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Example of Porter's Five Forces

McDonald’s Five Forces Analysis

Summary

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. For example, the U.S.

market presents a competitive landscape different from that of the European market. The

company must implement strategies to meet these external factors and minimize their negative

impacts. Considering the combination of market conditions, this Porter’s Five Forces analysis of

McDonald’s establishes the following intensities of the five forces:

1. Competitive rivalry or competition – Strong Force

2. Bargaining power of buyers or customers – Strong Force

3. Bargaining power of suppliers – Weak Force

4. Threat of substitutes or substitution – Strong Force

5. Threat of new entrants or new entry – Moderate Force

Recommendations

The results of this Five Forces analysis show that McDonald’s Corporation needs to prioritize the

strategic issues related to competition, consumers, and substitutes, all of which exert a strong

force on the company and its external environment. 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. In this regard, a recommendation is to strengthen the business by building on the

strengths enumerated in the SWOT analysis of McDonald’s Corporation. The company’s

managers must focus on reducing the effects of competitors and substitutes on revenues and

market share. McDonald’s marketing mix or 4Ps partly supports such effort. Also, it is

M.Amin Hasan
recommended that McDonald’s make its product innovation process more aggressive. While the

food service industry is saturated with aggressive firms, new products can attract new customers

and retain more customers. In relation, based on this Porter’s Five Forces analysis, McDonald’s

can implement higher quality standards to address the forces of competition and substitution.

1. Competitive Rivalry or Competition with McDonald’s (Strong Force)

McDonald’s faces tough competition because the fast food restaurant market is saturated. This

element of the Porter’s Five Forces analysis model tackles the effects of competing firms in the

industry environment. In McDonald’s case, the strong force of competitive rivalry is based on the

following external factors:

 High number of firms – Strong Force

 High aggressiveness of firms – Strong Force

 Low switching costs – Strong Force

The fast food restaurant industry has many firms of various sizes, such as global chains like

McDonald’s and local mom-and-pop fast food restaurants. This external factor strengthens the

force of rivalry in the industry. Also, the Five Forces analysis model considers firm

aggressiveness a factor that influences competition. In this business case, most medium and large

firms aggressively market their products. This factor increases the intensity of competitive

rivalry that McDonald’s Corporation experiences. In addition, low switching costs make it easy

for consumers to transfer to other restaurants, such as Wendy’s and Burger King. This external

factor adds to the force of competition. 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.

 2. Bargaining Power of McDonald’s Customers/Buyers (Strong Force)

McDonald’s must address the power of customers on business performance. This element of the

Five Forces analysis deals with the influence and demands of consumers, and how their

decisions impact businesses. In McDonald’s case, the following are the external factors that

contribute to the strong bargaining power of buyers:

 Low switching costs – Strong Force

 Large number of providers – Strong Force

 High availability of substitutes – Strong Force

The ease of changing from one restaurant to another (low switching costs) enables consumers to

easily impose their demands on McDonald’s. In the Five Forces analysis model, this external

factor strengthens the bargaining power of customers. In relation, because of market saturation,

consumers can choose from many fast food restaurants other than McDonald’s. This condition

makes the bargaining power of buyers a strong force in affecting the company’s external

environment. Moreover, the availability of substitutes is relevant in this external analysis. In this

case, the availability of many substitutes adds to the bargaining power of customers. For

example, substitutes include food kiosks and outlets, and artisanal bakeries, as well as

microwave meals and foods that one could cook at home. Based on this element of Porter’s Five

Forces analysis, it is crucial to develop strategies to increase customer loyalty, especially in the

face of the socio cultural trends outlined in the PESTEL/PESTLE analysis of McDonald’s

Corporation.
 3. Bargaining Power of McDonald’s Suppliers (Weak Force)

Suppliers influence McDonald’s in terms of the company’s production capacity based on the

availability of raw materials. This element of the Five Forces analysis model shows the impact of

suppliers on firms and the fast food restaurant industry environment. In McDonald’s case, the

weak bargaining power of suppliers is based on the following external factors:

 Large number of suppliers – Weak Force

 Low forward vertical integration of suppliers – Weak Force

 High overall supply – Weak Force

The large population of suppliers weakens the effect of individual suppliers on McDonald’s

Corporation. This weakness is partly based on the lack of strong regional and global alliances

among suppliers. In relation, most of McDonald’s suppliers are not vertically integrated. This

means that they do not control the distribution network that transports their products to firms like

McDonald’s. In Porter’s Five Forces analysis model, such low vertical integration weakens the

bargaining power of suppliers. Also, the relative abundance of materials like flour and meat

reduces individual suppliers’ influence on the company. Thus, this element of the Five Forces

analysis shows that external factors combine to create the weak supplier power, which is a

minimal issue in strategic management. McDonald’s corporate social responsibility strategy

and stakeholder management approaches help in addressing this force from suppliers.
 4. Threat of Substitutes or Substitution (Strong Force)

Substitutes are a significant concern for McDonald’s Corporation. This element of Porter’s Five

Forces analysis model deals with the potential effects of substitutes on firm growth. In

McDonald’s case, the following external factors make the threat of substitution a strong force:

