Porter’s Five Forces & PEST

Porter’s Five Forces and Political, Economic, Sociocultural and Technology (PEST) analyses are key components used to complete an environmental analysis for the packaged food industry. This paper provides a brief summary of the components of each analysis and provides recommended sources to complete the required components within each system. Accessing federal and state government resources, journals, newspapers and industry financial records provide adequate resources to complete each analysis that will ultimately lead to an accurate environmental analysis.Porter’s Five Forces & PEST Porter’s Five Forces and Political, Economic, Sociocultural and Technology (PEST) analyses are key components used to complete an environmental analysis for the packaged food industry.

However, completing either of these analyses is not possible without first understanding where to find the information to build a complete picture. This paper provides a brief summary on each of the analysis systems and nails down the sources that will inevitably lead to the packaged food industry analysis.Porter’s Five ForcesThe configuration of the five forces differs by industry. The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most prominent force, however, is not always obvious. Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force.

Taking the perspective of an incumbent or a company already present in the industry molds the end result of the analysis. The analysis can be readily extended to understand the challenges facing a potential entrant. Moreover, the devil is in the details of locating the key data to conduct the actual analysis. The following sections provide a brief summary of the five forces and resources necessary to conducting analysis.Threat of New EntrantsIn Porter’s Five Forces, threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. Profitable markets that yield high returns will attract new firms.

This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will trend towards zero (WikiCFO, 2012). Barriers to entrants can be found on company’s annual reports, quarterly earnings reports, dividend announcements and similar websites reporting on their financial data (Gwin, 2001). Additionally, the Securities Exchange Commission (SEC) is another great source to obtain financial reports containing information on barriers (SEC, ND). In addition to financial reports, food and beverage regulation administered by the U.

S. Food and Drug Administration or the U.S Department of Agriculture may pose significant obstacles to entrants (Barrios, 2008).Threat of SubstitutesSubstitutes perform the same or a similar function as an industry’s product by a different means.

Substitutes are always present, but they can be easy to overlook because they may appear to be very different from the industry’s product. For example, Father’s Day gifts like neckties and power tools may be substitutes or used items vice buying new (Porter, 2008). However, the food industry may not have parallel issues identifying its competitors or substitutes. An excellent source to determine substitutes for the food industry is the U.S.

Census Bureau. It classifies industries with the North American Industrial Classification System (NAICS) accessible through the Census Bureau’s website (Gwin, 2001). Analysis into competitors and/or substitutes is tailored using codes ranging from two to six digits that provide broad to narrow focus, respectively.Bargaining Power of SuppliersPowerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. Powerful suppliers, including suppliers of labor, can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices (Porter, 2008).

An analysis of the company’s manufacturing process inputs will identify a variety of suppliers that have potential to impact profits. Reviewing the availability of ingredients for the packaged food products and taking note of any specific uncommon ingredients provides insight into the power of suppliers.Additionally, a company’s labor force also represents the power of suppliers. Through the company’s website and financial documents; an analysis of the labor force experience requirements and organization will indicate further supplier power. Then using Guides for Advertising Allowances and Other Merchandising Payments and Services 16 CFR 240.

1 available from the Federal Trade Commission website we will be able to compare available sources (Gwin, 2001).Bargaining Power of BuyersThe flip side of powerful suppliers is powerful buyers. They can capture more value by forcing down prices, demanding better quality or more service (thereby driving up costs), and generally playing industry participants off against one another, all at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions (Porter, 2008). Determining buyer power requires a multifaceted approach.

Reviewing the financial documents from competing companies and cross referencing the key parameters of the products will indicate trends.Financial statistics from the host company website or the U.S. Securities Exchange Commission are great sources to obtain information to compare. Additionally, Reuters and Yahoo Finance are excellent websites that provide side-by-side comparison of financial data sets.

Lastly, customer surveys obtained from social media websites such as Facebook and testimonials may indicate key buyer decision points.Intensity of CompetitionRivalry among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns and service improvements. High rivalry limits the profitability of an industry. The degree to which rivalry drives down an industry’s profit potential depends upon the intensity with which companies compete and on the basis on which they compete (Porter, 2008). Comparing company websites and business news articles on companies within the same industry provides the necessary insights to the level of competitive intensity. Reviewing trade associations can also provide key information into competition.

Lastly, consolidating information from each of the prior Porter Forces provide insight into the overall intensity of competition.PESTPolitical, Economic, Social and Technological (PEST) analysis describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. PEST Analysis is useful for four main reasons. First, it helps to spot business or personal opportunities, and it gives advanced warning of significant threats. Second, it reveals the direction of change within your business environment.

This helps you shape what the company is doing to work with change, rather than against it. Third, it helps avoid starting projects that are likely to fail, for reasons beyond your control. Lastly, it can help break free of unconscious assumptions when you enter a new country, region, or market; because it helps develop an objective view of this new environment (MindTools, ND).Political/LegalPolitical forces may influence industry’s ability to be profitable or impact its ability to be viable. Political factors include areas such as tax policy, labor law, environmental law, trade restrictions, tariffs, and political stability.

Political factors may also include goods and services which the government wants to provide or be provided and those that the government does not want to be provided (Wikipedia, ND). These factors can be found via both federal and state government resources such as websites, regulations and policies. The U.S. Department of the Treasury, U.S.

Department of Labor, U.S. Environmental Protection Agency, U.S. Department of State and subordinate state entities are ideal resources for conducting political/legal analysis on the packaged food industry.

EconomicEconomic factors such as economic growth, interest rates, exchange rates and the inflation rate have major impacts on how businesses operate and make decisions. Unemployment rates, the value of the dollar, inflations, growth, and productivity are factors that impact the health of the economy and consumer confidence. These factors provide indicators to potential concerns on recession and inflation. The economy may lead to reduced spending by consumers that have a rebound effect throughout companies and industries (Gwin, 2001). The Federal Reserve website, Recovery Act website and a multitude of news websites provide the necessary information to analyze the impacts to the packaged food industry.

SocioculturalSocial factors include the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets. The composition of the workforce, population growth, fads and trends may have significant impact on industries (QuickMBA, ND). Sources of information regarding these characteristics includes newspapers, magazines, television, internet and social media provide insight into the evolution of society and the impact on the food industry is not an exception.TechnologyTechnological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions (QuickMBA, ND).

Technological factors include technological aspects such as research & development activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation (Wikipedia, ND). Journals, newspapers and magazines are ideal resources to analyze technological revolutions in the food industry.ConclusionFederal and state government resources, journals, newspapers and industry financial records provide adequate resources to complete Porter’s Five Forces and a PEST analyses that will ultimately lead to an accurate environmental analysis. Understanding which resources to access for each component of these two analyses is paramount to accurately assessing the industry’s overall environmental analysis.