April 23, 2010

ENVC Exercise 3

Question:

Discuss an idea for a new product that will create a new industry niche. To convince others of your idea you need to set out the likely scenario for how the new niche will develop in terms of competition, numbers of firms, and how firms compete over time.

New Product

I would like to introduce an idea and concept of relax drink RD. This type of drink should serve to calm down stress, sooth nerves and remove irritations. Beverage market is going through the boom of energy drinks. RD can use this “wave” to promote itself creating new industry segment on principle of opposite concept. Relax drink is made of natural products and contains no sugar or artificial sweeteners. Packaging comes in cans. RDs will be placed next to energy drinks on the store shelves in order for a customer to make a choice. It is a new choice which was not there before: Relax fast and easy. Customers with a need to increase energy level will not consider purchase between energy and relax drink. However, there are many customers who are buying energy drinks for image or taste while energy boost is a secondary element. These are the target customers of RD. Relax drink will parasite on customer base of energy drinks.

Competitors

The current competitors are seen in herbal tea producers, in different type of medication and supplements. There is no direct competitor selling this or similar type of products in the same format.

Timing of the market entry

RD drink will be first mover of its kind in a beverage market with a focus on Europe. However, considering the fact that it is not first in the area of beverages with “value added dimension” like energy drinks, it can benefit from advantages of late entrant (e.g. approach to marketing and distribution chain) and those of a first mover at the same time (benefiting from rapid growth of a new industry segment).

Company & market development

It is expected that after entering the market with new RD product its success and potential will attract new competitors appearing in the segment as it grows. Competitors can be large beverage producers launching new product line in the space of relax drinks, energy drinks producers might decide to extend their product portfolio and diversify it or there can be new small producers entering the segment as late entrants after the RD has proven to be successful. I expect the development of revenue and firms to follow the typical pattern for the number of firms and industry revenue as captured in Figure 1.

It is difficult to assess how many competitor firms will be attracted, however in the long run the segment might consolidate up to 5 top firms which will dominate the market.

Figure 1.

Production of RD drink will trigger higher initial costs for developing formula, testing it and gaining required certifications in order to comply with high health standards in Europe, developing a can design, setting up production plants and establishing distribution channels. Costs will amount to high numbers therefore minimum efficient scale is high. Pricing strategy will be to set up prices on a higher than average levels as intention is to create image of a premium product with trustworthy content and effect. With higher than average prices and minimized cost based on economies of scale profit results can be maximized. RD drink is a homegenous product which allows for standardization, large production runs and mass production techniques.

Barriers to entry

Barriers to entry depend on a type of a competitor. For those who already are present in beverage industry introducing new product is not so costly – they can use economies of scopes. Most of the initial costs which are faced by RD drink can be avoided by these companies (e.g. production plants, distribution channels). In order to increase barriers to entry RD drink needs to emphasize uniqueness of formula, advertising and goodwill. For new start up companies entering calm drink segment barriers to entry are higher as they have to face the same sunk costs as RD, although they can also benefit from being late entrants.

Market maturing

In the initial phase of entering a new segment high growths are expected. Before competition enters RD can enjoy high revenues and high profits. In this phase RD will maximize benefits and gains of a first mover. It is important that in this stage company avoids burning cash and invest in facilities, working capital, recruiting and training in order to secure the right resources availability – company has to become an Adaptive Survivor (Day 1997). Also, from initial phase with management focusing on growth there might be a need for replacement in case the management is not suitable for phase with slower growth, as it is probable that original high growth slows down after the first company life cycle of 2-3 years.

Relax drink segment is expected to undergo overshooting shakeout due to number of firms trying to exploit the same market opportunity, which is characteristic for new industries. It is vital that RD is prepared for shakeout and is able to benefit from it. Management needs to carefully consider amount of long term investments, expansion plans and mainly cash management as already mentioned. Effective cost & expense management and operational effectiveness will be crucial as the company enters the shakeout and revenue drop will trigger margin reduction.

Provided RD is successful in a more maturing market it might consider expanding to new markets outside of Europe as once the market is fairly stabilized with few key players it will be difficult to gain further market shares. Such step can help to increase economies of scale even more, reduce the cost and increase the margins giving RD stronger position against other competitors. It might also consider extending or diversifying its product portfolio or aggressively acquire smaller companies – following the approach of an Aggressive Amalgamators, which will eventually cause a seismic shakeout (Day 1997).

Overtime I would consider selling the business to larger beverage or food company. Niche segment can expand better in the larger corporation with strong brand name, which is difficult to gain for a smaller player.

References:

Burke, A. (2009). Warwick MBA: Entrepreneurship and New Venture Creation. Coventry: Warwick Business School

Day, G.S. (1997). ‘Strategies for Surviving a Shakeout’. CHarvard Business Review, 75, 2, pp 8-9


- One comment Not publicly viewable

  1. Harminder Singh

    Hi Beata,
    you have covered the key apects in the development of the company- at this stage it is safe to move on and complete the remaining exercises.
    Regards,
    Harminder

    24 Apr 2010, 09:40


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