Competition in the Bottled Water Industry in 2006 John E.docx
1. Competition in the Bottled
Water Industry in 2006
John E. Gan1ble
University of South Alabama
ith global revenues exceeding $62 bil-
lion in 2005, bottled water was among
the world's most attractive beverage cat-
egories. Industry revenues were forecast to grow by
an additional 30 percent between 2005 and 2010, to
reach approximately $82 billion. Bottled water had
long been a widely consumed product in Western
Europe and Mexico, where annual per capita con-
sumption approached or exceeded 40 gallons in 2005,
but until the mid-1990s bottled water had been some-
what of a novelty or prestige product in the United
States. In 1990, approximately 2.2 billion gallons of
bottled water were consumed in the United States and
per capita consumption approximated 9 gallons. U.S.
per capita consumption had grown to more than 25
gallons by 2005. The rising popularity of bottled wa-
ter in the United States during the late 1990s and ear-
ly 2000s had allowed the United States to become the
world's largest market for bottled water, with annual
volume sales of nearly 7.5 billion gallons in 2005. In
2006, emerging-country markets in Asia and South
America seemed to be replicating the impressive
growth of bottled water in the United States, with
annual growth rates exceeding 20 percent. Exhibit 1
presents bottled water statistics for the 10 largest
3. IN UST co I o
I 2006
Even though it was the world's largest market for
bottled water, the United States remained among the
faster-growing markets for bottled water since per
capita consumption rates of bottled water fell sub-
stantially below those in Western Europe, the Middle
C-48
C-49 Case 4 Competition in the Bottled Water Industry in 2006
-""h Ot Leading Country Markets for Bottled Water, 1999,
2004
(in millions of gallons)
United States 4,579.9 6,806.7 8.2%
2 Mexico 3,056.9 4,668.3 8.8
3 China 1,217.0 3,140.1 20.9
4 Brazil 1,493.8 3,062.0 15.4
5 Italy 2,356.1 2,814.4 3.6
6 Germany 2,194.6 2,722.6 4.4
7 France 1,834.1 2,257.3 4.2
8 Indonesia 907.1 1,943.5 16.5
9 Spain 1,076.4 1,453.5 6.2
4. 10 India 444.0 1,353.3 25.0
All others 6,833.5 10,535.0 9.0
Worldwide tota.l 25,993.4 40,756.7 (Avg. CARG) 9.4
* CAGR=Compound annual growth rate
Source: Beverage Marketing Corporation as reported by the
International Bottled Water Association, 2006.
East, and Mexico. Bottled water consumption in the
United States also lagged per capita consumption of
soft drinks by more than a 2: 1 margin, but in 2003
bottled water surpassed coffee, tea, milk, and beer
to become the second largest beverage category in
the United States. In 2005, more than 15.3 million
gallons of carbonated soft drinks were consumed
in the United States, but concerns about sugar con-
sumption and other nutrition and6tness issues had
encouraged many consumers to transition from soft
drinks to bottled water. Whereas the bottled water
market in the United States grew by 10.7 percent be-
tween 2004 and 2005 to reach 7.5 billion gallons, the
U.S. carbonated soft drink market declined by 0.6
percent. Industry analysts expected the carbonated
soft drink industry to decline by 1.5 percent annu-
ally for the foreseeable future as bottled water, en-
ergy drinks, and sports drinks gained a larger "share
of the stomach." Exhibits 2, 3, and 4 illustrate the
growing popularity ofbottled water among u.s. con-
sumers during the 1990s and through 2004.
Almost one-half of bottled water consumed in
the United States in 1990 was delivered to homes and
5. offices in returnable five-gallon containers and dis-
pensed through coolers. At that time, only 186 mil-
lion gallons of water was sold in one-liter or smaller
single-serving polyethylene terephthalate (PET)
bottles. Beginning in the late 1990s, consumers be-
gan to appreciate the convenience and portability of
water bottled in single-serving PET containers that
could be purchased chilled from a convenience store
and drunk immediately. By 2005, bottled water sold
in two-liter or smaller PET containers accounted for
60.8 percent of industry volume. The unit sales of
bottled water packaged in PET containers grew by
22.5 percent between 2004 and 2005. Water sold in
five-gallon containers used in the home and office
delivery (HOD) market accounted for only 17.8 per-
cent of industry volume in 2005 and grew by only
0.2 percent between 2004 and 2005. Similarly, water
sold in 1- or 2.5-gallon high-density polyethylene
(HDPE) containers accoL1nted for just 16.5 percent
of industry volume in 2005 and grew by only 1.0
percent between 2004 and 2005.
Convenience and portability were two of a va-
riety of reasons U.S. consumers were increasingly
attracted to bottled water. A heightened emphasis on
healthy lifestyles and improved consumer awareness
of the need for proper hydration led many consum-
ers to shift traditional beverage preferences toward
bottled water. Bottled water consumers frequently
claimed that drinking more water improved the ap-
pearance of their skin and gave them more energy.
Bottled water analysts also believed that many
health-conscious consumers drank bottled water be-
cause it was a symbol to others that they were inter-
ested in their health.
6. A certain amount of industry growth was at-
tributable to increased concerns over the quality
of tap water provided by municipal water sources.
C-50 Part 2 Cases in Crafting and Executing Strategy
._--/Jlbi 2 Per Capita Consumption of Bottled Water by Country
Market,
1999, 2004
Italy 40.9 48.5 3.5%
2 Mexico 30.9 44.5 7.6
3 United Arab Emirates 29 43.2 8.3
4 Belgium-Luxembourg 32.2 39.1 4.0
5 France 31 37.4 3.8
6 Spain 26.9 36.1 6.1
7 Germany 26.6 33 4.4
8 Lebanon 17.9 26.8 8.4
9 Switzerland 23.8 26.3 2.0
10 Cyprus 17.8 24.3 6.4
11 United States 16.8 23.9 7.3
12 Saudi Arabia 19.9 23.2 3.1
13 Czech Republic 16.4 23 7.0
7. 14 Austria 19.7 21.7 2.0
15 Portugal 18.6 21.2 2.7
Global Average 4.3 6.4 8.3
* CAGR =compound annual growth rate
Source: Beverage Marketing Corporation as reported by the
International Bottled Water Association, 2006.
l'~ -hi 'f 3 Global Bottled Water Market Wholesale Value
and Volume, 2001-2005,
Forecasts for 2006-2010
2001 92.8 $47.3
2002 99.5 7.2% 51.3 8.5%
2003 107.9 8.4 56.1 9.4
2004 113.3 5.0 59.1 5.3
2005(e) 119.7 5.6 62.9 6.4
2006(f) 125.9 5.2 66.4 5.6
2007(f) 132.9 5.6 70.4 6.0
2008(f) 139.5 5.0 74.5 5.8
2009(f) 146.4 4.9 78.5 5.4
2010(f) 153.4 4.8 81.9 4.3
(e) = estimated
8. (f) = forecast
Source: Global Bottled Water Industry Profile, December 2005,
Datamonitor.
Consumers in parts of the world with inadequate United States
was very pure by global standards.
water treatment facilities relied on bottled water to (Municipal
water systems were regulated by the U. S.
provide daily hydration needs, but tap water in the
Environmental Protection Agency and were required
Case 4 Competition in the Bottled Water Industry in 2006 C-Sl
u.s. Per Capita Consumption
of Bottled Water, 1991-2005
1991 9.3
1992 9.8 5.4%
1993 10.5 7.1
1994 11.5 9.5
1995 12.2 6.1
1996 13.1 7.4
1997 14.1 7.6
1998 15.3 8.5
9. 1999 16.8 9.8
2000 17.8 6.0
2001 19.3 8.4
2002 21.2 9.8
2003 22.6 6.6
2004 24 6.2
2005(p) 25.7 7.1
(p) =preliminary
Source: Beverage Marketing Corporation as reported by
the International Bottled Water Association, 2006.
to comply with the provisions of the Safe Drinking
Water Act Amendments of 2001.) Consumer con-
cerns over the quality of drinking water in the
United States emerged in 1993 when 400,000 resi-
dents of Milwaukee, Wisconsin, became ill with flu-
like symptoms and almost 100 immune-impaired
residents died from waterborne bacterial infections.
Throughout the 1990s and into the early 2000s, the
media sporadically reported cases of municipal wa-
ter contamination, such as in 2000 when residents of
Washington, D.C., became ill after the city's water
filtration process caused elevated levels of suspend-
ed materials in the water.
Even though some consumers were concerned
about the purity of municipal water, most consum-
ers' complaints with tap water centered on the chem-
10. ical taste of tap water that resulted from treatment
processes that included the use of chlorine and other
chemicals such as fluoride. In a tap-water tasting
in Atlanta hosted by Southpoint Magazine, judges
rated municipal water on taste and found some
cities' waters very palatable. Water obtained from
the municipal source in Memphis was said to have "a
refreshing texture." However, othermunicipal systems
did not fare as well with the jUdges-some of whom
suggested Houston's water tasted "like a chemistry
lab," while others said Atlanta's municipal water was
akin to "a gulp of swimming pool water."l However,
there were positive attributes to the chemicals added
to tap water, as chlorine was necessary to kill any
bacteria in the water and fluoride had contributed
greatly to improved dental health in the United States.
In addition, tap water had been shown to be no less
healthy than bottled water in a number of independent
studies, including a study publicized in Europe
that was commissioned by the World Wide Fund
for Nature and conducted by researchers at the
University of Geneva.
Bottled water producers in the United States
were required to meet the standards of both the
Environmental Protection Agency (EPA) and the
U.S. Food and Drug Administration (FDA). Like all
other food and beverage products sold in the United
States, bottled water was subject to such food safety
and labeling requirements as nutritional labeling
provisions and general good manufacturing prac-
tices (GMPs). Bottled water GMPs were mandated
under the 1962 Kefauver-Harris Drug Amendments
to the Federal Food, Drug and Cosmetic Act of 1938
and established specifications for plant construc-
11. tion and design, sanitation, equipment design and
construction, production and process controls, and
record keeping. The FDA required bottled water pro-
ducers to test at least weekly for the presence ofbac-
teria and to test annually for inorganic contaminants,
trace metals, minerals, pesticides, herbicides, and or-
ganic compounds. Bottled water was also regulated
by state agencies that conducted inspections of bot-
tling facilities and certification of testing facilities to
ensure that bottled water was bottled under federal
GMPs and was safe to drink.
