Titanium Dioxide, Cola, Pharma & Express Mail Analysis
Reasons Titanium Dioxide Is a Commodity
There are many reasons and mechanisms that make the titanium dioxide market a commodity. First, competitors in the market take actions to increase their share. Second, market value often does not come from product differentiation but from cost reduction and scale advantages. Third, production processes are similar across competitors and relatively easy to implement.
- Economies of scale: This strategy is suitable for markets where value comes from reduced costs rather than product differentiation.
- Similar process: Competitors use similar production processes that are relatively easy to replicate without delaying peers.
In conclusion, titanium dioxide behaves like a commodity because it is primarily used for paint, paper, and plastic; because market value largely derives from cost reduction (economies of scale); and because competitors use similar, simple production processes.
DuPont’s Competitive Advantage with Titanium Dioxide
DuPont’s competitive advantage was based on its production process. Instead of using sulfate-based chemistry, DuPont used a chloride-based process. The chloride process was more efficient, produced less environmental waste, and allowed lower operating and manufacturing costs compared to many competitors. It began as a small advantage but became significant after environmental regulation increased the costs of sulfate processes.
Environmental Factors That Increased DuPont’s Advantage
Two environmental factors increased DuPont’s competitive advantage:
- Lower pollution impact: The chloride process had less environmental impact than sulfate processes, making it more favorable under stricter environmental laws.
- Raw material availability: The availability of ilmenite (a key raw material for the chloride process) allowed earlier and more effective use of the chloride route. When environmental laws were enacted around 1970, DuPont captured substantial additional profit.
Bargaining Power of Customers (High/Low)
The bargaining power of customers changed over time. The number of buyers in the market increased and there were few alternative products that could replace titanium dioxide for its main uses. Before 1970, customers could source from several manufacturers, giving them some leverage evidenced by about a 3% price fluctuation.
Why Cola Concentrate Producers Earn More Than Bottlers
Cola concentrate producers (for example, Coca-Cola and PepsiCo) earn much more than bottlers because they control the concentrate formula, branding, and national marketing. The concentrate producers have strong bargaining power over bottlers. They control the cost structure they charge bottlers and capture the high-margin concentrate business.
Concentrate producers set prices and marketing strategy and maintain long-term relationships with bottlers. Bottlers face additional distribution costs (for example, transportation and retail dispersion) and variable input costs such as sugar, which reduces their margins. In short, concentrate producers secure high margins from formula, brand, and marketing control while bottlers bear distribution and operational costs.
Porter’s Five Forces: Coca-Cola
Substitute products: Substitute beverages are increasingly prevalent now compared to the past.
Customers: There are many customers and companies can set prices. A key factor is that many retail outlets regularly need cola products.
Competitors: There are a number of competitors in the beverage market, but large incumbents benefit from scale and distribution.
Suppliers: Many suppliers follow the lead of the concentrate producers but suppliers have limited power relative to the concentrated producers, who own secret formulas and major brand advantages.
Gross Margin: Cola Concentrates and Pharmaceuticals
The gross margin is (sales minus cost of goods sold) divided by sales. Both cola concentrate producers and pharmaceutical firms can have gross margins above 70%. That means for each dollar of sales, about $0.30 goes to variable costs and $0.70 is gross margin. High gross margins allow firms flexibility to set prices, endure price competition if necessary, and generate significant profits.
Why the Express Mail Industry Was Attractive with a 5% Gross Margin
The express mail industry was attractive despite a modest gross margin because it served an essential and growing need. Demand expanded, partly because of e-commerce. Competition between the major firms was limited, and each specialist held a defensible share of the market with differentiated network characteristics that prevented aggressive price wars. This combination of steady or growing volume and low price competition made the industry attractive. Over time, however, increased rivalry and price wars reduced margins and caused some firms, such as Airborne, to exit the industry.
How Airborne Express Survived FedEx and UPS
Airborne Express survived by focusing on morning delivery and on primarily low-weight shipments at lower prices. This focus gave Airborne operational flexibility and volume advantages. Owning airport facilities also reduced handling and stacking costs and improved their ability to compete on delivery times rather than on margins alone.
Why There Is No Rivalry in the Motorcycle Industry
The motorcycle industry is segmented into submarkets that operate by different rules. For example, Ducati focuses on sports bikes and competes through product innovation, not price. The industry is not a commodity; competition centers on engineering, design, and brand identity. Each brand occupies a distinct niche with loyal customers, so direct rivalry between niche players is limited. Rivalry would emerge if a player from one niche entered another niche (for example, if Ducati designed a motorcycle aimed at typical Harley-Davidson buyers).
Motorcycle Industry as a Niche Market Example
A niche market has two defining characteristics:
- High willingness to pay: Customers value features that match the niche’s attributes and are willing to pay premium prices. This is evident in motorcycle niches where products command higher prices.
- Small market size with loyal customers: Niche markets are smaller in volume but have very loyal customers with specific preferences (for example, Ducati riders seeking high-performance bikes). Loyalty makes switching difficult and stabilizes the niche.
In contrast, the cola industry targets a mass market and aims for broad appeal rather than niche specialization.
Why Drug Pipeline Development Is Critical
Pharmaceutical firms acquire property rights from new drugs through patents, which allow them to set prices and earn large margins. R&D success rates are low (close to 0%–10% success), and development requires huge investments. A single new drug development can cost hundreds of millions of dollars (case examples can show figures near $800 million). It also takes substantial time to bring a drug to market and to promote it. Once a patent expires, generic competitors enter and prices fall toward cost levels. Therefore, for a pharmaceutical firm to survive and prosper it must invest heavily in its pipeline to develop patented drugs that deliver high margins.
