Competitive Market Analysis 7
Competitive Market Analysis
Team A
ECO/365
Date
Instructor
Competitive Market Analysis
As a fierce competitor in “all things coffee”, Dunkin Donuts has decided to develop a new product. The new product is designed to capture more of the market share of those who enjoy brewing lattes and other coffee drinks at home in a single cup coffee machine. To gauge the proposed products potential success, a competitive market analysis must be completed. The primary competitor is Starbucks, Inc. Included in this competitive analysis is a short historical view, factors that affect demand, supply, and equilibrium within the competitive market, any issues or opportunities that Dunkin Donuts faces that affect competitiveness, variable cost factors, and fixed cost factors and recommendations based on the analysis.
Organizational History
According to the Starbucks, Inc. website, Starbuck’s first location was opened in 1971 and was a simple narrow storefront in Seattle, Washington. (Starbucks, Inc. 2012) It was in 1983 that the atmosphere of the stores was changed due to the vision of Howard Shultz (Chairman, President, and CEO). The atmosphere was designed to be inviting to the consumers encouraging them to linger in the store. The company expanding quickly and today boasts more than 15,000 stores in 50 countries. (Starbucks, Inc. 2012)
Demand, Supply, and Equilibrium Prices
Many factors affect demand and supply, the biggest factors are the competitive market. There was a time that Starbucks dominated the coffee market however now there are many competitors that are selling almost the same product that costs less. Demand is always high in the coffee market and the single cup coffee market has done pretty well for Starbucks. Sales and revenue were down due to so many competitors that caught on to the gold mine of the coffee industry so Starbucks had to come up with other innovative ideas to supplement revenue. They first started with the single serve coffee packs that were more like instant coffee, no one else in the market other than household coffee makers give their consumers this option. Now they are partnering with Green Mountain to offer consumers a higher quality product with the coffee maker pods. Starbucks has been the leader in this industry and are not about to let anyone else become #1. Starbucks has faithful consumers that may catch on to this idea regardless of the price because of the convenience, however, most Starbucks consumers prefer the experience of going to the coffee shop. Other competitors that may want in on this new trend would most likely be McDonalds, since they came out with their McCafe products they have been one of the leading competition for Starbucks.
Issues and Opportunities
Introducing a new product will help with short-term profits, as the lead will be taken from the competitor offering a new product that is unique. Single cup coffee machines have become very popular over the years with consumers and after thorough market research; single cup coffee machines are what consumers are wanting. By offering a new product demand is increased by giving current customers another way to enjoy our coffee products at home and expanding our market to those who do not usually visit a store. When they visit the stores to purchase the new single cup coffee machine, they will also help themselves to pre-packaged coffee to be used in the coffee maker or even perhaps a cup of coffee. With an increase in demand comes an increase in price, the revenue curve will shift up and the profit maximizing output will expand. An inward shift in the market demand will have an opposite effect. An example of an inward shift is Starbucks also offering a similar single cup coffee machine. The demand would then decline for a new product and the demand curve would lower for everything else, which would force a decreased price in order to remain competitive. (Tutor2u, 2012)
Introduction of a new product will also increase labor and service in order to meet the new increased demand for the product line. If Starbucks decides to introduce a similar product the demand for Dunkin Donuts’ products will decrease. This can negatively impact profits in the long term, as labor costs will have increased in the short term upon introduction of the new product. The end state is Dunkin Donuts will be forced to constantly produce new products in order to maintain profitability and keep up with labor costs. The benefit of offering a single cup coffee machine is the potential for offering a new line of several single serve coffees to be used in the coffee maker that can be introduced when this downward shift occurs.
Factors Affecting Variable Costs
“An entrepreneur should never offer a product for sale that cannot pay for its variable costs.” (Ecedweb Economics Lesson, n.d.) So what exactly is a variable cost you might ask? According to the National Council on Economic Education, "Other types of costs change with the number of products offered for sale. These are called variable costs. Variable costs include the wages of production workers or salespeople, raw materials, electric power to run machines, and the cost of maintaining inventory.” (Ecedweb Economics Lesson, n.d.)
