Table of Contents
Interest in the study of the forces that impact an organization has continued to rise, particularly those that have shown to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were all based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector.
As Porter's five forces analysis deals with factors outside an organization that influence the nature of competition within it, the forces inside the organization (microenvironment) that influence the way in which organizations compete, and so the organization's likely profitability is conducted in porters five force model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, illustrating that the competitive environment is created by the interaction of the five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, buyer's power and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.
Porter's five forces analysis:
The original competitive forces model identified the five forces which would impact on an organization's behavior in a competitive market. These include the following;
-The rivalry between the existing sellers in the market place.
-The power exerted by the customers in the market place.
-The impact of the suppliers on the sellers.
-The threat of potential entrants in the market
-The threat of substitute products becoming available in the market
Understanding each of these forces nature gives organizations the necessary procedures to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998). Thus the following diagram illustrates the porter's five forces as noted in the market.
Five forces analysis of an industry:
In the illustration above all the arrows point inwards denoting influence or power, thus if an industry looked like this competitive rivalry would be very fierce and profit streams would emerge low.
Force one: The Threat from Potential entrants
Average industry's profitability is influenced by both potential and existing customer. It's usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. (Porter, 1980b; Sanderson, 1998) .The most common forms of entry barriers are as follows, Economies of scale e.g. the benefits associated with bulk purchasing, Government action e.g. the introduction of new laws, Distribution channels e.g. ease of access for competitors, Capital requirements and product differentiation.
Force two: The Threat of Substitutes
The threat that this force poses to an industry's profitability largely depends on the relative price-to-performance ratios of the different types of services or products to which customers can turn to satisfy the same basic need.
Force three and four: The Power of Buyers and Suppliers
Both buyers and suppliers can influence profit margins by exercising their power. The more power they have, the lower margins there are likely to be, thus it's important to measure their respective power and if (and how) that influence may change. Thus buyer's power is likely to be high when purchases represent a substantial proportion of total sales by the producer. For example Marks & Spencer effectively 'tie' their suppliers by taking most of what they (the supplier) produce ,thus switching costs are low, engage in vertical integration if prices are too high and if entry barriers are low the buyer turns into a producer.
Force five: The threat of competitive rivalry.
Rivalry is the most obvious of the five forces in an industry; it helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. Rivalry, while important, is only one of several forces that determine industry attractiveness. This force is located at the centre of the diagram and is most likely to be high in those industries where there are threats of substitute products and existing power of suppliers and buyers in the market.
A company therefore will take fair advantage of its strengths, improve its weaknesses and avoid taking wrong steps, with a clear understanding of where power lies. Thus it is important to understand the situation and to look at each of the forces individually in order to apply this planning tool effectively.
Any company if it is to be successful in achieving its objectives and in establishing appropriate marketing strategies then it must seek first to understand the nature of its competitive environment. If a company is in a full position to understand fully the nature of the Porter's five forces, and thus appreciate the most important, it will be in a stronger position to defend itself against any threats and largely influence the forces with its strategies. The situation is fluid, and the nature and relative power of the forces will change. Consequently, contributing greatly to the company's SWOT analysis.
An evaluation of an organization's strength and weaknesses in relation to environmental opportunities and threats is generally referred to as SWOT analysis. Thus it is an extremely useful tool for understanding and decision-making for all sorts of situations in business and organizations and hence it is an acronym for Strengths, Weaknesses, Opportunities and Threats. Its main objective is to measure a business unit, a proposition or idea.
These determine an organization's strong points hence should be from both internal and external customers. If it gives the firm a comparative advantage in the market place then it is definitely a distinctive competence. Strengths arise from the resources and competencies available to the firm.
Determine largely an organization's weaknesses. This should be not only from the organizations own point of view, but also moreover importantly, from those of the customers. It is best for an organization to acknowledge its weaknesses which may seem difficult however, but it is positive to handle this bitter reality for its own good.
They are basically the marketplaces but also can be found everywhere, such as the changes in technology, government policy and social patterns. An opportunity is a major situation in a firm's environment. Key trends are one source of opportunities. Overlooked market segment identification, regulatory circumstances or changes in competitive circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm.
They are the most unthinkable, despite the fact that they are external factors that are out of our control, we still have to face them for example, the recent economic slump in Japan. Hence it is vital to be prepared and face threats even during turbulent times. Threat can be said to be a major unfavorable situation in a firm's environment. They are key impediments to the firm's current or desired position. The entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, and new or revised regulations could represent threats to a firm's success.
Thus it is always essential to note that the internal factors are always within and under the control of an organization such as finance, operations, marketing and other areas. On the other hand, external factors are out of the organization's control, such as political and economic factors, technology, competition, and other areas.
A successfully conducted SWOT analysis involves identifying the things an organization does particularly well (strengths) or bad (weaknesses) at present .The factors that in the future may give the potential to grow and increase its profits (opportunities) or may make its position weaker (threats). Opportunities and threats are experienced from changes in the environment, and at times can have their origin inside the organization - for example, if key machinery or people, functioning very effectively at present, are likely to break down or retire in a few years' time, that is a threat. Under a marketing perspective in SWOT analysis - a factor can be strength or a weakness, but not both.
Illustration: - a firm's IT system may deliver perfect management reports but poor production control information. This cannot be put down as both strength and a weakness as they partially cancel each other out, managers therefore have only two choices: either they upgrade the system or they do not (Mintzberg, 1990). Hence therefore you need to come to a definite and concrete answer to the question: On balance, is the IT system a strength or a weakness? Perhaps the lack of good production information is important, in which case the system needs to be upgraded. Perhaps it is vital to maintain the flow of management information, in which case the system should not be touched (Thompson, 2002). SWOT analysis then aims to differentiate factors from being bad or good for the company's performance.
SWOT analysis thus has among many managers been a framework of choice for a long time simply because of a perfect sound strategy formulation - matching a firm's opportunities and threats with its strengths and weaknesses. For SWOT analysis to be effective accurate internal analysis that consists of the identification of specific strengths and weaknesses around which sound strategy can be built, should be observed and followed.