Porter's Five Forces Model

• The chapter discusses the nature and context of business competition and the role of stakeholder groups
• It uses Porter's Five Forces model related to business competition

Background

• Considerations and theoretical principles necessitate changes in the conduct of business
• These theories are drivers and motivators, tasking managers to address competition challenges and strategic management
• Michael Porter's business competition model, introduced in the 1980s, has greatly influenced the concept of strategic management
• The model's context is complex, requiring detailed elaboration

Porter's Competition Model

• Michael Porter made substantial contributions to strategic management through his business competition model
• Also known as Porter's Five Forces Competition Model
• The model, introduced in the 1980s, became popular through business managers
• It supports that factors beyond competition among businesses drive business competition
• These factors necessitate strategic management for companies
• The model includes five major forces, it has expanded to include the stakeholders group
• The original five forces include rivalry among competing sellers, suppliers of key inputs, substitutes, buyers, and potential new entrants
• The model now includes a sixth component known as stakeholders

Rivalry among Competing Sellers

• Rivalry among competing sellers constitutes the traditional view of business competition
• Includes direct competitors within the industry or sector offering similar products or services
• Companies try to outdo each other and seek a larger market share
• It is the most powerful and important aspect of Porter's model for strategic management
• A key factor determining the strength of rivalry is how actively and aggressively rivals compete for market position
• Price competition is vigorous with active efforts to improve quality
• Rivals improve performance features as well as offer better customer service
• Advertising, sales promotions, a stronger dealer network, and product innovation are major factors to consider when looking at competition
• The strength of rivalry depends on certain conditions

Determinants of Stronger Rivalry

• Active jockeying for position among rivals and launches of offensives to gain sales and market share is a determinant of stronger rivalry
• It is more prevalent where firms are relatively equal in size and capability
• Slow market growth can allow for competitive advantages to occur
• Industry conditions may tempt firms to boost volume and market share
• Low costs for customers to switch to rival brands are key
• A successful strategic move carries a big payoff
• High costs to exit the market encourages firms staying for longer
• Firms contain diverse strategies, resources, and priorities

Determinants of Rivalry

• Other factors that result in rivalry within the industry includes level of the industry's growth
• Fixed (or storage) cost/value added, intermittent overcapacity, and product differences impact rivalry
• Brand identity, switching costs and concentration and balance all affect rivalry

Suppliers of Key Inputs

• Suppliers of Key Inputs include business organizations outside the middle box of Porter's competition model
• The role of suppliers is to provide inputs or support to the key players competing
• This group includes suppliers of raw materials and other inputs to products and services offered by the key players
• Considered part of the competition because of their potential to produce a product or service and join the direct competition
• In monopolistic situations, suppliers can manipulate prices to achieve profit goals, making key players more competitive

Competitive Force of Suppliers

• Suppliers exert competitive force or pressure by being involved when business organizations are dealing with competition
• A situation is prevalent when an item makes up a large portion of product costs and is crucial to production
• If its costly for buyers to switch suppliers and the supplier has good reputations, they hold a strong competitive force
• If they can supply a component cheaper than industry members and do not have to contend with substitutes they hold strength
• When buying firms are importunate customers they hold strength

Determinants of Supplier Power

• Differences in inputs affects supply power
• Switching costs of suppliers and firms in the industry are relevant
• The presence of substitute inputs and supplier concentration are applicable
• Volume is always importunate to supplier as is cost relative to total purchase in the industry
• Impact of inputs on costs or differentiation are important determinants

Factors Affecting Supplier Bargaining Power

• Avoid turning suppliers into a competitive force by forging a collaboration with suppliers
• Collaboration can be done in the form of strategic alliance or joint venture
• Rival sellers are forming long-term strategic partnerships with suppliers to promote just in time delivers and reduce inventory
• Supplier’s need to speed the availability of next-generation components and enhance part quality
• Need to reduce suppliers' costs which pave way for lower prices
• Competitive advantage potential may accrue to industry rivals doing the best job of managing supply-chain relationships

Substitutes

• Substitutes refer to products or services from another provider with similar utility or function
• Substitutes exert pressure by product switching, lessening demand for the original product
• New technologies and innovation have made a variety of products and services available
• Variances in utility and prices allow buying flexibility
• Substitute products or services provide similar benefits and value
• Strategy should consider whether substitute is expensive or cheap

Competition from Substitutes

• Product substitutes can be weak or strong. If threatening, it should be looked into
• Sales of substitutes growing rapidly is an indicator
• Producers of substitute products adding new capacities is an indicator
• Profits of substitute products are up and growing in popularity are indicators

Substitution Threats

• Develop regularly monitored technology developments in the industry
• Develop new products or services that can threaten the business
• A new product may make current product obsolete
• Product substitution is indicated by the relative price of substitutes

Switching Costs

• Switching cost leads prospective customers to entertaining buying or patronizing other products
• Switching cost refers to the amount buyers can save for using other products
• Prospective buyer takes into account the acquisition price and quality
• The buyer will favor the product or service of lower price, displacing the other product
• May involve direct benefit of savings

Role of Buyers

• Buyers are objects of desire of businesses competing
• Refer to prospective clients, buyers, users and consumers of the product or service
• Their purchasing power and desire to bargain for a price or terms of payment affect business competitiveness
• Buyers constitute a sector acting as a driving force that can disturb competition as market is about demand and supply

Competitive Force of the Buyers

• Buyers are a strong competitive force, influencing price levels
• Buyers are a strong competitive force when they purchase a sizable percentage of industry's products
• Driving forces are buyers that buy in large quantities and can integrate backward
• Other factors industry's standardized product, buyers low switching cost, and several sellers
• Other notable factors include high purchasing power and bargaining leverage
• Consider buyer concentration versus firm concentration
• Another aspect is considering buyer switching cost relative to firms switching costs
• Buyer information, availability of substitute products and price sensitivity are key
• Product difference is also relevant as is Brand Identity

Weak Bargaining Power of Buyers

• Buyers use their ability for seeks discounts under favorable conditions
• Buyers are considered weak under the following scenarios:
  • Buyer switching costs to competing brands are high
  • Surge in buyer demand
  • Seller-buyer collaboration provides attractive win-win opportunities.

Competitive Force of Buyers

• Investors put up a business to serve the market with profits in mind
• Contain the competitive force or influence of the buyers by leveraging a number of points:
  • The price buyers have to pay is affordable
  • Ensure the product quality acceptable
  • Provide services buyers can expect from a business
  • Other attractive conditions of the sale

Potential and New Entrants

• Competitors, thought to be threats to existing business concerns
• Strategists are supposed to be research-oriented and aware of new developments
• New entrants may be unnoticeable, but become factors when launching new product
• They are business organizations trying to make a name for the product and the business
• New entrants are likely to introduce a marketing strategy that will affect the market share of vulnerable players

Barriers to New Entrants

• New entrants bring extra capacity and increase industry demand
• When new entrants have similar product features imitation occurs
• Imitation produces similar competitive positions and resources

Entry Barriers Faced

• Economies of scale
• Access to secret technology (patented and not patented)
• Brand recognition and capital cost entry.
• Access to distribution channels.
• Lack of experience in carrying operational activities.

Stakeholders

• The term stakeholders emerged in the late 1990s
• Stakeholder group is a sector of the economy or society
• Considered an indirect player in the business
• Includes lobbyists, nongovernment organizations (NGOs), religious organizations, civil society and professional organizations
• Focuses on grassroots and other bodies with indirect interests on a particular business
• Parties in the stakeholder group are not buyers, sellers or suppliers