Challenges Faced by Five Guys in Italy: An Analysis of External and Internal Environment

This report analyses the challenges faced by Five Guys in Italy and provides an analysis of the external and internal environment of the firm. It elaborates on the competitive strategies that the company can adopt to ensure long-term development and growth. The report also provides recommendations for the company to strengthen its position in the Italian market.

Business Environment
and
Strategic Management

1
EXECUTIVE SUMMARY
Business units of big MNC’s are facing challenges in their operations in various parts of the
world. This report analyses the case of Five Guys which has been one of the fastest
expanding companies in this industry. After its choice of selecting franchising as a mode of
expansion what challenges it is facing in the European region especially in Italy has been
elaborated. The change in the external and internal environment of the firm has been
elaborated with the help of analysis on various macro and micro factors. This report gives the
idea about the factors that are effecting the industry as well Since the changes in the
competitive environment has brought difficulties for the cited firm hence they will have to
ensure that they construct effective competitive strategies so as to ensure long term
development of the organisation. Use of strategies such as porter’s generic strategies will be
beneficial for the organisation. Franchising is the mode of expansion that this company has
made for itself. It is found that company will have to look at their external environment and
must add new suppliers and distributors in their pool.

2
Contents
EXECUTIVE SUMMARY........................................................................................................1
INTRODUCTION......................................................................................................................2
Company’s background..........................................................................................................2
Industry background...............................................................................................................2
Key challenges faced by the company...................................................................................2
External environment analysis...................................................................................................3
Internal environmental analysis.................................................................................................5
Competitive strategies................................................................................................................6
Strategic Direction and method of expansion............................................................................6
RECOMMENDATIONS...........................................................................................................7
Conclusion..................................................................................................................................7
REFERENCES...........................................................................................................................8

3
INTRODUCTION
In the last few decades, competition in different industries has increased to very high levels.
This has made it necessary for the organisations to understand the internal and external
environment. The analysis is also essential for understand their strengths and weaknesses as
well as the threat and opportunities that is present in front of them (Rabellotti, 2016). This
will help the firms in constructing their competitive strategies on the local and global level.
All the organisations have used different types of methods of expansion so as to ensure their
growth in the industry. In food industry Five Guys enterprise is one of the biggest fast casual
restaurant chain dealing in the business of selling of hot dogs, French fries and hamburgers.
This report analyses macro and micro factors so as to understand the actual internal and
external environment of Five guys in Italy. It also analyses the competitive strategies that has
been made by the companies so as to understand the competitive direction of the firm in the
Italy. This report also gives the idea about the method of expansion that this firm has chosen
for its growth in the long term.
Company’s background
Five guys is one of the biggest American fast casual restaurant chains. This is specialised in
the business of French fries, hamburgers and hot dogs. Along with this it also deals in the
business of milkshakes in multiple flavours. This company was established in the year 1986.
Till 2001, it was only operating in five locations of Washington DC. In 2003, company
started to expand at much faster rate by choosing franchising as their expansion strategy. Due
to this in 2016, it was operating in more than 1500 locations in world and further 1500
locations were under development (Owler, 2018). This is the reason that they become one of
the fastest growing fast food chains in United States. Its sale increased by 32.8% from 2010
to 2011.
Industry background
Fast food chain industry is one of the biggest industries in America. It is worth 198.9 billion
U.S. dollars. Till 2020, it will be reaching to 223 billion USD. There are many big
competitors in the market and hence ensuring large market share would be a challenge for
any company. McDonalds leading the industry in terms of market share (S&P Global Rating,
2018). Till 2016, there were around 186,977 franchised restaurants in US which were just 28
thousand just a decade back.

