Strategic Management Assignment: Developing Suitable Strategy For Five Guys
Question
Task:
Purpose: The purpose of this strategic management assignment is to help learners identify elements of the strategic environment that contribute to a firm’s commercial decisions and demonstrate an understanding of the internal and external forces that affect the strategic decisions of a firm.
This is an individual assignment. It takes the form of a report.
It requires that you select a firm from anywhere in the world and apply Porters Fives Forces Model to its current market position as well as the suggestion of either a Cost-Leadership or a Differentiation strategy and justifications for this.
Answer
Introduction
With rapid growth in globalization, it has become increasingly important for firms to undertake efficient strategies for operating in competitive business environment. The firms need to devise suitable and effective strategies for staying ahead of the competitors, responding to the external challenges and meeting the changing customer demands and preferences (Hesterly and Barney, 2018). Strategy development can be referred to as the process of investigating and identifying different strategic options, analysing them and selecting the best suitable one. It also involves deciding how to allocate resources across the entire organization for achieving the desired objectives (Grant, 2016).
The purpose of the report is to provide strategy development for a selected firm. The organization taken under consideration is Five Guys. The report has first provided an overview of the current market status of the firm and applied the Porter’s Five Forces model for analysing its competitive position in the industry. Based on this analysis, cost leadership or differentiation strategy has been proposed for its future growth. Lastly, justifications for selecting the proposed strategy and other suggestions have been provided.
Five Guys was founded in 1986 in Washington, DC by opening a carry-out burger joint under Jerry and Jannie Murrell. Handmade burgers with perfect level of grill and fresh-cut fries cooked in pure peanut oil were served to the customers (Five Guys, 2021). With more than 30 years of experience, the restaurant is present in almost 1700 locations across the world alongside 1500 units in development.
Research and Data Collection
Data about the restaurant and its competitive position has been gathered from secondary sources such as company website, newspaper articles, documents and trusted Internet websites. On the other hand, information about strategic model and proposed strategies have been gathered from journals and books available at Google Scholar.
Current Market Status of Five Guys
Five Guys is one of the major fast-food brands in the US market. According to a 2015 survey, this brand was the second most favourite amongst the US customers for its burgers and fries just after McDonald’s (Statista, 2014). Besides, Five Guys enjoys leading market position in this region alongside Burger Kings. This shows that the brand has been enjoying a strong position in the fast-food industry of one of the biggest markets in the world.
Fig 1: Most popular limited-service hamburger restaurants in the United States in 2015*
(Source: Statista, 2016)
The above graph displays another 2015 report showing that Five Guys Burgers and Fries was the third popular limited-service hamburger restaurant in the country after In-N-Out Burger and Smashburger (Statista, 2016). It has been one of the most popular hamburger joint options available to these US customers. Since then, the brand has been performing quite well in the market. However, Five Guys faced struggle during the year 2017 in the first three months where a local burger joint of Texas named Whataburger performed better than six of the largest fast-casual burger chains generating 44% of the total transactions. In that year, Five Guys had the third position accounting for only 12% transactions (Taylor, 2017). Despite having 1312 stores in comparison to the local brand’s operations in 805 locations, Five Guys could not beat this brand.
Fig 2: Consumers' favourite burger and chicken fast food chains in the UK 2017
(Source: Lock, 2020)
Besides the US market, Five Guys has been able to capture the UK market as well. The product offerings of the brand have been able to satisfy the needs and demands of these customers apart from that of the ones in US and Canada (Witts, 2019). The strategy of redirecting and budgeting for sourcing ingredients to produce high-quality products has led to its success in the UK market. Five Guys also came out to be consumer’s favourite brand based on customer experience and satisfaction survey in 2017 (Lock, 2020). It consisted the highest rating as a quick service and fast causal restaurant in the burger, steak, chicken and grill category.
With the outbreak of the pandemic, Five Guys has suffered in the last year across many parts of its locations. For example, the pandemic resulted in material uncertainty across the supply chain of the company. This led to severe losses for many of its franchisees in Ireland in the regions of Dublin and Belfast (Whyte, 2021). It was because of the supply chain disruption from travel restrictions and social distancing norms, which ultimately resulted in losses for the brand. Moreover, Drew Smith, the owner of 35 Five Guys restaurants spread across Delaware, new Jersey and Pennsylvania decided to reduce his own salary for preventing layoffs of employees rising from business losses during the pandemic (Roland, 2020). In this regard, the sales were 50% less in 2020 as compared to the last year in those stores that led to this decision.
