In case of having power in the backward integration for instance, customers in the food industry are able to bargain over the decrease in price of the food items, this could result as a threat for the company. It is also cheaper to start up a restaurant than any other business. The existence of substitute product offers customers different choices and allows them options within the industry and beyond it to products that may fulfill a similar need. It is the price given for the product or services (Quick MBA, 2010). In McDonald’s case, the following external factors make the threat of substitution a strong force: There are many substitutes to McDonald’s products, such as products from artisanal food producers and local bakeries. A porter clearly explains in his model that the threat occurs usually due to the competition in price. A porter clearly explains in his model that the threat occurs usually due to the competition in price. There are regulations related to wages, hygiene and food quality that need to be complied with. Individuals can easily acquire their own funds as compared to starting any other business. In McDonald’s case, the following are the external factors that contribute to the strong bargaining power of buyers: The ease of changing from one restaurant to another (low switching costs) enables consumers to easily impose their demands on McDonald’s. “Factors affecting the competitiveness of the food industry by using Porter’s  five  forces  model  case  study  in  Hamadan province, Iran.” Journal of Asian Scientific Research, 2015, 5(4):185-197 Available at: http://www.aessweb.com/pdf-files/jasr-2015-5(4)-185-197.pdf The threat of substitutes in the industry is high. Rivalry is automatically increased when the firms are competing with the same customers. The reasoning behind this is that there are no set barriers or loops that could legally prevent a company from entering the industry. However, researches show evidence of a threat in fast food purchasing habits whereby supermarkets are possibly eroding the power of strong brands in the contemporary fast food market. Available at:  http://arpapress.com/Volumes/Vol11Issue3/IJRRAS_11_3_10.pdf If prices are set higher customer might leave unreasonably. But opting out of some of these cookies may have an effect on your browsing experience. It supplies organic produce and also antibiotic free meat and therefore charges a price for the product supplying (Quick MBA, 2010). For example, shifting from the company to substitutes typically involves insignificant or minimal disadvantages, such as slightly higher costs per meal in some cases, or additional time consumption for food preparation. This external factor strengthens the force of rivalry in the industry. The other forces (the bargaining power of suppliers and the threat of new entrants) are also significant to the business, although to a lower extent. Globally, the fast food brands have to comply with these requirements. Michael E. Porter’s Five Forces Analysis model provides valuable information to support strategic management, especially in addressing relevant issues in the external environment of the business. (1) Bargaining power of buyers. McDonald’s Corporation’s generic strategy and intensive growth strategies satisfy business needs in competing against such firms as Burger King, Wendy’s, Subway, and Dunkin’ Donuts, as well as food and beverage businesses like Starbucks Coffee Company. Yet they can still compete in terms of preparing food in a better way and giving good quality. The Threat of Substitute Products Sometimes the greatest competitive challenge comes from substitute products and services. (Quick MBA, 2010). If an airline operates on that route, it must compete with all other airlines on that r… The fast-food industry includes group of companies that are offering different products and services, which satisfy customers’ needs. Products from competitors such as McDonald’s Corporation, Café de Coral Holdings Limited, and Fairwood Holdings Limited local street food can be considered a major substitute, as well as food from its direct competitors in the industry. The supplier chosen will be according to the price the company sells its product at. Saleh, (2013). You also have the option to opt-out of these cookies. This category only includes cookies that ensures basic functionalities and security features of the website. This element of the Five Forces analysis model shows the impact of suppliers on firms and the fast food restaurant industry environment. Thus, this element of the Five Forces analysis of McDonald’s shows that competition is among the most significant external forces for consideration in the strategic management of the business. The … This weakness is partly based on the lack of strong regional and global alliances among suppliers. While the food service industry is saturated with aggressive firms, new products can attract new customers and retain more customers. Compliance is of utmost importance. The threat of substitute can be related as the products that exist outside the industry. This status shows that McDonald’s strategic direction is appropriate to the external factors, such as the ones identified in this Five Forces analysis. These substitutes offer attractive price and similar product … In case of food industry, if restaurants are to maintain an average checked price, they will not lose customers. Threat of substitutes is one of the five forces that determine the intensity of competition in an industry. The buyers have high bargaining power in a place where there are many