We can safely assume there will be a few factors affecting variable costs for this endeavor. These factors will likely include the following:
Raw materials
Employee wages
Power to run any equipment
Maintaining inventory
Any changes in the market will have a direct impact on variable costs. As supply and demand increases or decreases the variable costs will also increase or decrease because the changes will foster the need for increased or decreased labor. In addition to labor, adjustments will have to be made for any other factors affected by changes in supply and demand.
According to the National Council on Economic Education, "Entrepreneurs need to understand the important differences between fixed and variable costs and how these differences affect a firm's success. Fixed costs must be paid. Sometimes they are called "sunk costs" because at the present they are beyond the control of the entrepreneur. The only costs an entrepreneur has immediate control over are variable costs.” (Ecedweb Economics Lesson, n.d.)
Factors Affecting Fixed Costs
Fixed cost can be defined as a cost that is already spent, which cannot be recovered and is part of a firm’s total cost. Fixed costs generally exist in the short run and remain the same no matter the level of production. Typical factors affecting changes of fixed costs are: changes in business organization, changes in technology applied, sale of manufacturing equipment, decisions to undertake advertising activities etc. (Encyclopedia of Management, 2012).
Changes in the organization as attempts are made to improve products to customers will affect fixed costs. Costs may need to be increased to improve the organization. In economic downturns, attempts will be made to reduce costs by restructuring to ensure the firm stays healthy, which will affect fixed costs. The sale of equipment or adding equipment is a part of restructuring and it impacts fixed costs.
Adding better equipment equals implementing better technology. A technological change is a big factor that affects fixed costs. The reason technology has a major impact on fixed costs is because a technological change offers an increase in the known range of production. Technological changes will factor into our firm’s decisions and production. Another major factor that affects fixed costs is advertising. Products must be promoted as much as possible. Advertising at the right place and at the right time gives one the chance to gain more customers and grab more market share from competitors.
Recommendations
Entering a new market can be risky; the team has laid out some factors that will apply to Dunkin Donuts entering a new market with a new product. Dunkin Donuts’s competitors may or may not follow the new product. Dunkin Donuts should follow profit maximization, this will put our product on top and maximize profit, no matter what competitors follow Dunkin Donut’s new single coffee maker machine. There is a couple different ways to use profit maximization, the team recommends Dunkin Donuts should follow where marginal profit is zero, this will happen when marginal revenue equals marginal cost, which will put out maximum revenue for Dunkin Donuts. The new single coffee maker machine is not a perishable item, making a number of machines, then marketing them to set sail on a new innovative way of enjoying Dunkin Donuts, new coffee blends and other attachments will bring Dunkin Donuts to every home in the world with this new single coffee maker machine.
Conclusion
Based on the analysis performed by the Team, a Dunkin Donuts single serving coffee machine will enjoy success if in the fixed cost arena new technology is added to handle the “K-cup” production. Advertising must increase to support the new product as well. With regard to variable costs, labor will increase to supply the new “k-cups” for the coffee machines. A zero marginal profit model is ideal for this situation. Competition in this industry is fierce and unforgiving; Dunkin Donuts needs to take the lead.
References
Fixed Costs. (2012). In Encyclopedia of Management online. Retrieved from
http://mfiles.pl/en/index.php/Fixed_cost
National Council on Economic Education , EcEdWeb Economics Lesson. (n.d.). Retrieved on April 9, 2012 http://ecedweb.unomaha.edu/lessons/euse1.htm
Starbucks, Inc., Our Heritage, 2012. Retrieved on April 7, 2012
http://www.starbucks.com/about-us/our-heritage
Tutor2U. (2012). Perfect Competition: The Economics of Competitive Markets.
Retrieved from http://www.tutuor2u.net on April 5, 2012.