Bottled water producers were also required to
comply with the FDA's Standard of Identity, which
required bottlers to include source water information
on their products' labels. Water labeled as "spring
water" must have been captured from a borehole or
natural orifice of a spring that naturally flows to the
surface. "Artesian water" could be extracted from a
confined aquifer (a water-bearing underground layer
of rock or sand) where the water level stood above
the top of the aquifer. "Sparkling water" was re-
quired to have natural carbonation as it emerged from
the source, although carbonation could be added to
C-S2 Part 2 Cases in Crafting and Executing Strategy
return the carbon dioxide level to what was evident
as the water emerged from the source. Even though
sparkling water was very popular throughout most
of Europe, where it accounted for approximately 54
percent of industry sales, it made up only 8 percent
of the bottled water market in the United States.
12. The FDA's definition of "mineral water" stat-
ed that such water must have at least 250 parts per
million of total dissolved solids, and its standards
required water labeled as "purified" to have under-
gone distillation, deionization, or reverse osmosis
to remove chemicals such as chlorine and fluoride.
"Drinking water" required no additional processing
beyond what was required for tap water but could
not include flavoring or other additives that account
for more than 1 percent of the product 's total weight.
Both "drinking water" and "purified water" had to
cleaily state that the water originated "from a com-
munity water system" or "from a municipal source."
Bottled water producers could also voluntarily
become members of the International Bottled Water
Association (IBWA) and agree to comply with its
Model Code, which went beyond the standards of
the EPA, FDA, or state agencies. The Model Code al-
lowed fewer parts per million of certain organic and
inorganic chemicals and microbiological contami-
nants than FDA, EPA, or state regulations and im-
posed a chlorine limitation on bottled water. Neither
the FDA nor the EPA limited chlorine content. IBWA
members were monitored for compliance through
annual, unannounced inspections administered by
an independent third-party organization.
Distribution and Sale
of Bottled Water
Consumers could purchase bottled water in nearly
any location in the United States where food was
also sold. The distribution of bottled water varied
depending on the producer and the distribution chan-
nel. Typically, bottled water was distributed to large
grocers and wholesale clubs directly by the bottled
13. water producer, whereas most producers used third
parties like beer and wine distributors or food dis-
tributors to make sales and deliveries to convenience
stores, restaurants , and delis.
Because ofthe difficulty for food service distrib-
utors to restock vending machines and provide bottled
water to special events, Coca-Cola and PepsiCo were
able to dominate such channels since they could make
deliveries of bottled water along with their deliveries
of other beverages. Coca-Cola 's and PepsiCo 's vast
beverage distribution systems made it easy for the
two companies to make Dasani and Aquafina avail-
able anywhere Coke or Pepsi could be purcha ed. In
addition, the two cola giants almost always negoti-
ated contracts with sports stadiums, universities, and
school systems that made one of them the exclusive
supplier of all types of nonalcoholic beverages sold
in the venue for a specified period. Under such cir-
cumstances, it was nearly impossible for other brands
of bottled water to gain access to the account.
PepsiCo and Coca-Cola's soft drink businesses
had allowed vending machine sales to account for
8 percent of industry sales volume in 2005 and had
also aided the two companies in making Aquafina
and Dasani available in supermarkets, supercent-
ers, wholesale clubs, and convenience stores. Soft
dlink sales were important to all types of food stores
since soft dlinks made up a sizable percentage of
the store's sales and since food retailers frequently
relied on soft drink promotions to generate store
traffic. Coca-Cola and PepsiCo were able to encour-
age their customers to purchase items across their
product lines to ensure prompt and complete ship-
14. ment of key soft drink products. As a diversified
food products company, PepsiCo had exploited the
popularity of its soft drinks , Gatorade sports drinks,
Frito-Lay snack foods , and Tropicana orange juice
in persuading grocery accounts to purchase not
only Aquafina but also other non-soft drink brands
such as FruitWorks, SoBe, Lipton 's Iced Tea, and
Starbucks Frappuccino.
Since most supermarkets , supercenters, and food
stores usually carried fewer than seven branded bot-
tled waters plus a private-label brand, bottled water
producers other than Coke and Pepsi were required
to compete aggressively on price to gain access to
shelf space. Supermarkets and discount stores ac-
counted for 43.5 percent of U.S. industry sales in
2005 and were able to require bottled water suppliers
to pay slotting fees in addition to offering low prices
to gain shelf space. Natural foods stores could also
require aIIDual contracts and slotting fees but were
much more willing than traditional supermarkets to
pay higher wholesale prices for products that could
contribute to the store 's overall level of differentia-
tion. In fact, most natural foods stores would not
carry brands found in traditional supermarkets.
C-53 Case 4 Competition in the Bottled Water Industry in 2006
Convenience stores were also aggressive in press-
ing bottled water producers and food distributors for
low prices and slotting fees. Most convenience stores
carried only two to four brands of bottled water be-
yond what was distributed by Coca-Cola and Pepsi
and required bottlers to pay annual slotting fees of
15. $300 to $400 per store in return for providing 5 to
10 bottle facings on a cooler shelf. Some bottlers
offered to provide retailers with rebates of approxi-
mately 25 cents per case to help secure distributors
for their brand of bottled water. Food and beverage
distributors usually allowed bottled water producers
to negotiate slotting fees and rebates directly with
convenience store buyers.
There was not as much competition among
bottled water producers to gain shelf space in delis
and restaurants since that channel accounted for only
6.5 percerit of U.S. industry sales in 2005. PepsiCo
and Coca-Cola were among the better-suited bottled
water producers to economically distribute water to
restaurants since they likely provided fountain drinks
to such establishments.
Suppliers to the Indu try
The suppliers to the bottled water industry included
municipal water systems; spring operators; bottling
equipment manufacturers; deionization, reverse
osmosis, and filtration equipment manufacturers;
manufacturers of PET and HDPE bottles and plas-
tic caps; label printers; and secondary packaging
suppliers. Most packaging supplies needed for the
production of bottled water were readily available
from a large number of suppliers. Large bottlers able
to commit to annual purchases of more than 5 mil-
lion PET bottles could purchase bottles for as little
as 5 cents per bottle, whereas regional bottlers pur-
chasing smaller quantities of bottles or making only
one-time purchases of bottles could expect to pay a
much as 15 cents per bottle. Suppliers of secondary
packaging like cardboard boxes, shrink-wrap, and
six-pack rings and suppliers of printed film or paper
16. labels were numerous and aggressively competed for
the business of large bottled water producers.
Bottling equipment used for water purifica-
tion and filling bottles was manufactured and mar-
keted by about 50 different companies in the United
States. A basic bottle-filling line could be purchased
for about $125,000, whereas a large state-of-the-art
bottling facility could require a capital investment
of more than $100 million. Bottlers choosing to sell
spring water could expect to invest about $300,000
for source certification, road grading, and installa-
tion of pumping equipment, fencing, holding tanks,
and disinfecting equipment. Bottlers that did not
own springs were also required to enter into lease
agreements with spring owners that typically ranged
from $20,000 to $30,000 per year. Companies sell-
ing purified water merely purchased tap water from
municipal water systems at industrial rates prior to
purifying and bottling the water for sale to consum-
ers. Sellers ofpurified water were able not only to pay
less for water they bottled, but also to avoid spring
water's inbound shipping costs of 5 to 15 cents per
gallon since water arrived at the bottling facility by
pipe rather than by truck.
Key Comp titive Capabilities
in the Bottled Water Industry
Bottled water did not enjoy the brand loyalty of soft
drinks, beer, or many other food and beverage prod-
ucts but was experiencing some increased brand loy-
alty, with 10 to 25 percent of consumers looking for
a specific brand and an additional two-thirds consid-
ering only a few brands acceptable. Because of the
growing importance of brand recognition, success-
17. ful sellers of bottled water were required to possess
well-developed brand-building skills. Most of the
industry's major sellers were global food companies
that had built respected brands in soft drinks, dairy
products, chocolates, and breakfast cereals prior to
entering the bottled water industry.
Bottled water sellers also needed to have efficient
distribution systems to supermarket, wholesale club,
and convenience store channels to be successful in
the industry. It was imperative for bottled water dis-
tributors (whether direct store delivery by bottlers or
delivery by third parties) to maximize the number of
deliveries per driver since distribution included high
fixed costs for warehouses, trucks, handheld inven-
tory tracking devices, and labor. It was also critical for
distributors and bottlers to provide on-time deliveries
and offer responsive customer service to large cus-
tomers in the highly price-competitive market. Price
competition also mandated high utilization of large-
scale plants to achieve low production costs. Volume
and market share were also key factors in keeping
marketing expenses at an acceptable per-unit level.
C-54 Part 2 Cases in Crafting and Executing Strategy
Recent Trends in the Bottled
Water Industry
As the annual growth rate of bottled water sales in
the United States slowed from double-digit rates,
signs had begun to appear that price competition in
the bottled water industry might mirror that of the
carbonated soft drink industry. Fierce price compe-
tition could be expected to bring volume gains but
18. result in flat or declining revenues for the bottled
water industry. Coca-Cola, Nestle, and PepsiCo had
avoided strong price competition through 2004, but
during the first six months of 2005 all three of the
industry's largest sellers began to offer considerable
discounts on 12- and 24-bottle multipacks to boost
unit volume. Exhibit 5 presents average U.S. retail
prices for 24-bottle multipacks marketed by Nestle
Waters, Coca-Cola, and PepsiCo between 2003 and
the first six months of 2005.
