Economies of Scale in the Ready-to-Eat Cereal Industry: Technology, Capital Requirements, and Network Effects
Overview
This case study examines economies of scale in the ready-to-eat cereal industry, analyzing how the market leader maintains its competitive advantage through significant investment in research and development, substantial capital requirements for plant establishment, and network effects that facilitate price coordination among the top three competitors. The paper demonstrates that high barriers to entry in the sector prevent new companies from successfully competing.
What this case study covers
- Technology: R&D investment and innovation in product durability and unique cereal formulations that prevent milk absorption
- Capital Requirements: Analysis of the 75 million pound annual capacity requirement for minimum efficient scale and high distribution and promotional costs
- Network Effects: Discussion of restrained competition among top three firms, unwritten pricing agreements, and brand fortification strategies
Preview
Economies of Scale | Level | Specific Facts From the Case |
Technology | The is utilization of research and development to enhance technological use within the company. The company remains the number one producer of ready-to-eat cereals. Through the new technology, the products remain outstanding and fruit products are more durable. | The company spent considerable amount on research and development, which was above the average expenditure within the food industry. Moreover, through innovation, the company was able to produce unique products that prevented milk absorption and were more durable. |
Capital Requirements | In order to succeed, the company is spending many resources on research and development, promotion, and distribution of the products. All these costs make it hard for new companies to succeed in the sector. | The establishment of a plant was known to “require a capacity of 75 million pounds each year to achieve a minimum efficient scale” (3). Moreover, research and development were known to cost much in the company operations. This hindered growth and development in many areas. |
Network Effects | Based on the case study, there is a restrained competition among the top three companies within the sector. This implies that pricing of the products was still influenced by the amount of people consuming the product. | From the text, we can see that there was a restrained competition among the big three companies where there arrived at unwritten agreements. There were also trade deals and refraining from offering discounts. More Business samples |