Application of the Porter’s Five Forces: Beer Industry

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Table of Contents

Introduction
Summary Analysis of the Brewery Industry
The Threat of New Entrants
Threats of Substitute Products and Services
Bargaining Power of Customers
Rivalry between Competitors
Bargaining Power of Suppliers
Conclusion
Reference List

Introduction

Companies, individual businesses and organizations function in an environment that has the target customers who are the core reason for its existence and the motive of making profit. The opportunity that the market presents motivates investors, agencies or government to set up business for that opportunity with the reliance on market information.

The uncertainty of the industry and basic internal and external environment changes do require the industry players to make strategic decisions based on the information available. This Porter’s five force model acts as an analytic tool for players in the industry to strategize by attaining higher market share, increased profitability and competitive advantage over the others in the same.

The model consists of the aspects threats of new entry, rivalry between competitors, threats of substitute products/ services, the bargaining power of customers and the bargaining power of suppliers. The model is very much relevant in the analysis of an industry faced with high competition but at the same time experiencing high profitability especially the beer industry and market.

Summary Analysis of the Brewery Industry

Maintaining of a high competitive advantage in the industry and higher market share requires more market analysis especially through the porter’s five force model. The industry is faced with high operation costs because of the costs of manufacturing, equipment cost, labour and distribution among others.

Further, the issues of competition in the industry are quite high as the need to maintain a high market share increases. Competition is motivated by the high returns expected from the industry. While there are product and service differences, homogeneity is high with customers having a wide choice of products and services to choose from.

The suppliers in the industry affect the industry due to the fact that the quality of their supply influences the quality of products which is then spilled over to the market. The industry faces challenges of being associated with drug abuse and crime adversely affecting the market (Porter, 1998). The relevance of all these factors culminates to the analysis of the industry using the five forces model (Ireland et al., 2008).

The Threat of New Entrants

The level of profitability in the beer industry motivates other people to get interested in investing with the desire to have a share of the high profits in the industry (Kotler, 1997). The beer industry is however faced with high initial costs in terms of factory set up, quality equipment and machinery, high costs of supply, legal requirements for market entry and other requirements such as environmental protection, standards requirements and governmental regulations.

This high cost creates barriers of entry into the market which is also encouraged by the high costs of marketing involved. However, when an established foreign company capable of meeting the high costs and with a global strong brand enters the market, the existing firms are faced with challenges of losing customers to the new firm and lowered profits.

The already existing firms thus counter the threats of new entry through customer loyalty which can be maintained through consistency in production of high quality beer, lowering the cost involved, changing the pricing mechanisms such as lowering beer costs and achieving economies of scale (Porter, 1998).

Threats of Substitute Products and Services

Although beer products by beer companies can be taken by the customer and serve the same purpose, the quality, flavour and style of the products is what differs. Since a customer can easily switch from one beer to another provided the costs and flavours are related, the players in the industry need to consider this threat. This is because; the ability to switch products can adversely affect the profitability of a company.

As suggests, this would call for product differentiation where customers are able to distinguish the beer from the others in the market. This is achievable through establishment of a strong brand, uniqueness in quality in terms of flavour, style of brewing and strength in quality, changes in the prices of beer relative to substitutes, product diversification to capture a wider share of flavours, effective marketing and distribution network (Porter, 1998).

Bargaining Power of Customers

The bargaining power of customers in the beer industry refers to the level of influence the customer plays in the market. Beer in the individual context falls in the category of luxuries that customers can do without while it is associated with drug abuse and crimes (Kotler, 1997).

This requires the beer industry players to focus more not only on how to attract these customers, but also how to retain them to your brand due to the ability to switch brands. This is enhanced through effective and persuasive and unique marketing strategies that get customers on board. Further, it requires the investment in customer research so as to identify their needs, requirements and preferences and then incorporate these in the manufacture and brewing process.

The players also need to focus on product quality improvement and establishment to pints where customers own up to the brand and become loyal. The customers in the beer industry have individual differences hence the need for product and market segmentation by offering different packaging styles at different prices and innovation (Rainer & Turban, 2009).

Rivalry between Competitors

The beer industry being highly competitive is faced with rivalry among existing firms since they share the profits in the industry and the fact that customers can leave one firm and shift to the competitor (Porter, 1998).

A firm in the beer industry thus needs to differentiate itself from its competitors to ensure customer loyalty through establishment of a strong brand, emphasizing on high quality products, its diversification so that customers have a variety of tastes and flavours to choose from without going to the competitor, offering reasonable prices and being consistent and reliable to the customers.

The firm also requires engaging in providing the information to its customers regarding its products through persuasive and unique advertising. Rivalry can also be overcome by innovation and development of new products thus lowering the costs of production so that the firm has economies of scale and is not affected by the changes from its competitors (Rainer & Turban, 2009). Healthy competition through ethical practices, maintenance of legal and environmental standards is also recommendable.

Bargaining Power of Suppliers

The bargaining power of suppliers in the beer industry is revealed in the level of influence they have on the prices of inputs. These include labour, raw materials among other inputs. These usually have a high bargaining power in the market since they influence the quality and the final pricing of the products (Porter, 1998).

This poses as a challenge to the firm where there is low competition for the suppliers. The firm needs to make use of strategies focused on emphasizing and vetting of the quality of inputs, making use of alternatives of innovation to lower the bargaining power of suppliers (Rainer & Turban, 2009). It is important due to the critical importance of inputs that firms focus on bulk buying of inputs especially raw materials for brewing so as to achieve economies of scale.

Conclusion

This paper has provided an analysis of these models as the threats of new market entry, threats of substitute products/ services, the bargaining power of suppliers, the rivalry between competitors in the market and the bargaining power of customers for the beer market.

The beer industry is faced with issues of having a luxury good, association with crime and drug abuse and high competition. Effective analysis of the market using these models based on information available in the beer industry is likely to provide a firm with economies of scale and a competitive advantage in the industry.

Reference List

Ireland, D. Hoskisson, R. & Hitt, M., 2008. Understanding business strategy: Concepts and cases. Boston: South-Western College Publications.

Kotler, P., 1997. Marketing management. New York: Prentice Hall Publishers.

Porter, M., 1998. Competitive strategy: Techniques for analyzing industries and competitors. Boston: Free Press Publishers.

Rainer, K. & Turban, E., 2008. Introduction to information systems: Supporting and transforming business. New York: Willey Publications.

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