The world's largest sellers of bottled water ap-
peared to be positioning for industry maturity by
purchasing smaller regional brands. Nestle had ac-
quired bottled water producers and entered into joint
ventures in Poland, Hungary, Russia, Greece, France,
Turkey, Algeria, South Korea, Indonesia, and Saudi
Arabia between 2000 and 2006. Danone Waters also
made a number of acquisitions and entered into stra-
tegic alliances and j oint ventures during the early
2000s to increase penetration of selected emerging
and developed markets.
Danone and Nestle had long competed against
each other in most country markets, but PepsiCo
and Coca-Cola were also becoming global sellers
of bottled water. Coca-Cola had used a joint venture
with Danone Waters to increase its bottled water
product line in the United States beyond Dasani and
acquired established brands in Europe and Australia
to build strength in markets outside the United
States. PepsiCo expanded into international markets
for bottled water by allowing foreign bottling fran-
chisees to license the Aquafina brand. The strategic
maneuvering had created a more globally competi-
19. tive environment in which the top sellers met each
other in almost all of the world's markets and made
it difficult for regional sellers to survive. California-
based Palomar Mountain Spring Water was one of
many casualties of intensifying competibve rivalry.
Like many other independent bottled water compa-
nies launched in the 1990s, Palomar was forced into
bankruptcy in 2003 after losing key supermarket
and discount store contracts. After Palomar lost
much of its distribution in California supermarkets
and discount stores to Nestle, its 2003 revenues fell
to $7 million from $30 million just two years ear-
lier. Exhibit 6 illustrates the extent to which the U.S.
bottled water market had consolidated by 2003 and
2004.
. The introduction of enhanced waters or func-
tional waters was the most important product inno-
vation since,bottled water gained widespread accep-
tance in the United States, with most sellers in 2006
having introduced variations of their products that
included flavoring, vitamins, carbohydrates , electro-
lytes, and other supplements. The innovation seemed
to be a hit with U.S. consumers, as the market for
enhanced bottled waters expanded from $20 million
ExhilJ 'r- S Average Retail Prices of Multipack Bottled Water
Marketed by Nestle
Waters, Coca-Cola, and PepsiCo, 2003-2005
- - - - - .. ',. - - T2003 ' ... - .. , ':2004 '''2~
Average Average AV_~
'4 : 24-Pack .24-Pack ·24!P.a I(
:Brands ' 'Price Price ' Price
20. ... £' ....... • ..
Poland Spring $5.89 $5.17 $5.10
(Nestle Waters)
Dasani (Coca-Cola) $5.36 $5,88 $5.80
Dannon (Coca-Cola) $4.70 $4.70 $4.35
Aquafina (PepsiCo) $5.24 $5.40 $5.01
* January 2005-June 2005.
Source: Morgan Stanley, as reported by the Atlanta Journal-
Constitution, June 21,2005.
C-55 Case 4 Competition in the Bottled Water Industry in 2006
Exhibit 6 Top Four U.S. Bottled Water Marketers, 2003-2004
~-"-"-'·"-··o"'··':' 'f"'"
~ ~ ,...
t ~ .... " • -
.""!("~.... ~ r o ', ~., .·r 0 ,.--'
,..,
, ,
-',0 ~- ";,
~
22. 4 CG Roxanne Crystal Geyser 7.4 7.0
Others/Private-Label 15.0 15.3
TOTAL 100.0% 100.0%
Source: Morgan Stanley, as reported by the Atlanta Journal-
Constitution, June 21,2005.
in 2000 to approximately $1 billion in 2006. Most
sellers of bottled water had yet to make functional
waters widely available outside the United States.
Energy Brands helped create the enhanced water
segment in the United States with its 2000 launch of
Glaceau Vitamin Water, which contained a variety
of vitamins promoting mental stimulation, physical
rejuvenation, and overall improved health. Glaceau
was the best-selling brand of enhanced water in 2000
and 2001, but it fell to the number two position in
the segment upon PepsiCo's launch of Propel Fitness
Water. Propel Fitness Water remained the market
leader in the U.S. enhanced water segment in 2006.
Energy Brands had achieved a compounded annual
growth rate of more than 200 percent between 2000
and 2005, to record estimated sales of $350 million
and maintain its number two position in the U.S.
functional water category.
Coca-Cola, Nestle, and Danone Waters had be-
gun testing vitamin-enhanced waters in as early as
2002, but all three had changed their approaches to
functional waters by 2006. Coke had given up on
vitamin-enhanced waters in favor of flavored water,
while Nestle Waters and Danone Waters retained
only a fluoride-enhanced water. Like those at Coca-
Cola, managers at Nestle and Danone believed that
23. flavored waters offered substantial growth opportu-
nities in most country markets. The Tata Group, an
Indian beverage producer, showed greater confidence
in the vitamin-enhanced bottled water market with
its purchase of a 30 percent stake in Energy Brands
in 2006 for $677 million. The Tata Group's chairman
believed that Energy Brands had the potential to be-
come a $3 billion company within 10 years.
P 0 o
L-.-.. a...
WATE 5
N estle Waters
Nestle was the world's leading seller of bottled
water, with a worldwide market share of 18.3 percent
in 2006. It was also the world's largest food com-
pany, with 2005 sales of 91 billion Swiss francs (ap-
proximately $71 billion). The company was broadly
diversified into 10 food and beverage categories that
were sold in almost every country in the world under
such recognizable brand names as Nescafe, Taster's
Choice, Perrier, Vittel, Carnation, PowerBar, Friskies,
Alpo, Nestea, Libby's, Stouffer's, and of course,
Nestle. The company produced bottled water as ear-
ly as 1843, but its 1992 acquisition of Perrier created
the foundation of what has made Nestle Waters the
world's largest seller of bottled water, with 75 brands
in 130 countries. In 2005, Nestle recorded bottled
water sales of 8.8 billion Swiss francs (approximately
$6.9 billion) and was the global leader in the bottled
water industry, with an 18.3 percent worldwide mar-
ket share in 2005. Nestle Waters was the number one
seller of bottled water in the United States with a
24. 42.1 percent market share in 2004 and the number
one seller in Europe with a 20 percent market share.
Nestle was also the number one seller in Africa and
the Middle East and was aggressive in its attempts to
build market-leading positions in emerging markets
Asia and Latin America through the introduction
C-56 Part 2 Cases in Crafting and Executing Strategy
of global Nestle products and the acquisition of es-
tablished local brands. The company acquired nearly
20 bottled water producers between 2001 and 2003 .
In 2006, Nestle Waters was the number one brand
of bottled water in Pakistan, Vietnam, and Cuba; the
number two brand in Indonesia and Argentina; and
the number three brand in Thailand.
The company's bottled water portfolio in
2006 included two global brands (Nestle Pure Life
and Nestle Aqnarel), five international premium
brands (Perrier, Vittel, Contrex, Acqua Panna, and
S. Pellegrino), and 68 local brands . Nestle Pure Life
was a purified water product developed in 1998 for
emerging markets and other markets in which spring
water was not an important differentiating feature
ofbottled water. Nestle Aquarel was developed in
2000 for the European market and markets that pre-
ferred still spring water over purified water or spar-
kling spring water. Nestle's other waters marketed
in Europe were either spring water with a higher
mineral content or sparkling waters such as Perrier
and S. Pellegrino. Almost all brands marketed out-
side of Europe were either spring water or mineral
water with no carbonation. Its brands in the United
25. States included Pure Life, Arrowhead, Ice Mountain,
Calistoga, Deer Park, Zephyrhills, Ozarka, and
Poland Spring.
During the early 2000s, Nestle Waters manage-
ment believed that its broad portfolio of local wa-
ter brands was among the company 's key resource
strengths. However, the notable success of Nestle's
two global brands had caused management to reor-
ganize the division in 2006. Pure Life and Aquarel
had grown from just 2.5 percent of the division 's
sales in 2002 to 12.0 percent of the division's 2005
sales. Consumers in the United States seemed to ac-
cept the Pure Life brand as well as long-established
local brands, with sales of Nestle Pure Life in the
United States increasing by 50 percent between 2004
and 2005. Flavored varieties of Pure Life had also
achieved notable success in Canada by capturing a
70 percent share of the flavored water market within
the first six months on the market. Nestle's 68 local
brands had accounted for as much as 75.7 percent of
division sales in 2002, but local brands had declined
to 64.8 percent of sales in 2005. The company 's five
premium international brands accounted for an ad-
ditional 23.2 percent of 2005 sales.
Nestle had test-marketed functional waters
fortified with vitamins and plant extracts between
2003 and 2004, but offered only fruit-flavored
enhanced waters in 2006. Contrex Lemon Meringue
and Strawberry Melba were two innovative calorie-
free flavors introduced in 2006. The company had
also used packaging innovations to differentiate its
bottled water brands, including a spill-proof cap
for child-sized bottles of Poland Spring, Deer Park
26. and Arrowhead. Nestle Waters also developed ~
bubble-shaped bottle that was designed to appeal
to children. Perrier's new PET container was part
of a strategy to revitalize the prestigious brand,
which had experienced annual sales declines since
the mid-1990s. The new plastic bottle was intended
to better match the on-the-go lifestyles of young
consumers than Perrier's heavy one-liter glass con-
tainers. Nestle would still package Perrier in glass
bottles for consumers who preferred the brand's
traditional packaging for dinner parties and other
formal settings.
Home and office delivery (HOD) was also an im-
portant component of Nestle's strategy-especially
in North America, Europe, and the Middle East.
HOD made up nearly 30 percent of Nestle Waters '
sales volume in the United States and was record-
ing double-digit growth in most other country mar-
kets in 2005. In 2005, Nestle competed in the HOD
market for bottled water in 30 countries. Between
2000 and 2004, the company had made 8 acquisi-
tions in the European HOD segment to grow from
no presence to the leading position, with 32 percent
market share. Nestle had also made acquisitions and
entered into joint ventures to develop market lead-
ing positions in countries located in the Middle East,
Northern Africa, and the Far East. Nestle's market
leading positions in Europe and the United States in
HOD and PET channels allowed it to earn the status
of low-cost leader in the United States. Exhibit 7
illustrates Nestle Waters' cost and wholesale pric-
ing advantages relative to Coca-Cola and PepsiCo
in U.S. markets. Nestle Waters ' management stated
in mid-2002 that it expected to double the division's
revenues by 2010.
