Mr Empanada External Analysis - Research Paper Example

Mr. Empanada external analysis Threats of Substitution In the external analysis of Mr. Empanada, it is essential to evaluate the external environment in terms of the porters’ five forces. Porter’s five forces look at the basic competitive structure of a firm’s industry through competitive forces. The reason is that potential profitability of Mr. Empanada is largely influenced by the profitability of its industry. This discussion will evaluate one of the five forces; Threat of Substitution. Based on porter’s framework, competition in an industry emerges not only from established producers producing same or similar products, but also from suppliers of substitutes (Porter, 10). I. Fragmentation and/or Concentration As a player in the United States restaurant industry, Mr. Empanada is a fast casual industry and not a fast food company as most people take it. The U.S restaurant industry is characterized by countless actors. The industry has already entered the mature stage of the industry life cycle, as growth of the industry slows own. The united states restaurant industry is fragmented into various subsets, the most popular being the fast food, full service restaurants and the fast casual segments. In a fast food setting, food is prepared before being ordered while in a casual setting, food is prepared after the customer has ordered it. There are hundreds of fast food and fast casual joints in United States that offer products that are intractably similar in almost all aspects. Panera Bread Company is the renowned leader in the casual food subset while McDonald’s is the overall industry leader operating in the fast food segment. The yearly anticipated growth for the restaurant industry is 1.9% from 2013 through 2018 (The University of Tampa, 2). The slow growth rate is attributable to reduction in consumer disposable income due to prolonged recession period in United States. Consumers opt to consume home cooked means or consumer lower priced items when eating out. This is hurting the growth in the various fragments of the restaurant industry. United States restaurant industry sales ($ billions) (Source: The University of Tampa, 1) II. Switching costs Switching costs are the negative costs that buyers incur due to changing products, brands or suppliers. Switching costs are mostly evaluated in terms of money value, but they may also be time-based, effort based and psychological switching costs. Switching costs may be associated to learning, finding alternatives, ambiguity costs, contractual costs and transaction costs. Switching costs is a control mechanism that exists in most markets (Sundelin, para 1). In the case of Mr. Empanada, there are little or no switching costs as substitutes are readily available. Providers of casual foods are such as the chipotle Mexican grill, Panera bread, Skyline Chili, Donatos Pizza, Freebirds among others, which are easy to locate. Customers who wish to change from Mr. Empanada products and consumer rival products do not incur significant costs. For illustration, learning and compatibility cost is almost zero since the Mr. Empanada and its rival’s products are undifferentiated. Therefore, customers do not have to look and learn new information with regard to rival products. As such, consumers easily change from one Mr. Empanada products to its rivals due to insignificant switching costs or no cost at all. III. Buyer inclination to substitute In the United States restaurant industry, competition is so rife and fierce. As stated earlier, most of the industry’s products are undifferentiated. Customers hardly notice the difference between competitors’ products and this extremely heightens buyers’ inclination to substitute (Porter, 28). In regard to Mr. Empanada, buyer inclination to substitutes is indispensably high. The reason is that Mr. Empanada is not known to many people outside its headquarters in Tampa, Florida. In addition to limited popularity, Mr. Empanada offers few types of salads, beverages, sandwiches that can be easily found in other outlets like burger king, KFC, Five Guys Burger & fries, starbucks, Stewart’s restaurants and yum! The high buyer inclination to substitute is a key issue that Mr. Empanada has to observe and work towards it. As a way of minimizing the high rate of buyer inclination to substitute, the company can adopt the differentiation strategy to make products that customers consider unique in ways that are impetus to them. In a differentiation strategy, target consumers are willing to pay for product distinctiveness that creates value for them. Uniqueness may be physical such as superior reliability, or psychological such as perceived status. Differentiation strategy success relies on distinctiveness or cost advantage to better serve the specific needs of a narrow target market as opposed to an expansive market (Ireland, Hoskisson and Hitt, 116). Due to the small size of Mr. Empanada, differentiation strategy can efficiently work and thereby reduce buyer’s inclination to substitutes. IV. Price-performance tradeoff of substitutes Price performance tradeoff of substitutes is essentially high due to the existence of numerous fast casual and fast foods in the restaurant industry. Mr. Empanada’s bid to sell cheap products like frozen empanada is highly constrained to resource factors. Moreover, grocery stores that purchase empanadas products do it very low