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10/4/200

Are we still going nuts over


Donuts? – The Gonuts Donuts Case

Vidar Halvorsen
Mike Maquilan
xx xxx
Contents
1.1 Introduction...................................................................................................3
1.2 Background of the case.................................................................................3
1.3 Statement of the problem.............................................................................3
1.4 Objectives.....................................................................................................4
1.5 Case analysis.................................................................................................4
1.5.1 Marketing Mix ............................................................................................4
1.5.1.1 Price ....................................................................................................... 5
1.5.1.2 Place........................................................................................................6
1.5.1.3 Product....................................................................................................6
1.5.1.4 Promotion................................................................................................7
1.5.2 Swot Analysis.............................................................................................7
1.5.3 Porters 5 forces..........................................................................................8
1.5.3.1 Potential Entrants....................................................................................9
1.5.3.2 Substitutes..............................................................................................9
1.5.3.3 Suppliers powers...................................................................................10
1.5.3.4 Buyers Powers.......................................................................................11
1.5.3.5 Industry Rivals.......................................................................................11
1.5.4 BCG Matrix6 ............................................................................................12
1.5.5 Understanding consumers behavior ........................................................13
1.5.6 Internal marketing issues.........................................................................14
1.6 Theoretical Framework................................................................................15
1.6.1 Marketing Mix...........................................................................................15
1.6.2 SWOT Analysis..........................................................................................17
1.6.3 Porters 5- Forces Model............................................................................18
1.6.4 The BCG Growth-Share Matrix..................................................................22
1.6.5 Hub and Spoke Theory ( logistics )...........................................................25
The hub-and-spoke distribution paradigm (or model or network) is a system
of connections arranged like a chariot wheel, in which all traffic moves
along spokes connected to the hub at the center. The model is commonly
used in industry, in particular in transport, telecommunications and freight,
as well as in distributed computing..............................................................25

Benefits........................................................................................................25

Drawbacks....................................................................................................26
1.6.6 Guerilla Marketing Theory........................................................................26
1.7 Alternative courses of Actions.....................................................................28
1.8 reccomendations.........................................................................................29
1.9 Sources....................................................................................................... 29

1.1 INTRODUCTION

This case presents the analysis, findings and recommendations of the case “Are
we still going nuts over Donuts? – A case study on Go Nuts Donuts” (From now
called GND). The case is a recent one from August 2010, which made researching
through internet easier and easier to analyze in context of contemporary
marketing thinking.

1.2 BACKGROUND OF THE CASE

Inspired by the success of Krispy Kreme in the USA, Go Nuts Donuts was started
by the Trillianas and de Ocampos. After a year-and-a-half market research and
taste testing, the first store of Go Nuts Donuts opened at the Fort Strip Mall in
Bonifacio Global City on December 11, 2003. It opened to a sale of 700 donuts on
the first day. Initially priced at 15 pesos per donut, it was meant to be a quality
product with a mass market.

Since then, Go Nuts Donuts had spread 36 outlets as of September 2007,


including its first international branch in Kuwait. ( According to GND homepage
there are now 23 outlets registered. )

Aside from donuts, Go Nuts also sells coffee, iced tea, milk shakes, cupcakes,
cinnamon rolls, pizza and ice cream.

Now, 7 years later, the situation is one of negative growth, stagnant sales, and
increased competition. GND finds itself being a shade of its former self, and are
wondering what to do next….

1.3 STATEMENT OF THE PROBLEM


After analysing the case, and discussing the problem, the following problem
statement was authored:

“ What marketing strategy should Go Nuts Donuts employ in order to


change a stagnant /declining market situation into a growing and
sustainable one?”

1.4 OBJECTIVES

The objective of this case will be in 3 parts:

- Analyse GoNuts Donuts current situation in a theoretical marketing aspect.

- Offer alternative routes to positive and profitable changes.

- Recommend a new marketing strategy for renewed, profitable and


sustainable growth.

1.5 CASE ANALYSIS

This part will revolve around analysing GND in terms of existing marketing and
strategy concepts, in order to see what challenges must be addressed in order to
regain a positive and sustainable growth for GND.

1.5.1 MARKETING MIX

GND offers its products where the masses go, thus catering to the vast majority
of the consumers. They operate where people cluster,
ranging from super / mega malls, to malls, outlets in
heavy trafficked streets and other points of target
consumer convergence.

To understand where GND are today, and should go


forward, it is prudent to start with looking at their
situation through the use of a Marketing mix model. This will enable us to better
see how GND operate in the market, and give us basis for further analysis with
for example SWOT1 and 5-forces2.

1.5.1.1 PRICE

GND prices its products affordable and comparatively cheap. They opened up
with a price strategy of low cost/price differentiation, but have since adjusted
their prices more to the market median around
Thou GND is comparatively cheap, they do not cater to the low/low income
brackets, but rather the social /income ranges from the high/low to the High/high
income/society levels, giving them a wide area of impact. However; their price
strategy has led them into the same price bracket as the other 4 competitors,
now giving them an undifferentiated price in the eyes of the consumers which
give reduce the consumers cost of switching to competitors’ products. Though
the case state GND entered into a market primarily catering to the upper socio
economic classes, their price differentiation versus the competition soon
established them in the mass market area. Laterly, prices having gone up to an
average of 30 peso, move GND away from the lower socio-economic areas and
back to the upper area where they first started out. This might explain parts of
consumer flight, as competitors like Dunkin Donuts offer a wide range of their
Donuts from 10 peso and upwards.

