Porter’s Five Force Model and the Technologies that drive it Research Paper

Introduction

This chapter will look at the Porter’s Five Force Model in which the paper will exhaustively research on the academic writings that have been jotted by different scholars with the objective of demystifying the factors that have made the Porter’s Five Forces Model a phenomenon instrument in organization management and competitive strategic formulation.

The chapter will particularly dissect each of the five factors to bring out their role in organization management as it has been contributed by different writers and scholars.

The chapter will also seek to bring out the criticism that has been hurled at the Porter’s Five Force Model in which a number of scholars have attributed that this model is myopic and thus impotent in its capability to cope with the demand of the modern business environment. The chapter will then draw a conclusive summary that is expected to silhouette findings of the chapter.

The intensity of competitive rivalry

According to Romain, (2010), a firm’s behavior, the profits patterns and the investment policies are usually shaped by the set rules on competition that is inherent in the industry.

Firms in a specific industry invest heavily in technologies that enhance their capacity, marketing structures, research and product development as well as instituting price reductions, which are directly informed by the competition in the industry to adapt to its intensity and nature.

Competitive rivalry was originally viewed as indicative or descriptive of the industry’s potential to increase profit margins. Strategic managers have over time had a deeper understanding of competitive rivalry and are now integrating it into their competitive strategy.

According to Grundy, (2006), managers tend to spend more time monitoring and analyzing competitors in their industry when they are threatened by overwhelming competition. At times, strategic managers have had to keep the prices of their goods and services down since making of huge profits attracts competitors who view the industry as extremely lucrative hence having to share their market.

However, companies that have invested heavily in technology are sometimes able to price their products expensively and therefore, are able to achieve higher profit margins before other rival companies can imitate the technology.

This is more evident in companies that deal in development of electronics and pharmaceuticals since the innovation of a superior product and the setting up of new production lines is mostly too expensive for small firms (Kumar, Mathew & Kathryn, 2009).

Firms also need to dominate markets since lack of a dominant operator in the industry often attracts more competitors who see it as an opportunity to make their mark on the industry. Companies have to invest heavily in the industry so as to make the entrant of a competitor too expensive hence deterring competition.

They also need to invest in sophisticated technology which their competitors will often not come by easily hence blocking them out of the industry. According to Bruce, Laurie and Roberts, (2008) managers need to adopt innovative technologies that are superior to those of other industry players. This will help them anticipate tendencies in the market that their rivals may use to gain a competitive advantage over them.

This is possible where companies can patent their technologies to avoid their access by their competitors. Porter pointed out three strategies that managers can adopt in their creation of a competitive strategy that will yield them the most competitive advantage in the industry.

These are differentiation, focus and leadership approaches that are cost based. Differentiation helps companies achieve a competitive edge over their competitors by giving their customers goods or services that are of superior value compared to those of their competitors.

Companies often create superior business models that help them rise above the standards set by their competitors in the industry by focusing on a selection of a specific set of elements contained in a particular business system.

Jarratt & Stiles, (2010), in their research based on the application of methodologies and tools in competitive strategy development by senior managers in the UK, formulated case studies that explain to the manager’s adoption of innovative production systems to improve their profit margins.

Companies are able to give their customer’s better value for their money by lowering the prices of their goods or services below that of their competitors in the industry by adopting cost based strategies. Fry, (2008), explores the factors relating to the two fields of online social networking, niche and generic websites in relation to Michael Porter’s five forces model.

He also investigates the practicability of the model to the online networking industry whereby the internet has significantly encouraged the entry of numerous competitors into various industries. This has been facilitated by the establishment of companies coupled with cheap and readily available information about the rival firm’s ways of operation.

Setting up production technologies over the web is relatively cheap since the resources used in the setting up of websites is cheaply and readily available online, as well as accessing markets over the internet is cost effective.

However, companies can still retain their competitive advantage if they come up with innovative products before their competitors can venture in or by setting the standards for innovation and the types of technologies to be applied in that particular industry.

