Industry Analysis Final

SMM221 MANAGING INTERNATIONAL BUSINESS

3. Industry Analysis

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3. Industry Analysis

In the below section, one will gain a profound understanding of the competitive environment of the

baby feeding bottle industry. The key target of any firm is to earn maximized profits. The business

strategy is an essentially quest for profit maximization. Therefore, the primary task for any

successful business strategy is to identify the sources of profits and the factors influencing the

macro-environment. The firm’s proximate environment is its industry’s environment. The

environment of the firm consists of all external influences that affect its decision-making process

and performances. This will help a firm to identify the factors influencing its supply and demand

channels, new entrants and the threats from substitutes on the industry level. The systematic,

continuous scanning of the external influences are necessary and include PESTLE, Porter’s six

forces, S.W.O.T and the Structure-Conduct –Performance model for Feed Me Bottles Ltd. in the

baby feeding bottle industry.

3.1 PESTLE analysis

The Pestle analysis, macro-environmental factors which widely have the power to alter the demand

of the product offered by any firm in an industry; the way in which a product is distributed , prices

are changed or the way in which firms compete with each other in the industry. The below six

macro-environmental factors consider the impact on the Baby feeding bottle industry.

3.1.1 Political Factors

The International health bodies like World Health Organisation (WHO) and many other national

health organisations had put a pressure on Governments to regulate the use of BPA or to ban BPA

products in regards to health issues especially for the babies. The United States & Canada banned

the polycarbonate baby bottles in February 2008 following EU in November 2010 (Levy, S., 2009).

Today’s consumer (moms) is educated and exposed to lot of information on internet which is a

wonderful vehicle for the information and aware of new development in the market. They

understand BPA and its implications. Therefore, suppliers and retails have responded very well to

this issue and today BPA –free baby feeding bottles are a huge point of entry in the baby care

accessory category. For example Toys “R” Us, is the world’s leading dedicated toy and juvenile

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products retailer, have changed all baby bottles and baby –feeding products sold in stores or

through their websites to BPA free by 1 January 2009 (Levy, S., 2009).

3.1.2 Economic Factors

Economic recovery is very slow in mature markets like the United Kingdom and the United States,

which has great impact on lifestyle of the people. For example, Vat rose to 20% in the United

Kingdom in January, 2011, will not make much difference to the prices of small items but overall

impact can be seen on consumer’s purchasing power. Less money will be left for discretionary or

high end purchases (Mintel, 2011). Consumer will think twice before buying even small thing which

will be of short period use. Economic factors related to supply and demand are also important. The

firms that source their goods from china will see higher production cost due to rising costs in labour,

raw material and less preferential tax treatment in china (www.globalsources.com 2011).

3.1.3 Social factors

Consumer’s purchasing power is a reflection of the lifestyle and consumer’s taste which finally

determines the magnitude of demand. In today’s world, urbanization largely affects the size of

family. People have become more ambitious and they are moving towards cities. Due to their

lifestyle, couples are trying to become more financially secure before starting a family which leads

to time before marriage and parenthood. This is a clear sign of aging, as women leave it until later in

life to have children, contrary this is a positive sign for the market for baby and nursery goods as

older mothers are financially secured and can afford to spend more on their babies. The rise of

celebrity culture and the ‘yoga moms’ phenomenon, will help to increase the sales for boutique style

retailers and manufacturers of high end designer baby product (Euromonitor International, 2006).

3.1.4 Technological Factors

As mentioned above, the internet has become an important vehicle for information. Wide

availability of information and opinions about shopping for babies from magazines, internets (social

networking websites like Facebook, through blogs: bymomsformoms.blogspot.com) and smart

phone applications made easy for consumer to select product. Even brands now days use these blogs

to get more information on products for new developments. Even more, brands have turned their

attention in creating and developing online presence because of e-world. For example: all baby

product brands and shops have online shops like www.mothercare.com, www.1stbabyshop.co.uk,

www.avent.com, www.tommeetippee.com, www.kiddicare.com and many more.

