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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.
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.
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."
Source: case study of Honda Motors
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."
Source: case study of Honda Motors
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. Positioning refers to the perception of customers to Honda compared to other brands and substitutes, and also to the image that the company creates in the minds of this target niche.
In order to develop a good position strategy, Honda should take into consideration how competitors position themselves, and if it wants to position itself like them, and let the consumers make a direct comparison of what they want to purchase, or depending on if Honda wants to develop its own strategy, makes itself unique, and positions itself away and beyond other competitors. The strategy Honda will adopt to reach its goals, is going to focus on its marketing, prices, designs and the benefits that it will offer to the consumers including promotions, packaging...
The company should be aware of the needs and wants in order to win customers hearts and gain bigger profits.
"In order to strengthen their market positioning, Honda has set up more than 400 subsidiaries worldwide, each has speciality such as development, manufacturing, and marketing of Honda vast products ranges. This diversification according to Honda is imperative to earn an outstanding reputation from customers. Â Honda keeps producing high quality products withÂ distinctive new values, at affordable price, a guaranteed customerÂ satisfaction."
Source: Â http://www.mightystudents.com/essay/MBA.course.Corporate.8004
Honda has expanded its products globally, which makes it gain a rapid internationalization, , however, the spread of its activities and products makes it gain sustainable profits, and makes it well recognized throughout the world with its high technological performances.
"Fully three quarters of the company's global sales comprise the relatively conservative and simple Civic and Accord models, which occupy the market position which combines high quality with low cost based on core capabilities residing at the heart of Honda's product design and production process."
Source: case study of Honda Motors
Is this meaning that Honda's core capabilities are related to the success of the market position?
Well, highly skilled and well trained internal resources can provide better services and products using different expertise and experiences. Many companies see a great value in developing their internal resources, because human resources are more vital to the firm, so they should be developed with unique and valuable capabilities and skills.
Honda has invested huge resources into developing new technologies like new low pollution for its vehicle to unify the organisation and having a great position in the market, which lead the firm to gain competitive advantages, because efficient internal resources and the core competencies are the key success for Honda's position.
The internal resources should be developed depending on the consumer demands to serve as a source of advantages for the firm over its rivals, and having a great position in the market. So, internal resources in combination with market position are the firm's most important source of competitive advantages.
"Honda adopted both dichotomies and took advantages from them, so they become well known in the business world for the collective decision making utilized, sharing an open space encouraging executives to talk about problems and solutions with each other, preparing younger managers, working in teams, and having an important core competencies residing in SED teams, as well as its engineering pursuit of technological mastery to the evolution of market demand, so they focus their competencies to breakthrough market position."
Source: Case study of Honda Motors
In fact, both dichotomies help Honda to provide high quality with low cost, reliable products, satisfaction of customers, and gaining the market position.
"Pressures for global integration of activities" and "pressures for local responsiveness"
Local responsiveness means meeting the specific wants and needs of consumers in the country you operate in, and competing with local rivals. As firms move out of their market, and operate across borders, they should develop different ways to adopt consumer needs, tastes, and buying behaviour, as well as government regulations and labour rights.
Many automobiles industries operate outside their domestic countries, in order to expand their products internationally, and enhance their profits, but they must have the capability to be responsive to local conditions in order to succeed, otherwise, they might find themselves loosing regarding the local competitive market. Markets differ from a country to another, and adopting the right structure to the appropriate market, lead to gain a competitive advantage. As Honda, many automobile firms have the R&D department that do continuous researches about the market changes and needs, and design the local product that might fulfil consumer's needs.
And yes, it is a pressure for local responsiveness since firms should adapt to local market to succeed and position themselves to gain competitive advantages over the local competition, and recognize the simultaneous demands to meet the specific conditions. Moreover, the differences in supply can also lead the firm to be more locally responsive, because of the quality, prices of raw materials and components that vary between nations.
"Formulating a strategy to compete effectively in international markets is one of the major challenges a firm faces. So how automobile firms devise strategies that respond to the conflicting pressures for local responsiveness and integration?"
Otherwise, acting globally is becoming more global and international, means that a firm operates around the world, with an international expansion of their products worldwide. Automobile industries act more globally because they sell their products all over the world, they may have a global strategy, resources, workforce, but also adopt the local market as the culture and structure.
Pressures for global integration of activities are due to the expansion of multinational customers and competitors, so firms must co ordinate their activities globally in order to enhance their revenues, and expand their products world widely, so companies must compete with the global competitors to perform better. Companies that operate internationally must balance between retaining their own culture and adopting other cultures. "The increasing availability of technologies and products in the world means that consumer's needs are converging, leading to the standardization of products that facilitate globally integrated operations, and also it increases access to raw material and cheap labour."