Cymbal market in 10 forces

Further Examples of the 10 Forces

This is an extension of my post about refining Porter’s Five Forces.  Read the post here before reading this one.

Further Examples: Carbonated Soft Drink (CSD) Market

Let’s take a look at the carbonated soft drink (CSD) market.  This is the market where Coca-Cola and Pepsi-Cola are the big players, with a few generic or store-brands playing as well as a few “premium” or more unique soda manufacturers (think Jones Soda.)

Carbonated Soft Drink Market Analysis in the 10 forces

Internal alliance/competition

Warren Buffett

Warren Buffett

The threat of competition within the industry is really high, and we can expect that to stay consistent for quite some time.  Coke and Pepsi funnel billions of dollars into advertising each year, and do everything they an to protect every bit of turf they get.  When one company gets its fountain drinks into a restaurant or other establishment, you can bet that the establishment had to forfeit its opportunity to bring in drinks from the competing CSD manufacturer.  Virgin Cola tried to fight the giants head-on in the U.S. with some catchy gimmicks like driving a tank through a stack of Coke cans in Times Square, but the attempt to crack the U.S. CSD market ended being little more than a cute underdog getting crushed by a couple Goliaths.As far as the industry as a whole is concerned, there’s not a lot of opportunity for strategic alliances, mergers, or anything of that sort in the CSD market.  Pepsi and Coke are big enough that if they tried anything together, the government would be on their back with anti-trust legislation.  If any of the smaller competitors formed alliances or mergers in any meaningful way, Coke and Pepsi have the power to put enough pressure on such competition to break it apart.  We can be reasonably certain that this isn’t going to change, even top investor like Warren Buffett have huge investments in these companies out of the expectation that they will continue for a long time to come.

Entry

The CSD market has proven to be an excellent spring-board for launching into other beverage markets.  We’ll note in the section on substitutes that there are many substitutes that threaten the CSD market, but CSD manufacturers overcame that problem by becoming the primary producers of most of the substitutes.  Of the 33 non-alcoholic beverages that gross over $1 billion each year, Coke owns 15 of them.  The powerful brand that the CSD manufacturers have created also paved the way to enter the merchandise industry.  Add the abundance of food and snack companies owned by Coke and Pepsi and it’s undeniable that the CSD market comes with opportunities for entry into other markets.  I would also note that this is a part of the analysis that the Five Forces would be liable to miss.

When it comes to additional competition entering the market, it earns a moderate-certainty “meh” sort of threat.  Although entrants have tended to get crushed, the CSD market enjoys incredible margins and is an extremely attractive industry for people wanting large profits.  No company has found much success in cracking the market in a big way yet, but when the margins are so attractive, it’s not unreasonable to expect many to try.  And when many throw the dice, there’s more opportunity for someone to get lucky.  It’s worth noting that they will have to overcome huge barriers of brand, the expense of getting SKU’s, and the margin killing problem of bottling the stuff.  Coke and Pepsi relatively recently bought up many of the bottling plants that bottle their soda, making it even more difficult for entrants to get their product out there.

Compliments/Substitutes

Coke products I had a slightly difficult time thinking of anything that might be considered a compliment to CSD, but there’s actually quite a few.  Sporting events could be considered a complimentary good, since people tend to buy soft-drinks while there.  Any food product in a restaurant would be a complimentary good since people usually expect to have soda available to drink.  When people buy more birthday presents, people also probably buy more soda since soda tends to come to the parties as well.  Soda does more jobs than simply quench thirst, it also adds festivity and fun to occasions that call for it.
There are plenty of substitutes however.  For the thirst-quenching job, any beverage can take CSD’s place, from fountain water to orange juice, to vodka.  For adding festivity, there are plenty of people like me that are just as happy and festive with water, and plenty of people that need something harder, like alcohol, to feel satisfied at the party.  As noted above, the CSD manufacturers decided to deal with the substitute problem not by beating them, but by joining them.  Or rather, making the substitutes join the CSD manufacturers.

