According to the “Journal of Asian Scientific Research” in 2015, competition is how successfully a firm will compete with other firms in the industry at both national and international levels. This study will tell about Porter’s competitive model which affects the food industry by focusing on five areas which are listed below. With these newer opportunities arise with the help of which better business strategies may be developed. Porter (1979) had developed this business model. The research holds great importance especially in the developing countries that could generate employment and rise in the income levels as well as rise in export quality through usage of optimum resources and taking maximum advantage. Show Competition Among the CompetitorsJaradat (2013) exclaimed that a competitive strategy with effective competitors will give the company a competitive edge over other companies. In the food industry, competition is relatively high. Thus firms in this category prioritize on gaining a competitive advantage by using one of the ways that could be the change in prices, to focus of differentiating the product and bring about its improvements, to make use of creative channels of distribution and also to exploit the relationship with suppliers. Rivalry is automatically increased when the firms are competing with the same customers. Yet revenues can be gained through market expansion (Quick MBA, 2010). The Bargaining Power of BuyersIf the customers are more powerful, their tendency to bargain increases especially the price sensitive customers as a result of which prices may be forcefully reduced. In case of having power in the backward integration for instance, customers in the food industry are able to bargain over the decrease in price of the food items, this could result as a threat for the company. With purchase decision, the bargaining power increases. If more products are purchased, the bargaining power is thus enhanced. (Eskandari, 2015) In case of food industry the bargaining power of customer is very strong. They demand good quality, a great experience along with a reasonable price. If prices are set higher customer might leave unreasonably. (Lauron, 2009) The Bargaining Power of SuppliersThe bargaining power of suppliers is the reverse of the bargaining power of buyers. It is the price given for the product or services (Quick MBA, 2010). This too is a huge force in the industry. Usually restaurants would get food from external sources e.g butchers, different packaging companies and farmers and not make their own. For instance most of the restaurants sell meat. The supplier chosen will be according to the price the company sells its product at. Thus, in most industries it is a weak force yet can still advantage e.g Chipotle. It supplies organic produce and also antibiotic free meat and therefore charges a price for the product supplying (Quick MBA, 2010). The threat towards the entry of a new entrant is very high in case of the food industry. This is because there are very few barriers of entry. It is also cheaper to start up a restaurant than any other business. Individuals can easily acquire their own funds as compared to starting any other business. Also it is the experience that holds pivotal importance and not only the food. It is therefore important for the food industry to focus on entry of any new entrant that might become a threat in the near future. (restaurantowner.com, 2011) Substitute of Existing ProductsThe threat of substitute can be related as the products that exist outside the industry. This threat is arises when the product demand is effected by the change in price of the substitute product. A porter clearly explains in his model that the threat occurs usually due to the competition in price. (Quick MBA, 2010). In case of food industry, if restaurants are to maintain an average checked price, they will not lose customers. Issue arises when the customers prefer choosing a casual kind of restaurant or a fast food kind or may be prefer to eat at home. Thus the number of options increases. Even in economic crises consumers may chose to eat at home or opt for fast food. Yet they can still compete in terms of preparing food in a better way and giving good quality. This can be reduced by focusing on the consumer preferences. (Quick MBA, 2010). ReferencesBakan and Dogan, (2012). “Competitiveness Of The Industries Based On The Porter’s Diamond Model: An Empirical Study.” Volume 1, Issue 3. Available at: http://arpapress.com/Volumes/Vol11Issue3/IJRRAS_11_3_10.pdf
Porter’s five forces is a valuable tool to understand the dynamics of an industry. The application of the five forces on restaurant industry is discussed as below: Threat of New EntrantsSetting up a new restaurant requires moderate level of investment, making it an easy to enter industry. Another factor which affects the ease of entry for new restaurants is economies of scale, which can be established once the production and other operations achieve efficiency (Lee-Ross & Lashley, 2010). The new entrants also have to consider the fixed cost and operating cost, making sure that they are able to establish cost advantage (Hill & Jones, 2014). One possible way the new players in this industry attain cost advantage is through making bulk purchases and getting discounted prices. However, the high fixed cost remains a concern for the new entrants, who have to manage their operations, despite having low profitability in the initial stage of business. Keeping these points into view, it can be stated that the restaurant industry has moderate threat of new entrants. Bargaining Power of BuyersBesides the new entrants, the bargaining power of buyers is another important factor to consider. Since the buyers hold the power to influence the pricing decisions of a company, the restaurant industry is also affected by the buyer’s choice and switching behavior (Adhikari & Rao, 2013). Some of the ways through which buyers can effect a restaurant are the changes in prices, the items offered by a restaurant, the quality of the items offered etc. However, the restaurants can’t offer over priced items, because that will limit their number of customers. The prices need to be adjusted according to the target market and the affordability of that segment of the market. Based on this analysis, it can be concluded that buyers have a moderate bargaining power in the restaurant industry. Bargaining Power of SuppliersThe suppliers in this industry include the companies provide raw material to the restaurants. According to Chong et al. (2001), the number of suppliers in an industry determine the influence a supplier can have on the purchase decisions of its buyer companies. The regions which are marked with a high number of suppliers of similar raw ingredients, the suppliers have lower power as compared to regions where suppliers are fewer in number. The size of a restaurant is also a determining factor when it comes to the bargaining power of suppliers. Small scale restaurants create a higher supplier power because of the limited order they can generate, while the suppliers have a weaker negotiating position with large scale restaurants which place bulk orders. In order to maintain their business ties with the large firms, the suppliers have to adjust the price of raw material according to the demand of these businesses. The restaurant industry has various entities, making it easier for the customers to make a choice while switching from one restaurant to another. The low switching cost is another factor which makes it easier for a customer to shift their loyalty from one brand to another (Chong, Chen & Chen, 2001). The restaurants can charge a premium price from customers who are focused on quality and amazing dine in experience, while those customers looking for more economical choices opt for a cost effective outlet (Solomon, 2018). The ease of switching from one restaurant to another, in case if the experience is not according to customer expectations makes this industry having a high threat of substitute products. Competitive RivalryThe higher the number of competitors, the more intense would be the competitive rivalry in the restaurant industry (Chong et al., 2001). These players in the industry strive to keep a larger share in the market than their rivals, while maintaining a flow of profit and supporting the business towards growth. Therefore, the restaurant industry has high threat of rivalry, which makes it hard to maintain high profitability for smaller restaurants. The restaurant industry has intense competition owing to the presence of fast food franchises and numerous small scale establishments. The fast food giants having greater budget of marketing and product innovation are able to maintain an edge over their smaller counterparts. Moreover, there is little customer loyalty so people switch from one restaurant to another according to their demand and preference. ReferencesAdhikari, A., & Rao, A. K. (2013). Individual preference and bargaining behavior in families’ buying decisions of restaurant service. Cornell Hospitality Quarterly, 54(3), 248-261. Chong, P. P., Chen, Y. S., & Chen, C. J. (2001). IT induction in the food service industry. Industrial Management & Data Systems, 101(1), 13-20. Hill, C. W., & Jones, G. R. (2014). Strategic management: theory: an integrated approach. USA: South-Western Cengage Learning. Lee-Ross, D., & Lashley, C. (2010). Entrepreneurship and small business management in the hospitality industry. USA: Routledge. Solomon, M. (November 18, 2018). Only The Customer Gets To Decide What Matters In Customer Service And Customer Experience. Forbes. Retrieved from https://www.forbes.com/sites/micahsolomon/2018/11/18/the-customer-gets-to-decide-what-matters-in-customer-service-and-the-customer-experience/#4f5bd3b069db |
Bargaining power of suppliers in food industry
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