Application of Porter’s Five Forces Model
Strategic analysis has become essential for companies operating in an international context. It enables the firms in evaluating the threats and opportunities present in the external environment and accordingly devise strategies for responding to them. In this regard, Porter’s Five Forces model is a significant framework that can be used in the case of Five Guys. This model analyses five competitive forces, namely, bargaining power of buyers, bargaining power of suppliers, threat of substitution, threat of new entrants and competitive rivalry in any particular industry (Dobbs, 2014). It can be applied to the global fast food industry in which Five Guys operate for understanding the level of competition and formulating strategies for its long-term survival and profitability.
Buyers’ power- This force refers to the ability of customers in taking down prices of the products or services. Buyers may often threaten the fast-food industry in reducing their prices or bargain for higher quality of products and services and play competitors against each other. This results in reduced profitability of the firms. Various factors affecting this force include bargaining leverage, switching costs, price sensitivity of buyers, number of buyers and competitive advantage of the products (Indiatsy, et al., 2014). In the global fast-food industry, there exist numerous buyers in the market having the capability of driving down prices of the products or playing competitors against each other. Besides, there are various options of these fast-food brands available in the global market and the costs of switching between them is low. This also provides buyers with the opportunity of displaying their price sensitivity and firms are unable to raise their product prices. Moreover, the food items like hamburgers, fries, beverages, steak and others also provide little or no competitive advantage to each of the individual firms (Gamble, Thompsonand Peteraf, 2013). Thus, buyers in this industry have high bargaining power. Five Guys must formulate its strategies based on this force as rising prices significantly or reduced quality can motivate the customers to switch to other alternatives present in the market.
Suppliers’ power-This refers to the power of suppliers in increasing and decreasing prices of the raw materials that companies buy for manufacturing their products. These suppliers have the capability of pressurizing the global fast-food industry through number of ways like price increments and quality reduction of the purchased raw materials. Various factors affecting their power of bargaining in this industry are input differentiation, impact of cost on such differentiation, strength of the distribution centres and availability of input substitutes (Aithal, 2017). In the fast-food industry, there are various suppliers present selling raw materials like bread, meat, ingredients and others. These products need to be of high-quality but they are not differentiated. Besides, numerous suppliers sell substitute raw materials as well in the industry for the fast-food firms. The cost of switching between these suppliers is also much lower than the prices of the raw materials itself. Moreover, companies involved in this business have strong distribution networks and relationships with numerous suppliers in the market. Thus, they have low bargaining power in the industry. This indicates that any one supplier cannot charge high prices from Five Guys or reduce the quality of their raw materials (Srivastava, Franklinand Martinette, 2013). In that case, the brand has the opportunity of switching to another supplier in the industry providing lower prices and high-quality input materials.
Threat of substitutes- This indicates the risk that a company faces when the products or services fail to fulfil expectations of the customers and they switch to alternatives in the market (Davidand David, 2017). Substitutes can decrease the potential returns expected in the fast-food industry. the factors influencing this force are price performance, switching costs, availability, reduction in quality and close substitution. There exist various local restaurants, cafeterias or bakeries serving similar food products to the customers like Five Guys across various regions in the global market. Besides, home-cooked meals are also present in the market for consumption. The costs of switching to these options are quite low and further home-cooked meals are often considered healthier and high-quality than fast food (Gamble, Thompsonand Peteraf, 2013). The prices of these options are also lower than that of the international food chains like Five Guys. This indicates that the threat of substitution is high in the global fast-food industry. Five Guys need to focus on providing high-quality food items to the customers at affordable prices in the global market for preventing them from switching to these substitute options.
