China with its population of over 1.3 billion and the GDP growth rate of 7.7% is obviously a major player in the global market based on its size and growth potential. In recent years, the consumer food service industry in China has significantly grown, driven by the change in consumption patterns of urban Chinese consumers amid the robust Chinese economic growth. A number of Western-style franchise chains are increasingly crossing national boundaries and looking for growth among customers in China. In provinces and regions of better economic development and faster lifestyles, quick service restaurants make up a large share of the total food-service sector. Guangdong province can be chosen as a potentially profitable market where the fast-food market contributes about 90% of the total food service sector’s revenue. Mad Mex, as a new entrant in the quick service restaurant (QSR) industry, is ambitious to penetrate this promising market with the goal to open the first franchise restaurant in February 2014.
Situation analysis: ACMR-IBISWorld (Jan, 2013) estimates that the fast-food restaurant industry in China will generate revenue of $89.60 billion in 2012, up 14.1% from 2011. The pace of urbanization and the higher disposable income urge lifestyle changes and the increase in demand for fast-food. Chinese people have less leisure time to eat in traditional full-service restaurants and prefer to treat themselves in fast-food establishments. Moreover, the rapid development of fast-food service providers and new brands and food styles with improved chain store contribute to the strong growth of the industry in China. The geographic popularity of China’s fast-food restaurants industry is consistent with China’s economic development level. Beijing, Shanghai and Guangdong are three of the most developed provinces and regions in China, which account for about 45% of total industry revenue in 2012 (ACMR-IBISWorld, Jan 2013). These regions witness the relatively well developed franchise operations.
Porter’s Five Forces Industry Analysis
Figure 1: Forces driving industry competition Source: Porter (1980) “Industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm.” (Michael E. Porter 1980, P.3) The Porter’s Five Forces Model introduced a concept of structural analysis as a framework for understanding the five basic competitive forces in an industry. These forces, which are shown in Figure 1- new entrants, rivalry among existing competitors, threat of substitute products or services, bargaining power of buyers, and bargaining power of suppliers, reflect that the competition “goes well beyond the established players” (Porter 1980, pp. 6). Both potential and established players can influence average industry profitability.
The threat of potential entrants is balanced by the entry barriers like economic of scale, product differentiation, capital requirements, access to distribution channel, etc. The intensity of rivalry determines industry attractiveness but figures out the extent to which the value created by an industry will be dissipated through competition. Sharon M. Oster (1999) asserts that subsitute products or services play an uneven role in industry dynamics. They can play a modest role in highly competitive industries or during periods of excess production. But subtitutes become significant when demand rapidly increasing or in markets with few competitors. In these cases, the availability of good substitutes influences the profits of the existing firms in a market.
Buyer power is varied across markets and constituted by the most important determinants of buyer power in a market, which are the number of buyers and the distribution of their purchase, characteristics of product (for instance, standardization of products increases buyer power). In an industry, powerful suppliers can affect their bargaining power over firms by controlling prices or qualities of supply.
Depending on each industry and the particular conditions of the industry, different forces will be more or less prominent in the industry competition. And the collective strength of these forces determines the intensity of competition in the industry and the potential profitability. “Knowledge of these underlying sources of competition in an industry highlights the critical strengths and weaknesses of the company, animates its positioning in its industry, clarifies the areas where strategic changes may yield the greatest payoff, and highlights the areas where industry trends promise to hold the greatest significance as either opportunities or threats” (Poeter 1980, pp.4). Once understanding these forces and their strategic implications, the company can formulate an effective competitive stratey, which enables it to defend itself from the existing array of competitive forces, affect them in its favour thereby improves the firm’s position in the market.
Porter’s Diamond Model
Figure 2: Porter’s Diamond Model The theorical framework, which examines the competitive position of a nation and its industries, consists of four determinants: factor conditions, demand conditions, related and supporting industries and firm strategy and rivalry. According to Porter (1998), factor conditions refer to production endowment that players need to compete in an industry. These factors are discriminated into basic factors versus advanced factors, and generalized factors versus specialized factors. A basic factor is passively inherited, for example natural resources and unskilled labour. Meanwhile advanced factors include what nations can create during their industrial growth like capital, infrastructure and highly educated labour forces. The standard for production factors is gradually rising due to the improvement of knowledge, science and technology.