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http://www.globalsources.com/


3.1.5 Legal Factors

The firms have to adjust their products and the way they operate in the industry as per different

regulatory and legislative framework that govern each product in the country in which they are

active. Increase in global commerce which has impacted the international legal environment in terms

of standardization of many processes and other aspect of product. International organisation like

BPA, IBFAN are in the process of standardizing the processes in the value chain of the baby bottle

products. As explained earlier regarding ban of BPA chemical by many countries by law in the

manufacturing of baby bottles, has made many multinational companies and retailers to change baby

bottles to BPA free baby bottles.

3.1.6 Environmental Factor

Awareness of the effects of toxics contents in the product have led to increased the efforts to

develop technological methods or solution to the problems. The trend of organic products in the

market especially for baby products has increased. The firms like Avent (Philips) have already

developed a range of the baby products which is BPA free (Avent.com). Due to pressure groups and

use of internet, consumers are getting educated about different products and theirs advantages and

disadvantages. For Example, now day’s consumers are going back to traditional ways like use of

baby feeding bottles made of glass which is more eco-friendly and safe for the baby. This has led to

new range of glass feeding bottles which are also available on retail shelves.

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3.2 The Porter’s Model: the six forces

Two important features which shape the nature of competition or conditions for the firm to survive

in the industry are industry life cycle and macro-environment factors mentioned in above section.

The stages of industry’s life cycle and macro-environment will affect the relevant forces of

competition within the industry. The stronger the forces are, fierce the competition and difficult to

make profits.

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Firms’ rivalry in an Industry

Power of complementors

Threat of entry by new competitors

Power of Suppliers

Threats from substitute products

Power of buyers/customers

Figure 1: The six forces modelSource: Haberberg and Rieple (2008: 118)


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Below table explains how six forces changes and shapes the structure of the firm within the industry.

Power of Supplier Power of customer/buyer The threat of substitution The threat of new entrant The power of complementor Intensity of rivalry

The power supplier is very low in baby bottle industry as lot of

suppliers mainly from low skilled labour countries like China & India are present .Internal competition is

more

Customer as buyer:- customer has great deal of

power in this case as quality standards and other terms &

conditions are dictated by customer. Brand values also plays important role here.

regulations and more emphasis on breast feeding will act as threat of

substitution as it will affect baby formula milk industry which

indirectly can affect baby bottle industry to some extent.

Barriers to entry is low. Baby bottles can be replicated and can easily be

produced with low capital and standards ( industry norms for baby

products). Similar products with different patents

Formula milk firm or dairy milk companies act as complementor

here.

competitive rivalry is fierce. As product is undifferentiated,

competition to get market share is difficult. Here brand value

plays important role and customer prefers good and

trusted brands for their babies. Many consumers only stay in the baby goods market for a

short time, so there is a constant need to capture attention of

potential new consumers

Firms in the industry can shop around.

Firm as a buyer:- the product is undifferentiated , buyers have more bargain power

over supplier

some government promotes breast feeding and does not allow formula milk brands to get associated with hospitals. Sometimes they are also

not allowed to promote their products through marketing

promotions.

global expansion and global competitors are on the rise

hospitals, recommendation of midwives plays important role.

use of internet( blogs , social network sites ) plays important

role in building brands, as customer( mothers) discuss and check information and compare

products before use . So firm has to compete through heavy and expensive marketing and

advertising

switching cost for buyer is low

relationship also plays important role between

buyer and supplier in certain cases for e.g. big firms like

Avent (Philips) try not to switch easily as this may lead to fall of standards in quality

of the product.

Table 1,Source: KDMS, consultancy group.

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3.3 S.W.O.T Analysis

The S.W.O.T. analysis will analyse the internal Strengths and Weaknesses of the baby feeding bottle

industry, and then identify the potential Opportunities and Threats in the external environment.

Strength Weakness Opportunity Threats

Awareness through media and internet has increased. Parents can

get information easily. Wide availability of information and

opinion about what to buy, from magazines and internet, and

becoming even more convenient with Smartphone apps.

low R&D investments , only few recognised brands are in to R&D

Market opportunities in emerging economies .The citizens of

emerging nations such as China and India are getting wealthier and better educated. Consumers have

more disposable income and leisure time, and both of these

could increase over coming years

competition from MNC's

Government is helping to increase standardization in product and process which will help firms to have upper hand on suppliers.

local manufacturer copy or duplicate products with

minor changes

Market size – Global market – not limited in the country of

production – whole world is the market

Increase in prices in raw material like plastic prices has gone up by 10% in 2010

and will continue to increase.