Buyer Relations

The opportunity to have bargaining power over buyers has been big in the industry, and will probably continue for quite a while.  This comes from the high demand from the end users.  The “buyers” from the CSD industry aren’t normally the people that drink the soda, but the stores and restaurants that distribute and sell the stuff.  CSD manufacturers can have lots of power over stores and restaurants because the customers of the stores and restaurants expect those products to be available, and will get in quite the huff if they’re not.  CSD manufacturers also had the bottlers for their customers for quite some time (the CSD manufacturers just made the syrup,) but CSD manufacturers relatively recently bought them up in help limit entry opportunities, among other things.

The threat of buyers having power is usually tightly inversely related to the opportunity, so there’s not much more to say here.

Supplier Relations

The CSD market enjoys great power over its suppliers since most of its suppliers are commodities.  The trouble with commodities is that there are generally lots of people that produce them, and few ways to differentiate.  Sugar is sugar, water is water, chemicals are chemicals, and CSD manufacturers buy in large enough quantities that commodity providers need to take a reasonable amount of care in avoiding problems with them.  CSD manufacturers enjoy a great deal of power in both directions.

Government

There’s a solid “meh” of “whatever” uncertainty when it come to opportunities with the government.  Most of this comes from lobbying for favorable trade conditions to purchase their inputs and sell their products.  Coke and Pepsi have decided not to take advantage of patent opportunities with their flagship products, but it would be possible if needed.

The CSD market does face a reasonable threat from the government though.  Schools are in the process of kicking out unhealthy foods, and soft drinks fit that bill better than just about anything besides tubs of lard.  New York recently tried to impose size restrictions on soda beverages, but to add to the uncertainty, a judge blocked the ruling just before it could come into effect.

Economic Effects

As I write this, the recent job’s report was a good one.  The CSD market is definitely a “normal good,” so better paid people should mean better sales.  But, there’s tons of uncertainty with the economy right now.  For instance, although the job’s report was good, this may trigger the cutting back of the “quantitative easing” that the Fed has been doing to help curb the recession.  This will be done in a way designed to avoid hurting the market, but the way people respond to things makes such a change a welcome opportunity for just about anything to happen.  Beyond the U.S. market, the CSD market has found plenty of success pushing into new economies in developing areas.  It’s hard to say how successful things will be in the future for these efforts, but it certainly represents a large opportunity.

For similar reasons as listed above, the economy does offer some possible threat to the CSD market, but I wouldn’t say the threat is large.  The CSD market’s opportunities might be more uncertain than it would like, but I don’t think the economy has much of a chance to kill it right now.

Social Norms

Coke has done an incredible job branding its products, being named the world’s most valuable brand for 13 years.  With the high margins enjoyed in the CSD market, CSD manufacturers have been able to forcefully make their products practically a part of the culture.  I mean, would it still be Christmas if we didn’t have animated polar bears trying to get to their soft-drinks in adorable ways?  For the industry as a whole however, the opportunities probably aren’t grand in the foreseeable future, but that comes with a level of “I don’t really know” attached.

The reasons that the future opportunities for social norm synergies may be limited is due to the shifting climate around health.  CSD’s are not good for you, and people are starting to care.  It’s hard to overcome mankind’s preference for sugary delight over hard work though, so although the threat is there, it may not be too large.  When it comes to social norms, opportunities and threats both gets “I dunno’s” all around.

Technology

It’s hard to give anything in the technology realm a “high” level of certainty.  But, one thing that’s clear is that opportunities do currently exist, and will “probably” continue.  Vending machines have proven a play-ground for the CSD giants as they’ve made attempts to design vending machines of incredible complexity.  They have vending machines that let you create drink mixes and flavors on demand, with special care taken to make sure they’re simple to maintain and manufacture (and with patents galore to make sure no one else can do it.)  There’s also ideas for putting sensors into the machines to raise prices when the weather gets hot or it hits prime-time drinking hours.  Jone’s soda used advances in manufacturing and online communication to create customized bottles for customers.  Tech can provide all sorts of gimmicks to make particular sodas more attractive.

