Application of the model provides a systematic review of the organisation’s competitive position within the industry compared to competitors and possible substitute product services.
For example changes in parking regulations may dramatically alter foot flow, what was once a prime location moves to one that is off the beaten track or a new shopping development moves the market to new location and brings in new entrants.
The strength of Porter’s model lies in combining determinates such as Social, Technical, Economic, Political (STEP or REST) factors with elements the organisation can influence for example strategy to compete with established or new firms.
The model is further strengthened by the inclusion of barriers to entry. These include the setup capital costs for example premises, equipment, complying with licensing, health and safety legislation, competing with established customer loyalty with existing businesses and competitors supplier purchasing power may reduce their cost base consequently reduce your profit margin.
Buyers are fickle they can play one operation off against another. For instance if a purchasers volume business or their average spend is above the norm their bargaining power can force your prices down yet they can demand the same or better product service quality.
Suppliers who operate as a cartel or they are an essential supplier with few competitors or a speciality supplier or they supplier multiple integrated product groups the supplier has bargaining power to control prices rather than the purchaser.
Substitutes are product services where the buyer has choice. Applied to foodservice sector the nature of demand is the fundamental driver. For example visiting a pub to view a televised sporting event the primary motivation is to view the event the secondary activity is the consumption of food and beverage.
The key determinant is the nature of demand i.e. retail or leisure activity has to be satisfied before the secondary activity. The secondary activity is dependent upon the first activity for example initially a fast food outlet wouldn’t be perceived as competition for a fine dining venue but compare a customer who is shopping with one who visiting the theatre the chances are their needs are different.
The key factor to remember the market is dynamic, competitors will change their strategies, they come and go, others’ will disrupt the market for example Apple’s i-phone. Having an appreciation of your macro-environment will hopefully positively influence your businesses strategic direction.