Switching costs
Usually there are no switching costs in the industry so this barrier is unimportant in this case.
Access to distribution channels
A new entrant may face some difficulties in accessing the distribution channels. To sell a new tea brand it is very important for a product to secure front shelves in a shop. This will increase the cost of new entry and ultimately the barrier.
Cost disadvantages independent of scale
- The existing players in the industry are experienced and have more know-how of the industry. This might be a real disadvantage for a new entrant in the industry.
- The existing firms in the industry like unilever and Tapal have some deals with the tea producers in the tea growing countries which have decreased there costs and consequently created a barrier for new entrants.
Government policy
Government policies are not strict in the industry but government can influence the overall consumption in the industry like that was done in the era of Nawaz Sharif to reduce the import bill.
Expected retaliation
A new firm entering the industry must be ready for a severe retaliation by existing players who are in a position and having enough resources to retaliate. These firms have a history of vigorous retaliation to new entrants increasing the barrier for a new entry.
Although these Factors show that the entry barrier in the industry are somewhat high but there will be always a strong threat of a new entrant because 40% of the tea sold is not branded and the number of firms competing at mass level is quite low. This can attract more players into the industry.
Intensity of rivalry among existing competitors
The following will show the intensity of rivalry among existing competitors.
Numerous and equally balanced competitors
There are number of small firms in the industry with a few giants like unilever and Tapal in the market. This has made the intensity of competition in the industry intense. Although the firms marketing tea at mass level is low but they are equally balanced in resources .This has created instability because they fight with each other and vigorously retaliate to each others strategies. The level of competition on the basis of this factor is not very high nor very low.
Fixed costs to value addition
The ration of fixed cost to value addition is very high. The largest part of the firm total cost is the cost of the raw material that is the tea. This has also resulted in increased competition in the industry.
Industry growth
Tea industry is a moderately growing industry. The overall consumption of tea in Pakistan is quite high but tea imports are stable. The primary factor on which the increased demand of tea depends is the population growth. The competition in the industry is not very high on the basis of industry growth because it hasn’t turned into market share game yet. Any firm seeking growth or expansion can found new customers without decreasing share of other companies by finding those customers who are not using blended tea.
Lack of switching costs
There are no switching costs involved in these kinds of industries. Although product differentiation is an important aspect but lack of switching costs increases the overall competition. For example if a customer of Lipton switches to Tapal he will not have to incur any costs.
Diverse competitors
The competitors in the industry are diverse in their nature .Some view this industry as the primary one and their core business is tea selling like Tapal where as others are involved in other business along with this industry like unilever .This makes the goals and objectives of the business different resulting in different strategies. This makes the competition in the industry more intense.
Exit barriers
These differ from company to company. A small firm may find it easy to abandon its business but a giant firm like Tapal might face many difficulties quitting business.
Analysis of all these factors let us conclude that the intensity of rivalry among the existing competitors is moderately high.
Pressure from substitute products
Tea is the cheapest and most popular beverage that is served at both professional and social gatherings all over the world. In Pakistan it is counted as a staple food item of common man and is an integral part of our culture and heritage. There are some substitutes to tea available like coffee and green tea but in Pakistan black tea is the most popular .People prefer tea over any other hot beverages. It is entrenched into our culture. The other substitutes available are somewhat expensive and not as easily made as tea. So we can say that in tea industry the pressure from substitute products is minimal. This factor has a very little role in driving the competition in the industry.
Bargaining power of buyers
The bargaining power of buyers in the industry is very low. This is because of the enormous number of small buyers in the industry. We all know that tea is a commodity bought by almost every household in the country. This means a very high number of buyers resulting in very low bargaining power.
The only thing which is favorable to buyer is the ease to change the brand. The product i.e. the tea is standardized product and there are no switching costs involved in changing the brand. This variable increases the bargaining power of buyers to a little extent but the overall bargaining power of buyers in the industry is low. Considering this variable the industry is a low competitive (w.r.t buyers) industry.
Bargaining power of suppliers
In the blended tea industry the bargaining power of supplier is relatively high. This is because of the following reasons
a) It is dominated by few sellers and is more concentrated than the industry it sells to. This means that the supplier of tea leaves have other options if there is some problem with existing customers. Most of Pakistan’s tea is imported from Kenya and Srilanka. We are heavily dependant on these countries for our tea requirements. This has increased their bargaining power.
Lipton has to increase its prices up to 10% because of increase in tea prices in Kenya due to less output of tea leaves because of a drought there.
b) The supplier’s product is an important input to the buyers business. In our case it is absolutely true. The supplier knows that his product is the primary input of our business. This factor has increased the bargaining power of supplier.
These factors show that the bargaining power of supplier is relatively high in the industry. This makes the industry more competitive because now the firms have to compete each other for supplies. The existing firms should try to diverse their suppliers and should not heavily depend on a single supplier.
Summary
This analysis of the industry reveals many opportunities and threats for a business like Tapal. It can be clearly seen that the industry is more concentrated and there will be always a threat of new entrant. The existing rivalry among Tapal, Lipton and other mushroom firms is quite high .there is a moderate competition in the industry which can increase in the future. The bargaining power of buyers is quite low but they can effect a company by switching to other brands because of standardization of products. The supplier can also influence the firms by decreasing there output or increasing there price. Reviewing all these variables we can conclude that the tea industry in Pakistan is a moderately competitive industry. So before formulating any kind of strategy a firm must thoroughly analyze the industry structure and the factors influencing the industry competition because without this the firm will not be able to devise an effective plan which will result in the failure of the company in achieving its desired objectives.
