The Porters five forces analysis (Porter 1980) describes some aspects of the competitive pressures in an industry. This appendix runs through the model, focusing on the fast food industry.

Each force will in the following be identified and analysed to find out in which form and strength it contributes to the overall competitive pressure in the industry. Afterwards, the whole competitive pressure will be evaluated to get a better overview of the whole industry.

Bargaining power of buyers

Definition of buyers: Buyers are those who is ordering fast food at the local restaurant, over the telephone, or internet or just paying or consuming the products.

Each buyer in it self, does not have much bargaining power over the fast food industry. When ordering over the telephone, or standing at the line in the local QSR there is no actual bargaining going on, it is just ordering and paying, since the normal ordering sizes are of a limited scale.

But when the buyer is actually choosing a place to buy the fast food that is where their power is. Since the industry is flooded with many different kinds of fast foods and many different suppliers of fast food, then the buyer are in a situation where a lot of suppliers are offering products that have a certain similarity. Since the global fast food chains have been trying to match each others successful products and product packages, then the buyers can actually buy similar products from multiple suppliers, and that is a situation the empowers the buyer.

Furthermore, if the fast food industry does not match the demands of the buyers and the general consumer trends, then the buyers can choose not to buy their product and convince others to do the same. A good example of this is the movie ‘Super Size Me’. It is a movie showing an ordinary consumer trying live of McDonalds fast food, and the purpose of the movie was to see what the traditional fast food from McDonalds could do to your health if you were to eat their products for every meal. This movie shows what the buyers possible reactions could be if not satisfied or not being pleased. The reactions from the whole market were a large change in consumer preferences and brand preferences.

Bargaining power of suppliers

Different suppliers have different bargain powers in the fast food industry. There is the soft drink industry where mayor supplier brand names supplies products and brand value to the fast food industry. And then there is the large amount of smaller suppliers that delivers other products to the fast food industry.

Vital suppliers

The market for soft drinks is dominated by a few companies. Mainly Coca Cola and Pepsi. These soft drinks suppliers are the only ones who have the capacity to match the needs of the global fast food chains. The domination of a few suppliers in an industry with more customers sets a high bargaining power for the suppliers.

Some of the larger fast food companies have realised the importance of these suppliers, and entered strategic alliances with the suppliers to make the dependence mutual. The largest fast food companies do deliver a large proportion of the revenues at the suppliers and thereby there exist a mutual interest of keeping each other as suppliers/customers.

The soft drink suppliers has normal guideline of delivering other soft drink supplies such as refrigerators, soft drink machines, cups etc. for their customers, helping branding their soft drinks. This provides a significant shifting cost for the customer, since it has to put resources into changing all these things. Furthermore the fast food industry is interested in having the soft drink producers being a part of their own branding. The Pepsi and Coca Cola brand have a global brand ranking of respectively 23 and 1. 

With the smaller fast food places the soft drink suppliers are holding all the bargaining power, since the individual fast food companies does not form a significant part of the supplier clientele, and their business could be partially dependant of the suppliers willingness to provide necessary equipment for the company.

Smaller suppliers

The smaller suppliers on the other hand, having no brand value to contribute with, or any unique products are worse of than the vital suppliers. Since they are easily replaceable as suppliers, then they have no real bargaining power over the fast food industry. But the industry still has to treat their suppliers descent, or else they will create bad publicity.

Risk of threat of new entrants

When operating on a market like the American, then there will be a lot of competitors for trying to get a bite of the multi-billion industry that signifies the fast food industry. Since the market is partly defined through being defined by convenience, then a close location will have a significant role in determining whether or not is will be a success. A signal of this could be McDonald’s ever continuing focus on having the right real-estate positions for their shops. Furthermore McDonalds have in the recent years been forced to close down/relocating several shops, since they were misplaced.

Since convenience is a big part of the fast food industry, then it would be fairly easy to enter the industry as a local seller of fast food.

