Porter’s five forces is a framework developed by Michael E. Porter that we use to analyse the industry regarding the internal and external environment, competitors, and also better understand the industry context in which the firm operates.
The aim of the five forces is to modify the strategy or just some rules in the firm favour in order to stay competitive, improve the position, and realize profit.
Porter’s five forces is a very useful tool, since it helps us to understand the current position of the firm, and take advantages from the strengths of competition and also improve the weaknesses, and avoid taking a wrong strategy to do not stack in the middle, and lose position in the market.
This framework is used to identify whether a product, service, business will be profitable, and also know the suppliers; power of buyers, substitutes, new entrants and competitors that will face the firm in order to stay attractive.
Now we will see each force in more detail:
Rivalry: this force shows the competition between existing firms that offer the same product or service, and even have the same strategy. If there is many competitors, then you should have a little power over them by adopting a strategy that may be based on price, quality, innovation, advertisement, like differentiation, cost leadership, or the focus on a narrow segment.
Threats of new entrants: new firms entering the industry will bring new competition, in order to gain the market, and decrease profitability for existing firms, above all those firms who have little protection and barriers to entry, then expecting some firms to exit the market.
Threats of substitutes: the ability of customers to find other alternative ways and products with lower prices and better quality that must satisfy the same needs. There is a product for product substitute, substitute needs and also generic substitute that relates to something that people can do without.
Buyers bargaining power: determines the ability of buyers to impose pressure on the firm either by switching to another company or having other substitutes, or cutting down prices. They can also affect the conditions under which all the firms operate.
Suppliers bargaining power: determines the ability of suppliers to drive up prices which put pressure on firms if there is a few number of suppliers, or by the uniqueness of their products and the control they have over firms.
By analysing and understanding each force, and how it affects the strategy of the firm, it provides the opportunity to identify the strengths of the firm and the ability to modify some points of the strategy to make sustainable profits, and being successful in achieving and establishing appropriate strategies.
Porter’s five forces on Honda Motors:
Rivalry: competition in the automobile industries is very high, because there are many firms in this industry which offer many choices for the customers, so each firm try to do its best to make more profit than others, and make its products the more sellable in the market.
Toyota, Ford, General Motors are the main competitors of Honda, so it should keep on innovating, improving, researching, and developing to stay effective in this sector.
“The degree of rivalry in the automotive industry is further heightened by high fixed cost associated with manufacturing cars and trucks and the low switching cost for consumers when buying different marks and models”
Threats of substitutes: there is not a huge threat of substitute in the automobile industry that offers utility, independence and no wasting time, even if there is a large number of transportation. There are bicycles, subways, buses, trains and airplanes that could make our life easier, but that can be less convenience than automobiles. The price of fuel have a large effect on the consumer’s decision to buy vehicles, also the maintenance and the insurance of the car, but the automobile still has an important use in our personal and daily life.
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Barriers to entry: it is not easy for an entrant to enter into the automobile industry easily, because of the brand loyalty of the consumers. It is substantial for established companies to have barriers to entry to protect themselves, because some companies are entering into foreign markets by buying an existing company or either merging with it and then realising a huge profit. With local knowledge and expertise, companies have the potential to compete in the market in which they operate against the domestic firms.
“Honda took the risk of entering into a long and complex relationship during the 80s with a European company universally considered to be one of the least capable automobile manufacturers in the west “British Leyland”.
Source: the case study of Honda
Buyers bargaining power: consumers have many choices and brands, but the factors that affect more the consumer to buy a certain brand from another are: the appearance, quality, price, design. Consumers want always something new and nice looking with the latest technologies. The car had to be efficient, by saving fuel, protecting the environment, and running fast.
Since there are lot of competitors, people have more choices to select the less costly, and better in quality, for being loyal to a certain brand, that’s why Honda tries to make its cars unique.
“Honda has a history of delivering high quality and fuel efficient vehicles, so the consumers are seeking the best product for a good price. Honda has being a leader in producing fuel efficient and low emissions vehicles”
“Honda’s achievements on the technology front are well recognised, ranging from its cutting edge low pollution and low fuel consumption engine technologies. The CVCC engine attempts to reduce emission of the pollution and with less fuel used, while VTEC engines was fuel economy with more power”
Source: the case study of Honda
Suppliers bargaining power: there are many suppliers in the automobile industry, and “many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decides to switch the supplier, it could be devastating to the previous supplier business. As a result, suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold very little power.”
Honda relies on some main suppliers for the items and raw materials that uses in the manufacture of its products.
“Honda has only a handful of components makers that might be considered to belong to its supplier’s family.”
Source: case study of Honda
Porter’s Value Chain
The value chain is a framework developed by Porter to describe the development of competitive advantage and the value of the business. It is a chain of activities for a firm operating in a specific industry.