4
Key challenges faced by the company
This company is facing many types of problems in different areas. Some of the biggest
problems that company is facing are:
 High competition: Due to such a highly competitive market, it can be seen that
company is not able to control its position in United States and countries like Italy.
This competition has pulled them to reframe their competitive strategies so as to
improve their condition in the market (Perotti, Zorzini, Cagno and Micheli, 2012).
 High employee turnover: In the last few years, this company has faced high employee
turnover which is not good for the firm’s reputation. It has also been seen that there
are people from different parts of the world working in the company’s Italy unit but
they have failed to work as per their expectations.
 Price war: Due to high competition there is a serious price war going on the fast food
industry of Italy. This has raised issues for the company as they have to ensure higher
amount of profit margins while still being a winner in the price war (Wells Fargo,
2017).
 Increasing health consciousness: They are also facing pressure from different
segments of the society so as to improve quality of the good and make it more
hygienic.
 Expansion: Franchising which has been one of their best methods of expansion has
faced many challenges in their past few years (Tiffin, 2014). This is the reason that
their growth potential has been hampered especially in the European region.
 Economic breakdown of Europe: This company had a great deal of stake in the
European region which is facing many types of economic challenges hence it is an
issue for the overall development of the organisation.
External environment analysis
It is crucial for the organisation to understand the impact of external environment on their
business operations. The company plans to strengthen its position in Italy hence they need to
have proper analysis about the external environment of Italy. This can be understood by
analysing different factors that are forming external environment. For understanding the
environment of Five Guys, the tool that can be used is PESTLE.
PESTLE analyses of Five Guys are as follows:

5
 Political: The political condition of world is changing along with their policies. These
changes in policies have forced the firm to change their policies. In the trump era
companies are forced to do more investments in US only. On the hand America is
imposing economic restrictions on countries like China which is posing a threat to the
expansion plans of Five Guys. On the other hand countries like Italy are having a
great deal of stability in terms of political environment (Del Giudice and Maggioni,
2014). They have good relations with all the countries hence might not face
challenges in importing best raw materials from the other countries.
 Economic: For strengthening their position in the Italy market, the biggest problem
that firm is facing is related to the economic condition of the region. Whole Europe is
facing challenges related to the economic stability and hence the purchasing power of
the people in Italy is decreasing. They are not finding investors in this region easily as
the chance of business failure or loss is very high. They can also invest in the regions
that are developing and have less competitive forces restricting their business
(Brunori, Malandrin and Rossi, 2013).
 Social: The society has changed due to changing environment of European region.
This has affected the purchasing behaviour of the people in Italy. The biggest problem
is that unemployment in Italy is increasing at much faster rate with around 25,000
jobs at risk. This is increasing the negativity in terms of purchasing capacity of Italy.
On the other hand the changes in life style has brought positive environment for fast
food restaurants as more people are coming to fast food chains.
 Technological: Italy is a technologically advanced nation hence the firms will also
have to make advancements in terms of technology use in business. Technology will
have to be upgraded in terms of food production so that quality of the food remains on
the higher side. This will also help the firms to improve the organisational operation
such as marketing, sales and services.
 Legal: It is to be noted that legal environment of Italy is very stable but they have
strengthened their consumer related to laws. These laws have affected the business
operations of firms. More hygienic and quality foods have to be prepared by the
organisation so as to comply with quality regulations within the country.
 Environmental: Five Guys have to improve the environment related concerns so as to
ensure that image of the company remains on the better side. The waste management
system will have to be improved so as to ensure that less waste is dumped into the
environment. Company will also have focus on the supply chain management and the

6
problems related to packaging of food in order to strengthen their position in the
industry.
In order to understand the environment of industry 5 forces framework is very much
effective. The five force analysis of Five guys is done below.
 Bargaining power of suppliers: In Italy there are large numbers of suppliers both
internal and external. Due to presence of huge numbers of suppliers in the region, the
bargaining power of suppliers is on the lower side (Hirsch and Gschwandtner, 2013).
This company has a good relation with their suppliers in the region hence they have
able to gain quality raw materials for their operations.
 Bargaining power of customers: As the competition in industry is on the higher side
hence bargaining power of customers is also high. This is because consumers have lot
of options of different taste that too available at every range. Italy being a small
country does not provide the company with an opportunity to enlarge their customer
base at much higher range.
 Competition: This is one of the biggest threats to the company as they are not able to
increase their market base as expected by the company. In order to strengthen the
position of the firm in front of others new set of competitive strategies needs to be
made by the firm (Massa and Testa, 2012). Quality improvement can be one of the
best tools for dealing with the competition.
 Threat of new entrants: The investment that is required to open a fast food chain is on
the higher side. Along with this, the competition is also too high and in the presence
of big brand names it is not easier for the new firms to make their mark in the industry
(Gerrard, 2017). These all reasons reduce the threat of new entrants. Along with this
the investment scope in the European region is also on the lower side hence this threat
further on the lower side.
 Threat of substitution: This threat is on the larger side. This is because there are large
numbers of items available in the market that can substitute the products that is
delivered by the Five guys. The biggest threat they are receiving is from Chinese and
Italian food products. In the coming time, it’s the innovation that can only save the
company from losing their market space (QSR, 2014).