Product cost: initially cost per donut was set to a mere 4 peso, giving a healthy
profit margin of 11 peso per unit. In 2010, prices are 30 peso per, giving the
assumption of linear cost increase to 6 peso per unit. Question is whether or not
the perceived cost/benefit to the consumer is the same as it was when GND
opened in 2003.

Competition is an important factor of the pricing strategy, and could account for
today’s unit price. With several of the competitors average price being in the 30
peso range (for their main product line), this could be one of the reasons for
GNDs price, but also an opportunity for growth, if the profit margins of the donuts
can be strategically adapter for a stronger market position, whilst still retaining a
defendable financial position.

1
http://en.wikipedia.org/wiki/SWOT_analysis
2
http://en.wikipedia.org/wiki/Porter_five_forces_analysis
Another issue that might influence buyers is the potential price sensitivity of the
market. While the price of the average donut with GND is 30 peso, ranging down
to 15 peso for their bites, and upward to 35 peso for pizza, Dunkin Donuts sells in
range from 10 peso and upward. With a lower price difference of 5 peso per
donut, consumers might opt to forego size to that of price.

1.5.1.2 PLACE

GND offer their donuts in 3 varieties of franchise 7 locations, from shops, to


kiosks, and finally carts. A 2010 list of outlets show 23 locations located in Metro
Manila and Greater Luzon Area. Similar for all is the locations are to be in areas of
greater pedestrian traffic, preferably near convergence sport and commercial
areas. A great part of the Unique Product offering GND employ is the freshness
of the products, focusing on fresh donuts where their competition offer mass-
produced, and prefab ( for satellite and province stalls ) donuts with short shelf
life. This is relevant to the place section as it opens up for expanding into
locations for satellite outlets further out than in immediate range of production
facilities.

In this we see a big strategic difference in the distribution employed by especially


Dunkin’ Donuts, who is the largest competitor. Areas to look into for GND could
therefore be in logistics to improve range of fresh product to a larger base of
resellers.

1.5.1.3 PRODUCT

The core product of GND is naturally Donuts. The concept has a wide range of
self-developed donuts, with the original ones developed through detailed
consumer research on tastes and preferences.

LifeCycle : One of the distinct benefits of GNDs products is its shelf life. While the
main competitors have mass-produced donuts with a day shelf life, GNDs donuts
incorporate a recipe which enables a full 3 days shelf life, giving rise to a wider
range of distribution possibilities.

GND employs

- 4 Donuts lines, with a total of 26 products


- 1 pizza line with 4 products

- 1 beverage line with 3 products

- 2 ice cream lines with 12 products

This gives a vast product assortment which can be both a blessing and a curse.
With a total of 45 products, franchises / outlets runs a larger risk of waste from
unsold donuts, and thereby a greater risk of lower financial stability. In
combination then, with potential changes in consumer preferences and tastes,
GND would do well to look into further Consumer preference research.

1.5.1.4 PROMOTION

GND seems to be little active on the promotional front. The group has seen little
advertising, except their webpage and their immediate outlets ( in Makati and
Robinsons Manila ) .. Their employees execute orders but are reactive, not
proactive, offer little sales-promoting advices or salesmanship.
We failed to find traces of recent end user marketing or mass marketing but were
told there occasionally have been some adverts in printed press (newspapers).
This leaves a major part of functional marketing to “word of mouth” which is a
highly uncontrollable and non-dependable marketing channel.

We therefore conclude with their PROMOTION channel being their weakest link
in the 4 P analysis.

1.5.2 SWOT ANALYSIS

Strengths Weaknesses
- Originally strong on basic - Lack of originalty
consumer research. - Un-original business model
- Household brand name - Low and/or ineffective
- Consistent and coherent Core advertising
products - Very strict on franchising
- Co-branding w/ Disney - Few outlets compared to
- Differentiated Price strategy competitors
- “fresh” donuts vs mass o 23 vs hundreds ...
produced - Some products made in
- 3 day shelf life response to fads
- Wide price range of products - Donuts unhealthy!
- Interactive, fun website - Declining Customer turnout
- Affordable Franchise fees. - Declining brand loyalty
- Declining brand awareness/
value
- Undifferentiated products

Opportunities Threats
- Large competitors in the market
- Repositioning of brand image - Consumer loyalty dwindling
- Release easier franchising - Consumer preferences changing
systems in terms of healthier or
- Strong demand from franchisers alternative comfort foods.
- Repositioning of brand - Entrance of Krispy crème
- Potential use of FCI for intensities existing competition
advertising purposes - Other Competitors low price
- Use of new marketing channels strategy.
to retouch with consumers - Health issues/ consciousness
- Establishment of more distant with the general public.
satellite outlets due to longer - Changing taste preferences with
shelf life of donuts.(Stalls and consumers.
mini-outlets) and establish
sufficient logistics support.
- Restructuring product offerings
more in terms with real
demands.

1.5.3 PORTERS 5 FORCES

By analysing what the forces operating in


the market, influencing all aspects of
decisions GND must make, we can get a
clearer image of what challenges face them.
Using 5 Forces will, among others strengthen
our SWOT analysis, and several of the forces influencing GND will be issues that
are important in the SWOT analysis.

