NO CASE STUDY IS PROVIDED Discuss Porter’s Five Forces model with reference to w
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Question
NO CASE STUDY IS PROVIDED
Discuss Porter’s Five Forces model with reference to what you know about the restaurant business in New York City . List out each "force" separately and discuss how they play out in this industry. Who has the "power", and why? Assess the impact of macro-environmental factors (general environmental trends in society) as it relates to big businesses (Walmart, Home Depot, McDonald’s etc…) replacing independent small businesses in the U.S. What are the causes and effects of such trends. Separately, read the mini case study at the end of Chapter 3 (page 67) entitled “The Multi-Industry Battle for Digital Living Room Entertainment”. Answer the 1 of the 4 questions posed. (Please make sure to post which question is being answered.) Note: Technology, and its adoption (or lack thereof) moves at a very rapid pace. Since the date of the textbook’s publication, Google TV has not quite lived up to the hype. You may wish substitute any “Smart TV” (Samsung, SONY, LG, etc …) in its place as you read and answer the questions posed.
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Explanation / Answer
Porter’s five forces model is an analysis tool that uses five forces to determine the profitability of an restaurant business in the industry and shape a firm’s competitive strategy. It is a framework that classifies and analyzes the most important forces affecting the intensity of competition in a restaurant industry and its profitability level. Five forces model was created by Michael Porter which is used to determine how five key competitive forces are affecting an industry. The five forces identified are:
1. Threat of new entrants
2. Industry rivalry
3. Bargaining power of supplier
4. Bargaining power of buyer
5. Threat of substitutes
These forces determine a restaurant industry structure and the level of competition. An industry with low barriers to enter, having few buyers and suppliers but many substitute products and competitors will be seen as very competitive and thus, not so attractive due to its low profitability.
Threat of new entrants: This force determines how easy it is to enter a restaurant business industry. If that industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more industries compete for the same market share, profits start to fall. It is essential for existing restaurant to create high barriers to enter to deter new entrants. Threat of new entrants is high when:
– Low amount of capital is required to enter into a particular market;
– Existing restaurant business can do little to retaliate;
– Existing business does not possess patents, trademarks or do not have established brand reputation;
– There is no government regulation in the particular business;
– Customer switching costs are low
– There is low customer loyalty;
– Economies of scale can be easily achieved.
Bargaining power of suppliers: Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying business profits because it has to pay more for materials. Suppliers have strong bargaining power when:
– There are few suppliers but many buyers;
– Suppliers are large and threaten to forward integrate;
– Few substitute raw materials exist;
– Suppliers hold scarce resources;
– Cost of switching raw materials is especially high.
Bargaining power of buyers: Buyers have the power to demand lower price or higher product quality from restaurant business industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when:
– Buying in large quantities or control many access points to the final customer;
– Only few buyers exist;
– Switching costs to other supplier are low;
– They threaten to backward integrate;
– There are many substitutes;
– Buyers are price sensitive.
Threat of substitutes: This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.
Rivalry among existing competitors: This force is the major determinant on how competitive and profitable a restaurant business industry is. In competitive industry, business has to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when:
– There are many competitors;
– Exit barriers are high;
– Industry of growth is slow or negative;
– Products are not differentiated and can be easily substituted;
– Competitors are of equal size;
– Low customer loyalty.
Power is associated with buyer and supplier. They have strong bargaining power which is performed collectively. Buyers have the power to lower the demand at lower price when there is high bargaining power. Low price result in low revenue. But simultaneously raises production cost. On the other hand seller has the power to sell at high priced to their buyers. It directly affects the firm profitability position.
Macro environmental factor is a study in aggregates for big businesses. It maintains equilibrium in the industry .It gives a strong impetus to the growth and development in environment. Macro environmental factor deals with external factor of the environment which affects various decision making, helps in building strategies and accomplishment of projects. It includes government intervention, maintain policies, and also maintain demand and supply chain. Macro environment also depend upon beliefs, values. It reduces government intervention(providing duty free products, giving subsidies, less documentation and compliances), tax policies, decreases cost to increase profit, increases economies of scale and creates awareness among the society.
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