The Greeting Card Industry - Article Example

Question 1 The greeting card industry is comprised of paper stationery, writing equipment, greeting cards. According to the Datamonitor (2003), greeting cards and stationery account for 65.1 percent of the market and the compound annual growth rate (CAGR) was at 2.8 percent between 1999 and 2003. This is a $7.5 billion per year industry with 3000 publishers making up the industry. These range from small family run business like Blue Mountain (www.bluemountain.com) to major publishers such as Hallmark (www.hallmark.com). In 2003, the wholesale greeting card industry in the U.S. was estimated at about $3.5 billion (Datamonitor 2003). This industry is not highly regulated by the government. In contrast, the medical supply industry, which include pharmaceuticals, wound care, over the counter medicines like Tylenol, is highly regulated by various government entities. The medical supply industry includes major companies such as Johnson and Johnson, Merck, Proctor and Gamble and Novartis. Johnson and Johnson is currently the industry leader. The pharmaceutical industry is very attractive if a firm can afford to enter with high manufacturing, research, development and regulatory risks. According to Yahoo Finance, the pharmaceutical industry has nearly a twenty- percent earnings growth this year (Yahoo 2006), and market capitalization worth is 1,188 billion dollars. Organizations today are subject to an increasing number of regulations that entail compliance. From Sarbanes-Oxley to the Health Insurance Portability Accountability Act (HIPAA), companies are required to adhere to a multitude of standards and regulations. The greeting card industry is most impacted by Sarbanes-Oxley act, as there does not, aside from trade and accountancy laws, exist a government-regulated board specifically for this industry. However, there is the Greeting Card Association industry trade group (GCA) who “is the trade organization representing greeting card and stationery publishers, and allied members of the industry” (GCA 2006). The primary objective of this organization, which was created and developed by the industry, is “to represent the industry before government and regulatory agencies, to serve as an information service center for its members, and to monitor trends and developments that may impact the industry” (GCA 2006). The pharmaceutical industry is highly regulated by consumer protection medication laws such as HIPPA. In addition to various national and international regulations, there are many more rules that stem either from regional or local governments or industry oversight committees. For the pharmaceutical and medical supply industry, the FDA is the driving regulatory body: The Federal Food, Drug, and Cosmetic Act (FD&C Act) provides legal authority for inspections and access to factories, vehicles, equipment, records, processes, and controls necessary to determine that drugs are being produced in conformance with regulations that have the force of law. (FDA 2006). The government regulates the pharmaceutical industry highly for the health and safety of consumers. The greeting card industry is not regulated because in general, consumer choice does not impact the medical health of that consumer. In the relatively perfect economic theory of supply and demand, it could be assumed that people will only buy based on need, and that the correct provisions will be distributed to satisfy that need. Unfortunately, in the pharmaceutical industry, there must be market regulations on what can be sold, to whom it can be sold, and how it can be sold. This government regulation seeks to preserve the health of the consumers. Secondarily, because of the very high income potential, there have been government stipulations and regulations applied to mergers and acquisitions. Pfizer, maker of Lipitor, the leading drug to reduce harmful blood cholesterol, announced that it would pay $1.3 billion for Esperion Therapeutics, a small drug company (Yahoo Finance 2006). Other acquisitions include Johnson and Johnson’s purchase of Guidant promoting the manufacturer to become a leader in the industry (Yahoo Finance 2006). Industry acquisitions and mergers are seen as a way to increase productivity and attain economies of scale, eliminate redundant overhead costs, and reach a critical threshold of effort necessary to discover new drugs. However, the concept of supply and demand also comes into play with the mergers and acquisitions. Illness and disease, as a driving force behind the industry, is not constant as say, food purchase or oil purchases. Economies of scale is based on the theory that lower input costs will occur when purchased in high volume; costly inputs like research and development will be reduced; specialized inputs create greater efficiency; techniques and organizational efficiency improve production and distribution; learning inputs increase production and efficiency (Colander 2004). The highly profitable pharmaceutical industry is consolidating to reinforce their market power (Colander 2004). More consolidation decreases consumers’ opportunity for choice and increases the ability of pharmaceutical companies to charge higher prices (Colander 2004). While the economic theory allows this, government regulations contradict the economic theory by controlling industry consolidation influences product pricing, technological innovation and product quality, technological efficiency, corporate profit and other elements that determine the viability of the industry (Colander 2004). The greeting card industry is highly self-regulated, aside from various laws such as the Sarbanes-Oxley act for proper accountancy and stakeholder information. This industry relies very specifically on the proponents of economic supply and demand theory. The pharmaceutical industry is highly regulated beyond the simple accounting regulations. The government closely regulates mergers and acquisitions, as well as the actual production, distribution and pricing (in some cases) of medical supply. Therefore, the government’s vested interest in the pharmaceutical industry, initiated for consumer protection, is not entirely in line with economic theory and economic growth. Question 2 The cereal industry is an oligopoly with four large companies in the United States: Kellogg, General Mills, Post (Kraft Foods subsidiary), and Quaker (Datamonitor 2005). There are also a few small private companies that hold only about 10 percent of the market Quaker (Datamonitor 2005). These companies have no clear dominance, and pricing is equally distributed for the most part. A trip to the grocers will show that most of the major cereal brands have nearly the same cost. This shows that the major competitors are not true competitors, thus creating an oligopolistic industry with high profit margins. There is almost no competition in the cereal industry. Kellogg’s