THE INFLUENCE OF REGULATION ON THE
INNOVATIVE BEHAVIOR OF DUTCH CANDY
PRODUCING COMPANIES
By: Jorgen Boukes
University of Groningen
Msc BA Master Thesis
Strategy & Innovation
THE INFLUENCE OF REGULATION ON THE
INNOVATIVE BEHAVIOR OF DUTCH CANDY
PRODUCING COMPANIES
Author: Jorgen Boukes Student number: 1755757
University of Groningen; Msc BA Strategy & Innovation Supervisor: Dr. R van der Eijk
ABSTRACT
Increasing worries by the European public authorities about the consumer-health led to the decision by the European Union (EU) to develop a new EU regulation concerning the communication of product’s features to the consumer. This regulation contains three distinctive parts, each focusing on a different element. This research investigates the influence of each part of this regulation on the innovative behavior of companies active in the Dutch candy industry. A note is that the focus hereby is on product developments that improve the nutritional value of the products. This research found that (1) the response to ‘objective declaration regulation’ has no influence on innovative behavior of firms, (2) the ‘unfavorable declaration regulation’ encourages companies to renovate their - and when possible to innovate - products and (3) the response on restricted regulation for communicating positive product features is depending on company’s variables. The last type of regulation makes it increasingly difficult for companies to develop products with improved nutritional value. This increased difficulty is caused by different reasons, under which the decreased ability to communicate the positive product features (with an exception for nutriceutical candy products), and the lack of applicable ingredients to improve the nutritional value. Furthermore, it is doubtful to what extend companies are willing to initiate such product developments. This is only expected to be possible when the company has the physical resources as well as experience to initiate such developments. Additionally, multiple environmental factors are important to consider to calculate the chance of success of such product innovations. Of these environmental factors, the most important are corporate image and the appropriability regime, whereby both should fit with relatively the product innovation and the expectations of the management. Additionally, the efforts of companies in improving of the nutritional value of all candy can only be successful when the whole industry reaches a consensus and will work together. For now, the regulation splits one single market in two, whereby one is the traditional candy market, and the other is a healthy candy market.
TABLE OF CONTENTS
Chapter Subject Page
ABSTRACT 3
1 INTRODUCTION 6
1.1 The consumer 6
1.2 Public authorities 6, 7
1.3 The candy companies 7
2 RESEARCH PROBLEM 8
2.1 Problem definition 8, 9, 10. 11
2.2 Boundaries and limitations 11
2.3 Thesis outline 12
3 INDUSTRY REVIEW 13
3.1 Consumer concerns 13, 14
3.2 Issues and actions from the public authorities 15, 16, 17
3.3 Industry issues 17, 18
3.3.1 The analysis of the competitive forces 18, 19, 20
3.3.2 The competition concentration analysis 21, 22, 23
3.4 Conclusion chapter 3 23
4 LITERATURE REVIEW 24, 25
4.1 The dependent variable 25
4.2 The independent variables 26
4.2.1 Factual characteristics 26, 27 4.2.2 Firm’s strategy 27, 28, 29 4.2.3 Knowledge 29, 30, 31 4.3 Managerial behavior 31 4.3.1 Internal issues 32, 33, 34 4.3.2 External issues 34, 35, 36, 37, 38
4.4 Initial conceptual model 38, 39
5 METHODOLOGY 40
5.1 Research method 40
5.2 Case study design 41, 42
5.2.1 Construct validity 42
5.2.2 Internal validity 42, 43
5.2.3 External validity 43
5.2.4 Reliability 43
5.3 Research design 43, 44
5.3.1 Pilot case study design 44, 45
5.3.2 Final multiple case study design 45, 46
6 THE PILOT CASE STUDY 47
6.1 The pilot case study selection 47
6.2 Results of the pilot case study 47
6.2.1 Types of reactive innovation strategies 48
6.2.2 Factual characteristics revised 48, 49
6.2.3 Strategy revised 49, 50, 51
6.2.4 Knowledge revised 51
6.2.5 Managerial perception (internal perspective) revised 51, 52 6.2.6 Managerial perception (external perspective) revised 52, 53
Chapter Subject Page
7 FINAL MULTIPLE CASE STUDY 54
7.1 Multiple case study selection 54
7.2 Case descriptions 54, 55
7.3 Multiple case study results 56
7.3.1 Results case 1 56, 57, 58
7.3.2 Results case 2 58, 59, 60
7.3.3 Results case 3 60, 61, 62
7.3.4 Results case 4 62, 63, 64
7.3.5 Results case 5 64, 65
7.4 Analysis case study results 65, 66, 67
7.5 Discussion case study results 67, 68, 69
7.6 Final revised conceptual model 70, 71
7.7 Forecasting model 71, 72, 73
8 CONCLUSION 74
8.1 Role of firm’s characteristics 74
8.2 Conclusion regulation part A 74
8.3 Conclusion regulation part B 75
8.4 Conclusion regulation part C 75, 76
1 INTRODUCTION
Recently, nutrition content and health claims on food products are under intensive attention (Den Ouden, 2009; Brecher et al., 2000). There is discussion about several problems that are suggested to be a consequence of bad diets and health claims are one of the main concerns (Pomeranz, 2009, Website RIVM). Three kinds of products are playing a major role in this discussion as they affect children and/or youngsters; alcoholic beverages and soft drinks, fast food and candy. These products have some characteristics in common, however, the most important relations are the fact that these products contain a significant amount of energy, fat and/or sugar, have low nutritional value and affect children and/or youngsters. As the European Union became worried, it introduced a new regulation. In this thesis, the influence of this regulation on the behaviour of companies is researched. To start with, there are three main groups of players relevant in this case, namely: consumers, the public authorities and companies (Firth and Mellor, 1999). Below, the significance and reasons for these groups to be relevant is discussed briefly.
