Industry Analysis Report

Industry Analysis Report

An industry analysis report is an essential tool that enables a company to evaluate its position relative to other firms that produce similar commodities. An extensive industry analysis covers three key components that include industry forces at work, the overall attractiveness of the particular industry, and lastly, the key elements that influence an organization’s success within the industry. It is important to understand the forces at work in a particular industry to enable effective strategic planning. Exploring the intricate interplay of the forces that shape an industry is key in predicting and anticipating future trends that may impact business development. An industry analysis report helps businesses to develop a competitive advantage by enabling the efficient allocation and utilization of their resources in building unique capabilities and capacities. This paper aims to explore the industry and environment analysis of the fast-food industry to determine the opportunities and threats within the sector.

Industry analysis

There exist various models that businesses can use to explore the structure of the industry in which they operate. Michael E. Porter developed the most efficient model that is widely utilized in his work Competitive Strategy: Techniques for Analyzing Industries and Competitors. The book has provided a premier model to aid in analyzing industries in terms of their structure and attractiveness. Porter’s model outlines five forces that influence the rivalry among firms operating in a particular industry. These five forces include ease of entry, power of supplies, power of buyers, availability of substitutes, and lastly, nature of competition.

The initial step in analyzing the structure of an industry is to assess the effect of Porter’s five forces. According to Porter, the five forces impact on the profit potential within a particular industry. Porter stated that “The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long term return on invested capital,”( Porter, 1980). Besides, understanding the forces at work in the fast-food industry is crucial in establishing the strengths and weaknesses that may influence a company’s growth and development. Porter believed that the “The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor.” (Porter, 1980). An industry analysis exercise is crucial as it highlights the areas where strategic changes may have the greatest influence on developing a competitive advantage. Performing industry analysis helps to illuminate key trends within the industry that may turn into threats or opportunities.

Ease of Entry

Ease of entry determines the potential of new firms to begin operating in a particular industry. In essence, this force measures the ease or difficulty of new entrants to set up operations in an industry. The ease of entry into a market is an important consideration because it determines the likelihood that a firm already in operation, will face new competitors. Industries that are perceived as being easy to enter increase the possibility of competition for existing firms. In these industries, sources of competitive advantage tend to decline quickly as new entrants enter the market. In contrast, sectors that are difficult to enter, the likelihood of competition for existing firms is low. In these industries, sources of competitive advantage tend to last longer, and therefore firms are assured of having to compete with a definite set of competitors.

The potential of new firms to enter the market is key in exploring the structure of an industry. The ease of entry into a particular industry is dependent on various factors, such as the reaction of existing firms to new entrants and the prevailing entry barriers in the industry. The response of existing firms to rival businesses can enhance or deter the chances of new entrants getting into an industry. A strong reaction inhibits the entry of competing firms. Such kind of response is likely to happen when the existing firms have invested substantial resources in the industry and when the market is characterized by declining or slow growth. Besides, strong barriers to market entry also act as deterrents to the entry of new firms into an industry. These barriers include economies of scale, limited channels of distribution, high level of product differentiation, exorbitant capital requirements, high switching costs for the consumers, and lastly, restrictive government policies.

Power of Suppliers

The power of suppliers within an industry affects the ability of a firm to compete effectively. The bargaining power of suppliers is an existential force that can reduce the competitive advantage of an organization. Suppliers can establish bargaining power in different situations, such as in instances when an industry relies heavily on a few suppliers. Besides, in cases where there are no substitute products and raw materials, suppliers tend to gain extra bargaining power. In industries where the costs associated with switching to different suppliers are high, firms are less likely to change suppliers and thus strengthening the supplier’s power. In markets where individual purchasers only account for a small percentage of the supplier’s business, then the suppliers gain a strong claim in the industry.

Suppliers with massive resources have influential bargaining power as they can alter the chain of distribution and take on the position and role of weaker firms operating within the industry. Supplier power has the potential of affecting the quality and price of the finished product and thus indirectly affecting the relationship between small firms and their clients. Companies require collaborative supplier relationships to help develop their competitive advantage within an industry. Business needs to keenly analyze the power of suppliers as it is a force that can affect the ability of the firm to compete effectively and efficiently.

Power of Buyers

The purchasing power of consumers is another force that can exert pressure on the operation of small businesses. Influential consumers have the potential to exert pressure on firms by demanding higher quality products, albeit at lower prices, huge discounts, and additional aftersales services. Buyers with high bargaining power have the potential of playing competitors against one another and thus adversely impacting small businesses. The bargaining power of consumers tends to increase when a single buyer accounts for a large portion of the firm’s business. In industries where substitutes are readily available in the market, the bargaining power of buyers tends to increase as they can easily switch to rival firms.

In markets where the costs associated with changing suppliers are low, there is an influx of large volumes of goods with little differentiation, which reduces the bargaining power of individual firms. In such instances, the customers benefit from an increase in a variety of goods. Thus the buyer’s position is strengthened as they can easily choose among various products at cheaper prices. Lastly, buyers with enough resources have considerable bargaining power as they can move backward in the distribution chain, thus affecting small businesses. Firms need to understand the influence of the bargaining power of buyers as it is a critical force that can affect their ability to realize productivity.