27. Groupe Danone
Groupe Danone was established through the 1966
merger of two of France's leading glass makers,
who foresaw the oncoming acceptability of plastic
as a substitute to glass containers. The management
of the newly merged company believed that, rather
I
r
Case 4 Competition in the Bottled Water Industry in 2006
C-S7
c t 'I .r. J, 11 Value Chain Comparison for the Bottled Water
Operations of Nestle,
PepsiCo, and Coca-Cola
Retailer price per case $8.44 $8.52 $8.65
Retailer margin 35.0% 17.5% 17.6%
Wholesale price per case $5.49 $7.03 $7.13
Wholesale sales $5.49 $7.03 $7.13
Support revenue 0.00 0.41 0.52
Total bottler revenue $5.49 $7.44 $7.65
Expenses
Water * $0.01 $1.67 $1.70
28. PET bottles 1.03 1.16 1.16
Secondary packaging 0.61 0.68 0.68
Closures 0.21 0.23 0.23
Labor/manufacturing 0.70 0.70 0.77
Depre~iation 0.07 0.08 0.08
Total cost of goods sold 2.63 4.52 4.62
Gross profit $2.86 $2.92 $3.03
Selling, general, & 2.29 2.25 2.53
administrative
EBITA $0.57 $0.67 $0.50
EBITA margin 10.4% 9.0% 6.5%
* Includes licensing fees and royalties paid by Coca-Cola and
PepsiCo bottlers to Coca-Cola and PepsiCo.
Source: Goldman Sachs Global Equity Research as reported by
Beverage World, April 2002.
than shi fting its focus to the manufacture of plastic volume in
2005 but was displaced by Nestle in both
containers, the company should enter markets for · terms of
volume and dollar sales during 2006.
products typically sold in glass containers. Groupe Danone
recorded worldwide bottled water sales
Danone's diversification outside of glass containers of €3.4
billion in 2005 . Among Groupe Danone's
29. began in 1969 when the company acquired Evian- most
important beverage brands were Evian, the
France 's leading brand of bottled water. Throughout world's
leading brand of spring water, and Wahaha,
the 1970s and 1980s, Groupe Danone acquired ad- the leading
brand of bottled water in China.
ditional food and beverage companies that produced Each brand
accounted for more than £1 billion in
beer, pasta, baby food, cereals, sauces, confection- sales during
2005. During that year, 40 percent of
ery, dairy products, and baked goods. In 1997, the Danone 's
bottled water sales originated in Europe,
company slimmed its portfolio of businesses to dairy 47 percent
were in China, and 13 percent were in
products, bottled water, and a baked goods division emerging
markets outside of Asia. Danone 's local
producing cereal, cookies, and snacks. In 2005 , and regional
brands held number one shares in many
Groupe Delllone was a leading global food company, country
markets such as Denmark, Germany, Spain,
with annual sales of€13 billion and was the world's the United
Kingdom, Poland, Indonesia, Mexico,
largest producer of dairy products, the number two and
Morocco.
producer of cereal, cookies, and baked snacks, and Like Nestle,
Danone had made a number of ac-
the second largest seller of bottled water. The com- quisitions
of regional bottled water producers dur-
pany had been the largest seller of bottled water by ing the late
1990s and early 2000s. During 2002,
C-58 Part 2 Cases in Crafting and Executing Strategy
Danone acquired a 'controlling interest in Poland's
30. leading brand of bottled water for an undisclosed
amount and purchased Canada's Sparkling Spring
brand of waters for an estimated $300-$400 million.
The company also entered into a joint venture with
Kirin Beverage Company to strengthen its distribu-
tion network in Japan and embarked on a partner-
ship with the Rachid Group, an Egyptian firm, to ac-
celerate its development of market opportunities in
North Africa and the Near and Middle East. During
2003 and 2004, Groupe Danone acquired three HOD
bottled water sellers in Mexico. Danone acquired the
leading brand ofbottled water in Serbia and an HOD
seller in Spain in 2004. In 2006, the company ac-
quired a 49 percent stake in Denmark's leading seller
of bottled water.
Danone Waters ' revenues had declined by nearly
20 percent between 2000 and 2005 as its U. S. dis-
tribution agreement with Coca-Cola began to suffer.
Prior to Coca-Cola's launch of Dasani, its bottlers
distributed Evian and other non-Coke bottled water
brands. Before the introduction of Dasani, about 60
percent of Evian's U.S. distribution was handled by
Coca-Cola bottlers. With Coca-Cola bottler's atten-
tion directed toward the sale of Dasani, Evian lost
shelf space in many convenience stores, supermar-
kets' delis, restaurants, and wholesale clubs.
Danone Waters and Coca-Cola entered into a
joint venture in 2002 that allowed Evian and Dannon
water brands to be distributed along with Dasani to
convenience stores, supermarkets, and other retail
locations serviced by Coca-Cola's bottling opera-
tions. In addition, the agreement made Coke respon-
sible for the production, marketing and distribution
of Dannon in the United States. Coca-Cola provided
31. Danone an up-front cash payment in return for 51
percent ownership of the joint venture. Danone con-
tributed its five plants and other bottled water as-
sets located in the United States to the joint venture.
However, Evian and Dannon continued to suffer un-
der the new distribution arrangement as Coca-Cola
continued to put most of its marketing muscle be-
hind Dasani. Danone sold its 49 percent interest in
the North American bottled water joint venture to
Coca-Cola in 2005.
Danone's home and office delivery businesses
were not included in the agreement with Coca-Cola
and were combined with Suntory Water Group's as-
sets to form DS Waters in 2003. The combination
of Danone Waters' and Suntory Waters assets made
the joint venture the largest HOD distributor in the
United States, with sales of approximately $800
million. Brands marketed by DS Waters included
Alhambra, Crystal Springs, Sierra Springs, Hinckley
Springs, Kentwood Springs, Belmont Springs, and
Sparkletts. Groupe Danone and Suntory sold 100
percent of DS Waters to a private investment fund
in 2005 for an undisclosed sum. The sale result-
ed in a €315 million loss for Groupe Danone and
completed Groupe Danone's exit from the North
American bottled water market. Danone 's HOD
business remained the worldwide leader in the cat-
egory with number one rankings in Asia, Argentina,
and Canada. Groupe Danone was the second larg-
est HOD provider in Europe in 2005 through a joint
venture with Swiss-based Eden Springs.
Groupe Danone had made functional and fla-
vored waters a strategic priority for its beverage
32. business. The company introduced flavored and
vitamin-rich versions of Volvic in Europe during
2003 and 2004, and by 2005 it was selling flavored
and functional waters in most of its markets. The
company held a number one ranking in functional
beverage categories in New Zealand and Argentina.
Functional and flavored waters accounted for 25 per-
cent of the group's beverage sales in 2005.
The Coca-Cola Company
With 300 brands worldwide, the Coca-Cola Company
was the world's leading manufacturer, marketer, and
distributor of nonalcoholic beverage concentrates.
The company produced soft drinks, juice and juice
drinks, sports drinks, water, and coffee and was
best known for Coca-Cola, which has been called
the world's most valuable brand. In 2005, the com-
pany sold more than 20.6 billion cases of beverages
worldwide to record revenues of $23.1 billion. Coca-
Cola's net income for 2005 was nearly $4.9 billion.
Seventy-three percent of Coke's gallon sales were
generated outside ofNorth America, with four inter-
national markets (Mexico, Brazil, China, and Japan)
accounting for 27 percent of Coca-Cola's sales by
volume. Sales in the United States also accounted
for 27 percent of the company's total volume.
Along with the universal appeal ofthe Coca-Cola
brand, Coca-Cola's vast global distribution system
that included independent bottlers, bottlers partially
owned by Coca-Cola, and company-owned bottlers
made Coke an almost unstoppable international
C-59 Case 4 Competition in the Bottled Water Industry in 2006
33. powerhouse. Coca-Cola held market-leading positions
in most countries in the cola segment of the soft
drink industry, and the strength of the Coca-Cola
brand aided the company in gaining market share in
most other soft drink segments such as the lemon-
lime and diet segments. The company had also been
able to leverage Coke's appeal with consumers to
gain access to retail distribution channels for new
beverages included in its portfolio such as Minute
Nlaid orange juice products, Powerade isotonic bev-
erages, and Dasani purified water.
The Coca-Cola Company did not market and
distribute its own brand of bottled water until 1999,
when it introduced Dasani. The company created a
purified water that included a combination of mag-
nesium sulfate, potassium chloride, and salt to recre-
ate what Coke researchers believed were the best
attributes of leading spring waters from around the
world. The Dasani formula was a closely guarded
secret and was sold to bottlers, just as the company
sold its Coke concentrate to bottlers. The Dasani
name was developed by linguists who suggested the
dual "a"s gave a soothing sound to the name, the "s"
conveyed crispness and freshness, and the "i" ending
added a foreign ring. Dasani was supported with an
estimated 5 million advertising budget during its
first year on the market and was distributed through
ail retail channels where Coke was available. Coca-
Cola's U.S. advertising budget for Dasani was $20
million in 2005. Coca-Cola's marketing expertise
and vast US. distribution system allowed Dasani to
become the second largest brand of water sold in the
United States by 2001--a position it continued to
hold in 2006.
34. Coca-Cola's 2002 joint venture with Danone
Waters allowed Coca-Cola to jump to the rank of
second largest bottled water producer in the United
States and third largest bottled water producer in the
world. The joint venture provided Coke with bottled
water products at all price points, with Dasani po-
sitioned as an upper-midpriced product, Evian as
a premium-priced bottled water, and Dannon as a
discount-priced water. Coke management believed
the addition of Dannon would allow the company to
protect Dasani's near-premium pricing, while gain-
spring water brands that could be marketed na-
tionally to challenge Nestle's regional brands in the
spring water segment.