1.1 The consumer
The consumption of products with low nutritional- and high energetic value bring (high) risks of health issues and diseases. Proven examples of these are obesity, diabetes, cavity and heart failure, and studies are suggesting even more risks (Daily paper “de Pers” June 22, 2009; Moore, 2007). Obesity is currently the biggest problem of all, however, the problems caused by bad diets may be interrelated. Garde (2008) finds the children to be obese “particularly worrying as an obese child is very likely to become an
obese adult”. Not only health risks are of importance, also other negative consequences
of obesity are of major significance. According to the research of “de Pers” (June 22, 2009), these may be for instance: low mobility, unemployment and bad (school) performances. Consequently, the concern about these problems is rising and as consumers are the people having this troubles, they are a very important party in this research. Although children are an important group of consumers in this Thesis, consumers are described here as all people that purchase and/or consume candy products.
1.2 The public authorities
loneliness and bad sport results1, the most important problem for public authorities are the high societal costs. The costs related to obesity are high: the Dutch ministry of health estimated the costs at about €500 Million per year, which is expected to grow dramatically in the recent future2. Other sources3 are suggesting already even higher costs of an estimated €3.4 Billion. These costs are estimated as direct costs, whereas bad school performance and other indirect consequences are not even considered. Sources4 are suggesting the World Health Organization (WHO) is going to warn for a global epidemic. As a result, public authorities are desperately searching for solutions for the problem, with the purpose to improve people’s diets and lower the societal costs. Public authorities in this thesis are described as all parties, instances and agencies that develop, create, control and provide regulation and act as control mechanisms over companies that produce and/or market food and/or beverages.
1.3 The candy companies
2 RESEARCH PROBLEM
As above stated, there are three perspectives in this case; consumers, the public authorities and companies. An important role is the one of the public authorities, as this is the only party with regulative power and furthermore has a role as improver for as well the society as the economy (Rothwell, 1980). As a consequence of the increased health problems related with food and (alcoholic) beverages, these public authorities became worried and one of their major ways of executing this trend is with the use of information campaigns and legal attempts (e.g. regulation, bans, restrictions, etc.). Rothwell (1980) found a friction between regulation, society’s interest and companies interest by stating that “the point is that the need for regulation (there is no doubt that regulation is
necessary for the general well-being of society) and the current need for the stimulation of industrial activity (especially innovative activity) are often incompatible”. The problem
of developing and implementing regulations in combination with the different interests of these three groups, may lead to certain negative consequences for one or more of these groups, which is the starting point of this research.
2.1 Problem definition
In this thesis, as been earlier mentioned, the industry that is chosen for investigation is the candy industry. Two typical characteristics of this industry are of major importance and were the main reason to investigate this industry. First, the trend of ”medicalisation” (Zwier, 2009) occurs in this industry. This term is defined as “advertisements for food
products which are not medicine by conventional standards, however, are increasingly shaped by representations of food as a type of medicine”. From this point, this type of
advertising will be called ‘claim advertising’. Claim advertising should not have to be a significant problem in the first place, however, the results of the research by Zwier (2009) “can also shed light on the – seemingly – contradictory findings that present-day
food advertising largely features unwholesome products but at the same time increasingly contains claims that the food products contain nutritious and healthy ingredients”. The second important characteristic is the target group of their promotion
activities, under which in particular children. Linn and Novosat (2008) state that “given
These two characteristics have been the reason for public authorities to be alert on the consequences of these marketing efforts and interfere when this is necessary. Pomeranz (2009) reasons that “since a portion of food and beverage advertising is
directed at audiences primarily composed of children, it may be possible for the government to ban or otherwise regulate child-targeted advertising that reaches only this intended audience. In addition, government may entirely ban or otherwise regulate commercial speech that is false, deceptive, or misleading”. Public authorities, in the form
of the EU, criticized these characteristics as misleading and undesirable and decided to interfere. As a consequence, the new EU regulation about health and nutrition content claims is introduced5, of which “the main objectives … have been to ensure a high level of
consumer protection, effective functioning of the internal market within the EU, fair competition within the food industry, and both stimulation and protection of innovations”6. Whereas a lot of research has been done on the consequences of these attempts on the side of consumers and public authorities (Cash and Lacanilao, 2007; Garde, 2007; Hastings et al, 2003; Knight and Baca, 1978; Linn and Novosat, 2008), there has not been many research on the effects of governmental regulation on company’s behavior. Although all perspectives are suggested to be interrelated, it might be of use to investigate how companies think about these campaigns, regulations and restrictions and of what influence these governmental efforts are on their decision-making. As one of the main objectives of the new EU regulation is to promote innovation, the response of companies and the influence of the new regulation on their innovative behaviour will be the central point of research in this thesis. Consequently, this Thesis will focus on the influence of regulation, bans and restrictions on innovative behaviour of companies active in the Dutch candy industry. The research question is s follows:
“How is restricted regulation influencing the innovative behavior in nutritionally improving product development of Dutch candy-producing and -marketing companies?”
This research question will be answered with the help of the following sub questions: 1. What are the current issues, market characteristics and developments in the
Dutch candy industry considering regulation, society and innovation?
2. What was the effect of restricted regulation on the innovative behavior of companies in former literature?
Below, the significance of all sub questions are discussed shortly:
1. What are the current issues, market characteristics and developments in the Dutch candy industry considering regulation, society and innovation?
The state of the environment the company is active in, is an important factor for the decision-making units of a company. Earle (1997) supports this with saying that there are “two prerequisites for successful innovation in the food industry: an
innovation-oriented company, and a positively reactive environment”. According to Earle (1997), the
climate comprises the next factors: (1) company organization and strategy; (2) urbanization and industrial growth; (3) consumers’ economic status; (4) technological knowledge and competences; (5) social and political will; and (6) consumers’ needs and wants. These factors determine the competition and opportunities in the industry and for this reason are influencing company’s behavior. Consequently, these are very important to consider in this research.
2. What was the effect of restricted regulation on the innovative behavior of companies in former literature?
Innovation that occurs in most industries is mostly incremental innovation. Incremental innovation is defined by Garcia and Calantone (2002) as “products that provide new
features, benefits, or improvements to the existing technology in the existing market”.
