Michael Porter’s framework describes an industry as being influenced by five forces: buyer power, supplier power, threat of substitutes, threat of new entrants and the degree of rivalry between existing firms within the industry. A strategic business manager can use Porter’s model to more clearly understand the industry environment in which its firm operates and to therefore develop a competitive edge over rival firms. After analyzing the carbonated soft drink, ready-to-eat breakfast cereal and specialty coffee industries using this framework, I found that the three industries were very similar in their degree of bargaining power among suppliers, threat of substitutes and most importantly, the degree of rivalry among existing firms. However, the three industries varied in their degree of buyer power and threat of new entrants.
The bargaining power of the buyers in the soft drink industry differs from the power of the buyers in both the ready-to-eat cereal industry and the specialty coffee industry. Specifically, the power of the buyers in the cereal and coffee industries can be classified as low; whereas in the carbonated soft drink industry it is more moderate. In the ready-to-eat cereal industry, the three major cereal manufactures “accounted for 59 percent of 1993 ready-to-eat sales by volume” in the massive eight billion dollar industry. Because of the enormous amount of money in the industry and therefore the large amount of money that the three major firms brought in for grocery stores, grocery stores had no choice but to stock cereal on their shelves. Furthermore, due to factors such as brand loyalty, consumers were willing to pay a premium price for these branded cereals. For example, cereal prices rose 15.6 percent between 1990 and 1993 “compared to a 5.9 percent increase in overall food prices.” (Corts, 5). This apparent consumer insensitivity to price kept the negotiating power of the buyers to a minimum and allowed the industry to thrive. Similarly, loyalty to high-quality specialty coffee and the ability of the firms within this industry to differentiate themselves from the basic coffee industry, allowed the specialty coffee industry to flourish. As the Starbucks case specifically states, research “found that once a consumer learned to appreciate a high-quality specialty coffee, he or she did not go back to his or her favorite average quality brew.” (Kachra, 3). Lastly, the major firms in the ready-to-eat cereal industry and Starbucks in the specialty coffee industry took control of their distribution/ retail channels through some form of forward integration. Ultimately, the bargaining power of the buyers in these two industries was extremely low, if any at all.
On the other hand, the power of all of the buyers in the carbonated soft drink industry was not so limited. The buyers with the most bargaining power in the carbonated soft drink industry were those with national or local fountain accounts. According to Cola Wars Continue: Coke and Pepsi in 2006, “Competition for national fountain accounts was intense; and CSD companies frequently sacrificed profitability in order to land and keep those accounts.” (Yoffie, 4). Additionally, there was intense competition among firms for prime shelf space in supermarkets, the soft drink industries main distribution channel, which did give this buyer some negotiating power. However, another buyer, the bottlers, had very little bargaining power; which ultimately causes the buyer power in the industry to be classified as moderate. The increased power of the buyers in the carbonated soft drink industry hindered the ability of the firms within this industry to set the price of their goods, relative to the ability of the firms in the specialty coffee and ready-to-eat breakfast cereal industries.
The threat of new entrants...