Porters Five Forces Analysis of Restaurant Industry - Essay Example

Industry Analysis Paper (on Restaurant Business) Table of Contents Industry Analysis Paper (on Restaurant Business Table of Contents 2 Introduction 3 Industry Analysis of Restaurant Industry 4 Porter’s Five Forces Analysis of Restaurant Industry 5 Bargaining Power of Suppliers 5 Bargaining Power of Buyers 6 Threat of New Entrants 7 Rivalry among Competitors 8 Threat of Substitutes 9 Conclusion 10 Works Cited 11 Bibliography 13 Introduction The restaurant business is one of the vibrant, strong and emerging industries in New York. The restaurant industry contributes large part to the travelling, hospitality and entertainment divisions and also to the economy of New York (National Restaurant Association, “New York Restaurant Industry at a Glance”). In the year 2000, the restaurant business contributed revenue of almost 8 billion USD and the figure had increased to 13 billion USD by 2010. Restaurants are the contributing forces of the financial structure of the city’s economy and it provides employments and career opportunities for thousands of people (Urban Justice Center, “Behind the Kitchen Door: Pervasive Inequality in New York City’s Thriving Restaurant Industry”). Industry Analysis of Restaurant Industry New York is regarded as the ‘restaurant capital of the world’. Restaurants are located in almost everywhere in the New York City. There were almost 15,000 food service places as of the year 2002 and the number is growing extensively. According to industry report, in 2002, among top 100 highest revenue earning restaurants in the United States, 24 were situated in New York City (Urban Justice Center, “Behind the Kitchen Door: Pervasive Inequality in New York City’s Thriving Restaurant Industry”). The food service industry in New York is divided into four different categories which are: Full service restaurants Limited service restaurants (only eating) Special food service restaurants and Drinking places (Urban Justice Center, “Behind the Kitchen Door: Pervasive Inequality in New York City’s Thriving Restaurant Industry”). In the year 2008, New York had almost 13,249 restaurants which signify 25% increase compared to the year 2000, in which there were only 10,363 restaurants. The significant growth of restaurants in New York was characterized by Manhattan City. The majority of restaurants in New York are based on Manhattan City. Yet, Queens and Brooklyn had also experienced tremendous growths in restaurant business since 2000. The percentage of increases in restaurants in Queens and Brooklyn were 34 and 37 respectively from 2000–2008. The following table describes the concentration of restaurants throughout New York City from 2000–2008: Area 2000 2008 Change Bronx 835 1,050 26% Brooklyn 1,872 2,558 37% Manhattan 5,374 6,241 16% Queens 2,134 2,854 34% Staten Island 421 543 29% New York City 10,363 13,249 25% Source: (Center for Urban Research, “Employment in New York City Restaurants”). In addition to food services, the restaurants also provide alcoholic drinks, nontheatrical entertainments, fast food services, snack bars, nonalcoholic brews, canteens and buffets (Center for Urban Research, “Employment in New York City Restaurants”). Porter’s Five Forces Analysis of Restaurant Industry The economic structure of any industry determines the success or failure of any business. The Porter’s Five Forces model is a basis for examining industry and developing business strategy accordingly. Porter’s model is based on the forces of micro-environment which impact on organizations’ businesses. According to Michael Porter, there are five micro-environmental forces which are extensively used for evaluating industry structure: Bargaining Power of Suppliers Every business needs certain inputs in the form of employees, raw materials and services. The cost of input has significant influence on the success of restaurant. The bargaining power of suppliers is determined by the extent of their influence over the terms and conditions of business deal. Suppliers will always try to sell raw materials at high price and if the bargaining power is weak then an organization can convey a satisfactory business deal for profitability of business. Conversely, if the influence of supplier is strong, an organization is bound to pay higher cost for raw materials or low quality products with certain rates (Ehmke & Et. Al., “Industry Analysis: The Five Forces”). In the restaurant industry, the bargaining power of supplier is less. Majority of restaurants in New York attain their raw materials for food products from several farmers and packaging organizations. Thus, for new restaurants there are several alternatives to choose appropriate suppliers which can regulate the price at which organization will purchase products. Therefore, the force of suppliers is weak in restaurant industry of New York (Ohio Dominican University, “Application of Porter’s Five Forces Model Paper”). Bargaining Power of Buyers The bargaining power of buyers defines the impact of customers over the cost-effectiveness of business. The force of buyer is strong when there are many small organizations in the same business and customers purchase large amount of products. If the purchasing ability of buyer is high then organizations’ capability to secure high percentage of value created will reduce and it can lead to lower profit. A buyer will always try to purchase products at high prices and if there are only few large buyers in any industry they can have significant influence on the prices by putting organization in a weak situation. Conversely, if there are numerous small purchasers then organizations will have better control on purchase as each buyer comprises of small percentage of the total sales (Ehmke & Et. Al., “Industry Analysis: The Five Forces”). In the restaurant business industry, the bargaining power of buyer is moderate. The customers of restaurant business request high quality foods and exclusive dining experiences with