This is cited for instance by Romain, (2010), where most of the small motor vehicle makers being established in the United States have had to apply guidelines and technologies established by General Motors hence putting GM a step ahead of their competitors in the motor vehicle industry.

Threats posed by substitute goods and services

Companies have to develop products and technologies that will help them to mitigate the threats posed by the availability of substitute products or services. The existence of products or services that do not conform to the common product boundaries prompts a company’s customer to switch to alternative products in the market, which is often driven by the increased customers’ propensity to substitute products.

According to Vecchiato and Roveda, (2010), customers switch to alternative products can be attributed by relative price differences for products available in the market, especially if competitors launch products into the market that serves the same purpose as those produced by a specific company and are cheaper than the original products.

This can be avoided by companies investing in technologies that reduce production costs so that they can be able to reduce the cost of their products. However, cost reduction should not be done at the expense of quality.

According to Grundy, (2006), the luxury boat manufactures had to abandon the use of wood in making their boats and adopted the use of fiberglass that is relatively cheaper and also increases the quality of the finished products. Motor vehicle manufacturers are also adopting the use of plastics and aluminum parts due to the high cost of steel.

Product differentiation is also of great importance if companies are willing to avert the threat of substituted products diluting their market base. This can be avoided by companies investing in technologies that differentiate and strengthen their products by investing in innovative technologies that promote customer confidence and loyalty to their specific brand.

These technologies are meant to increase the uniqueness of their products so that competitors cannot copy them. It also makes their products hard to substitute. For instance companies that deal with information based products always find it hard to deal with substitute products since material products tend to be easily replaceable by online products (Bruce, Laurie & Roberts, 2008).

Companies should also ensure that, their products are not substandard as they will easily be substituted by any superior products in the market. They therefore have to invest heavily in their product design to ensure they are of superior quality.

Pugh & Bourgeois, (2009), investigates the formula applied by the management in formulating holistic and adaptive strategies for the organization and ensure that it attains its set objectives. Companies must ensure to always stay relevant in the market by making sure that their products do not suffer quality depreciation.

This will make customers to seek satisfaction for their needs elsewhere hence leading to loss of a company’s competitive advantage in the industry.

According to Wang & Chang, (2008), innovation and quality production averts the proliferation of substitute products that dilute a company’s market base. Therefore, companies must be timely in the launch of new products before their competitors can launch any substitute products. For instance, stock brokers can invest in technologies that allow their customers to buy and sell stocks aver the internet for a fee.

This is necessary as there are already other companies that offer the same services and if stock brokers do not move with relative speed to adopt this technology, they might find themselves being substituted by other service providers like banks. Banks have their products tailored to also provide stock selling and stock buying by their customers even though this is not their core business.

The availability of substitute products comes about as a result of customer needs that a company’s products cannot satisfy, which is then noticed by prospective investors who come up with products that are different from the original product, but still satisfy the need of the customers.

The bargaining power of powerful customers

The bargaining power of a company’s customers has also been a challenge that many companies struggle with as they are forced to conform to customer demands or loose out on the market. This mainly comes where customer preferences change periodically and producers have to adjust their production process to be in line with the changing customer preferences, by pricing and other terms that shift the cost base of suppliers.

This is influenced by factors such as the buyer concentration ratio compared to the suppliers concentration ratio. In a situation where there are few suppliers in the market, then buyers would have to accept the standards set by their supplier.

In a situation where there are more suppliers than buyers or where the capacity of the buyers exceeds that of the suppliers, the suppliers are in a position to bargain for goods and service that conform to their desired needs.

This also happens to be the case where there are substitute products in the market that can be adopted by buyers if the original products do not meet their needs. If the suppliers are not able to provide goods and services that are suited to satisfy the needs of the buyers they may end up loosing out on the market to other suppliers who develop goods and services that are compliant with customers’ preferences.