A nation can possess competitive advantage in an industry when it is able to create new competitive factor conditions and/or upgrade the needed factors. Demand conditions refer to the nature of home-market demand for an industry’s product or service considering in terms of quantity and quality. The size of the home market, the presence of demanding and sophisticated domestic buyers pressure companies to innovate and upgrade, meet high standards in order to respond to more diverse and higher levels of customer needs. “The presence of suppliers and related industries within a nation that are internationally competitive provides benefits such as innovation, upgrading, information flow, and shared technology development which create advantages in downstream industries” (Porter 1998). A nation thereby gains competitive advantage in an industry when it has competititve edge in the number of related industries. Another determinant is firm strategy, structure, and rivalry, referring to firms’ organizational structure, management situations and the performance of competitors in domestic market.
The presence of intense rivalry in the home base is important, because it is powerful stimilus to creation and persistence of competitive advantage. Two external factors are chance and governments. Chance can discontinue the possibility of some companies to gain competitive position and some lose. Governments have an overarching effect on all the players. In many industries, government is a buyer/ supplier and can influence the competition of the industry by its policies. Government can also affect the relation between an industry and subsitutes through regulations and other means. They play a role in shaping the context and institutional structure surrounding companies and in creating an environment to support companies to gain competitive advantage.
SWOT Analysis Internal analysis: Strength: Mad Mex is known as a gourmet restaurant with a healthy, fresh approach to Mexican cuisine. Its philosophy is to offer food servicing in a fast paced environment to create a high volume takeaway business but a unique and high quality product offer that is sufficient to command a premium price point. This concept will bring it the competitive advantage in food service industry relative to other global QSRs in China at present. By remaining true to the founding principles: Fresh and Healthy, Fast and Delicious, Authentic and Exciting, Mad Mex gradually broadens its business with 15 stores opened in just over four years and makes effort to arm itself with a team of business savvy, hands-on, franchisees.
Established in 2007, Mad Mex is still a baby to global giant fast-food restaurants like Mc Donald’s or KFC with its limited presence in three states of New South Wales, Victoria and Queensland within Australia. It is regarded as a strange brandname to the worldwide food service industry and particularly the Chinese market.
Opportunities: Chinese consumers are believed to have a positive image of quick service restaurants (QSRs) and good perception of their meal quality and customer services. The average level of consumer satisfaction yet high loyalty of Chinese customers is attracting to Western fast food restaurants franchise to engage their business in this market. According to a study on International Journal of Quality and Reliability Management regarding perceived service quality in the fast food industry in China, “reliability, recoverability, tangibles, and responsiveness were all significant dimensions of perceived service quality”( Hong Qin, 2010). As the study mentioned, all these positive perception in turn influenced the customer behavioral intentions in the industry. Despite the increasing customer preference for Western-style “to-go” restaurants in the Chinese market, the QSRs market share accounts for only 9.8 percent of Chinese sales for outside meals (Datamonitor, 2007). This means the unprecedented opportunity for Western restaurant chains to operate in China.
The segmentation of QSRs in China is witnessing a tougher competition between international brands like MacDonald’s and KFC and myriad domestic companies like Yum!Brand and Ajisen. Besides, Asian QSRs are the largest sub-sector in the QSRs in China, in which Chinese cuisine is dominant. It is explained by the fact that Chinese people prefer their tradition rice-based dishes and their price sensitivity when choosing the lower dishes in the Chinese restaurants. Furthermore, for the first time penetrating foreign market, the inability or unwillingness of the company to face dietary and cultural challenges will lead to the failure in the image of Mad Mex in the global market. To succeed in the Chinese market, Western-style QSRs are required to examine Chinese customer behaviours and develop marketing strategies that adapt to the Chinese cultural environment.