Introduction

To determine the competitive intensity, and therefore attractiveness of a market we modeled Michael E. Porters five forces. These are1. Rivalry within the industry

2. Threat of Entry from new competitors3. Pressures from substitute products4. Pressures from buyer bargaining power5. Pressures from suppliers bargaining powerBased on the information provided in case 10 we have analyzed the influence of the above five forces on attractiveness of global fast-food industry:

1. Rivalry within the industry:

The second competitive force is the extent of competition or rivalry among established companies in the industry. For instance, if the rivalry is weak, companies have an opportunity to increase prices and gain more profits. While, if there is a strong competition, companies would compete in prices, which might result in a price war. This would reduce or limit profitability due to the reduction in the sales margins.

As explained in this case rivalry among companies depends on the following factors:

Price is an issue for undifferentiated product:

If the products are very similar the switching cost of customers is low then price competition is common. If the products are differentiated and switching cost is high then rivalry is less sensitive. In case of global fast-food industry switching cost is low and products are quite similar among existing players in the industry. It implies rivalry is quite high in the global fast-food industry. As a result first food industry is unattractive.

Number of Competitors and size of competitors:

There are more than 800,000 restaurants and food outlets made up the U.S Restaurant industry. Out of which full-service and fast-food segments were expected to make up about 65 percent of total food-service industry sales in 2000. The fast-food businesses are competing globally in the fast-food industry and the size of some company like McDonalds, Pizza Hut, KFC are quite large and they are operating globally. McDonalds operated the largest number of restaurants which is more than 12,000 in USA and 14,000 foreign units all over 119 countries. Tricon global restaurants operated more than 20,000 in USA and close to 30,000 non-USA. KFC, Pizza Hut, and Taco Bell restaurants in 85 countries. Because of their early expansion abroad, McDonalds, KFC, Burger Kind, and Pizza Hut had all developed strong brand name and managerial expertise in the international market. This made them formidable competitors for the fast-food chain. It reflects that global fast-food industry is unattractive in terms of number of competitors and size of competitors.

If Demand is growing slowly:

The changes in demographic trends in the past two decades, rising incomes, greater affluence among a greater percentage of American households, higher divorce rates, and the fact that people married later in life contributed to the rising number of single households and the demands for fast food. But due to immense price competition and saturation of the US and other develop countrys market; all global fast-food industry is unable to raise its prices to cover the increased costs. As a result global giants focused on developing country as there are huge growths potential like Latin American countries and NAFTA region countries. Finally it can be concluded that seeing price competition and industry growth, global fast food industry is unattractive in developed country and attractive in developing country.

If Brand loyalty does not exists:

In fast-food industry, as it is found in the case brand loyalty is the only identity here. As the name implies KFC, McDonalds, Pizza Hut, burger Kind including all 35 companies (exhibit 5) has their strong customer base. Another important thing in Fast-food industry is the test of food. It is a matter of habituation. There is a natural loyalty to the brand for the test.

So, Brand loyalty is high and as a matter of fact industry is unattractive.

Concentration and balance of competitors:

Concentration of the number of firms in the industry shapes the competitive behavior of the firm. In case of fast-food industry some giant company like McDonald, Pizza Hut, KFC, Burger King are shaping the industry and dominated all over the world. So in case of concentration we found global fast-food industry unattractive.

2. Threat of New Entrants:Threat of entry from new competitors depends on existing entry barriers and reaction from existing players. Existing Entry barriers are Brand loyalty, Economies of scale, Learning curve effect, Absolute cost advantages, Access to distribution channels, Government regulations etc.

Brand Loyalty:KFC is brand of example. As we find in the case its customer base is unbreakable unless otherwise its corporate strategy fails. The rapid growth of first food industry encourage lots of potential competitors who are not currently operating and competing in the industry to enter and establish their businesses. These potential competitors might be Heublein, Inc and R. J. Reynolds Industries, Inc or other companies, which have diversification strategy that includes the acquisition of different companies in several industries. For example, RJR has a diversification strategy into unrelated areas to its major business. It merged with KFC in 1982, but it sold it to PepsiCo after 3 years. Therefore, such companies could enter the industry if they have the capability to compete with other fast-food companies. Potential companies or new entrants would face some difficulties or barriers that eliminate their entrance. For example, brand loyalty to goods produced by incumbent companies is considered as a barrier to new entrants as they would take a long time to shift customers loyalty to their products.