1.5.3.1 POTENTIAL ENTRANTS

Baking donuts is not a hard task, and there are several mini stalls in various
malls that offer their own type of donuts and alike. However, as with all National,
international or otherwise large scale concepts, there are barriers to entry in
terms of Investment for quality production equipment, marketing channels and
Marketing Information Systems, the economies needed to obtain economies of
scale, and of course political / local rules, regulations and certifications needed.
However; there is nothing that says entrepreneurs here in the Philippines cannot
come up with a concept that could prove to be a challenger to all these 4 major
market leaders.

The entrants to the market must be seen in terms of what market GND sees itself
in. GND state they operate in the “Comfort Food” market, which has seen a vast
expansion the last 20 years. In here there is a much greater threat, ad new
entrants to this market also consists of competitors of substitutes like Ice-cream ,
Gelato, Waffles, and many more. Entrants to the comfort food market need not
necessarily invest as much money to enter the market, nor have the same range
of offerings in order to steal consumers from GND. Given the totality of
alternatives competitors entering and catering to the same market, we find this
to be a medium high risk.

Krispy Creme opened in 2007 in Greenhills, putting great efforts into its pre-
opening marketing and advertising. Among the stunts promoted was the
giveaway of a year’s supply of donuts. Go Nuts donuts being the direct
competitor, with a business model close to Krispy Creme’s would naturally suffer
from the entrance of the original. Krispy Kreme has since grown, and focused
efforts in targeted marketing, using a well experienced marketing backup from
U.S side.

1.5.3.2 SUBSTITUTES

The market since GND opened up has changed dramatically, and the concept of
“comfort food“, has changed dramatically. This is much caused by globalization
which has brought numerous new offerings to cater to the palate of the Filipino.
Examples of new substitutes that cater the comfort food market include (but not
limited to)

- Waffles / wafflesticks

- ice cream / gelato,

- Coffee-buns / buns / bakeries and pastry,

- Chokolateries etc.

- Hot-dogs etc

- Street snacks like ( but not exclusively )

o Fried banana,

o Camote

o Bicho bicho

With the increase in disposable income, the initial customer segments GND
catered to now finds themselves with the ability to try more choices. Given that
case the chance of selecting something else than a) donuts and b) GND’ donuts
increase incrementally. We therefore rank this issue as a medium-high risk as
well.
Adding to the traditional “comfort foods” now sweeping the nation, it is also
interesting to see threats of subsidies in light of changes in consumer health
awareness. Donuts is, considering its sweet contents, not a particularly healthy
comfort food, and with the rise of heath issues and focus on healthier lives, it is
probable that a part of “comfort food” consumers have simply shifted away from
traditional sugar and calories heavy comfort foods to healthier alternatives.

1.5.3.3 SUPPLIERS POWERS

GNDs local suppliers could hold a certain grip over GND’s operations. Though the
recipes of the donuts themselves are a well-kept secret, there are certain base
ingredients that can pose problems. Given base ingredient like flour and the
special yeast used, it is thinkable that this is supplied by one, single supplier (in
each case), where long-term contracts has been signed. Providing this would be
the case, the change to another supplier, could be a hurdle hard to overcome.
The flour qualities, and yeast specifications can take long time to find, and would
be a time consuming, costly and added risk for GND.
We measure this as a moderate risk in this analysis as GND would be a key
account, if not strategic account for the supplier.

1.5.3.4 BUYERS POWERS

Consumers power is clearly where the greatest threat arises from, as a result of
increased competition. With the multitude of offerings from 4 major competitors
in the market, now with several choices in both variety and price, the cost of
change to the consumer is near non-existent. This poses a significant threat to
GND, which we measure as high.
The consumers now also have increased buying power, which mean many of the
wide segment GND originally catered to, might have tastes and unspoken needs
GND has been unsuccessful in uncovering. That tells us that changes in
consumer’s preferences also pose a high risk for GND.

1.5.3.5 INDUSTRY RIVALS

Dunkin' Donuts is the world's largest coffee and baked goods chain, serving
more than 3 million customers per day. Dunkin' Donuts sells 52 varieties of
donuts and more than a dozen coffee beverages as well as an array of bagels,
breakfast sandwiches and other baked goods. As of 2008, Dunkin' Donuts boasts
8,835 stores in 31 countries.3
Since coming to the Philippines in 1981, Dunkin' Donuts is the largest donut
chain in the Philippines in terms of sales, with over 700 outlets. Dunkin' Donuts
maintains its market share with their low price and store presence—an outlet is
always within reach.

This gives them a significant market position and a brand awareness/ recognition
hard to compete with.

Mister Donut was once the main competitor to Dunkin' Donuts. Since being
acquired by Dunkin' Donuts' parent company, most of its North American stores

3
Dunkin' Donuts company profile, retrieved from
https://www.dunkindonuts.com/aboutus/company/ on October 1, 2010
changed their name to Dunkin'. However, Mister Donut as a brand still maintains
a strong presence in Asian markets.4

Mister Donut is the second largest donut chain in the Philippines, with 1,300
outlets nationwide, including concessions inside convenience stores and
Kentucky Fried Chicken branches.

In addition to donuts, Mister Donut also sells croissants and meat buns, as well as
coffee, spaghetti, sandwiches and rice meals in selected branches. The variety of
offerings puts them a little on the sideline compared to GND as their offerings
also span into “merienda” food and small meals, yet still being a significant rival
in the industry.

