Simulation Strategy: The Five Forces

Welcome

In this simulation you will learn first-hand how an industry's competitive environment is defined
by five distinct forces.

You will play the role of a company—or force—within the gourmet chocolate industry,
responding to major events (economic and otherwise). A combination of your decisions and the
decisions of the others in the industry will determine how well you weather each event.

Description of the five Forces

Focal Firm:

Dahlia Chocolate

Dahlia Chocolate, named for a flower with chocolate-colored varietals, is an artisanal chocolate
manufacturer whose primary market is the southeastern United States. The company's products
boast Fair Trade certified cacao sources, and their marketing materials emphasize their old-
fashioned approach to handmade chocolates. End customers purchase the 2.75-ounce chocolate
bars—with innovative flavors like chili and cherries, brown butter bacon, or gorgonzola pear—
from retailers for a recommended price of $6.99.

Competitor:

Ruban de Soie

Ruban de Soie is Dahlia Chocolate's principal rival in the gourmet chocolate industry. The
company sells chocolate and confections, specializing in bonbons and luxurious filled chocolate
bars. Ruban de Soie has a commitment to fair trade sourcing and producing finished chocolates
of the highest quality, using affluent young social media influencers known for their commitment
to international social causes to promote the products. A 3-ounce bar of Ruban de Soie's
chocolate typically retails for $8 on their website, in boutiques and major department stores, and
in grocers like Bread & Circus.
New Entrant:

Vu Ventures

Vu Ventures is a small group of investors who have recently sold their previous enterprise, a third
party logistics (3PL) service for perishable gourmet food boxes. After noticing an unmet desire
for gourmet chocolate items and desserts to be included in these boxes, the group set out to start
a new venture, possibly centered around gourmet chocolate. They are carefully studying the
chocolate industry and have $1.5 million that they can use to invest in a new venture. They are
observing Dahlia Chocolate and Ruban de Soie to watch how events in the market affect these
current players, and are considering these events as they decide whether (and how) to enter the
gourmet chocolate arena.

Supplier:

Xoco Direct

Xoco Direct is a farmers' cooperative which provides high-quality cacao bearing the prized Fair
Trade certification. Collecting a small annual membership fee, Xoco Direct provides technical
assistance, training, and interest-free loans to 7,500 small cacao farmers in the Dominican
Republic and Ghana, who are subsequently able to cut out the cartel middlemen of the global
cacao market to trade directly with companies such as Dahlia Chocolate. The Fair Trade
certification allows cacao buyers the assurance that farmers are paid a living wage for their
harvests as opposed to the continuously diminishing prices paid by corporate chocolate buyers
and cartel nations.

Buyer:

Bread & Circus

Bread & Circus is a regional premium grocer with 100 locations across the eastern United States.
The stores offer a moderately wide range of products: dry goods, hand-picked produce, freshly
baked breads and desserts, a wide selection of luxury candies, take-home gourmet meals, and a
curated selection of fine wines. This grocer emphasizes hometown intimate customer service and
positions itself as a curator of elevated food offerings. Their efforts in customer service have
earned it the Best Specialty Grocer national award from The Atlantic Traveler magazine.
Substitute:

Spumoni Co.

Spumoni Co. is a Wisconsin dairy creamery and ice cream producer. The company earns annual
revenue of $5 million and sells its ice creams both to restaurants and through retail channels like
Bread & Circus. Spumoni Co. positions itself as a premium ice cream, featuring dense textures
and deep, unique flavors such as Vanilla Cabernet, Fireside Marshmallow, and Italian Flag
Spumoni. Some of their products are chocolate flavored with real cacao, others include cacao-
based mix-ins. They suggest a premium retail price for their ice cream products of $5 per pint in
stores, and sell to grocers for $3.50 per pint.

