Five Forces Model of Michael Porter - Essay Example

? Michael E Porter Theoretical Framework AFFILIATION: Michael E Porter Theoretical Framework Introduction Michael Porter's models of Five Forces and Value Chain enable analysts, stakeholders and decisions makers to evaluate the internal and external environment in which the business is operating. Using these models, companies evaluate their current market condition in comparison to competitors. This examination also allows businesses to make strategic and tactical decisions. The reason behind this is that these models exhibit the various areas that need attention within and outside the business. Moreover, they allow companies to understand the issues or challenges in the environment, supporting them in looking into appropriate solutions (Abuawad, 2013). For this paper, we will be analysing McDonalds through these models in order to understand how the two help in developing a successful strategy for the company. Five forces Model Five forces model of Michael Porter is based on the theory that every external environment for a business could be judged based on five primary forces or dimensions. These dimensions are Threat of competition/Rivalry among firms, Threat of new entrants, Threat of substitutes, Bargaining power of suppliers and Bargaining power of buyers. The company essentially need to understand the external environment surrounding them in each country, city or town they function. This is crucial for formulating a winning strategy given the McDonalds is a franchise being run worldwide (Abuawad, 2013). Rivalry among firms/Threat of competition Since McDonald's operates in the fast food industry, therefore, it faces an intense competition worldwide. the Fast Food industry has experienced a massive growth in just a couple of years. Thus the industry is highly competitive and McDonalds faces the threat of competition. This could be in terms of the competitor's advertising and marketing activities conducted to attract customers by snatching competitors' customers. Location of outlets is often selected considering the customer footfall at a particular place. Mostly McDonalds restaurants are located where customer footfall is high. Since the company offers fast-food, beverages like coffee and milkshakes and now breakfast food, it faces high competition with multiple firms. Major competitors are Burger King and the Yum Brand Inc. So, McDonalds experiences intense rivalry within the fast food industry (Aydrose, 2012). Threat of new entrants The fast food industry has no particular regulatory limit of the number of firms to be allowed to enter and is in fact quite a profitable industry. The startup costs for this industry are low, thus making it simpler for new entrants to start up fast food restaurants. Although, the industry has well-known market leaders who possess majority of the market share. These market giants are McDonalds, Burger King and Wendy's which using their power could hinder the new entrants from introducing their business in this industry. This makes the threat of new firms entering the industry to be moderate (Abuawad, 2013; Aydrose, 2012). Threat of substitutes Numerous substitutes exist of McDonalds' product offerings. For breakfast menu, the substitutes include the cheaper diners providing breakfast, or coffee houses like Gloria Jeans. Moreover, for meals like burgers, substitutes include the burgers of Wendy's, KFC, Burger King and small diners or restaurants. For beverages like coffee and milkshakes, again diners, coffee houses and beverage companies provide substitutes for McDonald's beverages. So the threat from substitutes is quite high for the company (Aydrose, 2012). Bargaining power of suppliers Since McDonald's is globally the largest fast food chain operating in terms of sales, therefore, it has bargaining power over its suppliers. The suppliers bargaining power thus is low, leading to lower costs and ability to charge competitive prices. So McDonald's do not face the threat of being forced to buy costly raw material since suppliers have no power over it ( Aydrose, 2012). Bargaining power of buyers The bargaining power of the buyers that is customer is also low in the industry. The reason is that the company along with its competitors Burger King and Wendy's are quite competitive in pricing their products. With prices already reaching the floor set by the company, the buyers have low power of getting the prices reduced further as they are already charged affordable prices Also, the company provides its customers with high quality products, making customers' brand switching costs to be higher. Yet the quantity purchased is generally low if compared to the quantity of normal street burger which could be bought in the price of one McDonald's burger. Moreover, the fast food is eaten generally less. There will be only a handful of people, food lovers, who eat burgers almost every day or at least twice or thrice a week. So purchases are low and thus customers' bargaining power is low (Aydrose, 2012). Value Chain Model Value Chain Model will depict how McDonalds attempts to transfer value to its customers. The company follows a complex, yet a very efficient value chain. One of its most significant values which it adheres to are providing customers with an excellent eating experience. This is examined by the Value Chain model's dimensions. These dimensions are Firm Infrastructure, Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales and Services (Sullivan, 2010; Anderson, 2013). Firm Infrastructure The company has a strong infrastructure. It is known as the number 1. retailer in fast food