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Using Limited Information to Support the Decision to Launch a New Product in the Fruit
Juice Market: A Teaching Case Study
Abstract
Fresh Juice Incorporated (FJI) is in the process of determining whether it should launch a new
fruit juice, Genetically Enhanced (GE) Juice. GE Juice meets consumers’ demands for a tasty,
nutritious product and it would be the first new juice product in the last fifteen years. Before FJI
decides to launch GE Juice, the uncertainty surrounding market size, market share, and price of
GE Juice must be analyzed. Finally, if FJI decides to launch GE Juice, then they must decide if
they will bottle the juice themselves or outsource this process. This case teaches students how to
discuss the strategic implications of launching a new product and develop a net present value and
financial feasibility simulation model given limited information.
Keywords: finance, net present value, product life cycle, simulation, strategic management
Brian C. Briggeman, Assistant Professor, Oklahoma State University
Allan W. Gray, Associate Professor, Purdue University
Joshua D. Detre, Assistant Professor, Louisiana State University
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Since 1964, Fresh Juice Incorporated (FJI)1 has been a leader in the finished fruit juice industry.
Demand for fruit juice has remained steady over the last ten years, but competitors continue to
place pressure on FJI’s leader status. The intense competition for shelf space and the continuing
fragmentation of consumers’ tastes and preferences have kept competitors battling each other on
price, advertising, and packaging just to maintain their market share. Since this industry has not
seen an innovative product in fifteen years, FJI’s product development team feels the market is
ready for a new fruit juice product.
Tom Samson, Executive Vice President of Marketing for FJI, believes his product
development team has created a revolutionary product in Genetically Enhanced (GE) Juice. GE
Juice may be the ticket to give FJI the new competitive advantage it needs to maintain its market
leader status. The fruit used to make GE juice is genetically modified to produce increased levels
of amino acids and other essential nutrients while maintaining a sweet taste with half of the sugar
in other brands. In addition to being a healthy juice product, GE Juice is quick and convenient
for those consumers who have a busy lifestyle. Therefore, GE Juice meets consumer demands by
providing a flavorful, fast, and nutritious meal replacement.
FJI has been producing and distributing competitively priced, high quality fruit juices to
all leading national grocery chains for over thirty years. The ever-changing taste preferences of
consumers have forced FJI to reassess the manner by which it makes operational decisions on
new product launches. The launching of GE Juice presents a challenge to FJI because it is the
first launch of a truly innovative product in the fruit juice market in fifteen years.
Tom understands that there are many uncertainties surrounding the introduction of a new
product to the market. Because of these uncertainties, Tom must answer a myriad of questions.
Can this revolutionary new product earn enough profit to pay back the large investment
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necessary to start production of GE Juice? What happens to the probability of GE Juice being
profitable if the market does not grow as fast as projected? What will happen if competitors enter
the market and take market share and/or pressure prices? These questions are interrelated and
they each affect the likelihood of the investment returning a positive net present value (NPV).
With all of this uncertainty, Tom must decide if FJI should proceed with the rollout of the new
product. If they decide to launch GE Juice, then FJI must decide if they will bottle the GE Juice
in-house or outsource the bottling of GE Juice to a co-packing company. One thing is for sure, if
the decision is not made quickly, then others will surely beat FJI to the market.
Tom has assembled your research team to help analyze the decision of introducing the
new GE Juice to the market. With the amount of uncertainty surrounding the decision, your team
feels that it is necessary to conduct a qualitative and quantitative analysis of the likelihood of GE
Juice being a profitable product for FJI. Before discussing GE Juice, Tom suggests that your
team analyze FJI’s data of an innovative and similar product to GE Juice: ENER Juice.
Historical Market Analysis of a Similar Product: ENER Juice
In 1985, FJI introduced a new product called ENER Juice. ENER Juice was a formulated fruit
juice product that produced increased energy levels relative to regular fruit juice. This new
product turned out to be a profitable venture for FJI. Therefore, analyzing ENER Juice’s product
life cycle, price, and competitor entry data will provide valuable strategic insights for the
discussion and analysis of GE Juice.