sensible costs. Though restaurants can increase the cost of their products, it should not surpass more than the price of competitors or to that extent which can interrupt the anticipations of customers towards the restaurant. If the prices of food products become expensive, then customers will certainly shift to other restaurants. For this reason, restaurants need to maintain the prices of food products according to general experience of customers in other restaurants (Ohio Dominican University, “Application of Porter’s Five Forces Model Paper”). Threat of New Entrants Threat of new entrants comprises of inspecting the obstacles of entry in any industry and likely responses of existing organizations to new entrants. Barrier to entry is the budget or legal requirements needed for entering in the market. The barriers help to protect the existing organizations in that industry. New entrants can stimulate the existing organizations to prevent entry through several strategies, such as, minimizing the prices of products or making partnerships with other organizations. The chances of reaction of existing organizations are high in those industries where companies have invested excess money or the industry has slow development rate (Ehmke & Et. Al., “Industry Analysis: The Five Forces”). Entry barriers can differ from industry to industry. In case of restaurant business, the entry barrier is too low and thus, the threat of new entrants is much higher compared to other industries. Starting a restaurant business is not much expensive. According to a survey in 2011, the average cost of starting a restaurant business is almost 225,000 USD. Thus, it is relatively easy for a group of average people to obtain the required capital and begin their own restaurant. The experience also plays vital role in restaurant business. If any organization develops unique dining experience in the restaurant industry, then it can easily enter in the market and threaten other competitors (Ohio Dominican University, “Application of Porter’s Five Forces Model Paper”). Rivalry among Competitors Rivalry among competitors is the strongest micro-economic force which can impact the performance of organizations in majority of industries. The rivalries within firms differ broadly from industry to industry. If the forces of competitors are weak, then an organization can easily increase the prices of products and earn more income. Conversely, if the forces of competitors are strong, then organizations need to increase their products’ offerings to attract customers. At times, the costs of products can even drop under the break-even level. The competition within organizations can occur for several reasons, for example: providing low price, providing attractive promotion, providing better service, introducing new product, and maintaining strong brand image (Ehmke & Et. Al., “Industry Analysis: The Five Forces”). In restaurant industry, the rivalry among competitors is high. There are large number of restaurants in New York City which strive to gain competitive advantage by changing the prices of products, differentiating the offerings, using innovative mediums for distribution, and developing strong association with the suppliers. Another reason for strong rivalry within restaurants is that they deal with same target customer segments and struggle for capturing high market share (Ohio Dominican University, “Application of Porter’s Five Forces Model Paper”). Threat of Substitutes In any industry, a homogeneous product can be easily replaced by competitors’ products. The substitute product can appear at any form and size. While starting a business, it is necessary to evaluate the alternatives, which can satisfy the requirements of customers. A product which provides same utility like another product can become a perfect substitute (Ehmke & Et. Al., “Industry Analysis: The Five Forces”). In restaurant industry, the threat of substitute is moderate. If any restaurant maintains its products prices within the affordable range of customers there will be less impact of substitute products and the threat of switching to substitute product will be less. Apart from the threat of alternative products, the threat of substitute in restaurant industry can appear by growing desire of eating food at home. As there are several restaurants in New York City, one restaurant can be a substitute of other restaurant unless it differentiates the products offerings (Ohio Dominican University, “Application of Porter’s Five Forces Model Paper”). Conclusion Porter’s five forces can control the potentiality of generating profit in any industry. It can influence the prices of products or services, and essential investments in businesses. In the restaurant industry, it can be seen that the bargaining power of supplier is less but bargaining power of buyer is moderate. Restaurant industry is characterized by high threat of new entrants and intense rivalry. Thus, to maintain a strong position in this industry, an organization needs to differentiate its products and services and change products offerings according to customers’ requirements. Works Cited Center for Urban Research. “Employment in New York City Restaurants”. November 02, 2011. Labor Market Information Service, 2009. Ehmke, Cole. & Et. Al. “Industry Analysis: The Five Forces”. November 02, 2011. Purdue University, No Date. National Restaurant Association. “New York Restaurant Industry at a Glance”. November 02, 2011. New York Restaurants by the Numbers, 2009. Ohio Dominican University. “Application of Porter’s Five Forces Model Paper”. November 02, 2011. Fast Casual Industry, No Date. Urban Justice Center. “Behind the Kitchen Door: Pervasive Inequality in New York City’s Thriving Restaurant Industry”. November 02, 2011. New York City Restaurant Industry Coalition, 2005. Bibliography McKinney, Robert A. “Analyzing the Attractiveness of an Industry Using Porter’s Five Forces Framework”. November 02, 2011. McKinney Strategic Management Consulting, 2008. Read More