Structural Forces Affecting the US Fast Casual Restaurant Industry - Research Paper Example

? Structural Forces Affecting the US Fast Casual Restaurant Industry Fast causal restaurants came into the United Sates market when entrepreneurs realized that they could offer the services that traditional fast food restaurants offer, but in a casual dining environment. With time, the industry of fast causal restaurants grew, and the level of competition consequently grew. Businesses in the industry thus face the threat of new entrants into the market. Entry of new businesses into an industry is not healthy for the business since it entails stiff competition leading to low profitability levels. However, the business can shield itself by use of the barriers to entry. Barriers to entry are those actions by the firm that increase the costs incurred by potential competitors for them to enter the market (Hill & Jones, 2012). Therefore, the higher the barriers to entry, the higher the costs incurred by competitors and, therefore, the lower the rate of entrance into the market. The common barriers used by industries include economies of scale, switching costs by customers, capital investments, government regulation, brand loyalty and absolute cost advantages. Economies of Scale Economies of scale refer to the benefits and advantages that accrue to a company due to its large size. Economies of scale usually arise from sources such as mass production by the firm, discounts awarded due to buying in bulk, and benefits received due to spreading fixed costs over a large volume of production. Because of a large volume of output, the industry also limits its marketing and advertisements costs (Hill & Jones, 2012). Therefore, the profitability of a fast-causal restaurant will be affected if its size is small, which limits its economies of scale. However, it can focus on increasing its size in order to increase its economies of scale such as pricing benefits. With new competitors not having such benefits, they will thus be barred from entering the market. The business will then maintain its high profitability. Product Differentiation and Brand Loyalty This is also a strategy that fast-causal restaurants can use to hinder new competing businesses from entering the market. It mainly involves the production of unique brands of products with distinctive features as compared to those of competitors. For example, a restaurant could create new recipes for foods; it could also spice up its foods in a unique way as compared to those of its current competitors. Therefore, customers will get used to the products and will prefer the restaurant’s foods to other foods offered in the market (Hill & Jones, 2011). This is a feature referred to as customer loyalty; it is used to ensure that customers stick to the original supplier irrespective of any other suppliers in the market. Capital Investments The business can ensure that its profitability is maintained by investing in capital intensive projects which assure it high returns in the future. For example, a restaurant could invest in latest technological equipment of operation. Such an investment will lead to offering of quality services to customers, thus increasing the number of customers attracted. Consequently, the profitability of the business will be increased. New competitors will be barred from entering the market since they will not have similar investments for them to compete in the market. On the other hand, the capital requirements needed to make similar investments will be extremely high, so any new business would opt not to enter the market (Kar, 2011). Absolute Cost Advantages Cost advantages for the business will arise from such angles as experience, high quality trained personnel, and control of crucial inputs of production in the market such as labor, raw materials and management skills. It could also have additional advantages such as access to cheap sources of finance and insurance benefits. Therefore, a new company in the market will be hindered from entering since it will not be able to match to the advantages of the already established company (Hill & Jones, 2012). Switching Costs These are the costs incurred by consumers when they decide to purchase items from a different business. Examples of such costs include quantity discounts, quality products, packaging benefits, and low price benefits. This will act as a barrier to entry because a new business in the market will not offer such benefits and, therefore, a customer who chooses to shift will lose all the benefits. Therefore, for fear of losing these benefits and thus incurring unnecessary costs, customers will opt to remain with the old supplier rather than shift to the new ones (QuickMBA, 2012). Government Regulations The government acts as a barrier to entry by placing restrictions for entry by businesses (Kar, 2011). Such restrictions will include licensing requirements, taxation requirements and demand of business permits (Hill & Jones, 2011). Therefore, unlike the old business that is already established in the market, the new business will have to incur all these expenditures in order to obtain a permit from the government. Therefore, these costs will bar a business from entering the industry, thus acting as a benefit to the already existing businesses, which will not face a high competition level. Access to Distribution Channels When a business has been in the market for a long period, it establishes solid relations with its distributors and thus it can distribute its products at a cheaper cost as compared to its competitors. It will also have experience with the distribution channels and, therefore, will be better placed than a business that is new to the market. Therefore, to maintain its profitability, a business can ensure that it maintains excellent relations with its distributors. Expected Retaliation With the entry of new businesses in the industry, the business will have to come up with ways to shielding itself from the effects of stiff competition posed by the competitors. The expected reaction will be the upgrading of quality of the products above that of the competitors. The company will also respond to the new competitors by increasing the promotion of its products. Other retaliation procedures expected include the innovation and invention of new brands of products and diversification of services offered. This will act as a major barrier to the entry of other competitors since they might not be able to compete with the standards of the products. Consequently, strong forces affect the business negatively while weak forces will enable a business to increase its profitability. For example, when the Noodles and Spice Restaurant in Asia first came into the industry, it made supernormal profits since there was no other restaurant with a similar recipe in the industry. Therefore, the company had a very wide opportunity to increase its profitability since the force of threat of new entrants in the market was very weak. However, with time other restaurants also came up with similar recipes and the force of threat of new entrants becomes. Consequently, the profitability of the company was negatively affected. One other notable example of a company that was seriously affected by strong forces is the Pitman Toothbrushes & Soaps. This company had found itself a market where it supplied soaps with very limited competition. Therefore, its profitability was very high at first. However, when other companies entered the industry, the force of new entrants became very strong and thus, the profitability of the company was negatively affected. This is because; when a new business enters the market, competition in the industry increases. Therefore, the business has to share its current market with new entrants. With the number of customers in the market still remaining fixed, the business will thus have to lose some of its customers to the new competitors. With a decrease in the number of customers, the profitability of the business will be gravely affected. In addition, entrants in the market will cause the business to lower its profit margin since it will no longer be able to achieve its previous profit objectives (Hill & Jones, 2012). References Hill, C. W., & Jones, G. R. (2012). Strategic management: An integrated approach (9th ed.). Mason, OH: South-Western, Cengage Learning. Kar, A. (2011, April 7). Michael Porter’s 5 forces model. Retrieved from http://business-fundas.com/2011/michael-porters-5-forces-model/ QuickMBA (2012). Porter's Five Forces. Retrieved from http://www.quickmba.com/strategy/porter.shtml Hill, C. W., & Jones, G. R. (2011). Strategic management theory: An integrated approach (10th ed.). Mason, OH: South-Western/Cengage Learning. Read More