Question 3: Competition

Strength of the Competition:

The major competitors to Dakota are the American Italian Pasta Company, Hershey Pasta Group and Borden Food Holdings. Despite the existence of other private pasta companies, these three competitors along with Dakota have captured the significance of the market share. The AIPC produced 800 millions pounds of pasta in 1998 which was nearly three times greater than Dakota. Furthermore, as exclusive pasta provider to the major market segment occupied by Sysco system, Mueller’s and Sam’s Club, AIPC gains competitive advantage with the ability to sell at a cost-plus basis. Category management of its brands is also a major plus regarding AIPC’s reputation.

The branded segment of the industry is led by the Hershey’s which currently occupies 27 percent of the market share. The main competitive advantage for Hershey’s is its longevities and customers’ loyalty. The company began operation in 1966 and its quick growth allowed expansion and consolidation with its competitors such as San Giorgio and Skinner Macaroni. As a result of broader brand recognition, Hershey Pasta Group’s brands hold the highest retail market share in 22 of the top 64 markets. Hershey’s and AIPC have captured most of the wholesale and retail distribution segment. Borden, however, focuses on the complimentary product and has become the largest pasta sauce manufacturer as a result. Borden remains strong in the pasta industry despite its success in the pasta sauce market. The 1998 statistics reveal 350 millions pounds of pasta production which exceeds that of Dakota.

The pasta industry is a strong established industry. In order for a new company to enter, it must direct its focus on a significantly lower price structure, a new specialized pasta innovation, or perhaps pure luck. Dakota’s ability to exercise competitive advantage through its “cooperative” organization enables the company to maintain steady profit margin and satisfies its cooperative owners.

Competitive Forces, Attractiveness, and the effects:

Competitive rivalry revolves around 1) degree of capacity utilization; 2) product distribution capabilities; 3) service capability; 4) ability to provide consistent quality to customer specifications; and 5) access to durum wheat. AIPC and DGP maximize their supple management system and thus able to utilize 100 percent of the capacity. The use of EDI help AIPC, DGP and Hershey’s to provide marketing services to the customers. DGP and AIPC were able to withstand recent price increase in durum wheat and maintain high quality standards at lower average cost. The rivalry revolves around the top producers in general. Therefore, new competitors must address the intangibles held by these leaders and exceed these intangibles to gain their market share.

The suppliers are constant for most companies in this industry. There is a shift, however, to consumer preference for imported pasta which may hurt the industry in general. Dakota’s cooperative system allows it to have the greatest advantage in this area due to its access to high quality durum. The durum wheat resource is a major issue in this industry and perhaps the top reason to detract competitors. It is difficult to secure large amount of quality resources while the price remains on the rise.

Buyers of pasta products are considered loyal but will accept substitution at lower prices. AIPC and DGP direct their focus on maintaining the highest quality while keeping the price constant; as a result, new cheaper products were not able to compete due to the quality factor. The rise in popularity of imported pasta may concern the American growers. However, many new brands have implemented the use of Italian names to help sell the perception of originality. Finally, it must be stressed that Americans consumed more pasta than ever before. The continuous increase in pasta consumption suggests that the industry is safe domestically from foreign invasion. On the contrary, there is no telling when this sudden increase in pasta consumption will stop. If the increase is eventually considered as temporary (less than 20 years), then the industry may suffer significantly. New entries and the current market must consider the time table factor prior to further their strategies.

As mentioned earlier, new entries into the industry would have difficulties compete for natural resources and market share. Pasta consumers and wholesalers are mostly loyal and it would take a significantly lower price structure for the new entries to capture any market share. A strategy is substitute product such as healthier pasta or specialized pasta. On the contrary, specialized pasta tends to be more costly and has less market attractiveness; in turn, it would be difficult to make profit.

The five forces reveal the strength of the current leaders in the industry and the adequate barriers for new entries. As a result, the industry is viewed as unattractive for new companies. However, the increase in pasta consumption may create enough intrigue to witness major new entries in the near future. Overall, the rivalry benefits the consumers with low prices and high quality. On the contrary, the same rivalry prevents the competing companies from becoming even more profitable. In turn, the lower profit margin helps detract competitors and maintain market share.