The Five Forces That Shape Industry Competition

Also known as Porter's Five Forces, the Five Forces that Shape Industry Competition is a business strategy development method created by Michael E Porter in 1979 at the Harvard Business School. This is yet another tool to help the business owner understand where his strengths lie within an industry and how to find for himself/herself, a comfortable niche within the industry where the external factors affecting him/her are least disruptive.

Each force is gauged to be either highly competitively, moderately competitive or lowly competitive to arrive at an overall level of competitive rivalry within the industry. The first of the forces is Supplier Power. Here we assess how much bargaining power, the suppliers of the raw materials or machinery have within the industry. Their ability to hike up the prices, their control or strength over the business owner and how much choice between suppliers there is for a business owner. In the airline industry, Bargaining power of the supplier is high as there are only two major suppliers.

The second opposing force is the Buyer Power. Here we assess how much clout the collective or individual buyer has over a company in an industry. The switching costs to another provider and the number of buyers are both factors to be considered. Again, in the airline industry, the buyer has low switching costs and therefore high bargaining power.

Competitive Rivalry is the number and capability of a business' competitors. The strength of competition is determined by the similarity of products within a market and how exclusive the services a company offers are. The competitive rivalry in the Airline industry is high as there are many airlines all offering the exact same service.

If there are other methods available outside of a specific industry for customers to achieve the same ends, then the Threat of substitution is said to be high. If substitutes are viable and readily available then the strength a company occupies within an industry is low 

Threat of New Entry also affects the potential strength that a company has within an industry. If it is easy for prospective business owners to enter the industry in which a company operates, then the exclusive power of that company is said to be low and threat of a new entry is high. We will now look at how these factors affect the technology industry and Google Inc. in particular.

Please play the following presentation:



Google analysis partially quoted & referenced from
http://utsavmahendra.blogspot.co.uk/2012/03/google-porters-five-force-model.html

SWOT for potential coffee business

Before starting a business it is imperative to see the factors which influence its success. The SWOT analysis serves as an important tool to deduce how lucrative a business is and what changes can be made to improve its profitability and future growth.

Conducting a SWOT analysis can help businesses uncover opportunities which are easily exploitable and determine the threats it faces so they become avoidable. These are the externalities of a SWOT analysis. The SWOT analysis also helps a business realise its strengths which it can use to exploit opportunities and its weaknesses which it can come to terms with and change to strengths. 

Sample of an independent coffee store.

Strengths

A Skilled Barista

• The independent coffee industry is booming. 
• Loyal customers
• Highly personalised service
• Skilled service compared to big brands
• Quality coffee 
• Comfortable, character filled environment

Weaknesses

Coffee shop closed due to rising costs

• Customers spend less on each individual purchase.
• High start-up costs
• High rents
• More susceptible to market fluctuations
• Competition with brands that have achieved economies of scale.
• Less capital for marketing and attracting foot fall.

Opportunities

Local drive against big corporations

• Aging population allows for different target groups
• Internet. One of the largest opportunities available to the coffee industry is the advent of the internet which serves as a resource through which new startups can source their raw material and sell to a larger market. 
• Automatic coffee machines and standardised coffee have deskilled and de personalised the labour force of large brands. 

Threats

Three of the largest UK Coffee Chains

• Very stiff competition from big brands.
• The threats faced by some new startups in the coffee industry are the high set up costs.
• Economic irregularity
• Startups survive on average for under two years
• Need a safety net for initial period while forming consumer base
• The opening up of a large brand coffee store in the same neighbourhood

Globalization as a force concerning business

Globalization, in this context, refers to the expansion of businesses from domestic to international markets. Due to this expansion their access to resources, good and services reach a wider geographical area which makes the businesses susceptible to conditions outside the home countries. Some factors contributing to businesses to go global are:

• Increase in expansion of technology

• Increasing consumer pressures

• Potential for growth

• Development of services that promote global integration

• Liberalization of trade policies

• Increase in global pressures to expand

• Changing political situations

Recent events in history which allowed for globalization to take place is the collapse of the soviet union in 1991, opening up and relaxation of trade restriction by China, rapid development and access of Internet and the rise of India and Brazil after 2000 which became centres of cheap R&D and economic development.