Product Life Cycle
The strategy division of FJI has compiled data on ENER Juice and the five primary competitors’
actions during its product life cycle from 1985 through 1999. Table 1 lists the total cases
marketed annually for all juices in the energy juice market, FJI’s sales of ENER Juice cases, and
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the price per case of ENER Juice. FJI’s sales of ENER Juice are a close depiction of the product
life cycle curve that is shown in figure 1.
The product life cycle or product adoption curve consists of four stages: introduction,
growth, mature, and decline (Besanko, et al). During the introduction stage, a firm builds market
awareness and establishes a market for the new product. The firm will try to increase market
share and enjoy higher total demand for its product in the growth stage. At the top of the classic
product adoption curve is the mature stage. If competitors have not entered already, they have a
higher likelihood of entering the market at this stage. This creates a situation where incumbent
firms will try to defend their market share and maintain profit levels. Finally, demand for the
product tapers off during the decline stage. When a product enters the decline stage, a firm might
observe a severe drop in the profitability of the product line because of competitors saturating the
market with similar products and/or a decrease in overall demand. So, how did competitors affect
FJI and ENER Juice? A discussion of FJI’s competitors will help answer this question.
Competitor Analysis
According to table 1, FJI was the only firm in the market between 1985 and 1987. Competitors
could not enter the market initially because of the difficulty in emulating the formula for ENER
Juice. Over the product life cycle of ENER Juice, competitors developed similar products and
entered the market. As more competitors entered into the market, FJI lost market share until FJI
reached its long run market share of 33% in 1998.
Table 2 shows the relative market power index and date of entry into the energy juice
market for each competitor. The strategy division’s estimate of market power follows Powell in
determining the market power for competitors relative to FJI.
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The relative market power index for FJI is equal to one. Therefore, FJI is the market
leader since it has the highest relative market power index2. The first competing firm is a
relatively small company with a market power index of 0.27. This firm was the first to develop
an alternative ENER Juice product and entered the market in 1988. The next firm to develop a
competing energy juice product had the smallest relative market power index, 0.25. FJI’s largest
competitor, firm three, entered the market six years after the launch of ENER Juice. All firms
were in the energy juice market by 1996. It is interesting to note that a majority of the firms did
not enter the energy juice market until the end of the product life cycle of ENER Juice. This
caused a substantial decrease in ENER Juice’s total sales and market share at the end of its life
cycle. However, FJI amassed substantial revenues because ENER Juice was the first product in
the energy juice market.
Now that the ENER Juice classic product adoption curve and competitor entry has been
discussed, how does it relate to FJI’s decision to launch GE Juice? Before your team can answer
this question, more information is necessary on the market of GE Juice.
Market Analysis of GE Juice
A consulting group was hired four months ago to conduct an analysis of the likely market for GE
Juice. The group conducted pilot tests of the product in five major metropolitan areas in the
United States. One of the critical findings of the study was that consumers were not discouraged
by the notion of the juice being genetically modified. These results are further supported by
research completed in the area of willingness-to-pay for genetically modified foods (Lusk).
One of the primary concerns with GE Juice is whether consumers would want to have a
meal replacement drink that tasted like fruit juice. The study found that 75 percent of those who
sampled the juice found the taste of GE Juice to be equal if not better than their preferred brand
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of currently available fruit juices. The study also found that 21 percent would likely choose the
fruit juice over other meal replacement drinks. Consumers felt the product was truly unique and
had piqued their interest not as a meal replacement, but as a healthy alternative to currently
available fruit juices. Finally, GE Juice and ENER Juice had similar acceptance rates with
consumers in pilot tests. Therefore, ENER Juice can serve as a proxy of the market acceptance of
GE Juice relative to all fruit juice consumers.
