Porter’s Five Forces Model
Porter’s five forces model is an analytical framework that helps in analysing the competition of a certain business. This tool helps in shedding tight upon the availability of opportunities that an organization has in terms the profitability in the niche. This framework is named after its originator Micheal E. Porter from Harvard University. It was published in Harvard Business Review in 1979 (Lewis, 2017). The Five Forces model analyses the desirability of a business with respect to the microenvironment. Thus, this framework puts into consideration factors that affect the ability of an organization to serve its customers and earn profits on an immediate level (Kumar et al. 2015). A change in any one of the forces among the five will have to be accompanied by a subsequent re-assessment of the market situation that shall affect the strategy. The five forces in question are:
- Threat of New Entrants: Industries that have a high level of profitability in general shall attract new firms. This shall thereby increase the competition at the expense of the profitability until abnormal profitability becomes zero which is the minimum level of profit required to keep the industry in business. There are many factors that affect the threat of new entrants of a given industry which are barriers to entry, brand equity, government policies et cetera. For example, in industries which require a huge investment, new firms shall be deterred to enter as most would not be able to afford such an amount of expenditure despite the profitability of the industry. For example, for an e-commerce organization like Amazon, the threat of new entrants is indeed low.
- Threat of Substitutes: A substitute is a product of different composition and characteristics but address the same economic need. For example, beer and wine are substitutes, in terms of transport, buses and trains can be perceived as substitutes. The success of an organization producing a certain product or service depends to a great extent upon the availability of substitutes in the market. If cheap substitutes are readily available, then it shall be inadvisable to start business in the niche.
- Bargaining Power of Customers: It refers to the ability of customers to pressurize the firm to lower the prices of the products it offers. Firms usually try to keep the bargaining power of customers low as this shall let them increase their profitability. The bargaining power of customers is directly proportional to the number of alternative choices that the customer can make and avail for other products. In a monopolistic market condition consumers have minimum bargaining power.
- Bargaining Power of Suppliers: Suppliers of raw materials and labour can exercise a certain degree of influence over an organization. If the organization requires unique and rare resources for its production processes with not many suppliers, then the bargaining power of the supplier shall be greater. The supplier will be in a position to affect the prices of the raw materials that shall be bought by the organization.
- Industry Rivalry: Degree of competition offered by other industries is a major factor affecting the profitability and competitive advantage of an organization. In order to differentiate the product from its competitors the organization shall to engage in a product differentiation strategy that shall let customers differentiate the product from other similar kinds of products available in the market (Porter, 2017).
Strengths:
- Gives a relative overview of the competitiveness of a certain industry.
- Can help an organization arrive at strategic decisions in order to increase profitability and fight competition.
- Helps in evaluating the current position of an organization with respect to competing ones.
Weaknesses:
- Analyses only the microeconomic environment for the organization.
- Market forces are assumed to be relatively static, therefore, the framework becomes irrelevant in the modern day market conditions where change is rapid.
- Does not put into consideration non-economic forces that might affect the choices of customers.
It is an analytical tool that relies on the creation of a ‘blue ocean’ which is an uncontested market space where there are not many competitors available in contrast to operation in a ‘red ocean’ which is a market with a large degree of competition (Kim and Mauborgne, 2014). For example, TATA Motors in India launched the cheap Nano car which engaged in product differentiation and radically altered consumers’ perception of the family car. There are, broadly speaking, four steps to the creation of a blue space strategy which are:
- Extension of the market boundaries in order to create a space where competition does not exist.
- Focusing on the macroeconomic environment.
- Reaching outside the prevalent demand and supply mechanisms.
- Devising a proper strategy.
Strengths:
- In contrast to the Porter’s Five Forces Model, this framework analyses the macroeconomic environment and therefore, makes it possible to analyse the big picture (Agnihotri, 2016).
- Helps in finding a relatively profitable niche for the organization where competition is low.
- Facilitates the creation of groundbreaking innovations in the market.
Weaknesses:
- It is difficult to find the right blue ocean for the organization. A new market does not necessarily culminate in high profitability. The consumers might not be ready for the product yet (Dvorak and Razova, 2018).
- There is a lot of uncertainty involved in the blue ocean strategy especially in terms of the devising of the strategy. There is no telling how consumers would react to the new product.
- Once a blue ocean is discovered which is profitable, it will only be a matter of time for the market to become saturated with competitors who shall eventually bring down the profit level.