Krispy Kreme

Krispy Kreme is an international donut brand. Established in 1937 at Nashville,


Tennessee, it has since expanded to the United Kingdom, Australia, Dominican
Republic, Kuwait, Mexico, Puerto Rico, South Korea, Hong Kong (2006–2008),
Thailand, Indonesia, Japan, the United Arab Emirates, Qatar, Saudi Arabia,
Lebanon, Ethiopia, and Bahrain.5

Krispy Kreme has 11 stores since it came to the Philippines in November 2006. It
is Go Nuts Donuts' rival in terms of market and reach. It sells its original glazed
and flavored donuts, as well as other products like coffee, muffins, shakes, fruit
juices and novelty items. Priced in the upper range of the rivals, it has a more
limited consumer base than Dunkin Donuts and Mr. Donuts.

1.5.4 BCG MATRIX6

The BCG matrix is a classic matrix showing the relative market growth/position of
a product/company concept. It is valuable in this case to give a graphic view of
GND’s current position in the market, so as to easier also signify what routes to
improvement they can take.

4
Internet, retrieved from http://en.wikipedia.org/wiki/Mister_Donut and http://www.mister-
donut.com/welcome.htm on October 1, 2010
5
Internet, retrieved from http://en.wikipedia.org/wiki/Krispy_Kreme and
http://www.krispykreme.com.ph/ on October 1, 2010
Based on the SWOT analysis, and the 5-forces we
can conclude that GND’s position today is that of
a low, and declining market share, in a market
with relatively high market growth and/or growth
potential. This give us what BCG would signify as
a Problem Child.

“Problem Children: These are products with a


low share of a high growth market. They consume
resources and generate little in return. They absorb most money as you attempt
to increase market share6”

For GND this pose significant challenge, as has also been discussed earlier.
According to the Theory on the BCG matrix, development can only occur in
straight (not diagonal) lines. GND can therefore either invest and see their
relative market share in a growing comfort food market increase, or they can
simply do nothing and see their own growth rate in a growing market decline,
along with an already excising low, and declining market share. This would turn
GND as a concept into a DOG, which theory stipulate is best left dead.
It is noteworthy to realize transforming a problem child into a star (higher relative
market share in a relatively high growing market) demands investment, time and
sustained efforts. This is also one of the criticisms to this framework (that is
doesn’t give enough information about the cost and efforts required to change
for the better of the current situation)

1.5.5 UNDERSTANDING CONSUMERS BEHAVIOR

GND operates in an environment where the consumers are surrounded with


temptations of every kind. Today’s end-users are swamped with offers every day,
and mass market advertising tries its best to erase current top-of-mind brand
awareness to that of the advertiser with the hardest market advertising
campaign. What you through was perfect yesterday will undoubtedly be
challenged by advertising tomorrow. This poses a significant problem to GND.
So for GND to really understand how to approach their consumers, an in-depth
analysis of what attracted consumers before, versus what are the needs, wants,
desires and purchasing psychology of consumers today is warranted.

6
http://en.wikipedia.org/wiki/BCG_Matrix
1. Problem recognition – I want some
snack, or comfort food

2. Information search: what is available


here and where is nearest location of
what i know is good?

3. Evaluation of alternatives: - all these


choices; where to go ?

4. Purchase decision – I’ll go for this one

5. Post Purchase behaviour: do i want more, did i like it, do i have a


preference now?

Now with this in mind, the question GND need to address is if the results of the
initial consumer analysis in 2003, would be the same, today, and if not, what has
changed in the consumer purchasing decision process?

1.5.6 INTERNAL MARKETING ISSUES

(reasoning based on personal experience, and theory7 ) Company

As a company depending on end users to approach their Conumers Employees

outlets, GND is fully dependent on their sales people being


both friendly, approachable and offering proactive service
to their consumers. An issue, based on personal experience
is the lack of proactivity seen with several of the front
personnel in GNDs outlets. One way of making changes for
increased sales, would be to teach the store personnel in
how to sell, and not just to assist. In other words, improving internal marketing so
the personnel are motivated, enthusiastic, highly knowledgeable and proactive.
By teaching the personnel basic consumer behaviour and how to address the
signs of purchase signals, how to guide potential customers into “the buying,
loyal and returning” consumer, would be an efficient to increase store
productivity, sales, customer retention and increased sales / profits.

7
http://www.strategicmarketsegmentation.com/category/marketing-other/internal-
marketing/
This group know little about what training the franchisees and their personnel
undergo, but from first-hand experience, the general sales techniques,
extrovertness and proactivity of their front-personnel leave much to be desired.

Summed up, the benefits of a focus on internal marketing are well summed up
through the words of www.interalmarketing.co.za8:

 Your staff perform better and take more responsibility


 Staff feel empowered and worthy
 Betted co-operation between staff and departments
 The genesis of a wow customer experience
 Increased customer loyalty and retention rates
 Customers spend more and cost less to service
 New products and service are more easily accepted
 Increased profitability
 Easier management and better focus on real business issues

1.6 THEORETICAL FRAMEWORK

This chapter lists the theoretical frameworks used, along with its theories; all
copy/pasted directly from their sources. All sources disclosed fully.

