Introduction: Five Forces Analysis of Food and Beverage Industry
Many firms in the beverage industry have integrated Porter’s five forces model into their marketing strategies with the aim to competitively positioning their products and services in the market against rivals firms (Porter 1985). One such typical example is the beverages industry. The beverage industry is a case study which contributes a rich body of knowledge based on Porter’s five forces leading to the successful growth the industry has experienced over the years.
In this case, this analysis provides an in-depth understanding of how Michael Porter’s five generic forces have influenced how firms in the beverages industry position their products and services in the market and the most appropriate forces an industry should emphasize on to gain an upper hand against competitors, with firms such as Starbucks as a case example.
According to Ball (2007 p 1), firms dynamically formulate strategies to enable them to gain a strong position in the market, increase the market share to optimize on profits, to gain and sustain strong brand images, and positively influence profits (Argenti 2004; Cummings & Daellenbach 2009).
In practice, clever company executives keenly learn the implications of different forces in the market on the performance of their firms and the best ways to combine the forces and isolate the best combination to strategically position their firms in the market (Parker 2000). That is in addition to conceptualizing on the best strategies to retain and grow their market shares. Ones such solution is provided by Michael Porter’s five forces.
The Aim of Five Forces Analysis in the Soft Drink Industry
The aim is to provide an analysis of Porter’s five forces on how firms in the beverages industry operate in the market to gain and create a strong market position in a competitive environment and create a strong market share and strong brand image.
The objectives used in the study were to:
- Analyze how firms in the beverages industry have employed Michael Porter’s five forces to gain a strong market position.
- Identify the strongest forces the firms in the beverages industry employ, which provide the right combination to gains a strong market position.
- Provide a critical analysis of the outside-in approach to strategy formulation.
The Importance of Studying Firms in the Beverages Industry
The rationale for studying firms in the beverages industry is because of the body of knowledge the study contributes to this paper based on Michael Porter’s five generic forces. That provides an in-depth understanding of the significance and role the forces have on the positioning of firm in the market to gain a competitive advantage in their rivalry.
Beverage Industry: Porter Analysis
Based on a strategy to grow and sustain their position in the market, firms in the beverage industry have exemplified the significance of applying Michael Porter’s five forces in a competitive marketing environment (Adamy 2008). Studies have shown that many firms in the industry have integrated the five forces, which include the potential for new entrants, industry suppliers, buyers, substitutes, and new entrants into their marketing strategies to analyze competitors, and strategically position the firms and succeed in the market.
Industry Competitors
Different firms in the beverages industry have strategically positioned themselves to compete with rival firms in the beverages industry. To be competitive, firms in the industry have specialized in product based competition based on price adjustments against their rival firms (Barney 2002; Barney 2002; Mahoney 1992).
To counter the rising competition from related companies, such firms have narrowed their products by specializing in product differentiation, by introducing differently flavored coffee such as raspberry, amaretto, hazelnut, and pumpkin spices with distinctive flavors.
Threat of New Entrants in Beverage Industry
A typical example in the beverage industry is in the production of coffee beverages. The coffee industry has low premium on economies of scale leading to low barriers of entry into the coffee industry. Firms that operate in this industry with Starbuck as a typical example have endeavored to introduce a variety of products to address the entry level into the coffee industry by new firms.
That is in addition to optimizing the high switching costs, fixed costs, high costs of specialized equipment, and high costs of constructing roasting plants. In addition, firms have entered into exclusive retail chain distribution agreements, limiting access to the market by new entrants (Barney 2002).
In addition to that, other factors to include are asset specificity that can easily be converted to produce other beverages. The firms have integrated in the production processes minimum efficiency in scale using proprietary product technology (Pickering & Matthews 2000).
Substitute Products
To success, firms in the beverages industry introduce products tailored to address different customer needs to counter the effect of substitute products into the market. The impact of substitute products has had little impact on firms operating in the beverages industry’s market position (Blumenthal 2007).
Bargaining Power of Buyers
The bargaining power of buyers in the beverages industry is at a disadvantage because large firms have little abilities to negotiate with the buyers since there are few alternatives. To address the situation, firms have developed a specialization strategy of creating a significant amount of product differentiation because of price variations (Cummings & Daellenbach 2009).
