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The five-forces model of Porter is a framework used as a strategy tool to make an analysis of the value of an industry structure. It is a vital analytical tool developed by Michael E. Porter of Harvard Business School in 1979. It captures the key elements of industry competition.2
2. The five-forces model of competition
A business can face competition that comes from rivalry businesses producing and selling similar products to the same market. A competitive environment can be a fierce and even cutthroat environment, or even governed by unwritten rules, what we call "gentlemen's agreements," which help the industry to steer clear of the damage that excessive price-cutting, advertising and promotion expenses can have on the business' profits.
To gain a better understanding and knowledge of a business's industry and competitive market, managers should focus more on the task at hand rather than gathering all the information they can get and waste a lot of their time digesting it. Managers can use some well-defined concepts and analytical tools to think strategically about the company's competitive environment. One way of analysing and understanding the nature of this competitive environment is using Porter's five-forces model. The five forces are:
Substitute products of services
Rivalry among competing businesses
Bargaining power of buyers
Potential New Entrants
Bargaining power of suppliers2.1 Substitute products of services
Competitive pressures that come from companies outside the industry trying to win buyers over to their products.
Competitive pressures from substitutes are stronger when:
Good substitutes are readily available.
Switching to substitutes has low costs on end users.
Substitute products are attractively priced, attracting buyers over to buy their products.
Substitutes have comparable or better performance features than the current business.
Constant usage of substitutes has become a habit for the end users growing more comfortable each time.
Competitive pressures from substitutes are weaker when:
Good substitutes are unavailable or non-existent.
Switching to substitutes has high costs on end users.
Substitutes are not as good in performance or are at a higher price compared to the current business.
2.2 Bargaining power of suppliers
Competitive pressures that stem from supplier bargaining power and collaboration between the supplier and seller.
Supplier bargaining power is stronger when:
Businesses switching their purchases to alternative suppliers may incur higher costs.
Needed inputs are in short supply, which gives suppliers more leverage in setting prices.
The suppliers' products are a valuable or critical part of the sellers' production process.
Products required are available with only a few suppliers.
Some suppliers threaten to integrate forward into the business of industry members and perhaps become a powerful rival.
Supplier bargaining power is weaker when:
The item being supplied is a commodity that is available from many suppliers.
Seller switching costs to alternative suppliers are low.
Good substitute inputs exist or new ones emerge.
There is a surge in the availability of suppliers thus greatly weakening supplier's pricing power.
Seller collaboration with selected suppliers provides beneficial opportunities.
Industry members are a threat to integrate backward into the business of suppliers and to self-manufacture their own requirements.
2.3 Rivalry among competing businesses
Competitive pressures created by jockeying for better market position, increased sales and market share, and competitive advantage.
Rivalry is stronger when:
Buyer demand is low.
Buyer demand falls off and businesses find themselves with excess capacity and/or inventory.
The number of rivals increase and rivals are roughly equal size and competitive capability.
The products of rival businesses are commodities or else weakly differentiated.
Costs in switching brands for buyer are low.
Rivals make aggressive moves to attract more customers.
Outsiders have recently acquired weak competitors and are trying to turn them into major contenders.4
Rivals have rigid strategies.
Rivals are fighting over for the same market.
Rivalry is weaker when:
Industry members move only infrequently or in a non-aggressive manner to draw sales and market share away from rivals.4
Buyer demand is high.
The products of rival businesses are strongly differentiated and customer loyalty is high.4
Costs in switching brands for buyer are high.
A rival's actions have little direct impact on the current business because of an already saturated market.
2.4 Bargaining power of buyers
Competitive pressures that stem from buyer bargaining power and collaboration between the buyer and seller.
Buyer bargaining power is stronger when:
Buyers' usage of competing brands or substitutes is low.
Bulk purchases are vital to the success of a business. Buyers can demand for discounts when purchasing in large quantities.
Buyer demand is weak or declining.
There are only a few buyers.
Buyers have the ability to postpone purchases until later if they do not like the present deals being offered by sellers.
Some buyers are a threat to integrate backward into the business of sellers and become an important competitor.
Buyer bargaining power is weaker when:
Buyers purchase the item infrequently or in small quantities.
Costs in switching brands for buyer are high.
There is a surge in buyer demand that creates a "sellers' market".
A seller's brand reputation is important to a buyer.
A specific supplier's product delivers better performance or higher quality that is important to the buyer, and no other brands can match it.