Even though the joint venture allowed Coca-
Cola's sales of bottled water to increase from $765
million in 2002 to $1.3 billion in 2003, the three-tier
strategy seemed to be failing in some regards since
Coke's three water brands had collectively lost 2.2
market share points between 2003 and 2004. Coca-
Cola's loss ofmarket share seemed to be attributable,
to some to degree, to ~est16 's growth during 2004
and the increasing popularity ofprivate-label brands,
which had grown by more than 60 percent during
2004. However, some lost market share for the three
brands combined might have been a result of weak
support for Evian and Dannon brands. Coca-Cola
had committed to increasing advertising and pro-
motion for Evian by 20 percent between 2005 and
2010, but beverage industry analysts believed it was
unlikely that Evian would ever return to its previous
top-five ranking in the United States.
35. Coca-Cola tested a vitamin- and flavor-enhanced
Dasani NutriWater sub-brand during 2002 and 2003,
but it abandoned the concept after poor test-market
performance. In 2005, the company did go forward
with Splenda-sweetened lemon- and raspberry-
flavored varieties of Dasani. The company later add-
ed strawberry and grape flavors to the Dasani line.
Fruit-flavored Dasani had proved to be successful in
the market by 2006, with most retailers stocking at
least two flavors of Dasani in addition to unflavored
Dasani water. Coca-Cola extended the Dasani line in
2006 with the introduction of Dasani Sensations-a
flavored water with light carbonation. Like other va-
rieties of Dasani, Dasani Sensations contained no
calories. Powerade Option was another functional
water developed by Coca-Cola that was introduced
in 2005. Powerade Option was a competing product
to Gatorade Propel Fitness Water and was available
in grape and strawberry flavors in 2006. As of 2006,
Powerade Option had been largely unsuccessful in
capturing share from Propel Fitness Water and was
unavail.able in many retail locations.
Coca-Cola had long produced and marketed,
bottled water in foreign countries under local brand
names, such as its Bon Aqua brand in the German
market and NaturAqua in Hungary, but began ef-
forts to make Dasani an international brand in 2004
with expansion into in Africa, Brazil, and the United
Kingdom. Coca-Cola management chose the United
Kingdom as its entry point to Western Europe
with launches planned for 20 additional European
countries by mid-2004. Coca-Cola supported the
March 2004 launch of Dasani in the United King-
dom with a $3.2 million advertising budget and a
36. C-60 Part 2 Cases in Crafting and Executing Strategy
4-million-bottle sampling campaign but voluntarily
rccalled all Dasani bottles from retailers' shelves just
two weeks after the launch.
The recall was predicated on test results per-
formed by the company that indicated the bottles
were tainted with bromate--a cancer-causing agent.
Bromate became introduced to the product when cal-
cium, a mandatory ingredient for bottled waters sold
in the United Kingdom, was added to Coca-Cola's
proprietary formula of minerals used to distinguish
Dasani from other bottled waters. The bromate lev-
els present in Dasani exceeded regulatory limits in
the United Kingdom but met standards for purity on
the European c,ontlnent. Nevertheless, Coke man-
agement believed it best to recall the product and
discontinue imn1ediate plans to distribute Dasani
not only in the United Kingdom but also in all other
European markets. The Dasani launch was viewed
by many in the business press as one of the all-time
great marketing disasters and resulted in Coke's
abandoning the Dasani brand in Europe. Coca-
Cola management announced during a June 2006
Deutsche Bank conference for consumer goods that
it would expand its line of noncarbonated beverages
in Europe through acquisitions. Within two weeks
of the announcement, Coca-Cola had acquired the
Italian mineral water company Fonti del Vulture and
the Apollinaris mineral water brand sold in Germany
by Orangina. Coca-Cola also acquired two HOD
bottled water producers in Australia during 2006.
37. In 2006, PepsiCo was the world's fourth largest food
and beverage company, with sales of approximately
$32 billion. The company's brands were sold in more
than 200 countries and included such well-known
names as Tostitos, Mountain Dew, Pepsi,
Doritos, Lipton Iced Tea, Gatorade, Quaker, and
Cracker Jack. Six of PepsiCo's products were among
the top-IS largest selling products sold in U. S. su-
permarkets. PepsiCo also produced and marketed
Aquafina-the best-selling brand of bottled water in
the United States between 2002 and 2006.
PepsiCo had made attempts to enter the bottled
water market in as early as 1987, when it purchased
a spring water company, but its attempts were un-
successful until its 1997 introduction of Aquafina.
After experimenting with spring water and sparkling
water for several years, Pepsi management believed
it would be easier to produce a national brand of
bottled water that could utilize the same water pu-
rification facilities in Pepsi bottling plants that were
used to produce the company's brands of soft
Pepsi management also believed that the company
could distinguish its brand of purified bottled water
from competing brands by stripping all chlorine and
other particles out of tap water that might impart an
unpleasant taste or smelL PepsiCo began testing a
filtration process for Aquafina in 1994 when it in-
stalled million worth of reverse osmosis filtration
equipment in its Wichita, Kansas, bottling plant to
further purify municipal water used to make soft
drinks. The system pushed water through a fiberglass
membrane at very high pressure to remove chemi-
cals and minerals before further purifying the water
38. using carbon filters. The water produced Pepsi's
process was so free of chemicals that the company
was required to add ozone gas to the water prevent
bacteria growth.
Since the company's introduction of Aquafina,
PepsiCo had expanded its water brands in the
United States to include Gatorade Propel Fitness
Water, SoBe Life Water, and functional versions of
Aquafina. The product lines for its water business
were developed around customer type and lifestyle.
Propel was a flavor- and vitamin-enriched water
marketed to physically active consumers, while
Life Water was a vitamin-enhanced water similar to
Glaceau Vitamin Water in formulation and packag-
ing that was marketed to image-driven consumers.
The company targeted mainstream water consumers
with unflavored Aquafina~ Aquafina FlavorSplash
(offered in four flavors) I and Aquafina Sparkling
(a zero-calorie, lightly carbonated citrus or berry-
flavored water). Aquafi.na Alive, planned for a 2007
launch, included vitamins and natural fruit
The company's strategy involved offering a contin-
uum of healthy beverages from unflavored Aquafina
to nutrient-rich Gatorade. In 2006, Gatorade, Propel,
and Aquafina were all number one in their catego-
ries, with market shares of 80 percent, 34 percent,
and approximately 14 percent, respectively.
PepsiCo was slowly moving into international
bottled water markets, with its most notable effort
occurring in Mexico. In 2002, PepsiCo's bottling
operations acquired :Mexico's largest Pepsi bottler,
Pepsi -Gemex SA de Cv, for $1.26 billion. Gemex
not only bottled and distributed Pepsi soft drinks in
Mexico but also was Mexico's number one producer
39. http:Aquafi.na
Case 4 Competition in the Bottled Water in 2006 C-61
of purified water. After its acquisition of Gemex,
PepsiCo shifted its international expansion efforts to
bringing Aquafina to selected emerging markets in
Eastern Europe, the Middle and Asia. In 2006,
Aquafina was the number one brand of bottled water
in Russia and Vietnam and the number two brand in
Kuwait.
In addition to the industry's ""'........ LL';;.,
tIed water, there were hundreds of and spe-
cialty brands of bottled water in the United States.
Most of these companies were privately held bottlers
with distribution limited to small geographic
that competed aggressively on price to make it onto
convenience store and supermarket shelves as third-
tier brands. Many of these bottlers also sought out
private-label contracts with discounters and large
supermarket chains to better ensure full capacity uti-
lization and to achieve sufficient volume to purchase
bottles and other packaging at lower prices. CG
Roxanne was the most successful privately owned
bottled water company in the United States. The
company's Crystal Geyer brand made it the fourth
largest seller of bottled water in the United States
in with a 7.4 market share. Crystal
competed at the lower price points in U.S.
supermarkets and convenience stores and was bot-
tled from in California, Tennessee, South
Carolina, and New Hampshire. The company did not
40. disclose its financial performance.
Another group of small bottlers such as
Penta and Trinity used differentiating
features to avoid the fierce competition at the
low end of the market and sold in the superpremium
segment, where bottled water retailed from $1.50 to
$2.25 per 16-ounee PET container. Superpremium
brands were most often sold in natural foods stores,
with Trinity Springs being among the leaders in the
channel in 2005. Trinity's differentiation was based
on its water source, which was a 2.2-mile-deep arte-
sian well located in the Trinity rv10untains of Idaho.
Trinity Springs' distribution halted in March 2006
Endnote
when a court invalidated the 2004 sale of the com-
pany to Amcon Distributing. which had lost
$2 million in fiscal 2005 and another $1.8 million
during the first six months of fiscal 2006, shut down
its Trinity Springs water division after the and
was negotiating a settlement with Trinity
shareholders in late 2006.
Penta's differentiation was based on a propri-
etary purification system that the company claimed
removed 100 of impurities from tap wa-
ter. The company had also built brand recognition
through product placements in motion pictures, mu-
sic and more than 25 television series. Penta
also sponsored a large number of triathlons across
the United States and was endorsed a wide variety
of entertainers and professional athletes. In 2006,
Penta was distributed in more than 5,000 health food
41. stores in the enited States. Penta was also avail-
able in Australia, Japan, the United Kingdom, and
Canada. was also among the best-selling brands
of superpremium water sold in natural foods stores
in 2006 but was also sold in many supermarkets,
convenience stores, and drugstores aeross the United
States. Like Penta, received considerable expo-
sure from its placement in network television series
and motion pictures.
Voss achieved differentiation not only from the
purity of its source in Norway but also through its
distinctive glass bottle and limited channels of dis-
tribution. The brand was available only in the most
exclusive hotels, spas, and resorts. Another super-
premium brand, Eon, achieved its differentiation
through its anti-aging claims. The company's anti-
aging properties were said to result from the basic
atomic structure of Eon water, which was altered
through a proprietary reverse osmosis technology.
