Diageo plc Porter Five Forces Analysis

Strategic Management Essays, Term Papers & Presentations

Porter Five Forces Analysis is a strategic management tool to analyze industry and understand underlying levers of profitability in a given industry. Diageo plc managers can use Porter Five Forces to understand how the five competitive forces influence profitability and develop a strategy for enhancing Diageo plc competitive advantage and long term profitability in Beverages - Wineries & Distillers industry.

Brief overview of Diageo plc

Diageo plc is one of the leading firms in the Beverages - Wineries & Distillers. Over the years Diageo plc has redefined the ways of doing business in Consumer Goods. Diageo plc is listed at New York Stock Exchange (NYSE) and have a market cap 76.42B USD.

What are Porter Five (5) Forces

In his revolutionary article - "Five Forces that Shape Strategy", Michael Porter observed five forces that have significant impact on a firm's profitability in its industry. These five forces analysis today in business world is also known as -Porter Five Forces Analysis. The Porter Five (5) Forces are -

• Threat of New Entrants
• Bargaining Power of Suppliers
• Bargaining Power of Buyers
• Threat from Substitute Products
• Rivalry among the existing players.

Porter Five Forces is a holistic strategy framework that took strategic decision away from just analyzing the present competition. Porter Five Forces focuses on - how Diageo plc can build a sustainable competitive advantage in Beverages - Wineries & Distillers industry. Managers at Diageo plc can not only use Porter Five Forces to develop a strategic position with in Beverages - Wineries & Distillers industry but also can explore profitable opportunities in whole Consumer Goods sector.

Diageo plc Porter Five (5) Forces Analysis for Consumer Goods Industry

Threats of New Entrants

New entrants in Beverages - Wineries & Distillers brings innovation, new ways of doing things and put pressure on Diageo plc through lower pricing strategy, reducing  costs, and providing new value propositions to the customers. Diageo plc has to manage all these challenges and build effective barriers to safeguard its competitive edge.

How Diageo plc can tackle the Threats of New Entrants

• By innovating new products and services. New products not only brings new customers to the fold but also give old customer a reason to buy Diageo plc ‘s products.
• By building economies of scale so that it can lower the fixed cost per unit. 
• Building capacities and spending money on research and development. New entrants are less likely to enter a dynamic industry where the established players such as Diageo plc keep defining the standards regularly. It significantly reduces the window of extraordinary profits for the new firms thus discourage new players in the industry.

Bargaining Power of Suppliers

All most all the companies in the Beverages - Wineries & Distillers industry buy their raw material from numerous suppliers. Suppliers in dominant position can decrease the margins Diageo plc can earn in the market. Powerful suppliers in Consumer Goods sector use their negotiating power to extract higher prices from the firms in Beverages - Wineries & Distillers field. The overall impact of higher supplier bargaining power is that it lowers the overall profitability of Beverages - Wineries & Distillers.

How Diageo plc can tackle Bargaining Power of the Suppliers

• By building efficient supply chain with multiple suppliers.
• By experimenting with product designs using different materials so that if the prices go up of one raw material then company can shift to another.
• Developing dedicated suppliers whose business depends upon the firm. One of the lessons Diageo plc can learn from Wal-Mart and Nike is how these companies developed third party manufacturers whose business solely depends on them thus creating a scenario where these third party manufacturers have significantly less bargaining power compare to Wal-Mart and Nike.

Bargaining Power of Buyers

Buyers are often a demanding lot. They want to buy the best offerings available by paying the minimum price as possible. This put pressure on Diageo plc profitability in the long run. The smaller and more powerful the customer base is of Diageo plc the higher the bargaining power of the customers and higher their ability to seek increasing discounts and offers.

How Diageo plc can tackle the Bargaining Power of Buyers

• By building a large base of customers. This will be helpful in two ways. It will reduce the bargaining power of the buyers plus it will provide an opportunity to the firm to streamline its sales and production process.
• By rapidly innovating new products. Customers often seek discounts and offerings on established products so if Diageo plc keep on coming up with new products then it can limit the bargaining power of buyers.
• New products will also reduce the defection of existing customers of Diageo plc to its competitors.

Threats of Substitute Products or Services

When a new product or service meets a similar customer needs in different ways, industry profitability suffers. For example services like Dropbox and Google Drive are substitute to storage hardware drives. The threat of a substitute product or service is high if it offers a value proposition that is uniquely different from present offerings of the industry.

How Diageo plc can tackle the Treat of Substitute Products / Services

• By being service oriented rather than just product oriented.
• By understanding the core need of the customer rather than what the customer is buying.
• By increasing the switching cost for the customers.

Rivalry among the Existing Competitors

If the rivalry among the existing players in an industry is intense then it will drive down prices and decrease the overall profitability of the industry. Diageo plc operates in a very competitive Beverages - Wineries & Distillers industry. This competition does take toll on the overall long term profitability of the organization.

How Diageo plc can tackle Intense Rivalry among the Existing Competitors in Beverages - Wineries & Distillers industry

• By building a sustainable differentiation
• By building scale so that it can compete better
• Collaborating with competitors to increase the market size rather than just competing for small market.

Implications of Porter Five Forces on Diageo plc

By analyzing all the five competitive forces Diageo plc strategists can gain a complete picture of what impacts the profitability of the organization in Beverages - Wineries & Distillers industry. They can identify game changing trends early on and can swiftly respond to exploit the emerging opportunity. By understanding the Porter Five Forces in great detail Diageo plc 's managers can shape those forces in their favor.

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