There is a large choice of well-established brands and own-label

baby bottles in Industry.

tariff rates can be one of the barriers to import baby

products or raw material to the country.

consumer prefer branded products for their babies

Ban on raw materials which contains toxics and harmful chemicals for e.g. Ban on use

of BPA in plastic feeding baby bottles

People want to reflect their status and sense of style in the baby goods

they purchase. This will be a win situation for high end designer

products.

to maintain High standards in quality and to keep up with consumer demands is becoming difficult for producers as consumer

awareness has increased .

consumer will pay premium prices for baby products

Increase in Vat and taxes

Ease of selling using internet-Website, Amazon, E-bay

Many consumers only stay in the baby goods market

for a short time, so there is a constant need to capture attention of potential new

consumers

Lot of scope in Product innovation

urbanization affects size of family, more ambitious people move to major cities and due to their lifestyle, couples have tried to

become more financially established before starting a family which leads to time before marriage and parenthood

Increase in expenditure in supply chain management.

Table 2Source: KDMS, consultancy group

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3.4 Structure - Conduct - Performance (SCP)

As per Mason (1939, 1949) & Bain (1951, 1956, 1959) theory of Structure - Conduct - Performance

explains the behaviour and performance of the firms and the industries to which they belong. This

approach explains how the structure of a market influences the conduct of the firms operating in the

market, which in turns influences the performance of the firms.

3.4.1 Structure

Structure characteristics changes slowly and can be regarded as fixed variables. Few important

variables which influence the structure of the market are a) The number and size distribution of the

buyers and seller b) entry and exist conditions c) product differentiation d) vertical integration and

diversification.

The number and size distribution of the buyers and seller

In the Baby feeding bottle industry, the focus is on number of size of seller as product caters to one

particular segment of consumer. Mature markets like the United States, the United Kingdom, and

Europe are well versed with products and demands for product quality standards are high. Big

players in the industry like Avent (Philips), Mr. Brown, and Tommee Tippee (May born) holds

major shares in the market globally. Still, the market power is on the demand side and as well on the

supply side: here in this case (baby feeding bottle industry) buyer can exercise discretion over prices

they want to pay.

Entry and exist conditions (Barrier to entry and exist)

Entry of barrier is very low in the baby feeding bottle industry as explained in porter six forces (the

threat of new entrant) but to survive in the industry is difficult as market of baby feeding bottle is

driven by customers demand. The baby feeding bottles can be replicated and can easily be produced

with minor changes but product remains similar. The structure of the industry is very competitive

(existence of monopolistic). At the same time, exist condition for any firm would be difficult due to

increase in irreversible investment commitment, makes difficult for firm to withdraw.

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Product differentiation

Though the characteristics of the baby feeding bottle are very basic but due to demand of superior

quality, better technology from customers, forces firms to differentiate their product from rivals.

Now days, the variety available on the retail shelve is incredible. Baby feeding bottles comes with

different shapes, with different features like close to nature (Tommee Tippee), anti colic, wide

mouth opening, BPA free ,which makes product different from each other.

Vertical integration & diversification

Vertical integration plays important role in structuring the firm in the industry. The major players in

the industry with global presence are highly vertical integrated and diversified. These firms have

greater certainty in obtaining supplies of raw material and guaranteed distribution of the supplies.

These diversified firms enjoy the economies of scale and less prone to risk. For example: The baby

care brand ‘Avent’ is from well renowned company Royal Philips Electronics of the Netherlands,

which is highly diversified and fully vertical integrated ( Philips.com). Another Brand ‘Tommee

Tippee’ from Mayborn Group Limited is also a highly diversified and fully vertical integrated

company with different product line in baby care world and well established R&D

department(Mayborn.com).

3.4.2 Conduct

Conduct refers to the behaviour of firms in the industry which is influenced by characters of

structure factors explained above. Few Important variables of conduct are a) Business objectives b)

pricing policies c) product design, branding, advertising and marketing d) research and development

e) merger (if any).

Pricing policies

The extent to which a firm can determine its own price in the market depends largely on the

industrial structural characteristics. Due to high demand in quality and standards, the competition is

fierce in the baby feeding bottle industry. This fierce competition controls the pricing of the product

in different markets. This kind of environment (monopolistic) in industry, avoid the direct price

competition leading to mutually destructive price wars.