1.6.1 MARKETING MIX9

The major marketing management decisions can be classified in one of the


following four categories:

* Product
* Price
* Place (distribution)
* Promotion

8
http://www.internalmarketing.co.za/
9
http://www.quickmba.com/marketing/mix/
These variables are known as the marketing mix or the 4 P's of marketing. They
are the variables that marketing managers can control in order to best satisfy
customers in the target market.

The firm attempts to generate a positive response in the target market by


blending these four marketing mix variables in an optimal manner.

Product
The product is the physical product or service offered to the consumer. In the
case of physical products, it also refers to any services or conveniences that are
part of the offering.

Product decisions include aspects such as function, appearance, packaging,


service, warranty, etc.

Price
Pricing decisions should take into account profit margins and the probable pricing
response of competitors. Pricing includes not only the list price, but also
discounts, financing, and other options such as leasing.

Place
Place (or placement) decisions are those associated with channels of distribution
that serve as the means for getting the product to the target customers. The
distribution system performs transactional, logistical, and facilitating functions.
Distribution decisions include market coverage, channel member selection,
logistics, and levels of service.

Promotion
Promotion decisions are those related to communicating and selling to potential
consumers. Since these costs can be large in proportion to the product price, a
break-even analysis should be performed when making promotion decisions. It is
useful to know the value of a customer in order to determine whether additional
customers are worth the cost of acquiring them.
Promotion decisions involve advertising, public relations, which media types, etc.
1.6.2 SWOT ANALYSIS10

A scan of the internal and external environment is an important part of the


strategic planning process. Environmental factors internal to the firm usually can
be classified as strengths (S) or weaknesses (W), and those external to the firm
can be classified as opportunities (O) or threats (T). Such an analysis of the
strategic environment is referred to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm's
resources and capabilities to the competitive environment in which it operates.
As such, it is instrumental in strategy formulation and selection. The following
diagram shows how a SWOT analysis fits into an environmental scan:

Strengths
A firm's strengths are its resources and capabilities that can be used as a basis
for developing a competitive advantage. Examples of such strengths include:

* patents
* strong brand names
* good reputation among customers
* cost advantages from proprietary know-how
* exclusive access to high grade natural resources
* favorable access to distribution networks

Weaknesses
The absence of certain strengths may be viewed as a weakness. For example,
each of the following may be considered weaknesses:

* lack of patent protection


* a weak brand name
* poor reputation among customers
* high cost structure
* lack of access to the best natural resources

10
http://www.quickmba.com/strategy/swot/
* lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in
which a firm has a large amount of manufacturing capacity. While this capacity
may be considered a strength that competitors do not share, it also may be a
considered a weakness if the large investment in manufacturing capacity
prevents the firm from reacting quickly to changes in the strategic environment.

Opportunities
The external environmental analysis may reveal certain new opportunities for
profit and growth. Some examples of such opportunities include:

* an unfulfilled customer need


* arrival of new technologies
* loosening of regulations
* removal of international trade barriers

Threats
Changes in the external environmental also may present threats to the firm.
Some examples of such threats include:

* shifts in consumer tastes away from the firm's products


* emergence of substitute products
* new regulations
* increased trade barriers

1.6.3 PORTERS 5- FORCES MODEL11

The model of pure competition implies that risk-adjusted rates of return should
be constant across firms and industries. However, numerous economic studies
have affirmed that different industries can sustain different levels of profitability;
part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced


by five forces. The strategic business manager seeking to develop an edge over
11
http://www.quickmba.com/strategy/porter.shtml
rival firms can use this model to better understand the industry context in which
the firm operates.

I. Industry Rivals
In the traditional economic model, competition among rival firms drives profits to
zero. But competition is not perfect and firms are not unsophisticated passive
price takers. Rather, firms strive for a competitive advantage over their rivals.
The intensity of rivalry among firms varies across industries, and strategic
analysts are interested in these differences.

If rivalry among firms in an industry is low, the industry is considered to be


disciplined. This discipline may result from the industry's history of competition,
the role of a leading firm, or informal compliance with a generally understood
code of conduct. Explicit collusion generally is illegal and not an option; in low-
rivalry industries competitive moves must be constrained informally. However, a
maverick firm seeking a competitive advantage can displace the otherwise
disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry
intensifies. The intensity of rivalry commonly is referred to as being cutthroat,
intense, moderate, or weak, based on the firms' aggressiveness in attempting to
gain an advantage.

II. Consumers Buying Power


The power of buyers is the impact that customers have on a producing industry.
In general, when buyer power is strong, the relationship to the producing industry
is near to what an economist terms a monopsony - a market in which there are
many suppliers and one buyer. Under such market conditions, the buyer sets the
price. In reality few pure monopsonies exist, but frequently there is some
asymmetry between a producing industry and buyers.

For example, buyers are powerful if:


* Buyers are concentrated - there are a few buyers with significant market
share
Buyers purchase a significant proportion of output - distribution of
purchases or if the product is standardized
Buyers possess a credible backward integration threat - can threaten to
buy producing firm or rival

Buyers are weak if:


* Producers threaten forward integration - producer can take over own
distribution/retailing
* There are significant buyer switching costs - products not standardized and
buyer cannot easily switch to another product
* Buyers are fragmented (many, different) - no buyer has any particular
influence on product or price
* Producers supply critical portions of buyers' input - distribution of purchases

III. Supplier Power


A producing industry requires raw materials - labor, components, and other
supplies. This requirement leads to buyer-supplier relationships between the
industry and the firms that provide it the raw materials used to create products.
Suppliers, if powerful, can exert an influence on the producing industry, such as
selling raw materials at a high price to capture some of the industry's profits. The
following tables outline some factors that determine supplier power.

