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Every corporate management is interest and struggle at achieving their corporate goals and objectives. They struggle to use available resources to develop organizational, competitive advantage offer competing organizations (Baker, 1992). Several scholars have tried to come up with frame works to assist organizational management to come up with strategies to assist them attain their goals. Porter is one of those who made tremendous contributions. Porter was born in 1947, inAmerica. He graduated as an aeronautic engineer and later he achieved an economic doctorate at Harvard where he was rate awarded professorship. He work on corporate strategy, and he extended his ideas and theories to international economies, and competitive positioning of nations.
In 1980, he wrote his first book competitive strategy which he wrote in his thirties. The book changed the way most manager viewed their organizations. At one point, it was the bestselling book internationally. The book is published in more than nineteen languages. It has since publication become a guide of choice for managers from all over the world.
Porter was appointed to the President Ronald Reagan’s Commission on Industrial Competitiveness in 1985. He has tremendous ability to present complex concepts in relatively easy accessible formats. At that period, he was amongst the top earning academics and second strategic speaker after Tom Peter. He made significant contributions in the corporate world, but most significant is the Porter’s five force theory (Porter, 2008)
Porter comes up with five issues to analyze industrial and business strategy for development. He derived five forces, referred to Porter’s five Forces. The five forces analysis is a straightforward model that supports strategic understanding of the business. He used industrial organization and economics to derive these forces. It analyzes the industrial attractiveness in terms of the general profitability of an organization and the industry. According to him, unattractive industry will not tend to bring down its profits when the five forces apply. The framework can be applied at the level of industry, group of firms, or individual firm. The aim of this model is to sustainability of profit of a company. It also tries to relate bargaining power and indirect competition of the organization concerned.
Three of these forces are external in nature, and the other two internally sourced. Internal forces are part of micro environment of the organization. External forces are macro environment, which are outside the control of the organization. When there is a change in the macro environment, the organization will re access its environment and new market demands. Firms in the same industry will make different levels of profits depending on various factors. These factors are core competencies, model or network. Some organizations will manage to earn more than industrial average.
The porter’ five forces include threat of substitute product, threat of rivals, new entrants, the bargaining power of suppliers and customers (Porter, 2008). The first three forces are horizontal competition while the other is vertical competition.
Profitable markets and industries will yield high returns to the firms that operate in that business. This will attractive return will attract more firms, to enter the market. The profitability of the existing firms will reduce, and abnormal profits may no longer be earned. For a firm to survive in such a market, they need to rearrange and strategies on how to retain the market or loss it to the new comers. An existing company can use available entry barriers to block new firms. They can use patent and rights among others restrict the number of firms that enter the market. At this point, only the strong firms will remain in the market as the weak ones corrupts. A firm can use product differentiation to attract as much number of consumers as they can. Existing products can be modified by adding a new feature to improve their quality, or producing a totally different product. The more a company can be able to differentiate its product the more they stand out than others.
Brand is one of the most valuable assets that accompany can have. Developing a strong brand will give the company an added advantage over the other competitors. Customers develop royalty to strong and developed brand than upcoming ones. A strong brand will be appearing to consumers and to imitate such a brand is very hard. Organizations will spend a lot of resources to develop a strong brand with a competitive advantage over the other brands.
Distribution channel are extremely influential in that they provide the path through which products move to the consumers. Factors such as the existence of intermediaries, type of product, the size of market among other factors, affect the accessibility to a distribution channel. A firm with strong and established distribution channel will strongly remain in the market while the other will have high chances of facing out the market. The channel used by an organization should be reliable and cost effective. Intermediaries used must be screened first to be sure of their efficiency. Methods such as sales representatives, outlets and agents can be used to contact the customers directly. When the market coverage is beyond the organization’s capability, intermediaries can be used.
When capital required entering a given market, is easily affordable quite a considerable number of firms open operations. This is a threat of existing firms in that their market will be perfectly competitive. There will be a lot of firms dealing with that product and no firm can dominate such a market. Economies of scale are the benefits accrued from operating in large scale. When operating on a large scale, there are advantages such as low cost of production, which result into low prices. Large- scale organizations makes purchases in bulk. They enjoy quantity discount and reduced the cost of transportation. In case of financial constraint, large organizations can access loan from financial institutions at ease and hence they survive during the economic hard times. Small-scale firm may not survive some economic recession periods. They lack collateral to secure loans and do not enjoy the benefits enjoyed by large scale firms. Those producing in large scale will remain in that market while the other closes their business.