For instance, in the motor vehicle industry, suppliers of products used in the manufacture of vehicles to companies like General Motors often find themselves being overwhelmed by GM’s demands for superior products.

General Motors spends about eighty billion dollars in purchasing parts and raw materials and due to the magnitude of their orders their suppliers often have to conform to their specifications or else loose this huge portfolio of business.

It is fairly challenging especially for small firms to quickly adapt to the changing demands of customers especially when they demand new products which force the suppliers to establish a new production line altogether.

This makes some industries to be less attractive to competitors willing to enter into that particular market although some companies find it more attractive especially if they have the capacity to invest in those customer demands that other companies that already exist in the market cannot invest in.

According to Jarratt and Stiles, (2010), in Europe for instance, there are only five grocery distributors who dominate the grocery market. These groceries have the capacity to conform to the retailers’ demands especially on price, inventory requirements, credit terms, new products, packages and delivery schedules.

According to Mann, Vinod and Kumar, (2009), who examine the strategies outlined by porter from a supply chain management point of view, this is not dictated by the ability of companies to marshal resources, but rather their ability to keep in touch with their customers by building onto relationships. This promotes customers’ loyalty to only these five major companies.

This is evidenced where great multinational companies such as Unilever and Nestlé have found themselves held hostage by the retailers hence loosing their business to companies like Carrefour, Aldi and Tesco. These companies enjoy a more casual interaction with their customers and they therefore understand their customers more and are in a position to anticipate customers needs before the issues are raised by their customers.

They incorporate technological information systems, hence avoiding being caught off guard and being held hostage by customer needs that they cannot satisfy (Fry, 2008).

The availability of information to the buyer often gives the buyers an edge since they are able to know what they need, which company provides whatever they need, the prices they prefer and information on any suppliers providing substitute products. Karagiannopoulos, Georgopoulos and Nikolopoulos, (2005), explain the effects of information technology and more so the use of the internet in business.

They relate the use of technology to traditionally accepted market rules and they make their argument from a modern economy point of view while exploring the practicability of Porter’s Five Forces Model in the modern economy. It is therefore, imperative that companies invest in obtaining information on customers needs and also in informing customers of the superiority of their products compared to other competitors in the industry.

The authors analysis is based on their business environment and their argument is based on an exaggerated phenomena observing that the profitability of a particular sector could be boosted by the use of technology and more so in information systems.

General Motors in particular which has a high buyer volume which boosts their bargaining power, has already forced their supplier to adopt electronic data interchange which they were previously reluctant to adopt due to increased operational cost and in-house information controls. The company is now forcing its suppliers to shift their functions to the electronic data interchange on the internet.

According to Rice, (2008), the companies that survive this phenomenon and gain a competitive advantage over their competitors in the industry are those that are able to make the necessary investments in the infrastructure required, in their conformance to the change in their customers’ needs.

According to Porter, (2001), the Porter’s Five Forces Model is an essential component in assessing the competitive advantage of the technology industry. This model has played a leading role in evaluating the attractiveness of technology business in its specific area of operation. It makes it easier for the management to identify the competitive position of the business in the market and that of its rivals.

Technology also enables the management to strategically plan on where they desire the business to be in the future with regard to its competitiveness, product innovation among other determinant factors that dictate the market trends in the area of operation.

The Porter’s Five Force Model is, therefore, considered to be one of the most important planning tools in any management competitive strategy formulation kit. It corrodes the management’s myopic projection and makes it easy for industries to identify their paramount competitive power in their specific business environments and situation.

Threat of New Entrants into the Technological Market

Porter, (2001), lucidly identifies threat of new market entrants to be one of the major driving forces that was suggested by Porter in his model. Romain, (2010), contribution to this driving force in porter’s model observes that the entry of a new business in the already existing market brings with it new capacities and capabilities. The new entrant is motivated to acquire a portion of the market share for itself.