For example, suppliers are powerful if:


* There is a credible forward integration threat by suppliers
* Suppliers are concentrated
* There is a significant costs to switch suppliers
* Customers are powerful

Suppliers are weak if


* There are many competitive suppliers - product is standardized
* Consumers prefer to purchase branded commodity products
* There is a credible backward integration threat by purchasers
* Purchasers are conentrated
* Customers are weak
IV. Threat Of Substitutes
In Porter's model, substitute products refer to products in other industries. To the
economist, a threat of substitutes exists when a product's demand is affected by
the price change of a substitute product. A product's price elasticity is affected by
substitute products - as more substitutes become available, the demand
becomes more elastic since customers have more alternatives. A close substitute
product constrains the ability of firms in an industry to raise prices.

The competition engendered by a Threat of Substitute comes from products


outside the industry. The price of aluminum beverage cans is constrained by the
price of glass bottles, steel cans, and plastic containers. These containers are
substitutes, yet they are not rivals in the aluminum can industry. To the
manufacturer of automobile tires, tire retreads are a substitute. Today, new tires
are not so expensive that car owners give much consideration to retreading old
tires. But in the trucking industry new tires are expensive and tires must be
replaced often. In the truck tire market, retreading remains a viable substitute
industry. In the disposable diaper industry, cloth diapers are a substitute and
their prices constrain the price of disposables.

While the threat of substitutes typically impacts an industry through price


competition, there can be other concerns in assessing the threat of substitutes.
Consider the substitutability of different types of TV transmission: local station
transmission to home TV antennas via the airways versus transmission via cable,
satellite, and telephone lines. The new technologies available and the changing
structure of the entertainment media are contributing to competition among
these substitute means of connecting the home to entertainment.

V. Threat of Entry / Barriers to Entry


It is not only incumbent rivals that pose a threat to firms in an industry; the
possibility that new firms may enter the industry also affects competition. In
theory, any firm should be able to enter and exit a market, and if free entry and
exit exists, then profits always should be nominal. In reality, however, industries
possess characteristics that protect the high profit levels of firms in the market
and inhibit additional rivals from entering the market. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that
markets typically make. For example, when industry profits increase, we
would expect additional firms to enter the market to take advantage of the
high profit levels, over time driving down profits for all firms in the industry.
When profits decrease, we would expect some firms to exit the market thus
restoring a market equilibrium. Falling prices, or the expectation that future
prices will fall, deters rivals from entering a market. Firms also may be
reluctant to enter markets that are extremely uncertain, especially if entering
involves expensive start-up costs. These are normal accommodations to
market conditions. But if firms individually (collective action would be illegal
collusion) keep prices artificially low as a strategy to prevent potential
entrants from entering the market, such entry-deterring pricing establishes a
barrier.

Barriers to entry are unique industry characteristics that define the industry.
Barriers reduce the rate of entry of new firms, thus maintaining a level of
profits for those already in the industry. From a strategic perspective, barriers
can be created or exploited to enhance a firm's competitive advantage.

1.6.4 THE BCG GROWTH-SHARE MATRIX12

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce


Henderson of the Boston Consulting Group in the early 1970's. It is based on the
observation that a company's business units can be classified into four categories
based on combinations of market growth and market share relative to the largest
competitor, hence the name "growth-share". Market growth serves as a proxy for
industry attractiveness, and relative market share serves as a proxy for
competitive advantage. The growth-share matrix thus maps the business unit
positions within these two important determinants of profitability.

12
http://www.netmba.com/strategy/matrix/bcg/
This framework assumes that an increase in relative market share will result in
an increase in the generation of cash. This assumption often is true because of
the experience curve; increased relative market share implies that the firm is
moving forward on the experience curve relative to its competitors, thus
developing a cost advantage. A second assumption is that a growing market
requires investment in assets to increase capacity and therefore results in the
consumption of cash. Thus the position of a business on the growth-share matrix
provides an indication of its cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units
could be obtained from the firm's other business units that were at a more
mature stage and generating significant cash. By investing to become the market
share leader in a rapidly growing market, the business unit could move along the
experience curve and develop a cost advantage. From this reasoning, the BCG
Growth-Share Matrix was born.

The four categories are:

• Dogs - Dogs have low market share and a low growth rate and thus
neither generate nor consume a large amount of cash. However, dogs are
cash traps because of the money tied up in a business that has little
potential. Such businesses are candidates for divestiture.
• Question marks - Question marks are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do
not generate much cash. The result is a large net cash comsumption. A
question mark (also known as a "problem child") has the potential to gain
market share and become a star, and eventually a cash cow when the
market growth slows. If the question mark does not succeed in becoming
the market leader, then after perhaps years of cash consumption it will
degenerate into a dog when the market growth declines. Question marks
must be analyzed carefully in order to determine whether they are worth
the investment required to grow market share.
• Stars - Stars generate large amounts of cash because of their strong
relative market share, but also consume large amounts of cash because of
their high growth rate; therefore the cash in each direction approximately
nets out. If a star can maintain its large market share, it will become a
cash cow when the market growth rate declines. The portfolio of a
diversified company always should have stars that will become the next
cash cows and ensure future cash generation.
• Cash cows - As leaders in a mature market, cash cows exhibit a return on
assets that is greater than the market growth rate, and thus generate
more cash than they consume. Such business units should be "milked",
extracting the profits and investing as little cash as possible. Cash cows
provide the cash required to turn question marks into market leaders, to
cover the administrative costs of the company, to fund research and
development, to service the corporate debt, and to pay dividends to
shareholders. Because the cash cow generates a relatively stable cash
flow, its value can be determined with reasonable accuracy by calculating
the present value of its cash stream using a discounted cash flow analysis.

Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined
soley by whether it had become the market leader during the period of high
growth.

While originally developed as a model for resource allocation among the various
business units in a corporation, the growth-share matrix also can be used for
resource allocation among products within a single business unit. Its simplicity is
its strength - the relative positions of the firm's entire business portfolio can be
displayed in a single diagram.

Limitations

The growth-share matrix once was used widely, but has since faded from
popularity as more comprehensive models have been developed. Some of its
weaknesses are:

• Market growth rate is only one factor in industry attractiveness, and


relative market share is only one factor in competitive advantage. The
growth-share matrix overlooks many other factors in these two important
determinants of profitability.
• The framework assumes that each business unit is independent of the
others. In some cases, a business unit that is a "dog" may be helping other
business units gain a competitive advantage.
• The matrix depends heavily upon the breadth of the definition of the
market. A business unit may dominate its small niche, but have very low
market share in the overall industry. In such a case, the definition of the
market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple
tool for viewing a corporation's business portfolio at a glance, and may serve as a
starting point for discussing resource allocation among strategic business units.

1.6.5 HUB AND SPOKE THEORY ( LOGISTICS )

The hub-and-spoke distribution paradigm (or model or network) is a


system of connections arranged like a chariot wheel, in which all traffic
moves along spokes connected to the hub at the center. The model is
commonly used in industry, in particular
in transport, telecommunications and freight, as well as in distributed
computing.

Benefits

 For a network of n nodes, only n - 1 routes are necessary to connect all


nodes; that is, the upper bound is n - 1, and the complexity is O(n). This

compares favorably to the routes, or O(n2), that would be required


to connect each node to every other node in a point-to-point network. For
example, in a system with 10 destinations, the spoke-hub system requires
only 9 routes to connect all destinations, while a true point-to-point system
would require 45 routes.

 The small number of routes generally leads to more efficient use of


transportation resources. For example, aircraft are more likely to fly at full
capacity, and can often fly routes more than once a day.

 Complicated operations, such as package sorting and accounting, can be


carried out at the hub, rather than at every node.

 Spokes are simple, and new ones can be created easily.

 Customers may find the network more intuitive. Scheduling is convenient


for them since there are few routes, with frequent service.
Drawbacks

 Because the model is centralized, day-to-day operations may be relatively


inflexible. Changes at the hub, or even in a single route, could have
unexpected consequences throughout the network. It may be difficult or
impossible to handle occasional periods of high demand between two spokes.

 Route scheduling is complicated for the network operator. Scarce


resources must be used carefully to avoid starving the hub. Careful traffic
analysis and precise timing are required to keep the hub operating efficiently.

 The hub constitutes a bottleneck or single point of failure in the network.


Total cargo capacity of the network is limited by the hub's capacity. Delays at
the hub (caused, for example, by bad weather conditions) can result in delays
throughout the network. Delays at a spoke (from mechanical problems with
an airplane, for example) can also affect the network.

 Cargo must pass through the hub before reaching its destination, requiring
longer journeys than direct point-to-point trips. This trade-off may be
desirable for freight, which can benefit from sorting and consolidating
operations at the hub, but not for time-critical cargo and passengers.

1.6.6 GUERILLA MARKETING THEORY1314

The concept of guerrilla marketing was invented as an unconventional system


of promotions that relies on time, energy and imagination rather than a
big marketing budget. Typically, guerrilla marketing campaigns are unexpected
and unconventional; potentially interactive and consumers are targeted in
unexpected places. The objective of guerrilla marketing is to create a unique,
engaging and thought-provoking concept to generate buzz, and consequently
turn viral. The term was coined and defined by Jay Conrad Levinson in his
book Guerrilla Marketing. The term has since entered the popular vocabulary and
marketing textbooks.

Guerrilla marketing involves unusual approaches such as intercept encounters in


public places, street giveaways of products, PR stunts, any unconventional
marketing intended to get maximum results from minimal resources. More
innovative approaches to Guerrilla marketing now utilize cutting
13
http://en.wikipedia.org/wiki/Guerrilla_marketing
14
http://www.gmarketing.com/
edge mobile digital technologies to really engage the consumer and create a
memorable brand experience.

Levinson's books include hundreds of "guerrilla marketing weapons", but they


also encourage guerrilla marketeers to be creative and devise their own
unconventional methods of promotion. Guerrilla marketeers use all of their
contacts, both professional and personal, and examine their company and
its products, looking for sources of publicity. Many forms of publicity can be very
inexpensive, while others are free.

Levinson says that when implementing guerrilla marketing tactics, small size is
actually an advantage instead of a disadvantage. Small organizations
and entrepreneurs are able to obtain publicity more easily than large companies
as they are closer to their customers and considerably more agile.