Detecting a Cartel Without Price Monitoring
If price evolution cannot be directly monitored, an industry may still be suspected of acting as a cartel based on market behavior and company activities. A cartel is an illicit agreement among firms to limit competition. Indications include coordinated behavior across firms such as similar output levels, parallel commercial terms, market sharing of customers or geographic regions, and the concerted exclusion of competitors. If no firm actively competes against others on price, output, or market access, that pattern can suggest a cartel.
Breaking the Prisoners’ Dilemma at $299
Microsoft and Sony could avoid the Prisoners’ Dilemma around a $299 price point by building mutual trust and expectations rather than by explicit agreement (which would be illegal cartel behavior). They must believe the other will not cut price and maintain stable pricing, but this is difficult in practice. If one firm cuts prices, the other typically retaliates, driving margins down while market share remains similar. The practical solution is to create an industry environment of mutual trust, but achieving this without illegal collusion is challenging.
Porter Analysis: Pharmaceutical Industry
Power of Suppliers
The bargaining power of suppliers in pharmaceuticals is generally low. Pharmaceutical production requires many organic chemicals that are commodity-like and widely available from many chemical suppliers. This availability limits supplier power, and pharma companies can often switch suppliers without large switching costs.
Power of Buyers
Buyers have limited power in many cases because drug prices are often set by the market or by regulation, and consumers prioritize therapeutic effectiveness over brand. End users typically do not differentiate by manufacturer when purchasing essential medicines. However, institutional buyers such as hospitals and public health systems can exercise significant bargaining power.
Barriers to Entry
Entry barriers are high: developing new drugs requires massive investment, regulatory approvals, manufacturing capability, established distribution channels, and patent protection. Small labs cannot scale to compete with major players. Patents and government regulations also raise entry costs.
Threat of Substitutes
The threat of substitutes is real: when patents expire, generics enter and substitute the branded product, reducing prices. Big pharmaceutical companies must constantly innovate to replace lost margin when patents expire.
Industry Competition
Competition is intense and time is a critical enemy: companies must recoup R&D expenditures before patents expire and competitors launch alternatives.
Biggest Problem for Coca-Cola in 2010
The biggest problem in 2010 was declining consumption of carbonated soft drinks. Over a decade (2000 to 2009) the share of carbonated soft drinks fell (for example, from about 29% to 25.2% of total beverage consumption). Health concerns, especially about sugar and obesity, drove consumers toward other beverage categories.
Is the Pharmaceutical Industry Attractive?
Yes. The pharmaceutical industry is highly attractive and competitive worldwide, especially after the COVID-19 public health crisis. Many firms compete for market share; top players may have relatively small shares (for example, a top player with about 6% market share and the top five together around 18%), showing fragmentation. Demand for health products is persistent and growing with population growth and aging, so the industry remains attractive. The COVID-19 crisis further highlighted healthcare as a central societal priority.
Key Success Factors (KSF) — Pharmaceutical Case
Pfizer is an example of a company with many marketed drugs and a broad portfolio, giving it multiple solutions across therapeutic areas. Key success factors include a strong R&D pipeline, patent protection, manufacturing capacity, regulatory expertise, and broad distribution and marketing capabilities.
Was the US Titanium Dioxide Industry Attractive in 1971?
The industry was attractive because firms were earning substantial profits and market concentration favored a few large players. Two firms (DuPont and NL Industries) accounted for more than 60% of total market share, contributing to attractive returns for incumbents.
KSF in the US Titanium Dioxide Industry (1971)
Key success factors included low foreign manufacturing costs, favorable domestic manufacturing advantages, and access to raw materials. Foreign producers faced higher manufacturing costs because of taxes, tariffs, and distribution charges. Extraction restrictions (for example, limits on rutile extraction in Australia) pushed rutile prices up by more than 70%. Plants using the sulfate-based process also needed large capital investments to meet new environmental protection regulations.
Was the US Titanium Dioxide Industry a Cartel in 1971?
Yes. The industry exhibited oligopolistic features: a few large players, commodity-like products, and similar prices. These conditions are consistent with cartel-like behavior.
Bargaining Power of Suppliers (Titanium Dioxide)
Supplier bargaining power was high. For example, a rise in the price of sand in the late 1970s made producers realize their dependence on raw material prices.
Entry Barriers (Titanium Dioxide, 1971)
Entry barriers were high. Around eight companies held more than 90% of the market. High manufacturing costs, tariffs, and distribution costs made entry difficult for new players.
Is Express Mail a Commodity or Differentiated Service?
Express mail is largely a commodity service: competitors offer similar delivery-on-time guarantees and comparable quality, and pricing tends to be similar for comparable services.
KSF in the Express Mail Industry — Lesson from Exhibit 3
The primary path to higher margins would be raising prices, but price competition and declining prices limit that option. Therefore, firms should focus on cost reduction. To succeed, companies must minimize and control costs across operations.
Main Strengths of Express Mail Companies
Federal Express (FedEx): Technology, quality, and personal customer service. FedEx held about 45% of the domestic express market in the USA and offered personalized attention and convenience.
United Parcel Service (UPS): Wide pickup and delivery network. UPS was the largest package delivery company worldwide with extensive ground logistics strength.
Airborne Express: Low costs (about 20% lower than competitors) and flexibility. Airborne concentrated on major metropolitan areas and dominated intra-city volume, focusing on low-weight shipments and morning delivery windows.