My Role

Focal Firm: Dahlia Chocolate

Dahlia Chocolate's small-scale operation earns high return on its $700,000 in annual sales, as the
unusual flavors, promise of an ethical supply chain, and placement in high-end retailers and
grocers appeal to customers willing to pay top dollar for what they see as a rebellion against
mass food production. Even after sourcing the cacao (the beans from which all chocolate is
derived) from Xoco Direct, a Fair Trade certified cacao farmers co-op in the Dominican
Republic, adding organic and unusual flavors, and applying a slow manufacturing process, the
variable cost to produce each chocolate bar amounts to only $0.25. Your company then sells 60%
of the bars to regional organic grocer Bread & Circus, a well-established brand who pre-
determines a per-bar price of $4. The rest of the chocolate products are sold to individual
retailers and local gift shops for $5 per bar, which they then price for resale.

Event 1

Cacao Blight
A fungus blight has befallen a portion of the world cacao crop, shrinking yields 30% for this
season. This could last up to three years. Fortunately, none of Xoco Direct's farms, or the cacao
suppliers for Spumoni Co. and Ruban de Soie have been affected by the blight.

Cacao Blight Outcome

Decisions: Focal Firm (My)

1. Do nothing differently, continue to operate as usual

Feedback on this decision:

Cacao prices will rise, reducing Dahlia's profit margin. In addition, Dahlia would lose out on the
opportunity to gain market share that comes from competitors' difficulty obtaining cacao.

Note: While making my first decision, I was completely unaware of the influence of one decision
to the others. I wanted to make 3 decisions but for choosing ‘Do nothing differently, continue to
operate as usual’, I was unable to make other decisions.

Rationale of Decision

As Dahlia Chocolate's supplier is not likely to be affected by fungus, it can operate in its normal
course of business and this problem will not likely affect its production of chocolate.

Other Alternative Decision

The other alternative could be considered that is attempting to negotiate lower price from
supplier via a long-term contract as this action will restrict the suppliers from contracting with
other competitors, assuring reliable flow of materials for producing chocolate.

Cacao Blight Analysis

Review Question 1 of 3

Xoco Direct (supplier) decided to charge farmers a lower fee for co-op membership. What effect
do you think this had on Xoco Direct's financial position?

Feedback:
Reducing the fee for cooperative membership could increase the supply of farmers wishing to
join, thus enhancing Xoco Direct's position as a larger supplier.

Review Question 2 of 3

Dahlia Chocolate (focal firm) decided to do nothing differently, continue to operate as usual.
What effect do you think this had on Dahlia Chocolate's financial position?

Feedback:

Cacao prices will rise, reducing Dahlia's profit margin. In addition, Dahlia would lose out on the
opportunity to gain market share that comes from competitors' difficulty obtaining cacao.

Review Question 3 of 3

Bread & Circus (buyer) decided to increase retail price commensurate with cost increase (if any).
What effect do you think this had on Bread & Circus's financial position?

Feedback:

Correct. Bread & Circus is a gourmet foods grocer whose customers are willing to pay premiums
for luxury goods. Increases in costs can be made up through increases in price to the customer.

Event 2

Governmental Warning

The United States' Food and Drug Administration has issued a warning. There is a study that
shows a specific chemical in cacao causes a detrimental change in brain chemistry. The
governing body now requires that all chocolate carry a warning of this effect, while suggesting
that people limit their consumption of cacao-based products.

Governmental Warning Outcome

Decisions: Focal Firm (My)

1. Increase number of non-chocolate-based product lines

Feedback on this decision:

Since the warning includes products made with cacao, shifting the product mix to non-cacao-
based products can capitalize on shifts in consumer demand.

2. Place new warning label on packaging

Feedback on this decision:

Compliance with new regulations is mandatory; noncompliance would result in fines and
deterioration of brand.

3. Create new non-chocolate product lines

Feedback on this decision:

Creating new products that solve the same needs as chocolate but don't expose customers to
cacao would increase demand for Dahlia's goods.

Rationale of Decision

Based on the government warning, a portion of consumers will likely decrease their consumption
of chocolate products produced from cocoa beans. So, it is suitable for the firm to increase non-
chocolate- based product lines and create new non-chocolate product lines. Besides, it can
increase its brand awareness and loyalty by placing new warning labels on packaging and also
will be able to maintain CSR activities.