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Product design, branding, advertising and marketing

As discussed earlier in the product differentiation, section above, there is a fierce competition in the

industry because of high demand in quality and standards due to which branding, advertising,

product designing and marketing gets affected. To get more market share, firm tries to differentiate

their product through design, branding, advertising and marketing. The problem with niche markets

like this is one of critical mass. It is expensive to run long-term advertising campaigns, particularly

on television and so campaigns tend to be short-lived. To create brand awareness, firms are using

innovative mediums to get in touch with the customers as firms are introducing smart-phone

applications for the mobile phones.

Research and development

Style and design innovation has touched almost every part of the market. Most manufacturers see

innovation as highly important in stimulating demand and staying ahead of competitors. Product is

undifferentiated and competition is fierce to get market share. So major players, in the industry

constantly keep on innovating new product line to stay ahead of the rivals. For quality of the

products and services, firms keep constant check on consumer demands like Tommee Tippee claims

that they are in close contact with mums, asking them what exactly they want. Avent and Dr. Brown

(Dr.Brown.com) claims that their product are innovated by paediatrician as they know best about

baby's problem.

3.4.3 Performance

The structure of the firm and how it behaves in the industry leads to the performance. The final

indicators are a) Profitability b) growth c) quality of product and services d) technological progress

e) productive and allocative efficiency.

Profitability

Being highly competitive market, the profits for the firms are normal as it has been shared by other

rivals in the industry. The product ( the baby feeding bottle) is very basic , undifferentiated, can

easily be replicated with few minor changes. To be ahead of the rivals and to target abnormal

profits, the firm needs to take decision to continue in the industry by introducing new innovative

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product lines constantly. Big Players like Avent, Mr, Brown, Tommee Tippee claims to have

Research and development department. As per Steve Parkin, the Managing Director of the Tommee

Tippee ‘25 % of sales each year comes from innovation’ (Future story Tommee Tippee,2010).

Growth

Nevertheless, the performance is the main and basic indicator for growth for any firm but in today’s

world if firm is increasing its global presence and consumer can recall its brand easily, then it is

considered as one the main indicators for the growth. In the baby feeding bottle industry, major

brands are easily recognizable by customers across globe. Tommee Tippee is a leading brand in

baby feeding bottle industry with strong presence in Italy, Spain, France, Scandinavia, Poland,

Japan, Australia, Middle East and preparing for giant markets of China. They have recently

launched in the United States, which again a giant market for any industry (Future story Tommee

Tippee, 2010).

Quality of product and services

Quality of the products and services is an important indicator of performance. As discussed earlier,

this industry is driven by consumer’s demand. The product is related to a sensitive issue of baby care

and quality standard plays vital role. Avent and Dr. Brown claims that their products are developed

by paediatrician as mentioned earlier in the report.

Technological progress

Due to high demand in standards, quality and competition for the baby feeding bottle, the cycle of

innovation and developing a new product is on constant move. For that firms are investing huge in

research & development and introducing new technological process in the production. Most

manufacturers see innovation as highly important factor in stimulating demand for product and

staying ahead of competitors. Tommee Tippee claims that 25% of their sales each year come from

innovation.

Overall, the level of competition, regulations from government and international bodies and

technological process has lowered the entry of barriers which makes this market of baby feeding

bottle a monopolistic market. In virtue of the relatively free entry of new firms, the long run price

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makes monopolistic market similar to perfect competition. But due to this product differentiation, it

come closes to monopoly market.

3.5 In the Industry

The above analysis of the baby feeding bottle industry, with the support of Porters six forces and

SCP, depicts that the industry is at the stage of growth in its industry life cycle, with characteristics

of a monopolistic competition. As firms produce a less-differentiated product, they will have a

certain amount of market power due to brand loyalty. Firms are therefore not price takers, as they

can raise prices without losing all of their customers. The demand curve will be downward sloping,

but relatively elastic due to the number of close substitutes. Thus, the firm that has been particularly

successful in fulfilling the demands of customers may continue to earn excess of profits with the

adjustment made, towards changing the industry environment. On the other hand, yoomi is a new

self-warming baby feeding bottle with a different concept and technology which is new to the

customer and market and makes yoomi a sole producer. The yoomi is a unique product and there is

no substitute yet available in the market. In a nutshell, Feed Me Bottles Ltd. has introduced an

innovative product which is completely differentiated. These features position the yoomi in a

monopoly. Regarding, yoomi’s demand curve is equal to the market demand curve and output

decision determines the market price.