In order that this objective could be achieved, it is evident that substantial resources are put at stake. Among the most obvious observations that are made in the market include: prices of commodities or services are bid downwards. These results to a tug of war between the existing businesses and the new entrants in which the incumbent costs of operation are inflated consequently resulting in the decline in the businesses’ profitability.

Romain, (2010), noted that most new business entries entails acquisitions by companies that are diversifying in which they use their colossal capital built up from years of operation to shake up the new market entry. An example that is often cited in such cases is the Philip Morris acquisition of Miller Beer.

The degree of threat that emanates from the new entrant depends immensely on the new entry barricades available in conjunction with the receptions that are conceived by the already existing business entities.

That is, if the barricades for new entry are high, it means that the new entrant should be ready to fight toe and tooth with the already developed business entities in that particular market as their retaliation is expected to be of vigorous and uncouth if need be in order to save their own market share.

According to Mann, Vinod and Kumar (2009), there are five factors that make it very turbulent for new entrants and they include: first, is the economics of scale. Economics of scale is a paramount factor that could deter the entry of a new business entity in a market that is already saturated with established businesses.

This arise whereby the new entrant at one juncture could be coerced to enter the new market in extremely large scale or at a very low scale and be the underdog in terms of cost merits that ooze from the market. In case the new entrants’ enters the new market on large scale it is expected that this would spark a strong off-putting reaction from the existing businesses (Porter, 2001).

Secondly is the product differentiation factor which puts the already existing firms or businesses at an upper hand as the market is already conversant with the products that are being offered. These businesses are therefore, swimming in already established brands and customer loyalty that ascertains their businesses sales at all times, despite the market forces prevailing at that particular time.

This makes it difficult for the new entrants as they have to stem out and spend hugely so that they can overcome the existing customer affiliations to particular products. This translates to start up losses that are likely to prevail for a continued period of time if the market is adamant and resistive to change (Porter, 2001).

Thirdly, is the capital requirement factor. It is evident that for any business to penetrate a new market that is already saturated with established firms, it must possess huge financial resources that it will flex in order to be in a position to compete and acquire a market share for itself (Porter, 2001).

Fourthly, is the switching costs factor that could be emanated from the operations of the business. For instance costs that are incurred by the business in attempt to retain some of its talented employees from its arch rivals in case they are poached or they are satisfied with the company’s wage policy.

Therefore, if a new entrant wants to attain its strategies, the management must be ready to incur high switching costs that are likely to accrue from the firm’s desire to succeed in convincing a buyer to switch from an already existing seller to the new firm and also to maintain its superb employees (Porter, 2001).

Lastly is the new firms’ accessibility to channels of distribution. The manufacturer of new products in a new market is at loss in his capability to secure distribution channels for his products as they have already been taken by the existing firms.

Therefore, to access the distribution channels, the new entrant has to persuade the distribution channels to drop some of the firms so that they can accommodate its products and this comes at a price.

For instance, the firm may be forced to woo the distribution channels by proposing price breaks, advertising projects that accrue high allowances among other benefits for the distributing firm. The consequential of such a sacrifice for the new entrant is reduction in the profits that are reaped from their operations (Porter, 2001).

According to Jarratt and Stiles (2010), it is prudent to conclude that the existence of entry barriers for firms into new markets translates into valuation in the attractiveness of a new venture. That is, a venture promises to be more profitable when the entry barriers are sharp and high and vice versa.

The Bargaining Power that is Possessed By the Supplier

This is another paramount force in the Porter’s Five Force Model. Rice, (2008), noted that suppliers have the power to coerce all the participants of business as they deem appropriate.

This is evident that suppliers can threaten to raise the prices of services or goods or they can trim down the quality of the goods or services. Thus, powerful suppliers have the power to decrease the profitability of industries if the industries are unable to recover the costs that they incur in the production of their goods or services.

