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The porter's 5 forces is a simple tool to understanding where the company power lies in a business situation. The porter's forces also helping company understand the strength of a current competitive position. The porter' 5 forces includes bargaining power of buyers, bargaining power of supplier, threat of new entry, threat of substitute and rivalry among competitors.
The bargaining power of buyer is described as the market of outputs. The bargaining power of buyers ability of the customers exert pressure on businesses by demanding reduce price and increasing the product quality. Company must recognize consumer want and need. In order to boost sales volume, manufactures follow changing consumer trends. The bargaining power of buyer will be high when the large volume buyer are concentrated buying the product or services. There is a concentration of buyers. Other factor will be increasing bargaining power of buyers is the products available replaces by substitutes in the market. In automotive industry the buyers have the greatest power because they can the low switching costs associated with selecting from competing brands. If buyers become disenchanted with some automaker, they can look for alternatives especially foreign cars. Automotive industries have many automakers can substitutes replace General Motors Corporate such as Toyota, Honda, Ford, and so on. General Motors Corporate in order to avoid replaces by other automakers, General Motors Corporate always carve out unique line of cars and trucks like fuel cell electric and hybrid vehicles.
The bargaining power of supplier is described as the market of inputs. Supplier is provided the raw materials and machinery to company than the company can carry out its business operations. When the bargaining power of supplier will be high is an industry relies on just few suppliers or there are not substitutes available for supplier's product. If bargaining power of supplier higher, the company will be often faces to high pressure on margins from supplier. For example, if General Motors Corporate have one supplier to supply raw material, then the supplier increase their price this will lead General Motors cars and truck also will increase the price because General Motors don't have other supplier to supply raw material. In order to reducing the bargaining power of supplier, the company will be increasing dependency means partnering with many suppliers. Some biggest company maybe will take over a supplier.
The threat of substitutes is described as an industry's profitability depends on the relative price to performance of the different types services or product to which customer can turn to buy other product that almost has the same functions. The threats of substitutes exist when a products demand is affected by switching costs. This means the costs of switching to substitutes. In the automotive industry the threat of substitute's product is very huge because automotive industry has many automakers. In order to avoid substitute product replace the General Motors cars and trucks, General Motors Corporate has carve out its own unique product. For example, General Motors carve out alternative fuel vehicles like fuel cell electric and hybrid vehicles. Product differentiation can reduce the threat of substitute so each company also attempts to carve out unique products. Some company will be buy patent developed by potential substitute because avoid the substitute entry markets.
The rivalry among competitor is described the intensity of competitive rivalry. The rivalry among competitor means have the major determinant of the competitiveness of industry. The rivalry among competitor is most obvious of any industry. The competitor normally will offer the same product or services as your company. Competitive battles include price wars, new product introduction or advertising campaigns. In order to gain more market share and increase sales, every company often use comparative advertising to emphasize areas where it outperformance its competitor. Rivalry among competitor can reduce the profitability of company but these maybe good things of publics. The rivalry among competitor exist when the industry growth. In order to reduce the rivalry among competitor, General Motors Corporate avoid price competition with other automakers and focus on different segments. Company communicates with competitor also can reduce the rivalry among competitor. This also can build win-win relationship with competitors.
The threat of new entry is described the new competitor or firms entering into industry. In order to reduce the threat of new entry, the company needs to create a good brand image. If the company have a good brand image, then customer would like to stay with the brand products. The customer loyalty is a barrier entry into market. The threat of new entry depends on economics of scale. For example, company minimum size requirement for profitable operations. Automotive industry is a high threat of new entry but some industry low threat of new entry like shipbuilding because shipbuilding industry has high entry barriers. The government restriction also can reduce threat of new entry. For example, Malaysia government restricts new entry into automotive industry because government wants to protect of local cars (PROTON).
Limitation of Porter Analysis
The porter's 5 forces is a useful framework for competitive analysis within industry. Competitive analysis is lead into strategic planning and the development of a tailored competitive strategy that expects to exploit the situation. The porter's 5 forces model has some limitation and weaknesses. In general, porter's analysis focuses on company external competitive environment. In order to complete a full competitive analysis, the porter's 5 forces need to be compensated.
The porter's 5 forces has further limitation in today market environment because porter's analysis is assumes relativity static market structures. This means porter's 5 forces are applicable for simple market structures not best applicable for today dynamic markets. Today dynamic markets are highly influenced by technological innovation such as information technology, so porter's analysis cannot analyze today dynamic changes.
