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Barriers to Entry - Rte Cereal

In: Business and Management

Submitted By gvnmsr
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RTE Cereal Industry Barriers to Entry
Giovanni Massari

1) Economies of Scale: with regards to Economies of Scale, we have Product-Specific ones with regard to the fact that there is a minimum efficient scale of production in the industry, without which firms wouldn’t survive in the environment; requirements, in this case, are 75 million pounds of cereals per year to be efficient.
Other scale economies can be Multi-Product ES (“Economies of Scope”); indeed, different types of cereals can be produced in a very similar way, not requiring different production facilities, but leveraging the existing ones. The same can also be applied to packaging/bagging, which is the main source of Economies of Scale, because the Big Three use the same package within the firm for the various cereals they produce, with little differentiation. Finally, there are scope economies in advertising, since there’s the possibility of leveraging on it for new product introductions (“Brand Extension”), decreasing costs related to it – even though they’re still high, ¼ of the entire food industry’s expenses.

2) Experience Curve advantages: we have that the Big Three encounter Experience Curve advantages whenever trying to develop a brand extension or a new product, because of the cost reduction faced due to knowledge of basic processes needed for production. This, in combination with the existence of proprietary technology (see below, section 7), increases new entrants’ difficulty in entering the market (actually, there’s no figure provided for the learning curve these firms face, so we cannot quantify the cost reduction).

3) Reputation: incumbent firms, as the FTC investigation pointed out, reacted in two main ways to the “Private Labels” threat. First, they introduced a multitude of new products, filling all profitable niches in the cereal market; secondly, they engaged in practices…...

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