7
Internal environmental analysis
Along with the external environmental analysis, it is crucial that company evaluates the
internal environment of the company. This is also essential for identifying strengths and
weaknesses of the firm which is further essential for constructing strategies. The analysis that
can be used for understanding the strengths and weaknesses is value chain analysis. There are
two main types of activities performed in organisation i.e. primary and supporting activities.
Primary activities are as follows:
 Inbound logistics: They have invested huge amount of money in the storage and
receiving of the raw materials. Their business units have same receiving and storage
area within the same. In some of their units they have different receiving and storing
areas. In terms of material distribution they have higher efficiency in which materials
can be distributed whenever required in the business organisations (Melnick, 2011).
Value chain and support system are also effective and organisation culture of the
company is also very good.
 Production: Their production capacity is also high and is able to fulfil the
requirements of the firm. Since their manufacturing units are capable of fulfilling the
fluctuating demands of the organisation which is very much essential for the gaining
higher consumer satisfaction.
 Outbound logistics: This is also the strength of the company as they are delivering the
products and services to their customers in the given time. Storage and distribution
along with service platforms ensures that company is able to deliver the products and
services in the stores. The only problem with the outbound logistics is that the
company has no delivery policy.
 Marketing and sales: This Company has a very good marketing and sales team which
has helped them in making their growth fast. They are using both traditional and
digital mediums for improving their marketing and sales performance. The franchise
partners do the local marketing effective (Credibly, 2018).
 Service: Franchising contracts are only given to those partners who have qualified for
their service standards. Their company has been able to make healthy relations with
their customers. They are giving their services as per the customer’s expectations.
Support activities are as follows:

8
 Firm infrastructure: The infrastructures of the restaurants are very good and are
providing comfortable and best experience to the consumers. Administrative
handling, line management, financial management all are done at each of their units in
an appropriate manner.
 Human resource management: In this segment, the company has been poor especially
in terms of retaining staffs. They have to continuously invest in recruitment and
training process so as to maintain the standards of their services.
 Technology development: When compared with other competitors they have not been
able to make advancements at such faster rate. Even the marketing through
technological mediums has not been able to reach to larger numbers of people
(Restaurant business, 2018). They will have to move towards automation and artificial
intelligence especially for improving the service industry.
 Procurement: They have been able to manage healthy relationship with suppliers. At
the same time they have been able to negotiate with their suppliers to reach at the best
prices. Their franchising and purchasing agreement with suppliers has been very
effective. They have been able to generate valuable services, products as well as
distinctiveness.
Competitive strategies
In the competitive environment that has been analysed in the above section, it can be said that
it is essential for the Five guys to construct the best of strategies for their growth. In different
types of strategies made by the Five guys, the best of strategies that is made by the company
is illustrated as Porter’s Generic Strategies. For the cited firm the strategies are as follows:
 Cost leadership strategies: Five guys have adopted cost leadership strategies so as to
ensure that they gain competitive advantage over the rivals. Since the cost of
franchising of this company is lower than most of the rivals hence the franchisers can
easily reduce the cost of their operations. These reductions in the cost of operations
have helped the firm to maintain the prices of the product on the lower side (Burke,
2012). In order to strengthen their position in the Italian market, they can further
lower down their prices without actually making huge changes in the quality of the
products. At almost no cost they personalise the toppings which helps them in
retaining larger customer base.