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2011)

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Academic appendix 1. BPA : Baby Product association

2. BPA : Bisphenol A

3. Barrier to entry: Any factor which makes the average cost of a would-be entrant higher than

that of an incumbent, or which impedes entry in any other way (Lipczynski et al., 2005:726).

4. Barrier to exist: Any cost incurred by an incumbent wishing to exist from an industry

(Lipczynski et al., 2005:726).

5. IBFAN : International baby food action network

6. Industry life-cycle: A model of a how a typical industry progresses from its birth, with the

creation of a new product type, to its demise, with the sale of its very last product .( Haberberg

and Rieple, 2008:802)

7. Macro-environment: The set of factors and influences that is not specific to an organisation or

the industry in which it operates, but that nonetheless affect them.( Haberberg and Rieple,

2008:105).

8. Monopolistic market: Market structure with a large number of firms producing similar but not

identical product, with few entry barriers. Falls between the polar cases of perfect competition

and monopoly (Lipczynski et al., 2005:730).

9. Monopoly: Market structure with a single firm, producing a unique product and protected from

competition by insurmountable entry barrier. (Lipczynski et al., 2005:730) A monopoly remains

Figure: Industry life cycle Source: Haberberg and Rieple (2008:115)

Introduction Growth maturity decline

Time

Total sales

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the only seller in its market because other firms cannot enter the market and compete with it.

Barriers to entry, in turn, have three main sources. a) Monopoly resources b) government

regulations c) production process. The key difference between other competitions is the

monopoly’s ability to influence the price of its output. Because monopoly is the sole producer in

its market, it can alter the price of its goods by adjusting the quantity it supplies to the market.

Its demand curve is the market demand curve. If monopolist raises the price of the goods of its,

consumer buys less of it. The market demand curve provides a constraint on a monopoly’s

ability to profit from its market power. A monopolist would prefer, if it were possible, to charge

a high price and sell a large quantity at that price. The market demand curve makes that

outcome impossible. In particular, the market demand curve describes the combinations of price

and quantity that are available to a monopoly firm. By adjusting the quantity produced, the

monopolist can choose any point on the demand curve, but it cannot choose a point off the

demand curve. Below figure 1, the monopolist’s profit, the height of the box (segment BC) is

price minus average total cost, P – ATC, which is the profit on the typical unit sold. The width

of the box (segment DC) is the quantity sold, Q. Therefore, the area of the box is the monopoly

firm’s total profit.

O Q Quantity

Marginal revenue

Demand

Average total cost

Marginal cost

Costs and Revenue

MonopolyPrice

Average total cost

B

CD

E

Figure: Monopolist Source: Mankiw (2008:321)

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10. Oligopoly: A market structure with small number of firms, whose product may be identical or

differentiated and where there are barriers to entry.

11. Perfect competition: A Market structure with large number of firms producing identical

products, and with free entry. The demand curve for competitive firms is absolutely horizontal.

The demand curve for a perfectly competitive firm is perfectly elastic; competitive firms can

sell all they want to the market price. The firm is price taker (Lipczynski et al., 2005:731).

12. Product differentiation: The practise of making close substitutes appears different, so that

customer no longer regards them as similar or identical (Lipczynski et al., 2005:731).

13. Structure - Conduct – Performance: A methodological approach for research in industrial

organisation, in which the structural characteristics of industries are assumed to influence or

dictate the conduct and performance of the industry’s member firms. More sophisticated models

allow for feedback effects, whereby conduct and performance variables help shape the

industry’s future structure (Lipczynski et al., 2005:733).

14. Vertical integration: Vertical integration refers to the extent to which firm is involved in

different stages of the same production process or the extent to which an organisation extends

Marginal cost

Marginal revenueP=MR

Quantity

Price

P

O Q Figure: Perfect competitionSource: Mankiw (2008:321)

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control over its activities ‘ forward’ towards the customer and ‘ backward’ towards the

production of its raw material (Lipczynski et al., 2005:734)

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Industry Analysis Final

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