The total fruit juice market is about 10,000,000 cases annually. There are six primary
players in the marketplace, including FJI, and they have not introduced a new product to the
market in several years. Consumers have continued to purchase approximately the same amount
of fruit juice for the past several years. Therefore, the fruit juice market is stagnant with very
little growth in total demand for all fruit juices.
The consultants and Tom differ in their expectations of total market potential for GE
juice. Tom believes there could be a large market for the product but perhaps not as strong as the
consultants’ estimate of 2,750,000 cases. After discussions with Tom, the belief is that there is a
90% chance the market for GE Juice is between 2,250,000 and 2,750,000 cases annually. The
most likely scenario for annual market demand of GE Juice is 2,500,000 cases and the interval
recognizes the uncertainty in this estimate of market size. With the potential market for GE Juice
established, what portion of this market will go to FJI.
GE Juice Competitors
The same competitors in the energy juice market or ENER Juice market are expected to
introduce products that will compete against FJI’s GE Juice. Therefore, the relative market
power indices listed in table 2 will apply to the analysis of GE Juice. An important piece of
information is missing for FJI’s competitors in this new market; when will these competing firms
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introduce an alternative product to GE Juice? Table 3 lists the probability of each competing firm
entering the GE Juice market as determined by FJI’s strategy division.
The strategy division is 100% confident that firm three, FJI’s largest competitor, will
introduce an alternative GE Juice product in year one. In addition, firm five has an 80% chance
of entering in year one and will definitely be in the market by year two. The other three firms
will not enter the market in year one and each will have varying probabilities of entry each
subsequent year. By year five, the strategy division expects all firms, except firm two, to have
launched alternative GE Juice products into the marketplace. Since these competing firms did not
exit the ENER Juice market once they entered, the strategy division assumes that once a
competitor enters the GE Juice market they do not exit. Based on all of this information and the
fact that two of FJI’s biggest competitors will more than likely enter the GE Juice market in the
first year, Tom states that FJI’s expected initial market share in the GE Juice market would be
49%.
The discussion so far has covered the market acceptance of ENER Juice, FJI’s
competitors, and the initial market analysis of GE Juice. In addition to a strategic analysis of
launching GE Juice, Tom wants a discussion on the likelihood of GE Juice being a profitable
venture for FJI. Therefore, the revenues and cost or profitability of GE Juice must be discussed.
Profitability of GE Juice
The market analysis sections have provided a foundation to determine the market size of GE
Juice and FJI’s market share. To determine profitability of GE Juice for FJI, estimated prices and
costs are necessary.
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GE Juice Price Discovery
Your team knows that prices for a new product will have a significant impact on its profitability.
Prices in this marketplace have traditionally been determined by the demand for the product and
the relative strengths of competitors in the market.3 To determine the impacts that demand and
supply will have on the price for GE Juice, your team believes that the ENER Juice information
in table 1 will serve as a good proxy. Tom states that the initial price for GE Juice will be $5.00
per case. Your team knows that if demand and supply elasticities can be estimated from the
ENER Juice data, then estimating the price of GE Juice should be no problem.
Cost Analysis for Alternative Bottling Operations
FJI’s operations department has finished its test runs of the GE Juice formulation suggested by
the product development team. To start production of GE Juice, FJI must make a substantial
investment. Given the unique qualities of the genetically modified fruit, a special juice extractor
must be purchased to ensure the integrity of the GE Juice. This special juice extractor costs
$150,000.4 In addition to this cost, FJI must either build a new in-house bottling and labeling
line or outsource this process to another firm (co-packing option). Establishing an in-house
bottling and labeling line will cost FJI $1,225,000.
The operations manager has estimated that the variable cost of producing and bottling the
juice in-house follows a polynomial average variable cost (AVC) curve. The following equation
is the AVC for FJI:
(1)
AVCq  3.75  0.007q  0.000006q 2
where q represents 1,000 cases of GE Juice produced. In addition, this equation includes the
purchase of raw products. Fixed annual overhead costs for in-house bottling is $300,000.
