The Patterns of Competition in the Restaurant Industry - Essay Example

? A critical discussion of Porter’s view that the economic structure of the restaurant industry determines the pattern of competition in that industry BY YOU YOUR SCHOOL INFO HERE DATE HERE A critical discussion of Porter’s view that the economic structure of the restaurant industry determines the pattern of competition in that industry Introduction Michael Porter iterated that it is the economic structure of an industry that determines competitive patterns within that industry. The global restaurant industry is highly saturated and in a mature stage of development along the industry life cycle, a factor that is driven by the economics of the industry. The economic structure is influenced by the tangibles along the value chain for food services organisations, including the volume of suppliers along the supply chain and the pricing structure of procurement, which impacts all restaurant organisations. The industry is also impacted by the demographics of the consuming public in terms of income as well as the availability of financial capital or ability to raise capital in the regions where the food services organisations operate. Hence, there are a variety of factors that will determine the methods and strategies by which competitors attempt to compete to attain some form of competitive advantage that are all linked with the economics of the industry. The restaurant industry In China, as one example, there is a high concentration of Western fast food companies that have saturated the industry. Growth in consumer demand for Western food brands has given food service companies ample opportunities for expansion out of the North American and European markets. However, it not only consumer demand that has provided these opportunities, it is the investment by a more liberal Chinese government that has stabilised the regional economy that provides advantages for market entry and expansion. The government has injected considerable financial capital into urban development, there is more interest by venture capitalists for this same pursuit, and government policies have provided much more incentives for foreign direct investment in the country (Areddy 2009). Inflation has been largely stabilised by government intervention and policy development, thereby offering consumers much more disposable income that is crucial for sustaining profitability. In 2012, the government invested 57.92 billion USD to motivate more effective corporate borrowing and to control interest rates (Safe Trading 2013). From a social perspective, as Chinese culture begins adopting more ideologies and principles associated with a capitalistic economy, lifestyle preferences are changing that are favourable for new entrants in the fast food industry. In contemporary China, 50 percent of consumers prefer eating in restaurants over that of household consumption (Ganster 2006), which provides a potential market of approximately one half billion consumers. In 2008, consumers in Shanghai spent approximately seven percent of their total disposable income on restaurant dining which represented a whopping 20 percent increase in spending from that of 2007 (Rentz and Xu 2010). Therefore, the economic structure of the industry, coupled with higher guarantees of consumer expenditures on food services, establishes an industry environment that can satisfy profit expectations for a variety of major competitors and new market entrants into the country. The entire fast food industry in China, from a market value perspective, increased 16 percent between 2010 and 2011 and is estimated to be worth 74.8 billion USD in revenues to all competitors (Ho 2011). Therefore, major fast food companies, such as KFC, McDonald’s, Pizza Hut and Taco Bell, have found considerable profit success by entering the Chinese fast food market. Prior to recent years, however, in order for the aforementioned companies (and their large variety of other competitors) to achieve market success, they were forced to import food products from the West which significantly raised operating expenses. There simply was not an adequate, local supply chain methodology or product availability to sustain substantial cost controls, which were often placed back on the consumer in the form of higher pricing models. Today, however, due to government investment and better infrastructure development, local farmers and agriculturalists have been equipped with the capacity to provide a higher volume of domestic food products to these restaurants (Browne 2004). With the ability of fast food companies now able to procure many of their raw products in the country, it removes the importation costs that allow companies to offer lower pricing in an effort to satisfy their expectations. This is the driving force behind competitive behaviour in this industry. Buyer power is strong in this industry with high price elasticities in a market environment where Chinese consumers are known to be quite frugal and willing to defect to other competing brands based on price factors. In marketing theory, pricing promotions are some of the most widely used strategic tactics to gain consumer patronage and loyalty and are usually the measure by which consumers judge quality (Dawes 2004). In this industry, even though there is ample demand and available consumer incomes, companies must ensure they have competitive pricing structures and express a sense of quality that will give consumer markets the perception of value. The economics of the industry therefore influence the development of large-scale promotions in order to differentiate the firm and gain more consumer following. Many fast food companies in China, and across the world, have recurring value menu options, items that are segregated from higher priced menu