These innovations are small changes in existing products that are most likely to be developed to satisfy the demands of the consumer, thus are consumer-driven. Regulation on the other side is forcing companies to innovate into a certain direction (Earle, 1997; Firth and Mellor, 1999; Rothwell, 1980) and companies are obliged to fulfill this by governmental demanded conditions. In addition, industry characteristics, like for instance competition and trends, are also influencing innovative behavior. As a consequence, the society as well as the governmental and the industry characteristics are influencing the innovative behavior of companies, which is supported by Earle (1997) by stating that “food industry innovations are often directed by these social and governmental activities,
whether they are aimed at developing import replacement products, following nutritional directions, or obeying food additive regulations”. By reviewing former literature about
this topic, it is possible to find propositions that are possible to test in this research. 3. What are the relevant characteristics of a company active in the food industry that
determine its innovativeness and innovative capabilities?
Dutch candy industry and their reaction depends on the strategy and character of each company. Earle (1997) states that “in developing innovation strategies for the global
future, a company needs to consider its place in the food system: its size, competencies and knowledge; the resources available; the targeted consumer groups and their needs and wants; as well as its aims for the future and its business strategies to achieve these aims”. The purpose of this question is to make it possible to distinguish companies
opposed to each other, which makes it possible to discover which characteristics are important to determine the effect of regulation on innovative behavior. Also this question will be answered with the help of a review of former literature and furthermore an explorative interview. As a consequence, this research will result in a better understanding and improved support of the propositions and will show which factors determine the firm’s response.
2.2 Boundaries and limitations
This part describes the boundaries that are considered and the limitations that are perceived during this research. The boundaries and the limitations of this research are:
1 A wide range of products is possible to be considered as candy. For this reason, only products that are produced with sugar or sugar replacements as chief ingredient as well marketed as candy are taken into account. Furthermore, as the chocolate market is significant different than the traditional candy market, this market is not taken into account either. In conclusion, only traditional candy, mint/throat tablets, gum and liquorice are considered in this thesis.
2 The research is only focused on the Dutch candy market. The candy industry is subject to various cultural influences, like for example typical market characteristics and cultural preferences (Firth and Mellor, 1999). For this reason, the results are only legitimate for the Dutch candy market.
3 The main question is only answered by the use of insights provided by the respondents. No other sources of information are used to gain more insights. For this reason, this research is exclusively depending on the opinions of the respondents. Additionally, the outcome of this research is dependent on the willingness of firm’s representatives to participate in this research.
2.3 Thesis outline
Figure 1 shows the structure of the Thesis and the steps that are taken to give an answer to the main question of this research. In chapter 3, the Dutch candy industry is reviewed, making this industry more comprehensible. This will give an answer to the first research question. In chapter 4, former literature is gathered and reviewed, leading to initial propositions for research. This chapter will consequently give an answer to both sub questions 2 and 3. The way the research is executed is given in chapter 5, supporting the reliability and validity of this research. In chapter 6, a pilot case study is executed, so that the initial propositions are modified into propositions that are more applicable. In chapter 7, the results of the case studies are given, together with a discussion of these results. Finally, in chapter 8, the conclusion of this investigation is given, wherein the main research question is answered. For the future, two types of recommendations are given, firstly to the parties considered in this Thesis (chapter 9) and secondly, for future researchers (in chapter 10).
Figure 1: Thesis outline
1: Introduction 2: Research problem
3: Industry review 4: Literature review 5: Research methodology
6: Pilot case study results 7: Multiple case study results
8: Conclusion
Initial conceptual model
Modified conceptual model
Final revised conceptual model Forecasting model
3 THE INDUSTRY REVIEW
In this part, the candy industry is exemplified, which will lead to the answer on the first sub question: What are the current issues, market characteristics and developments in
the Dutch candy industry considering regulation, society and innovation? In accordance
with the points mentioned by Earle (1997) given in chapter 2, this chapter considers the points about the consumer, government and industry environment. In chapter 4, the other two points, considering company’s internal issues are discussed. Firstly, the concerns of the consumers are described. Secondly, the current situation for the public authorities are opined, after which thirdly the conditions of the industry are discussed.
3.1 Consumer concerns
In this paragraph, two main subjects are discussed, namely: the health of the Dutch consumer and the trends in the Dutch consumer market. These two subjects are discussed because they will help to determine the social and cultural support for (healthy) innovation, in accordance with the six points argued by Earle (1997).
As mentioned in the introduction, the state of health of Dutch citizens is worrying. One of the main reasons here are bad diets and the figures are not pronouncing an improvement (Garde 2008; Linn and Novosat, 2008; Moore, 2007; Stillman et al., 2002). Besides obesity itself, also other factors related to obesity bring costs or are negative consequences of overweight. Moore (2007) states that “childhood obesity has been
associated with adverse health effects, including elevated risks of hypertension, atherosclerosis, obstructive sleep apnea, chronic inflammation, and metabolic disorders, such as diabetes”. In particular for children, which are in the development stage of their
mean of 4.9% of the total expenditures8. This percentage is almost equal for the richest as well for the poorest9. As a consequence, the expenditures in money is much higher for the richest people compared with the poorest people. According to the website of RIVM10, the Dutch Governmental institution for Public Health and Environment, people with lower social, economic status have a more unfavorable eating pattern. For this reason, the percentage of obesity is higher in the group of people with lower social, economic status.