This opportunity comes with an equal measure of threat however.  The problem with so many opportunities is that you need to be the one on the cutting edge to stay in the game.  If your competitor manages a breakthrough that you can’t imitate or beat, your business model may be in jeopardy.  Sustaining innovation is nice for the giants, but it may indicate the existence of opportunities for disruptive innovation as well.

Z-axis

In this case, I think much of the Z-axis items were covered in earlier sections on substitutes and compliments, as well as entry.  The CSD market is part of the larger food and drink industry, and has found opportunities to take advantage of it.

There is a threat that I haven’t mentioned well.  Being part of the retail industry has subjected it to competition from store-brand sodas.  Sam’s club was able to create its own soda brand and gain some market share because it decides what who gets the SKU’s on its own shelves.  I suppose this could also have been addressed in “supplier power,” but that’s why we include this section–it helps us catch anything else that we might have needed to include.

Advantage Of This Analysis

The Five Forces analysis of the CSD market would reveal much, but as noted above, there were a few things that it surely would have missed.  I also wanted to point out the advantage gained by listing the full analysis together instead of doing a separate PEST or SWOT analysis.  The items gained from the Five Forces generally have a high degree of certainty.  Items from the rest of the analysis tend to have a great deal of expected volatility.  By using this full analysis, CSD participants would be more keen on the fact that the areas most in need of regular monitoring and preparation involved extra-business issues.

Further Examples: Cymbal Market

I love playing drums.  My brother and a few friends and I even formed a band in high school called Semi-Formal Thursday.  We cut a CD that was pretty good I would say.

My favorite part of the drums are the cymbals.  The bright, explosive tones created by vibrating metal is simply untouchable when it comes to audible sound.  Mmmmmmm.  So, let’s take a look at the market.

The cymbal market has 4 large players: Sabian, Paiste, Meinl, and my favorite, Zildjian.  Beyond that, there are many smaller manufacturers (including 27 listed by Wikipedia) that make all sorts of specialty or traditional cymbals.

Cymbal Market Analysis in the 10 forces

Internal Alliance/Competition

Innovative cymbal design from Zildjian
Innovative cymbal designs from Zildjian

One thing imperative to the success of any company in the music business is innovation.  Without a unique offering to the world of sound, the company is generally destined to be a low cost alternative, often with lower margins as a result (which isn’t to say the company can’t be healthy, it just wont be awesome.)  Innovation and creativity come as a result of a number of things, outlined fairly well in the book The Innovator’s DNA.  One crucial ingredient to creativity and innovation is a network fruitful in trading and evaluating ideas.  Cymbal manufacturers can benefit greatly by learning how one another manufactures their products, what alloys to use, what sounds to search for, etc.  The opportunity is moderate however, since such information often defines the competitive advantage of the company, so too much sharing could eliminate the company’s stance in the market.  It does leave opportunities open for mergers or acquisitions though.

The threat of competition is fairly high.  Although the big 4 manufacturers do fairly well by providing consistent, quality experiences with their cymbals, other manufacturers like Wuhan take away market share by providing more unique experiences.  The many varying ways to manufacture a cymbal put manufacturers on a constant defensive.

Entry

Matt Nolan Custom

A Matt Nolan Custom

The threat of other firms entering the market is moderate as well.  Although building a manufacturing plant requires a reasonable investment, some manufacturers like  Matt Nolan Custom have managed to enter the market with relatively small investments, making cymbals by hand and appealing to an artistic audience.  Other musical instrument manufacturers may decide to try to capitalize on their brand names and enter the cymbal market as wellThere’s some possibility to enter other markets from the cymbal industry.  Cymbals require investment in foundry infrastructure, which may bode well for expanding the firm’s scope by manufacturing other metallic products.  Building a strong brand also helps to move into other musical items as well, such as Zildjian’s drumsticks and percussion accessories.