Economies of Scale:

The threat of new entrants can be reduced because most of the established companies in the industry have economies of scale advantage. For instance, McDonalds has cut its building costs and spread this fixed cost over large outputs. Also, PepsiCo has improved its economies of scale within its business operation by adopting the dual branding strategy. Therefore, this enables KFC to improve its customer base by increasing its menu offerings. This would reduce the threat of new entrants because they will not be able to compete in the market and hold high cost disadvantages compare to the already established firms.

Government Regulation:

In addition, government regulations and other bureaucratic procedures make it difficult for new competitors to enter the market.

At the same time we find in the case that the giant are facing competition with local entrepreneurs who had grassroots understanding of local language, culture, customs, law, financial markets, and marketing characteristics. Most case they are overcoming this problem by franchising local entrepreneurs.

In conclusion there is moderate threat of new competition. The sales increased 5.4 percent, to $358 billion in 1999 in United States. The reason behind such a threat existing is due to the fact that the industry is highly profitable. So, global fast-food industry is moderately attractive for existing giant as well as new players considering the fact of threat of new entrants. 3.The Threat from Substitute products:

Substitute products are alternative products that satisfy customers needs in a similar way to those being served and provided by the industry. At the same time availability or affordability would shift customers to substitute products. As a result, the existence of substitute products acts as a strong competitive threat for companies as it restricts its ability to increase prices and boost revenue. Similarly, if a firms products have fewer substitutes in the market, it would have a good opportunity to reflect its prices and gain more net income. Here we find in global fast-food industry there are numbers of substitutes that fast-food industry faces as competitive forces. Fine dining, hot and spicy foods, smoothies, wraps and pitas, salads, and espresso and specialty coffees. As in this case Starbucks, the Seattle-based coffee retailer, capitalized on the popularity of specialty coffee by aggressively expanding its coffee-shop concept into shopping malls, commercial buildings and bookstores. Mexican-food is aggressively popular. Japanese, Indian, and Vietnamese restaurants are getting shape as mentioned in the case. Aged consumers are reluctant taking fast-food and were more likely to visit dinner houses and full service restaurants.

Another point to mention is that products in each segment of the fast food chains is considered as substitute for the products that are being offered in other segments. As found in the case, the items that are being offered in the sandwich segment by McDonalds might be considered as substitute for other items offered in the chicken segment by KFC. Although KFC sandwich is not popular due to unique test of McDee, but this is quite a R&D and marketing failure issue.4. The bargaining power of buyers:KFC is a single company including others is small in number and big in size, which gives them the ability to bargain for price reduction as they purchase in large quantities from suppliers. KFC as a multinational company it has large internal cash flow that allows it to invest in cheap and less risky countries(NAFTA Countries including Mxico) to supply their own input needs (vertical integration). As a result, the suppliers would be threatened and forced to reduce their prices. The buyers would be able to reduce their costs and increase the competitiveness of their goods in the market.

On the other hand individual customers can have power over the fast food companies and force them to reduce their prices. For a first food customer it is just a meal of one sitting, and switching cost is negligible other than test and appetite satisfaction

Considering both side it can be concluded that the bargaining power of buyers in the fast food industry is very strong. It implies that the industry is very attractive.

5. The bargaining power of suppliers:

The bargaining power of supplier could be very strong, if we assumed that the buying companies are not important for the supplier as its business profitability doesnt depend on them. Therefore, he could set his own terms and offer them to the buying companies and if they refused to approve on the terms, the suppliers could go to other buying companies in the industry such as McDonalds if KFC refused the terms. From this it is clear that the buyer could not force the supplier to reduce prices or improve quality.

On the other hand suppliers could have relatively moderate or weak bargaining power in the fast food industry. This is because the industrys products have lots of substitutes that customers can use to satisfy their needs. Also, the buyers products are not highly differentiated, which makes it easy for them to change their suppliers. This means they dont depend on one supplier and can switch to other suppliers. Furthermore, the buying companies such as PepsiCo are not heavily depended on this industry to generate profits, but it diversify their business operations into several unrelated industries to diversify its source of income. This helps to reduce the bargaining power of suppliers. Another thing is that the buyers who distribute the products to end users are big companies that are financially strong. This enables them to invest their money on cheaper countries such as Mexico and supply their own needs. From this we can see that buyers can match with the threat of vertical integrating backward and reduce the bargaining power of suppliers.

INDUSTRY ANALYSISWhat are the primary driving forces in the U.S. fast-food industry in 2004?