Another important factor is the influence of advertising on people. Nutrition content and health claims have been increasingly used as a marketing tool in the recent years (Zwier, 2009), which has a significant influence on people’s purchase behavior and diet choices. Studies have proved that advertising to children increases sales figures, like the one by Hastings (2003): “food promotion is having an effect, particularly on
children's food preferences, purchase behavior and consumption. This effect is independent of other factors and operates at both a brand and category level”. Garde
(2008) states that “the link has been established between the nature of advertising and
children’s eating habits. If advertising for food high in fat, sugar and salt alone does not make children fat, it is an important contributory factor to their overweight”. And
furthermore “A study by a team of psychologists from the University of Liverpool recently
established that obese and overweight children increased their food intake by more than 100% after watching food advertisements on television”. Also Williams (2006) says
“there are a number of studies that have indicated that nutrition claims (such as “fat
free”) are appealing to consumer and influence purchase. Such claims may, however, not necessarily lead to better diet choices overall”. The problem is clear: claims and
3.2 Issues and actions from the public authorities
The in paragraph 3.1 mentioned rising health problems bring high societal costs, as been earlier mentioned in chapter 1. The consequences of bad diets are already counting for an estimated €3,7 Billion of direct health costs in the Netherlands a year (Daily paper “de Pers” June 22, 2009). In Europe, 2 – 8% of all health costs are spent on obesity. In the Netherlands this number is around 2%, which counts for about €1 Billion only caused by obesity11. The EU as well as the Dutch public authorities started to worry about the situation and decided to do something against the increased problem of obesity and other diet related problems. Although all countries that are member of the European Union are obliged to comply with the EU legislation, countries are able to even restrict this regulation individually. In the Netherlands, the government first decided to start up several campaigns, like for instance “healthy diet and workout with children – prevention of overweight” (in Dutch: “Gezond eten en bewegen met kinderen – voorkom overgewicht”) and “Do not be fed up with yourself” (in Dutch: “maak je niet dik”)12. As these campaigns did not lead to declining numbers of overweight people, the Dutch public authorities decided to search for other ways to intervene. The initiated way of doing this was by the use of regulation on promotional activities. For example, thoughts were going up to forbid advertising via media by law, but this has been rejected by the Dutch Parliament13. After this rejection, so far, there have not been further individually Dutch actions against the increase of overweight and obesity.
For this reason, restrictions by the European Union are most relevant for this research. The EU already had decided to restrict the rules for claiming and advertising in 2003 and this regulation is introduced in steps, started from January 2010. The question is: will this regulation really help in the way of improving the current situation? The new regulation is designed to lower the confusion that claims and other promotional activities may lead to by consumers (Asp and Bryngelsson, 2009). An example of this can be found in the Chupa Chups case, where the new lollipop of Chupa Chups was enriched with vitamin C14. On the one hand, the product is improved as it contains an added healthy ingredient. On the other hand, the claim suggests the product to be healthy, while it contains 95% sugar and thus certainly is not. Consequently, the claim was called misleading and Chupa Chups was forbidden to use the claim from then.
innovations15. Although the purpose of the regulation is positive, “programs often have
failed to meet their own stated goals” (Stewart, 1981). As been stated by the European
Union: “the regulation on nutrition and health claims will ensure that any claim made on
a food label in the EU is clear, accurate and based on generally accepted scientific evidence. In doing so, it will enable consumers to make informed and meaningful choices when it comes to food and drinks. This should also contribute to a higher level of human health protection, as it ties in with the Commissions campaign for healthier lifestyle
choices”16. By forcing the companies to improve the communication of the product’s
ingredients, the EU expects the consumer to be better informed and for this reason they will make better decisions when choosing and purchasing their products. There are three different important parts of the regulation relevant here, shortly discussed below.
1. The EU wants companies to be clear about the nutritional value of their products. For this reason, all products sold in the EU should contain a clear table with all relevant declarations of the nutritional value on the package.
2. A recent study found out that artificial colors and flavors may cause problems in children’s behavior. For this reason, when there has been made use of such supplements, it should be mentioned on the package clearly and must be clear on all products sold in the EU.
3. In the current assortment, a lot of products contain insufficient amounts of a certain supplement or ingredient to be valuable. Furthermore, some products claim the content of a healthy ingredient, while the product itself is unhealthy. The above mentioned Chupa Chups case is a good example of this. The EU finds this type of claiming misleading to consumers and started the PASSCLAIM project. This EU project was started to “define a set of generally applicable criteria for
scientific substantiation of health claims” (Asp and Bryngelsson, 2009). Only
nutrients present in this list and added sufficiently to the products are allowed to be used in a claim. One essential article, considering candy, in the new EU regulation is article 4, which is called the ‘whereas clause’. This clause mentions that: ‘‘the application of nutrient profiles as a criterion would aim to avoid a
situation where nutrition or health claims mask the overall nutritional status of a food product, which could mislead consumers when trying to make healthy choices in the context of a balanced diet” (Asp and Bryngelsson, 2009). In other
words: when the marketer is claiming a healthy element in an unhealthy product, the marketer also have to highlight the unhealthy element of the product.
These efforts will have an impact on as well consumer behavior as well as the behavior of companies active in the European, thus also the Dutch candy industry. The impact of the
introduction of the new regulation already led to different expectations. Firstly, The Dutch Nutrition Centre (the DNC; het Voedingscentrum) perceives the new regulation to be a step forward as they expect producers to relinquish claims. Eventually, the DNC expects a lower amount of incorrect information on products17. Another advantage of the new legislation is the consensus of multiple countries. Whereas in the old situation every country had its own regulation, there is a standard now. When the claim is permitted by the EU, it is allowed in twenty seven countries simultaneously (Binns, 2008). On the other hand, these governmental efforts are also expected to have some negative consequences for the industry and companies active in these industries. The Dutch Federation of the Victuals Industry (FNLI) finds the standards too strict and insufficiently underpinned. The FNLI expects the restrictions to negatively influence the innovative behavior of companies in the way of nutritional value improvements18. In the next paragraph, the current situation as well as the issues of the firms active in the Dutch the industry will be discussed.
3.3 The industry issues
At first, the EU decided to give the responsibility of improving the communication of product’s features as well as improving the nutritional value of the products to the companies. For example, because “children are unable to distinguish between
information and intent to persuade” (International Communication Association, 2008),
some companies decided to not advertise candy to children under the age of twelve anymore19. Although later on other companies joined this effort, most companies did not. Also as a response on the health problems, the biggest companies are “trying to educate
consumers that candy is fine and permissible, in moderation, as part of a balanced diet. The stress is that candy is a treat, reward, a pick-me-up” (www.fei.org, 2003). Other
attempts by the industry are nutritional labeling and continually exploring sugar-free products (www.fei.org, 2003). An important issue for companies, is that they do not want to make concessions on the taste of their product, which is difficult to combine with nutritional improvements (Voedingsmiddelentechnologie, 2007). This is suggested to be the reason for companies for not improving the nutritional value of their products sufficiently. Consequently, the EU interfered because the companies were not taking their responsibility. In particular the focus on children was criticized by the EU, because “by
(Linn and Novosat, 2008). As a consequence, the industry will have to deal with the in paragraph 3.2 mentioned new regulation, which is not always considered as positive. Stated by Pacyniak (2009): "we believe that the Nutrition and Health Claims Regulation
has put a lot of obstacles in the way of food innovation and in our sector there are additional restrictions because of the nutrient profiles. It's really a challenge to do something positive and not be able to communicate it". In the next sub paragraphs, the
Dutch candy industry will be analyzed with the help of different research tools. This gives an insight into which issues the companies have to deal with besides this EU regulation. 3.3.1 The analysis of competitive forces
In the Porter’s five forces analysis, the attractiveness of the industry can be measured (McGee, 2005). The stronger the forces are, the less attractive the industry is and vice versa. There are five forces to be measured, namely: rivalry, threat of entry, supplier power, buyer power and threat of substitutes. These forces will all be discussed below in this same order.
