1. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. C H A P T E R Industry Analysis 3 Key Issue: Analyzing a Market’s Trends and Attractiveness Assumption: Level of Competition is Set

2. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Continuing from Ch. 2 Choose the Level of Competition Ex) Product Category Level  Soft Drinks; Snack/Health Bar Industry Analysis  (Product) Category Analysis

3. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Bases for Category Analysis Market Factors (at the Aggregate Level) Competitive Factors Environmental Factors Michael Porter’s Framework

4. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. I. Market Factors for Industry Analysis Category Size: Volume or $$ http://www.beerinsights.com http://www.npd.com Growth Rate Stage in Product Life Cycle* Cyclicity & Seasonality Marketing Mix (General Trends) Product differentiation: Macro (www.census.gov) and Microwww.census.gov (advertising $$ or number of product lines or skus) Profits & Financial Ratios

5. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Category Attractiveness over the Product Life Cycle Stage of product life cycle Category size Category growth Category attractiveness Introduction Small Low Growth Moderate High Maturity Large Low Low/high Decline Moderate Negative Low Sales Time

6. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Industry Concentration Measures Industry Concentration Measures 1.The share of the largest firm 2.The combined shares of the three largest firms 3.The number of firms with at least x percent of the market (e.g., 1 percent) 4.The share of the largest firm divided by the share of the next three largest competitors 5.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. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Characteristics of Intensive Rivalry Many or Balanced Competitors Slow Growth High Fixed Costs Lack of Product Differentiation Any Example?

9. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Buyer Power Is Higher When 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. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Supplier Power Is Higher When Supplier Power Is Higher When Suppliers are concentrated. No or few Substitute for the product. Differentiated product/high switching cost. Limited Supply. Example:

11. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Industry Attractiveness based on Market Factors HighLow SizeLargeSmall GrowthHighSlow Stage in life cycleEarlyLate CyclicityLowHigh SeasonalityLowHigh Marketing spendingLowHigh ProfitsHighLow Financial ratiosHighLow Attractiveness Market Factors

12. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Industry Attractiveness based on Competitive Factors HighLow ConcentrationLowHigh Power of buyersLowHigh Power of suppliersLowHigh RivalryLowHigh Pressure from substitutesLowHigh Capacity utilizationHighLow Threat of entryLowHigh Attractiveness Competitive Factors

13. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. III. (Macro) Environmental Factors Technological* Economic* Social Political Regulatory*

14. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Typology of Technical Developments Welfare Diffusion Innovation Invention Information Materials Transportation Energy Genetic* Commercial Defense Technology Process Impetus * Includes agronomic and biomedical developments.

15. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Projected Change in U.S. Population 1995-2005 The coming bulge of TEENAGE “ECHO BOOMERS” will benefit the entertainment, casual apparel, and consumer electronics industries. AGING BOOMERS will give a lift to industries related to financial services, travel and leisure, nutrition, and home furnishings. ES:

16. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. U.S. Income Inequality

17. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Business Implications of Social Changes The Shrinking Day Connected Individual Body + Soul

18. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Examples for Evaluating Category Attractiveness Energy Bars (p. 70) Personal Digital Assistants (p. 73)

19. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Category Attractiveness Summary Aggregate Market Analysis Category Size $504 mm energy bar category in 2001 Attractiveness ++ Energy bar category contains four primary brands, plus their sub- brands and over 100 smaller players

20. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Category Growth Average annual growth rate of 57% between 1997 and 2001 Attractiveness ++ 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. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Product Life Cycle Both the category and Odwalla Bars specifically are both securely in early stages of growth phase Attractiveness ++

22. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Sales Cyclicity 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 Attractiveness +

23. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Seasonality Year-round sales Attractiveness ++ 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. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Profits 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. Attractiveness + Increased category competitiveness may lead to lower pricing and profits

25. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Category Analysis Threat of New Entrants/Exits Strong potential for new competitors given that the category is profitable, fairly easy to enter, and increasingly relevant to consumers. Attractiveness - 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. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Category Analysis Economies of Scale Competitors within the broader category of snack bars would likely experience economies of scale with a relatively easy entry into the energy bar market Attractiveness -

27. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Category Analysis Capital Requirements 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. Attractiveness -

28. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Category Analysis Switching Costs Switching costs are very low, opening the door to potential competitors Attractiveness -

29. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Distribution 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. Attractiveness - Shelf life

30. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Bargaining Power of Buyers Lots of competitors with relatively similar options distinguished by brand and taste keeps retailer power strong Attractiveness -

31. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Bargaining Power of Suppliers 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 Attractiveness +

32. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Pressure from Substitutes Considerable Attractiveness - 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. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Category Capacity 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 Attractiveness +

34. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Aggregate Market Analysis Current Category Rivalry Very high. Differentiation largely by taste and flavor variety, and by targeting unique market segments Attractiveness -

35. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Environmental Analysis Technological Technology could play a significant role with respect to manufacturing efficiencies and taste profiles Attractiveness +

36. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Environmental Analysis Economic 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 Attractiveness +

37. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Environmental Analysis Political/ Regulatory 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. Attractiveness 0

38. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Energy Bars: Attractiveness Summary (cont) Environmental Analysis Social As lives get busier and mealtimes shrink, energy bars will continue to be an acceptable meal replacement. Attractiveness ++