The structure ofEon was similar to that naturally oc-
curring in snowflakes and ice and was sug-
gested to improve cellular hydration and cell detoxi-
fication properties better than unstructured water.
Many. other superpremium brands of bottled water
were sold in the United States during 2006, with
each attempting to support its premium pricing with
some unique characteristic.
As quoted in "The Taste of Water," Bottled Water Web,
Statistics I - Adiletta 1
Statistics Correlation Worksheet Name:
_________________________
42. Ice Cream Sales
Answer the following questions, showing any calculations
involved. Include this document along with the graphs created
with Minitab in your submission.
1. Identify the independent (predictor) and dependent (response)
variables. [2 pts]
Independent variable: __________________ Dependent
variable: __________________
2. From the scatter diagram, does there seem to be a linear
correlation? If so, is it strong or weak? Is it positive or
negative? What does it say about the relationship between the 2
variables? [4 pts]
3. Use your scatter diagram to answer the following questions.
a. If you calculated the linear correlation coefficient for this
data to be r = –0.75, explain in one sentence how you know this
is incorrect. [2 pts]
b. If you calculated the linear correlation coefficient for this
43. data to be r = 1.20, explain in one sentence how you know this
is incorrect. [2 pts]
4. What is the correlation coefficient, r. Based on the
correlation coefficient, how accurate do you think your
regression equation is at making a prediction? Why? [2 pts]
5. What is the p-value? Is a linear relationship appropriate?
How do you know? [2 pts]
6. Identify the following quantities: [3 pts]
Regression Equation: ______________________________
Slope: _______________ y-Intercept: _______________
7. Explain the meaning of the slope in terms of this problem. [5
44. pts]
8. Explain the meaning of the y-intercept in terms of this
problem. Is it meaningful? Why or why not? [5 pts]
9. Predict the ice cream cone sales on a day where the high
temperature was 75°. Show all work here and round to 2
decimals. [2 pts]
10. On a 70° day, the Creamery had sales of 400 ice cream
cones. Is this sales figure above or below the average for this
temperature? Show your work for credit. [2 pts]
45. 11. Answer the following questions.
a. The high temperature on Saturday is predicted to be 75°.
Would it be reasonable to use the regression equation you
created to predict this day’s sales? Why or why not? [2 pts]
b. The high temperature on Sunday is predicted to be 85°.
Would it be reasonable to use the regression equation you
created to predict this day’s sales? Why or why not? [2 pts]
c. The high temperature on Sunday at the Creamery’s Buffalo
store is predicted to be 74°. Would it be reasonable to use the
regression equation you created to predict this store’s sales?
Why or why not? [2 pts]
46. 12. Compute and interpret R2. [4 pts]
Minitab Commands:
Correlation
Stat > Basic Statistics > Correlation
Enter both variables > OK
Regression Analysis
Stat > Regression > Regression > Fit Regression Model
Responses: Enter response variable
Continuous predictors: Enter predictor variable > OK
Fitted Line Plot & Regression Equation
Stat > Regression > Fitted Line Plot
Enter Response and Predictor variables > OK
To create a Residual Plot in Minitab
Stat > Regression > Fitted Line Plot.
Enter Response and Predictor variables
Be sure Type of Regression Model is Linear
Graphs > In the cell that says “Residuals versus the variables,”
enter the name of the explanatory variable. OK > OK
47. Five Forces Analysis – MGMT 425 Rubric
Failing
Poor
Acceptable
Exceptional
Points
Power of Buyers
Incorrect identification of relevant buyers and impact on
industry.(0)
Correctly identifies one or two relevant buyers, but unclear or
weak discussion of factors that shape impact of buyers on
industry. (1)
Correctly identifies relevant buyers and supports choices with a
discussion of one factor that shapes impact of buyers on
industry. (2)
Correctly identifies relevant buyers and supports choice with a
discussion of two or more factors that shape impact of buyers
on industry. (3)
Power of Suppliers
Incorrect identification of relevant suppliers and impact on
industry. (0)
Correctly identifies one or two relevant suppliers, but unclear or
weak. discussion of factors that shape impact of suppliers on
industry. (1)
Correctly identifies relevant suppliers and supports choices with
a discussion of one factor that shapes impact of suppliers on
industry. (2)
Correctly identifies relevant suppliers and supports choice with
a discussion of two or more factors that shape impact of
suppliers on industry. (3)
48. Strength of Rivalry
Incorrect assessment of rivalry and factors that drive industry
rivalry. (0)
Correctly assesses rivalry, but unclear or weak discussion of
factors that shape industry rivalry. (1)
Correctly assesses rivalry and provides a discussion of one
factor that shapes industry rivalry. (2)
Correctly assesses rivalry and provides a discussion of two or
more factors that shape industry rivalry. (3)
Strength of Substitutes
Incorrect identification of substitutes and impact on industry.
(0)
Correctly identifies relevant substitutes, but unclear or weak
discussion of factors that shape the impact of substitutes on
industry. (1)
Correctly identifies relevant substitutes and supports choices
with a discussion of one factor that shapes the impact of
substitutes on industry. (2)
Correctly identifies relevant substitutes and supports choices
with a discussion of two or more factors that shape the impact
of substitutes on industry. (3)
Threat of Entry
Incorrect identification of entry threats and impact on industry.
No discussion of entry barriers. (0)
Correctly identifies entry threats, but unclear or weak
discussion of factors that impact the threat of entry. Mentions
entry barriers, but limited discussion of impact. (1)
Correctly identifies entry threats and supports choices with a
discussion of one factor that impacts the threat of entry.
Mentions entry barriers and discusses impact. (2)
Correctly identifies entry threats and supports choices with a
discussion of two or more factors that impact the threat of
entry. Mentions entry barriers and discusses impact. (3)
51. Chapter RoadmapThe Strategically Relevant Components of a
Company’s External EnvironmentThinking Strategically About
a Company’s Industry and Competitive EnvironmentQuestion 1:
What Are the Industry’s Dominant Economic Features?Question
2: How Strong Are Competitive Forces?Question 3: What
Forces Are Driving Industry Change and What Impacts Will
They Have?Question 4: What Market Positions Do Rivals
Occupy—Who Is Strongly Positioned and Who Is Not?Question
5: What Strategic Moves Are Rivals Likely to Make
Next?Question 6: What Are the Key Factors for Future
Competitive Success?Question 7: Does the Outlook for the
Industry Offer the Company a Good Opportunity to Earn
Attractive Profits?
*
3-*
Diagnosing a company’s situation has two facetsAssessing the
company’s external or macro-environment Industry and
competitive conditions Forces acting to reshape this
environmentAssessing the company’s internal or
micro-environment Market position and competitiveness
Competencies, capabilities,
resource strengths and
weaknesses, and competitiveness
Understanding the Factors that Determine a Company’s
Situation
53. 3-*
Figure 3.1: From Thinking Strategically About the
Company’s Situation to Choosing a Strategy
3-*
*
3-*
Figure 3.2: The Components of a Company’s Macro-
environment
3-*
*
3-*
Thinking Strategically About a
Company’s Macro-environmentA company’s macro-
environment includes all relevant factors and influences outside
its boundariesDiagnosing a company’s external situation
involves assessing strategically important factors that have a
bearing on the decisions a company’s makes about
54. itsDirectionObjectivesStrategyBusiness modelRequires that
company managers scan
the external environment toIdentify potentially important
external developmentsAssess their impact and influenceAdapt a
company’s direction and strategy as needed
*
3-*
Key Questions Regarding the
Industry and Competitive Environment
3-*
55. What are the industry’s dominant economic traits?
How strong are competitive forces?
What forces are driving change in the industry?
What market positions do rivals occupy? What moves will they
make next?
What are the key factors for competitive success?
How attractive is the industry from a profit perspective?
*
3-*
Market size and growth rateNumber of rivalsScope of
competitive rivalryBuyer needs and requirementsDegree of
product differentiationProduct innovationSupply/demand
conditionsPace of technological changeVertical
integrationEconomies of scaleLearning and experience curve
effects
Question 1: What are the Industry’s
Dominant Economic Traits?
3-*
Table 3.1: What to Consider in Identifying
an Industry’s Dominant Economic Features
56. 3-*
*
3-*
Learning/Experience EffectsLearning/experience effects exist
when a company’s unit costs decline as its cumulative
production volume increases because of
Accumulating production know-how
Growing mastery of the technology The bigger the learning or
experience curve effect, the bigger the cost advantage of the
firm with the largest cumulative production volume
3-*
Question 2: How Strong Are Competitive Forces?Objectives
are to identify Main sources of competitive forces Strength of
these forcesKey analytical tool Five Forces Model
of Competition
*
3-*
57. Figure 3.3: The Five Forces Model of Competition
3-*
*
3-*
Analyzing the Five Competitive Forces: How to Do It
Step 1: Identify the specific competitive
pressures associated with each of
the five forces
Step 2: Evaluate the strength of each
competitive force – fierce, strong,
moderate to normal, or weak?
Step 3: Determine whether the collective
strength of the five competitive forces
is conducive to earning attractive profits
3-*
Usually the strongest of the five forcesKey factor in
determining strength of rivalryHow aggressively are rivals
using various weapons of competition to improve their market
58. positions and performance?Competitive rivalry is a combative
contest involvingOffensive actionsDefensive countermoves
Competitive Pressures
Among Rival Sellers
*
3-*
Figure 3.4: Weapons for Competing and Factors
Affecting Strength of Rivalry
3-*
*
3-*
What Are the Typical
Weapons for Competing?
