Discuss Porter’s five forces theory of market competition. How does strategic group analysis provide a refinement to the five forces model? Key words here are: -discuss -Porter’s five forces -strategic group analysis -refinement of it(improve it yaani k extra benefits of strategic group analysis compared to five forces) Strategic decisions have always been a vital part of business as ever since their conception but the word strategy is barely mentioned pre 1960s. However, the concepts of strategy were linear and largely inefficient before the 1980’s and Micheal Porter’s contribution to modern businesses.
He presented many theories and “models” on how to improve decision making and gain competitive advantage in the market. One of these models was the “five forces analysis of industry attractiveness” which said the “attractiveness” i. e. profitability of an industry or market is based on five factors which are: Threat of new entrants l bargaining power of supplier – Rival firms(competition) – bargaining power of buyers l Substitute firms(if you make butter, they make margarine and might steal your customers)
What this means is the industry should be judged or analyzed by viewing these five factors and comparing them to find out how profitably it can be. The centre point of this seems to be the competition from similar firms in the industry and this depends on a certain factors like how differentiated or homogenous the firms are, more homogenized they are the more they are affected by the change in one firm e. g. similar soap making companies exist, selling at almost identical prices and market shares but suddenly one firm launches a half price deal for buying two soaps.
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Abstract LEGO Group is a worldwide, well-known toy manufacturing company. In 2004, the company was faced with a major financial crisis and a major decision to make. Do they try to save the business or not? Through strategic analysis of the company’s external and internal environments, many contributing factors became evident. External Analysis The external environment facing LEGO “consists of many ...
The other firms will have to react with a similar deal or there is a serious threat to lose customers. Also changes in demand must be viewed as an increase in demand signifies higher potential for success. The second factor to analyze is threat of new entrants i. e. new companies starting up in your industry/market. This is different from competition as new entrants will not be as established or known as the current competing firms and they have to be competed with in different ways. The threat of new entrants depends on the barriers to entry and this will vary from industry to industry.
For example in the catering business the barriers to entry will be fairly low as starting a small catering company will not require much capital or paperwork as compared to starting a nuclear power generation company, which will have many barriers to entry such as high capital, lengthy paperwork and rigid inspection, to name a few. Another factor is indirect competition from substitute firms who make products different to ours but they fulfill similar needs. An example would be butter and margarine or light bulbs and fluorescent tubes (tube light oi! . many times the demand will overlap but if the industry has little to no substitutes, the firm supplying to it can charge higher prices and vice versa if there were high substitutes available. The fourth factor to keep in mind is the bargaining power of suppliers. This means how much the firm can negotiate with the suppliers and this depends on various factors such as the availability of substitutes and how many clients they have and their percentages of sales will affect how much they can negotiate(how important of a customer they are) e. . firm A buys 80% of Firm B’s products so it will have more leverage in negotiating as compared to firm C who only buy 20%. Another factor affecting bargaining power of suppliers is how high the switching costs are, this is largely dependent on how differentiated or unique the supplier’s product is. Also the ability of the supplier to forward vertical merge(become direct competition) and the firm’s ability to backward vertical merge(become its own supplier) affects the bargaining power immensely.
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The last factor of the Five forces model is the bargaining power of buyers. This is similar to bargaining power of supplier but the roles are switched, and the firm is the supplier. The buyers have a high bargaining power when there are many firms producing the same products, i. e. high competition. Also if the buyers are buying larger quantities of a firms output they will have leverage in deciding prices. Also if the firm is largely dependent on the buyer such as the native craft ndustry in most countries is highly dependent on tourism, any change in tourism greatly affects them. Also similar to bargaining power of suppliers, if the buyers can backward vertical merge and secure their own supply easily, they will have more negotiating power. What the five forces model does is it’s a easy and relevant method to organize various chunks of information under one roof to be understood quickly. This helps in the development of competitive advantage as the managers begin to think of strategic decision making in a wider sense.
It is best if the five forces model is used several times on various levels such as a different managers working on the analysis of the industry as a whole, a certain segment and then the industry as it will be 10 years in the future, and then use the three analysis to help in planning and/or decision making. Even though the five forces model is a strong management tool, it does have many limitations and should not be used as a stand-alone, step by step guide. The first of the limitations is that usually the model is used in a static manner, i. e. ow things are right now, and this limits the firm greatly and might not prepare it for change. Also its qualitative in nature, which is not a completely bad thing but it does make it very hard to measure anything and because of this it is very difficult on how to give importance to each factor as they will not always be equal in importance. Also the vastness of reality makes it hard to find out everything about everyone in the industry. The five forces model is also very paranoid in nature, discouraging every kind of risk , sharply cutting down most profitable options.
The Term Paper on Porter Generic Strategies and Strategic Group
... STRATEGIC GROUP ANALYSIS 3. 4. 1 STRATEGIC GROUP IN AUTOMOBILE INDUSTRY Strategic group analysis helps in understanding competitive structure of a broad industry. A strategic group is defined as group of firms ... pursued by strategic group will be explained along with its response to macro and industry forces. The ... In 1914, four cylinder based Dodge ‘Model 30’ was manufactured. 1920s- this stage ...
This is mainly because the five forces model does not account for networks or alliances. However this does not mean the five forces analysis is a waste of time, in 1995 Mcgee, Thomas and Pruett proposed an improvement to the earlier model in several ways. They argued that in reality all businesses in any industry will have certain differences and in most industries every business was focusing on a certain “niche” or segment of a market, thus succeeding at profiting. This concept based off the five forces approach, analyzing the industry’s various factors mentioned in the five forces model.
It addressed the basic idea of competitive strategy which is to offer a product/service to the market which has or is presumed by the market to an advantage over competitors. This can be done by satisfying a niche not previously satisfied by another product/service. For example low fat milk when it was not previously available. This approach states that the industry is divided in “strategic groups” and entry barriers exist WITHIN the industry in resulting in the strategic groups and keeping them from merging.
Some of these factors are capital costs and legal barriers to entry(in the form of patents or legislation).
A strong example of this is seen in pharmaceuticals and the automotive industry. Many small companies exist; even thrive in the presence of giant multinationals, all producing “medicine and transport devices” but satisfying different niches. According to Strategic group analysis a firm must not focus much outside of its strategic group as the other strategic groups won’t be strong enough threats compared to rival firms within the strategic group or new entrants within it.
To put this in perspective we can look at the automobile industry, Mercedes should not be bothered about another company like Suzuki even though they both make cars. Mercedes is clearly defined as producing luxury high performance cars and Suzuki is clearly defined as economic, easy maintenance and affordable by most. Mercedes potential clientele won’t be affected by Suzuki as the products are for different needs, however Mercedes would have to keep an eye on other companies with similar luxury/high performance products (Audi, Rolls Royce etc).
The Essay on Strategic Groups, Strategic Choices, Generic Strategies and Hybrid Strategies
... most industries, all the fundamental strategic differences among industry players are captured by a small number of strategic groups. Strategic Groups can ... advantage * Creating a business that stands out from the rest through development of product or service features which ... the analysis * Analyse attractiveness of each group by performing a five forces analysis * Identifiy mobility barriers that ...
The strategic group analysis approach is almost identical to Porter’s Five Forces model as it too analyzes the industry, the competition, power of supplier/buyers etc, but it is more effective in real business situations because of its nature to focus down to the immediate strategic group. This shows a truer picture of the business world, especially where the products are more differentiated. It reduces some of the five forces “paranoia of risks” as indirect competition from other strategic groups is not focused on, making it easier for the managers to make profitable decisions thus making the five forces approach more relevant.
