How Does Porters Five Forces Model Assist an Organisation in Their Strategic Planning - Coursework Example

Porter’s five force analysis Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 11th September, 2012 Table of Contents Table of Contents 1 Introduction 3 Importance of porter’s five force model in strategic planning 4 The power of a customer 5 The power of a supplier 6 The threat of potential new entrants 6 The availability and comparability of substitutes 7 Competitive rivalry 8 Conclusion 10 References 11 Introduction The establishment and institutionalization of an organization is driven and backed by the objectives and goals of those involved in the process. These goals and desired objectives must be of achievable nature for the organization’s realization to be possible. In the business industry, these institutions are governed by set laws or regulations that they must adhere to. Their existence and, once again, goals and objectives, are therefore, a factor of a number of determinants, which are generally acceptable to the participants in the industry. Once an organization is established, the need for a set of ethics, management and planning is felt, for the success of the body, where success refers to goal and objective achievement. Complementary to the process, ethics here refer to the acceptable codes of conduct for the organizations personnel, the customers and the organization itself, with respect to the society. This paper puts into view the need for winning management, planning and operation models or strategies as a formula for the realization of an organization’s dreams (Brahma & Chakraborty, 2011). In the business industry there exist various business analysis models and strategies of planning and management that enhance the existence of an organization. The reason for existence of an organization is actually its mission. It is important that this reason is publicly known so that it can guide the organization’s employees and for the customers to what to expect from it. A successful management cannot do without strategic planning but then, the model of operation employed is the function of a good design and implementation of a strategy (O'Shannassy, 2003). A strategy can either be intended or emergent. Importance of porter’s five force model in strategic planning Management and planning wants to solely achieve set goals. It calls for perfect stratification of procedures and activities, this in turn calls for good leadership in the management structure. A leadership that incorporates all the styles is considered good and it is this good leadership that wisely makes decisions on what business analysis model to adopt. These models are theoretically based on competitiveness. Porter’s Five Force Model is an analysis model which examines the profitability of an industry, the business industry. This model of analysis provides an insight on the impacts of external factors on the competition nature, and information on how the organizations compete internally. Importantly, a firm can use this model to establish and harness their competitive advantage. The five forces in Porter's model are the bargaining power of buyers and suppliers, threat of new competitors, threat of substitute products by other firms and competitive rivalry (Porter, 2008). Strategic management can be viewed as a cycle of processes that include visionary planning, strategy formulation, implementation operation and practices, and coordination of practices to actual performance of competitiveness (Eishenhardt & Sull, 2001). The porter’s five forces model is simple but it achieves for a firm the goal of understanding the positions of power in an industry. The model is important to enable a firm take advantage of a situation fairly, to improve on weaknesses, explore opportunities and so is an essential part of planning. The other importance of this model is related to the utilization of opportunities, it identifies profit potential in new products or services. For this reason, as a complement to the Porter’s model in planning, an organization engages the SWOT analysis. Henry (2010) describes SWOT as a tool analyzes the external environment which has direct effect on a firm’s operation and determines strengths and opportunities against any weaknesses and threats of a company. All is with the aim of making business operation easier and cheaper for the firm. The positions in which powers lie in a business are best explained by the bargaining powers of a buyer and that of a supplier. This powers help to establish the profitable potential of a new opportunity exploration. Besides, the strategic plan and ultimate goal of a firm is to be of superior profitability to create value for the shareholders in terms of returns (Henson, 2012). The power of a customer The customer is also referenced as the buyer. It represents buyer’s bargaining powers as by Porter. The preference of the user can be influenced by the effectiveness of the administration and management strategy that is implemented. A strategy can intended or implemented as a result of emergent issues. An individual has access to a number of other organizations that provide the same services, this means that they can compare and determine the trends in each case (Morita, Flynn & Ochiai, 2010). The buyer power is one of the two straight forces that influence the appropriation of the value created by the business environment. The most important determinants of buyer power are the size and the concentration of customers on a specific good, service or firm. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Articles show that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use (Henson, 2012). This force is relatively high where there a few, large players in the market, as it is the case with retailers and other stores. Present where there is a large number of undifferentiated suppliers, such as industries supplying large ones. A low cost of switching between suppliers, such as from one fleet supplier of trucks to another. The power of a supplier Refers to the firm or organization that provides a particular service or manufactures a good (Brahma & Chakraborty, 2011). It is used herein as analogous to Porter’s bargaining power of the supplier. This may be considered as a result of quality service that is driven by how competitive a market is. The supplier’s bargaining power is essential to ensure that maximum profit is gained Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). The threat of potential new entrants Where a company is having a lot of profit in return, more companies will find an opportunity to enter in the new market. By their entrance, profits will tend to decrease because there are more players in the market. Strategies need to be adopted by a company to ensure that they take the first lead in the market and to remain in the industry. Strategies that can be adopted is to ensure that their products though similar to the new competitors still remain preferred to the customers, and therefore, there is the need to know the strategies adopted by the new rivals in distribution of their products, the costs involved in the product development, the kind of loyalty that the organizations product has compared to the competitors and how profitable the industry is and how long it seems to be in existence (Leithbridge, 2011). To be unique from the new entrants, one should come up with ways of having a competitive advantage where consumers will prefer a company’s product to the new entrants. The theory of sustainable competitive advantage argues that there can still be more profits earned even though entering the market might be difficult or there are too many competitors. With the introduction of unique resources that will increase the value of a product, and by firms introducing a variety of competitive strategies such as new types of products, increased discounts and new features in an already existing product. Strategies adopted to ensure that new entrants do not control the industry are, by involving strategies such as producing a larger volume of goods and selling them at low costs (Henson, 2012). Another way is to increase customer loyalty by engaging in networking activities that ensure a large customer following. Capital limitation may force a new entrant to easily quite the industry as the existing competitors may have an enough cash float that may be used in case the industry experiences harsh economic times (Porter, 2008). Threat of new entrants is high when there are no economies of scale required in determination of profit, brand names are not established or known to people, the products are undifferentiated and the retaliation from the existing firms is not an issue. The availability and comparability of substitutes Increase of substitute in a market tends to lower the prices of goods hence making profits to decrease. However the threat behind substitution might even be higher if there are attractive prices in the industry (Polasky, Carpenter, Folke, & Keeler, 2011). By this, the service or product being offered should be quick to satisfy the customer. It even increases where a customer is aware that there are better products that can be gotten using minimal costs. To ensure that the product offered does well in the industry despite the many substitutes, there is need for massive improvement on quality that will guarantee sustainable growth. Consumer theory states that consumers are prone to get substitutes that offer the same satisfaction and which constitute less of their income (Porter, 2004). If prices go up in any product, customers will switch to less expensive products. The diffusion theory also explains that if products in the market are old, there is the need to substitute them with modern ones therefore a producer will have a competitive advantage if their products are modern hence high profits. Threat of substitution can affect competitive environment and heavily influences the profitability in a firm (O’Shannassy, 2003). On the other hand, lack of substitution makes an industry to be less competitive hence no innovation on the part of the producer. There are however low risk situations that enable substitution to be a challenge in the market. If a substitute is of low quality and its characteristics do not match with the market demands, then there will be no much influence of it being a threat. Using Porter’s 5 force analysis, substitutes are more attractive to customers if there is a chance to increase on the profit and the product offers quality that a consumer needs. Competitive rivalry Competitive rivalry in an industry is considered the force that most profoundly influences the strategic planning of an organization (Luthans, 2002). In an industry where there are few competitors profits are easy to