cereal has the largest percentage of cold cereals. The cereal industry is highly consolidated to only four major companies, creating fierce advertising rivalries. Kellogg is the current leader of breakfast cereals at 32.2% of the market share, and General Mills follows this at 31.2 percent. Kraft at 17$ and Quaker with the majority of the remainder; however, the rivalry is truly between the individualized cereals rather than the companies (Datamonitor 2005). The government has tried to prevent the oligopolistic nature of the cereal industry through regulations, but this has held little sway over the major competitors. In the 1970’s to 1980’s, the cereal industry was accused of creating a shared monopoly and intensely investigated by the Federal Trade Commission. However, regardless of this scrutiny, the four major cereal competitors were able to avert any negative impact from investigation and legislation. For the cereal industry, the lack of competition and substitutes allows the cereal industry to control the prices. Based on economic theory, there is a high demand for these cereal products because there is no substitution, and secondly the prices can be controlled because of lack of competition. There is no fear for the cereal industry, and certainly no ceiling on their viability and capability. The lack of bargaining power on both the supplier and buyer side is an extreme advantage because this allows the cereal industry to buy and sell at a price the maximum price the market will support. With little to no possibility of a major competitor entering the cereal industry, the four major competitors (barring small and regional manufacturers) can dominate the cereal industry. The cereal industry’s profit potential is capped only by the industry itself. There is no competition, no bargaining power, and no lack of consumers. While this can not be proven as a shared monopoly as of yet, it can be logically assumed that raw materials, prices and distribution is in the hands of the four major competitors, and not the market economy. The U.S. home video game industry has developed tremendously over the past ten years to become a strong entertainment force. In 1999, video games equalled motion pictures with revenues of $7.4 billion and the game industry continues to grow (Graser 2000). American media environment as game use has skyrocketed among users of all ages. Time spent on games has risen steadily and is expected to climb at the expense of more traditional media. Video games are a mass medium with properties that are not driven by multiplicity of product as seen in the cereal industry. Video games mostly run on proprietary hardware, creating important competitive pressures on firms (Vogel 1998). While there are only a few hardware supportive mediums (Xbox, Playstation, Nintendo), there are hundreds of video game designers and distributors worldwide. These designers rely on copyrights and software development as well as hardware development. The industry’s development cycle is also very different from the cereal industry, and its publishing and distribution stages have elements that extend to other media, especially industry and game specific movies and games. The industry relies on the ‘new’ and large scale customer communications, especially box office hits (known as ‘killer aps’). The vertical stages of the video game software industry have aspects similar to that of the book publishing industry. Firms are often integrated and communicative with one another during various stages. Most video game consumers will see the credits of software comes very often from several firms. Atari (a long-standing major software developer) may work with Nintendo Games in adjoining stages, while other software designers such as Rockstar games will remain solitary. The structural properties of the current competition in the industry comes from the conduct of firms as well as the media surrounding the industry. For example, G-4 is a cable television channel devoted to games, designers and conventions (E3). The U.S. development industry is highly dependent on the creative process, especially in PC games. In general, the most successful game designers tend to work and produce better without interference from a larger corporate structure. This may be due to the young generation trend in the industry, as the industry itself is very young. Some publishers like Electronic Arts have been very successful by acquiring smaller development studios like Maxis and Westwood Studios, but retained the original name for competitive continuity. There are thousands of video game titles, and this is largely because there are hundreds of small, medium and large video game designers that create games specifically for competition (Bossong-Martines 1999). In the cereal industry, economic objectives are achieved by examining consumer trends in types of foods. For example, healthier cereals followed trends in American health initiatives, where in early years (1980’s), cereals like Count Chocula were heavily marketed. Now, following the American health trend, Cheerio’s strongly markets its ‘healthy heart’ program to lower cholesterol. Similarly, the game industry also must follow customer trends for marketing and sales initiatives. In early years, games were simple, and whether as a response to better technology or consumer demand (probably a little bit of both) games have become much more complex with tighter graphics and stronger story lines. Both companies follow economic theory of supply and demand. As consumers focus on different cultural trends for their purchase demands, the cereal and gaming industry answer to that. Or, like Count Chocula and Sega Dreamcast, they will find there is not a purchasing market and fade into modern American history. References Graser, M. (2000) ‘Triumph of the Tech Toys: DVD, vidgames and other gadgets open outlets for H’wood product’, Variety, vol. 377, no. 10, p. 31 Vogel, H. (1998) Entertainment Industry Economics, Cambridge University Press, Cambridge. Bossong-Martines, E., (ed.) (1999) Industry Surveys, Computers: Software, Standard & Poor’s, New York, vol. 167, no. 39, Section 1. Datamonitor (2003) Stationery in the United States. Stationery Industry Profile: United States; March 2004, p1, 15p Datamonitor (2005) Breakfast Cereals Industry Profile: United States. Breakfast Cereals Industry Profile: United States; Oct2005, p1, 20p Yahoo Finance (2006) Pharmacuetical Industry. Retrieved October 29, 2006 from http://finance.yahoo.com/marketupdate/inplay Greeting Card Association (2006) The Greeting Card Association. Retrieved October 30, 2006 from http://www.greetingcard.org/ Food and Drug Administration (2006) Federal Food, Drug, and Cosmetic Act. Retrieved October 30, 2006 from http://www.fda.gov/opacom/laws/fdcact/fdctoc.htm Colander, David (2004) The Economic E-Book. The McGraw Hill Companies. New York, New York. Read More