Porter’s Five Factor Model in Hospitality (Restaurants)

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Table of Contents

Porter’s Five Factor Model
Threat of Substitute Goods
Bargaining Power of Buyers
Rivalry among existing competitors
Barriers to Entry
Bargaining power of suppliers
Industry overview
Interconnection in the hospitality industry
Works Cited

Porter’s Five Factor Model

The restaurant industry remains competitive because of modernization, high speed Internet and other supplies that are likely to attract customers. Thus, it remains difficult for restaurants to sustain their competitive advantage. This implies that restaurants, which have remained successful over decades, know their abilities and brand identity. Such restaurants also understand activities of their competitors and what differentiate them from the rest. In addition, they also understand what factors drive their success (Sand 34).

Therefore, it is necessary for the restaurant industry to understand applications of Porter’s five forces in their business. This must also consider the interconnection among services in the hospitality industry. Competition creates differences in returns among firms in the same industry. In addition, market conditions can also influence profitability of firms. According to Michael Porter, there are five forces, which affect performance of a company.

Restaurants can use various resources to create competitive advantage. Such competitive strategies can enhance profitability and competition if sustained over time. Porter identified these five forces as “barriers to entry, threat of substitutes, bargaining power of buyers and sellers, and the rivalry among existing competitors” (Porter 5). Porter identified these factors based available resources for companies. The five factors have their relevance on restaurants.

Threat of Substitute Goods

The restaurant industry remains competitive due to their close location to each other. In addition, their prices vary in range coupled with different levels of services and facilities. As a result, customers have considerable challenges when making decision regarding a specific restaurant.

In this sense, customers can look at additional facilities in restaurants that can fit their tastes. For instance, restaurants of the US may differentiate themselves with the high speed Internet facilities, pools, self-service, delivery service and other services, which customers may find convenient. Restaurants, which have such services, are threats to their competitors (Charles and Gareth 102).

Restaurants can introduce new services or marketing campaigns that can create stiff competition in the industry. As a result, a number of restaurants have gone out of business or joined chains of franchises in the US.

The industry also faces stiff competition from other products from convenience stores, grocery stores, delis, clubs and other outlets that serve meals. Still, home cooking also remains a serious challenger to the industry.

Bargaining Power of Buyers

Customers in the hospitality industry are demanding and hard to please. This is because they want values for their spending. Therefore, additional services in restaurants may provide such customers with value-added services they require. In some instances, customer may make their purchases online and expect restaurants to deliver their orders for less cost.

Such services have enhanced bargaining power of customers in the restaurant industry. This implies that creating loyalty in the restaurant industry requires excellence services and products. Thus, restaurants must find ways of impressing customers and at the same time protect their profit margins. In this sense, the bargaining power of customers becomes a threat to the business.

Rivalry among existing competitors

Rivalry in the restaurant industry increases as a result of changing consumer behaviors, products, increasing numbers of competitors, rising prices of commodities, rising costs as well as increasing costs of risk management in the industry. For instance, we have German, Asian Chinese, Italian, African, among other restaurants in the US.

These restaurants have various levels of menu options, qualities of food, services, cleanliness, standards in terms of records with health departments, values with reference to prices, ambiance, and overall experiences customers get.

Despite this rivalry, the restaurant industry has managed to stay competitive and provide value to customers and achieve economies of scale. The restaurants industry has implemented management systems, which create differentiation in terms of achieving the above factors.

Rivalry among competitors has taken a different turn with the social media. Most restaurants have gone online to reach many consumers. Restaurants, which have an online presence, have considerably reduced their marketing costs. This strategy has given such restaurants a competitive advantage over their competitors.

Therefore, restaurants can reduce their prices to attract many customers. Consumers can review prices of different restaurants over the Internet and choose the one with best services and products at relatively affordable rates. In addition, the online presence also enables customers to identify restaurants within their localities easily.

Being and sustaining a competitive edge in the restaurant industry is a challenging task. However, successful restaurants have learned to provide excellence services and products to their customers with quality supplies and amenities as a means of differentiation. This is the only way to match stiff competitions in the restaurant industry.

This requires restaurants to implement their customers’ suggestions in terms of quality and service improvements. Provisions of better services and differentiation strategies can ensure that a restaurant remains competitive. However, this can only come from employees’ skills and commitment.

Barriers to Entry

The main barrier to entry in the restaurant industry involves the initial cost of investments. Restaurants require modern equipment accompanied with advanced services and aggressive marketing. However, some marketing tools such as the Internet may reduce costs of initial marketing.