items to attract the price-sensitive buyer markets. Now that the industry provides for much lower cost procurement and national investment into improving GDP has raised consumer incomes, competitors are now free to develop discounting on many different products, something now afforded through high cost importation activities. If the economics of this industry were not as stable due to government support and the ability to obtain corporate borrowing, these price promotions would not be as viable as competitive tools and would jeopardise profit expectations for many different fast food companies with such high costs along the global supply chain. Furthermore, the industry also provides for less-expensive labour than in Western markets where solid minimum wages have been established. It is typical in China and in other nations for fast food companies to provide only wages and no extended benefits such as health care. This lowers that administrative costs for companies operating in this industry which ultimately provides the businesses with a higher cash flow. Therefore, companies in this industry can compete by hiring more competent managers equipped with the necessary leadership and human resources talents that give the companies better human capital advantages. By devoting more time to recruitment and training of these managers, businesses are able to improve their operational strategies, better motivate employees toward meeting service goals, and a variety of important service-related conceptions that make one company stand out over another competitor. Companies with high labour expenditures at the lower-level of subordination cannot devote as much labour and financial capital toward better training models and recruitment strategies, which could limit the service capabilities of the business in the long-term. Therefore, it should be said that a cheaper labour market provides economic incentives to foreign fast food companies that translates into better competitive strategies through human capital development. Now that these fast food companies have local procurement options, it also allows them to compete through other aspects of marketing with an emphasis on product. Companies can conduct market research to determine the eating preferences and cultural dimensions of restaurant consumption so as to devote more labour and capital resources into the research and development process. Whether it be the creation of an innovative menu item or variations on existing products, companies are able to differentiate their businesses from competitors. It is relatively easy in this industry for competitors to replicate existing products which poses a significant strategic risk for maintaining a unique brand identity and personality. Therefore, the only real asset the business has is its brand reputation (Nandan 2005). Companies in this industry often develop new sandwiches or beverages that are unique from competing offers and then invest heavily in the advertising and other promotional functions along the marketing model. Cost reductions associated with procurement, coupled with lower wage payments to workers that provide more capital availability, give new opportunities to revamp or diversify the company menu to better satisfy and engage desirable consumer markets. Furthermore, because of the strong economic structure of the fast food industry and the availability of a quality infrastructure associated with urban development and enhanced manufacturing capabilities of food providers, there is a constant threat of substitutes that drives competitive behaviour. In Asia, there is a growing demand for vending services that provide a diverse array of food products with an emphasis on price and convenience. In 2009, consumers spent approximately 1.9 percent of their disposable income on vending products (Research and Markets 2010). In Japan, there is one vending machine for every 23 consumers (AVA 2012). Technology has provided many unique innovations in vending services that include touch screens and even chat services to speak with service representatives during their vending experience (Hickman 2011). Therefore, there is a recurring competitive risk for fast food companies associated with the provision of substitute products to a more contemporary consumer that appreciates quick service food options. Threat of substitutes change the economics of the industry when there is now a legitimate risk of profit loss due to changes in the external market and new market entrants that can provide substitute products to many different consumer segments. Companies in this industry, such as McDonald’s, can begin installing corporately-owned vending services with trademark beverage products as a means of expanding their brand presence across the country. Companies can further utilise promotional activity to make their products more attractive as a means of undercutting the competitive prowess of vending companies. Whatever the specific strategy, the threat of substitutes (which is legitimate in this industry) creates a type of economic disparity that forces companies to either innovate or better promote their businesses. When there is an ongoing risk of customer defection to substitute product suppliers, it lessens the market segment availability to these companies that further changes the dynamics of revenue production and ultimately long-run expansion and growth for all competing businesses impacted by growth in substitute product distribution along many different marketing channels. Companies in this industry are also able to compete differently depending on their procurement models along the supply chain. KFC, a major competitor in China and worldwide, utilises Tyson Foods as their main supplier of chicken products. The main problem is that Tyson also supplies many other