Rivalry
The candy industry can be determined as an industry with very high competition. Typical for the candy industry is the shredded market, with lots of small players. In the Netherlands, some big companies are leading in the business. The biggest players are Leaf, Concorp, Haribo, Perfetti/van Melle and Katja/Fassin. The actual power of these big companies will be discussed more exhaustive in paragraph 3.3.2. Typical for these companies is that they as well produce as market their products, while other, in particular small companies, mainly choose to either exclusively produce or market products only. According to the Dutch Study Centre of Snacks and Confectionary (SSZ, www.ssz.nl) the consumption of candy in the Netherlands is stable at an approximate 105,5 million kilograms a year. The turnover in the Dutch candy market is growing annually around 3 to 5% and is estimated at €826.000 in 200820. The increase of turnover is mainly caused by the price increase of resources (Den Ouden, 2009). The stable turnover inside the market together with the stable consumption figures, points out the Dutch candy market to be a mature market with a lot of players. For this reason, the rivalry can be determined as high.
Threat of entry
According to McGee et al (2005), there are three components new entrants should calculate before entering a market. Firstly, the revenue stream is important, which
depends on the prices that can be charged. Because the market is mature, the volume is stable and the price elasticity of the demand is low. Consequently the chance for high revenues is low. This is supported by the FEI (2003), which states that “while the
industry is full of familiar brands, it needs to constantly develop new and different products. Consumers like a lot of variety, and they like new things which bring excitement to the category" and “with their tried-and-true brands, companies compete with their own best-sellers to bolster consumer and retailer excitement” (www.fei.org,
2003). In the industry there is one major goal: to drive impulse point-of purchase sales for candy items. "It is a great business, and there is a lot of competition in it" and “the
focus on bulk products is important as they secure business” (www.fei.org, 2003). As a
consequence, companies are trying to gain market share by constant innovation and promotion of products, with low margins (Den Ouden, 2009). Secondly, new entrants will consider the costs before entering the market (McGee, 2005). As candy is a low impulse product, high marketing investments are needed for gaining market share. Furthermore, finding access to economies of scale, scope and learning is difficult as there are so many players on the market, which are all fighting for space on the shelves. Thirdly, the capital cost of the investment needs to be reckoned (McGee, 2005). As the cost per product is higher for the new entrant than for the incumbents, it is even less attractive to enter the market. In conclusion, there can be said that the threat of new entrants is low.
Supplier power
As a result of the recently altering of the sugar market21, which is a very important ingredient for candy, the costs for this ingredient has decreased and the bargaining power for candy producers has increased. The other ingredients that are commonly used in candy are available from various suppliers in comparable qualities, leading to low dependency and switching costs. Although the candy ingredients of are not complex, the process for making candy can be. As there is not many variance in the ingredients that are offered, it is difficult to be creative or different from others in the nutritional value of candy. For instance, sugar is a fixed product, of which the nutritional value or taste from one supplier or the other is the same. Consequently, all candy producers are using the same type of sugar. In conclusion, the supplier power is moderate.
Buyer power
pressure for candy producers. Furthermore, a lot of copying is going on in the market. A lot of supermarkets and other distributors have their own private/store brand, causing pressure on the margins for A brands. The private brands already “account for close to
30% of grocery sales in the Netherlands. And there is no end in sight. Store brands offer better margins, build store loyalty, and put pressure on brand manufacturers to offer better deals on their brands” (Den Ouden, 2009). This huge pressure on prices and fast
copying by private brands, causes a high buyer power. This increase of power by the buyer is even more increasing when looking at the developments in the supply chain. This is shown in the next table (table 1):
Table 1: the percentage of turnover of candy per distribution channel (October 2007)22
Particularly notable are the even more increased sales portion in the supermarkets as well as the increase of selling in the drugstores, which makes the candy producer even more depending on the shelve space in the supermarkets. In conclusion, there can be said that the buyer power is considered to be high.
Threat of substitutes
As candy is a sweat treat item, the alternative sweet treat items are considered here as possible substitutes. The main threat of substitutes is coming from chocolate candy bars and other confectionary products as snacks and cookies. It is realistic that for example an increasing the price of candy will lead to a situation whereby consumers may switch to these other segments. For this reason, the threat of substitutes is considered to be moderate.
The stronger the forces are, the less attractive the business is. Furthermore, as mentioned by McGee et al (2005), “the heart of the five forces is the horizontal line”, which for this reason are the most important forces in the model. The forces on the horizontal line in this case are considered to be strong as the supplier power is moderate, and the rivalry and buyer power are high. Although the other two forces, threat of substitutes and threat of entry, are relatively moderate and low, the candy industry can be typed as not attractive due to the high rivalry and small profitability. To zoom in into the type of rivalry there is in Dutch candy industry, the next sub paragraph will shortly discuss the concentration analysis.
3.3.2 The competition concentration analysis
To analyze the concentration of the competition in the candy industry, there is made use of the C4 analysis. With the help of this instrument, the type of competition can be found.
1 The biggest candy producer and marketer in the Netherlands is Perfetti/van Melle. The total turnover of Perfetti/van Melle is circa €1.8 Billion23, of which €280 Million24in the Netherlands.
