Porter's Five Forces Degree of Rivalry.

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Porter’s Five Forces

Degree of Rivalry

  • Number of firms: There were 7 major and 7 moderately strong companies in the United States Dry pasta industry and the total value of the industry was $2.6 billion so it is a big number according to the size of the industry. That means U.S. Pasta industry’s concentration ratio was pretty high i.e. only 7 manufacturers (AIPC, Hershey Foods, Borden Food Holdings Company, DGP, Philadelphia Macaroni Company, A. Zerega Sons. Inc and Gooch Foods) held 55% market share, another 25% of market share was owned by other 7 farms. So, with only a few firms holding a large market share, the competitive landscape is very competitive. Imported pasta was another big competitor, which has been growing in the 1990s (Exhibit 10) and represented around 12.5 percent of the domestic market.

  • Slow market growth: Pasta consumption in the United States had risen in the early 1990s reaching a maximum of 14 pounds per capita in 1994. But then it decreased slightly to approximately 12 pounds per capita (exhibit 1) in 1998. The main acceptance of pasta, healthy food that can be prepared easily, is on question by other substitutes. Also its main customers, single households are shrinking.  So, the market is actually declining, which would cause firms to fight for market share and make the industry more competitive.
  • Economies of Scale: One of the main principal methods for competition in the pasta industry was to achieve lowest average production cost. That means firms would have to produce more to achieve economies of scale. Since the firm must sell this large quantity of product, high levels of production would lead to a fight for market share and result in increased rivalry.

  • Low levels of product differentiation: Pasta products from different companies were very similar. Also the cost differential between private-label pasta and brand-label pasta declined in the 90s. So, this would intensify the competition in the industry.

  • Diversified Farms: Farms like Hershey Pasta Group and Borden Food Holdings Corporation were from different industry. Hershey Pasta Group was not a core part of Hershey Foods’ business and in 1996 it had combined its pasta sales force with its general foods force and significantly reduced its marketing and promotional expenses, which gave them an advantage, as price was a major issue in competition. So, these diversified firms could use their skills form other industries, which would result in increasing competition.

80% of the dry pasta market is on the hand of 14 firms where major 7 is controlling 55% when the market is facing declining demand in the face of substitutes with aging customers. With very little level of product differentiation, economies of scale is a must to achieve low cost. Moreover some of the major players are diversified that allows them to keep their cost low. All these add to rivalry and makes competition in the dry food industry fierce.

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Threat of substitutes

  • Variety of healthy and quick preparation food: The main reason behind the growing demand of dry pasta in the early 1990s was that people wanted meals that were tasty, healthful or nutritious, inexpensive, easy and relatively quick to prepare and pasta fit that description. But the food industry had developed other such foods and consumer actually substituted away from pasta. So, these substitutes were perceived in equal terms with pasta.

  • No significant switching cost: It is relatively easy to change ones eating habit. Moreover pasta consumption did not require any specific home ...

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