1. INDUSTRY ANALYSIS
Introduction
Porter’s five forces´ model of industry competition is used to inspect a competitive
environment and establish a firm’s possible profits. The model uses five competitive forces
that determine a particular firm’s capability to compete. The chocolate and cocoa industry
can use the five forces´ model as an analytical tool to determine the competitive market. The
five competitive forces used in the model are threat of new entrants, bargaining power of
buyers, bargaining power of suppliers, threat of substitute products, and intensity of rivalry
among competitors
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 f new competitors in the industry. There are six barriers that
determine the risk of new entrants. These include economies of scale, product differentiation,
capital requirements, switching costs, access to distribution channels and cost disadvantages
independent of scale .Economies of scale reduce the per-unit cost of a product as the number
of units being produced increases. The chocolate and cocoa industry does have a significant
economy of scale entry barrier because large companies existing the industry that has high
production output, which reduces the cost to produce chocolate and cocoa. If a new
competitor wanted to enter the market, the company would have to enter the market
producing a large quantity at the same low price as competitors or the company would have
to compete with a cost disadvantage. Because economies of scale exist in the industry, it
deters smaller competitors from entering into the market and reduces the threat of entrants.
In addition to economy of scale, product differentiation is another entry barrier in the
chocolate and cocoa industry. There are many competitors in the industry that have
remarkably identifiable brand names and customer loyalty. Some of the strongest
competitors in the industry are Hershey Foods Corporation, Farley Candy Company,
World’s Finest Chocolate, Inc., Merckens Chocolate Company, and Ghirardelli Chocolate
Company. All of the companies have established brand names and customer loyalty, which
creates a considerable entry barrier for new companies. Thus, the new company must
increase spending to overcome the reputation and large customer base of the existing
companies.
Another entry barrier is the presence of large capital requirements that are required in the
chocolate and cocoa industry. Large capital requirements create an entry barrier for new
entrants because it requires the company to have a significant source of capital to get started.
The large capital investment entails costs for items such as production equipment, labor,
raw materials, and research and development. In addition to these costs, a new company
would need to spend a large amount of money on advertising and marketing to overcome
product differentiation. An example of the large capital requirement needed for production is
Grace Cocoa’s new production plant that cost $95million dollars .It would be difficult for a
new company to enter the market because of this significant need for capital. Furthermore,

2. switching cost create a barrier to entry for new companies entering the chocolate and cocoa
industry. Switching the supplier of chocolate’s raw materials such as cocoa beans, sugar, and
milk create additional testing and research that must be completed by the company to ensure
correct quality, safety and taste. Additionally, the expense and network that must be present
to obtain access to distribution channels is an entry barrier for new companies. A new
company must acquire distribution channels for their chocolate and cocoa products. This
requires the company to create a network of buyers, which is time and money intensive.
Further, the new companies have to compete for shelf space in stores with the larger players
in the industry that have existing distribution channels already established. Cost
disadvantages independent of scale such as patents, favourable access to raw materials,
government subsidies and polices create barriers of entry for new companies. Because the
industry produces food for the end consumer, companies in the industry must meet several
government standards. For these companies, the Food and Drug Administration is the
government agency that sets the guidelines and regulations. These regulations increase
barrier to entry for new companies in the chocolate and cocoa industry. There is a low threat
of new entrants in the chocolate and cocoa product industry because the existence of
economy of scale, the differences in products, the need for large capital requirements, the
existence of switching costs, the lack of access to distribution channels, and the regulations
that are in place for food manufacturers.
Bargaining Power of Buyers
The bargaining power of buyers is a competitive force that can result in lower prices
for a product and increase the quality of service, which decreases profits and increases costs
for the industry. Buyer’s power increases if large volumes of the product are purchased, the
product is undifferentiated, few switching costs exist, low profits are earned, backward
integration is possible, and the quality of the buyer’s product is not affected by the supplier’s
product. If a buyer represents a large percentage of the supplier’s sales, the buyer has more
bargaining power over the supplier. The chocolate and cocoa industry has several large
volume retailers, like Wal-Mart, that have significant bargaining power. These large volume
retailers can bargain for lower prices and reduce the industry’s profits. Another condition
that affects the power of buyers is product differentiation. If the product is undifferentiated,
the buyer has the power to play competitors against each other and reduce the cost. The
chocolate and cocoa industry has a differentiated product, which reduces the power of
buyers. The industry has several large players that have brand identification and customer
loyalty, which makes it hard for buyers not to use a particular supplier. The lack of
switching costs also increases the power of buyers in a particular industry because the buyer
can threaten to change suppliers if they are not getting an adequate price or service from the
supplier. The buyer’s switching costs in the chocolate and cocoa industry is moderate to
high. Specifically, the industry’s industrial-use buyers have significant switching costs
because the supplier’s product can change the flavour or texture of the buyers’ product. If the
buyer wanted to play competitors against each other, the buyer would have to extensively
taste test different recipes for different products. In addition, the buyer’s customers may react