Restaurants may also find it difficult to differentiate their products and services from competitors after the entry. Most restaurants use services, superb locations, amazing views, facilities, and complementary services and products to differentiate themselves. This shows the customers that restaurants add values to their money.

The restaurant industry also requires expertise. Start-ups may not have the required human resources, skills, and experiences to meet customers’ expectations. In addition, employees may also leave after training and gaining experiences to work for a competitor.

The restaurant industry also requires routine and daily tasks of buying supplies and facilities for customers. This may be expensive for start-ups, especially when they have to balance budgetary constraints, meet needs of different customers and customers’ preferences.

Bargaining power of suppliers

This may affect the operation of restaurants in relation to supply of products, services, and employees. The labor marketing is undergoing demographic shifts, which may have a negative effect on supply of labor to the restaurant industry.

The absence of substitutes in the market or low availability of suppliers may influence their prices and quantity to supply to any given restaurant. This creates opportunities for supplies to bargain for higher prices.

The restaurant industry depends on various suppliers such as farmers, brokers and other companies supplying various services and products. Scarcity of farm produce in the market and lack of substitutes for such produce enable suppliers to bargain. Bargaining power of suppliers is a threat to profitability of the industry.

Not all suppliers may have equal measures of bargaining power. For instance, suppliers delivering restaurants packaging materials may not have higher bargaining power due to availability of such products from other suppliers. As a result, the industry may save costs due to low prices. However, oligopoly that exists with regard to other products and services in the restaurant industry presents threats to profitability of the industry.

Industry overview

According to First Research, there are about “550,000 restaurants with combined annual revenue of more than $400 billion in the US” (First Research 10). The main restaurants of the US include McDonald’s, Yum! Brands, and Darden Restaurants. The restaurant industry remains highly fragmented as top 50 brands only control 20 percent of the market share. There are full-service restaurants (FSR) as well as quick service restaurants (QSR). They offer snacks, buffets, cafeteria, and nonalcoholic beverage bars.

The restaurant industry of the US remains highly competitive with factors such as consumer tastes, demographics and income levels playing significant roles in driving demands. The industry profits vary considerable between QSR and FSR. National Restaurant Association noted that the sales volume was $632 billion with over 12.9 million employees making it one of the largest employers in the private sector during 2012.

QSR depends on high volumes of sales and efficient operation for profitability whereas FSR uses high-margin services, and strategic marketing to drive sales volumes. Large restaurants have advantages on purchasing, marketing resources and access to finance. Conversely, customers prefer small restaurants due to superior quality of food they serve. The industry remains heavily dependent on labor.

The main products in restaurants include appetizers, beverages, desserts, hamburgers, and other main dishes. However, many restaurants prefer to specialize on the cuisine, entrée and other types of foods. Large FSRs prefer to specialize on various types of cuisines. A number of restaurants have hamburgers and other good foods.

Interconnection in the hospitality industry

The hospitality industry is in the service industry with several interconnected services such as transportation, accommodation, restaurants, events, and other services available within the tourism industry. The industry services have strong interconnection as they depend on one another for customers.

The industry depends on activities and disposable incomes of customers and visitors. Activities in the industry remain intermittent and transient. However, such activities account for the industry revenues. For instance, customers may fly from one destination to another.

This facilitates the growth of transport services within the hospitality industry. These visitors normally book accommodation services for the period of the visit. As a result, the same customers will dine at restaurants in the locality. They also visit various attraction areas within the area. All these are elements of services available within the hospitality industry demonstrating interconnection and dependence in the industry.

Therefore, the hospitality industry is vital in supporting tourism and leisure activities. Customers normally consider the availability of transport, accommodation, and restaurants in an area before making the decision to visit. The kind of hospitality customers receive determines their subsequent visits and recommendations to other people.

This requires a provision of excellence and professional services to customers. Thus, employees in this industry must learn courtesy as it is important for the success of the industry. The provision of services should start from the initial arrival of visitors, transport arrangements, meal services, and accommodation. The industry must extend these services as visitors leave too.

Works Cited

Charles, Hill and Gareth Jones. Strategic Management Theory. 6th ed. Boston: Houghton Mifflin Company, 2004. Print.

First Research. Restaurants Industry Profile. Austin, TX: Hoover’s, Inc., 2012. Print.

Porter, Michael. Competitive Advantage: Creating and Sustaining Superior Performance: New Introduction. New York: Simon and Schuster, 1998. Print.

Sand, Claire. The Packaging Value Chain. Lancaster, PA: DEStech Publications, Inc, 2010. Print.

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