Buyer collaboration or partnering with selected sellers provides beneficial opportunities.
2.5 Potential new entrants
Competitive pressures that come from the threat of new entrants (rivals).
Entry threats are stronger when:
The number of new entrants is large.
New entrants are formidable market contenders because of their resources available to them.
Lower requirements / barriers for new entrants.
Buyer demand is high.
When existing industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence.4
Newcomers can expect to earn attractive profits.
Businesses are unable to strongly contest with the entry of newcomers.
Entry threats are weaker when:
The number of new entrants is small.
Existing competitors are struggling to earn healthy profits.4
The industry's outlook is risky or uncertain.4
Buyer demand is low.
Businesses will strongly contest with the new entrants to gain a market stronghold.
Higher requirements / barriers for new entrants.
2.6 Usage of the five-forces model
How to use the five-forces model to determine the nature and strength of competitive pressures in a given industry is to build the image of competition in three steps:
Step 1: To identify the competitive pressures in relation with each of the forces.
Step 2: To evaluate how strong the pressures of each of the forces are.
Step 3: To determine whether the collective strength of the forces is conducive to earning profits.
3. Case study - MOS Burger
For this task, I have decided to choose a fast food outlet such as MOS Burger, as a case study to determine the nature and strength of its competitive pressures in Singapore's food industry.
A) Threats of new entrants Â
In Singapore, threats of new entrants are rather high as there are little differences with the products among the competitors and the cost to enter the market is low. Since Singapore employs workers from regional areas mainly from the Philippines, Malaysia, Indonesia and China, labour is available in abundance.
MOS Burger is a fast-food restaurant chain (fast-casual) that originated in Japan. It is now the second-largest fast-food franchise in Japan after McDonald's, and owns numerous overseas outlets over East Asia, including Taiwan, Singapore, Hong Kong, Thailand and Indonesia.5 In Singapore, it is a recognised fast food organisation locally but as for western foreigners, they may still choose to eat at McDonald's. Stiff competition will come from the large established chain restaurants rather than from small independent newcomer.
B) Bargaining power of buyers
Consumers in Singapore have a variety of fast food restaurant choices that they can choose from, so they do have some bargaining power. However, type of food and location of the premises may reduce this bargaining power. The problem with most fast food restaurants including MOS Burger is that most of the consumer purchase in small quantities at low and affordable prices. Therefore, it would be necessary to appeal to a large crowd of people in order to be profitable, and as a result, MOS Burger outlets may not likely do well in remote areas but is doing well in high traffic flow areas such as in shopping malls.
As consumers would not have the same equipment and food supply used by MOS Burger, it would be difficult for consumers to replicate the same meal at home, in addition to the same atmosphere that attracts them.
C) Bargaining power of suppliers
Bargaining power of suppliers within Singapore would be small, unless the main ingredient of the product is not available or non-existent. For example, the MOS Rice Burger uses a bun made of rice mixed with barley and millet.5
D) Threats of substitutes
This could range from competitive rivals to family restaurants to home cooked meals. MOS Burger is known for using uniquely Japanese sauces, flavours and fresh vegetables in its meals which is hard for any person or organisation to duplicate.
E) Rivalry among existing competitors
Singapore is already saturated with many fast food outlets and large established chain restaurants with strong brand identities such as McDonald's, Pizza Hut, Burger King and KFC. However, to stand apart, it would be advisable for new entrants to focus on product differentiation; making their product and services unique and different from others. Fortunately, MOS Burger's products are slightly different from the other average burgers. Eating at MOS Burger can be a different experience. Most MOS Burgers prepare the food al carte. The burgers are prepared only after receiving an ordered and customers may have wait 10 - 15 minutes.
Besides offering the standard type of hamburgers on the menu, MOS Burger also offers burgers that are unique and cannot be found at Burger King, McDonald's or other fast food restaurants in Singapore. One of these unique burgers is called the Rice Burger, which replaces the typical bun with two flat round rice patties made of rice with millet and barley. The Rice Burgers may be hard and messy to hold with your bare hands, however, most people in Singapore tend to hold burgers using the wrappers. Other offerings include the "Kinpira" rice burger, made with root vegetables that are sauteed with soy sauce and other flavourings. The "Ros Katsu" burger is made with deep fried pork cutlet (tonkatsu) served with a sweet barbecue-like sauce and cabbage.