realize, the extreme end of this, monopoly is taken by strategist as the perfect situation for businesses as the impact of all the other forces is insignificant in the absence of other competitors. Monopolies in the modern business environment are becoming rare as trade liberalization makes them impractical. Therefore most firms have to compete with a number of rivals in their respective industries. A firm’s strategic intent is heavily influenced by the numbers of rivals in the industry and the strategies they use to gain a larger share of the market. This influence is largest if a number of conditions are present in the industry where the firm operates in (Morita, Flynn & Ochiai, 2010). These factors are: a). Where there are many competitors who have similar powers to the firm that is planning its strategy. In these conditions a firm can slightly differentiate its strategy to achieve market share as even the slightest changes have a profound impact b) The industry is declining or recording slow growth means competition for market share intensifies demanding that companies adopt an innovative approach to stem against decline of their own market share along with the industry. c) In industry where the cost of exiting is high companies are wary about investing too much as even weak competitors are not keen on exiting. In such an industry pricing may go to low as some weak competitors are not keen on surviving for long in the industry. d) Where competitors have other goals other economic performance business rivalry takes another dimension. For example state owned corporations may provide subsidized services to citizens as they use taxpayer’s money. Some companies participate in business aiming at bringing prestige to their home country for example. It is imperative for organization to understand the goals of their competitors while developing their strategic plans as they are likely to impact greatly on their profitability or lack of it. e) Where competitors cannot be able to deduce the others intentions because of diversity in approach to competition, competitive rivalry is a greater force for the firm that is not diverse in its approach. The negative influence of competitive rivalry is more severe where competition is solely based on price consideration only. Price as strategy to address competitive rivalry is visible to rivals who can easily copy or better the offer to customers (Luthans, 2002). In some cases competitors hijack the pricing strategies of their competitors and achieve phenomenal success as they excel in promoting their products. Therefore any company that is planning its strategic plan must avoid basing their strategies on price only. Conclusion The potters five forces framework of industrial analysis reveals the foundations that businesses can use to realize profitability (Eishenhardt & Sull, 2001). A thorough analysis of the industry based on the five competitive forces can enable companies realize sustainable competitive advantage in their respective industries. Each of the competitive forces can be reflected on the income statements and balance sheets of each company as they impact on the price of products, cost of production and of doing business and the investment necessary to be competitive. Intensity in rivalry as the most influential of the forces drives prices down while elevating the cost of research and development, customer service and marketing. A good analysis of porter’s five forces enable a firm understand the overall industry as a system where every factor that impacts on operations is considered. It helps explain which force contributes presently to the good performance of a firm and which one may be relevant in the future. Therefore, the porter’s five forces remain an important part of formulating a strategy that ensures competitive advantage. References Brahma, S. & Chakraborty, H. (2011). ‘From Industry to Firm Resources: Resource – Based View of Competitive Advantage. The IUP Journal of Business Strategy, VIII (2), pp. 7 – 21. Eishenhardt, K. M. & Sull, D. N. (2001). ‘Strategy as Simple Rules’ Harvard Business Review, Vol. 79, Issue 1, p 106 – 116. Henry, C. (2010). Business analysis model innovation: opportunities and barriers. Long Range Planning. 43 (2). Henson, R.M. (2012). ‘Industrial – Organizational and Strategy are integrated in Practice!’ Industrial and Organizational Psychology: Perspectives on Science and Practice, (5), pp. 82 – 86. Luthans, F. (2002). 'Positive organizational behaviour: Developing and managing psychological strengths,' Academy of Management Executive, 16 (1), pp. 57-75. Morita, M., Flynn, J. E. & Ochiai, S. (2010). Strategic Management Cycle: The Underlying Aligned Linkage among Operators Practices. International Journal of Production Economics. 133(2) pp. 530 - 540. Doi:10.1016/j.ijpe.2010.09.003. O'Shannassy, T. (2003), 'Modern strategic management: balancing strategic thinking and strategic planning for internal and external stakeholders', Singapore Management Review, 25(1), 53-67. Polasky, S., Carpenter, S., Folke, C. & Keeler, B. (2011). ‘Decision – Making Under Great Uncertainty: Environmental Management in an Ecology and Evolution. 26 (8), pp. 398 – 404. Porter, M. (2004). ‘Seven Surprises for New CEOs, Harvard Business Review, 82 (10), pp. 62 – 72. Porter, M. (2008). 'The five competitive forces that shape strategy', Harvard Business Review, 86 (1), 76-93. Read More