Availability of Substitutes

The availability of substitute products can affect the ability of a firm to compete effectively and efficiently in an industry. Porter explained that “All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge.” The availability of a large number of substitutes adversely affects a firm as it dilutes their respective competitive advantage in the market place. As mentioned earlier, the availability of substitutes is one factor that enhances the bargaining powers of the buyers, thus disenfranchising small businesses. Product substitution occurs when buyers are persuaded that they can acquire similar products that provide the same functions but at a reasonably lower price to what other firms are offering. Small businesses need to keenly evaluate the impact of product substitution as it occurs in either subtle or sudden ways. Firms require to invest in high degree differentiation of their goods if they are to counter the force of product substitution. In addition, organizations need to form a deep understanding of their buyers to create demand specifically for their goods and services.

Competitive rivalry

The intensity of competition is a critical force that can impact the profitability of a business. According to Cook, “The battle you wage against competitors is one of the strongest industry forces with which you contend.” Competitive battles have the potential to curtail the growth and progression of small businesses in an industry. Competitive battles exist in various forms, such as price wars, new product introduction, expanded service delivery, and advertising campaigns. The intensity of competition is influenced by several factors, such as the existence of a large number of well-balanced competitors who stay and fight even in instances where the industry is no longer profitable.

An industry experiencing slow growth is prone to having an increase in the intensity of competition as more firms join the market. It is common to have intense competition in industries where there is little or no differentiation between commodities. In addition, the intensity of competition is high in sectors that are characterized by high exist barriers. Firms operating in such an industry find it difficult to exit the market due to several factors such as specialized assets, government or social restrictions, emotional ties, and strategic relationships with other buyers and other business units. Additional exit barriers include high fixed costs and labor agreements. These high exist barriers make it difficult for existing firms to stop or switch lines of operations, and thus they continue operating in the saturated industry, therefore, intensifying competition. Businesses must understand the nature of competition in an industry as it can be an opposing force that affects their profitability and progression.

Industry Attractiveness and Success Factors

An industry analysis report reveals the attractiveness of a particular market under consideration. According to Cook, “Industry attractiveness is the presence or absence of threats exhibited by each of the industry forces.” The analysis of Porter’s five forces is crucial in establishing the threats posed by each factor. Cook further explained that “The greater the threat posed by an industry force, the less attractive the industry becomes.” Firms seeking to enter new markets should seek out industries in which attractiveness is high, and the threats are low. Small businesses must understand the industry forces aptly at work in specific markets to devise strategic plans to deal with them. Developing effective strategic plans ensures that the business finds unique and ingenious ways to satisfy the needs of its customers, thus nurturing a competitive advantage over its rivals.

Attractiveness of the Fast Food Industry

The fast-food market is a segment of the restaurant industry. It is a highly competitive market with individual firms competing on factors such as taste, price, and quality. Firms seeking to enter the fast-food market should keenly analyze Porter’s five forces to determine the overall attractiveness of the industry. Porter’s premium model is particularly important in establishing the external factors that may influence the performance of a firm within an industry. Porter’s model can be used to assess the intensity of each force as either strong, moderate, or weak. In the fast-food industry, the intensities of the five forces can be established as follows: competitive rivalry (strong force), power of buyers (strong force), power of suppliers (weak force), the threat of substitution (strong force), the threat of new entrants (moderate force).

Competitive Rivalry: The competitive rivalry in the fast-food industry is a strong force due to the presence of a high number of competitors, a high variety of firms, and low switching costs. The quick-service restaurant industry is saturated with a high number of firms of different sizes. A new entrant must consider the variety of these firms in terms of products, market focus, and pricing strategy. The low switching costs indicate that buyers are more likely to transfer from one firm to another. These factors indicate that competition is a strong concern for firms in the fast-food industry.

Power of Buyers: The bargaining power of consumers is a strong force that influences the profitability of firms in the fast-food industry. Consumers possess a high bargaining power due to several factors such as low switching costs, availability of substitutes, and the presence of consumer unions. The low switching costs empower customers to transfer to other firms offering higher quality services at lower prices. The availability of numerous substitutes gives buyers more choice and thus more bargaining power. The presence of customer unions empowers buyers to demand more accountability from firms in the fast-food industry. These factors indicate the bargaining power of buyers is a strong concern for businesses in the fast-food industry.

Power of Suppliers: The power of suppliers is a weak force, and thus firms in the fast-food industry need not worry about it. The power of suppliers is weakened by several factors, such as a high number of suppliers, high overall supply, and low forward integration. The high number of suppliers leads to an abundance of raw materials and therefore limiting the influence of individual supplier firms.

The Threat of Substitution: The availability of substitutes is a strong force that significantly affects the business of firms in the fast-food industry. Customers can easily switch from one fast food outlet to the other due to the high availability of substitute products with even satisfying taste and quality. Competition from dining restaurants and home cooking increases the threat of substitution. These factors indicate that the availability of substitutes should be a huge concern for businesses in the fast-food industry.

