes.
  2. The large companies which sales branded products can promote their products in such a way which will explain the quality of their products and special attributes they offer.  Thus they can be able to attract the customers and pursue them to become brand loyal.
  3. To reduce the pressure from supplier bargaining power, small and medium pasta manufacturer can involve in collaborative partnership with their suppliers. By doing this they can reduce supplier bargaining power.
  4. To reduce the pressure from buyer bargaining power firm can go for forward link and thus they can distribute it by themselves. It will be a threat to the distributor and retailers, the pressure of buyer bargaining power will reduce.
  5. The small companies can also be able to capture a large market share if some of them merge together and increase their production capacity like the DGP. Thus they will be able to earn more profit and industry will be attractive for them.
  6. If the small companies can achieve diseconomies of scale, than they don’t need to start up with a high fixed cost and thus without achieving the economies of scale they can compete with large companies.
  7. The companies which have production capacity can merge with the companies which have brand assets, and thus can become a powerful branded company.

 

 

 

 

 

 

 

 

 

 

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