Case Study 5 Forces De Porter

McDonald’s position as the global leader in the fast food restaurant market is partly a result of the firm’s effectiveness in responding to the Five Forces in its industry environment. Michael Porter’s Five Forces analysis model identifies the most relevant external factors that influence business organizations. In McDonald’s Five Forces analysis, the focus is on the fast food restaurant industry. The environment of this industry interacts with McDonald’s to affect the firm’s potential and success. Nonetheless, its current global success indicates that McDonald’s remains effective in addressing these five forces and in overcoming related issues.

McDonald’s Five Forces analysis gives insights about the company’s strategic direction. McDonald’s strategies must align to the external factors in the global fast food restaurant industry’s environment.

Overview: McDonald’s Five Forces Analysis

In this Five Forces analysis, McDonald’s experiences the effects of external factors at varying intensities. The company must implement strategies to meet these external factors and minimize negative impact. In summary, McDonald’s Five Forces analysis yields the following intensities of the five forces:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (strong force)
  3. Bargaining power of suppliers (weak force)
  4. Threat of substitutes or substitution (strong force)
  5. Threat of new entrants or new entry (moderate force)

The results of the Five Forces analysis shows that McDonald’s needs to prioritize the issues related to competition, consumers, and substitutes, all of which exert a strong force on the company. A possible course of action for McDonald’s to address these issues is product innovation. New McDonald’s products can attract and keep more customers. Also, this Five Forces analysis shows that McDonald’s can implement higher quality standards to address competition and substitution in this saturated market.

Competitive Rivalry or Competition with McDonald’s (Strong Force)

McDonald’s faces tough competition because the fast food restaurant market is already saturated. This element of the Five Forces analysis tackles the effect of competing firms in the industry environment. In McDonald’s case, the strong force of competitive rivalry is based on the following external factors:

  • High number of firms (strong force)
  • High aggressiveness of firms (strong force)
  • Low switching costs (strong force)

The fast food restaurant industry has many firms of various sizes, such as global chains like McDonald’s and local mom-and-pop fast food restaurants. Also, most medium and large firms aggressively market their products. In addition, McDonald’s customers experience low switching costs, which means that they can easily transfer to other restaurants, such as Wendy’s. Thus, this element of the Five Forces analysis of McDonald’s shows that competition is among the most significant external forces on the business.

Bargaining Power of McDonald’s Customers/Buyers (Strong Force)

McDonald’s must address the significant power of customers. This element of the Five Forces analysis deals with the influence and demands of consumers. In McDonald’s case, the following are the external factors that contribute to the strong bargaining power of buyers:

  • Low switching costs (strong force)
  • Large number of providers (strong force)
  • High availability of substitutes (strong force)

Because of the ease of changing from one restaurant to another (low switching costs), customers can easily impose their demands on McDonald’s. In relation, because of market saturation, consumers can choose from many fast food restaurants other than McDonald’s. Also, there are many substitutes to firms like McDonald’s. These substitutes include food outlets, artisanal bakeries, as well as foods that one could cook at home. Based on this element of the Five Forces analysis, McDonald’s must develop strategies to increase customer loyalty.

Bargaining Power of McDonald’s Suppliers (Weak Force)

Suppliers also influence McDonald’s. This element of the Five Forces analysis shows the impact of suppliers on firms. In McDonald’s case, the weak bargaining power of suppliers is based on the following external factors:

  • Large number of suppliers (weak force)
  • Low forward vertical integration (weak force)
  • High overall supply (weak force)

The large population of suppliers weakens the effect of individual suppliers on McDonald’s. This is especially so because of the lack of regional or global alliances among suppliers. In relation, most of McDonald’s suppliers are not vertically integrated. This means that they do not control the distribution network linked to McDonald’s facilities. Also, the relative abundance of materials like flour and meat reduces suppliers’ influence on McDonald’s. Thus, this element of the Five Forces analysis shows that supplier power is a minimal issue for McDonald’s.