3. poorly to new flavours, forcing the buyer to switch back to the original supplier. The high
switching costs decrease the power of buyers in the chocolate and cocoa industry.
Furthermore, if the buyer earns low profits on products they sell, they are more price-
sensitive. This causes buyers to shop around the industry and create more bargaining power.
The chocolate and cocoa industry’s buyers usually make low profits on the products they
sell, forcing the buyer to lower purchasing costs. This gives the buyer more power in the
industry. However, the buyer must be willing to accept taste changes in the product, which
restricts their bargaining power. The buyer can gain power if they pose a threat of backward
integration. If a buyer can successfully become his or her own supplier, the bargaining
power of the buyer increases. Both retail buyers and industrial-use buyers are limited when
posing a threat of backward integration because the ability to produce chocolate and cocoa
products requires significant capital investment and other barriers to entry. This lack of threat
reduces the buyer’s bargaining power. Buyers are able to increase bargaining power if the
quality of their product is not affected by the industry’s product. When it is unimportant to
the buyer’s product, the buyer is able to be more price-conscious. The industrial-use buyer of
the chocolate and cocoa industry relies heavily on the industry’s input product. The input
product directly affects the quality and taste of the buyer’s end product. This dependency
decreases the buyer’s bargaining power. The bargaining power of buyers is increased by
two factors: a number of large volume buyers and the buyers’ relatively low profits from the
product. However, the bargaining power of buyers is low to moderate because of the
industry’s differentiated products, the presence of switching costs, the lack of threat of
backward integration and the reliance on the industry’s product.
Bargaining Power of Suppliers
The bargaining power of suppliers is a competitive force that can diminish a firm’s
profitability by raising prices or reducing the quality of the supplier’s product. In many
instances, the profitability is reduced such that the firm cannot recover from raw material
expenses. The six conditions that increase a supplier’s power are a concentrated
supplier group, no substitute products available, industry is an unimportant customer to the
supplier, supplier’s product is essential to the industry’s business, supplier’s product is
differentiated, and justifiable threat of forward integration .If the industry’s suppliers are
concentrated, then the supplier has more bargaining power over the industry. The suppliers
of the chocolate and cocoa industry have significant bargaining power over the industry
because of the limited number of these suppliers. Because the cacao tree is grown in areas
that have a tropical climate, many players in the industry are forced to import the product.
Tropical climates are often at risk for natural disasters, such as hurricanes, which can
dramatically reduce the number of suppliers. In addition, civil unrest in areas that grow the
cacao tree can have an adverse affect on the amount of suppliers to the industry. The
bargaining power of the industry’s suppliers is increased because of the limited number of
these suppliers. In addition to concentrated suppliers, the supplier groups’ bargaining power
is increased if there are no substitute products that they must contend with in the market.
Because the cocoa bean is a required ingredient in chocolate and cocoa industry, the

4. suppliers do not have any substitute products for which they must compete. This lack
of substitutes increases the bargaining power of the chocolate and cocoa industry’s suppliers.
The bargaining power of a supplier is increased if the industry is not an important customer
of that supplier. The chocolate and cocoa industry is an extremely important customer of its
supplier group. The cocoa bean is an important export of the countries that produce the
cocoa bean. The bargaining power of the suppliers is reduced because of the importance of
the chocolate and cocoa industry as a customer. Another condition that enhances the
bargaining power of the supplier group is the dependency of the industry’s product on the
suppliers’ product. The chocolate and cocoa industry relies on suppliers to deliver high
quality products that meet food regulations and consumer taste tests. If the suppliers’ product
is not available or does not meet the quality expected, the industry will suffer greatly. This
dependency on the suppliers’ product increases the suppliers’ bargaining power. The
bargaining power of a supplier group is increased if the product they supply is differentiated
or has switching costs. If differentiation or switching costs exist, then the industry has limited
ability to increase the competition among the suppliers. The chocolate and cocoa industry
has moderate differentiation among their suppliers. It is important for the suppliers¶ product
to be a certain quality or grade; however, if the product meets grade guidelines, it is
relatively undifferentiated. This is true of all suppliers of the industry including cocoa bean,
milk, and sugar suppliers. Additionally, the bargaining power of a supplier is increased if the
supplier can threaten to forward integrate. If the supplier can become a producer of
chocolate and cocoa products, then it can increase its bargaining power. Suppliers to the
chocolate and cocoa industry do not pose a reasonable threat of forward integration. As
previously stated, the threat of entrants into the industry is low. The suppliers would have to
spend a significant amount of money in research and development, capital requirements,
and obtaining customer contacts. They would also have to overcome strong industry leaders
who have significant brand identification and customer loyalty. The lack of threat of forward
integration decreases the bargaining power of suppliers. The bargaining power of suppliers
is decreased because the industry is an important customer of the supplier group and the
supplier does not pose a threat of forward integration. But the bargaining power of suppliers
is moderate to high because the supplier group is concentrated; there are no substitute
products, and the importance of the supplier’s product to the industry.
Threat of Substitute Products and Services
The threat of substitute products is a competitive force that can set a ceiling on the
price the industry can charge for their product. If there are substitutes available to the
consumer, an industry’s potential returns are limited. One ratio that can be used to measure
the threat of substitute products is the price-performance ratio .The chocolate and cocoa
industry must compete with numerous substitute products that can threaten the industry’s
profitability. Alternate cooking flavours are a substitute product to chocolate and cocoa.
These flavours include vanilla, lemon, butter, or mint flavour. These flavours can be used by
the industry’s customers that use chocolate and cocoa products for industrial and cooking
use. Another significant category of substitutes is snacks. Many non-chocolate snacks are

