Case study and Background Porter (1979) argued that the essence of strategy formulation is coping with competition in the marketplace. He found that most business managers tended to view competition too narrowly and too pessimistically. Porter emphasised that while one would sometimes hear executives complaining to the contrary, intense competition in an industry is neither coincidence nor bad luck - moreover, in the fight for market share, competition is generally not manifested only in the other players, but rather, it is rooted in underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Source: Porter, M.E. 2008. The five competitive forces that shape strategy. Harvard Business Review, 86 (1): 78-93. "[I]n 2018, South Africa imported US$3.2 billion in processed foods, an increase of 5.5 percent from 2017, with the top five products being palm oil, food preparations, whiskies, beer made from malt, and animal guts, bladder and stomach parts. In the same year, the United States processed foods exports to South Africa, were valued at U.S. $111 million, and consisted of largely food preparations, whiskies, animal guts, bladder & stomach parts, sauces and mixed condiments, and nuts and seeds. Other products with good sales potential in South Africa include poultry meat, beer made from malt, organic products, oils, sardines prepared and preserved, dairy products, including dog and pet food." (Ntloedibe, 2019). "There are over 1,800 food production companies in South Africa. However, the top ten companies are responsible for more than 80 percent of the industry's production revenue. The industry employs 450,000 people in the subsectors of meat, fish, fruit, dairy products, grain mill products, and beverages. As a major producer and exporter of finished processed food products, South Africa's appetite for ingredients drives demand for a wide range of products inputs." (Ntloedibe, 2019). Source: Ntloedibe, M. 2019. South Africa: Food Processing Ingredients Report 2019. Global Agricultural Information Network, 28 March 2019. [Online]. Available at: https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Food%20Processing%20Ingredients P retoria South%20Africa%20-%20Republic%20of 3-28-2019.pdf [Accessed 18 February 2022].Case study and Background Porter (1979) argued that the essence of strategy formulation is coping with competition in the marketplace. He found that most business managers tended to view competition too narrowly and too pessimistically. Porter emphasised that while one would sometimes hear executives complaining to the contrary, intense competition in an industry is neither coincidence nor bad luck - moreover, in the fight for market share, competition is generally not manifested only in the other players, but rather, it is rooted in underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Source: Porter, M.E. 2008. The five competitive forces that shape strategy. Harvard Business Review, 86 (1): 78-93. "[I]n 2018, South Africa imported US$3.2 billion in processed foods, an increase of 5.5 percent from 2017, with the top five products being palm oil, food preparations, whiskies, beer made from malt, and animal guts, bladder and stomach parts. In the same year, the United States processed foods exports to South Africa, were valued at U.S. $111 million, and consisted of largely food preparations, whiskies, animal guts, bladder & stomach parts, sauces and mixed condiments, and nuts and seeds. Other products with good sales potential in South Africa include poultry meat, beer made from malt, organic products, oils, sardines prepared and preserved, dairy products, including dog and pet food." (Ntloedibe, 2019). "There are over 1,800 food production companies in South Africa. However, the top ten companies are responsible for more than 80 percent of the industry's production revenue. The industry employs 450,000 people in the subsectors of meat, fish, fruit, dairy products, grain mill products, and beverages. As a major producer and exporter of finished processed food products, South Africa's appetite for ingredients drives demand for a wide range of products inputs." (Ntloedibe, 2019). Source: Ntloedibe, M. 2019. South Africa: Food Processing Ingredients Report 2019. Global Agricultural Information Network, 28 March 2019. [Online]. Available at: https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Food%20Processing%20Ingredients P retoria South%20Africa%20-%20Republic%20of 3-28-2019.pdf [Accessed 18 February 2022].21; 22; 23 2022 \"[W]e are a leading South African food manufacturer employing over 21 000 people, producing a wide range of branded and private label food products which we distribute through our own route- to-market supply chain specialist, Vector. Our strategy is founded on a clear sense of who we are and where we are going as a business. We aim to create the future lDur Way driven by Our Passion and Our Ambition and guided by Our Values. In our Passion to do "more", we are driven by a desire to improve people's access to nourishing food while achieving sustained business growth. The three \"mores\" of our Passion express our interlinked social and business agenda.\" (RCL Foods, 2021} Source: RCL Foods. 2021. Who we are. [Online]. Available at: httpszgrclfoodscom[our-businessgwho- weare [Accessed 13 February 2022]. (1.2.1 a} Conduct an industry analysis for the food industry in South Africa using the {25} Porter's Five Forces model. b} Provide application specific to RCL Foods to your industry analysis. (1.2.2 Critically examine the different industry key success factors for RCL foods by {10} applying the concept of "the three C's\". NB: There will be no marks allocated for just naming the three C's. an fundamentall stry struc competition in an industry. nce competition and rivalry in The five forces are interrelated rather than different ways. Three basic forms of competi- tion are discussed below:21 independent, and pressure on one force may trigger changes or shifts in other . Monopolies: The opposite of competition is sources of competition. For example , a monopoly, where only one organisation suppliers that are blocked or undercut serves the market. In many countries, may try to find ways of selling directly to electricity generation is a monopolistic industry, for example Eskom in end-users. South Africa (at the time of writing). Some competitive behaviour may be Monopolists can control production, concerned with disrupting the forces and charge what suppliers and customers of competition, and not with simply will let them. They are generally limited accommodating them. For example, in only by substitutes and regulation. In the fast-moving environments, competitors case of electricity generation, households may be more concerned with disrupting could use alternatives (substitutes) such competitive forces to achieve a series of as generators, solar panels, gas or even short-lived competitive advantages than wood as a means of generating energy for with building and sustaining long-term household use. In addition, Eskom has competitive advantage. consistently asked for price increases far higher than inflation, but the regulatory The relationships between these five forces authorities have often put downward are shown in Figure 6.2. The relative power of pressure on such requests. Figure 6.2 Porter's five forces framework for industry analysis22 Threat of entry Direct competition Industry Bargaining power of suppliers rivalry Bargaining power of buyers Threat of substitutesSpin1 3 2 1 2 HOM 186 | CHAPTER 6 Analysing the industry environment | 187 other advantages (such as customer or supplier loyalty) because of their time improved ones, for example Blu-ray replacing DVDs as mentioned about power to exert downward pressure on the cost and stationery also does not affect the advantage. prices of individual food producers (see quality of the furniture they produce. . Retaliation: Expected retaliation by This may occur because of industry existing competitors can deter new convergence, as discussed in section (21 Strategy in action The buying power of Information: The more information buyers have about suppliers' pricing structures entrants. Unless ways are found to where, for example, electric cars with large southern African supermarket chain advanced ICT capabilities, such as yet is keeping small suppliers out on page 193). and input costs, the more powerful they will be. compete so as not to elicit retaliation, driving capabilities, are substitutes for . Switching costs: The bargaining power of entry into certain industries may not be buyers is high when the cost of switching traditional or hybrid cars. Substitution worthwhile. suppliers is low. This may include The bargaining power of suppliers Legal restraints: These can provide a may also occur because of complemente situations where the product or service The relative bargaining power of suppliers relationships, such as the one between determines the supplier opportunity cost. This whole range of barriers or deterrents to is undifferentiated and generic, i.e. a Windows and Intel, where products er affects input prices, and therefore the profita- entry. Patents, copyright or even outright constantly updated, and users have aco commodity. Backward vertical integration: If there is bility, of competitors, as we can see from the regulation restricting new entrants to the latest versions. a threat of backward vertical integration Strategy in action case: The buying power of (such as in the electricity generation . Substitution of need occurs when a tex - in other words, the threat of a buyer large southern African supermarket chains is industry) are all examples of legislation or product or service renders an existing to acquiring the supplier or setting up their keeping small suppliers out (page 193). Similar government action and its impact on new redundant by satisfying the same need own sources of supply - then this will forces to those determining buyer power entrants. The substitution of digital cameras for in increase the bargaining power of buyers. determine the bargaining power of suppliers:" . Differentiation: Where differentiation cameras is an example of this category. Ratio of purchase price to total cost: Buyers, . Supplier concentration: The larger and exists - in other words, where customers . Generic substitution occurs when products who themselves are often producers more concentrated suppliers are, the more perceive that a product, service or even a or services compete for disposable or providers of services, will generally powerful they will be. Again, this power product package, offers better value than income. For example, when consumer be less price sensitive, and as a result will be enhanced if there are many buyers. This is the case in the banking industry the competition - entering that industry have less disposable income during a less inclined to shop around, when the recession, they may trade down or may purchase price of a product or service is where there are relatively few banks to may be difficult unless ways are found to stop buying certain categories of prodan service many customers. (Also see the imitate the offering or to reduce customer a small fraction of their total production loyalty. However, this may require heavy altogether. cost, and is not important to the quality of Case example AB InBev below.) their production. Buyers who are highly Switching costs: The bargaining power of spending on advertising and promotions. The bargaining power of buyers profitable and interested in quality rather suppliers is high where the buyers' cost The threat of substitutes The relative bargaining power of buyers (as than price are also less price sensitive. For of switching suppliers is high. This may tomers) can have an impact on the prices that example, an organisation that produces include situations where products or Substitutes are those products or services that furniture may be less sensitive to the price services are unique or so differentiated an industry's customers can turn to, seeing can be charged