New entrants- The global fast-food industry has become highly profitable in the recent years. This encourages various firms to enter the market. This force refers to the risk of such new firms venturing into the industry, which consequently decrease the overall profits (Zekiriand Nedelea, 2012). This makes it essential for the existing brands to block these new entrants with various strategies. Some of the major barriers that prevent these new firms from entering the industry are economies of scale, access to distribution channels, product differentiation and others. In the global fast-food industry, there already exist a large number of established brands in the market. The new firms often do not possess the capacity of competing with these brands having strong customer base, reputation, capital and resources and market share in the industry (Alkandari, 2015). Besides, they also have the power to block out such new entrants from entering the market by consulting with their competitors if such firms are viewed as a threat to their profits. However, the attractiveness of this fast-food industry and requirements of low capital have been increasing the number of entrants in the market. This indicates that there exists moderate threat of new entrants that Five Guys can face in the near future.
Competitive Rivalry- This refers to the extent of competition present in the industry. The global fast-food industry has become saturated with numerous food chains entering the industry. Some of the world’ largest fast-food restaurant chains are McDonald’s, Subway, Starbucks, KFC, Burger King, Pizza Hut, Dominos, Taco Bell, Baskin Robbins and others. These brands have established themselves in the international market and consist of the largest market share across the world. For example, Subway is present in 42,998 locations, McDonald’s in 37,200 locations, Starbucks in 30,000, KFC in 20,404 and so on (World Atlas, 2021). Furthermore, these restaurants have loyal and strong customer base, strong brand reputation and popularity and efficient supply chain and distribution channels across the global market. This indicates that there is high competitive rivalry in the global fast-food industry. While Five Guys is also an international brand with presence in different locations, it still falls far behind these brands.
Proposed Strategy: Cost Leadership/ Differentiation
The competition in the global food retail market has become very intense. Thus, to strive in this competitive business environment Five Guys should start operating in developing and under-developed economies along with developed country. Moreover, Five Guys should undertake differentiation strategy to strive in the current market. When corporate leaders make meaningful differences in order to make the offerings of the firm different from the competitors, it is known as differentiation strategy (Semuel, Siagian and Octavia, 2017). Five Guys that is operating in the food retail chain industry can also provide unique offerings to the people across the world.
Furthermore, obesity is marked as one of the major issues across the world and it has tripled since 1975. In 2016, 1.9 billion adults were marked as overweight and the number is increasing day by day (WHO, 2021). Thus, Five Guys can target this market and provide unique and differentiated product to these set of customers that can increase the organisational value. Including healthy ingredients into the products that are offered by Five Guys can be marked as a part of differentiation strategy. This organisation can provide Burgers with low-fat mayonnaise and can use canola oil for cooking burgers and sandwiches. Furthermore, Five Guys is also well-known for providing beef burgers but to expand its business in a country like India the corporate leaders should also focus on providing different and unique product to the customers. In India 37% of the population are vegetarians (Biswas, 2018). Thus, introduction of Potato Burger, Vegetable cutlet burger can grab the attention of a large number of customers from this country.
In addition to this, sustainability and eco-friendly business practices are grabbing attention of various external stakeholders across the world. This opportunity can be further used by Five Guys to differentiate their product offerings or service from other competitors operating in the similar industry. Five Guys can initiate sustainable packaging of food products. When recyclable materials are used for packing any products it can be known as sustainable packaging (Khalil, et.al., 2016). Five Guys can deliver products in recycled cardboards. Customers often visit malls and sit and eat food. In such cases, the organisation can serve food to the customers in containers that are made up of bamboo. This approach is also an integral part of differentiation strategy. This approach helps in promoting eco-friendly business practices. Governments, suppliers and customers will be satisfied by witnessing the environmental-consciousness that of the corporate leaders of Five Guys which will further help the firm to gain competitive advantage.
Furthermore, marketing is currently one of the important functional department of an organisation. Effective marketing strategies is necessary because it is directly related with the growth of the firm. Thus, green marketing can be adopted by Five Guys while promoting its product in the global market. Green marketing is closely associated with sustainability of environment and industrial ecology (Singh and Pandey, 2012). Five Guys can communicate sustainable packaging and other eco-friendly practices that the organisation is undertaking with the help of campaign. Innovative and environment friendly campaign should be formulated by the marketing department of the company. This is how the voice of the organisation will reach to large number of customers across the world with the help of this green marketing strategies. Therefore, green marketing strategies can also help Five Guys to attract large number of customers in the global market and can also help the firm to gain competitive advantage. Thus, from the above discussion it is clear that differentiation strategy is the most effective strategy for Five Guys. It will not only help the firm to gain competitive advantage but this strategy will also open several opportunities for the organisation.
