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PORTERS FIVE FORCES: A guide to industry analysis

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1 PORTERS FIVE FORCES: A guide to industry analysis
The McIntire Investment Institute Fundamental Presented by Shilpee Raina PORTERS FIVE FORCES: A guide to industry analysis

2 What are Porter’s Five Forces?
Developed by HBS professor, Michael Porter: Competitive Advantage: Creating and Sustaining superior Performance Extensive framework utilized to assess an industry’s competitive environment Incredibly useful in determining a company’s positioning and evaluating its strategy

3 The Five Critical Factors
Threat of Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitutes Rivalry Among Competitors Apply to: FAST FOOD INDUSTRY

4 Threat of Potential Entrants
Ability of new firms to successfully enter the market due to level of BARRIERS TO ENTRY Economies of scale, capital requirements, cost & distribution advantages: International Food Chains Product or service differentiation: Happy Meals Psychological factors: Burger King brand name Fast Food Industry: HIGH barriers to entry, LOW threat of entrants

5 Bargaining Power of Buyers
The buyers ability to drive down prices, demand higher quality goods, and play competitors against each other Power GAINED by: High concentration of Buyers relative to companies: several fast eating options for mainstream consumer Products/services are undifferentiated: burgers are burgers Purchases represent significant fraction of buyer’s cost: fast food is inexpensive, lower buying anxiety

6 Bargaining Power of Buyers
Power REDUCED by: Differentiate Product or Services by raising SWITCHING COSTS: chalupas, happy meals, whoppers Avoid dependence on one buyer: kids, teens, and adults Fast food industry: HIGH Bargaining Power of Buyers

7 Bargaining Power of Suppliers
The suppliers ability to raise prices, or reduce quantity and quality of inputs Power GAINED by: Supplier’s industry is concentrated: input foods are common goods Buyer is not important to supplier: several food chains No substitutes: numerous food wholesalers Power REDUCED by: Supply flexibility: relationships with many wholesalers Backward integration: develop own farms Fast Food Industry: LOW

8 Threat of Substitutes These are products/services that perform the same function, but are in different industries: grocery stores, fast casual Availability of substitutes limits industry profitability To REDUCE threat: Product/service differentiation: dollar menus, brands Collective industry response: healthier foods, low prices Fast Food Industry: HIGH

9 Rivalry Among Competitors
Competition is intensified when: Competitors are numerous and equally balanced Slow industry growth: fast food is saturated High fixed costs: need to sell high volumes to recup Standardized products/services: intense price competition, $1 menus Fast Food Industry: HIGH level of rivalry

10 In Summation Fast Food Industry is highly competitive due to: high barriers to entry, high bargaining power of suppliers, significant substitutes, and intense rivalry. QUESTIONS?

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