EXECUTIVE SUMMARY
Strategic Recommendations
Due to the change in competitive forces and industry landscape, it is not possible for Birds Eye (B.E.) to regain its previous
competitive position as the unchallenged market leader with an astounding 62% market share, but it is possible for B.E. to
regain lost market share and increase profitability. In the face of greater buyer power, increasing costs, and decreasing profit
margins, B.E. needs to capitalize on its distinctive resources of high quality frozen food production and strong brand
leadership while decreasing costs. Achieving these goals means participating in only those areas of the value chain that
continue to add value to B.E. while de-integrating parts of the value chain that can be more cost effectively performed by
other more specialized intermediaries. Taking all factors into consideration, we recommend that B.E. undertake the
following five actions: (1) de-integrate the distribution system that is increasingly burdensome on the bottomline; (2) reduce
the number of product lines to alleviate marketing difficulties and decrease costs; (3) focus on the parts of the value chain
that affect frozen food quality and therefore brand image; (4) enter the rapidly growing private labels business in product
lines B.E. no long participates in and in locations where it currently lacks sufficient presence; and (5) lease out excess storage
capacity in the warehouses utilizing its warehouses’ prime locations as marketing tools.
Birds Eye’s Vertical Integration: A Competitive Advantage with an Expiration Date
While B.E.’s early entry as a pioneer in the frozen food industry earned it a first-mover advantage, it also required that it
establish the non-existent infrastructure to support the new retail frozen food industry. Given the need to locate processing
facilities near the source of raw materials in order to maintain product quality, B.E. constructed processing and storage
facilities in distinct geographic areas. While the notion of going to the market to encourage partners to establish these
facilities was an option, the transaction costs of doing so were too high to successfully broker a deal with local farmers,
ranchers, and fisheries due to the costly transaction-specific investment requirements. Partnering via long-term contracts that
would specify higher pricing would allow farmers to make the equipment investment and to recoup their investment costs;
however, B.E. may be incentivized to renege on such agreements. As Grant suggests, such situations of mutual dependency
often result in opportunism (p. 355).
B.E.’s quest to dominate the rapidly growing frozen foods industry resulted in a vertically integrated network of tightly
controlled processing facilities, cold storage sites and distribution infrastructure that fit together as a system that served as
B.E.’s primary source of competitive advantage and barrier to entry for many years. However, over time this competitive
advantage diminished, in part due to the reduced costs of acquiring freezing technology off-the-shelf (blast freezers) and the
flexibility the technology provided; no longer were large processing facilities that required volume to achieve scale
economies and their associated cold storage warehouses a necessity to playing in the frozen food industry. Suddenly new
entrants could afford to enter and independently specialize in activities in the value chain that once only cost effectively
existed as a cohesive vertically integrated system. Furthermore, as the industry evolved and transitioned towards supplying
large supermarket chains, the relevance of inventory storage and strategic location relative to processing facilities diminished.
Paving the Way for Industry De-integration
In large part, B.E. paved the way for successful de-integration of the value chain by new entrants, giving rise to heightened
administrative costs. Unlike many manufacturers that rented retailers freezer units, B.E. pushed freezer vendors to develop
new units and required retailers to purchase freezers to carry B.E. products. By allowing retailers to own their freezers, B.E.
minimized the switching costs to retailers once competitors arose. Similarly, by owning large processing facilities and cold
warehouses in distinct locations that required large scale, raw material sources now possessed the power in the relationship as
new competitors entered the industry. While vertical integration avoids market costs, these costs are internalized and still
burden the firm. As time progressed, with increased competition, eruption of private-labels, reduced transaction costs, and
specialization of components of the frozen food value chain by new players, the relative costs of being vertically integrated
for B.E. rose steadily. Specifically, B.E.’s distribution activities accounted for 15-25% of costs, contributing a reduced
benefit and increased burden over time, leading our team to ultimately recommend its de-integration from B.E’s activities.
Deterioration of Birds Eye’s Competitive Position
During the 1970s, vertical integration became B.E.’s Achilles heel. The significant competitive pressure and unprecedented
tumultuous environment compounded upon by B.E.’s inability to adapt to the changing market conditions ultimately eroded
its competitive position. B.E. experienced an eroding market share (62% in 1966 to 20% in 1982) that it tried to prevent by
increasing its presence in supermarkets and other underrepresented areas such as home freezer centers. The strategy of
maintaining sales growth by continuing to extend its already large product range and the decision to shift from consumer to
trade marketing on a limited advertising budget in widely different sectors created costly inefficiencies. The increased risk
and cost of managing and investing in its growing number of strategically different businesses in an increasingly fragmented
Team: Prime Time Players | Core: OCC2 | GSBA 519b | Summer 2011
