Porter’s Five Forces Framework
Porter’s Five Forces Framework is a ubiquitous instrument that could be used to analyze a company’s external situation in a particular market. It can highlight its strong and weak positions vis-à-vis other key stakeholders and potential competition to determine how dependable and vulnerable its stance might be. Diageo’s position in Africa can be described as unstable, with many additional forces entering the market. The following analysis will evaluate it based on the threats from new entrants, bargaining power of buyers, bargaining power of suppliers, threat of new substitutes, and competitive rivalry.
Threat of New Entrants
The threat of new entrants remains significant, but the main competitors, such as Miller, Heineken, and Castel Group, are already there. Some smaller players may make their bid for Africa in the future as it develops and creates a higher standard of living and more disposable income. Those new entrants would also benefit from the infrastructure the big companies are helping create. While it will take time to establish their brands and names, the money they save will enable them to launch strong branding advertising campaigns. Right now, the strength of this threat is Medium, as African countries still need to solve their logistical and bureaucratic issues.
Bargaining Power of Buyers
The bargaining power of buyers is always high when it comes to beer and other light alcoholic drinks. For Diageo, 60% of their revenues come from Lager, Guinness, and similar products, putting them in a vulnerable position versus their buyers. As the company itself acknowledges, the only main ways in which beer products differ from one another are flavor, quality, and price. Customers could choose based on these parameters with the variety of beers increasing. Diageo must improve its taste and quality, reduce costs, and do all three to keep customers buying their products. Their bargaining power is, thus, rated High.
Bargaining Power of Suppliers
The bargaining power of suppliers is a crucial matter for Diageo. Because shipping beer from Europe and other places to Africa is an expensive affair that immediately adds costs to production, it is cheaper and more competitive to produce it domestically. All food and drink companies establish production values in large markets to save costs. At the same time, the logistics chains in Africa are vulnerable, and local suppliers cannot guarantee timely deliveries. Those suppliers that can, however, are put in an exceedingly strong position, becoming highly sought after. For some specific flavors, producing the drink requires buying it domestically. Because of this, Diageo relies on local suppliers, marking their bargaining power as High.
Threat of New Substitutes
There are plenty of alternatives to beer regarding light alcohol. Ciders have been seen increasing in popularity. Bottled cocktail mixes of more complex alcohol with sodas of various kinds have also been popular in other countries worldwide. Local beverages and products offer potential substitutes for beer and more complex alcohols. As such, it is feasible for the beer market to shrink as more of these alternatives become available. However, it is unlikely that these substitutes will push the beer out of the picture due to the drink’s iconic status in international culture and Africans’ familiarity with it. Thus, the threat of new substitutes is graded Medium for Diageo.
Competitive Rivalry
Large competitors, such as Heineken, Castel Group, and Miller, have long realized the importance of Africa as a potential new market. They have been largely pursuing the same strategy Diageo had, with investments in African infrastructure, building refineries, and making deals with distributors. There is not much that Diageo can do differently in that regard. While innovation is the quality that gives the company a competitive edge, these three giants will be hounding Diageo at every turn, forcing it to sell products at lower prices and constantly upgrading the quality of products at its own expense. Thus, the competitive environment is very high.