of 76
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.

Strategy Related Materials

Category:

Documents

Publish on:

Views: 70 | Pages: 76

Extension: PDF | Download: 0

Share
Description
Five Forces - Critique Porter‘s model of Five Competitive Forces has been subject of much critique. Its main weakness results from the historical context in which it was developed. In the early eighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achieving these objectives has been optimization of strategy in relation to the external environment. At that time, development in most industrie
Transcript
  Five Forces - Critique   Porter‘s model of Five Competitive Forces has been subject of much critique. Its main weakness results from the historical co ntext in which it was developed. In the earlyeighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achievingthese objectives has been optimization of strategy in relation to the external environment. At that time, development in most industries has been fairly stable and predictable, compared with today‘s dynamics.  In general, the meaningfulness of this model is reduced by the following factors:1. In the economic sense, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver.2. The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complexindustries with multiple interrelations, product groups, by-products and segments. A too narrow focus on particular segments of such industries, however, bearsthe risk of missing important elements.3. The model assumes relatively static market structures. This is hardly the case in today‘s dynamic ma rkets. Technological breakthroughs and dynamic marketentrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times.The Five Forces model may have some use for later analysis of the new situation; but it will hardly provide much meaningful advice for preventive actions.4. The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well asover suppliers or customers. With this focus, it does not really take into consideration strategies like strategic alliances, electronic linking of information systemsof all companies along a value chain, virtual enterprise-networks or others. Overall, Porters Five Forces Model has some major limitations in today‘s market environment. It is not able to take into acco unt new business models and thedynamics of markets. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way  – as a starting point for further analysis.Source: TheManager.org   Porter’s five forces model   Introduction  There is continuing interest in the study of the forces that impact on anorganisation,particularly those that can be harnessed to providecompetitive advantage.The ideas   and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were based on the idea thatcompetitive advantagecame from the ability to earn areturn oninvestmentthat was better than the average for theindustrysector (Thurlby, 1998).   AsPorter's 5 Forcesanalysis deals with factors outside anindustrythat influence the nature ofcompetitionwithin it, the forces inside the industry (microenvironment) that   influence the way in which firms compete, and so the ind ustry‘s likely profitability is conducted in   Porter‘s five forces model .A business has to understand the dynamics of its  industries and markets in order to compete effectively in the marketplace.Porter(1980a) defined the forces which drive competition, contending that the competitiveenvironment is created by the interaction offive different forcesacting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market,there are also the forces ofsupplierpower, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is   determined by the relative strengths of these forces. Main Aspects of Porter’s Five Forces Analysis  The srcinal competitive forces model, as proposed byPorter,identifiedfive forceswhich wo uld impact on an organization‘s behaviour in a competitive market. These include the following:    The rivalry between existing sellers in the market.     The power exerted by the customers in the market.     The impact of the suppliers on the sellers.     The potential threat of new sellers entering the market.     The threat of substitute products becoming available in the market. Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriatestrategiesto be successful in their   market (Thurlby, 1998). Force 1: The Degree of Rivalry  The intensity of rivalry, which is the most obvious of the five forces in anindustry,helps determine the extent to which the value created by anindustrywill be dissipated   through head-to-head competition. The most valuable contribution of Porter's ―five forces‖ framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.    This force is located at the centre of the diagram;    Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market. Force 2: The Threat of Entry Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverseforms and are used to prevent an influx of firms into an industry whenever profits, adjusted for thecost of capital,rise above zero. In contrast, entry barriers exist whenever it   is difficult or not economically feasible for an outsider to replicate the incumbents‘ position (Porter, 1980b; San derson, 1998) The most common forms of entry barriers,except intrinsic physical or legal obstacles, are as follows:    Economies of scale: for example, benefits associated with bulk purchasing;    Cost of entry: for example,investmentinto technology;    Distribution channels: for example, ease of access for competitors;    Cost advantages not related to the size of the company: for example, contacts and expertise;    Government legislations: for example, introduction of new laws might weaken company‘s competitive position;      Differentiation:for example, a certain brand that cannot be copied (The Champagne)  Force 3: The Threat of Substitutes The threat that substitute products pose to an industry's profitability depends on the relative price-to-performanceratiosof the different types of products or services to whichcustomers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs  – that is, the costs in areas such as retraining, retooling andredesigning that are incurred when a customer switches to a different type of product or service. It also involves:    Product-for-product substitution (email for mail, fax); is based on the substitution of need;    Generic substitution (Video suppliers compete with travel companies);    Substitution that relates to something that people can do without(cigarettes,alcohol). Force 4: Buyer Power Buyer power is one of the two horizontal forces that influence the appropriation of the value created by anindustry(refer to the diagram). The most important determinants of   buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of thecompetitors. Kippenberger (1998) states 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 .    