In addition to that, brand premium is critically significant in diluting the power of the buyers, making the demand for a product not to be influenced by the consumer’s knowledge of the market status of a firm. Therefore the effect on the bargaining power of buyers has no positive impact on the firms operations in the market.
Bargaining Power of Suppliers in Food and Beverage Industry
Firms in the beverage industry have optimized the bargaining power of suppliers of raw material such as the supply of raw coffee bean, which are used to produce coffee with different flavors by optimizing the supply of coffee beans from unionized suppliers of the raw beans (Porter 2008; Engau & Hoffmann 2011). Here, firms optimize concentrated suppliers, different suppliers of the raw materials, and reducing the bargaining power of the suppliers, which leads to a decrease in the price of raw materials (Hall 1992).
The Most Important Porter’s Forces in the Beverage Industry
In practice, the five generic forces, according to Michael Porter’s play unique roles when formulating a strategy to position a firm competitively in the market (Hall 1992). Each of the forces play varied roles with varying significance. One typical example is how firms in the beverages industry have identified and combined the most appropriate forces to create a competitive advantage against rival firms in the market (Genzlinger 2007).
The most critical forces include industry rivalry, potential for new entrants, and substitute products. Other forces including the bargaining power of suppliers and the bargaining power of the consumer have had less significant impact on the market position of firms in the industry (Genzlinger 2007). The following is a discussion of the most important forces and the rationale for their significance in the beverages industry (Porter 2008).
Competitive Rivalry
In theory, the degree of rivalry in an industry is based on the rivalry between firms in the same industry, the cost associated with migrating from the industry, the level and ability for a firm to utilize capacity, the size of the market and growth trend of the market, and the strength and loyalty of a brand in the market (Porter 2008).
These elements, being salient features in industry rivalry are identified as critical in positioning successfully firms in the beverages in particular the coffee industry (Genzlinger 2007). Firms in the beverages industry have been very successful in positioning themselves in many retail chain outlets in many countries.
To sustain the position in the market, one critical component identified their strategy is the approach used to counter the rivalry experienced from small and large industry competitors (Gaffen 2008; Genzlinger 2007). A typical example is the rivalry experienced by Starbucks. The rivalry in the coffee and beverages industry has evidently been rising in the recent past.
That has been in the form of competitors which include Gloria Jeans Coffee, Coffee Bean & Tea Leaf, among other industry players. The industry players range from privately owned firms to small players in the industry. That is in addition to the competition that has increasingly been experienced from secondary coffee providers which include Burger King, Dunkin Donuts, and McDonalds among others in the industry (Gaffen 2008).
The strategy is to provide cost leadership based on competitive prices, create strong brand loyalties and brand image with the aim of increasing customer loyalty through product differentiation, and address differentiated focused customer needs through specialized focus. It is critical to note that rivalry because of undermining factors for the business model adopted by firms in the beverages industry is not affected by technology, political regulations, demographics, and new products.
Potential for New Entrants
The potential for new entrants into the beverages industry dominated by different firms such as Starbucks enjoys leadership in coffee has experienced growth in threat from new entrants into the industry (Gaffen 2008). New entrants pause the threat partly because of the rise in profits and dominance the firms have experienced in the industry with time, and the fact that such firms have dominated the industry for long with premium profits.
One of the strategic approaches of countering and creating barriers to potential new entrants exemplified in their strategy is to reduce product prices as a cost leadership strategy, by differentiating such products to discourage new entrants into the market (Porter 2008).
The cost leadership differentiation strategy includes providing a number of different products at different prices to ensure each category of people in different income brakes are catered for. In addition to that, the firms have created a unique and strong image in the market creating strong customer loyalty and brand image.
Here, customers have developed strong attachments to the products which are uniquely identifiable attributes, reducing the potential threat from new entrants (Gaffen 2008). The variety of different quality products the firms offer to their customers in the market and the degree of loyalty in the supply of coffee beans in the market places the firm at a competitive advantage against its rivals.