Compliments/Substitutes

The cymbal market benefits greatly from complimentary goods.  Anyone wanting to buy a drum kit will need some sort of cymbal to make music happen.  Anytime a group of people want to get together and form a professional orchestra, that group will need cymbals as well.

Unfortunately for the cymbal market (and in my opinion, for the world of music in general,) electronic substitutes are becoming extremely popular.  Instead of buying a cymbal, many music producers are getting away with electronically synthesized sounds.  Recorded music often gets accompanied by a drum track values for its consistency and cheapness rather than a real drummer with real cymbals.  This is a very real threat to the cymbal market.

Buyer Relations

Cymbals generally have some power over their buyers, but not enough to go crazy.  Many cymbal purchasers are young artists (or parents of young artists) looking for something cheap and “good enough.”  This can put cymbal manufacturers on the defensive, needing to keep costs down.  On the other hand, cymbal manufacturers have managed to form deals and partnerships with professional drummers to bind them to using their products and gain wider recognition.  Also, some of the smaller and more custom cymbal manufacturers can gain some level of bargaining power by providing unique cymbals, unavailable anywhere else.  The trick is making the unique cymbals also sound good.

Supplier Relations

The opportunities for power over suppliers is high in this market since the inputs are also commodities.  Cymbal manufacturers primarily need copper, tin, and some traces of silver to get their job done.  Also heat, lots of it.  There is a tad of uncertainty since metal prices aren’t always secure and they compete with every other manufacturer that wants metal, these inputs have tended to be fairly abundant and relatively easy to come by.

Government

Beyond securing favorable international trade, there’s not a whole lot of opportunity, nor threat for cymbal manufacturers, and there isn’t likely to be enough opportunity to grow large enough to influence policy in huge ways.

Economic Effects

Like most normal goods, cymbals may stand with hopes for decent gains as the economy picks up, but there’s still so much volatility expected in the near term that it’s hard to say how good things might get.

In terms of threats, it’s about the same as for the CSD market or any other normal good.  The economy may tank again, and you can bet the people are going to sacrifice cymbal purchases ahead of many other items.

Social Norms

Although the musical world has shifted in a big way to artificial sounds, the growing premium and demand placed on “authenticity” may help boost the cymbal business.  As people gain more and more access to music and ideas previously unavailable without the internet, people are becoming less subject to a “mainstream” defined by the top and more able to access fringe desires.  Finding “real” music has become increasingly profitable, and although many people that value this aspect flock to folky music that doesn’t require a large set of cymbals, lots of authentic music does require some percussion.  Also, as music downloads become more popular, artists are starting to focus more on making live shows big, and real cymbals still have their place there (right alongside the fake stuff.)

The hope for swings towards authenticity doesn’t eliminate the fact that big business is using the drum machine more and more, and the mainstream has a real thing for the electronic beats that come out of it.  Listen to the top 40 charts and you’ll hear a lot of songs that didn’t likely have any originally recorded sounds beyond the vocals, and even those will be played with in the mixing room.  The cymbal industry needs to watch the conflict of social norms carefully, and find ways to influence popular opinion about what sounds awesome.

Technology

A lot of the opportunities in the technology field link tightly with the social norms in opening up opportunities for people to access “real” music.  There may also be technological opportunities in the manufacturing process.  Small time manufacturers are finding ways to produce cymbals with small capital investment.  A little ingenuity may allow large manufacturers to produce more interesting, beautiful, and innovative designs.  Even just finding ways to bring manufacturing costs down through tech advances will increase the attractiveness and profitability of the industry.

The tech advances, as with the CSD market, may also rise as a threat.  What small-time manufacturers may see as a disruptive opportunity to make unique cymbals may end up being sustaining innovation to help the big 4 push them back out of the market.  The continual improvements in the electronic sound realm also threaten the cymbal market, as drum machines sound more and more like the real thing, and as more and more people prefer the fancy opportunities available from synthesized sounds.

