Strategic Management Author Institution Abstract Every firm requires formulation of strategies in order to stay competitive in its industry. According to Michael Porter firms face five competitive forces namely bargaining power of suppliers, bargaining power of customers, threat of new entrants, threat of substitute products and rivalry among industry competitors…
Keywords: strategy, five forces, entrants, analysis, differentiation, Porter, focus, competitors, substitutes, buyers, suppliers, cost leadership, competitive, method, framework, bargaining, rivalry The significance of strategy formulation by firms is coping with competition. Every firm competing in an industry has either an explicit or implicit competitive strategy. Strategies may have been developed specifically through a planning process or may have developed inherently through tasks carried out by various functional departments of a firm. Each functional department implements approaches directed by its professional direction and the motivation of those in charge. Developing a competitive strategy involves developing an extensive method for how a business is going to compete in an industry, what the objectives of that business will be and what approaches will be needed to achieve those objectives. According to porter, there are five competitive forces that form every industry and every market. The five forces model analyzes the environment in which a business operates to gain competitive advantage. The five forces include the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products and services and rivalry among industry competitors. These forces drive the magnitude of competition and hence the profitability and attractiveness of an industry. Corporate strategy aims to modify these forces in a way that promotes the position of a business. Competition within an industry is more intense when new companies have easy means of entering the industry. Several barriers of entry can be implemented to limit the threat of new entrants. These barriers include loyalty to major brands, high fixed costs, and scarcity of resources, incentives for using a specific buyer, government legislation, brand equity, switching costs, patents, economies of product differences, capital requirements, access to distribution, absolute cost advantages, learning curve advantages and anticipated retaliation from incumbents. Higher entry barriers lead to higher profits. Suppliers with large enough impact to affect a company’s margins and volumes hold substantial power. Suppliers can place pressure on a business for a range of reasons. They include existence of few suppliers for a particular product, lack of substitutes, products that buyers cannot do without, supplying industries with higher profitability than buying industries, Supplier switching costs being relative to a firms switching costs, presence of substitute inputs, degree of differentiation of inputs and cost of inputs relative to the selling price of the product. Firms can reduce the power of suppliers by diversifying their range of products, standardizing products and supplying some needs from within. Buyers compete with a firm for added value in the value chain, this drives down the prices obtained by a firm. Buyers have power when there are a small number of them, they purchase in large volumes, they cannot do without the product, switching to another competitive product is simple, they are price sensitive and when their switching costs are relative to a firms switching costs. Buyers can be lesser threats when there is a threat of forward integration from the firm. They are less powerful when a product or service is ...
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