A more ethical approach to the overall business can bring huge amount of development for the business. First of all, the fact has to be delivered here that ethical consideration of the business activities and succumbing to ethical means helps the business to be more sustainable in its operations. If the business is more ethical and responsible for all its actions and does take them on a serious note, it helps in persuading the stakeholders for keeping good faith on the business. They prefer the organization over the other existing organization in the market. This helps them to gain an upper hand over the other organizations. They finally are able to arrange and channelize all their resources in the most perfect manner (Korschun et al. 2014). Thus, they gain the competitive advantage. This can finally help in directing the performance of the organization in the right direction as the business shall have more motivation to focus upon and better chances to mend its ways (Saeidi et al. 2015). The ethical and socially responsible approach taken by the business can also be termed as the Corporate Social responsibility (CSR) of the business. A business having more ethical and social approach towards its responsibilities can be termed to be a business with a higher level of CSR. A business meeting all its corporate social responsibilities can easily have a better brand recognition in the market. It can have better reputation among the stakeholders, better ability to attract and retain skilled staffs and will have better and easier access to capital and fund sources. This shall finally enable the organization to render the best in class goods and services. A more ethical and social organization shall also be able to cut short all of its operational and other costs, thus making its goods and services cheaper in prices as compared to all of its rivals (Epstein, 2018). This shall help in producing better quality goods and services at competitive prices. With a better selection of goods and services customers shall be more attracted towards the business. With a better customer base and better trained staffs, the organization can easily bring a hike in its level of performance. In order to be more socially responsible, the business has to bring a decrease in its use of different kind of resources such as water, fossil fuels and minerals. For bringing a decrease in the use of these resources, the business has to bring in sufficient level of innovation which shall let it to use less resources and render the same kind of goods and services (Helmig et al. 2016). Thus, with use of modern technology, the business shall be able to reduce the use of different resources. This shall also help it in reducing its costs for buying all the resources that it earlier needed in an enormous amount. This shall aid in bringing down the overall costs of operation and production. Thus, the cm of any shall be able to revise all the prices of the goods and services and make them cheaper. Further, due to lessening of costs, the business shall be able to earn greater amounts of profits, thus creating better employment opportunities and paying the staffs in handful. This shall help in attracting skilled and efficient staffs in large number. This shall on the other hand helps in boosting up the effectiveness and productivity of the company. It shall be able to take production on a greater scale with limited use of resources, thus, enhancing its overall growth and performance (Cooper, 2017). A business with more social and ethical approach towards the business can easily be able to gain and attract positive media attraction. This shall let it have better reputation, thus attracting more customers towards it and more skilled staffs to work for it. Further, it shall also be able to have a clean chit for carrying out all business activities from the authorities. Being more green and socially responsible, the Government shall help the business to gain easy finances from different institutions. It shall also get different aids and grants from the Government (Crane, 2017). With better financial power, better staffs, the company shall be able to give better services and goods to customers. With more customers, it shall have huge level of sales. This shall lead to enhanced performance of the business, thus taping all the unutilized sectors of the industry. It shall further be able to find better and more diverse business opportunities, which shall further bring in profit earning and growth opportunities for it.
Strengths of Porter’s Five Forces Model
For example: The Virgin group has been one of the most socially responsible and ethical business concern in the whole of UK. In the 1990s, when Kuwait was invaded by forces of Iraq, Richard Branson, the CEO of Virgin group sent blankets and medical help for the refugees who were fleeing through the borders and trapped in the cold deserts. Virgin Group has also partnered with the Whole Earth Water and as part of the plan, the group filters and bottles water for its own use as well as donates 10% of the produce to different fundraising organization aimed at removing the scarcity of water at global level (Idle, 2018). The company also announced to spend an amount of $3 billion from its profits of the travel business in order to develop biofuels. This responsibility was taken up by the company in order to remove the pressure on biofuels and thus make the aviation industry more economically friendly and sustainable. Further, the company has also spent around a total of $25 million out of its total profits in order to develop ways for extracting and lessening the carbon dioxide present in the air (Baker, 2018). All these social and ethical approaches have made the company a great one in the eyes of the common people. Since these activities, the company has had a huge fan base and dedicated masses of customers. The company has stable performance and due to help from authorities and customers, the organization has developed its performance to great heights. Another ethically responsible organization is Google. The company encourages all of its employees in alternating all the managers of the organization if they succumb to any kind of unethical means (Pistritto, 2018). The workplace environment in Google can be said to be the best in the world. It offers high payments and opportunities to the employees., Further, it serves customers with various and innovative services and products. The company has also taken pledge to develop hybrid fuel efficient cars which shall help in lessening the dependency on fossil fuels (Altstadt, 2018). This has helped in attracting better staffs and customers for the organization, thus contributing to the growth of the performance of the company.
References
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Baker, M. (2018). Richard Branson’s evolution in corporate social responsibility. [online] Mallen Baker’s Respectful Business Blog. Available at: https://mallenbaker.net/article/clear-reflection/richard-bransons-evolution-in-corporate-social-responsibility [Accessed 29 Nov. 2018].
Cooper, S., 2017. Corporate social performance: A stakeholder approach. Routledge.
Crane, A., 2017. Rhetoric and reality in the greening of organisational culture. In Greening the Boardroom (pp. 129-144). Routledge.
Dvorak, J. and Razova, I., 2018. Empirical Validation of Blue Ocean Strategy Sustainability in an International Environment. Foundations of Management, 10(1), pp.143-162.
Epstein, M.J., 2018. Making sustainability work: Best practices in managing and measuring corporate social, environmental and economic impacts. Routledge.
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Kim, W.C. and Mauborgne, R.A., 2014. Blue ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant. Harvard business review Press.
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Lewis, R., 2017. Porter’s Five Forces of competitive advantage.
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Saeidi, S.P., Sofian, S., Saeidi, P., Saeidi, S.P. and Saaeidi, S.A., 2015. How does corporate social responsibility contribute to firm financial performance? The mediating role of competitive advantage, reputation, and customer satisfaction. Journal of business research, 68(2), pp.341-350.
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