“All organisations consist of activities that link together to develop the value of the business, and together these activities form the organisation’s value chain. Such activities may include purchasing activities, manufacturing the products, distribution and marketing of the company’s products and activities. The value chain framework has been used as a powerful analysis tool for strategic planning of an organisation. Its aim is to maximise value creation while minimizing costs.”
Value chain represents the processes from getting raw materials and components until providing the whole product or service.
In order to conduct a value chain analysis, the company is divided into primary activities and support ones. Primary activities are those related with production, and the cost of providing the product or service, while support activities are those that maintain and arise the effectiveness and efficiency of the firm to enhance the product value.
“Primary activities: inbound logistics, operations (production), outbound logistics, marketing and sales (demand); services (maintenance).
Support activities: administrative infrastructure management, HRM, technology (R&D), and procurement.”
Inbound logistics: it is related with bringing raw materials from suppliers, and handling them.
Operations: it is related with the products and handling the raw material, to come up with the final means activities that transform the inputs into the output.
Outbound logistics: it is related with activities of distributing the product.
Marketing and sales: analyse the needs and wants of customers, creating awareness, advertisement, and sales promoting to attract people.
Services activities are those that maintain and enhance the product’s value including customer support, repair service.
Procurement: purchasing raw materials for the company’s operation at a high quality and low prices.
Technology development: it is concerned with technological innovation, expertise and knowledge that lead the business to survive such as research and development.
HRM: it is an important way of attaining sustainable competitive advantage by recruiting, training, motivating, and rewarding the workforce.
Firm infrastructure: finance, quality management, R&D.
Let’s now analyse Porter’s value chain on Honda Motors:
Inbound logistics: Honda purchases the raw materials from a number of components and tries to gain advantages in quality and cost as much as possible. Both manual and automated assembly tasks to handle the components together to come up with the final product, and it also adopts an innovative strategy for the planning production called small batch production systems, in order to reduce costs and having a product variety.
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Operations: Honda has developed a small batch production system, in which same vehicles are sent down the assembly line in batches, and then workers execute the same task for each batch, then components are delivered to the assembly line in batches which exactly match the vehicle they will be fitted into. There is also the facelift that Honda applies to its cars; the components are then replaced by others more developed to come up with a new product. Honda designs models which are related to geographical dimension depend of different market segments.
Marketing and sales: Honda expanded several products and models that customers could choose among them, and also it adopts a good production system that is related to its marketing and sales.
Honda’s strategy emphasizes the high technology build into all its products and it offers features like advanced engines as standards rather than optional extras, thus simplifying product variety within each model type, so that every customers could benefit from it whatever the model of the car.
The alignment of output levels with customer demand tends to focus on sales strategy, so the production levels of particular models can be varied up or down as a function of demand.
Services: Honda is aiming to improve their relational with the consumers, by being responsive to the service support throughout maintenance and repair, and adopting a high level of transparency with their customers.
Procurement: for a number of components, Honda arranges to purchase the raw materials gaining advantages in price and quality. It has also the possibility of purchasing raw materials from component maker’s located very long distance away to allow cheap labour sources in other regions, or purchasing them few square kilometres which is advantageous for just in time logistics.
Technology development: Honda has technologically innovative products, developing new low pollution power sources for its vehicles such as CVCC and VTEC in order to have a good market positions, and also it gives to its models a cosmetic facelift every four years in order to gain competitive advantages.
HRM: Honda praises the achievements of individuals, makes merit the key to promotion, and awards responsibility to younger employees across elder ones.
Firm infrastructure: Honda had become well known in the business for the collective decision making process utilized by its top executives. Honda adopts too much dichotomies in their strategies management taking advantages from all. They also have a good research and development department aiming to improve the quality of the products and entering new technologies to gain sustainable advantages.
The primary activities and the support ones are related to each other, one activity can affect the cost of another activity. Thus, the primary activity is related to the creation of the product by handling raw materials together and selling it, and the support activity is related to the competitive advantages that you gain from buying the components at a low cost and with a high quality and to the technology used in the product. So those linkages between the two activities added value to the firm, and can be a source for a sustainable competitive advantages.
This approach of reconciling dichotomies is used in a wide range of activities of Honda, and it represents the innovation strategy that seeks to adopt different ways and opposite polarities.
Dichotomy means two contradictory polarities that do not fit together, and reconciling in this context, refers to an approach in which those two poles are somehow made compatible with each other. Honda’s strategic thinking rejects the trade off, or to choose one strategy, however, Honda has mixed too many dichotomies to incorporate the best of both worlds, and this contributes to the success of its strategy.
After Honda had selected its market and customers segments, it is time to decide how it wants to position itself within this segment.
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