2 The second biggest candy producer in the Netherlands is CSM/Leaf. This company has a total turnover of €552 Million25, of which in the Netherlands a total of €202 Million26.
3 The third biggest candy producer in the Netherlands is Haribo. This company has a turnover €1.6 Billion in the world27, of which €180 in the Dutch candy market28. 4 The number four candy producer in the Netherlands is Concorp, with a turnover of
€70 Million29.
The accumulated turnover of these companies is €733 Million. In 2008, the total turnover in the Dutch candy industry is €826 Million (Studiecentrum Snacks en Zoetwaren, 2009) meaning that the share in turnover of the four biggest companies is 89%. When the four biggest companies have a accumulated market share of 60% or more of the total market, which is the case here, the industry is typed as oligopoly (McGee et al, 2005), meaning the concentration of the rivalry is high.
Later in this research, the companies will be divided into three categories. There are companies that only produce products (first category) and then sell them to trading and marketing companies, which is the second category. Thirdly, there are companies that are busy in both production and marketing activities (the third category), called wholesalers. In the Netherlands, there is a total of 291 companies active in the confectionary industry30. An estimated 25% percent of these companies is active in the candy industry, meaning a total of about seventy companies (Studiecentrum snacks en zoetwaren, 2009). The amount of companies per category are estimated next to make the market more understandable. Firstly, there are a moderate amount of production-based companies. These companies are exclusively active in producing as well semi-finished as semi-finished products for marketing-based companies. The amount of such companies is an estimated fifteen. By far, the biggest number of the companies can be
23Jaarboek adverterend bedrijfsleven, 2008
categorized as those active in the trading and marketing business. The amount of such companies is estimated around forty. Finally, there is also a moderate amount of companies active as a wholesaler. The amount of these companies is estimated at fifteen. Figure 2 shows the number of companies per category more clearly. Although there are far more companies active in the marketing-based business, the share of turnover is extensively the biggest by wholesalers. This is already shown in the C4 analysis, whereby the four biggest companies were all wholesalers, and in total already accounted for 89% of the total turnover in the candy industry. The turnover of the marketing-based firms is estimated on 7% of the total turnover, making it €58 Million. Notable is the different position here for the production-based firms, because they are suppliers for both marketing-based firms and wholesalers. Unfortunately, the turnover of the production-based firms is unknown, but is said to be a bit lower than the turnover of marketing-based firms. The next figure shows the estimated shares of each category in number of companies and in turnover.
Figure 2: the share of the number of companies and the turnover per category
As a consequence of the high rivalry, mentioned before, companies are actively trying to gain and keep their positions. One way of doing this is by the use of innovation as high competition in an industry leads to constant development of new products (Herath et al., 2008). As a consequence, companies are trying to gain market share by constant innovation and promotion of products, with low margins. One important common trend is the diet candy, like for instance candy with less sugar of sugar replacements. Considering innovation, Business Insights (2007) found that “confectionery showed a rise in the
number of products launched in 2006 that were natural and organic rising to 5.3% from 4.2% in 2001”. Furthermore, there is found an increase of nutrition content claims in the
confectionary industry in the recent years, showed in table 2.
Claim 2003 (%) 2004 (%) 2006 (%) Pure 9,7 10,3 12,6 High vitamins 12,6 12,5 12,1 Low fat 11,6 11,0 10,0 No artificial flavor 10,1 9,4 9,9 No trans fat 2,6 6,4 9,7 No genetic modification 8,9 8,9 8,8 Low sugar 6,0 6,6 8,2 High fiber 6,2 7,2 7,8
Remarkable are the increase of the ‘pure’, ‘no trans fat’, ‘low sugar’ and ‘high fiber’ claims. The main goal of companies is "to change the mix of the products to make them
much more profitable, helping to create affordability by expanding margins"
(www.fei.org, 2003). There can be concluded that one of the major ways to add value to the product of firms active in the candy industry is to increase the nutritional value of the product. This is mainly done in two ways, namely via adding healthy additives or via decreasing the amount of unhealthy elements in the product.
3.4 Conclusion chapter 3
4 LITERATURE REVIEW
Regulation often influences companies in their opportunities to innovate (Firth and Mellor, 1999). The consequences of regulation on these opportunities will determine the expected response of the companies. By investigating this influence, the answer on sub-question 2; What was the effect of restricted regulation on the innovative behavior of
companies in former literature? is found. This influence, together with the factors that
determine the innovation capabilities of firms, which is the answer on sub question 3;
What are the relevant characteristics of a company active in the food industry that determine its innovativeness and innovative capabilities?, lead to propositions which will
predict the firm’s expected response. The influence of regulation on innovation opportunities is found by Firth and Mellor (1999), by stating that “learning has an
external effect in that while it increases the value of the learner in social relationships, it also increases the value of that knowledge and of those social relations … regulation influences what will be learned by creating incentives, and by changing the context in which parties interact … the interplay of parties to industry and the institutional framework that determines the rules under which they interact generate the incentives and opportunities to innovate. Therefore, the rate and direction of innovation can be understood within the holistic context of the society, technology and industry“. Thus,
regulation affect as well the society as the industry and both these and the current technology determine the opportunities for companies to innovate. This regulative influence is not always positive for the industry, which is already found by Stewart (1981): “from 1973 until 1978, the rate of productivity growth in the US fell dramatically,
while a massive expansion of federal environmental, health and safety regulation coincided with the decline of this fall of productivity growth”. Also other research found
this negatively causal relationship between regulation and organizational performance and innovation (Binns, 2008; Herath et al, 2008; Pacyniak, 2009; Rothwell, 1980; Zwier, 2009). However, other research found an improved situation (Leth et al., 2006; Loader and Hobbs, 1999; Shaffer, 1995).