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The operations manager also researched the costs of out-sourcing the finished GE Juice
in bulk tanks to a co-packer to be bottled. Using this alternative would reduce annual fixed costs
for FJI to $7,500. For the co-packing option, variable costs are a constant $3.05 per case.
Advertising Costs
Tom has indicated that a substantial marketing campaign is necessary to raise awareness of GE
Juice. For the first year, $295,000 will be allocated for in-store product displays and advertising
in local media. After the first year, marketing activities will continue to run over $200,000 until
year 6 when FJI is expected to reach its long run market share and marketing costs would decline
substantially. Here are the specific advertising costs: $290,000 for year 2, $215,000 for year 3,
$200,000 for years 4 and 5, $165,000 for year 6, $40,000 for year 7, $20,000 for year 8, $15,000
for year 9, and $10,000 for year 10. Of course, the return on the investment would have to cover
the marketing costs as well as operational costs for the investment to be profitable.
Investment and Financial Considerations
Discussions with the finance department yielded several important pieces of information
concerning this investment. First, the depreciable life of any new equipment purchased is ten
years. Thus, 10 percent of the initial investment value will be remaining at the end of ten years.
In addition, new investments for FJI must cover the opportunity cost of capital, which is 15
percent. If the GE Juice investment does not cover this opportunity cost of capital, then Tom will
not consider launching this new product. The firm will finance 50 percent of the new investment
over its ten-year life at an annual interest rate of 9 percent.
The Final Report
With all of this information, your team is ready to discuss the strategic implications of launching
GE Juice and to develop a quantitative model to determine the profitability of GE Juice. To
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complete the strategic assessment of GE Juice, your team should relate the market analysis of
ENER Juice to the market and profitability analysis of GE Juice through the product life cycle
presented in figure 1. Your team should take the ENER Juice sales data in table 1 and plot the
data on a graph. This graph is the expected GE Juice product life cycle since Tom has indicated
he expects GE Juice sales to emulate ENER Juice sales. Next, identify the four product life cycle
stages discussed above on the expected GE Juice product life cycle. Finally, discuss how FJI
should price GE Juice and the threat of competitor entry as it relates to the expected GE Juice
product life cycle.
To complete the quantitative model, your team needs to identify key output and input
variables, design output tables, formulate equations for calculating the final output variables, and
identify the stochastic variables. Figure 2 outlines the key areas for developing the quantitative
model. Tom has stated that he wants an estimate of the project’s NPV based on a ten-year
analysis for both bottling options. In figure 2, a circle indicates those variables that have
uncertain outcomes. Since FJI has a limited amount of information, the distributions your team
selects should account for this and any correlation between these random variables. Given the
uncertainty for each of the scenarios, your team’s recommendation should also include an overall
risk assessment of the project. Furthermore, the model should be able to calculate the likelihood
of each bottling option returning a positive NPV. In addition, the model should consider the
financial feasibility of this investment. In other words, will the profits generated be enough to
repay the principal and interest of the investment loan?5
With this task set before your team, you know that it is time to get started. FJI’s principal
competition is ready to launch its version of GE Juice. Tom needs a well-constructed model and
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report soon. This will allow him to make an informed decision and ensure the viability of FJI
going into the future.
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Acknowledgements
The authors wish to thank Joan Fulton and two anonymous reviewers for their insightful
comments on earlier drafts of this paper.
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Footnotes
1. The case is based on an actual company; however, the name of the company and persons
involved has been changed to protect their identity.
2. Powell states that the firm in question, here FJI, relative market power index is equal to 1. A
competitor’s relative market power index can be greater than one. Therefore, indicating that the
firm in question is not the market leader. However, this is not the case for FJI.
3. Assume that all firms in the marketplace supply enough products to meet market demand.
4. The extractor equipment costs are incurred for both the in-house and co-packing bottling
options.