fast-food joints, as they … Guidelines for applying Porter’s five forces framework: A set of industry analysis templates. An example of this is the option to choose different modes of transportation when going from destination A to destination B. For example, substitutes include food kiosks and outlets, and artisanal bakeries, as well as microwave meals and foods that one could cook at home. In this regard, a recommendation is to strengthen the business by building on the strengths enumerated in the SWOT analysis of McDonald’s Corporation. This element of the Five Forces analysis model pertains to the impact of substitute products on business and the industry. In the Five Forces analysis model, this external factor contributes to the strength of the threat of substitution in the fast food service industry. To understand the impact of Porter’s Five Forces model, let us now look at each of the forces as though it is acting on a particular industry, say the fast-food industry of burgers, pizzas, and sandwiches. For example, small restaurant businesses involve low capital costs compared to major corporations in the market. In countries where wage rates are higher, costs of labor are al… Threat of Substitutes Definition Porter’s threat of substitutes definition is the availability of a product that the consumer can purchase instead of the industry’s product. New market participants bring new capacity, the desire for profit and often significant funds in the industry. This can lead by the established competitors to falling prices or increasing cost and thus to a reduced profitability. This external factor adds to the force of competition. In this Five Forces analysis of McDonald’s, the forces are mainly within the fast food restaurant industry. An Entire MBA in 1 Course:Award Winning Business School Prof, MBA in a Box: Business Lessons from a CEO. The threat of substitute products is considered to be just right or in the middle. It is therefore important for the food industry to focus on entry of any new entrant that might become a threat in the near future. Jaradat. Necessary cookies are absolutely essential for the website to function properly. Ready-meals are therefore a more substantial threat, competing with fast-food on price as well as convenience (Datamonitor, 2012). High number of firms – Strong Force 2. (Quick MBA, 2010). For example tea and coffee, bread and rusk are substitute … This element of Porter’s Five Forces analysis model deals with the potential effects of substitutes on firm growth. In this case, the availability of many substitutes adds to the bargaining power of customers. Moreover, substitutes are competitive in terms of quality and customer satisfaction (high performance-to-cost ratio). This website uses cookies to improve your experience while you navigate through the website. Fast food faces constant competition from home cooked food. In. In this business case, most medium and large firms aggressively market their products. The price for most fast foods is in the same low range and it is easy to switch to an alternative restaurant. Brand-name suppliers tend to have more bargaining power. The major barriers a firm faces in this industry are the economies of scale and the access to distribution. These products and services might be considered as close substitutes for each other. The company must implement strategies to meet these external factors and minimize their negative impacts. Burke, A., van Stel, A., & Thurik, R. (2010). U.S. sales of plant-based alternatives to animal products increased 17% from 2017 to 2018, according to Forbes, and the growing demand for meat substitutes is being reflected in the fast food industry. In this Five Forces analysis, McDonald’s experiences the effects of external factors at varying intensities, based on the variations among markets around the world. The Threat of Substitutes – Medium. McDonald’s Corporation expands internationally through strategies that account for the external factors in the industry environment, as identifiable through a Five Forces analysis of the business. In more generic products, there are often more than one ways to address a particular need. (Porter's Five Forces) Five Force concepts rank Rivalry among firms: High Threat of Substitutes: High Buyer Power: Low Power of Supplier: Low Entry barriers: High Industry rivalry: Competition among fast food companies is really high, because there are a lot of competitors and fast food companies all try to again competitive advantage over the other companies in this industry. Also, it is recommended that McDonald’s make its product innovation process more aggressive. This element of the Five Forces analysis deals with the influence and demands of consumers, and how their decisions impact businesses. The existence of substitutes such as frozen meals, home cooked meals, and food trucks create alternative foodservice options. They demand good quality, a great experience along with a reasonable price. McDonald’s faces tough competition because the fast food restaurant market is saturated. As the leading restaurant chain business in the world, the company is an example of effective strategic management, especially in dealing with competition in different markets worldwide. “With more than 11 million Twitter mentions of the word “vegan” in 2019 alone, the fast-food industry seems to have found its next frontier and is ready to deliver on fast-food … This condition makes the bargaining power of buyers a strong force in affecting the company’s external environment. 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