Porter’s Five Forces model is one of the most effective tools for analyzing the business environment. Simple but powerful, the model is used in a wide variety of industries.
Do you want to figure out the principle of the model operation? Check out the following essay on the impact of Porter’s Five Forces on the beer industry.
The principal aim of any company is to make a profit. Therefore, an effective strategy of influencing a target audience plays a crucial role.
In a modern competitive business environment, the changes occur with an extremely fast rare. Thus, the maintaining of business on an operatable level is a challenging task. The 5 forces model is a helpful tool in dealing with potential threats. It is useful for increasing profits and gaining a competitive advantage as well.
Porter’s model includes five elements. They are the threat of new entrants, the threat of substitutes, the bargaining power of suppliers, bargaining power of buyers, and competitive rivalry. The precise analysis of these elements is vital for any business. A brewery industry is not an exception. The following paper will examine the implementation of the 5 forces model on beer companies.
Beer Industry Analysis
Firstly, the beer industry requires vast inputs. The costs of equipment, labor force and distribution are extremely high for beer production. Porter’s Five Forces model will help to conduct a wise analysis. It will prevent losses caused by high operating costs.
Secondly, the beer industry is highly competitive. Thus, consumers have a wide variety of beer brands to choose from. On the one hand, this creates more opportunities for the buyers. On the other hand, craft breweries owners have to deal with a lot of difficulties. For example, overcoming their business rivals is a severe issue. The business owners expect high returns from the production. It can explain the brewery industry’s competitive nature. Therefore, a wise application of the Five Forces model helps to maintain a high level of market shares. As a result, beer companies remain operatable in a highly competitive environment.
Thirdly, the suppliers have a direct impact on the brewery industry. The quality of materials they supply affects the quality of the final product the craft breweries produce. Moreover, beer commerce is often mistakingly perceived by people as drug dealing activity (Porter, 1998). This affects market sales and lowers profit of the beer companies.
Porter’s Five Forces model takes into consideration all the factors of the beer industry mentioned above. It develops an effective strategy for the owners of beer companies to increase their gains from sales and lower the prices of inputs (Ireland et al., 2008).
Bargaining power plays an essential role in business leading. First and foremost, it determines the ability of one party to affect another. In the case of the beer business, two parties are suppliers and customers. Hence, the group that has more powerful bargaining power has the strongest influence on the entire industry.
Secondly, the bargaining power helps to set a relatable price for a product or a service. Considering its factors, business owners can price the products adequately and gain the highest profit.
Bargaining Power of Suppliers
The bargaining power of suppliers in a craft beer industry influences the prices of inputs. It includes the cost of equipment and raw materials, wages, utility expenses, etc. The better the quality of the inputs, the higher the prices. Consequently, the final product is more sophisticated yet more expensive.
The bargaining power of suppliers can be lowered. According to Rainer and Turban (2009), implementing innovations and using alternative sources can do so. The well-balanced price levels of inputs and outputs will control the bargaining power of suppliers. This will help to establish a profitable business that fulfills the needs of both: the sellers and the buyers.
Bargaining Power of Customers
The bargaining power of customers determines the level the buyers can influence the beer industry. Here is where the businessmen face difficulties. Firstly, beer is not a necessity. It is a luxurious product, so people do not have an incentive to buy it regularly. Secondly, people incorrectly link craft beer production with crimes and drug abuse (Kotler, 1997). This lowers the sales levels of beer.
Therefore, the owners of the craft breweries have to focus on attracting consumers. This is why they need the development of powerful advertising strategies. It may require considerable investments in the marketing sector. However, these expenses are worth doing because they will result in higher profits in the long-run.
Besides, the advancement of the product quality and diversity will help establish an effective producer-consumer relationship. Beer consumers have entirely different tastes and preferences. Thus, it is essential to provide a wide variety of beer species to the buyers. They have to differ by taste, price, packaging styles, producing techniques, etc. (Rainer & Turban, 2009).
Threats to Beer Industry
Just like any other industry, beer commerce faces threats. The central ones are the threat of new entrants and the threat of new products. Nevertheless, in any business, threats are not something to be afraid of. In contrast, they have to be overcome to lead a successful enterprise.
Threat of New Entrants
The high profitability of the brewery industry makes a lot of people get interested in it. A strong desire to share market profits drive the businessmen to enter the industry (Kotler, 1997).
However, the initial cost of establishing a beer company is exceptionally high. It requires investments in machinery and other production equipment. Moreover, governmental requirements cause considerable financial losses. They include quality certificates, environmentally sustainable production, alcohol-selling license, etc. Thus, entering the beer industry is a complex cost-based process. So, it prevents the establishment of craft breweries by new entrants.
When a fell-financed foreign beer company enters the beer industry, it blocks the development of local craft breweries. As a result, existing enterprises need to apply a switching cost strategy to attract customers. By reducing the costs of inputs, they manage to make the final product’s price more appealing to the buyers (Porter, 1998). Thus, the consumers pay more attention to the local firm than to the foreign one.
Overall, the lowering cost strategy is one of the most effective methods. It helps to deal with the threat of new entrants and maintain the business on an operatable level.
Threat of New Products
The threat of new products is a critical aspect of the beer industry. Nowadays, consumers can easily differentiate the qualities of the beer. Nothing prevents them from switching from one product to another. Hence, companies need to focus on the development of a unique beverage. They need a drink that would not be replaced by substitute products.
The most effective way to deal with the threat of new entrants is to establish the right price-quality product balance. A beer company has to create an original beverage. It requires strong flavor qualities, affordable prices, and an effective marketing campaign (Porter, 1998). This will help the company to gain the favor of the customers and increase the gains from sales.
The buyers’ ability to switch brand preferences causes rivalry among competitors. To operate in a highly competitive environment, firms need to establish a strong brand in the beer market. A product has to be of high quality and provide costumers with a vast spectrum of tastes and flavors.
Innovative production is a useful tool to establish a competitive advantage in the industry. It can cause the lowering of initial costs. The change of funds flow within a beer company provides more opportunities (Rainer & Turban, 2009). For instance, by lowering the production cost, the business owner can invest more money in the promotion. Persuasive advertising is a useful tool to attract buyers. Besides, it assists in overcoming rivalry in the industry.
It is worth mentioning that while dealing with competitors, only ethical methods should be applied. An unhealthy competition may lead to enormous losses for a beer company.
Although the beer industry is profitable, it has several obstacles that cause a massive threat for firms. The Five Forces analysis is great for developing a powerful strategy for a company. It analyzes the possible problems and highlighting the beer industry’s advantages. So, the study shows how to increase profits and prevent financial losses. Thus, Porter’s Five Forces model plays a crucial role in the thriving business establishment.
- Ireland, D. Hoskisson, R. & Hitt, M. Understanding business strategy: Concepts and cases. 2008, Boston: South-Western College Publications.
- Kotler, P. Marketing management. 1997, New York: Prentice Hall Publishers.
- Porter, M. Competitive strategy: Techniques for analyzing industries and competitors. 1998, Boston: Free Press Publishers.
- Rainer, K. & Turban, E. Introduction to information systems: Supporting and transforming business. 2008, New York: Willey Publications.