But one were to scale it up and try to compete with the larger chains, then there would be a large economies of scale and scope to compete with. This would set a severe barrier for new entrants trying to enter the large scale fast food industry.

A large amount of product differentiation exists in the industry. The McDonalds brand ranks as 8^th in Business Weeks Scoreboard over global brands. Furthermore the brands KFC and Pizza Hut are also represented (with place nr. 61 and 63 on the scoreboard). This signifies a large consumer preference to the global brands, and would create somewhat of a barrier for new entrants.

A new fast food shop could be opened for a fairly small amount of money, and not creating a larger barrier for new entrants. But there are some health regulations both in the start-up process and also some standard regulations for all types of restaurants.

The current focus on obesity and the link to fast food consumption makes the impressions of the fast food industry diversified. The healthy part of the fast food industry would seem more appealing to new entrants than the conventional fast food industry.

Threat of substitute products

Definition of substitute products: product that fulfil the same generic important product abilities.

The generic product of fast food is mainly considered as convenience. Convenience and availability are the main drivers for choosing fast food. But this is backed up by focus on value. Since the market as a whole consists of many differentiated fast food companies, then the customers are used to having the option of choosing the best value products.

The threat of substitute products is mainly found in the frozen food section of the supermarkets.

Frozen reheatable prepared food offers a strong competitive strength against regular take away fast food. Since the whole “convenience” industry is still growing as a result of people’s trend towards having less time to spend in the kitchen.

Since consumers like having a large variety of convenience food (Datamonitor 2006a) at hand, and the market size is a multi billion dollar industry, then the fast food industry can expect severe competition from the frozen reheatable prepared food to get a bite of the market.

The value of the substitute products in general matches the fast food products and the consumer preferences of the consumers. The substitute product offers both cheap value meals and quality products for both ends of the quality scale that the fast food industry normally targets. Furthermore it offers healthy alternatives to match the consumer needs and wishes.

But still the frozen food industry has a image problem with their food. Even though it can offer the same quality, convenience and healthiness as the fast food industry can, then it haves a problem in how it is presented. The fast food industry has a large advantage of being able to build an image around their products and sell more than just a product; they can sell an experience, whereas the frozen food industry has a hard time selling more than a cardboard box the meals is normally bought in.

Rivalry among established firms

The rivalry between competing companies in the fast food industry defines how they are fighting to get new customers.

The American market has been going through a slow development and minimal growth the last couple of years. So instead of the companies going for new customers of the fast food industry, they have to turn elsewhere for company growth. They have to gain market shares from other fast food companies. This shift in focus has made the rivalry between the companies stronger.

A good example of this would be the price competition between multiple fast food chains’ value meals. The value meals, usually going for around 99 cents, are a reaction for the shifting consumer trends and a larger focus on competing against each other. Pricedumping is normally a good way to attract new customers, or stealing customers from competing companies, and since it have been a growing consumer trend to go after these value meals, then it is a product category that have been adapted from most of the global fast food companies.

In the other end, then there is a trend of quality meals. This “new” trend of quality fast food have required for the companies to set up R&D to develop new products and other initiatives to gain market shares from the competing companies. But even though there is a large focus on R&D, the high level of competition forces the individual competitors to copy of each others products and ideas quickly, which means that the product R&D quickly develops to be an mere incremental advantage, since the competitors are always keeping an eye out for new ideas for themselves, and so far there have been no way of protecting a burger or sandwich recipe.

So even though there is some ways of gaining small advantages through product R&D, then the main competition goes through the branding. And the competition to create the strongest brand is fierce. Firstly normal advertising through TV, posters radio-commercials are regular. But the biggest brands like McDonald’s, Burger King, and Subway have been branding their own brand through piggy backing on other brands power.

Some brands like McDonald’s and Burger King are going after each others market shares, with having nearly the same product offerings. Some of the other companies, like SubWay have instead tried to diversify themselves from the crowd, and producing other products than different variants of regular burgers. Thereby they have found a way to differentiate, which gives them a bit more space to move in, and thereby a little less fierce competition.