This force is relatively high where there a few, large players in the market, as it is the case with retailers angrocerystores;    Present where there is a large number of undifferentiated,smallsuppliers, such assmall farming businessessupplying largegrocerycompanies;    Low cost of switching between suppliers, such as from one fleet supplier of trucks to another. Force 5: Supplier Power 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 suppliersrelative 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 thevalue 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).Bargaining power of suppliers exists in the following situations:    Where the switching costs are high (switching from one Internet provider to another);    High power ofbrands(McDonalds,British Airways,Tesco);    Possibility of forward integration of suppliers (Brewers buying bars);    Fragmentation of customers (not in clusters) with a limited bargaining power(Gas/Petrolstations in remote places).The nature of competition in an industry is strongly affected by the suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats ofentry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in anindustry will compete  – the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the ― Structure-Conduct-Performance ‖ (SCP) model: the structure of an industry determines organizations‘ competitive behaviour (conduct), which in turn determines their  profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than infragmented ones. However, as Haberberg and Rieple (2001) state, thehistoriesandculturesof the firms in the industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to be modified accordingly.  How to write a Good Porter's 5 Forces analysis The Porter‘s Five Forces model is a simple tool that supports strategic understanding where power lies in a businesssituation. It also helps to understand both the strength of a firm‘s current competitive position, and the strength of a position a company is looking to move into. Despite the fact tha t theFive Force frameworkfocuses on businessconcerns rather than public policy, it also emphasizes extended competition for value rather than just competition among existing rivals, and the simplicity of its applicationinspired numerous companies as well as business schools to adopt its use (Wheelen and Hunger, 1998).With a clear understanding of where power lies, it will enable acompanyto take fair advantage of itsstrengths,improveweaknesses,and avoid taking wrong steps.   Therefore, to apply this planning tool effectively, it is important to understand the situation and to look at each of the forces individually.In conducting an analysis of  Porter‘s Five Forces ,it is required to brainstorm all relevant factors for the  company’s  market situation , and then check against the factors   presented for each force in the diagram above. The next step is to highlight the key factors on a diagram, and summarize the size and the scale of the force on the diagram. It is suggested to use relevant signs, for instance, ―+‖ and ― - to represent the forces moderately in company‘s favour, or for a force strongly against.  After identifying favourable and unfavourable forces for the company‘s performance and industry‘s attractiveness, it is important t o analyse the situation and examine theimpacts of the forces. One of the critical comments made of the Five Forces framework is its static nature, whereas the competitive environment is changing turbulently. Arethe five forces able to foresee industry expansion? Is it thecorporate strategist'sgoal to find a position in the industry where his or her company can best defend itself against   these forces or can influence them in its favour, or is the goal to become part of the ongoing commerce with the intention to produceinnovativeideas that will expand the sizeof the industry? Is it true that the environment poses a threat to the organisation, leading to the consideration of suppliers and buyers as threats that need to be tackled, ordoes it offer the ground for a constitutive industry player co-operation?By thinking through how each force affects a company, and by identifying the strength and direction of each force, it provides an opportunity to identify the strength of theposition and the ability to make a sustained profit in the industry (Mind Tools, 2006). Limitations of Porter’s Five Force Model   Porter‘s model  is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminatingwhen used to understand the balance of power in other situations.Porter argues thatfive forcesdetermine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing oradvertising ;but, he contends, it is important to look beyond one‘s immediate comp etitors as there are other determinates of profitability. Specifically, there might be   competition from substitute products or services. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. An examplewould be plastic bottles, glass bottles, and cans for packagingsoft drinks ( substitute products). There may also be the potential threat of new entrants, although somecompetitors will see this as an opportunity to strengthen their position in the market by ensuring, as far as they can,customer loyalty.Finally, it is important to appreciate that   companies purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either costincreases or price decreases. This relates to the strategic option of vertical integration, when the company acquires, ormergeswith, a supplier or customer and thereby gains   greater control over the chain of activities which leads from basic materials through to final consumption (Luffman and et al., 1996; Wheelen and Hunger, 1998).It is important to be aware that this model has further limitations in today'smarket environment;as it assumes relatively static market structures. Based srcinally on theeconomic situation in the eighties with its strong competition and relatively stable market structures, it is not able to take into account new business models and thedynamism of the industries, such as technologicalinnovationsand dynamic market entrants from start-ups that will completely change business models within short times.For instance, the computer andsoftware industryis often considered as being highly competitive. The industry structure is constantly being revolutionized by innovation that
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks