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Porter’s Five Forces Analysis
An industry’s external environment refers to the factors outside the control of the firm. The factors may influence the firm positively or negatively. These external factors are economics, legal environment, demographics, natural resources, technology, and social economic factors among others (Brech, 2008). The model can be used to analyze the external environment of a new business venture called Abel and Johnson Accounting Firm (AJAF) which is a small business group.
- Threat of entrants
- Bargaining power of customers
- Threat of substitute products
- Bargaining power of suppliers
- Industry rivalry
Threat of new entrants – It occurs if there is ease of new players to enter into the market thus gaining a market share out of the existing market. AJAF will pose as a threat to the already existing firms in the market since it will put pressure on service costs downwards. It will pose as a threat since many consumers are willing to switch pattern and service to the new accounting firm.
The industry will be very attractive upon entrance by AJAF since it provides the mush needed competition to put prices down and in that process increase its profits considerably. It is good for AJAF to venture in accounting services since it is an ever growing market that is profitable and there is promise of making good money.
Bargaining power of customers – Customers exert low pressure to a business. They have the power to drive the cost of services downwards. AJAF has the ability to influence the customers by requiring them to maintain the internationally required standards of accounting.
AJAF as an audit firm should exert pressure by provision of quality services either on post-deals or pre-deal agreements once it gets into the market (Hill, 2009). However, customers will exert pressure on AJAF if it has a small customer base and if there are several other firms offering same service such as Earnest & Young and Deloitte.
Threats of substitute products – Substitutes are products that would perform the same function. The challenge here is that AJAF may suffer if its customers decided to seek other services such consultancy in order to mitigate themselves from adverse accounting practices. The customers may go for tax consultancy and legal advice thus shunning away the service provided by AJAF. The firm is at an advantage since it will start offering its services at a lower price than most of the existing industry players thus it will attract more customers.
Bargaining power of suppliers – It is used to identify the amount of influence the suppliers will have over the accounting firm. AJAF will be forced to start with suppliers who have less influence in the market since they will not control the prices of products or services they offer the firm. This would give AJAF an upper hand since it would threaten to shift to another supplier who has a lower price.
Industry Rivalry – Intense rivalry in the market leads to price wars in the market. It also leads to a change in the way a business conducts its activities. Businesses are forced to invest in research and development and they engage in sales promotions. These activities tend to increase costs and reduce profit. Therefore, before AJAF enters into the market, it will have to research on the market trends to determine the market competitiveness.
These refer to strategies employed by a firm to maintain a competitive advantage. AJAF being in the accounting and financial service would use a Cost Leadership strategy. This is a low cost strategy which allows the firm to compete in the industry and at the same time earn profits per unit of service rendered. It can do this by offering its services at the average market price or by offering its services at a price lower than the market price in order to penetrate the market.
A firm’s strategy is determined by the cost strategy where effective competitive advantage is gained by offering services at low costs. Cost Leadership Strategy aims at ensuring that the firm is the market leader and has no equal in the industry, especially where the customers are price sensitive. This means that, even where there are price wars for services rendered by the accounting service providers, the firm will still make profits.
- The four critical business perspectives are customer perspective, internal processes, innovation and learning, and financial perspective (Niven, 2010).
- Customer perspective – It is concerned on how clients consider our business.
- Internal perspective – It involves having the best quality of staff and improved internal processes.
- Innovation and learning – This perspective looks at the ability of the firm to attain and retain its competitive position.
- Financial perspective – This is concerned with how shareholders and other creditors view our business.
- 3. b) SMART Key Performance Indicator (KPI)
|Perspective||objective||SMART Key Performance Indicator (KPI)||Measurement|
|Customer perspective|| || || |
|Internal perspective|| || || |
|Innovation and learning|| || ||Employee retention in the firm, reduced repeat work due to skill acquisition and experience and higher percentage of in house promotions.|
|Financial perspective|| || || |
Brech, E. F. (2008). The principles and practice of management. New York: Longman.
Hill, C. (2009). Strategic Management: An Integrated Approach : Theory. New York: Cengage Learning.
Niven, P. R. (2010). Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. London: ohn Wiley and Sons.