Kellogg’s Special K, innovation of cereal

20080765 Ki-hun Kim

20080930 Tae-hun Kim

20080897 Sang-hyeon Koh

2010 fall, IME381 Technology management and strategy, prof. Eui-ho Suh

CONTENTS

1. Background

1.1. Introduction

1.1.1. Introduction of Nongsim-Kellogg (Kellogg in Korea)

1.1.2. Introduction of Special K

1.2. Industry analysis before Special K with P5FM

1.3. Cereal market situation before Special K

1.4. Change of rule of competition

1.5. Motivation of innovation

2. Special K

2.1. Advent and success of Special K

2.2. Core technology of Special K

2.2.1. Inside technology

2.2.2. Outside technology

2.3. Types of innovation

2.3.1. Radical & Incremental innovation

2.3.2. Architectural innovation

2.3.3. Competence-destroying innovation

2.4. Timing of entry of Special K

3. Future expansion of Kellogg

3.1. Other efforts of Kellogg

3.1.1. STAR marketing

3.2.2. CSR marketing

3.2. Analysis of present situation

3.2.1. BCG matrix

3.2.2. Balanced score card

3.3 SWOT analysis and future strategy

1. Background

1.1. Introduction

1.1.1. Introduction of Nongsim-Kellogg (Kellogg in Korea)

Kellogg Company (often referred to as Kellogg or Kellogg's in its corporate logo, or even

more formally as Kellogg's of Battle Creek) is the world's leading producer of cereal and a

leading producer of convenience foods, including cookies, crackers, Toaster pastries, cereal

bars, fruit-flavored snacks, frozen waffles, and vegetarian foods.

In Korea, Nongsim founded Nongsim-Kellogg in 1981 by collaborating with American-

Kellogg. The company introduced the Kellogg’s cereals which suit the Korean’s taste such as

Corn flakes, Crunch nut and Special K. Now, they dominate the half of cereal market

competing with POST and Samyang.

1.1.2. Introduction of Special K

Special K which was introduced in 2008 in Korea is

main commodities of Kellogg. This is a new diet concept

cereal which makes people lose weight while eating the

cereal. While the company made this product, they

increase the percentage of protein and reduce trans-fat

and saturated-fat which lead to gain weight easily with

retaining same quality of taste. Thus, people manage

their figure easily by eating Special K rather than other

food. Now, Special K is the only weight control food in

cereal market because nutrients are well-balanced. In

November, 2010, Special K has the largest market share

(19.5%) of Korean cereal market.

1.2. Industry analysis before Special K with P5FM

At first, we analyze Porter’s 5 force model in the cereal market. There are 5 forces in the

model, which are degree of rivalry among competitors, bargaining power of suppliers,

bargaining power of customers, threat of potential entrants, and threat of substitutes.

First, degree of rivalry among competitors was strong. In market, POST, rival of Kellogg,

was so strong in occupying market share and making cheaper cereal. Globally, Kellogg is the

greatest cereal company, but, in Korea, Nongsim-Kellogg was just one branch of Kellogg and

there was little support from mother company Nongsim. However, POST was heavily

supported by its mother company Dongseo. Because of this difference, POST can produce

cheaper cereal than Kellogg did.

Second, bargaining power of suppliers is weak force. Raw materials of cereal are mainly

corn or rice. Although there were global price rises of corn and rice, cereal making company

can obtain raw materials easily because there were many suppliers of corn and rice. Thus,

cereal companies didn’t suffer from supplying problem.

Third, bargaining power of customers is strong. There were many requests of customers.

Customers wanted cheap, delicious, and nutritious cereal. It’s difficult to meet all of these

requests. Therefore, cereal companies had difficulty in gaining customers. In addition

customers couldn’t change their preference easily. If a customer chooses one company,

others have a difficulty in fascinating this customer. These two factors generate strong

bargaining force of customer.