9
 Differentiation: There are people from different cultural backgrounds living in Italy.
They prefer to have innovative products having completely different type of products
from their competitors. With their innovation as a strategy they have been able to
capture much larger segment in the market. Differentiation has also been done in
terms of services as they have a unique and customer oriented style of providing the
services. The differentiation must be based on the heavy research that is done by the
company on different target segments (Kelly, 2018).
 Focus: They have used both cost focus and differentiation focus as their strategy so as
to improve their sales. It is seen that there are people from different segments of the
society and company has targeted them all. In order to target them, Five guys have
adopted cost focus and differentiation focus as a strategy (The daily meal, 2018). This
helps the firm to personalise the services and products as per the demands of the
customers. Changes in the menu and special types of toppings without actually
making changes in the costing have helped them in gaining success in the market. It
has been seen that there are people from the different segments of the society and they
have different types of taste and cost preferences. Company should target health
conscious people and for this they will have to focus on the bringing the new line of
food products that are healthy and nutritious. This is also crucial for making long term
loyal consumers.
Strategic Direction and method of expansion
Five Guys have to redefine their strategic directions along with the expansion strategies so as
to ensure their long term growth. Their strategic direction consisted of some of the basic
elements such as:
 Products: They have been serving many types of products in different food segments.
In order to ensure that the products are of high quality they have adopted no frozen
policy. They have good links with their suppliers in the European region which
enables them to serve fresh food (Johnson, 2017). They are also adding to their
product range regularly which helps them in adding new set of customers to their list.
 Services: They are adding to the services based on customer’s requirements. In order
to improve the service quality they have been using new set of technology. They have
also made their training process in such a manner that it enables them to build
services of the higher standards.

10
 Markets: In order to capture larger market share, they have been channelizing their
suppliers and distributors so as to reach to maximum possible customers. The use of
digital marketing strategies along with traditional mediums for promotions could help
them in gaining control in the Italy market (Dockery, 2018).
Apart from this company has been using different types of methods of expansion so as to
improve their position in the market. Franchising has been their major focused method so as
to expand in the market. For this they have also brought changes in the rules of franchising.
In Italy, there are many rural areas that are developing. These developing areas act as an
opportunity for the firm so as to make investments (S&P Global Rating, 2018). More
franchisees have to be given at lower cost so as to increase their scope in the market. They
also need to invest directly into opening their own stores so as to ensure that the service
quality remains on the higher side. Five guys can also make partnership with the local
distributors and suppliers so as to expand in the small cities having controlled by one or two
companies. Before the expansion process, companies should invest in improving the quality
supply chain. More local employees must be hired so that cultural and social problems can be
resolved easily.
RECOMMENDATIONS
It is recommended that the company focus on developing healthy relation with the local
public for which they will have make innovations in products and services. The performance
evaluation must be done so as to ensure that firm do not face challenges related to any service
quality failure. Since Five guys should invest on their staff development program so as to
reduce the employee turnover which has been one the major problems of the organisation. It
is also recommended that company brings advanced technologies in the data management.
This data will be helpful in making of the effective strategies especially related to the
operation management. It is also crucial that firm regains its control in the European region
so that each business unit in different parts of Europe helps each other in their performance.
Company should also add Italian taste in their food products so as to attracted local people
especially in the semi-urban areas as they are more attached with their culture and food
habits.

11
Conclusion
From the above based report, it can be concluded that Five Guys is one of the biggest fast
food chains in America. This company has a very less food variety but of high quality that
helps them in attracting large numbers of consumers to their outlets. The political,
technological and environmental condition of Italy is favourable for the business but the
factors such as economic and social are changing in such a manner that it is posing threat to
their business. In Italy, threat like competition and substitution is on the higher side while
threat of new entrants is on the lower side. Their primary activities acts as their strength while
the support activities acts as their actual weakness. Innovation, cost leadership and cost and
differentiation focus are some of their strategies that help in giving them competitive
advantage. In the method of expansion they have chosen franchising as their basic strategy
for expanding new market. Company should focus on making a healthy bond with their
suppliers and distributors in the European region so as to improve its position in Italy.