In this case, the strengths experienced by the firms based on the potential new entrants force incudes having competitive assets, strong employee skills, knowledge and experience, and strong market position. That could be used to counter the weaknesses that has in the recent past lead to a decline in profits, market share, and unproven liabilities.
Substitute Products
In theory and practice, substitute products provide customers with new and different options when trying to switch to new products that suit their needs. The ease of switching to new products depends on different factors which firms in the beverage industry have to identify when formulating the positioning strategy (Porter 2008).
The core element in view of differentiation, cost leadership, and focus that is critical in light of the threats of substitutes includes (Porter 2008). Porter (1985) shows, in the context of threat of substitutes, that it is critical for a firm to create a range of products with different attributes and quality and having a perceived value and quality that suits the needs of each customer.
In this case, the firms have enjoyed a level of near monopoly because of lack of alternative substitutes of real products such as substitutes for coffee (Gaffen 2008). That emphasizes on the strength of the firms’ position in the market and the relationship between the firm and its customers in the provision of specialized quality coffee.
The specialized products offered in the market and the unique customer loyalty the beverages firms have developed in the market has made it difficult for new entrants, limiting significantly new entrants into the industry with their substitute products (Gaffen 2008).
In addition, the strength and weakness of the buyers of beverages has been factored when formulating its marketing strategies making the firm competitive against its rival partners (Porter 2008). The opportunity for sustained a sustained position in the market is based on the ability of the firm to manufacture different products that suit different markets to address different customer needs.
Strategy Formulation: Outside-In Approach
The outside-in approach to strategy formulation emphasizes on positioning firms to address external pressures in the operating environment with the underlying paradigm drawn from industrial economics based on the structure-conduct-performance sequence (Engau &Hoffmann 2011).
Strategy is about the uniqueness of a mix of values based on the choice of activities appropriate in delivering quality services and products in the market. Strategy enables the positioning of a firm in the market with a unique and radically different approach to offering services and products in the market.
Strategy, in this case is defined as “the common thread among the organization’s activities and product markets that defines the essential nature of business that the organization was or planned to be in the future” (Engau &Hoffmann 2011). In this case, strategy is formulated at different levels of business, corporate, and strategic business area. Strategy can be formulated to be functional or competitive.
In each case, the positioning of a firm is critical in implementing strategy. Here, the positioning of a firm underlies the fundamental concept of the outside-in- approach, which is defined by the key steps of analysis, choice, and implementation outline (Cummings & Daellenbach 2009). In this case, a critical analysis of the outside-in approach to strategy formulation includes an analysis of the external environment with its key elements which include positioning.
Positioning
To be competitive in the marketing environment, it is critical that a firm is able to address external competing forces by delivering low cost services and products. Positioning can be need based, segmentation based, and access based. That is because strategy is “Customer-Innovation-Processes-Finance” (Cummings & Daellenbach 2009). The key elements of the positioning strategy are discussed below.
Structure
Positioning follows the components of structure-conduct-performance to align a firm and position it against competitors in the external environment. In this case, structure is based on a through analysis of the firm in terms of its ability to compete with other similar firms in the industry (Cummings & Daellenbach 2009).
That is in addition to the economic factors that underlie the operational capabilities of the firm and its infrastructure (Hall 1992). At this point, it is critical to identify how the firm addresses key issues that arise such as the products the customers buy, the kind of steps to take including legal steps to discourage competitors, and the internal structure of the firm to enable organizational managers introduce requisite changes to achieve better performance (Hall 1992).
A critical analysis shows that the outside-in approach enables the firm to achieve its long term goals by enabling structural reorganization to take the most appropriate actions to position the firm competitively. In addition, the current portfolio resources are factored, a self-renewing cycle is initiated, the core competencies are revised regularly, tradeoffs are eliminated, past knowledge is accumulated and used, and a clear foresight is developed in the process exhaustively leading to the next element of conduct (Gaffen 2008).
Conduct
Conduct includes identifying competitors and their strategies in the industry. Competitors are always aware of the strengths of other competitors in the same industry and always endeavor to design strategies to counter their rivals. In this case, industry analysis incorporates analyzing the five forces identified by Porter.