There are some conditions that must prevail so that a supplier can be referred to as strong and they include: first the supplier group should be having few companies that are dominant in their field of operation in which their operation must be more concentrated than those of the industries that these particular suppliers sell their products to.

This arises because a supplier whose market is fragmented is most likely to exert considerable amount of influence on the buyers in terms of product prices, quality and the terms of delivery.

Secondly, powerful suppliers do not compete with substitute goods in order that they meet their sales targets. Powerful suppliers can determine to a great level the type of goods that are going to be supplied in the market and in what volumes. These suppliers must be larger than the individual buyers at all times.

Thirdly, it should be evident that the industries that the supplier sells its products are not the core customers of the supplying group. This is ascertained if each and every industry that the group sells its products to make just a small fraction of its overall list of buyers. This is evident because the smaller the fraction, the more the group is prone to exert a considerable amount of power on these buyers.

It should be noted that, if the industry forms a large portion of the suppliers’ buyers, the suppliers will not be in a position to exert any power over the industry, but on the contrary it will safeguard the relationship through rational pricing of the products and consistent lobbying for the industry and assistance in its research and design departments.

Lastly, it is notable that if the products supplied are the most crucial input material for that particular industry, then the supplier is likely to exhibit some power. This increases if the inputs are perishable and the industry cannot store them to build up its reserve stock. The above conditions guarantee the supplier power over the industries that it supplies its products to and they are not prone to any change whatsoever.

In black and white are out of the industries control. It should however be noted that if the industries have powerful buyers of their products they are in a strategic position to bargain their way out of the draconian claws of the powerful supplier.

Challenges Facing the Porter’s Five Force Model

In contribution Grundy, (2006), notes that the Porter’s Five Force Model has brained the production industry through its precise competitive strategic formulation criteria. It is notable that this model has greatly influenced the industries and governments in the developing countries.

However, it should be noted that this model has been criticized due to the shortcomings that have arisen from its implementation over the last two decades.

According to Wei Wang and Chang, (2008), the use of the Porter’s Five Force Model as a cornerstone in strategy formulation in organizations in China has not made any impact in the business practices in China.

The writer has stated that after a review had been carried out in China on the five force model it was discovered that this model was narrow, myopic and it lacked ability to come up with concise guidelines that are expected to project business growth in China in the future. This shortcoming in the use of the model in China has necessitated the adoption of new models by the Chinese business men.

An example of a model that has been adapted to replace the Porter’s Five Force Model is the Ren Shi Qian model because of its capability to incorporate all facets of the business. These include; the objective of the business, its location in the market, ability to carry out an analysis of the business climate that is prevailing and collaborative innovation that is possessed by the organization employees.

Another criticism that has been projected on the Porter’s Five Force Model is the dubious assumption that was made in the formulation of the model. The assumption stipulates there exists no relationship between suppliers, buyers and rival competitors.

According to Wei Wang and Chang (2008), it should be noted that, organizations have experienced enduring relationship that exists between the buyers, sellers and other parties. Relationship that exists between buyers and the suppliers has over the years developed and there are closer links that tie the two sectors together.

This relationship is being achieved through management improvement programs. It is evident that this has resulted in technological strides that have guaranteed better products in all consumer sections.

Summary

The information that has been relied in this chapter has dissected the Porter’s Five Force Model in which it has been ascertained that this tool of strategic management constantly monitors the trends in the technological and the societal environments in which the organizations operate.

The chapter has ascertained that harmonious operations of the business can only be achieved if the organization management constantly engages strategic management tools such as the Porter’s Model.

These tools assist the management in monitoring business sections that are volatile so as to ensure that the businesses retain the competitive edge they have over their arch rivals and to maintain their market share in case there are new entrants.

The chapter has also identified some of the ineffectiveness that have been identified in the Porter’s Model in a number of world markets such as the Chinese market. This has necessitated incorporating of better strategic formulation methods that are expected to be holistic and all inclusive in eliminating the vulgarities that are likely to affect smooth operation of the organizations.

References

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