Z-axis

Being part of the music industry provides opportunities to expand on a strong brand name, as Zildjian has done in drum sticks and percussion accessories.  Cymbal manufacturers could probably benefit by pushing further into the music realm and increasing the scope of their firms.  As part of the metal manufacturing industry in general, they may also benefit by entering other copper or tin markets.  It probably wouldn’t be a huge leap for Sabian to start to manufacture bullet shells, or Paiste to make cans.

Cymbal manufacturers are also threatened by the larger industry, such as by Pearl’s line of cymbals to sell as package deals with their drum kits.  Who knows but that trumpet manufacturers wont also try to get in on the cymbal action, or that manufacturers of other bronze items wont try to broaden their scope with cymbals.

Further Examples: Consumer Goods Market Special Analysis

For this one, I want to do something a little different.  Instead of just going through the market and talking about what the industry is, I want to see if we can use the framework to describe an oddity I noticed while in Peru:

Procter and Gamble (P&G) and Nestle both make lots of different products (P&G especially.)  In the U.S., lots of people don’t have a clue how many products P&G is behind, but in Peru, P&G jingles its logo at the end of every television advertisement.  I haven’t watched much TV in the last 5 years, so perhaps they do this in the U.S. now as well, but at least for my childhood, I never knew that P&G was behind Bounty, Charmin, Dawn, Duracell, Gillette, Pampers, Tide, Crest, and a host of other products.

So, why the difference?  What’s going on that makes P&G think it’s a good idea to let Peru know that it’s behind the tons of stuff your mom buys, but not America?  Let’s see if the framework can give us hints as to where to look for specific answers (the framework I have here is for Peru, not the U.S.).

Consumer Goods Market Analysis in 10 forces

Internal alliance/competition

As I said above, I wont go into too much detail about why I think each arrow is what it is, but we’ll see if any of these categories and outcomes can provide any hints as to why P&G has made a strategic decision to blow its horn in Peru, but not in the U.S.

With low opportunities for alliances and high threats of competition, it’s possible that P&G is looking to develop loyalty to the mother brand instead of trying to strengthen loyalty to its many children brands.  This could help stem the heavy competition in all of the sectors it plays in simultaneously.

But the competition is similar in the U.S., so on its own, this probably isn’t the answer (though it probably forms a part of the answer, which we’ll see when we get to the social part.  But I’m getting ahead of myself.)

Entry

As P&G has demonstrated, it’s possible to thrive on entering adjacent markets in field.  But this is the same for the U.S. and for Peru.  The threat of others entering the markets, however, is stronger in Peru than in the U.S.

In Peru, tons of people start up little business everywhere.  I’m told, but cannot verify, that Peru starts up more businesses per person than any other Latin American country (but sees 95% of them fail within 2 years.)  Just about everyone is trying to get a piece of the action that P&G has, and a few of them have become large competitors with a more homegrown flavor to them.

Instead of trying to fend off start-ups independently in each industry sector, P&G may find that the immense amount of resources that would be required to do so is best spent in a more holistic approach to fight them all at once.  It’s like when you’re playing Risk, and there’s that one guy that bundles all of his forces on the top of Australia and just sits there building them up every turn until he can run through and wipe everyone out in one shot.  As all the little guys wear themselves out in fights over Africa, Europe, and the Americas, Mr. Aussie just lets his forces grow and hits them while they’re down.  Consolidation is powerful.

Compliments/Substitutes

In Peru, more substitutes exist than in the U.S.  Specifically, people are more willing to go without, or make up uses for the things they already have.  P&G doesn’t seem to go after the CSD tactic of becoming its own substitute, so to compensate, pushing its name forward as something more recognizable, respectable, and required may help it to compete with the abundant substitutes.

For example, laundry soap is fair game to be used as dish soap.  If P&G can harbor the sentiment that its products are from the same overall company, and that overall company decided to make 2 different kind of soaps instead of just one for everything, then there must be an important difference and it must be important to buy both products separately.