Other Alternative Decision

The other alternatives could consider that it can decrease monthly coca orders by 25%. This will
protect the company from decreasing chocolate product demand because of government's
warning.

Governmental Warning Analysis

Review Question 1 of 3

Ruban de Soie (competitor) decided to place new warning label on packaging. What effect do
you think this had on Ruban de Soie's financial position?
Feedback:

Compliance with new regulations is mandatory; noncompliance would result in fines and
deterioration of brand.

Review Question 2 of 3

Spumoni Co. (substitute) decided to double marketing efforts, increasing staff. What effect do
you think this had on Spumoni Co.'s financial position?

Feedback:

Increasing promotion of Spumoni Co. ice creams could communicate the benefits of ice creams
over chocolate.

Review Question 3 of 3

Vu Ventures (new entrant) decided to start up in a different industry altogether. What effect do
you think this had on Vu Ventures's financial position?

Feedback:

Correct. Investment in a promising industry could be a better use of capital than not investing at
all.

Event 3

Global Recession

A global economic recession hits, causing unemployment to double around the world.

Global Recession Outcome

Decisions: Focal Firm (My)

1. Create lower cost product lines

Feedback on this decision:

If Dahlia could introduce new product lines at lower pricing, this could serve as an offering for
more price-sensitive customers during the recession.

2. Decrease price of chocolate bars to Bread & Circus by 10%

Feedback on this decision:

If Bread & Circus were to receive product at a discount, it could be possible to work with them
to lower price to the consumer and entice demand.

3. Increase market penetration, signing deals with more retailers

Feedback on this decision:

Reductions in volume in current stores could be made up through sales with other retail channels.

Rationale of Decision

Because of the global recession, Dahlia can create lower-cost product lines to make products
affordable to customers as customers will suffer from financial problems. To sustain in the global
recession, it can enhance its market by increasing market penetration, signing deals with more
retailers as well as reducing prices by 10% to Bread & Circus will help to retain customers.

Other Alternative Decision

The other alternative could be that it can attempt to negotiate a lower price of cocoa via a long-
term contract to reduce the cost of production.

Global Recession Analysis

Review Question 1 of 3

Xoco Direct (supplier) decided to charge farmers a higher fee for co-op membership. What effect
do you think this had on Xoco Direct's financial position?

Feedback:

Some lost revenue due to lower demand could be recouped by charging member farmers more
for their membership.

Review Question 2 of 3
Dahlia Chocolate (focal firm) decided to create lower cost product lines. What effect do you
think this had on Dahlia Chocolate's financial position?

Feedback:

If Dahlia could introduce new product lines at lower pricing, this could serve as an offering for
more price-sensitive customers during the recession.

Review Question 3 of 3

Bread & Circus (buyer) decided to decrease retail price of high end chocolate confections to
customers. What effect do you think this had on Bread & Circus's financial position?

Feedback:

The recession will cause demand to decrease for luxury products like elevated chocolates. One
way to entice customers would be to reduce the prices of goods.

Event 4

Cacao Cartel

A cacao cartel has formed within two major cacao-producing countries. The new cartel has
announced a 30% increase in prices of its output, claiming this will help bring better earning and
living conditions for its farmers. This cartel controls a majority of the world's cacao, and major
buyers are in tentative support because of its claims to help farmers. Xoco Direct is not under the
direction of the cartel, but all players in the industry will feel the global impact of this cartel's
decisions. Ruban de Soie currently purchases cacao from a supplier in a country that is part of
the new cartel.

Cacao Cartel Outcome

Decisions: Focal Firm (You)

1. Attempt to negotiate lower price from supplier via a long-term contract

Feedback on this decision:

If Xoco Direct will allow this, it would result in lowered materials costs for Dahlia; however
Dahlia's power is reduced to negotiate due to this global trend.

2. Increase number of non-chocolate product lines

Feedback on this decision:

As the global price for cacao increases and the market becomes more unstable, diversifying into
other non-chocolate sweets would be wise.

3. Invest in a cacao farm in order to produce own cacao

Feedback on this decision:

Now would be an opportune time for Dahlia to remove its long-term reliance on supplier cost
quotes by using capital to purchase an already existing cacao farm.

