Assessing Industry Attractiveness: Porter's 5 Forces
Porter’s five forces model is a great tool to determine industry attractiveness. The use of this model makes companies to step back, and see what is important. By stepping back and using the five forces, a company can get a broader view about what is significant to know on the industry they are in. The main thing in the five forces is to know where the power lies in the industry. This tool will become more effective by help knowing the strength of the competitors, and the strength of the position in which the company would like to move to. This tool can also help to take advantage in some situations, and improve weakness in others. The effectiveness of the five forces is not only on how to drive the company, but it also uses strategic planning for future products, and new rivals which is very important component in the market’s competition.
The Soft Drinks Industry Attractiveness- Porter’s Five Forces
Threats of entry posed by new or potential competitors:
Pepsi, and Coca Cola are controlling the industry, and the entry is difficult for reasons of the size and strong brand identity that this two main players have in the market. Bottling will be another barrier to entry since it requires capital investment, which might prevent entry.
Attractiveness level-Low
Rivalry among existing firms:
Pepsi and Coca Cola are controlling more than 70% of the industry in the U.S, and the top six controls about 90% of the market. Therefore the rivalry is less than if there were many small or equal size players in the market. Pepsi and Coke focusing more on rivalry in advertising, promotion and new products, rather than price since their buyers are characterize as brand loyal.
Attractiveness level- Medium
Bargaining power of suppliers:
Suppliers have little power over the industry, since the input of the biggest players in the market is primarily sugar, cans, and bottles. Sugar can be purchase easily in the market, and some times when sugar price is increase a sweet corn can be a cheap substitute. Aluminum is inexpensive material, and there are many suppliers that compete for a contract, therefore can dealers also have little supplier bargaining power.
Attractiveness level-LOW
Bargaining power of buyers:
In this industry consumers are brand- loyal, and in most cases they don’t base their purchase choice on price. Moreover, the stores see the soft drink industry as one that generates consumer traffic to the store, and therefore they find themselves obligate to hold variety of products from both Pepsi and Coke. The leading power buyer of this industry among all is the fast food network which buys in very low prices from Pepsi and Coke. By doing so Pepsi and Coke are trying to build brand recognition and loyalty, and use this avenue as an important channel to the customers through the fast food chains.
Attractiveness level-Low/ Medium
Closeness of substitute products:
Soft Drinks are unique and other drinks such as water and juices do not have the same taste, but they do have in common similar refreshing qualities that might make them a suitable substitute. Hot drinks and alcohol can’t be a substitute to soft drinks since they are not desirable or proper to the time when soft drink is needed.
Attractiveness level-Low/ Medium
By using the five forces analysis I will recap and say that the soft drink industry is profitable for the exiting firms. New firms will find it hard and in most times unprofitable market to go in.
5 comments:
First of all - thanks for posting the clip. I found it very helpful.
Secondly, I like the topic you chose. If you've been reading my blog, you should know I have a soft spot for Coca Cola - which brings us to substitute threats, and the point Madoc is making. Years ago there was a popular home appliance which enabled anyone to make their own soda. I haven't seen one of those in years. Add to that, that in most restaurants in New York, you basically have the same selection of brand name sodas and soft drinks. These two thoughts bring me to the conclusion that most people are either too busy are too lazy make their own soft drinks, especially since there are decent drinks available out there.
This is the key concept. People know these names of Coke, Pepsi, etc. They know these names and they like the products. This causes new small companies to have a difficult time entering the industry. Why buy an unknown brand of some sort when they can have a nice refreshing coke?
And here lies the catch. While it is true that Porter's model shows only a static snapshot of the industry and a clever analyst can mold the information in a preferred direction, an experienced businessman should ask why are there less and less substitutes out there?
While analysis advice is good, it’s the executive’s job to make the decisions and stir the company in the right direction.
Lastly, I think I can answer Madoc's first question: Money. Or in using the correct terminology - When the investor estimates he can make a good return on investment making the risk worth it.
Hello Eliran,
I just finished reading your Porter's 5 Forces analysis on the soft drink industry and I think it's great. To be honest, and this is going to sound foolish of me, I never thought of the fast food industry as one of the major buyers. But now that I think about it, they really are a power buyer!
But I do have a couple comments. I think that because Pepsi and Coca-Cola are the industry leaders (as you stated, they own 70% market share), that they have to be extremely fierce when they compete. We all know that Coca-Cola dominates, but even Coca-Cola knows that if they let their guard down, even for a week, that Pepsi is going to take advantage of that and try to steal some of their market share. My point is, these two giants are constantly attacking one another that even regular customers like me and you notice. So I would consider that Force to be highly unattractive due to the high competitiveness.
The other thing I want to mention is the bargaining power of buyers. I think you are giving too much credit to Coca-Cola's and Pepsi's brand loyal customers. I know brand loyalty exist but I don't think it is that strong. You also have to factor in low switching cost. If Pepsi is less expensive, I am sure they will get more sales. And the soft drink industry knows this. That is why every time Pepsi lowers their price, Coca-Cola follows and vice-versa because they know people will pick up one brand over the other if they are offering a better deal.
Ramon
I like the explanation you gave in your intro. 100% agree with you on how the five forces model is an excellent tool for companies to use to analyze the industry and where they should stand.
I would like to input on your analysis on the soft drink industry. You seem to suggest that bargaining power of suppliers is low since the companies inputs can be easily obtained from many vendors. Would that make the attractiveness level high for that category? Honest question so please correct me if I'm wrong :)
Aside from that, you make a good argument claiming the unattractiveness of the soft drink industry. Great job. Now you made me thirsty =X
Dear Eliran,
Soft drinks are an interesting topic, we all consume them on a daily basis, we all like them, and we all need them right along with our food. It seems as if the market potential is huge, and the revenues can be enormous. I think that new products do have room in this industry, its true that the big players are huge, but very similar to Yellow Tail, who knew what Vitamine Water is up until 3 years ago when it stormed the market and is now everywhere to be found, so like in everything, if a good product emerges, someone would drink it.
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