Strategic Analysis

"Choose an industry and apply a suitable external analysis model. Critically analyse the model"

Introduction 1.1

This assignment analyses and examines the different forces influencing the U.K fast food industry "An industry can be defined as a group of companies offering products or services that are close substitutes for each other. Close substitutes are products or services that satisfy the same basic consumer needs" (Hill, Jones, 1995)

Forecasted figures show the fast food industry in the U.K will generate estimated revenue of 8.8 billion pounds in 2006 which would be a 2.8% increase on 2005 figures. Growth is expected to slow down in 2007, with a 2.4% increase (www.keynote.co.uk)

Background on Porter's Five Forces model 1.2

Porter 1982 puts forward the theory that "analysis normally begins with a general examination of the forces influencing the organisation". Michel Porter's contribution has heightened "understanding of the competitive environment of the firm, and its many implications for many organisations (Lynch, 2006). Porter's five forces model outlines five basic forces that can act upon an organisation, the power of the supplier, barriers to entry, threat of substitutes, buying power and the degree of rivalry within the industry. Porter described the five forces model as "the forces driving industry competition" (Lynch, 2006).

Porters Five Forces model Figure 1.1

The diagram below displays how porters five forces diagram is structured

Source: www.tutor2u.net

Analysis of Competition within the industry 2.1

The first stage of Porter's analysis is investigating the "extent of competitive rivalry" within the U.K fast food industry. "The strongest of the five forces is usually jockeying for position and buyer favour that goes on along rival firms" (Thompson, Strickland, 1998). In the fast food industry, particularly among the major companies the competitive rivalry is particularly high. This is due to the industry being highly concentrated amongst the major fast food suppliers. These include famous retailers such as McDonalds, K.F.C, Burger King, Dominos and Pret-a-manager. According to Mindbranch (2004), McDonalds and Burger King have 91% of the burger sector sales, with K.F.C having 78% of total chicken sales in the U.K fast food industry. However what was most surprising was the sandwich sector within the industry. According to Mindbranch, the sandwich sector has seen the biggest growth and now has the largest share of the fast food industry with 71% of sales. (www.mindbranch.com).

There is evidence that some of the major companies collude together maybe to gain a competitive advantage over other competitors, in an indirect manner. A study conducted by Professor Waterson (2004) concluded that to his "surprise, big organisations appear to be unconcerned about the impact of competition on their outlets. It is remarkable how closely they locate to each other in shopping districts" (www.esrc.ac.uk). This suggests that although big companies do not directly collude, they use each other presence to "revise their expectations of market size upwards" (www.esrc.ac.uk).

"Higher competitive rivalry may occur if a market is growing slowly" (Lynch, 2006), this is evident within the fast food industry. Growth in 2006 was only 2.8% and it's projected that growth in 2007 will fall to 2.6% (www.keynote.co.uk). This indicates that competition within the market will heighten. This is because if one particular company wants to increase sales they will have to rely on "stealing" customers away from their competitors, thus heightening of competition.

Although the larger companies use strategic positioning to enhance each others market, competition between the smaller firms in the industry is massive. This is because there are many small companies competing within the market of similar size, sharing similar strategies, competing on price, speed of service and quality of food.

Additionally because there is not much product differentiation in the smaller end of the market, price competition tends to be the dominant factor driving customers. This can seriously dent smaller firms profit margins and the competition between the smaller firms drives the price down (www.keynote.co.uk)

Analysis of the power of suppliers within the industry 2.2

The second step in the analysis of the U.K fast food industry is the bargaining power of suppliers. "The Firms buyer's, influence prices and marketing costs. Its suppliers influence production costs. Suppliers tend to be powerful if there are only few of them" (Mason, Mockler, 1998).

Traditionally the fast food sector has been populated by small family run outlets meaning that no "group" has a significant share of the market. Most of the shops were based in the high street with little storage. The shelf life of products is short due to produce needing to be fresh and chilled, this means that deliveries to these small outlets are low volume and frequent, this can be as little as every two hours. (www.keynote.co.uk)

In the U.K fast food industry, the suppliers produce in large volume to achieve economies of scale, as the supplier produces in such bulk, its important for the suppliers not to lose a major contractor, as the lose of revenue and constraints on the economies of scale would be damaging. In this instance the major fast food outlets have the power over the suppliers; this is because the major outlets would be aware of the suppliers urge to keep the major fast food buyer's custom.

As the produce for the fast food industry is largely homogeneous, there is not many substitute inputs for the fast food industry. This means that suppliers are in a powerful position in this way, as the fast food major outlets can not replace the suppliers with substitute produce.

Suppliers do have a limited amount of power. This is due to the major fast food outlets using a small number of "select" suppliers from where they purchase their produce. This means that if the major fast food chains decided to switch there suppliers, there would be considerable "switching" costs involved for the suppliers. Suppliers would be aware of this, and this would enable the suppliers