Lower pricesMore or different performance featuresBetter
product performanceHigher qualityStronger brand image and
appealWider selection of models and stylesBigger/better dealer
networkLow interest rate financingBetter or more adsStronger
product innovation capabilitiesBetter customer serviceStronger
59. capabilities to provide buyers with custom-made products
3-*
*
3-*
Competitors are active in making fresh moves to improve
market standing and business performanceSlow market
growthNumber of rivals increases and rivals are ofequal size
and competitive capabilityBuyer costs to switch brands are
lowIndustry conditions tempt rivals to use price cuts or other
competitive weapons to boost volumeA successful strategic
move carries a big payoffDiversity of rivals increases in terms
of visions, objectives, strategies,
resources, and countries of originOutsiders acquire weak firms
in the
industry and use their resources to transform
new firms into major market contenders
What Causes Rivalry to be Stronger?
3-*
Industry rivals move only infrequently or in a non-aggressive
manner to draw sales from rivalsRapid market growthProducts
of rivals are strongly
60. differentiated and customer loyalty is highBuyer costs to switch
brands are highThere are fewer than 5 rivals or there are
numerous rivals so any one firm’s actions has minimal impact
on rivals’ business
What Causes Rivalry to be Weaker?
3-*
Test Your Knowledge
The rivalry among competing sellers in an industry intensifies
A. when buyer demand for the product is growing rapidly.
B. when customers are brand loyal and their costs to switch to
competing brands or substitute products are relatively high.
C. when buyer demand is strong and sellers have little or no
excess capacity and only minimal inventories.
D. as the number of rivals increases and as they become more
equal in size and competitive capability.
E. when the products of rival sellers are highly differentiated
products and the industry consists of so many rivals that any
one company’s actions have little direct impact on rivals’
business.
Answer: D
3-*
Seriousness of threat depends onSize of pool of entry candidates
and available resourcesBarriers to entryReaction of existing
firmsEvaluating threat of entry involves assessingHow
formidable entry barriers are for each type of potential entrant
62. *
3-*
Figure 3.5: Factors Affecting Threat of Entry
3-*
*
3-*
Sizable economies of scaleCost and resource disadvantages
independent of sizeBrand preferences and customer
loyaltyCapital requirements and/or other
specialized resource requirementsAccess to distribution
channelsRegulatory policiesTariffs and international trade
restrictionsAbility of industry incumbents to launch vigorous
initiatives to block a newcomer’s entry
Common Barriers to Entry
63. 3-*
There’s a sizable pool of entry candidatesEntry barriers are
lowIndustry growth is rapid and profit
potential is highIncumbents are unwilling or unable to contest a
newcomer’s entry effortsWhen existing industry members have
a strong incentive to expand into new geographic areas or new
product segments where they currently do not have a market
presence
When Is the Threat of Entry Stronger?
*
3-*
There’s only a small pool of entry candidatesEntry barriers are
highExisting competitors are struggling to earn good
profitsIndustry’s outlook is riskyIndustry growth is slow or
stagnantIndustry members will strongly contest
efforts of new entrants to gain a market foothold
When Is the Threat of Entry Weaker?
*
3-*
64. Competitive Pressures from Substitute Products
Substitutes matter when customers
are attracted to the products of
firms in other industries Sugar vs. artificial
sweetenersEyeglasses and contact lens
vs. laser surgeryNewspapers vs. TV vs. Internet
Concept
Examples
65.
66.
67. *
3-*
How to Tell Whether Substitute
Products Are a Strong ForceWhether substitutes are readily
available and attractively pricedWhether buyers view
substitutes
as being comparable or betterHow much it costs end users
to switch to substitutes
71. 3-*
There are many good substitutes readily availableSubstitutes are
attractively pricedThe higher the quality and
performance of substitutesThe lower the end user’s switching
costsEnd users grow more comfortable with using substitutes
When Is the Competition
From Substitutes Stronger?
*
3-*
Good substitutes are not readily available or do not
existSubstitutes are higher priced relative to performance they
deliverEnd users incur high costs
in switching to substitutes
When Is the Competition
From Substitutes Weaker?
*
3-*
Whether supplier-seller relationships represent a weak or strong
competitive force depends onWhether suppliers can exercise
sufficient bargaining leverage to
72. influence terms of supply in their favorNature and extent of
supplier-seller
collaboration in the industry
Competitive Pressures From Suppliers
and Supplier-Seller Collaboration
*
3-*
Figure 3.7: Factors Affecting Bargaining Power of
Suppliers
3-*
*
3-*
Industry members incur high
costs in switching their purchases
to alternative suppliersNeeded inputs are in short
supplySupplier provides a differentiated input
that enhances the quality of performance
of sellers’ products or is a valuable
73. part of sellers’ production processThere are only a few suppliers
of a specific inputSome suppliers threaten to integrate forward
When Is the Bargaining
Power of Suppliers Stronger?
*
3-*
Item being supplied is a commoditySeller switching costs to
alternative suppliers are lowGood substitutes exist or new ones
emergeSurge in availability of supplies occursIndustry members
account for a big
fraction of suppliers’ total salesIndustry members threaten
to integrate backwardSeller collaboration with selected
suppliers provides attractive win-win opportunities
When Is the Bargaining
Power of Suppliers Weaker?
*
3-*
Industry members often forge strategic partnerships with select
suppliers
toReduce inventory and logistics costsSpeed availability of
74. next-generation componentsEnhance quality of parts being
suppliedSqueeze out cost savings for both partiesCompetitive
advantage potential may accrue to those industry members
(sellers) doing the best job of managing supply-chain
relationships
Competitive Pressures: Collaboration Between Sellers and
Suppliers
*
3-*
Whether the relationships between industry members and buyers
represent a weak or strong competitive force depends
onWhether buyers have sufficient
bargaining leverage to influence
terms of sale in their favorExtent and competitive importance of
strategic partnerships between certain industry members and the
buyers
Competitive Pressures From Buyers
and Seller-Buyer Collaboration
*
3-*
75. Figure 3.8: Factors Affecting Bargaining Power of Buyers
3-*
*
3-*
Buyer switching costs to competing brands or substitutes are
lowBuyers are large and can demand concessionsLarge-volume
purchases by buyers are important to sellersBuyer demand is
weak or decliningOnly a few buyers existsIdentity of buyer adds
prestige
to seller’s list of customersQuantity and quality of information
available to buyers improvesBuyers have ability to postpone
purchases until laterBuyers threaten to integrate backward
When Is the Bargaining
Power of Buyers Stronger?
*
3-*
Buyers purchase item infrequently or in small quantitiesBuyer
switching costs to
competing brands are highSurge in buyer demand
76. creates a “sellers’ market”Seller’s brand reputation is important
to buyerA specific seller’s product delivers quality
or performance that is very important to buyerBuyer
collaboration with selected sellers provides attractive win-win
opportunities
When Is the Bargaining
Power of Buyers Weaker?
*
3-*
Partnerships between industry members and some/many of their
customers can impact competitive pressuresCollaboration may
result in
mutual benefits regardingJust-in-time deliveriesOrder
processingElectronic invoice paymentsData sharingCompetitive
advantage may accrue to those industry members doing the best
job of partnering with their customers
Competitive Pressures: Collaboration
Between Sellers and Buyers
*
3-*
77. For Discussion: Your Opinion
Explain why low switching costs and weakly differentiated
products tend to give buyers a high degree of bargaining power.
Buyers with low switching costs can more readily switch brands
or sources from several sellers than buyers who have high
switching costs. When the products of rivals are virtually
identical, i.e. weakly differentiated, it is relatively easy for
buyers to switch from seller to seller at little or no cost.
3-*
Competitive environment is
unattractive from the standpoint
of earning good profits whenRivalry is vigorousEntry barriers
are low
and entry is likelyCompetition from
substitutes is strongSuppliers and customers have
considerable bargaining power
Strategic Implications of
the Five Competitive Forces
*
3-*
Competitive environment is ideal from
78. a profit-making standpoint whenRivalry is moderateEntry
barriers are high
and no firm is likely to enter Good substitutes
do not existSuppliers and customers are
in a weak bargaining position
Strategic Implications of
the Five Competitive Forces
*
3-*
Objective is to craft a strategy toInsulate firm from
competitive pressuresInitiate actions to produce
sustainable competitive advantageAllow firm to be the
industry’s “mover and shaker” with the “most powerful”
strategy that defines the business model for the industry
Coping With the
Five Competitive Forces
*
3-*
79. Question 3: What Forces Are Driving Industry Change and
What Impacts Will They Have?Industries change because
forces
are driving industry participants
to alter their actionsDriving forces are the
major underlying causes
of changing industry and
competitive conditionsWhere do driving forces originate?Outer
ring of macroenvironmentInner ring of macroenvironment
*
3-*
STEP 1: Identify forces likely to exert greatest influence over
next 1 - 3 yearsUsually no more than 3 - 4 factors
qualify as real drivers of change
80. STEP 2: Assess impactAre driving forces acting to cause
market demand for product to increase or decrease?Are driving
forces acting to make competition more or less intense?Will
driving forces lead to higher or lower industry profitability?