These include competition among companies, the use of substitute products and services, threat from new entrants into the market, the bargaining power of the customers, and the bargaining power of suppliers (Gaffen 2008). The strategy formulated in this case can either be focused on generic.
Performance
One critical element that differentiates a strategy is performance, which is based on the profitability of a firm and across the industry. That is in addition to conducting an analysis of the performance gaps in the organization to determine the past, present, and future projections in performance of the firm. The link between the actual reality and the future position of the firm are critical in the analysis based on the current trend.
Strategy Formulation: The Positioning Approach
Having discussed the impact and essence of the core elements that define organizational positioning, it is critical to evaluate the approach used to position organizations in the market, which is critical in formulating the outside-in strategy. One of the approaches and core elements are defined by analysis, choice and implementation features (Gaffen 2008).
Typically, it is a combination of different elements in a framework which consists of analysis, choice and implementation. In the analysis context, the core elements are defined in the five forces framework which is used to identify competing forces in the industry.
Here, the competitive forces can be analyzed in the context of Porter’s five forces (Genzlinger 2007). The outside–in strategy formulation is based on the assessment of the external environment based on the impact of the five forces in relation to the source of competition.
In this case, the forces can be intense depending on the type of industry, which in turn provides an indicator of the profitability of the industry. The forces can be intense or benign. Understanding the forces in any industry and associating the impact due to the forces on the performance in profitability is a critical element in the outside-in strategy formulation.
Strategic Group Analysis
The five forces framework can be combined with the strategic group analysis, another component critical in the analysis phase in the outside-in strategy (Barney 2002). In this case, the strategic characteristics of the industry players are assessed in strategy formulation.
The strategic group characteristics in the industry include identifying the groups in the industry and other players in terms of technology, innovation, and structure to determine their competing capabilities (Barney 2002). That is in addition to the type of groups critically categorized into reference groups, which constitute an execution group for customers to learn what a firm does, resource groups which underlie the approach for initiating decisions and the impact markets have in influencing the accumulation of resources.
In addition to that, a market group defines the perceptions developed by the customer of the products and service provided by a firm. In this case, the industries with a similar combination of strategies are identified as strategic groups based on geographic coverage, the degree of vertical integration, marketing efforts, branding, market segmentation, pricing policies, channel selection, technological leadership, specialization, and product and service quality (Hall 1992).
The purpose of the group analysis is to enable a firm identify direct competitors and their strengths, the flexibility and ability of competitors to shift their competing strategies, ability to identify strategic problems, and the ability to identify existing opportunities.
Value Chain Analysis
The value chain analysis is another element in the outside-in strategy formulation designed to drive an organization into gaining competitive advantage over its rivals in the same industry. Value in this case is gained from a unique combination of attributes that a customer values most in a product or a service.
In formulating the strategy, the organization seeks to identify the best method a product and service gains value when in the production process, or in the process a service is rendered to the customer (Hall 1992). It is one element that enables the configuration of discrete activities in the value chain so as to create a strategy that positions an organization at a strategic advantage over its rivals.
Choice
Choice is one element that results from the combination of five forces framework identified above, strategic analysis of groups in the industry, and the value chain analysis. The combination provides an informed capability of identifying the best generic strategy by choosing between low cost leadership, focus, and differentiation in the industry.
Low cost entails leads to competitive advantage based on economies of scale, while differentiation is defined by the degree of uniqueness in services and products, with focus signifying market segments based on differentiation and cost leadership and the best approach of implementing the strategy.
Implementation
Critically, when all the elements of analysis and choice have been integrated and analyzed to provide the best combination in the process of the outside-in strategy formulation, the organization identifies the best approach of implementing the strategy to gains a competitive advantage and position in the market with the underlying focus on providing the best customer value.
That is in addition to requiring a full comprehension of the business results that could provide the basis for organizational growth in terms of establishing strong customer engagement with brands, strong brand image, improved levels of productivity, increased levels of customer satisfaction, and generate empirical results upon which implementation occurs.
Critically, the key elements of customer satisfaction and loyalty of the outside-in strategy provide a strong basis for organizational positioning in the market against its rivals.
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