The MOS Burger menu is not limited to burger type items. They also offer chicken nuggets, fried chicken, plain hot dogs and chilli dogs. Just like their competitor, McDonald's, MOS Burger also have set meals and special items that may be offered on special occasions. Side menu items include French fries, salads and onion rings. The kid's menus will include a small sized hamburger or rice burger with French fries on the side and an orange juice.
MOS Burger desserts include milkshakes, frozen cake bars and parfait type desserts; all made with Japanese style ingredients. The drink items offered include soft drinks, the various type of coffee/tea (hot or cold), orange juice, white grape soda, melon soda and iced cocoa.
The giants of the fast food industry like Burger King, McDonald's, Pizza Hut, KFC could impact how successful the business could be by having marketing campaigns to eliminate their competition.
4. Other theories and concepts
There are many other concepts and theories that could be used together with the five-forces of Porter to accurately analyse and evaluate factors (mainly external) that have an influence on the success of the business.
4.1 SWOT analysis
It is used in strategic planning, a method used to evaluate the Strengths, Weaknesses, Opportunities and Threats in a business venture. The SWOT analysis provides information that is useful to managers in matching the organisation's capabilities and resources to the competitive environment in which it operates.
Internal Analysis External Analysis
An organisation's strengths are its resources and capabilities. It can be used as a basis for developing a competitive advantage. For example, each of the following may be considered strengths:
Recognised brand names;
Low operating costs; and
Favourable access to distribution channels.
The lack of certain strengths can be seen as a weakness. Examples of such weaknesses include:
Not the sole-owner of the product;
A weak/unrecognised brand name;
High operating costs; and
Lack of access to distribution networks.
The external environmental analysis could show new opportunities for expansion and profits. For example, each of the following may be considered opportunities:
A customer need not being catered for;
The development of new technologies or improvements;
Removal of international trade barriers.
Changes in the external environmental may present threats to the organisation. Examples of such threats include:
Changes in trend which causes consumer tastes to shift;
The availability of substitute products;
Implementation of new regulations; and
Increased of international trade barriers.
4.2 PESTEL analysis
PESTEL is derived from Political, Economic, Social, Technological, Environmental and Legal factors. A PESTEL analysis is a business measurement tool, looking at factors external to the organisation. It is often used within a strategic SWOT analysis.
It is a vital strategic tool for determining and understanding:
The position of the business;
Potential market growth or market decline; and
The PESTEL analysis is often used to find out where an organization or product is in the context of what is happening outside that will at some point effect what is happening inside an organisation.D
4.2.1 Political factors
Political factors are how a government encourage or hinder growth in the economy and to what degree. Some examples of political factors include:
Restrictions on trade;
Political factors may also include services and goods which the government wants to provide and those that the government does not want to provide. In addition, governments have influence on a nation's education, employment, health, security and infrastructure.
4.2.2 Economic factors
Each of the following may be considered economic factors:
Economic growth (GDP /GNP);
Recessions / depressions;
Exchange rates; and
Inflation / deflation.
These factors have large impacts on how organisations run and make decisions. For example, exchange rates affect the costs of exported goods and affect the prices of imported goods.
4.2.3 Social factors
Examples of social factors include:
Population growth rate;
Age distribution; and
Trends in social factors affect how an organisation operates and the demand for its products. For instance, an aging population such as in Singapore may imply a smaller and less-willing workforce, therefore, employing foreign workers to meet the needs of the people (both local and foreign) and the escalating growth of the country.
4.2.4 Technological factors
Each of the following may be considered technological factors:
Computer software and systems;
Improvements in production methods; and
The rate of technological change.
They can affect efficiency, quality and costs in production and as well as lead to innovation.
4.2.5 Environmental factors
Environmental factors include ecological and environmental aspects:
Conservation / preservation;
Growing awareness of the potential impacts of climate change is affecting how companies are run and the products they offer. Creating new markets (eg. "green" tourists) and reducing or destroying existing ones.
4.2.6 Legal factors
Some examples of legal factors include:
Consumer protection laws;
Employment laws; and
Health and safety regulations.
These factors may affect how an organisation is operated, its costs and the demand for its products.
Strategic planning is an organisation's process of defining its direction, strategy and decision-making based on internal and as well as external environment, allocating its resources to pursue this strategy, including its capital and people. Besides the five-forces model, SWOT analysis and the PESTEL analysis, there are numerous business-analysis models that may assist a person in thinking more strategically about their business.