by competitors in an industry (willingness to pay). Where buyers are pow of stationery, as it will only represent a that it would be difficult to develop as these products or services satisfy the same erful, they will negatively affect the ability d small portion of their total production basic need. This normally takes the form of alternative sources of supply. new technologies or business models. The competitors to charge high prices or to rix effect of substitutes is that they place a ceil- them. However, less powerful buyers not CASE EXAMPLE: AB InBev ing on the prices that industry competitors that competitors have more freedom to chap can charge, and therefore limit the industry's high prices. The following are determinans In 2008, the Belgium-based brewer InBev acquired the American brewer, Anheuser- profit potential." In certain cases, substitute the bargaining power of buyers:" Busch, to become Anheuser-Busch InBev (AB InBev). In 2016, AB InBev acquired products or services can lure customers away Buyer concentration: Where there is a SABMiller in a deal worth $103 billion (R1.4 trillion), sealing the union of the world's from an industry despite higher prices. For concentration of buyers - in other word two biggest beer makers. The SABMiller name was dropped, but SAB still exists as an example, digital video disc (DVD) technology, a few large and powerful customers or AB InBev subsidiary.31 As a dominant player in the South African beer market with key which displaced video cassette recorder (VCR) customer groups, or buyers that purchas large volumes - this may increase their brands such as Castle and Black Label, and a distributor for Coca-cola through its soft- technology worldwide, was in turn displaced drink division Amalgamated Beverage Industries (ABI), AB InBev subsidiary SAB exerts by more expensive Blu-ray disc technology. bargaining power, especially where there are a large number of suppliers a strong influence over the retailers of liquor and soft drinks. The manufacturer thus has There are three types of substitution: Product-for-product substitution occurs For example, large retail groups such much influence over the wholesale as well as the retail price of beer and soft drinks, and as the Shoprite Group, Pick n Pay, and Thistore merchandising strategies. This is a typical example of a situation where reduced buyer power means more profit to a supplier. when customers substitute existing Woolworths have a lot of bargaining products and services with new andSpin 1 profitability in an industry. When conducting Analysing the industry environment | 185 ct an analysis of the industry, the first step should markets is often intense. Short-term rs be to define the industry and to determine the viewpoint of the analysis - from whose per insurance is an example of an industry Diverse strategies: Where rivals are where most competitive products are diverse in strategies and origins, personality clashes' may occur as ito spective is the analysis being conducted? After doing that, each competitive force can be and. similar and switching costs are relatively they have different ideas about how to e is ions. lysed using the factors driving competition low (one phone call is often all that is required), leading to a high level of compete and how the industry works. W, for example by rating them as high, medium competition. Aggregate service providers For example, in the short-term insurance or low. The last step is then to conclude on the industry, OUTsurance, MiWay and other ers like Hippo (www.hippo.co.za) provide le biggest competitive threats where they origi. shoppers for short-term insurance with direct short-term insurers provide a service that eliminates insurance brokers, eate nate from, and what the organisation can do the necessary information from many short-term insurance providers so that whereas other organisations such as about them. Each of the five forces will now be Mutual & Federal traditionally use discussed in more depth (also see Figure 63) they can easily compare insurance quotes online. On the other hand, where certain brokers as their sales and service points competitors have managed to create high and believe that is in their best interest to The degree of rivalry between existing continue doing so. ly to competitors levels of differentiation customers may able Rivalry among existing competitors in the not be willing to switch because of their The threat of new entrants market is the most obvious and immediate commitment to the brand or organisation, Whenever an industry becomes profitable, ion is source of competition. Competitive rival or they may be locked into contracts (e.g. there are incentives for other competitors to inate are organisations with similar products and in the cellular telephony industry). enter the market. The success of their entry is services aimed at the same customer group." . Fixed costs or perishable products: Where dependent on the existing barriers to entry in In There are several factors that influence the fixed costs are high or products are an industry, of which there are several.26 perishable, there may be pressure on . Economies of scale: The economies of scale is an level of competitive rivalry.25 competitors to cut costs. For example, with . Number and size of competitors: The more required to be successful can provide when there is excess production of a barrier to entry in some industries, ket. competitors there are and the more equal perishable products such as milk or fruit, such as manufacturing capacity in the d. they are in size and power, the more prices will drop to sell higher volumes. automotive industry. t their intense rivalry will be. For example, in Expansion: Where production capacity Capital cost of entry: The capital cost et the electronics retail industry there are can be increased only in large chunks, of entry into an industry can provide a several large competitors such as HiFi capacity expansion may lead to temporary ant barrier to entry. This is especially true of