Threat of Substitutes or Substitution (Strong Force)

Substitutes are a significant concern for McDonald’s. This element of the Five Forces analysis deals with the potential effects of substitutes on firm growth. In McDonald’s case, the following external factors make the threat of substitution a strong force:

  • High substitute availability (strong force)
  • Low switching costs (strong force)
  • High performance-to-cost ratio (strong force)

There are many substitutes to McDonald’s products, such as products from artisanal food producers and local bakeries. Consumers can also cook their food at home. It is also easy to shift from McDonald’s to these substitutes (low switching costs). In addition, these substitutes are competitive in terms of quality and consumer satisfaction. In this element of the Five Forces analysis of McDonald’s, substitutes are a major issue that the company must address through approaches like product quality improvement.

Threat of New Entrants or New Entry (Moderate Force)

New entrants can impact McDonald’s market share. This element of the Five Forces analysis refers to the effects of new players on existing firms. In McDonald’s case, the moderate threat of new entry is based on the following external factors:

  • Low switching costs (strong force)
  • Moderate capital cost (moderate force)
  • High cost of brand development (weak force)

Because of the low switching costs, consumers can easily move from McDonald’s toward new fast food restaurant companies. Also, the moderate capital costs of establishing a new restaurant makes it moderately easy for small or medium-sized firms to affect McDonald’s. However, it is expensive to build a strong brand that could match the McDonald’s brand. Thus, this element of the Five Forces analysis shows that the threat of new entrants is a considerable issue for McDonald’s.

References
  • Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. five forces. Harvard Business Review88(5), 28-29.
  • Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review24(1), 32-45.
  • Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(5), 213-229.
  • Maybury, M. T., & Belardo, S. (1992, January). Five forces. In System Sciences, 1992. Proceedings of the Twenty-Fifth Hawaii International Conference on (Vol. 4, pp. 579-588). IEEE.
  • McDonald’s Corporation Form 10-K 2014.
  • Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
  • United States Department of Agriculture Economic Research Service (2015). Food Service Industry Market Segments.

Case Study & Case Analysis, McDonald's Corporation, Porter's Five Forces Analysis, Restaurant Industry

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Ford Motor Company maintains its position as one of the biggest automobile manufacturers in the world by reforming its strategies to address the issues shown in this Five Forces analysis. Michael Porter developed the Five Forces analysis model for analyzing the external factors in firms’ industry environments. Ford needs to develop policies and approaches that respond to the most significant forces based on the external factors in the global automotive industry. This Five Forces analysis of Ford Motor Company identifies the most important external factors and how they impact the business, thereby providing input for managerial decision-making.

Ford Motor Company needs to prioritize the most significant of the Five Forces, which in this analysis is shown to be competitive rivalry. The other forces are also significant but with lower intensities of impact on Ford.

Overview: Ford Motor Company’s Five Forces Analysis

Ford Motor Company’s Five Forces analysis shows that competitive rivalry or competition is the most significant external force in the automotive industry environment. The following are the intensities of the five forces in influencing Ford’s business:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (moderate force)
  3. Bargaining power of suppliers (moderate force)
  4. Threat of substitutes or substitution (moderate force)
  5. Threat of new entrants or new entry (weak force)

The results of the Five Forces analysis of Ford Motor Company show that competition or competitive rivalry is the most significant issue for the business. For long-term viability in the automotive industry environment, Ford must prioritize strategic solutions to develop competitive advantage. For example, innovative products can boost the company’s sales performance. As such, Ford must prioritize R&D investment to maximize innovation processes.

Competitive Rivalry or Competition with Ford (Strong Force)

Ford Motor Company faces tough competition. This aspect of the Five Forces analysis refers to competing firms that influence the industry environment. The following are the external factors that contribute to the strong force of competitive rivalry against Ford:

  • High aggressiveness of firms (strong force)
  • High exit barriers (strong force)
  • Moderate number of firms (moderate force)

Ford needs to compete against top players (e.g. Toyota) that aggressively innovate and market their products. Also, the automotive industry has high exit barriers, which means that firms would rather keep competing with Ford than to close their business, because of the high costs and investments. Such a condition exerts a strong force of competition against Ford. In addition, Ford must compete against a moderate number of firms, especially a few large ones like General Motors. Based on this aspect of the Five Forces analysis, Ford must maximize its competitive advantage to address the external factors linked to competition.