 High substitute availability – Strong Force

 Low switching costs – Strong Force

 High performance-to-cost ratio of substitutes – Strong Force

There are many substitutes to McDonald’s products, such as products from artisanal food

producers and local bakeries. Also, consumers can cook their food at home. In the Five Forces

analysis model, this external factor contributes to the strength of the threat of substitution in the

fast food service industry. In addition, it is easy to shift from McDonald’s to substitutes because

of the low switching costs. 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. Moreover, substitutes are

competitive in terms of quality and customer satisfaction (high performance-to-cost ratio). In this

element of the Five Forces analysis of McDonald’s Corporation, external factors make

substitutes a major strategic issue that requires approaches like product quality improvement. In

relation, the company’s efforts include encouraging people to eat in fast food restaurants instead

of resorting to substitutes. Such efforts are evident in McDonald’s corporate mission and

vision statements.
 5. Threat of New Entrants or New Entry (Moderate Force)

New entrants can impact McDonald’s market share and financial performance. This element of

the Five Forces analysis refers to the effects of new players on existing firms. In McDonald’s

case, the moderate threat of new entry is based on the following external factors:

 Low switching costs – Strong Force

 Highly variable capital cost – Moderate Force

 High cost of brand development – Weak Force

The low switching costs allow consumers to easily move from McDonald’s toward new fast food

restaurant companies. In Porter’s Five Forces analysis model, this external factor strengthens the

threat of new entrants. Also, variable capital costs of establishing a new restaurant empowers

new businesses to enter the global fast food restaurant industry. For example, small restaurant

businesses involve low capital costs compared to major corporations in the market. This external

factor leads to the moderate threat of new entry against McDonald’s. On the other hand, it is

expensive to build a strong brand in the industry. Many small and medium businesses lack the

resources to create a strong brand to match the McDonald’s brand. Thus, the external factors in

this element of the Five Forces analysis shows that the threat of new entrants is a considerable

but not the most important strategic issue.

 References

 Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. five forces. Harvard Business

Review, 88(5), 28-29.

 Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: A set of industry

analysis templates. Competitiveness Review, 24(1), 32-45.

 Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic

Change, 15(5), 213-229.

 Maybury, M. T., & Belardo, S. (1992, January). Five forces. In System Sciences, 1992.

Proceedings of the Twenty-Fifth Hawaii International Conference on (Vol. 4, pp. 579-588).

IEEE.

 McDonald’s Corporation – Form 10-K.

 McDonald’s Corporation’s Website.

 Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.

 U.S. Department of Agriculture – Economic Research Service – Food Service Industry –

Market Segments.
Under Armour

Competitive rivalry:
Under Armour faces intense competition from Nike, Adidas and newer players. Nike and Adidas,
which have considerably larger resources at their disposal, are making a play within the
performance apparel market to gain market share in this up-and-coming product category. Under
Armour does not hold any fabric or process patents, hence its product portfolio could be copied
in the future.

Bargaining power of suppliers:

A diverse supplier base limits the company's bargaining power. Under Armour's products are
produced by dozens of manufacturers based in multiple countries.

Bargaining power of customers:

Under Armour's customers include both wholesale customers as well as end customers.
Wholesale customers, like Dick's Sporting Goods and the Sports Authority, hold a certain degree
of bargaining leverage, as they could substitute Under Armour's products with those of UA's
competitors to gain higher margins. The bargaining power of end customers is lower as UA
enjoys strong brand recognition.

Threat of new entrants:

Large capital costs are required for branding, advertising and creating product demand, and
hence limit the entry of newer players in the sports apparel market. However, existing companies
in the sports apparel industry could enter the performance apparel market in the future.

Threat of substitute products:

The demand for performance apparel, sports footwear and accessories is expected to continue,
and hence this force does not threaten Under Armour in the foreseeable future.
Coca-Cola

Threat of New Entrants/Potential Competitors: Medium Pressure

 Entry barriers are relatively low for the beverage industry: there is no consumer
switching cost and zero capital requirements. There is an increasing amount of new
brands appearing in the market with similar prices than Coke products

 Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant
market share for a long time and loyal customers are not very likely to try a new brand.

Threat of Substitute Products: Medium to High pressure

 There are many kinds of energy drink s/soda/juice products in the market. Coca-
cola doesn’t really have an entirely unique flavor. In a blind taste test, people can’t tell
the difference between Coca-Cola and Pepsi.

The Bargaining Power of Buyers: Low pressure

 The individual buyer no pressure on Coca-Cola

 Large retailers have bargaining power because of the large order quantity, but the
bargaining power is lessened because of the end consumer brand loyalty.

The Bargaining Power of Suppliers: Low pressure

 The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener,
and caffeine. The suppliers are not concentrated or differentiated.

 Coca-Cola is likely a large, or the largest customer of any of these suppliers.

Rivalry among Existing Firms: High Pressure

 Currently, the main competitor is Pepsi which also has a wide range of beverage products
under its brand. Both Coca-Cola and Pepsi are the predominant carbonated beverages
and committed heavily to sponsoring outdoor events and activities.

 There are other soda brands in the market that become popular, like Dr. Pepper, because
of their unique flavors. These other brands have failed to reach the success that Pepsi or
Coke have enjoyed.