5. The teaching note that accompanies this case study, which is available from the authors,
provides two sets of assignments. The quantitative assignments give a detailed explanation on
how to construct a Microsoft Excel based spreadsheet model that assesses the financial impact of
launching GE Juice. If the objective of this case study is not the construction of a quantitative
model, a quantitatively less rigorous assignment is provided in the teaching note, which is
specifically designed for undergraduate agribusiness courses. This assignment allows
students/team members to discuss the probability of GE Juice being profitable from a completed
quantitative model and the strategic implications of launching a new product. Finally, Winston
(1999) and Winston (2001) are excellent resources on developing financial simulation models.
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References
Besanko, D., D. Dranove, M. Shanley, and S. Schaefer. Economics of Strategy, 3rd ed. Hoboken,
New Jersey: John Wiley & Sons, Inc., 2004.
Lusk, J. L. "Effects of Cheap Talk on Consumer Willingness-to-Pay for Golden Rice." Amer. J.
Agr. Econ. 85 (2003): 840-856.
Powell, S.G. “The Teacher’s Forum: From Intelligent Consumer to Active Modeler—Two
MBA Success Stories.” Interfaces 27 (1997): 88-98.
Winston, W. Financial Models Using Simulation and Optimization II. Newfield, New York:
Palisade Corporation, 2001.
______. Financial Models Using Simulation and Optimization I. Newfield, New York: Palisade
Corporation, 1999.
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Table 1. Product life cycle and price information for ENER Juice
Total Annual Cases Sold in
FJI's1 Sales of
Price per Case of
Year
the Energy Juice Market
ENER Juice Cases
ENER Juice
1985
429,885
429,885
$2.88
1986
719,087
719,087
$3.30
1987
970,380
970,380
$3.62
1988
1,049,537
1,011,850
$2.84
1989
1,600,187
1,451,477
$2.73
1990
1,788,933
1,479,509
$2.49
1991
1,716,579
1,264,333
$1.55
1992
1,585,359
1,069,566
$1.58
1993
1,888,628
1,193,088
$1.46
1994
1,689,309
892,344
$1.49
1995
1,654,920
846,668
$1.64
1996
998,333
391,218
$1.17
1997
1,163,044
447,395
$1.31
1998
904,736
297,397
$1.37
1999
685,750
226,397
$1.49
Note: 1) FJI stands for Fresh Juice Incorporate.
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Table 2. Relative market power of competing firms and
year of entry into the ENER Juice market
Competing Firm
Relative Market Power Year of Entry
1
0.27
1988
2
0.25
1990
3
0.60
1991
4
0.36
1993
5
0.55
1996
Note: Once a competing firm entered the market they did not exit.
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Table 3. Probability of a competing firm entering the GE Juice market
Probability of Competitor Entry Assigned to Each Year
Competing Firm
1
2
3
4
5
6
7
8
9
1
0%
30% 60% 90% 100% 100% 100% 100% 100%
2
0%
10% 20% 30% 40% 50% 60% 70% 80%
3
100% 100% 100% 100% 100% 100% 100% 100% 100%
4
0%
25% 55% 75% 100% 100% 100% 100% 100%
5
80% 100% 100% 100% 100% 100% 100% 100% 100%
10
100%
90%
100%
100%
100%
Time
Source: Besanko, et al. (2004)
Figure 1. Product life cycle
Decline
Maturity
Growth
Introduction
Product Sales
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Initial Expected
Market Share of
GE Juice
Historical ENER
Juice Market Size
Expected Market
Size of GE Juice
Long Term
Market Share of
GE Juice
Probability of
Competitor Entry into
GE Juice Market
Estimated Elasticity
of Demand for
ENER Juice
FJI's GE Juice Market Share
GE Juice Market Size
Estimated Elasticity of
Supply for ENER Juice
GE Juice Demand
GE Juice Price
GE Juice Cases Sold
In-House
Bottling or
Co-Packing
Variable Costs
Fixed Costs
Investment
Costs
Total Revenues
Total Costs
Net Present Value
and
Financial Feasibility
Figure 2. Layout for developing the quantitative model to assess the profitability of GE Juice for Fresh Juice Incorporated
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