Bargaining Power of Ford’s Customers/Buyers (Moderate Force)

Ford’s customers significantly influence the business. This aspect of the Five Forces analysis pertains to the effects of buyers on businesses and the industry environment. The external factors that contribute to the moderate bargaining power of Ford’s customers are as follows:

  • Moderate switching costs (moderate force)
  • Moderate size of individual purchases (moderate force)
  • Moderate availability of substitutes (moderate force)

Ford Motor Company’s customers face moderate switching costs, which are the consequences of moving from one firm to another. In this case, customers can easily transfer to other firms, although infrequently because automobiles are big-ticket items. Also, each purchase of Ford’s products is moderate in terms of its price and contribution to the company’s revenues. Thus, even a small change in customer’s demand can have significant consequences on Ford. In addition, the moderate availability of substitutes gives customers the option to move away from Ford. Thus, Ford Motor Company must maximize customer satisfaction to address the external factors in this aspect of the Five Forces analysis.

Bargaining Power of Ford’s Suppliers (Moderate Force)

Suppliers exert moderate influence on Ford Motor Company. The impact of suppliers and their demands on firms are considered in this aspect of the Five Forces analysis. In Ford’s case, the following external factors contribute to the moderate bargaining power of suppliers:

  • Moderate overall supply (moderate force)
  • Moderate population of suppliers (moderate force)
  • Low forward vertical integration (weak force)

The moderate overall supply and moderate population of suppliers give suppliers significant but limited bargaining power on firms like Ford. Also, most of these suppliers have low forward vertical integration, which means that they do not own or control the distribution and sale of their products to Ford. The suppliers’ bargaining power is further weakened because of Ford’s backward vertical integration through the Ford River Rouge Complex. Through the Complex, Ford produces some of the materials it uses to manufacture cars and related finished products. Thus, this aspect of the Five Forces analysis shows that Ford must consider the significant but limited external factors linked to suppliers’ effect on the business.

Threat of Substitutes or Substitution (Moderate Force)

Ford Motor Company experiences the effects of the substitutes to its products. This aspect of the Five Forces analysis refers to the extent substitution threatens firms and the industry environment. The following external factors contribute to the moderate threat of substitution against Ford:

  • Moderate availability of substitutes (moderate force)
  • Moderate switching costs (moderate force)
  • Low performance of substitutes (weak force)

There are considerable substitutes to Ford’s products, including public transportation and bicycles. However, these substitutes are not always available or appropriate in certain areas or situations. In addition, the switching costs are moderate because, even through Ford’s customers can shift to using these substitutes, they cannot easily do so when they are still paying for their car loans. Also, in many instances, these substitutes have lower performance than Ford’s products in terms of convenience and safety. Based on this aspect of the Five Forces analysis, Ford needs to address suppliers as a second-priority external threat.

Threat of New Entrants or New Entry (Weak Force)

Ford Motor Company feels the effects of new entrants on its industry environment. The impact of new firms is considered in this aspect of the Five Forces analysis. The external factors that contribute to the weak threat of new entrants against Ford are as follows:

  • High capital costs (weak force)
  • High cost of doing business (weak force)
  • High cost of brand development (weak force)

Companies like Ford commit to huge spending to set up and maintain their businesses and facilities. These costs are a barrier to entry that weakens the threat of new entrants. In addition, it is costly to develop a strong brand comparable to Ford’s, thereby making it difficult for new entrants to effectively compete against industry giants. Based on this aspect of the Five Forces analysis, external factors present only a weak threat against Ford.

References
  • Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. five forces. Harvard Business Review88(5), 28-29.
  • Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review24(1), 32-45.
  • Ford Motor Company (2015). Supporting One Ford.
  • Ford Motor Company Form 10-K, 2014.
  • Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(5), 213-229.
  • Maybury, M. T., & Belardo, S. (1992, January). Five forces. In System Sciences, 1992. Proceedings of the Twenty-Fifth Hawaii International Conference on (Vol. 4, pp. 579-588). IEEE.
  • Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
  • U.S. Department of Commerce (2015). The Automotive Industry in the United States.

Automobile Industry, Automotive Industry, Case Study & Case Analysis, Ford Motor Company, Porter's Five Forces Analysis

COPYRIGHT NOTICE:
This article may not be reproduced, distributed, or mirrored without written permission from Panmore Institute and its author/s. Copyright by Panmore Institute - All rights reserved. Small parts of this article may be quoted or paraphrased for research purposes, as long as the article is properly cited and referenced together with its URL/link.

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