New firms may enter the market but, the customers may not be willing to switch to the new firm. This is particularly when the cost of switching to the new firm and product may not be bearable. If they can switch to the new product, at no or minimum cost the existing firm will have to study its environment and rearrange their strategies. Such a firm will spend a lot of resources to promote their products and persuade the market that what they offer is the right item with the required utility.
Another threat on entry is Government legislation. A government may introduce a new law which might weaken a company’s competitive position. It can restrict or limit the market coverage, control on prices of commodities among other things. These will affect the attractiveness and profitability of an industry. Government is a nonprofit marking system. It acts for the benefit of its citizens. The rules set by the government must be followed. Organizations which act against this rules and regulations, risk their registration and compulsory closure by the government. The strategies used to gain competitive advantage must be according to these rules.
Substitutes are products which can be used on behave of others, and consumer needs satisfied. Substitutes lower attractiveness of products. The prices of goods decreases, and hence profits decline. The significance of introduction of a substitute will depend on various factors. Buyers are the best scalar to measure the effect of substitution. Their willingness to substitute is tremendously beneficial. If the buyers are willing to substitute, the existing firms experience the effect (Porter, 2008).
The price of the substitute goods is particularly crucial in determining the effect and a possibility of substitution. If the price of new substitute is relatively low other factors remaining constant, a rational customer prefer the cheaper substitute. If the prices are relatively the same, other factors will determine the preferred product. The performance and level of utility accrued from a substitute also determines the rate of substitution. High-utility products will be more preferred than lest.
Switching into a substitute is not free of costs. A consumer may incur costs such as training, servicing, installation, transportation among other costs. Switching to new products especially technical assistance may be hugely expensive; therefore, the consumers may not switch to available substitutes.
An Industry is a system with the input, people, process and output. The inputs are particularly significant for the production of the output (Porter, 1979). Suppliers provide these inputs. These are individuals or businesses who supply material and other products required in the industry. The price charged by supplies affects attractiveness and profitability of an industry. If the bargaining power of suppliers is high than that of the company, then the cost of inputs is high. There are several factors, which affect the suppliers bargaining power.
When there are so many buyers, and a few or one supplier. Such suppliers will dictate the price and terms of supplies. They are likely to charge extraordinarily high prices, for the supplies they offer to the firms. Specialists supply Undifferentiated and highly valuable items. The strength of distribution channel is particularly crucial. When a firm can only be supplied from a specific channel, then they may not have a chance to bargain for supplies (Porter, 1979).
Employees are also part of suppliers of a firm. They offer labor, in exchange for wages and allowances. If employees have, a strong labor union they have a high-bargaining power. They can then influence the wages and allowance awarded by the firm. Human resources capital should be well managed. The support given by human resources to an organization is very vital. When employees develop organizational citizenship, they redirect their energy skills and knowledge towards organization goals. Such organizations tend to have a competitive advantage over the others.
The presence of substitute input reduces the bargaining power of suppliers. When a firm can get alternative and better terms of supplies they can change their current supplier to other suppliers. When there are no substitutes, a firm will only rely on that product no matter the terms of supplier (Rainer & Turban, 2009).
Some brands are extraordinarily strong such that some firms cannot do without. Purchasing these products will take place no matter the terms offered on other products. Some consumers maintain their royalty to some products and they better go far for them instead of purchasing substitutes in the market near them. Such products tend to be very expensive, but their brand dominates the market.
Customers are very important to the organization. They determine how successful a firm can be. A market without buyers is not a market. Firms strive to ensure that their customers’ satisfactions. They form the market of output of affirm. When customers have the ability to put a firm in pressure, they have the strong bargaining power. This ability reduces the attractiveness of the industry or the firm concerned. This ability depends on some factors (Rainer & Turban, 2009).
The 'buyer to firm' ratio is one of the crucial that determines a customer’s bargaining power. When the number of customers is more than the firms, their burgling power is weak. They cannot dictate on terms of services and products offered by firms.
Switching from one product to another may be costly to a customer. If switching costs are extremely high such customer, will not change consumption to other products. Incase standardized products, consumers will have no substitutes. They in this chase will have no or zero bargaining power.
