The Perspective of Porters 5-Force Model - Research Paper Example

The Perspective of Porter’s 5-Force Model The current investigation looks at the food and non-alcoholic beverage industry from the perspective of Porter’s 5-Force analysis model. In this model or school of thought, “The intensity of industry competition and an industry’s profit potential are a function of five forces of competition: the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors” (Schmalnese, 1985). Michael A. Porter’s Five Forces analysis is a methodology formulated for direct application in a business environment like the food and non alcoholic beverage industry. Porter has created a method of industry analysis coming from the business world and applying to the business world. Porter’s model is an effective way of looking at industries holistically, but may be limited in terms of looking at individual businesses. Nonetheless, companies in the food and non alcoholic beverage industry, as other industries, can use Porter’s model at each stage in the five-stage analysis. The main point of the analysis framework developed by Porter is to help managers analyze whole industries in terms of environments and competition. His method has become very popular in the present external market environment. “Porter argues that while many companies have been preoccupied with improving operational effectiveness--primarily through restructuring and reengineering--that's not enough in an increasingly competitive world. Each company must carve out a distinctive way of competing” (Schmalnese, 1985)). This report will provide a step-by-step synopsis of each of Porter’s five forces in relation to the food and non-alcoholic beverage industry. “The non-alcoholic beverage industry includes milk, juices (fruits and vegetables), bottled water and teas, and carbonated and uncarbonated soft drinks. This topic will discuss variables impacting the future of the non-alcoholic beverage industry, i.e., schools removing soft drinks vending machines for health issues” (Non, 2010). Porter’s system is more of a symbiotic relationship between variables than a hierarchy, so there is not any real proscribed or particular order in which one must address each of the five forces presented in turn. This report will start by summarizing Porter’s assessment of entry barriers as the first force. In general, entry barriers are factors which make it more difficult or more easy for a company to get a start in some given industry. The food and non-alcoholic beverage industry has low entry barriers at local and regional levels, and high ones at national and international levels. High barriers are like high obstacles that keep competitors from entering the industry, while low barriers are more easily surmountable to competitors seeking returns within the industry. It is a rule of thumb within this equation that the fewer competitors there are in an industry, the more they can take advantage of opportunities and strengths to garner better returns. The power of buyers is also important in the food and non-alcoholic beverage industry. The buyer group is very powerful in this industry, because they are ultimately responsible for the product that is given to the consumers. Buyers have high power, but suppliers have low power in this industry. Suppliers are often bidding for contracts multi nationally, because in the food and non-alcoholic beverage industry, the suppliers are global. Rivalry among established firms is another important factor in the food and non-alcoholic beverage industry. There are millions spent in beverage advertising campaigns alone, daily. “The results of this study, which make up the backbone of this section highlight the gains over the last year in food-service sales of almost every important beverage category Plausibly driving some of these gains is a definite shift in demand to larger and larger drink sizes” (Forman, 1994 Overall, the food and non-alcoholic beverage industry is attractive, but saturated. There are also drawbacks to the global situation in this industry: this hearkens back to Porter’s force of substitute products, which are increasingly available in an increasingly globalized international marketplace. But overall, being the first mover in a new market represents enormous opportunities for an expanding food company, for example, in terms of providing needed goods and services before anyone else is able to do so. Another risk of this situation, however, is that the first mover is also coming from the perspective of the international host country, and in cases in which this country is going through a political transition between deregulation and state control, the first mover could be subject to more scrutiny than another company that would come onto the scene later. But learning to adapt to the dynamic first mover situation may be a situation in which even failure is a benefit, in terms of lessons learned for the dynamic manager. "The final analytical task is to zero in on the strategic issues that management needs to address in forming an effective strategic action plan. Here, managers need to draw upon all prior analysis, put the company's overall situation into perspective, and get a lock on exactly where they need to focus their strategic attention" (Porter, 1995, p. 203). In many ways, however, the media portrayal of management in the food and non-alcoholic beverage industry being ineffective and inefficient is correct. Improving communication, information, and public awareness is one thing, but service must also be improved. These companies have had the opportunity to respond to dynamic and changing environments proactively, while many government programs are stuck in patterns of perceived environmental stability and cost-effectiveness. “Overall, sporting goods companies and sport drink and water companies were considered the most appropriate sponsors. Tobacco was the least appropriate sponsor followed y liquor and fast food. The majority of participants were not in favor of government laws to prevent less healthy food and beverage companies from sponsoring sporting events” (Danylchuk, 2009). Marketing is an important force of the organization. If a company does not have any substitutes for its product on the market, it is going to have a greater control over pricing, will be more assured that there is not going to be product switching, and will not have to worry about this facet of competition. “Sugar producers confronted with the large-scale commercialization of high fructose corn syrup, a sugar substitute, are learning this lesson today, as have the producers of acetylene and rayon who faced extreme competition from alternative, lower-cost materials for many of their respective applications” (Porter, 1980, p. 3) As noted briefly above, the force analysis discusses the bargaining power of buyers as a factor in the model. In more detail, any of the conditions of buyers having bargaining power are the same as those of suppliers having power. Buyers are not competing directly with only suppliers in this relationship, however: the industry itself is often affected. “Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other -- all at the expense of industry profitability” (Porter, 1980, p. 33). Related factors of differentiation and switching costs are again, as in the bargaining power of suppliers, related to this relationship. This shows again how many of the forces in Porter’s model have a symbiotic or integrated function with one another. In most cases, the terms mentioned above related to the bargaining power of suppliers can be reversed in favor of the buyer and provide an adequate description of this facet of Porter’s model. The market force model of industry analysis is, stemming rationally from this perspective, a tool that is primarily used by management to assess competitive issues within an industry. Many of the forces, as mentioned, are connected and have interrelationships. Using this model to look at an individual company is sometimes difficult: it is meant more as a holistic industry analysis tool to be used by the individual. REFERENCE Danylchuk, K (2009). Food and Non-Alcoholic Beverage Sponsorship of Sporting Events: The Link to the Obesity Issue Sport Marketing Quarterly Forman, C (1994). Beverage trends - nonalcoholic and decaffeinated beverages sales rising Nation's Restaurant News Porter, M. (1996, Nov/Dec) What is strategy? Harvard Business Review, 65(4), 61-78. ... (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press Schmalensee, R. (1985 June). Do markets differ much? The American Economic Review, 75(3), 341-351. Non alcoholic beverage industry (2010). http://bx.businessweek.com/non-alcoholic-beverage-industry/news/ Read More