Industry sales are flat:The industry growth rate, which has averaged about three percent per year, indicates that the industry has matured. Lower growth rates have intensified competition among fast-food chains. Market share gains are increasingly achieved only by taking customers away from existing competitors rather than by attracting new customers into the industry.The industry is consolidating:Significant merger and acquisition activity during the last decade has consolidated many fast-food chains under the same corporate umbrella. Many chains such as Yum! Brands, Inc. are actively engaged in acquisitions as a means of creating purchasing power and greater economies of scale in purchasing, brand management, advertising, and distribution.

The industry is becoming more global:Most of the top U.S. fast-food chains have implemented foreign growth strategies to expand outside of the mature U.S. market. Foreign markets are less saturated than the U.S. market and offer significant opportunities for chains to grow sales and establish strong, long-term market positions outside of the United States.

Diversification has become an important growth strategy:Fast-food chains are diversifying outside of their core products and attacking other fast-food chains as a means of increasing growth. For example, McDonald's, Wendy's, Arby's, and Hardee's sell a variety of chicken sandwiches in addition to their core portfolio of hamburgers. McDonald's also sells breakfast burritos, salads, cookies, and ice cream. Pizza Hut and other pizza chains have introduced chicken wings and other non-pizza items to their menus. This has blurred the distinction between competing chains and substitute products chains that were once classified as substitutes (e.g., McDonalds and KFC) are now competing chains.

Many customers are health conscious:Want products with lower fat content, lower cholesterol, or fewer carbohydrates. Many hamburger chains have introduced grilled chicken sandwiches, low carbohydrate hamburgers, and salads to appeal to these consumers. The instructor might discuss the wide variety of viewpoints about what constitutes healthy food. Americans have historically viewed low-fat, low-protein products (i.e., carbohydrate-rich) products as most healthy. A growing number of Americans, however, have switched to low-carbohydrate, high-protein diets (the Atkins Diet) or more balanced diets (the Zone). To take advantage of these trends, KFC has begun advertising its products as low-carbohydrate alternatives to other fast-food products such as Burger Kings Whopper, in essence attempting to create the perception that fried chicken is healthy.Using Porters Five Forces Model, assess the strength of each competitive force in the U.S. fast-food industry.

Substitute Products (Strong Force)Substitute products include:

Full service restaurants. Cafeterias. Microwavable products purchased at grocery stores and eaten at home. Family restaurants (Denny's, IHOP, and Cracker Barrel) Dinner houses (Red Lobster, Chilis, and Outback Steakhouse) Grilled buffet chains (Golden Corral, Ryans, and Ponderosa).Substitute products are a strong force because:

There are a variety of high quality, reasonably priced eating alternatives available.

There are numerous restaurants and other eating alternatives located near most Pizza Hut and KFC locations.

Customer switching costs are low.

Strong substitute products lower profitability of the industrys competitors because they provide cheap, high quality, and readily available alternatives to customers. Customers may, for example, choose to take home a cooked chicken purchased from their local supermarkets deli instead of eating out at KFC.

Competition (Strong Force)

Pizza Huts primary competitors are:

Other pizza outlets (Dominos, Papa Johns, Little Caesars, Chuck E. Cheeses).

Chicken outlets (KFC, Churchs, Chick-fil-A, Popeyes, Bojangles).

Sandwich chains (McDonald's, Burger King, and Wendys).KFCs primary competitors are:

Other chicken chains (Churchs, Chick-fil-A, Boston Market, Popeyes, Bojangles).

Pizza outlets (Pizza Hut, Domino's, Papa Johns, Little Caesars).

Sandwich chains (McDonald's, Burger King, Wendys).

An interesting question is whether Pizza Hut, KFC, and McDonalds are competitors or substitutes. During the 1980s and early 1990s, other fast-food chains (non- chicken-on-the-bone) were viewed as substitutes for KFC. Today, McDonalds sells chicken sandwiches and chicken McNuggets. Pizza Hut sells chicken wings and a variety of pizzas with chicken toppings. This has blurred the distinction between segments (dinner houses versus grilled buffet chains, sandwich chains versus chicken chains, etc.). The instructor may wish to pursue this issue. If a slow-growth market prevents Pizza Hut from growing its pizza sales, then it can attempt to draw customers away from KFC and other chicken chains by offering a variety of chicken products in addition to their traditional pizza menu.

Competition (rivalry) is a strong force (intense) because:

Industry sales growth is flat.

Competition for market share among existing chains is intense.

There are high first mover advantages (e.g., McDonald's created brand awareness for its chicken sandwich by introducing its sandwich before KFC).

Low customer switching costs have increased pressure on chains to attract customers through advertising, new product offerings, and price discounts.