competitors in this industry, which gives them significant supplier power in the industry (Krug 2004). The switching costs for Tyson are low when there are many buyers that are willing to provide profit to their main supplier. Companies in this industry can develop strategic alliances with many different suppliers in order to diversify the supply chain, better negotiate pricing for raw food products, and remove the supplier power that impacts capital availability for fast food companies. Such alliances are quite important for gaining competitive advantage of competition (Copacino 1996). Strategic alliances and contract negotiations with various suppliers limits the control and authority of a singular supplier, therefore competitively these businesses utilise managerial and executive-level knowledge and experience to ensure that the company’s procurement models are diversified. This lowers prices along the supply chain and ensures that suppliers are more willing to be responsive and flexible to the changing purchasing needs of these companies. There are long-run implications for service delivery elements as well with a more efficient and cost-controlled supply chain to ensure limited product shortages and the ability to provide consumers with lower prices on products. Additionally, business leaders must recognise that fast food companies in China and across the world cannot set prices that are higher than competition whilst also not sacrificing demands for service quality and excellence. In this industry, buyers are strong and have the ability to essentially set prices by promising to defect to other competing companies with more value-perceived pricing structures. Price-sensitive consumer segments represent a fundamental risk, economically, to the business as there are legitimate barriers that prevent fast food companies from performing deep discounting. Therefore, they must align perceptions of quality with value (as previously described) through more emphasis on brand development. Brand development is creating a type of connectedness with target consumer segments that allows firms to nurture their market-based assets (Abimbola 2001). Hence, companies in this industry often position based on certain factors such as quality, price, or even convenience that makes the brand stand out from other competing companies. Market positioning is focusing the companies integrated marketing communications on a singular concept (such as using only top quality beef) that gives consumers the perception that they are getting a more valuable product output. In some instances, this branding development strategy allows companies to raise prices moderately once they have convinced their desired market segments that the business is genuinely top quality over competing product offerings. Consumers who find high value are more willing to recommend through word-of-mouth advertising and are more willing to pay premium prices. Emphasis on establishing a solid and consistent market position and building a unique and differentiated brand identity are driven by the economics of consumer behaviour and their consumption preferences that drive either loyalty or a willingness to seek out the products or services of competing fast food firms. Therefore, competitively, fast food companies in this industry must understand what could best satisfy consumers (using qualitative or quantitative market research) which is important as, again, buyers have considerable bargaining power in this industry. They can, through withholding their expenditures from a less-favoured company, force a legitimate backward integration that imposes much higher costs on the operational model in the long-term. Conclusion As indicated by the research, the fast food industry in China and across the world provides an environment in which different competitive behaviours occur as a result of the economic structure of the industry. Pricing considerations, emphasis on promotional activity, building a brand identity for uniqueness, building supplier alliances, and even human capital development emphasis built on a low-wage environment provides companies with competitive advantages and differentiation from other competitors. Combined with market positioning focus and brand development activities, businesses can find a favourable market position. At the same time, all of the aforementioned activities are driven by the economic structure of the global or regional fast food industry which externalises strategy development. The economic structure of the fast food industry drives contingent changes in the operational and managerial models that give a business more individuality and exclusivity in certain markets if competing companies recognise these factors and develop plans for more effective marketing positioning. It is a dynamic market driven by socio-economic factors of diverse consumer market segments and the tangibles of the infrastructure that supports opportunities for cost controls in the industry. Companies would not be able to develop competitive advantages without recognition of what drives external industry economics as strategy development, when formed, would be ineffective to meeting the challenges and demands of the external market. References Abimbola, T. (2001). Branding as a competitive strategy for demand management in SMEs, Journal of Research in Marketing & Entrepreneurship, 3(2), pp.97-106. Areddy, J. (2009). China slowdown stunts entrepreneurs, Wall Street Journal, 27 March. [online] Available at: http://online.wsj.com/home-page (accessed 20 December 2013). AVA. (2012). Industry overview, Automatic Vending Association. [online] Available at: http://www.ava-vending.co.uk/pages/press/industry-overview.php (accessed 19 December 2013). Browne, A. (2004). 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