STEP 3: Determine what strategy changes are needed to
prepare for impacts of driving forces
Analyzing Driving Forces:
Three Key Steps
81. *
3-*
Changes in long-term industry growth rateIncreasing
globalization of industryEmerging new Internet capabilities
and applicationsChanges in who buys the
product and how they use itProduct innovationTechnological
82. change/process innovationMarketing innovation
Common Types of Driving Forces
3-*
Entry or exit of major firmsDiffusion of technical
knowledgeChanges in cost and efficiencyConsumer preferences
shift
from standardized to
differentiated products (or vice versa)Changes in degree of
uncertainty and riskRegulatory policies / government
legislationChanging societal concerns, attitudes, and lifestyles
Common Types of Driving Forces (con’t)
3-*
Table 3.2: The Most Common Driving Forces
3-*
*
3-*
83. Question 4: What Market
Positions Do Rivals Occupy?One technique to reveal different
competitive positions of industry rivals is
strategic group mappingA strategic group is a cluster of firms in
an industry with similar competitive
approaches and market positions
*
3-*
Firms in same strategic group
have two or more competitive characteristics in commonHave
comparable product line breadthSell in same price/quality
rangeEmphasize same distribution channelsUse same product
attributes to appeal
to similar types of buyersUse identical technological
approachesOffer buyers similar servicesCover same geographic
84. areas
Strategic Group Mapping
3-*
STEP 1: Identify competitive characteristics that differentiate
firms in an industry from one another
STEP 2: Plot firms on a two-variable map using pairs of these
differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy space
to same strategic group
STEP 4: Draw circles around each group, making circles
proportional to size of group’s respective share of total industry
sales
Procedure for Constructing
a Strategic Group Map
3-*
Example: Strategic Group Map of Selected Automobile
Manufacturers
3-*
*
85. 3-*
Variables selected as axes should not be highly
correlatedVariables chosen as axes should expose big
differences in how rivals competeVariables do not have to be
either quantitative or continuousDrawing sizes of circles
proportional to combined sales of firms in each strategic group
allows map to reflect relative sizes of each strategic groupIf
more than two good competitive variables can be used, several
maps can be drawn
Guidelines: Strategic Group Maps
3-*
Interpreting Strategic Group MapsThe closer strategic groups
are
on the map, the stronger the cross-group
competitive rivalry tends to beNot all positions on the map
are equally attractiveDriving forces and competitive pressures
often
favor some strategic groups and hurt othersProfit potential of
different strategic
groups varies due to strengths and
weaknesses in each group’s market
86. position
3-*
Test Your Knowledge
A strategic group map is a helpful analytical tool for
A. assessing why competitive pressures and driving forces
usually impact the biggest strategic groups more so than the
smaller groups.
B. determining which companies have how big a competitive
advantage and how good their prospects are for increasing their
market shares.
C. determining which company is the most profitable in the
industry and why it is doing so well.
D. determining who competes most closely with whom;
evaluating whether industry driving forces and competitive
pressures favor some strategic groups and hurt others; and
ascertaining whether the profit potential of different strategic
groups varies due to the strengths and weaknesses in each
group’s respective market positions.
E. pinpointing which of the five competitive forces is the
strongest and which is the weakest.
Answer: D
3-*
A firm’s best strategic moves
are affected byCurrent strategies of competitorsFuture actions
of competitors Profiling key rivals involves gathering
87. competitive intelligence aboutCurrent strategiesMost recent
actions and public announcementsResource strengths and
weaknessesEfforts being made to improve their
situationThinking and leadership styles of top executives
Question 5: What Strategic Moves
Are Rivals Likely to Make Next?
*
3-*
Sizing up strategies and competitive strengths and weaknesses
of rivals involves assessingWhich rival has the best strategy?
Which
rivals appear to have weak strategies?Which firms are poised to
gain
market share, and which ones
seen destined to lose ground?Which rivals are likely to rank
among the industry leaders five years from now? Do any up-
and-coming rivals have strategies and the resources to overtake
the current industry leader?
Competitor Analysis
88. 3-*
Which rivals need to increase their unit sales and market share?
What strategies are rivals most likely to pursue?Which rivals
have a strong incentive, along with resources, to make major
strategic changes?Which rivals are good candidates to be
acquired? Which rivals have the resources to acquire
others?Which rivals are likely to enter new geographic
markets?Which rivals are likely to expand their product
offerings and enter new product segments?
Things to Consider in
Predicting Moves of Rivals
3-*
For Discussion: Your Opinion
Why does a company need to bother with studying competitors
and trying to predict what moves rivals will make next? Why
can’t it just choose whatever strategy it wants or make whatever
moves in the marketplace it wishes without first worrying about
what rivals are going to do?
89. Having good information to predict the strategic direction and
likely next moves of key rivals allows a company to prepare
defensive countermoves, to craft its own strategic moves with
some confidence about what market maneuvers to expect from
rivals, and to exploit any openings that arise from competitors’
missteps or strategy flaws. If a company neglects studying its
competitors, it risks being caught unaware when rivals make
fresh, bold strategic moves; thus, a company is likely to lose
ground in the marketplace.
3-*
Key Success Factors (KSFs) are competitive factors and
attributes that affect every industry member’s ability to be
competitively and financially successfulKSFs are those
particular attributes that are so important that they spell the
difference betweenProfit and lossCompetitive success or failure
KSFs can relate toSpecific strategy elementsProduct
attributesResourcesCompetenciesCompetitive
capabilitiesMarket achievements
Question 6: What Are the Key
Factors for Competitive Success?
90. *
3-*
The answers to 3 questions often help pinpoint an industry’s
KSFsOn what basis do customers choose
between competing brands of sellers?What resources and
competitive capabilities does a company need to have to be
competitively successful?What shortcomings are likely to place
a company at a significant competitive disadvantage?Rarely are
there more than 5 - 6
factors that are truly key to the future financial and competitive
success of industry members
Identifying Industry Key Success Factors
3-*
Table 3.3: Common Types of Industry Key Success
Factors
91. 3-*
*
3-*
Access to distribution – to get a company’s brand stocked and
favorably displayed in retail outletsImage – to induce
consumers to
buy a particular company’s product
(brand name and attractiveness of packaging are key deciding
factors)Low-cost production capabilities –
to keep selling prices competitiveSufficient sales volume – to
achieve
scale economies in marketing expenditures
Example: KSFs for Bottled Water Industry
*
3-*
Example: KSFs for
Ready-to-Wear Apparel IndustryAppealing designs and color
combinations – to create buyer appealLow-cost manufacturing
efficiency – to keep selling prices competitiveStrong network of
92. retailers/company-owned stores – to allow stores
to keep best-selling items in stockClever advertising – to
effectively
convey a specific image to induce consumers to purchase a
particular label
*
3-*
Involves assessing whether the industry and competitive
environment presents a company with an attractive or
unattractive opportunity
for earning good profitsFactors to consider:Industry
growth potentialWhether competitive forces are growing
stronger/weakerWhether driving forces will
favorable/unfavorably impact industry profitabilityDegree of
risk and uncertainty in industry’s futureWhether the industry
confronts severe problemsFirm’s competitive position in
industry vis-à-vis rivalsFirm’s potential to capitalize on
industry opportunities or the vulnerabilities of weaker
rivalsWhether a firm has sufficient competitive strength to
defend against unattractive industry factors
Question 7: Does the Outlook for the
Industry Offer an Attractive Opportunity?
*
93. 3-*
Factors to Consider in
Assessing Industry AttractivenessAs a general propositionIf an
industry’s overall profit prospects are above average, the
industry environment is basically attractiveIf an industry’s
overall profit prospects are below average, the industry
environment is basically unattractiveHoweverAttractiveness is
relative, not absoluteConclusions about attractiveness have
to be drawn from the perspective of a
particular company
*
3-*
An industry is unlikely to be equally attractive or unattractive
to all industry members Industry environments attractive to
strong competitors may be unattractive to weak competitorsA
favorably positioned company may survey an industry
environment and see opportunities that weak competitors have
little or no ability to captureIndustry environments attractive to
insiders may be unattractive to potential entrantsUnder certain
circumstances, a firm uniquely well-situated in an otherwise
unattractive industry can still earn good profits by taking sales
and market share away from weaker competitors
Factors to Consider in
Assessing Industry Attractiveness
94. 3-*
Core Concept: Assessing
Industry Attractiveness
The degree to which an industry
is attractive or unattractive is not the same for all industry
participants
or potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
3-*
*
3-*
Test Your Knowledge
Which of the following is not an important factor for company
managers to consider in drawing conclusions about whether the
industry presents an attractive opportunity?
A. Whether powerful competitive forces are squeezing industry
95. profitability to subpar levels and whether competition appears
destined to grow stronger or weaker
B. The industry’s growth potential and the degree of
uncertainty and risk in the industry’s future
C. Whether industry profitability will be affected favorably or
unfavorably by the prevailing driving forces
D. How many of the industry’s key success factors do
companies in the industry typically incorporate into their
strategies
E. The company’s ability to capitalize on the vulnerabilities of
weakly positioned rivals and whether the company has
sufficient competitive strength to defend against or counteract
the factors that make the industry unattractive
Answer: D
ASSIGNMENTS
Written Case Assignment #1 – Case: ____________ (100
points total)
For the first case you are to do an external analysis of the
industry in which the company competes. Your paper must be
no longer than 5 double-spaced pages (12pt font). Please write
in complete sentences, using proper grammar and spelling, but
remember, this is a report – not an essay. Use Chapter 3
concepts to guide your work. The format/subheadings must be
as follows:
Rubric
5 points
1. Major economic features of the industry, including, but not
limited to market size, market growth rate, number of rivals,
scope of rivalry, number of buyers etc. (Text Table 3.1).
Describe only those features that are relevant to the case.
96. 15 points
2. The industry’s competitive (five) forces. You must discuss
all five forces. Make sure to properly identify rivals,
supplies/suppliers, buyers, and substitutes. Don’t forget to
asses the strength of each force. Make sure you identify two or
more factors that support your strength assessment (each with
an example from the case) (Text Figures 3.3 – 3.8). You should
use the format below to guide your writing.
a. Rivalry in the industry is____________ (strong, weak, or
moderate) because___________.
b. Suppliers to the industry provide_(what?)_____. They are
(strong, weak, or moderate) __________, because___________.
c. Buyers of the product are__(who?)______. They
are__________ (strong, weak, or moderate),
because____________.
d. Substitutes are ____(what?)_____. They are
_________(strong, weak, or moderate), because____________.
e. Threat of entry of new competitors is __________(strong,
weak, or moderate), because_________. The barriers to entry
are _(what?)_____.
10 points
3. Factors that are causing major long-term industry change
(driving forces). Please identify the appropriate categories and
provide an example from the case for each category (Text Table
3.2). This section should discuss at least 3 driving forces.
10 points
4. Key success factors. Please identify the relevant types of key
success factors and provide an example from the case for each
type (Text Table 3.3). This section should contain at least 3,
97. but no more than 6 key success factors.
10 points
Proper spelling, grammar and formatting, paper length,
appropriate style and word choice, section headings, fonts and
margins.