Fourth, threat of potential entrants was medium. Cereal market was growing. Many people

ate cereal as a breakfast, and this trend was accelerating. Thus there were many possible

entrants. However, market barrier is pretty high. As we said, customers didn’t change their

preference easily and new company may have difficulty in attracting these customers.

Fifth, threat of substitutes was medium. There were many substitutes for cereal such as

sandwich, toast and rice. However, cereal was substitute of breakfast itself. In addition, cereal

has competitive domain in terms of convenience and good nutrition balance. Thus busy and

convenient-following people couldn’t throw out cereal for their breakfast.

In this market situation, if one company has dominant product, the company can enjoy the

market fully. If once customers select dominant product, they couldn’t change their choice

easily and there are few substitutes and potential entrants. However, Kellogg didn’t have

market dominant product, and lost its market share continuously because of the low-price

strategy of POST.

In addition, new well-being products couldn’t reach

the maximum growth until maturity level. They have

good margin rate, but there were so many well-being

cereals that the market share of each product was quite

low. Considering other product life time, for example,

Corn flake, well-being cereal’s life time was short and

company needed to upgrade them or make new

product to maintaining its market share, which is hot

potato.

1.3. Cereal market situation before Special K

The transition of cereal trend changes from tasty cereal to well-being cereal. The typical

major cereal companies in Korea were POST and Kellogg. They dominated over 90% of cereal

market. However, differences between cereal from POST and cereal from Kellogg were not

outstanding. In this situation, Kellogg couldn’t have advantage in terms of price which

critically affects the customer’s purchase due to POST’s low price strategy. Kellogg figured out

the customer’s trend was well-being. However the well-being concept of Korea and that of

foreign country was different. Well-being in foreign country was considering health. However,

well-being in Korea was focusing on not health but well-shaped body. Spreading out this

transformed well-being trend, the desire for diet and great body was growing explosively.

Kellogg understood this syndrome and combined this concept to its product. Eventually, it

achieved a big success.

1.4. Change of rule of competition

From the first cereal appeared, cereal companies tried to diversify flavor of product. That is

because the tastes of customers were very various. Therefore, cereal companies placed

emphasis on flavor to fulfill the taste of customers. Kellogg also developed many products

that have various flavor such as Coco-pops, Checks and Fruit-ring. Kellogg tried to get

competitive advantage by these products.

Early of the 2000s, well-being boom stroke Korean society. Cereal market also followed this

trend. Customers tended to consider not only flavor of products but also ingredient of

products. They wanted to enhance their health by eating products made of brown rice and

five grains. Kellogg made product line of ‘Story of grains’ to enhance its market share.

However, its efforts faced rough going. POST, the biggest competitor of Kellogg, was smaller

than Kellogg in the world market but had more power than Kellogg in Korea. POST’s mother

company was Dongseo food. Dongseo food is large company that held 80% of market share

in coffee mix market. However Nongsim-Kellogg didn’t have support of Nongsim. Therefore,

Kellogg lost a battle for production economies of scale and scope by POST. Finally, Kellogg

lost its market share despite of its effort.

Therefore, Kellogg should make strategy that changes the rule of competition. Latter of the

2000s, concern of beauty were raised in Korean society. People concerned about a diet

without distinction of gender. Kellogg noticed this trend and tried to change rule of

competition of cereal market from well-being to beauty. Kellogg presented innovation

strategy, which is development of Special K, to win in the battle.

1.5. The motivation of innovation

The transition of cereal trend changes as above. Firstly, people thought that cereal is just

substitute of breakfast. This fact made tasty cereal trend because enjoying the cereal.

However, the cereal had to contain the nutrients that make people healthy as the proportion

of cereal in the meal has been increased so the well-being trend emerged. After that time,

People prefer food that makes people gain weight not easily as the diet fever hit Korean

society. Therefore, Kellogg decided to launch Special K that contains less fat and more

protein with abundant nutrients.