Rationale of Decision

The decision to attempt to negotiate a lower price from the supplier via a long-term contract will
enable Dahlia to supply cacao at a reduced price from other competitors as well as increased
profit. Besides, the rise in the number of non-chocolate product lines can help to reduce the
reliability of cacao-based products. Finally, it can invest in a cacao farm in order to produce own
cacao that will reduce reliability on the suppliers.

Other Alternative Decision

The other alternative could be that it can raise the product price of Bread & Circus by 20% as
worldwide the product price is increasing.

Cacao Cartel Analysis

Review Question 1 of 3

Ruban de Soie (competitor) decided to raise product price to Bread & Circus by 20%. What
effect do you think this had on Ruban de Soie's financial position?

Feedback:

Passing on the cost increases that are occurring is one way to preserve profitability.
Review Question 2 of 3

Spumoni Co. (substitute) decided to do nothing differently, continue to operate as usual. What
effect do you think this had on Spumoni Co.'s financial position?

Feedback:

With chocolate price increases on the horizon, it is likely that customers could purchase ice
creams instead.

Review Question 3 of 3

Vu Ventures (new entrant) decided to invest in a different industry altogether. What effect do you
think this had on Vu Ventures's financial position?

Feedback:

Investment in a promising industry could be a better use of capital than not investing at all.

Event 5

Contamination

A larger direct chocolate competitor of both Dahlia Chocolate and Ruban de Soie has announced
a contamination of product and will miss a quarter of order fulfillment while shutting down and
remediating the plant.

Contamination Outcome

Decisions: Focal Firm (My)

1. Start promotion on trustworthy cleanliness practices at your firm

Feedback on this decision:

One good lesson to be learned from this competitors' mistakes is that having strong procedures in
place for materials handling is critical to the industry.

2. Increase current production

Feedback on this decision:

Increasing production will be required to be able to meet any increase in orders as a residual of
the competitor's fulfillment problems.

3. Increase monthly cacao order

Feedback on this decision:

Smaller companies like Dahlia should see this as an opportunity to produce more and grab
market share from the crippled larger direct competitor.

Contamination Analysis

Review Question 1 of 3

Xoco Direct (supplier) decided to do nothing differently, continue to operate as usual. What
effect do you think this had on Xoco Direct's financial position?

Feedback:

Xoco Direct's clients may sieze the opportunity to fill the chocolate shortage and increase their
orders.

Review Question 2 of 3

Dahlia Chocolate (focal firm) decided to start promotion on trustworthy cleanliness practices at
your firm. What effect do you think this had on Dahlia Chocolate's financial position?

Feedback:

One good lesson to be learned from this competitors' mistakes is that having strong procedures in
place for materials handling is critical to the industry.

Review Question 3 of 3

Bread & Circus (buyer) decided to attempt to demand high product quality at the same price.
What effect do you think this had on Bread & Circus's financial position?

Feedback:
Bread & Circus has much higher power than Dahlia or Ruban de Soie, due to its size and share
of the chocolatiers' annual revenue. Negotiating higher product quality allows Bread & Circus to
charge a higher price to consumers for chocolate.

Assume that you are a strategic management student who participated in the simulation strategy:
five forces, Now Critically describe self-reflection based on the information provided about the
simulation for the following questions:

Now What? – Explain how you will use the knowledge you gain will help you in
the future. (Word Count Must be 500 words)

Think about your next units, your jobs, you future career/jobs, your personal life

Think about where can you apply the knowledge gain

What? – Describe what you did (Word count must be 1500 words)

Explain what you do for the business simulation activity, what steps you took and what tasks you
completed.

Explain for each step/ task, what decision you took and why?

Provide evidence of how the decision was taken. Explain how you used strategic management
tools to make the decision.

So What? – Explain why this activity was significant for you and your course (Approx 500
words)
Explain what did you learn from this activity?

Now What? – Explain how you will use the knowledge you gain will help you in
the future. (Approx 500 words)

Think about your next units, your jobs, you future career/jobs, your personal life

Think about where can you apply the knowledge gain