Buyers have a great bargaining power when the firm at hand is not a key supplying firm to the buyers. The buyers have alternative suppliers. The firms have less bargaining power, and they have to listen to customers, and fulfill their demands. When suppliers threaten, and actual integrate forward to into the buyers industry they reduce the bargaining power of the buyers (Rainer & Turban, 2009).
Buyer’s information is extremely important in consumer behavior. When buyers have information about availability product, how to use them, available substitute among others they can then have the confidence to bargain for the best offer. When there is inadequate information, the buyer may lack supportive information to bargain (Rainer & Turban, 2009).
The volume of purchases can influence buyer’s bargaining power. Buyers, who purchase in large volumes, can be considered, and their terms can be better than small scale buyer. Such buyer can be offered quantity discount to retain them. The amount they require should always be available as much as possible.
Price of commodities should be well established. They should be set on objective manner, considering factors such as costs, revenue required prices offered by competitors among other factors. Buyers who are sensitive to prices should be considered. Reasons must be given when there is the rise in price especially prices of other substitutes remain low.
Availability of substitute product is another threat. Buyers can choose from a variety of products. The substitute will have unique features and term. It’s extremely very essential to ensure you offer the best of terms and quality. A company can use product differentiation to outstand the other substitutes. Where a substitute is stronger, the firm can explore other markets where they can perform better. More intensive marketing strategies such as advertisement can be used.
Competition in a corporate world brings about rivalry. Every firm in the market wants to out win the other in order to retain to capture as much number of customers as possible. It takes place where there is a threat of substitution product, power of supply and buyers in the market. Rivalry is the driving force behind good quality of services. Every firm strives to create a good perception on the society it operates, particularly, customers, supplies, government among other stake holders (Porter, 1979).
A firm can do various things in order to remain competitive in the corporate world. Consumer needs and standards keep on changing with time. For a company to sustain competitive advantage, it must be innovative. Its products can be improved by additional of other feature that makes them outstanding compared to those of competitors. The level of advertising expense should be increased in order to persuade inform and educate existing and potential buyers. Competitive rivalry based on variable such as price, quality, and innovation exist. Some companies use technology to cover themselves against their competitors. Some companies will take advantage of technology to charge extraordinary high prices earning a lot of profits before other are able to implement modern technology. Both service and commodity markets experience competitive rivalry in one way or the other (Gilad, 2009).
Several people challenged the Porter’s five forces theory. Kevin and Somu have challenged three assumptions in the five forces. First, there is an assumption that suppliers, buyers, and competitors, cannot have any mutual relation. In one way or the other, they may have a chance to interact. For example, a supplier may trade with two or more competing parties. A buyer can move from one business to another as he looks for the best offer in terms of price and quality (Porter, 1979).
Secondly, the assumption that sources of value is structural advantage, which involves creating, barriers to entry. This may not always be the way. Creating barriers to entry may not always work especially where legislation does not allow such practices. Thirdly, business ethical behavior does not allow participants in the market to plan and respond to competitive behavior of competitors. This may bring enormity instead of pure competition in the market.
Porter has also been criticized for undermining the force that the government on business world. Other scholars recognized local and national governments as the sixth force. He also recognized forces such as government, innovation, and complementary products as the forces that affect the five forces bring about ambiguity. It is also particularly difficult sometimes to evaluate the attractiveness of an industry based on individualized firm. These firms have different levels of resources, technology, management, policies and strategies (Porter, M.E. 1979). Two or more companies might be operating in the same industry, but, they differ in so many aspects and to compare them some times is not realist even if they are on the same industry.
Consultants have used the five forces framework when making evaluation of organization’s strategic position. It successfully has assisted in evaluation of line industry where similar products or, closely related products are or services.
Some companies operate in a different line of industries. The five forces framework gives them a chance to identify each line separately. Corporate strategy is developing after analyzing each and every line. Industries all over the world, single and multiple line organizations apply this framework. This strategy is very effective for unique strategies in those different lines of operations.
In conclusion, as companies seek to achieve their goals and objectives they must have sound strategies. Porter’s five forces can be particularly acutely crucial. The frame work will give it a chance to analyze both it macro and micro environment in a comprehensive manner. The organization will be able to raise area where there are threats and prepare itself to mitigate those threats. The frame work is also highly applicable for long- term business strategies and competitive advantage plans. Porter’s five forces give a company to identify possible competition its strength and possible mean to counterattack such competitions. Manager and strategic consultants will find the Porter’s five forces very relevant in their work.