There are numerous motivations of innovation. Special K was innovated from change in

perception. Before Special K emerged, people thought diet was related to skipping meals.

However, Special K changed their perception. Customers can go diet with enjoying their

cereal.

2. Special K

2.1. The advent and success of Special K

In this situation, Kellogg launched Special K, and Special K’s sales is sky rocketing. After

one-half years from launching, Special K has 19.5% of market share which is the greatest

market share in cereal market1. Special K did great job, and its sales reached 30% of Kellogg’s

total sales2

.

2.2. Core technology of Special K

2.2.1. Inside technology

There are two kinds of core technology of Special K. With this core technology, Kellogg

Special K can dominate diet cereal market and have great market share on cereal market at

once.

First core technology is inside of the product, and second one is outside of the product.

First technology is new process named Special K process which is additional process of

baking and addition process. The general process map of producing cereal is as follow :

1 from interview of David Mackay, CEO of Kellogg at 2010.11.29 2 from news article of Newsis at 2009.08.18

0 50 100

Kellogg's total

Special KSales(B ￦)

Kellogg's total

Special K

Before producing, cereal companies should check its raw materials. Several things are

tested in this stage. After the test, corn or rice is steamed. After steaming, raw materials are

dried. After drying, cereal is compressed by cereal press. After the compression, cereal is

baked and many nutrients are added to cereal. After these whole process, cereal is packaged

and sold.

Special K’s process is not totally different from general cereal making process. It is

additional process in baking and addition process. When cereal is baked, the Special K

process is started. Generally, high protein cereal has unpleasant taste, because corn has low

protein rate, and the protein rate is heavily depend on additional agent which has unpleasant

taste. Thus cereal companies use more sugar to solve this problem. In this case, new problem

appears. The problem is high calorie caused by added sugar.

To solve this problem, Kellogg made Special K process. Special K process is a kind of trade

secret. It is related to the way baking cereal. Comparing corn and rice, rice has sweeter taste

itself. However, when rice is baked, the true taste of rice is usually destroyed. Special K

process is related to preserve this taste. Thanks to this process, Special K can contain high

protein with less sugar at once.

As you see this graph, Special K has higher protein rate and lower fat rate than others have.

2.2.2. Outside technology

The second core technology is IT based diet planner. Kellogg provided the web based diet

planner with Special K. After registration, customer can check his/her BMI index with easy test.

After BMI check, the web page asks about your diet plan. In this stage, you can make your

0

5

10

15

carbohydrate protein fat

Recommended daily %

Special k choco-ball star-berry cranberry

squash seven-grain brown rice

long term or short term diet objective.

After finishing this simple survey, Kellogg diet planner provides your diet carte and

recommended exercise.

After customers take this plan, diet planner offers body graphs. Customer can check this

plan work well or not with his/her daily condition and body weight.

2.3. Types of innovation

2.3.1. Radical & Incremental innovation

The Special K is both radical innovation and incremental innovation with different point of

view. As original concept of cereal is substitute of meal, cereal pursues balanced nutrition

only. Nobody thought that it was related to diet-concept. When people want to manage their

body shape, they normally think that they have to take supplement not meal. However,

Special K combines these two concepts: meal and supplement. Thus, people are able to

maintain their figure with enjoying their meal. Therefore, the concept of Special K is radical

innovation.

However, the manufacturing process is incremental innovation. The Kellogg figured out the

customer’s needs and developed the technology from old time. Based on our research,

Special K needs only one additional process compared to original cereal manufacturing

process. Therefore, the manufacturing process of Special k is incremental innovation.

2.3.2. Architectural innovation

The overall concept of cereal changes from well-being cereal to diet cereal. The existing

trend which considers the nutrition related to well-being but didn’t focus on the body shape.

However, overall trend changes from well-being to diet-concept because of rapid growth of

Special K. Kellogg made new product not just ample nutrition but high percentage of protein

and low percentage of fat. Therefore, it is architectural innovation.

