Portor's Five Analysis on Scharffen Berger

For many decades, the United States led the world in global chocolate market on the basis of various products such as dark chocolate, milk chocolate, and white chocolate. The market has been witnessing a trend of shifting consumer preferences towards the dark and premium chocolate segments. The health benefits of dark chocolate a major driver for the market. There are hundreds of chocolate companies working in United States; few of them are manufacturing their products from stretch to finish goods whereas the remaining chunk working with third parties. Furthermore chocolate industry is divided into two segments: mass market and premium and offered their products for both retail use and commercial use.  

Porter's five forces model:

Porter's five forces analysis is a framework for analyzing the level of competition within an industry and consider as a very important tool in strategic formulation.  The five competitive forces used in the model are bargaining power of buyers, bargaining power of suppliers, intensity of rivalry among competitors, threat of new entrants and threat of substitute products.

Bargaining Power of Buyers

This factor holds great importance in this case because buyers are scattered all around the US. The increasing number of competitors that offers the same type of products at low cost can shift customer’s loyalty. It doesn’t cost much for buyers to switch to another brand of chocolate or to start using other flavor of chocolate. Since the switching cost from one brand to another brand is low buyers can easily choose alternative chocolate brand. In this business case, bargaining power of customers is moderate but it can be controlled through careful means.

Bargaining Power of Suppliers

Bargaining power of suppliers is very important factor to be considered in any industry as they are the main strength of the company and played a vital role in company’s performance. The suppliers of the chocolate and cocoa industry have significant bargaining power over the industry because of the limited number of these suppliers. The cacao tree is grown in specific areas such as Ghana, Trinidad, Jamaica etc. all of these countries are poor so suppliers may not pose the threat of forward integration. Many players in the industry are forced to import the product to maintain their quality standard.

Intensity of Rivalry

The chocolate industry has many industry leaders that are similar in size and product offerings. Because there are many competitors that are operating in the same industry so there are more chances of intense rivalry among competitors. Slow industry growth rate increases the intensity of rivalry between participants. Because the market growth rate is slow, companies tried to take the market share of other companies in order to increase sales. Another condition that increases the rivalry is high fixed costs. The chocolate industry witnessed the high fixed cost for both manufacturing and storage. In addition, high fixed costs associated with high exit barriers. The factor of high exit barrier also determines the degree of rivalry among competitors in an industry. Switching cost for buyer from one brand to another brand in low but they need to sacrifice the specific taste that one company poses. Likewise if the switching cost is low then there are more chances of intense rivalry among the competitor because if one’s product is not differentiated then they have less chance to maintain their market share. There are many key players working in this slow growth industry which has high fixed cost and high exit barriers. All of these conditions lead to the price and advertisement war among the industry players. Scharffen Berger positioned itself in high-end product and follow the role of higher the quality higher the price. Where, other players of chocolate industry offering their product at $0.35 per ounce Scharffen Berger placed its products for premium market with price of $2.00 per ounce bar. In Scharffen Berger’s case there are more chances that industry’s intensity of rivalry would be high.

Threat of New Entrants

The threat of new entrants is a competitive force that determines how easily a firm’s profits can be lowered because of new competitors in the industry. If the barriers to entry are high then the threat of new entrant is low. An economy of scale is one the barrier which allows us to analyze the industry whether it is favorable for the new comers or not. Since the chocolate industry has the high fixed cost for both manufacturing and storage facilities it is quite difficult for the new comer to achieve economies of scale. There are many competitors in the industry those have the strength to be identified with their brand names and customer loyalty. Some of them hold 75% of market share. They have strong brand image and customers loyalty which creates the entry barrier for new comers. Another entry barrier is the presence of large capital requirement in the startup, need of specific assets and high fixed cost creates the high entry barrier. In addition, existing players have strong established marketing and distribution channel which is another entry barrier for the new competitors. Government and other law bodies such Food Administration Authority have well defined rules and guideline for the food business, these regulations may increase the level of barrier to entry for new companies in chocolate industry.  Therefore, the threats of new entrants are low in chocolate industry.

Threat of Substitution

The chocolate industry must compete with number of substitute products that can threaten industry’s profitability and product line. Non-chocolate snacks, peanut butter, fruits, ice cream, and dried fruits can be possible substitute of chocolate products. The substitute offer a better and cheap price while buyer faces low switching cost which increases the threat of substitution for chocolate industry.  

The Porters 5 Forces Model (Template)

Bargaining Power of Buyers