12
REFERENCES
Brunori, G., Malandrin, V. and Rossi, A., 2013. Trade-off or convergence? The role of food
security in the evolution of food discourse in Italy. Journal of Rural Studies, 29, pp.19-29.
Burke, M. (2012) Five Guys Burgers: America's Fastest Growing Restaurant Chain. [Online].
Available at: https://www.forbes.com/sites/monteburke/2012/07/18/five-guys-burgers-
americas-fastest-growing-restaurant-chain/#1d070066d01f.[Accessed on 16th November
2018].
Credibly, (2018) FIVE GUYS. [Online]. Available at:
https://www.credibly.com/incredibly/business-loans-index/industries/five-guys/. [Accessed
on 16th November 2018].
Del Giudice, M. and Maggioni, V., 2014. Managerial practices and operative directions of
knowledge management within inter-firm networks: a global view. Journal of Knowledge
Management, 18(5), pp.841-846.
Dockery, J. (2018) New Info Released! Another Restaurant Joins Soon to be Five Guys
Burgers and Fries. [Online]. Available at: http://thecitymenus.com/2018/10/23/the-wait-is-
just-about-over-for-five-guys-burgers-and-fries-in-carrollton/. [Accessed on 16th November
2018].
Gerrard, B. (2017) US burger chain Five Guys plans further expansion in Europe. [Online].
Available at: https://www.telegraph.co.uk/business/2017/04/23/us-burger-chain-five-guys-
plans-expansion-europe/[Accessed on 16th November 2018].
Hirsch, S. and Gschwandtner, A., 2013. Profit persistence in the food industry: evidence from
five European countries. European Review of Agricultural Economics, 40(5), pp.741-759.
Johnson, H. (2017) This East Coast cult favorite just beat In-N-Out as America's favorite
burger chain - here's what it's like. [Online]. Available at:
https://www.businessinsider.in/This-East-Coast-cult-favorite-just-beat-In-N-Out-as-
Americas-favorite-burger-chain-heres-what-its-like/articleshow/58723797.cms. [Accessed on
16th November 2018].
Kelly, D. (2018) The untold truth of Five Guys. [Online]. Available at:
https://www.mashed.com/102893/dont-know-white-castles-famous-sliders/. [Accessed on
16th November 2018].

13
Massa, S. and Testa, S., 2012. The role of ideology in brand strategy: the case of a food retail
company in Italy. International Journal of Retail & Distribution Management, 40(2), pp.109-
127.
Melnick, (2011) The Runaway Hit. [Online]. Available at:
https://www.qsrmagazine.com/runaway-hit. [Accessed on 16th November 2018].
Owler, (2018) Five Guys's Competitors, Revenue, Number of Employees, Funding and
Acquisitions. [Online]. Available at: https://www.owler.com/company/fiveguys. [Accessed
on 16th November 2018].
Perotti, S., Zorzini, M., Cagno, E. and Micheli, G.J., 2012. Green supply chain practices and
company performance: the case of 3PLs in Italy. International Journal of Physical
Distribution & Logistics Management, 42(7), pp.640-672.
QSR, (2014) The Cost of Outdated Pricing Strategies: Part 2. [Online]. Available at:
https://www.qsrmagazine.com/outside-insights/cost-outdated-pricing-strategies-part-2.
[Accessed on 16th November 2018].
Rabellotti, R., 2016. External economies and cooperation in industrial districts: a
comparison of Italy and Mexico. Springer.
Restaurant business, (2018) Five guys burgers and fries. [Online]. Available at:
https://www.restaurantbusinessonline.com/restaurant/five-guys-burgers-and-fries[Accessed
on 16th November 2018].
S&P Global Rating, (2018) Rating Direct. [Online]. Available at:
https://www.spratings.com//documents/20184/769219/Five+Guys+Funding+LLC+(2017-
1)/84ede481-cb0c-4950-a3fe-9911d09c3e67. [Accessed on 16th November 2018].
The daily meal, (2018) 13 Things You Didn’t Know About Five Guys Burgers & Fries.
[Online]. Available at: https://www.thedailymeal.com/eat/13-things-you-didn-t-know-about-
five-guys-burgers-fries-slideshow. [Accessed on 16th November 2018].
Tiffin, M.A., 2014. European productivity, innovation and competitiveness: the case of
Italy (No. 14-79). International Monetary Fund.

14
Wells Fargo, (2017) What Five Guys Burgers and Fries has learned about going global.
[Online]. Available at: https://wholesale.wf.com/global-focus/what-five-guys-famous-
burgers-and-fries-has-learned-about-going-global/. [Accessed on 16th November 2018].

15