2.3.3. Competence-destroying innovation

The emergence of Special K’s new concept destroys existing well-being cereal market. This

phenomenon is accelerated because the interest of losing weight gradually increases. Finally,

the diet-cereal will overwhelm well-being cereal market. Therefore, special K is competence-

destroying innovation.

2.4. Timing of entry of Special K

Special K : Early mover

Special K had its advantages and disadvantages when entering the market. Special K

needed to take huge risk due to market uncertainty. However, if Special K succeeded as an

early-mover, Special K would have loyal customers and know-how.

The cereal industry situation can be described as "The Market Leads" situation. The

industry had a fast growing market with slowly evolving technology. Although there is low

entry barrier in market lead situation, cereal market had high entry barrier because once

customers choose one brand, they have a strong tendency to be loyal to the brand.

Therefore, Special K had to focus on rivalry among existing competitor. It is crucial for Special

K to Special K has durable advantages as an early mover in these kinds of situations.

Therefore, Special K needs to have active marketing to hammer the perception that diet-

cereal is Special K home to the customers.

3. Future expansion of Kellogg

3.1. Other efforts of Kellogg

3.1.1. STAR marketing

Marketing is one of the essential strategies to success. Marketing strategy of Kellogg is

very simple. Kellogg obviously sells product, but it doesn’t advertise that product directly.

Kellogg’s main product is nourishing food.

Kellogg holds 40% of market share in world cereal market. However, Kellogg never hurries

to open up new market. It fully considers that customs of food are different in each and

every country. In Mexico, it takes 20 years to take Kellogg’s style breakfast. In India, it also

takes 10 years.

Korea is not unusual case. In Korea, Kellogg started to produce items in 1983. However, the

time that Korean consumers naturally eat the products of Kellogg is 1996. During this time,

Kellogg tried to change traditional customs of breakfast, that eating both of rice and soup is

well breakfast, in Korea. Kellogg also tried to change perception of customers that cereal is

just a kind of snack.

Kellogg focused on enhancing popularity of nourishing products of Kellogg. To do this,

Kellogg emphasizes the importance of breakfast and balanced intake of nutrition by the

science council and air and correspondence education.

STAR program is the summary of indirect marketing strategy. That program is introduced in

Nongsim-Kellogg in 1996. Now that program is the standard of Kellogg’s world marketing

program.

STAR program is ‘Simplify’ the message and ‘Take action’ perception of customers to

‘Accelerate’ consumption’ of Kellogg’s products and ‘Realize’ short term volume and build

long term equity.

The main content of this program is not product but not skipping breakfast, giving brain

nutrition and being health and slender. The mainstream of advertisement is slogan whose

subject is nutrition.

Another axis of Kellogg’s marketing is nutrition education. 80% of products of Kellogg are

consumed by children. Therefore, Kellogg executes instructor-led education and broadcasts

video. Video material is made by Kellogg and EBS. Video is made as animation and doesn’t

imply products of Kellogg. This video is sent to the head office of Kellogg and global team of

Kellogg sent to branch office in other countries as reference.

Kellogg’s public relations officer Gu-myeong Jung says, “The core of Kellogg’s marketing is

that if Kellogg makes equation ‘breakfast = nutrition = health = Kellogg’ by sustainable

education and indirect advertisement, then takings naturally increases.”

3.1.2. CSR marketing

Kellogg also executes CSR marketing, launching Special K. In Korea CSR journal, Myeong-

hoon Yoo defines CSR, “CSR market is the effort to make relation with various stakeholders

by desirable way to receive recognition of worth living and to grow sustainably in society and

meet stakeholders' economic, legal, ethical and charitable expectation spontaneously and

actively.”

That is, company reacts and satisfies the expectation and request of components of society

to get sustainable competitiveness. CSR is very strategic and active management system. In

these backgrounds, CSR marketing is growing as important issue in marketing. Kellogg sets

health up as core theme of CSR. Kellogg offers correct and useful information about

consumer’s fitness enhancement, balance of nutrition and activation of exercise habit for a

long time.

