Planning a strategy for a business cannot be conducted without a good analysis of the external environment. The findings of such analysis allow evaluating the industry in which the company operates, which if combined with an internal analysis of the company might reveal threats to avoid and opportunities to utilize in the market. One of the most essential tools to conduct an external environment analysis is Porter’s five forces model. The present paper will provide an analysis of two of Porter’s forces that apply to the industry of fast food, the threat of substitutes and competitive rivalry.
The main elements related to substitutes and rivalry in Porter’s Five Forces can be seen in Table 1. In terms of substitutes, it can be stated that the main aspects in such elements are related to the quality of the substitutes, the readiness of customers to switch, and the costs to switch. The fast-food market belongs to the industry of Limited-Service Restaurants, classified as 722211 by the US Census Bureau (U.S. Census Bureau “Limited-Service Restaurants”). In that regard, the closest substitutes, in addition to preparing food at home, are from the closest industries to Limited-Service Restaurants, which in this case are snack and nonalcoholic beverage bars, cafeterias, grill buffets, and buffets, and full-service restaurants. Accordingly, there are many substitutes within the industry of limited-service itself, including pizzerias, carryout, steakhouses, etc. The switch costs are low for all of the substitutes, except for the full-service restaurants. Other than the aforementioned, the options in the remaining substitutes are mainly similar, and at the same time lacking some of the concerns and the criticisms addressed toward fast-food restaurants in terms of health outcomes and obesity. Thus, it can be stated that the threat of substitutes in the fast restaurant industry is rather high.
The focus on the competition and rivalry aspect is mainly related to the concentration of the industry. Analyzing the concentration ratio of the limited-service industry, it can be stated that the industry is rather fragmented, where the largest four companies in the industry constitute only 10 percent of the total sales for the industry. Similarly, the 50 largest firms only constitute 13 percent of the total number of establishments, while constituting 22 percent of the total sales (U.S. Census Bureau “Establishment and Firm Size: 2002”). In that regard, it can be seen that the market is largely competitive. Accordingly, it can be stated that the market is saturated with many small firms, where many rivals exist in an industry, none of which has a significant market share. In that regard, it can be seen that competitive advantage is reached through differentiation of products, and marketing initiatives as it might be seen from the table indicating advertisement expenditures for the largest players in the market. Thus, it can be concluded that the industry can be characterized by an intensive rivalry among competitors.
It can be concluded that an analysis of the external environment using Porter’s Five Forces, can be a useful tool to identify threats and opportunities in the fast-food industry. The present paper analyzed two forces from Porter’s Five which are the threat of substitutes and rivalry among existing firms. The analysis revealed that both threats are high in such an industry. The analysis of a company’s strengths and weaknesses might reveal the threats and the opportunities that companies might have in such an industry.
Table1: Rivalry and Substitutes in Porter’s Five Forces
U.S. Census Bureau. “Establishment and Firm Size: 2002”. 2005. U.S. Census Bureau. Web.
U.S. Census Bureau. “Limited-Service Restaurants”. 2009. U.S. Census Bureau. Web.