Justifications for Choice of Strategy
In the above section, differentiation strategy has been proposed to Five Guys. Introducing vegetable food items in India have been proposed. In the competitive business environment, increasing customer engagement and customer loyalty is of utmost importance. The deliberate effort made by firm to motivate and empower customers increase customer engagement (Alvarez-Milán, et al., 2018). Therefore, this is a justified choice because this strategy will increase food choices for vegetarians which will further increase customer engagement towards the product offered by the firm. With the increase in customer engagement this strategy can also help Five Guys to increase customer loyalty.
Furthermore, it is also proposed to the strategic team of Five Guys to target customers who are suffering from health issues especially obesity. It is found that health consciousness among people across the world has increased to a great level. This is one of the major reasons, people are often avoiding food items like burgers and fries because these foods are labelled as unhygienic food. This change in the perception of the customer can have a negative impact on the profit margin of Five Guys. Organisations adopt business strategies to reduce cost and improve profit margin (Raja Sreedharan, Raju and Srivatsa Srinivas, 2017). In such scenario, initiating healthy burgers for people who are suffering from obesity is a justified differentiation strategy. Promoting health awareness among people with the help of newly found products can increase the sale volume of the products that will further have a positive impact on the profit margin of Five Guys.
In addition to this, differentiation strategy is beneficial for an organisation because it helps in creating additional organisational value. Enhancing organisational values is important because it not only satisfies the customers but it also has an impact on the financial performance of the organisation (Pedersen,Gwozdz and Hvass, 2018). Initiation of green marketing and sustainable packaging can help the corporate leaders of Five Guys promote sustainability and issues that are related to environmental degradation and climate change. With the help of this the external stakeholders can understand that the senior team and the board members of Five Guys are not only doing business to incur profit and strive in the global market but they have also indulged themselves to bring major changes within the world.
Recommendations
Five Guys has significant market share in various developed countries because of its high-quality and fresh products and efficient services. However, as compared to large brands like McDonald’s, Burger King, Starbucks, KFC, Subway and others, the brand has lower market share in the global market. It is essential for Five Guys to expand its market share by venturing into various other nations. In this regard, the brand can target developing countries for its business growth in the near future. This will provide the firm with the opportunity of ensuring its long-term survival through expansion of customer base and operations and gaining sustained competitive advantage. For this purpose, it can apply its market entry strategy of franchisees in those selected developing markets. This will help the company to survive in the intensive competition of the global fast-food industry as identified in the Porter’s Five Forces Analysis. Furthermore, Five Guys should also cater to the changing tastes and preferences of customers in the recent years. There has been a shift of consumers’ behaviour towards green and sustainable consumption because of growing concerns towards environment and living a healthier lifestyle. In this regard, the brand can add some healthier and vegan food items in its menu as mentioned in the differentiation strategy. This will help it to better satisfy the needs and demands of the customers alongside distinguishing itself from the other top brands in the market. The company will enhance its competitive advantage and ensure its survival in the long run.
Conclusion
The report aimed at providing a strategy development for the chosen fast-food restaurant Five Guys. In this regard, it provided a brief background of the organization, structure to be followed and the importance of strategy development in today’s competitive world. Furthermore, it pointed out that data and information about the company, its strategies, theoretical framework like Porter’s Five Forces model, its application, theories like differentiation and current market status of the firm were collected from different secondary sources. These included newspaper articles, journals, company website, sources like Statista, government websites and other published documents. The model helped in identifying that there exists strong bargaining power of buyers, high threat of substitution, intense competitive rivalry, low suppliers’ power and moderate threat of new entrants. Based on this analysis, differentiation strategy for Five Guys was proposed so that the firm can ensure its business growth by expanding to developing countries as well. The report displayed that such differentiation would be obtained through vegetarian food choices, sustainable packaging, green marketing campaigns, targeting obese customers and others. This would provide the company with various benefits of increased customer loyalty, enhanced market share and sustained business growth. Lastly, the recommendation section suggested the fast-food brand to venture into other developing regions alongside providing healthier food choices.
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