The world population is increasing at a rapid rate and it is likely to reach 9.2 billion by 2050 from the current population of 6.7 billion. The majority of this increase will come from the less developed regions such as South Asia, where the population is projected to rise from 5.4 billion in 2007 to a staggering 7.9 billion in 2050. (UN Press Release)
The population however, isn’t the only major increase around the world. The world basic food commodity prices have been on a rapid increase since 2006 and according to the Food and Agriculture Organization (FAO), the overall price of food commodity has increased by 75 per cent in dollar terms since 2000. (The World Bank) In particular, the price of rice and wheat has seen a rapid growth in prices in South Asian countries such as India, Pakistan and Bangladesh where prices have soared. India saw an increase of 9.3 per cent in price of rice between March 2007 and March 2008, Pakistan saw an increase of 60 per cent in the price of rice between the same time and Bangladesh saw a staggering 100 per cent increase in price of rice for the same period. (Asian Development Bank, Soaring Food Crisis)
With Rice and wheat making up 40% of daily calorie consumption for the population in the Asian region and being the daily staple food for the population, the dramatic increase has had a major political and civil implication that has had a flow on effect onto other industries as well. (EuroMonitor International)
The aim of this paper will be to analyse the increase in the price of basic food commodities and its likely strategic implications for South Asia with reference to Porter’s five forces model and the PEST analysis model.
The use of Porter’s five forces provides an effective tool that allows for a comprehensive analysis of the environmental forces and the market structure in an industry. This framework will help describe and evaluate the industry attractiveness and the competitive pressures in an industry.
Porter’s five forces model of competition include the following forces: •Threat of new entrants
•Bargaining power of suppliers
•Bargaining power of buyers
•Threat of substitute products
•Rivalry among competing firms
Threat of new entrants
It is crucial to identify new entrants because they are able to threaten the market share of existing competitors. New entrants may pose a threat as they may bring additional production capacity and as additional production capacity tend to hold consumer’s costs down, this result in reduced revenue and lower returns for the competing firms. (Strategic Management)
The new entrant’s decision to enter the industry depends on the two factors. These two factors are: barriers to entry and the retaliation it expects from the current participants. Competitors already established in the industry may try to develop barriers to entry. Potential entrants may try to avoid such barriers and seek industries where the entry barriers are low. When the barriers to entry are low it increases the chance of the new entrant operating profitably.
New entrants would need to consider the retaliation it expects from the current participants of an industry; obviously the greater expectation of a vigorous competitive response would reduce the likelihood of entry. An example of vigorous retaliation would be expected from the car manufacturing industry where there are already many established firms and the market is already over its capacity.
Bargaining power of suppliers
Powerful suppliers would exert power over firms competing within an industry by increasing prices and reducing the quality of their products and by this, they are able to capture some of the customers’ profits. (Strategic Management)
A supplier group may be considered powerful when:
•Only few large companies dominate and is more concentrated than the industry to which it sells •Lack of satisfactory substitutes...