Companies opt for different ways to go global depending on their specific needs. These prove to be successful for some while disastrous for others. 'Going Global' can be divided into two methods, internal and external. The Internal methods of globalization allow for companies to retain methods of production and distribution. A company can export their goods directly to other countries, as does apple, since they moved their production back to the US. Another internal method of going global is Direct investment, this allows companies to keep a centralised chain of command and retain control over distribution lines and production. Tesco attempted this method in the US but did not achieve success. E-commerce is yet another way a company can go global via the Internet. Companies like Amazon have access to international market yet they have no physical presence outside of the US. Businesses can market their products on websites to be purchased from anywhere in the world.

Companies or businesses go global by expanding their branches to different countries, off shoring, outsourcing and e-commerce. Off shoring refers to getting work done in a different country to leverage cost advantages such as in the case of Apple products being manufactured in China. Outsourcing refers to a company contracting a business process to a 3rd party such as a US company hiring an independently operated call centre in Pakistan to handle telephone customer service.

Other external methods for going global include, Joint venture or strategic alliances. This allows a company to utilise the experiences and expertise of local producers and sellers. Tesco is now attempting this strategy in China as they have learnt from experience. In the recent past, Franchising has proved to be a sure shot method of having a global reach for a company. McDonald's has become a trans-global corporation due to the thousand of franchises it has across the globe. It maintains the quality of its brand and product but outsources the rest. Companies like Google, Facebook and Microsoft have achieved global dominance by acquiring other companies like Motorola, Whatsapp and Nokia respectively. Hence, mergers and acquisitions are also a useful way for a large company to exert its dominance globally.

Hurdles in the way of Globalization can be numerous. Tariffs applied by certain trading blocks or countries. Hostility by nations whose sovereignty is being threatened. Quotas on certain goods, especially luxury items and automobiles. High duties and corrupt officials. Subsidies for local producers to encourage economic growth can also put global companies at a disadvantage. Embargoes and sanctions applied by the United Nations on conflict regions.

Globalization has been a force for change and development the world over but with these large strides in technology, education and development come some negative impacts as well. Globalization has come under criticism by anti-globalization forces which contend that it has far reaching negative implications for the host country. By allowing international companies to set the economic and often the political agenda, critics argue that the nation state becomes irrelevant. The economic divide between segments of the society that benefit from this sporadic development and those who do not is increasingly widening. A loss of culture and westernization is experience by countries in the Global south where most large corporations outsource their labour. 

Ansoff's Matrix

Ansoff’s Matrix is a tool that helps organizations to determine what practical plan to adopt to achieve the specific goals that they have in mind. The Ansoff Matrix was first introduced in 1957 in the Harvard Business Review by a Russian American called Igor Ansoff, and has since helped countless businesspeople narrow down their options for successful future strategies. The Matrix or Market Expansion Grid (otherwise known), by providing four major ways in which businesses can grow, is a simple way of pondering company escalation.

The Matrix in its essence shows us the risks involved in moving from one quadrant to another.  The top left quadrant relates to a growth within an existing market using existing products, hence, we call this strategy Market Penetration. Out of the four possible options it has the lowest risk associated with it. Market penetration involves selling more of the same products within an existing market. This can be done by increasing advertising, introducing Loyalty Schemes, changing pricing or bringing in special offer promotions, increasing sales team and by acquiring a competitor. E.g. if a coffee seller like Starbucks wants to increase its market share, it will adopt market penetration activities as a safe method for growth.    

  

Moving a quadrant in the y-axis to new markets but existing products is a moderately risky option. This strategy within the matrix is referred to as Market Development. New markets can be found by moving to new geographical areas or by using the internet as a resource. Market research and further segmentation of markets can help identify new customer bases. E.g. Tommy Hilfiger can access a new market by targeting an older age demographic by changing advertising tactics.

Another moderately risky option is, Product development. This move in the x-axis of the matrix refers to the development of a new product for an existing market. A company may choose to do this if it senses the need of existing customers for a new product which the company can reasonably provide. Product development can be achieved by either extending the existing product or offering variations of it. Furthermore, related products can be developed which compliment already existing products. Improvement in customer service and human resource can also be regarded as product development. E.g. the introduction by Apple Inc. Of iTunes was product development within an existing market. This has massively helped them provide a complimentary service to existing customers.

The final and most risky move within the Ansoff Matrix is that of Diversification. By diversifying, a company is exposing itself to two levels of risk; the first of entering a totally new market and the second of developing a new product for this market. Existing expertise cannot be used and there is little chance of achieving economies of scale. However, by diversifying, a company is no longer susceptible to complete disaster if one venture were to fail and if successful the profits generated would also be double.  A good example of diversification is Virgin Group, which moved from music production to travel and mobile phones successfully. 

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