prices. This makes it hard for Mr. Empanada to compete with other key players in terms of price. The initial ups and downs of the company have significantly played a key role in lowering Mr. Empanada’s price performance as compared to other casual joints. The owners (Perez) operated the company for six years only and sold it to another investor in 1990. The new owner later closed the business in 1993. In 2003, the original owner re-launched Mr. Empanada with the hopes of enlarging the company to national levels. This discontinuity of the casual facility had an impact on the company as the re-launch came at a time when the restaurant industry was full of competitors. A rival like McDonald’s is large in size and is able to find its way out of the cut throat competition through pricing. For illustration, McDonald’s corporation adjusts its prices through the Happy Hour offer to entice customers during off peak periods. Other competitors like starbucks and Yum! Brands are able to sell at reduced prices to attract customers and keep up with the stiff competition. Mr. Empanada has a long way to go to attain such levels due to its small size and this makes Price-performance tradeoff of substitutes to be essentially high. V. Variety of substitutes Lindeman (62) defines substitute goods as those that consumers can exchange for one another in the consumption pattern. In products that are perfect substitutes, consumers cannot distinguish between perfect substitutes and only consumes the cheapest. In regard to close substitutes, a consumer may consume some of each but he is still sensitive to the products’ substitutability. A slight change in price of one will result in changes in the consumption pattern of all of them. In the United States restaurant industry, there exist hundreds of fast food and fast casual outlets that prepare perfect and close substitutes. When the price of one close substitute rises, the consumer buys less of it and more of the other. The opposite happens when the price of one close substitute reduces. Mr. Empanada products have a wide variety of substitutes from key players like the Panera bread company. The rival’s products are perfect and close substitutes to Empanada’s salads and soups, beverages and Cuban sandwiches. The variety of substitutes is attributable to low or no product differentiation in the restaurant industry in terms of size, physical appearance and perceived status. Moreover, the substitutes are competitively priced to attract customers as the market is saturated and the products are at the peak stage; maturity. VI. Necessity of product or service As consumer’s disposable income decreases, most are opting to cut back on expenses like eating out. In instances when they do, customers go for lower priced items. Products offered by Mr. Empanada may be termed as basic but not as necessities. The reason is that in times when consumer incomes are low, they opt to eat home cooked meals. This restaurant industry is has been experiencing noteworthy market shifts and changes in consumer tastes and preferences. In the recent past, the increase in the obesity epidemic has raised an alarm on the need for people to be sensitive to what they eat. As such, high fat, high salt and other delicacies prepared by fast food and fast casual gave been negatively impacted (The University of Tampa, 3). People rebuff such foods as they consider them not as necessities but as luxuries that are health risking. In conclusion, Mr. Empanada threat of substitution is undeniably high. One of the key factors contributing to this reality is that there are hundreds of substitutes that are perfect or close substitutes. Secondly, Mr. Empanada is rarely known outside Florida and much needs to be done to popularize it. This restrains its products from purchase as customers want to identify with known brands like KFC, Pizza Hut among others that have become household names. The existence of numerous competitors in the restaurant industry increases buyer’s inclination to substitutes. The propensity of Mr. Empanada’s competitors to offer low and competitive prices further restrain the company’s Price performance tradeoff of substitutes. Major industry leaders are able to use their large size and market power to lower prices so as to attract customers. This leaves small and upcoming companies like Mr. Empanada struggling with high price performance tradeoff. The significantly low or no switching costs from Mr. Empanada’s products to its competitors further enhance the threat of substitutes to the company. Works Cited “Porter’s five forces. A model for industry analysis”. Web 18 September 2013 < http://web.ntpu.edu.tw/~jason/120%20MM/reference%201/Porter's%20Five%20Forces.p df> Sundelin, Anders. Switching costs. Web 18 September 2013 < http://tbmdb.blogspot.com/2009/04/switching-costs.html>. Lindeman, Bruce. Microeconomics. NY: Barron's Educational Series, 2002. Print. Ireland, Duane; Hoskisson, Robert, and Hitt, Michael. Understanding Business Strategy Concepts Plus, 3rd ed.: Concepts Plus. Connecticut: Cengage Learning, 2010. Print. Porter, Michael. Competitive Advantage: Creating and Sustaining Superior Performance. London: Simon and Schuster, 2008. Print. Porter, Michael. Competitive Strategy: Techniques for Analyzing Industries and Competitors. London: Simon and Schuster, 2008. Print. The University of Tampa, Fall 2013 MGT 431. Mr. Empanada Franchise Corporation. Read More