industry and has a high brand recognition associated with its red and yellow colors. The company’s image is quite reputable owing to their consistent provision of high quality food. Its leadership status in the industry brings the company financial strength. However, contrarily, the company has at certain points faced certain lawsuits, one being done by a customer who accidentally spilt coffee on herself while driving. This harmed its image slightly but McDonald's regained respect by immediate action of putting a warning on coffee cups saying it is hot so must be handled carefully (Sullivan, 2010; Anderson, 2013). Inbound Logistics Inbound logistics is strong of the company which is displayed by it enjoying economies of scale. Just-in-time order and delivery enables it to deliver fresh high quality food in time, without any wastage of resources. Also McDonalds makes use of renewable resources and has a sustainable packaging. Supply chain control is quite efficient. Freight truck inspections and unannounced audits ensure high quality of products. Yet one challenge is media backlash leading towards intensifying the need to move further in competition even more (Sullivan, 2010; Anderson, 2013). Operations The online and on-site kiosk job application systems, the reinforcement systems, McDonald's position as the second largest employer in USA and usage of wireless headsets make company's operations strong. The Wi-Fi facilities are offered to customers on restaurants. McDonalds makes extensive use of Research and Development to know the customer trends. However, being a restaurant, the franchises of the company suffers from high employee turnover. Impersonal greeters on drive-thru are a put-off for customers. Yet the company has a high operational efficiency and strength (Sullivan, 2010; Anderson, 2013). Outbound Logistics McDonalds has strong outbound logistics system owing to numerous factors. The distributor's agreement it has with distributors of their products and quality control measures taken are the primary factors. Reinforced information systems on assembly lines, with cashier and for order fulfillment, Just-in-time systems and high quality packaging are the remaining factors. These contribute to the efficient outbound logistics of the company's products (Sullivan, 2010; Anderson, 2013). Marketing & Sales McDonald's major strength in marketing and sales comes from the company's inclination towards market research. They conduct market research before the launch of every product/service. The health and wellness campaign and its huge variety of high quality products makes it stand out from competitors. The price of products is convenient for middle to upper and even lower middle class. This company has achieved through its McValue Dollar menu and Party Pack. Promotional activities of McDonalds are a success. Its promotional tagline 'I'm Lovin It' is a part of its brand recognition now. The company has licensed agreements with Nikelodeon and Disney and endorses the brand Coca Cola. The restaurants of the franchise is red and yellow, which are the brand colours of McDonald. It offers Wi-Fi facilities and has a designated Play-area in every outlet for children. The Ronald McDonald dummy is placed on every outlet, which is a mascot of the brand. Its concentration towards community outreach programs enhances company's image and thus its sales (Sullivan, 2010; Anderson, 2013). Services McDonald's service could be considered to be moderate when compared with its image worldwide. The food service is quite fast, environment is clean, order accuracy is quite adequate and the place has a friendly customer-service and environment. However, many at times the place have had dissatisfied customers damaging their brand's image. At times lack of customer service in terms of speed or hospitality has been observed. Moreover absence of employee apathy could impact company's service delivery process. Despite these few shortfalls, company's service has been given high rankings. Conclusion The model's analysis above concludes that McDonalds is functioning in a highly competitive external environment. This is mainly due to the ease of entering the fast food industry and the lower cost and higher profit potential of it. Value Chain analysis depicts that the company has been successful in providing customers with high value for their money. Yet there are still areas that require improvement, considering the dynamic market characteristics. This depicts that the best and successful strategy for McDonalds for going forward would be to continue with the current strategies and adopt the innovation strategy to capture a wider market. These analysis show that McDonalds in order to devise an effective strategy must focus on remaining distinct from its competitors and improving internal operations by fine-tuning their already existing efficiency. Through these models the company can see the loopholes that are there within the business. These models assist them in examining how the improvements within the value chain could be achieved by eradicating the loopholes identified. Also they depict how these improvements could let them sustain or better yet increase its market against its competitors. References Anderson, T., 2013. McDonald's Value Chain Analysis. [online] Available at: [Accessed 2 December 2013]. Abuawad, M.J., 2013. McDonald's Corporation. Educational Investment Fund. Aydrose, A., 2012. Porters 5 Forces & McDonalds. [online] Available at: [Accessed 2 December 2013]. Sullivan, G., 2010. Porter's Value Chain Model and McDonalds. [online] Available at: [Accessed 2 December 2013]. Read More