10/4/200

Are we still going nuts over Donuts? – The Gonuts Donuts Case

Vidar HalvorsenMike Maquilanxx 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....................................................................................................................................4

1.5.1.2 Place...................................................................................................................................5

1.5.1.3 Product...............................................................................................................................6

1.5.1.4 Promotion...........................................................................................................................6

1.5.2 Swot Analysis......................................................................................................................7

1.5.3 Market analysis – orters 5 forces........................................................................................8

1.5.3.1 Potential Entrants...............................................................................................................8

1.5.3.2 Substitutes..........................................................................................................................9

1.5.3.3 Suppliers powers................................................................................................................9

1.5.3.4 Buyers Powers..................................................................................................................10

1.5.3.5 Industry Rivals...................................................................................................................10

1.5.4 BCG Matrix........................................................................................................................11

1.5.5 Understanding consumers behavior.................................................................................12

1.5.6 Internal marketing issues..................................................................................................13

1.6 Theoretical Framework.........................................................................................................14

1.6.1 Marketing Mix..................................................................................................................14

1.6.2 SWOT Analysis..................................................................................................................15

1.6.3 Porters 5- Forces Model...................................................................................................17

1.6.4 The BCG Growth-Share Matrix.........................................................................................21

1.7 Alternative courses of Actions..............................................................................................26

1.8 reccomendations..................................................................................................................26

1.9 Sources.................................................................................................................................27

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

1 http://en.wikipedia.org/wiki/SWOT_analysis2 http://en.wikipedia.org/wiki/Porter_five_forces_analysis

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.

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

- Originally strong on basic consumer

research.

- Household brand name

- Consistent and coherent Core products

- Co-branding w/ Disney

- Differentiated Price strategy

- “fresh” donuts vs mass produced

- 3 day shelf life

- Wide price range of products

- Interactive, fun website

- Affordable Franchise fees.

Weaknesses

- Lack of originalty

- Un-original business model

- Low and/or ineffective advertising

- Very strict on franchising

- Few outlets compared to competitors

o 23 vs hundreds ...

- Some products made in response to fads

- Donuts unhealthy!

- Declining Customer turnout

- Declining brand loyalty

- Declining brand awareness/ value

- Undifferentiated products

Opportunities

- Repositioning of brand image

- Release easier franchising systems

- Strong demand from franchisers

- Repositioning of brand

- Potential use of FCI for advertising

purposes

- Use of new marketing channels to

retouch with consumers

- Establishment of more distant satellite

outlets due to longer shelf life of donuts.

(Stalls and mini-outlets) and establish

sufficient logistics support.

- Restructuring product offerings more in

terms with real demands.

Threats

- Large competitors in the market

- Consumer loyalty dwindling

- Consumer preferences changing in

terms of healthier or alternative comfort

foods.

- Entrance of Krispy crème intensities

existing competition

- Other Competitors low price strategy.

- Health issues/ consciousness with the

general public.

- Changing taste preferences with

consumers.

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 changed their name to Dunkin'.

However, Mister Donut as a brand still maintains a strong presence in Asian markets.4

3 Dunkin' Donuts company profile, retrieved from https://www.dunkindonuts.com/aboutus/company/ on October 1, 2010 4 Internet, retrieved from http://en.wikipedia.org/wiki/Mister_Donut and http://www.mister-donut.com/welcome.htm on October 1, 2010

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.

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.

5 Internet, retrieved from http://en.wikipedia.org/wiki/Krispy_Kreme and http://www.krispykreme.com.ph/ on October 1, 2010

“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.

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

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

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 )

As a company depending on end users to approach their 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.

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

7 http://www.strategicmarketsegmentation.com/category/marketing-other/internal-marketing/8 http://www.internalmarketing.co.za/

Company

EmployeesConumers

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

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

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

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

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

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

* 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 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.

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

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

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

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.

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

edge mobile digital technologies to really engage the consumer and create a memorable

brand experience.

13 http://en.wikipedia.org/wiki/Guerrilla_marketing14 http://www.gmarketing.com/

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)

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

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

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

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

16 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