Customers (Strong Force):Some customers have strong loyalty to particular chains (e.g., McDonalds, Burger King, Pizza Hut, and KFC). This decreases customer power. Overall, however, customers are increasingly becoming a stronger force because:

They are knowledgeable, repeat buyers. They are price and quality sensitive. They want great convenience and are location sensitive. Switching costs are low.Threat of Entry

(High Entry Barriers = Low Threat of Entry = Weak Force)

The threat of new entry is low (weak force) because:

Many customers have strong loyalty to individual brands such as KFC. It is extremely difficult to develop brand awareness and image for new brands in a well-developed industry like fast-food. High fixed costs reduce the likelihood that new firms will enter the industry. Economies of scale force new entrants to enter at a cost disadvantage. Existing fast-food chains are intensely competitive and willing to defend their positions with discounting and advertising.Suppliers (Weak Force)

Suppliers are a weak force because:

Paper and plastic are standardized commodities. This allows KFC to shop around for the best price Switching costs are low. KFC can easily switch from one supplier to another. Threat of backward integration. KFC could integrate backward if needed. KFC buys in large volumes, giving it the power to negotiate lower prices.

Is the U.S. fast-food industry attractive?

According to Porter's model, it is not. Three of the five forces (substitute products, competitors, and customers) are strong. It is an intensely competitive industry and profit margins are low.

The industry is mature.

The segment market share leaders are in the most attractive position because of their ability to leverage assets and lower costs through economies of scale (e.g., McDonald's, Burger King, Wendy's, Applebees, Denny's, Pizza Hut, Domino's Pizza, and KFC).

It is certainly an unattractive industry for new entrants, which must overcome high fixed costs of entry, economies of scale disadvantages, strong brand recognition among existing chains, and the risk of strong retaliation by existing competitors.

What are the fast-food industry's key success factor? Product quality and consistency.

Q

Service.

S

Cleanliness.

C

Perceived Value.

V

Location. Global brand awareness.Restaurant companies use the acronym Q S C V to refer to the industrys key success factors. Because of intensified competition in the mature and increasingly saturated U.S. market, many companies have also begun to view location and global brand awareness as important key success factors.BUSINESS STRATEGY ANALYSISComplete a SWOT analysis for Pizza Hut and KFC.

Strengths (For both brands)

Strong brand awareness.

Strong brand loyalty.

Market share leader.

Proprietary recipes and technology.

Marketing expertise.

Brand management.

International expertise.

Weaknesses (For both brands)

Many restaurants are aged.

Many restaurants are small or takeout only (KFC).

Reputation for poor service and cleanliness.

Independent franchises make it difficult to develop product and operating consistencies (Especially KFC).

Opportunities (For both brands)

International expansion. Co-branding (KFC, Pizza Hut, Taco Bell, A&W, and Long John Silvers). Development of lunch day-part by promoting lunch and snacks. Expansion of all-you-can-eat buffets (Especially KFC). Promotion of roasted chicken and chicken sandwiches (KFC). Promotion of low-carbohydrate/low fat pizzas (Pizza Hut). Promotion of ethnic foods in ethnic neighborhoods. Construction of restaurants in non-traditional locations such as collegesThreats (For both brands) Poor service and cleanliness in many restaurants.

Expansion of chains promoting non-fried chicken (Chick-fil-A, Boston Market, and Pollo Loco).

Expansion of non-traditional pizza chains (Chuck E. Cheeses, Round Table Pizza).

McDonalds quickly becoming market leader in key international markets such as Brazil.

McDonalds is threatening to replace KFC as the market leader in Mexico.

Conclusion:So far the concern of global fast-food industry it is needed to conclude in two different aspects. From the view of developed countries attractiveness of the fast food industry is low as the market is already saturated. There is extreme rivalry inside the industry although the threat from new entry is low; there is no bargaining power from supplier and buyer and not so much threat from substitute, Exhibit 1. On the other hand in the context of developing country attractiveness of fast-food industry is high as growth potentiality is high, no bargaining power from buyer and suppler. There are some threats from substitute but it can be minimize by adopting creative marketing policy and pricing. Also the threat from new entry is there but global giants can compete easily by franchising, brand image and through managerial expertise. Exhibit 1.

RivalryThreat of new EntrantsThreat of substitute productBargaining power of BuyerBargaining power of Supplier

CauseExtreme RivalryModerate ThreatNot too strongStrongWeak

EffectVery UnattractiveModerately AttractiveAttractiveAttractiveAttractive

Weak

Strong

Strong

Strong

Weak

Substitutes

Customers

Threat of Entry

Competitors

Suppliers

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