Logically, the influence the regulation has on the firm depends on the individual situation of the company. Whereas one can profit from it, the other may be harmed by it. This individual situation mainly depends on the idiosyncratic features of the firm. These idiosyncratic features are of major importance as they affect productive routines, which “can reflect learning, in which those in a firm gain greater understanding of how to
influence action-outcome relationships” and additionally ”investments in development are attractive, by implication, when results idiosyncratically improve the relative uncertainty a firm faces in ways that can be kept firm specific” (McGrath, 1997). These features
defined as “the firm’s processes that use resources – specifically the processes to
integrate, reconfigure, gain and release resources – to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die”. These dynamic capabilities are important when there are regulation adjustments, as
they determine company’s possible responses on these adjustments. There are a lot of possible firm-specific dynamic capability factors, like for instance the age of the company, the size of the company, the market share of the company, the resources of the company and the managerial behavior (Earle, 1997; Herath et al, 2008), which are important determinants of the innovative behavior.
As a starting point, the research of Herath et al. (2008) will be used, because here, a lot of variables which are also applicable in this research are already found. The initial variables of Herath et al (2008) can be found in appendix III. An important notification is that candy products differ significantly from the Functional Food and Nutriceutical (FFN) products, which was the subject of the research by Herath et al. (2008). Although product developments in the form of an improved nutritional value as well as product enrichment with healthy ingredients are present in the candy industry, the products have a different purpose. As FFN products are produced to provide health improving food, candy is expected to be more of a treat and is suggested to not be consumed for health motives. For this reason, some of the independent variables of the original model are not relevant for the candy industry and other variables that may not be relevant for the FFN industry are indeed of relevance for the candy industry. Consequently, the variables of Herath et al (2008) are modified in this Thesis for the sake of this research. In the next paragraphs, first the dependent and later the independent variables for this research derived from former literature are given.
4.1 The dependent variable
4.2 The independent variables
The above mentioned dependent variable is influenced by a lot of factors. These factors are firm specific, which leads to the premise that depending on these factors, company’s innovative behavior is positively or negatively influenced by the new EU regulation. In the following sub paragraphs, the factors that were proved to be of influence by former research are discussed and put into different independent variables.
4.2.1 Factual characteristics
To start with, there is literature written about research done on the size, age and the way of doing business of companies (Earle, 1997). Regarding the size and age of companies, three types are distinguished in this Thesis, namely: big established firms, small established firms and new entrants. Although usually innovations come from small players in the industry, this is different in the food industry (Earle, 1997), which “led to
the hypothesis that radical innovation occurs in small companies; however, this does not occur as often in food technology as it does in information technology and biotechnology. In most sectors of the US food industry, large companies had higher innovation rates than smaller companies”. Rothwell (1980) found that another possible sponger are new
entrants, which, although they may not have high investment capabilities, have the advantage to be able to react specifically on the regulation: “several important,
innovative responses were seen to have arisen from new entrants to the industry, whose entry was made possible by regulation”. As a result, big companies with capabilities to
response on new regulation as well as new entrants may profit from new regulation and as thus are expected to come up with responsive product innovations, while small established companies are expected to have troubles to respond well on new regulation.
Another important factual characteristic is the way of doing business (Herath et al, 2008). The candy industry exists of, as in many industries, two parts. Firstly, there is a group of companies that is exclusively producing candy and are only selling their products to other companies, called business to business. Additionally, there is another group of companies that is only buying products from production companies and only markets the products to the consumer, called business to consumer. Moreover, there is also a third group of companies, that is doing both the producing as the marketing of their products. Here, this group of companies are called wholesalers. According to Herath et al. (2008), there is a difference between companies active in the first stage of the product innovation and companies active in the latter stage of the product innovation: “early stage development is less expensive, but more risky, than marketing and
the more expensive marketing/promotion stage while those involved in the later stage activities might have more products on the market”. As a consequence, production
companies are expected to have initiated more product developments than marketing companies. All propositions considering the above mentioned factual characteristics are shown in the next table (table 3).
Factual characteristic Proposition
Big established firm Positive
Small established firm Negative
New entrant Positive
Producer Positive
Marketer None
Wholesaler Positive
Table3: propositions factual characteristics
4.2.2 Firm’s strategy
In relation to the firm’s characteristics, the firm acts following a type of strategy, which is also proved to be of influence (Earle, 1997; Loader and Hobbs, 1999). Firstly, there is the competitive strategy, whereby the company decides in which way it markets its products opposed to its competitors. The determination of a company’s strategy is “based on an analysis of the firm’s strategic advantage (low cost position or uniqueness
perceived by the customer) and strategic target (industry wide or a particular segment)”
(Konstantopoulos, 2007). The possible strategies are found by Porter and are called the generic strategies. “According to Porter, a business can strive to supply a product or
service more cost-effectively than its competitors (cost leadership), it can strive to add value to the product or service through differentiation and command higher prices (differentiation), or it can narrow its focus to a special product-market segment which it can monopolize (focus)” (McGee et al, 2005). According to Konstantopoulos (2007),
there are two possible types of differentiation strategies, namely product innovation and image management, whereby product innovation is suggested to be the most innovative. The innovation strategy of the company is comes forth of this generic strategy (Earle, 1997): “national technology policies and government research will not by themselves
bring about changes at the level of the company - the company must have the strategy and planning for innovation”. There are various types of strategy, but the ones used here
found three types of reactive strategies, namely: “stonewalling — where the firm
attempts to ignore or ride out the problems created by the regulation; Opportunity-seeking — where the firm sees the regulation as an opportunity to gain competitive or other advantages, and; A mixed strategy — where the firm’s response might be characterized by new product development and heavy marketing — maybe in a new area for the firm”. The combination of the competitive innovation strategies given by Earle
(1997) with the reactive strategies found by Loader and Hobbs (1999), result in the following possible reactive strategies:
- Innovators – opportunity seeking strategy (Konstantopoulos (2007): reactors) - Improvers – mixed strategy (Konstantopoulos (2007): analyzers)
- Me-too copiers – mixed strategy (Konstantopoulos (2007): defenders) - Die-hards – stonewalling strategy (Konstantopoulos (2007): prospectors) The proposition suggests innovators to be the ones that are relatively the most - whereas die-hards to be the ones that are relatively the least - expected to come up with product developments in response to regulation.