Yet ultimately, according to Levinson, the Guerrilla marketeer must "deliver the
goods". In The Guerrilla Marketing Handbook, he states: "In order to sell a
product or a service, a company must establish a relationship with the customer.
It must build trust and support. It must understand the customer's needs, and it
must provide a product that delivers the promised benefits."

Levinson identifies the following principles as the foundation of guerrilla


marketing:

 Guerrilla Marketing is specifically geared for the small


business and entrepreneur.
 It should be based on human psychology rather than experience,
judgment, and guesswork.
 Instead of money, the primary investments of marketing should be time,
energy, and imagination.
 The primary statistic to measure your business is the amount of profits,
not sales.
 The marketer should also concentrate on how many new relationships are
made each month.
 Create a standard of excellence with an acute focus instead of trying to
diversify by offering too many diverse products and services.
 Instead of concentrating on getting new customers, aim for more referrals,
more transactions with existing customers, and larger transactions.
 Forget about the competition and concentrate more on cooperating with
other businesses.
 Guerrilla Marketers should use a combination of marketing methods for a
campaign.
 Use current technology as a tool to build your business.
 Messages are aimed at individuals or small groups, the smaller the better.
 Focuses on gaining the consent of the individual to send them more
information rather than trying to make the sale.

1.7 ALTERNATIVE COURSES OF ACTIONS

GND have several courses of action from where they are today.

1) GND can research cheaper yet high-quality equipment that makes it easier
for franchisees to afford the franchise fee/ system, thereby opening up for
more franchises.

2) Rethink the logistics/ distribution system, adapt to a “hub and wheel”15


( hub and spoke ) distribution which extend some 5 hours driving time
from production hubs. This will enable them to expand their current area of
operations to that of mini stalls with a set quantity of donuts; much like the
Mr. Donuts and Dunkin’ Donuts one can see along the major highways.

3) Establish new production centres in major cities AND adapt to a “hub and
wheel” distribution system. One can imagine production facilities in the 4
largest cities in the country, with strategic alliances in logistics bringing
out a set pre-ordered amount of donuts to mini-stalls, in the periphery
areas, and 2-3 updated deliveries to closer shops or kiosks.
As a continuation to this, add a “stall” franchise alternative, such as what
we often see in the rural areas, 1-3 hours away from Manila. With a good
logistican network, GND shold be able to reach areas of good road quality,
out to ( in Manila terms ) Angeles , Subic and alike)

15
http://en.wikipedia.org/wiki/Spoke-hub_distribution_paradigm
All ACA include a significant increase in marketing efforts, internet
marketing, end-user marketing, and advertising and consumer flavour
research. Results of research would most likely produce statistics over
which products have reached the end of their consumer acceptance
lifetime, and should be phased out.

1.8 RECCOMENDATIONS

The group finds that the 3rd ACA would be the most benefitial one, as it would not
impair on the quality product promise of GND, while still increasing geographical
market coverage. Investments should be made to establish production facilities
in new areas suitable as a hub ( cebu, davao, Bacolod ). Secondly, Establish a
fourth Franchise alternative, giving root to the mini-stalls along the road
networks, such as one can see with Mr. Donut, and Dunkin Donuts. Developing
the logistical network to distribute fresh donuts where baking facilities are
impractical, and where consumers do not mind not having oven-fresh donuts
( but still the quality of GND ) would expand relative market coverage, and over
time, increase market shares.
With the improvement of technology that has come since the birth of GND, it
could also be interesting for GND to see if there are newer, cheaper yet still same
quality deep fryers available for their smaller franchisees, so that this segment
could also expand.

As for advertising, the analysis gives a clear picture of this marketing channel as
a severely neglected one. The group makes recommendation for GND to allocate
far more resources to the marketing channels, and embark on new concepts to
both research consumer tastes, and how to more effectively reach the average
consumer. Use of new internet technology and concepts are one way, increase in
cinema advertising, billboards and megaboards another. In the malls, where
competition is dense, end-user marketing should be applied, with sample-tasting
and guerrilla marketing16 being a preferred approach.

1.9 SOURCES

http://en.wikipedia.org/wiki/SWOT_analysis

http://en.wikipedia.org/wiki/Porter_five_forces_analysis

16
http://en.wikipedia.org/wiki/Guerrilla_marketing
Dunkin' Donuts company profile, retrieved from
https://www.dunkindonuts.com/aboutus/company/ on October 1, 2010

Internet, retrieved from http://en.wikipedia.org/wiki/Mister_Donut and http://www.mister-


donut.com/welcome.htm on October 1, 2010

Internet, retrieved from http://en.wikipedia.org/wiki/Krispy_Kreme and


http://www.krispykreme.com.ph/ on October 1, 2010

http://en.wikipedia.org/wiki/BCG_Matrix

http://www.strategicmarketsegmentation.com/category/marketing-other/internal-
marketing/

http://www.internalmarketing.co.za/

http://www.quickmba.com/marketing/mix/

http://www.quickmba.com/strategy/swot/

http://www.quickmba.com/strategy/porter.shtml

http://www.netmba.com/strategy/matrix/bcg/

http://en.wikipedia.org/wiki/Guerrilla_marketing

http://www.gmarketing.com/

http://en.wikipedia.org/wiki/Spoke-hub_distribution_paradigm

http://en.wikipedia.org/wiki/Guerrilla_marketing