5. available, such as peanut butter, fruits, potato chips, ice cream, etc. There is no need to stick
with a specific snack other than personal preference. Further, many consumers consider
chocolate unhealthy and are willing to substitute it readily. In addition to flavour and snack
substitute products, the chocolate and cocoa industry must compete with substitute products
in the retail arena. Specialty chocolate and cocoa products are used as gifts during numerous
seasons and celebrations including Christmas, Easter, Halloween, Valentine’s Day,
anniversaries and birthdays. Other types of gifts during these seasons are viewed as
substitute products. These products are flowers, fruit, jewellery and stuffed animals. All of
these products can be purchased instead of chocolate and cocoa products. Many different
cooking flavours, a hugely diverse selection of alternate snacks, and a wide variety of
seasonal gifts make the threat of substitute products high in the chocolate and cocoa industry.
Intensity of Rivalry among Competitors in an Industry
The final competitive force of Porter’s five forces model is the intensity of rivalry
among competitors in an industry. This competitive force can create price wars, advertising
battles, new product lines, and higher quality of customer service. There are six
circumstances that intensify rivalry: many balanced competitors, a slow growing industry,
high fixed or storage costs, undifferentiated products or no switching costs, large increments
of capacity, and high exit barriers. An industry’s competitor rivalry is increased if there are
numerous competitors or if the competitors are equally balanced. This condition can create a
strain on raw materials and consumer groups. The chocolate and cocoa industry has
numerous industry leaders that are similar in size and product offerings. Many of the leaders
create new product lines and actively participate in advertising wars. Because there are
numerous competitors that are equally balanced, competitor rivalry is increased. In addition
to numerous competitors, slow industry growth increases the intensity of rivalry among
competitors. Because the market is growing slowly, companies in a slow industry must
compete for market share in order to increase sales. The chocolate and cocoa industry is a
mature market that is growing slowly. This slow growth increases the rivalry among
competitors in the chocolate and cocoa industry. Another condition that increases the
intensity of rivalry among competitors is if the industry has high fixed or storage costs. If
fixed costs are high, firms in an industry are under pressure to increase capacity. The
chocolate and cocoa industry has both high fixed costs and high storage costs. The
industry’s fixed costs consist of large amounts of equipment and huge facilities to house
manufacturing operations. Although the industry consists of perishable food sand
ingredients, which typically have a short shelf-life, the storage costs are high due to the
precise storage environment needed. For example, both milk and chocolate must be kept at a
proper temperature and humidity. Lack of differentiation or switching costs is a
circumstance that increases the intensity of competitor rivalry in an industry. If the industry’s
product is not differentiated, buyer’s base their purchasing decision purely on price or quality
of service. Likewise, if no switching costs are involved, buyers can play competitors against
each other and obtain a lower price. The chocolate and cocoa industry does have many

6. companies that offer iconic brands which are differentiated. The industry’s buyers must
sacrifice specific taste to switch products. In addition, the industry’s industrial-use customers
rely heavily on a certain brand of the industry’s product to produce the customer’s product
which increases switching costs. The differentiated product and moderate switching costs
reduce the intensity of rivalry among competitors in the chocolate and cocoa industry. The
high exit barriers factor also determines the degree of rivalry among competitors in an
industry. If an industry has particular assets, high fixed costs associated with exit, strategic
relationships among the particular business unit and others within the same firm, emotional
barriers, and other pressures from a social point or government aspect; then the firms in the
industry may compete, despite low earnings. The chocolate and cocoa industry has high exit
barriers that increase the intensity of rivalry among the industry’s competitors. The industry
requires specialized assets that would be difficult to recover upon exit. In addition to
specialized assets, the chocolate and cocoa industry has several companies that may have
social pressures not to exit the industry. These high exit barriers increase
competitor rivalry. Although the chocolate and cocoa industry has partially differentiated
products, the industry’s intensity of rivalry among competitors is high. The industry has
numerous, equally balanced competitors, is slow growing, has high storage and fixed costs,
and has high exit barriers. All of these conditions create price wars, advertising battles, new
product lines and higher quality of customer service in the chocolate and cocoa industry.