The second limitation of porter's analysis is generally based on the idea of competition. In porter's analysis just described how to company or business to achieve competitive advantages. Porter's analysis just focuses on competitive advantages and then ignores other important consideration strategy. For example, company not really into consideration strategy such as electronic linking of information system of all company along a value chain, virtual network or enterprise and strategies alliances.
The third limitation of porter's analysis is porter's 5 forces are designed for analyzing individual business strategy. Porter's analysis cannot cope with interdependencies and synergies within the portfolio a large company. The fourth limitation of porter's analysis is the sources of value are structural advantages. Sometimes may be possible to create barriers to entry. This mean porter's analysis possible will create completely new market rather than selecting existing ones.
Although porter's analysis are not best applicable for today dynamic markets but porter's analysis still can compensated with other analysis such as SWOT analysis, PEST analysis, Value Chain analysis and etc. Porter's analysis in conjunction with other tools such as PEST and SWOT can define effective competitive strategy. General Motors Corporate also uses SWOT analysis, PEST analysis, and Value Chain analysis to compensated limitation of porter's analysis.
PEST analysis also can uses to compensated limitation of porter's analysis. PEST analysis is described macro environment such as political, economic, social and technological. PEST analysis is strategy tool for understanding markets growth or decline and potential and direction for operations. For example, General Motors must be doing market research before carve out new cars or new markets. The markets research includes economic condition, political and government policy. Government decision can affect organization directly like employments law, tax policy, trade restrictions and tariffs and environmental regulation. The economic condition also can affect company profitability like oil price, interest rates, and economic growth and financial crisis. Especially financial crisis because many people lose job, then almost people temporary don't want buy a new cars. This is can influence company make lose. We can refer to appendix 2; we can understand how PEST analysis is function.
SWOT analysis is a strategic planning used to identify the strengths, weaknesses, opportunities and threats for company or business. SWOT analysis applicable to measures a business units, and a proposition. SWOT analysis also can understand where the company strengths and weaknesses and then minimize the affect of weaknesses on company and maximizing or maintain company strengths. When company have know weaknesses and strengths itself then can making good decision for strategy of business proposition. For example, General Motors strengths are have large market shares, global experience, and variety of brand names and current development of alternative vehicles. So General Motors always maintain them strengths. The weaknesses of General Motors are poor customers perception, stagnant profitability, higher labor costs and overly dependent on U.S market. So General Motors try to gain more market share and increase sale volume at other countries such as China, Japan, and Malaysia and so on. General Motors also need to increase customer's perception. We can refer to appendix 3; we can see how company uses SWOT analysis to identify strengths and weaknesses themselves.
Value Chain analysis can overcome the limitation of porter' 5 forces. Value Chain analysis described the activities that take place in a business and relates them to an analysis of the competitive strengths of the business. Value Chain analysis will help the company pursue a competitive advantages. Porter's described value chain have two different categories of activities that is a primary activities and support activities. The primary activities of company include inbound logistics, operations, outbound logistics, marketing and sales and services. The support activities include procurement, human resources management, technology development and firm infrastructure. Value Chain analysis will help the company pursue a competitive advantages. We can refer to appendix 4. In appendix 4, we can see how to value chain contribution from different functions of an organization in the value adding process.
Balanced scorecard is a good way to overcome the limitation of porter's 5 forces. Balanced scorecard is defined are strategic planning or management system that is used extensively in industry and business to align business activities to the vision and strategy of the organization and monitor organization performance against strategic goals. Balanced scorecard can help company known how well business is running. Balanced scorecard also allows company measures economic value added and operating income. For example, General Motors use balanced scorecard to measures customer satisfaction and market share in target segments. . We can refer to appendix 5; we can see how 2 balanced scorecard running.
Product life cycle can overcome the limitation of porter's 5 forces. Product life cycle is defined a new product progress through a sequence of stages from introduction to growth, maturity and decline. When companies produce some product like cars or trucks they must take cars market life and services life into account. Recently more and more company is attempting to optimize profit and revenue over entire life cycle. Company does this need to consideration product warranties, the ability to upgrade existing product and space part. For example, General Motors cars have 3 years warranty. . We can refer to appendix 6; we can see the new product progress thought life cycle.