The threat of New Entrants: The risk of entry of new firms into the fast-food industry is considered to be of medium intensity due to various factors such as moderate cost disadvantage, and moderate cost of doing business. New entrants face the challenge of high-cost disadvantage due to a lack of economies of scale which large firms enjoy. Also, the high cost of doing business can be a financial challenge for new firms. Existing firms need not worry about the threat of new entrants since it is a moderate force.

Recommendations: Considering the strength of the five forces, it is appropriate to recommend that firms in the fast-food industry focus their efforts mainly on competition, customers, the threat of substitution. Businesses in the fast-food industry should utilize aggressive marketing in a bid to counter the force of competition and the risk of substitution. Firms should be keen on improving their product quality and implementing an appropriate pricing strategy to attract and retain customers.

Fast Food Industry Environment Analysis

The external environment of any industry is affected by various aspects such as political, economic, technological, legal, and cultural factors. The PESTEL analysis provides a framework to explore the macro-environmental factors that affect the operations of a firm. The PESTEL analysis yields results which indicate the key opportunities and threat that face a firm in a particular industry.

Political: The political factors that affect the operations of a firm in the fast-food industry vary from country to country. It is of utmost importance that companies ensure adherence and compliance to the different political requirements in various jurisdictions. Political regulations can differ from wage requirements, hygiene, and food quality standards. The minimum wage requirements can vary from one country to another. In countries where the minimum wage standards are high, the associated costs of labor are also high. In many jurisdictions, packaging requirements that regulate the fast food industry have also changed. Government policies can be used to press fast food businesses to incorporate healthier options in their menus. The overall attitude of the government towards the operations in the fast-food industry can affect the performance of firms within the sector.

Economic: The prevailing economic factors in a country will affect the performance of businesses. Economic factors such as recession and consumer purchasing power influence the fast food industry to a great extent. Recession periods are characterized by low economic activity, and thus firms need to restructure their operations. Businesses can cope during periods of low economic activity by including low priced products and increasing the variety of items on their menu. During periods of high economic activity, the purchasing power of buyers increases, and therefore, businesses need to invest in customer service to attract and retain them.

Social: The societal perceptions of health and lifestyle have a profound effect on the fast-food industry. The growing trend towards health awareness has affected the whole food industry. People now put a lot of thought into what they consume before they eat. The fast-food industry has been heavily criticized for including high-calorie food items on their menus, which contribute to childhood obesity. Consumers and the media have played a role in pressing fast food joints to include low-calorie food options. The change in social trends has a significant impact on the performance and profitability of the business in the fast-food industry.  Firms have been required to indicate the nutritional content and calorie levels on the labels of food items.

Technological: The growth of the fast-food industry is dependent on the level of technological innovations in a country. Technological advancements are crucial in enhancing customer service and convenience for buyers. Technological factors affect the way brands serve and engage their customers. Social media platforms and online ordering have greatly changed the style and dynamics of customer service. Technological innovations have also influenced marketing and advertising strategies for fast food brands. Technology is an indispensable tool, and therefore fast-food firms must utilize technology to devise innovative ways of doing business.

Environmental: Sustainability is a critical factor that has influenced the changes in the fast-food industry globally. The rise in environmental awareness has forced companies to adopt a greener approach to doing business. Brands need to ensure compliance with government regulations on recycling and waste management. Companies in the fast-food industry face enormous pressure to ensure that their supply chains are compliant and sustainable. Adopting a green approach can be an effective way of gaining customer loyalty.

Legal: Changes in legal requirements in different jurisdictions have affected the fast-food industry. More stringent laws have been enacted to ensure that brands strictly adhere to food quality standards and nutritional values. The enactment of new laws imposes new restrictions and responsibilities on fast food businesses. Brands must comply with legal changes to ensure that their operations are above reproach.

Opportunities and Threats

Several issues are facing the fast-food industry. The key issues include: 1) small operating margins as a result of constant price wars in the industry 2) lack of fresh ingredients 3) increase in consumer demand for healthy foods 4) increase in competition 5) technology innovations 6) low customer loyalty 7) lack of innovation in product and services 8) increase in logistical problems 9) increase in awareness towards sustainability 10) social perceptions. These issues can be broken down to establish the opportunities and the threats that face fast-food businesses. The areas of opportunities include investing in technology, adopting sustainable approaches, incorporating healthy options in menus. The threats include an increase in competition, lower operating margins, low customer loyalty, adverse social perceptions, and high logistical costs.

In summary, an industry analysis exercise is a crucial task that enables company executives to identify the opportunities and threats that face their businesses. The paper has discussed in depth Porter’s five forces and their influence on the overall attractiveness of an industry. The analysis established that the threat of substitution, power of buyers, and competition are strong forces in the fast-food industry. The PESTEL analysis has revealed several issues that face the fast-food industry. Some of the issues amount to opportunities, while the rest are threats that may hinder the performance of firms in the fast-food industry.

References

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