CSR is not factor to disturb maximization of profit of a corporation, but makes a sacrifice of

oneself for growth of a corporation in the long run. CSR has an effect on attitude to brand,

intention to buy and loyalty to brand of customers. CSR has more effect on image of a

corporation than advertisement. Moreover, CSR promotes friendly relation with customers

and helps collecting talented people and the heightening of intention to invest.

3.2. Analysis of present situation

3.2.1. BCG matrix

BCG matrix – star industry (market share and market growth are both high).

Now, Special K has 19.5% cereal market share as mentioned above. The interest of diet will

also gradually increase to manage body shape. Thus, the market share is high in current

situation and the market growth also will increase. Therefore, Special K belongs to star

industry. Although Kellogg could release improved product with another name, the concept

of the product is as same as concept of Special K. This industry needs considerable capital to

earn money sustainably. Therefore, the active investment is needed.

3.2.2. Balanced score card

In order to choose the suitable strategy and measure its progress and success, the

balanced score card can be used very effectively. The following table shows the Balanced

Score Card suited to Kellogg’s strategic intent

Kellogg needs to invest its assets to marketing and innovation & learning parts.

3.3. SWOT analysis and future strategy

Establishing appropriate strategy, we must execute SWOT analysis. SWOT analysis is

powerful tool to analyze internal environment. The components of SWOT analysis are

strength, weakness, opportunity, and threat.

First, Kellogg has two strengths. Kellogg has powerful brand image. Special K has first

mover advantage. Second, it has two weaknesses. Special K is more expensive than product

of rivals. The core technology of Special K is not difficult to copy. Third, Special K has two

opportunities. In Korea, there is trend that interest in diet is very high. Also, cereal market in

Korea grows. Finally, Special K has two threats. There are many entrants of diet cereal. Besides,

success of Special K is highly depending on trend.

By SWOT analysis, we can make 4 kinds of strategies. First one is offensive strategy.

Offensive strategy is combination of strength and opportunity. It is using strengths to

increase profit by using opportunities. Kellogg has powerful brand image and first mover

advantage and there is trend of interest in diet in Korea. Therefore, we conclude that Kellogg

can penetrate other food market as a diet food. The one possible strategy is penetrating

snack market. Snack market is large enough and its main customer is like that of cereal

market. Also, the raw material of snack is similar to that of cereal. That is, Kellogg can easily

penetrate snack market.

Second one is defensive strategy. Defensive strategy is combination of weakness and

opportunity. It is overcoming weaknesses by using opportunities. Kellogg has weakness that

the price of product is more expensive than rival. To overcome this weakness, we use the

interest in diet. That is because interest in diet is spreading, people tend to buy products if

the products are good at diet although the products are very expensive. Therefore, we

conclude if Kellogg make brand image that Special K is specialized product for diet then it

overcome expensive price. Also, collaboration with milk companies might effective. Milk is

necessary to eat cereal. Therefore collaboration with milk companies can make win-win result.

Third one is risk aversion strategy. Risk aversion strategy is combination of strength and

threat. It is minimizing threats by using strengths. Kellogg is the first mover in diet cereal

market. It has much know-how to manage customers. By managing customers with diet

programs, Kellogg might maintain existing customers. Therefore we conclude that by

customer management program, Kellogg can maintain existing customers although new

entries of diet cereal market are many.

Last one is turn-around strategy. Turn-around strategy is combination of weakness and

threat. It is protecting the effect of threats by improving weaknesses. Diet cereal market is

highly affected by trend. If trend changes, the diet cereal market may collapse in a day. To

prevent this, Kellogg should execute powerful marketing strategies that fix trend of preferring

slender body. Maintaining trend of preferring slim body guarantees success of diet cereal

such as Special K.