Competitive Analysis: Porter’s Five-Forces Model
McDonald's is the largest fast-food restaurant in the world that started in 1955 in
California, United States. With a superior product in the form of a Burger called Bigmac,
McDonald's to date has thousands of restaurants spread across more than 100 countries.
McDonald's companies drive internationally through a strategy that takes into account external
factors in the industrial environment, as identified through an analysis of the Five Forces of
business. Michael E. Porter's Five Forces Analysis Model provides valuable information to
support strategic management, especially in dealing with relevant problems in the external
environment of business.
1. Rivalry Among Competing Firms - Strong
In the case of McDonald's, the strong competitive forces are based on the following external
factors:
• High number of firms – Strong Force
• High aggressiveness of firms – Strong Force
• Low switching costs – Strong Force
These external factors strengthen the competitive power in the industry. In addition, the Five
Forces analysis model considers corporate aggressiveness as a factor affecting competition. In
this business case, most medium and large companies are aggressively marketing their products.
With many multinational and local restaurants having almost the same menu, competition is
getting tougher with each player in this industry fighting for market share. There is a certain
degree of saturation that has developed. McDonald's competitors are other fast-food restaurants
such as Wendy's, Burger King, and many countries also local restaurants. Each player is
aggressively spending money on advertising, innovating in their offerings and menus, and
constantly opening new franchises to increase their access to new potential customers. The
increasing number of competitors made competitive competition for McDonald's strong force.
2. Potential Entry of New Competitors - Moderate
In the case of McDonald's, the moderate threat of new entry was based on the following external
factors:
• Low switching costs – Strong Force
• Highly variable capital cost – Moderate Force
• High cost of brand development – Weak Force
At the international level, the threat of new entrants is a weak force because there are a
number of barriers to entry. To become a successful McDonald's competitor, participants had to
create a large number of outlets worldwide that required a massive investment of capital and
time, rapidly build economies of scale to be profitable, gain access to suppliers, and undertake
extensive marketing to create awareness among consumers. So that newcomers require enormous
resources. This makes it difficult for newcomers to enter and generates competition. However,
the same threat is higher at a local scale where investment is not high, 2 or 3 outlets are
sufficient, and economies of scale are easily established. These local outlets could easily give
McDonald's competition. Low switching costs allow consumers to easily move from McDonald's
to a new fast-food restaurant company. So, overall this is quite a threat to McDonald's.
3. Potential Development of Substitute Products
In the case of McDonald's, the following external factors make the threat of substitution a
powerful force:
• High substitute availability – Strong Force
• Low switching costs – Strong Force
• High performance-to-cost ratio of substitutes – Strong Force
McDonald's meal substitutes are meals from other slightly different fast-food restaurants
such as KFC and Pizza as well as home-cooked meals. Bread products are also a substitute for
McDonald's products. Most of these substitutes are competitive in terms of customer satisfaction
and quality (high cost-performance ratio). In addition, it is easy to switch from McDonald's to a
replacement company because of the low switching costs. Therefore, the threat of substitution is
a powerful force against McDonald's.
4. Bargaining Power of Suppliers - Weak
Suppliers influence McDonald's in terms of the company's production capacity based on the
availability of raw materials. In the case of McDonald's, the supplier's weak bargaining power
was 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 supplier population undermines the influence of individual suppliers at
McDonald's. This weakness is based in part on the lack of strong regional and global alliances
among suppliers. Accordingly, most of McDonald's suppliers are not vertically integrated. This
means that they don't control the distribution network that delivers their products to companies
like McDonald's. Such low vertical integration undermines the bargaining power of suppliers.
Additionally, the relative abundance of ingredients such as flour and meat reduces the influence
each supplier has on the company. weak supplier power, which is a minimal problem in strategic
management. So, overall this is a weak threat to McDonald's.
5. Bargaining Power of Consumers - Strong
In the case of McDonald's, the following are external factors that contribute to strong bargaining
power:
• Low switching costs – Strong Force
• Large number of providers – Strong Force
• High availability of substitutes – Strong Force
McDonald's shoppers have many choices available on the market today. Due to market
saturation, consumers can choose from many fast-food restaurants other than McDonald's. They
can easily switch from one restaurant to another without any switching costs if they are not
satisfied. Buyers could easily protest any price increases by McDonald's and turn to other
competitors . This puts the buyer in a strong bargaining position to influence McDonald's to
defend its price if it is to return the customer. Customer loyalty to fast food restaurants is
decreasing day by day with many competitors. 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 the customer. For example, replacements include food stalls and outlets, and
artisanal bakeries. Thus, the bargaining power of buyers is strong.
