Porters Six Forces on Business - Research Paper Example

Porter’s Six Forces on Business Introduction All organisational strategy developed should include a proper comprehension of the external environmentthat the business is operating in. The two most commonly used tools that can facilitate this are Porter’s Five Forces and the PESTLE Analysis (Ceccagnoli, 2009:85). While PESTLE facilitates an understanding of the macro-environment, Porter’s Five Forces enables organisations to gain an excellent understanding of their rivals and the effects they can have on their operations (Conley & Galeson, 1998:470). In essence, knowing the macro-environment paints just half of the picture. Porter’s Five Forces, combined with PESTLE, are highly effective when applied correctly. In this paper, Porter’s Five Forces will be applied to a food retail business that involves taking customised orders from clients and delivering the orders. The food is fresh, healthy, and organic. Competition Rivalry One of routes to success for this business is its ability to understand its rivals’ actions and marketing techniques. The extent to which competition exists among rivals varies between sectors and the market sectors in them. The food industry, and specifically the retail segment, is very competitive (Mollona, 2010:27). Considering that this business is in the food retail sector, it must recognise the presence of and extent of competition in the industry. There are a lot of companies and their products are tailored to outmatch each other (Wetherley & Otter, 2011:37). As a result, this business must know what it faces and might face in its operations. Failure to do this will probably contribute to its downfall before the six-month window closes. However, regardless of the number of rivals this business faces it is important for its durability that it understands the differences between its competitors. This information is vital when designing its strategy and it cannot be accomplished by simply employing two indices, e.g. the company size and market share, or sales income and market capitalisation (French, 2009:12). The business should use two indices to gauge its competitive edge and those of its competitors: HHI (Herfindahl-Hirschman Index) This is more sophisticated than the CRx. It measures the size of firms in relation to the sector and shows the level of competition amongst these firms (Boone, 2012:39). The HHI also provides more weighting to large firms. CRx (Concentration Ratio) This gauges the overall output in the industry by the specific number of firms present. It shows the degree of market control of the largest companies in the industry (Hulsmann & Fornahl, 2013:75). This business also needs to understand the factors that affect competitive rivalry so that it can navigate its way through the industry (Warner, 2010:52). These factors include: storage costs; switching costs; number of firms; rate of market growth; exit barriers; and product differentiation levels. The better it understands these factors the readier it is to face the industry. Threat of New Entrants The number of possible entrants into the food retail industry varies considerably and is a crucial factor the business should quantify. Sectors that demand high levels of expertise and investment are more challenging for new firms to break into and disturb the existing status quo. This protects the profitability of the existing firms (Hill & Jones, 2013:32). The food industry has a large technology base, great brand awareness and loyalty, and is a market in which the distribution networks are not accessible to all sizes of firms. This means that this business will find it very challenging for new competitors to enter its market, and should therefore make the most of its opportunities (Dess, 2012:44). Threat of Substitutes Substitutes are products or services that satisfy a specific customer’s needs but can be found in another market. Substitutes are from other industries and provide benefits to clients that are similar to those of the main product in the industry (Roy, 2009:19). The food retail industry has a lot of substitutes. For instance, the organic food market that this business operates in has a lot of good substitutes from other sectors. The threat is therefore very real. It will impact the competitive environment for the business and influence its ability to hit profitability because consumers can choose to buy processed food instead of ordering ready-made meals from the business (Treyer, 2009:358). This can be a major problem because it limits suppliers’ ability to increase prices, even though this may be to the advantage of all of them. Bargaining Power of Suppliers This business needs raw materials in order to operate. For instance, it buys food from suppliers and then cooks it to meet customers’ orders. This develops a buyer-seller relationship between the business and its suppliers (Magretta, 2012:22). Power distribution within this relationship will vary, but if it rests with the suppliers then they can use it to control prices and availability. The business should evaluate the balance of power in its market in line with this threat. The business can also implement a strategy of backward integration. This, when combined with access to many other suppliers, is key to the survival of the business. Bargaining Power of Customers Based on the information provided, the firm’s customers will have the bargaining power because the business is customer-centred. If this is true, the business should evaluate the degree to which its clients hold the chips (Nair, 2009:28). The customers can adopt a strong position and bring great pressure to the business by demanding better quality and lower prices. The business can check this great bargaining power by significantly diversifying its product range. This will have the effect of customers spending more time deciding between the food options on offer (Bowden, 2011:59). Regulation Regulations will greatly affect the ability of this business to successfully operate and achieve profitability. Regulations have the unwanted effect of slowing down progress by providing bottlenecks at each step of the way (Pereira, 2013:45). One area in which regulation may affect this particular business is the laws involved in the food retail industry, especially those associated with food preparation. Most countries have very strict policies governing food retail because of health concerns and safety. A lot of permits and licenses are required to operate, and the rules are very strict. Any violations result in very heavy penalties that will affect the firm’s profitability, ease of operation, and progress. This may eventually put the company out of business because it is too involving. An example is the food truck business which is profitable but has too many challenges in terms of regulation (Williams, 2009:47). Many entrepreneurs avoid this investment because the obstacles are eventually not worth it. References Boone, L.E. (2012) Contemporary marketing, 2013 update, Cengage Learning, S.L. Bowden, R. (2011) Food industry, Rosen Central, New York. Ceccagnoli, M. (2009) ‘Appropriability, pre-emption, and firm performance,’ Strategic Management Journal, vol. 30, no. 1, pp. 81-98. Conley, T.G. & Galeson, D.W. (1998) Nativity and wealth in mid-nineteenth century cities, Journal of Economic History, vol. 58, no. 2, pp. 468-493. Dess, G.G. (2012) Strategic management: text and cases (6th ed.), McGraw-Hill/Irwin, New York. French, S. (2009) ‘Critiquing the language of strategic management,’ Journal of Management Development, vol. 28, no. 1, pp. 6-17. Hill, C.W., & Jones, G.R. (2013) Strategic management: an integrated approach (10th ed.), South-Western, Cengage Learning, Mason, OH. Hulsmann, M., & Fornahl, D. (2013) Evolutionary paths towards the mobility patterns of the future, Springer, Dordrecht. Magretta, J. (2012) Understanding Michael Porter: the essential guide to competition and strategy, Harvard Business Review Press, Boston, Mass. Mollona, E. (2010) Computational analysis of firms organisation and strategic behaviour, Routledge, New York. Nair, S.R. (2009) Retail management (Rev. ed.), Himalaya Publishing House, Mumbai. Pereira, A.C. (2013) Porters five forces, Grin Verlag, S.L. Roy, D. (2009) Strategic foresight and Porters five forces: towards a synthesis, GRIN, Munchen. Treyer, S. (2009) ‘Changing perspectives on foresight and strategy: from foresight project management to the management of change in collective strategic elaboration processes,’ Technology Analysis & Strategic Management, vol. 21, no. 3, pp. 353-362. Warner, A.G. (2010) Strategic analysis and choice a structured approach, Business Expert Press, New York. Wetherly, P., & Otter, D. (2011) The business environment themes and issues, (2nd ed.), OUP Oxford, Oxford. Williams, K. (2009) Strategic management, DK Publications, New York. Read More