Buyer Relations

This is a brand thing that I’ll address more in the social section, but putting all of the resources behind promoting one brand instead of splitting the resources over all the brands may give greater power over the customers (the end users.)

Supplier Relations

I could say something about the brand strengthening demand for P&G’s products which increases the quantity that P&G makes which gives them more power over suppliers, but I don’t feel like that’s necessarily a direct enough result for P&G to utilize the strategy.  I mean, P&G is trying to increase the quantity of stuff it sells independent of how much power it has over suppliers, so I don’t see enough of a causal effect.

Government Relations

There really might be something here, but I decided not to try to research it specifically since it would take me forever to try to find any relevant clause in Peruvian law and if it turned out to be true, I could ignore the rest of the framework.  This is because it’s possible that the Peruvian government requires more transparency from the parent companies than the U.S. for whatever reason.  It’s also possible that there were some specific lawsuits against P&G that require it to be even more transparent than other companies.

With that in mind, you can see how the framework can give hints at where to look deeper.  If the threat of a law was true, then the rest of the analysis would be posteriori knowledge at how the government policy has affected its stance in other parts of the framework.  Still useful, but not what I wanted to do here.

Economic Effects on the Market

In the U.S., the economy is mostly developed and the market isn’t necessarily growing a ton.  This may make it necessary to dig into each brand individually to gain market share rather than relying on the massive weight of the parent company.  In Peru, the market has more growth opportunities developing, but it’s still quite uncertain which markets will pan out the best.  This may make it more desirable to use the weight behind all of them so that if P&G does get beat in a segment, they don’t completely lose the dollars they put toward advertising .

Social Norms

Large corporations have been getting a bad rap in the U.S. lately.  Many people see them as greedy, corrupt, problematic, polluters, evil, cold, heartless, devilish, and smelly.  As such, P&G may find it most beneficial to hide behind its other brands.  Not that the brands seem small, but they certainly seem more appealing in comparison to the ginormous super-company that owns the brands.

In Peru, however, people kinda like the corporations.  They see them as a way to greater economic prosperity.  As a pathway to having enough.  As symbols that Peru is doing pretty well for itself.  As such, P&G can appeal to the Peruvians by letting them know that even though P&G is huge and could go anywhere it wants, it has set up a shop in Peru.  It has come, it is here to stay, and it has brought relatively cheap goods to enjoy.  That’s still a good thing in Peru.

Technology

I can’t think of anything great to write here.  Let me know if you think of something.  Add it in the comments below, or email me.  I’ll credit you in an update of this blog.

Z-Axis

P&G practically is a Z-axis in the U.S. and in Peru.  As such, I’m not sure this section has much influence over P&G’s decision to blow its horn in Peru.  Again, if you think of something, email me or stick it in the comments.

How to Best Use the Framework

As much fun as it was to think about how to modify the 5 forces to make it more useful, I have to be realistic about how useful it can be.  I think that this 10 forces framework is best for doing the same thing that Porter’s 5 forces does now: educate.

No one uses the 5 Forces as an independent framework by which to make plans.  It doesn’t get specific enough, nor does it provide instructions on what to do.  It gives hints at where to look for opportunities, it helps describe how business have ended up where they are, and it helps open up the eyes of students to the sorts of things they will need to watch for in the business world.

This framework does the same thing, but a little more.  Not only does it help the aspiring business person zoom out from looking solely at direct competition, but it helps the user zoom out from looking solely at business items in one shot.  Why do independent SWOT, PEST, and 5 Forces analysis when you can cover all the basis in a way that can actually be compared with one another?

So there you have it.  And, presumably, you just read a blog post so long that even I decided to break it into 2 pieces.  You deserve a picture of an award again (just like for when you read all of Ethics and Snowden.)  Email me at thedurfblog@gmail.com and I’ll send you a picture of an award.  I would say that I wont spam you, but that’s basically all the award is, so, sorry.

Keep seeking truth.
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