Introduction
The Porter’s Five Forces analysis is a model that seeks to determine particular aspects within a given industry. The five forces that this model evaluates include the bargaining power of buyers and seller, the industry entry limitations that exist, which acts as barriers to new entrants willing to join the industry, as well as the available substitute products.
They also seek to evaluate the general competition within the industry. These are important dimensions for any business enterprise as they offer the basis upon which the business’ strategy can be drawn out. This paper uses this model to analyze the foods industry in general, while analyzing the Kraft Foods Group in particular.
Porter’s Five Forces Analysis
Buyers’ bargaining power
Buyers’ bargaining power, especially on Kraft Foods Group, is comparatively high. Owing to the fact that quite a significant number of food commodities manufactured by the company are mostly undifferentiated, consumers generally are more price-sensitive (Enz, 2010). For instance, a decision by Kraft Foods Group to raise the price on its cereals brand would push customers into searching for a complimentary priced substitute.
The diverse product portfolio of the company equally contributes to the bargaining power of its buyers. The company cannot easily switch their suppliers for the mere fact that such a move would have adverse effects on the taste. Another high bargaining power aspect of the buyers originates from the large retail stores that purchase the food products from Kraft Foods Group.
The huge volume of food commodity that these stores purchase from the company makes them enjoy a higher bargaining power because of the advantage of economies of scale that such a huge purchase warrants.
Suppliers’ bargaining power
The main raw materials required by Kraft Foods Group to sustain their production are mainly commodities. These have quite a huge supplier base, basing on their simplicity, as well as their general availability. The commodities include sugar, dairy products, cereal grains, vegetable oils, fruits, meats, vegetables, as well as packaging materials and different other agricultural products.
Thus, the bargaining power of the suppliers is low (Pershing, 2006). In some other instances, the food companies have managed to recycle their packaging tools, a factor that further lowers the bargaining power of the suppliers.
Another aspect that lowers the bargaining power for the suppliers is the actions by Kraft Foods Group to hedge such risk as increasing commodity prices. The company achieves this by using futures, options, as well as adopting forward cash contracts. Such actions enable the company to limit risks, especially during extreme price movements concerning the commodities that they commonly require to sustain their production.
Entry barriers
The entry barrier into the food market by new players is high. The market structure is oligopolistic, which makes it highly challenging for new entrants to compete with the established firms. For instant, the breakfast cereal segment is dominated by Kraft Foods, General Mills, Kellog, and Quaker Oats (O’Connor, 2004).
The net effect for this kind of a market structure is the need for high capital, extensive research, as well as national wide advertising, all of which are costly to achieve especially for a new company that obviously faces the challenge of limited capital.
Another entry barrier emanates from the brand loyalties that the successful and already existing players have managed to build. This would make it difficult for the new entrants to convince the buyers and win them over from their competitors (O’Connor, 2004).
Kraft Foods Group is highly diversified, which is a factor that affords economies of scale advantages. This is a barrier to entry for rival firms because the company has the capacity to operate at very low costs and offer its commodities at very low prices.
Being the largest manufacturer of foods in the USA, the company offers foods in various categories, including meat, dairy, bakery, beverages, and confectionary. With such a wide scope of operation, the company enjoys high efficiencies in its activities that new entrants would definitely lack the power to compete against.
Threat of substitute products
There is a high threat of substitution in this industry. There are many other manufacturers whose products fall within the same market segment as those manufactured by Kraft Foods. Thus, buyers have a wide selection to choose from. There are also no switching costs as buyers will not incur any substantial costs for buying food from a different manufacturer.
Some of the companies that offer competition to Kraft Foods Group include Kellog, Quaker Oats, and General Mills (O’Connor, 2004). Kraft Foods Group continuously attempts to address the threat of the substitute products by undertaking differentiation of their products.
This mainly focuses on adding value to the products such that the consumers may find them unique as compared to the products by other competitors (Ungson & Wong, 2008).
Industry rivalry
Rivalry within the food industry is relatively high. This is because the major players in the industry are the ones competing at close range. These companies have almost an equal share of the market and spend almost the same amount of capital in their production.
Because customers of these companies have developed long term brand loyalty to their respective brands, the players are engaged in intense rivalry to win customers and obtain their loyalty (Greene et al., 2009).
Conclusion
The food industry in the USA has both high and low degrees of the various dimensions used by Porter in evaluating the competitive force within an industry. The bargaining power of the buyers is high because of a number of factors. Firstly, commodities manufactured by Kraft Foods Group are largely undifferentiated, which makes price to be a critical factor.
Food stores also purchase large volumes of stock, which affords them a higher bargaining power. Suppliers have lower bargaining power because mostly the raw materials are commodities that are readily available, and there are many suppliers in the market. However, the entry barriers to the industry are high as the major players have invested a lot in terms of diversification.
This affords them economies of scale, which virtually makes their operating costs to remain low. Brand loyalty also poses as a challenge to new entrants. Industry rivalry is high because the market is oligopolistic in nature, meaning the leading players have an almost equal magnitude in terms of market share and capital. These players, thus, try their best to outwit their competitors and expand their market share.
Finally, the threat of substitution is also high. There are many companies that manufacture almost the same range of products into the market. Because there exists no switching costs, customers can easily shift allegiance to the rival product provided it satisfies their needs and expectations.
References
Enz, C. A. (2010). The Cornell School of Hotel Administration handbook of applied hospitality strategy. Thousand Oaks, CA: SAGE Publication Inc.
Greene, C. et al. (2009). Emerging issues in the United States organic industry. New York, NY: Department of Ariculture
O’Connor, D. E. (2004). The basics of economics. Westport, CT: Greenwood Press.
Pershing, J. (2006). Handbook of human performance technology: principles, practices, and potential. San Francisco, CA: Pfeiffer
Ungson, G. R., & Wong, Y. (2008). Global strategic management. New York, NY: M.E. Sharpe, Inc.