Another strategy issue is the firm’s branding strategy (Earle, 1997). This strategy determines in which way the firm offers its (new) products. Globally, there are three types of branding strategies, namely product branding, private branding and corporate branding. In the case of product branding, consumers are only identifying the brand of the product, but in contrast, “the corporate brand contributes not only to customer-based
images of the organization, but to the images formed and held by all its stakeholders (including: employees, customers, investors, suppliers, partners, regulators, special interests and local communities)” (Hatch and Schulz, 2003). There are found seven
major differences between product and corporate branding by Hatch and Schultz (2003), summarized in the next table:
Product brands Corporate brands
Focus attention on The product The company
Managed by Middle manager CEO
Attraction and support of Customers Multiple stakeholders
Delivered by Marketing Whole company
Communication mix Marketing communications Total corporate communication Time horizon Short (product life cycle) Long (life of the company)
Importance to company Functional Strategic
Table 4: relevant differenced between product and corporate branding
According to these differences, the higher relative importance of corporate branding is suggested to lead a different influence on the innovative behavior of the company. Corporate branding is ”going to be more then romanticism about the organization’s
future, the claimed values of the corporate brand must resonate with the tacit meaning and values that organizational members hold and use (i.e. their values-in-use or their actual identity)” (Hatch and Schultz, 2003). For this reason, corporate branding has a
market place, because every product has the same brand name and is linked with the organization (Hatch and Schultz, 2003). Whereas the customer-based image of product brands only affects the product brand itself, the customer based image of the corporate brand affects the whole firm. For this reason, companies using product brands are easily able to come up with a new product under one of their existing brand names or even come up with a new line. In contrast, companies using a corporate brand only will develop a new product when it is in line with its corporate brand, and the innovation will be branded under the same brand as all other products. An additional type of branding is private branding. As been mentioned in chapter 3, this type of branding is increasingly important as it has become a strong competitor for A-brand manufacturers and furthermore this rivalry is expected to be even heavier in the future. Private brands are copiers of existing products, and are for this reason not innovative (Den Ouden, 2009). The former leads to the proposition that the number of initiated product innovation activities in response to regulation is relatively bigger in firms using product branding opposed to firms using corporate branding strategies.
The last, here relevant, strategic point of importance is the target group the company is focusing on. Former literature found the link between consumer’s income and technological change: “there is an interwoven pattern of rising per capita income and
technological change” (Earle, 1997). This leads to the premise that consumers with high
incomes may be willing to pay more for an improved product. Assuming that healthy product innovations will be more expensive to produce (through investments and more expensive ingredients), company’s focusing on consumers with higher social economic status may be encouraged to innovate as a consequence of this regulation. The strategy propositions are showed in the next table:
Strategy Proposition
Innovator Positive
Improver Positive
Me-too None
Die-hard Negative
Product branding Positive
Corporate branding Negative
Private branding Negative
Focus on high consumer segment Positive
Focus on low consumer segment Negative
Table 5: propositions of firm’s strategy
4.2.3 Knowledge
judgment, intelligence, relationships, and insight of individual managers and workers in a firm. In short, this means all value created by people inside the company, only by employees of that company. In this case, firm specific technology and product development history in relation with knowledge of the employees is of major importance, because the current productive routines are crucial to indicate if the firm is capable to respond quickly with its current knowledge and technology. The Dutch candy market can be typed as moderately dynamic, in which it is found that knowledge is very important. “Moderately dynamic markets are ones in which change occurs frequently, but along
roughly predictable and linear paths. They have relatively stable industry structures such that market boundaries are clear and the players are well-known. In these markets, effective dynamic capabilities rely heavily on existing knowledge” (Eisenhardt and Martin,
2000). The fact the candy market is moderately dynamic even emphasizes the significance of knowledge (Eisenhardt and Martin, 2000): “the pattern of effective
dynamic capabilities depends upon market dynamism... When a firm possesses certain knowledge about a typical product development, it may help the company to have an advantage over competitors that do not posses such knowledge”. With the help of
knowledge, companies may profit from regulation, while others without such knowledge can be harmed. “At the firm-level, the effects of the government on their competitive
position are an important determinant of profitability. Thus firms may support legislation and regulation that benefits their positions vis-a-vis rivals, entrants, substitute products, buyers, and suppliers” (Shaffer, 1995) and furthermore “indeed, firms with an established market position, and economies of scale in production, testing and marketing often see regulation as something that they are able to respond to with a greater degree of speed and precision than other firms” (Loader and Hobbs, 1999).
firms that do not. The second way for companies to obtain knowledge is via sources of knowledge, like for example databases and organizations that supply knowledge. These secondary sources are proposed to be of positive influence on the innovative behavior (Den Ouden, 2009). Consequently, the factors ‘presence of an R&D department’, ‘experienced with former activities’, ‘interaction with other companies’ and ‘obtaining knowledge’ are all proposed to have a positive influence on the innovative behavior of companies.
In contrast, a company can also protect its product/innovation, thus knowledge, by the use of protection mechanisms (Herath et al, 2008). A lot of the decision for protecting the innovation has to do with the appropriability regime; the relative chance of profiting from the innovation. “It is quite common for innovators – those firms which are
the first to commercialize a new product or process in the market – to lament the fact that competitors/imitators have profited more from the innovation than the firm first to commercialize it” (Teece, 1986). One important instrument for companies to profit from
their innovation are intellectual property mechanisms. However, these mechanisms are not always sufficient in protecting the innovator. This is discussed by as well Teece (1986) and Pisano (2006) and they found the major importance of the appropriability regime, which is defined as follows: “a regime of appropriability refers to the
environmental factors, excluding firm and market structure, that govern an innovator’s ability to capture the profits generated by an innovation” (Teece, 1986). Depending on
the appropriability regime, companies may have chosen to protect their innovation with the help of a protection mechanism. This regime will be discussed further in paragraph 4.4. Herath et al. (2008) found that companies that patent their products, are less innovative. For this reason, the proposition is that firms with existing or that are pending patents are less innovative. The next table shows all propositions considering knowledge factors.
Knowledge Proposition
Existence of an R&D department Positive
Experience caused by former activities Positive
Interaction with other firms Positive
Obtain knowledge Positive
Use of legal protection mechanisms Negative
Table 6: propositions of the factors of the variable ‘knowledge’
4.3 Managerial behavior
