Question 2

Michael E. Porter proposes that the intensity of competition is the most critical element in the
firms environment. He then suggests five basic competitive factors that should be monitored.
What are those five factors? Show how they apply to a particular organization of your choice.
Table of Contents
1 The Five Competitive Forces .................................................................................................. 2
1.1 Bargaining Power of Suppliers ........................................................................................ 2
1.2 Bargaining Power of Customers ...................................................................................... 2
1.3 Threat of New Entrants .................................................................................................... 2
1.4 Threat of Substitutes......................................................................................................... 3
1.5 Competitive Rivalry between Existing Players ................................................................ 3
2 How They Apply To a Particular Organization of My Choice ............................................... 3
2.1 Threat of New Entrants .................................................................................................... 3
2.2 Bargaining Power of Buyers ............................................................................................ 4
2.3 Bargaining Power of Suppliers ........................................................................................ 4
2.4 Threat of Substitute Products and Services ...................................................................... 4
2.5 Intensity of Rivalry among Competitors in an Industry ................................................... 5
3 References ............................................................................................................................... 5



1 The Five Competitive Forces
The Five Competitive Forces are typically described as follows:
1.1 Bargaining Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or
services.
Any organization needs raw materials and this creates buyerseller relationships between the
market and the suppliers. The distribution of power within such relationships varies, but if it lies
with the supplier then they can use this influence to dictate prices and availability. You need to
assess the balance of power within your own market as part of using Porters model.
Suppliers may work together to increase bargaining power, although this is usually against the
law in developed countries where legal redress is available if such actions are discovered.
1.2 Bargaining Power of Customers
Similarly, the bargaining power of customers determines how much customers can impose
pressure on margins and volumes.
Your organization should also assess the extent to which its customers or buyers have bargaining
power. In a situation where customers have a strong position they can bring considerable
pressure to the market and demand improved quality and/or lower prices.
1.3 Threat of New Entrants
The competition in an industry will be the higher; the easier it is for other companies to enter this
industry. In such a situation, new entrants could change major determinants of the market
environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent
pressure for reaction and adjustment for existing players in this industry.
The number of potential new entrants into a market varies considerably and is a key factor you
need to quantify. Sectors that require high levels of investment and expertise are much harder for
new organizations to break into and challenge the existing providers, which protects the profit
levels of the existing players.
If your market is one that has a common technology base, little brand awareness or loyalty, and
is one in which the distribution channels are accessible to all sizes of organization, then you will
usually find it is easy for new rivals to enter your market.
1.4 Threat of Substitutes
A threat from substitutes exists if there are alternative products with lower prices of better
performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for existing players.
This category also relates to complementary products.
The threat of substitution affects the competitive environment for the organizations in that
industry and influences their ability to achieve profitability because consumers can choose to
purchase the substitute instead of the industrys product.
1.5 Competitive Rivalry between Existing Players
This force describes the intensity of competition between existing players (companies) in an
industry. High competitive pressure results in pressure on prices, margins, and also on
profitability for every single company in the industry.
One of the keys to success for organizations is their ability to understand their competitors
actions and marketing strategies. The degree to which rivalry exists among competitors varies
between industries and the market sectors within them.
Regardless of the number of key competitors your organization faces it is vital for its longevity
that you understand the differences between your rivals. This knowledge is essential when
developing your strategy and it cannot be achieved by simply using two indices, e.g. size of
organization and market share, or sales revenue and market value.
2 How They Apply To a Particular Organization of My Choice
2.1 Threat of New Entrants
The threat of new entrants is relatively low. Although it is not too expensive to start up a fast
food restaurant, it is difficult to compete with established leaders in the industry such as
McDonalds, Burger King, and Wendys. With their standardized products and services at low
prices, combined with a very strong brand, it is extremely difficult for a new entrant to compete
directly with these existing businesses. The risk of new entrants is always there and there are
local fast food places that are created every year. However, it will take a significant amount of
capital investment and many years of operations to build up a recognizable name and be able to
compete with the well-known brands.
2.2 Bargaining Power of Buyers
The bargaining power of buyers is low in the industry as well. McDonalds, Burger King,
Wendys, among others, are highly competitive with their product pricing as it stands. Price
floors are already being experimented with through dollar menus at McDonalds and Burger
King, and 99 menu at Wendys, at which some of these companies actually operate at a loss for
each sale from this value menu. Therefore, with low prices already established in the industry,
the bargaining power of buyers will be low because fast food restaurants already offer selections
at various price points that cater to all budgets.
2.3 Bargaining Power of Suppliers
The bargaining power of suppliers is moderate. Based on the good relationship that McDonalds
has with suppliers, the bargaining power is fairly stable currently. The reliance that McDonalds
has on suppliers is equal to the reliance suppliers have on McDonalds. On one hand,
McDonalds has a good supply chain of quality materials at fair prices. On the other hand,
suppliers are surely content with supplying to a large consuming company such as McDonalds.
However, there are many substitute suppliers out there that can replace current suppliers (i.e.,
Pepsi could replace Coca Cola) without a significant drop in quality, should there be a rift in the
buyer-supplier relationship.
2.4 Threat of Substitute Products and Services
The threat of substitute products and services is high. Since McDonalds can be categorized as a
fast food service franchise, we have to take into account other fast food restaurants products and
classify them as substitute products. Restaurants with similar hamburger substitutes include
nationwide chains Burger King, Wendys, White Castle, and Sonic Drive-In, to name a few.
Regional chains with similar hamburger substitutes include the West Coasts In-N-Out Burger,
the Midwests Culvers, and the East Coasts Five Guys. Diverse fast food substitutes include
fried chicken from Kentucky Fried Chicken, sandwiches and subs from Subway, and fish from
Long John Silvers. As we can see, substantial substitute products exist, whether they are similar
in nature or completely different, yet still classifiable as fast food.
2.5 Intensity of Rivalry among Competitors in an Industry
The intensity of rivalry among competitors in the fast food industry is at a high level. Over the
years, fast food restaurants have done more to compete not only with similar quick service
institutions, but with high end food and beverage companies as well. For example, McDonalds
introduced premium customizable coffee beverages recently to compete with higher-end
Starbucks Coffee. Along with Burger King and many other fast food chains, they added a
breakfast menu in the 1970s, to compete with the breakfast chains every morning. There are
multiple reports on the number of fast food restaurants in the US, ranging from 85,000
300,000. With so many fast food establishments around, as well as competition with non-fast
food restaurants, it is logical that rivalry is high and intense in the industry.
3 References
1. Businessballs.com, (2014). michael porter's five forces competition theory model.
[online] Available at: http://www.businessballs.com/portersfiveforcesofcompetition.htm
[Accessed 8 Sep. 2014].
2. Pereira, A. (2013). Porters five forces. 1st ed. [S.l.]: Grin Verlag.
3. RAPIDBI, (2012). Porter's Five Forces a Competitor Analysis tool - Michael Porter |
RAPIDBI. [online] Available at: http://rapidbi.com/porterfiveforces/ [Accessed 8 Sep.
2014].
4. Swaan Arons, H. and Waalewijn, P. (1999). A knowledge base representing Porter's five
forces model. 1st ed. Rotterdam: RIBES, Rotterdam Institute for Business Economic
Studies.
5. Uiccreativesolutions.wikispaces.com, (2014). UICCreativeSolutions - McDonald's Five
Forces. [online] Available at:
http://uiccreativesolutions.wikispaces.com/McDonald's+Five+Forces [Accessed 8 Sep.
2014].