Corporation, Dion Wired, Hirsch's and excess capacity and price cutting. For ses, capital-intensive industries such as gold Makro. This rivalry leads to intense price example, automotive producers can only mining or electricity supply. competition and discounting. add capacity in relatively large chunks by Control of distribution channels: Where Rate of industry growth: When industry installing a new production line or factory. When such capacity additions are made, existing competitors have control over growth is slow, competition may be more distribution channels, whether through ve intense as competitors battle for market producers could use lower prices as a means of generating higher volumes, in direct ownership or simply by virtue of etitive share. Therefore, as industries mature this manner using the capacity which has customer or supplier loyalty, this can one would usually expect competitive been added. provide a barrier to entry. sense intensity to increase. For example, as the High exit barriers: Where exit barriers, such Good relationships: Where existing stries South African cellular industry matures competitors have good relationships there is more competition for high- as specialised assets, are high, competitors vice value customers such as high-income may try to compete for as long as possible with customers and suppliers, or where for low or even negative returns. Given customers and suppliers are locked ng individuals and businesses. he investment that automotive producers into relationships with competitors, for ets . Differentiation and switching costs Ifa example through contracts, new entrants ed. product or service lacks differentiation (and the government) have made in the ndustry in South Africa, producers would may find it difficult to break into the d the or customer switching costs are low, rather sell at a discount and lose money industry. customers are not locked in, and this mar or a time than close down and exit the Time: Because of the experience curve, lead to more intense competition. This industry too soon. existing competitors that have been in explains why competition in commodity the industry for longer may have cost or of the of) on188 | CHAPTER 6 . Forward vertical integration: The threat of . Porter's view is essentially one of the forward vertical integration could increase industry environment as a threat, and supplier bargaining power. This threat it focuses on those relationships that Many forces exists when suppliers are not making reduce profits. It therefore largely ignores frame sufficient profit margins, and could profit-enhancing relationships such as acquire their own channels or bypass cooperation. A A pla existing intermediaries to sell directly to It also mostly ignores the human elements values end-customers. For example, Apple and of strategy such as the role of management other many other electronics and appliance skills in strategy. your manufacturers (such as LG and Samsung) The framework seems to be predisposed sider have invested heavily in their own retail towards a top-down or prescriptive frame spaces, which increases their bargaining approach to strategy - identifying and s power with other retailers. opportunities and threats in the comp Lack of substitutes: If there are no environment and formulating a response tors, a substitutes available, this may increase to them. There is little room for emergent comp supplier bargaining power. strategies. less w Dependence on a single industry: There has never been consensus among uct th Sometimes the fortunes of suppliers may For ex researchers on the effect of the industry a be closely tied to a single industry or even ple C organisational performance. device a single customer (such as a coalmine Economists have questioned its theoretical smart being dependent on a single power foundation. It is based on the structure increa station). For example, the manufacturers conduct-performance approach to pay h of car seats are dependent on the industrial organisations, which has largely we ca automotive industry. In this case, this will been displaced by game theory. and a reduce suppliers' bargaining power. relatic Up to this point we have focused mostly du Usi Despite the widespread acceptance and use- those relationships that reduce profits. The that co fulness of the five forces framework for indus- value net, however, emphasises complement partn try analysis, it has not gone without criticism, tary relationships that enhance profitability. ship t and it has several limitations:32 both It is a static framework, viewing industries 6.2.3.2 Complementary with as stable and shaped by external forces. In relationships - the value net ity, th many industries today, the reality is that While the five forces framework focuses te to the industry structure and boundaries are substitutes as a competitive relationship organ constantly changing. economic theory also identifies comple of the It assumes that organisations are ments as a relationship.33 This relationship below essentially selfish and will always put their is not addressed by the five forces frame Co own interests first. This is not true of not- work. However, Brandenburger and Nalebut cor for-profit and public-sector organisations. Also, with the increasing focus on emphasised the importance of complementany mo relationships in their value net concept. The wil sustainability, this perspective may be value net concept examined similar constructs rel somewhat outdated. to Porter's five forces framework, but also COT . While the framework approaches the five forces as equal, this may not be true, focused on value-enhancing (complementary Ni especially for customers. There are many rather than value-destroying relationship ma (such as bargaining power).34 Con . 34 Complementary gar observers who suggest that customers are the most important component to any relationships are profit-enhancing because aspect of strategy. they increase the maximum price that custom ers are willing to pay for a product or service