Growth and Profitability: A Tale of Two Competitive Industries
Posted: 26 May 2000
SUBJECT AREAS: Growth, Entry, and Specialized Factors CASE SETTING: 1994-1998 for Bagel Industry and 1998 for Cranberry Industry
Are competitive industries with faster growth rates in market demand more profitable than those with slower growth rates are? George Bailey thinks so. That is why he opened his first bagel store in 1994 and then rapidly expanded into a 10-bagel store chain against the advice of his close business associates. At the time he was convinced that the bagels would become a growth market. His associates threw cold water on the idea and predict his proposed venture would fail because, as one of his colleagues said, "You can't make profits in an easy entry business". His bagel chain is profitable for three years as the bagel market explodes but rivals enter in 1997 and store profitability drops sharply. Fearing continued erosion in profitability, George sells his chain. In 1998 he faces another entry decision -- should he enter the cranberry business where growers have received record cranberry prices in each of the last three years? George is tempted to get in early because, unlike the bagel business, rivals will have difficulty entering because there simply isn't much land available upon which cranberries can be grown. Still, George wonders if he can make more profits in the slower growing cranberry industry than he made in the faster growing bagel industry. This case can be used for class discussion, or in a review session, or as a take home exam.
JEL Classification: D4, L8, M2
Suggested Citation: Suggested Citation