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Strategic Management is planning, applying and evaluating efficient decisions that will allow an organization to reach its long-term objectives. It is the path of identifying the organization's mission, vision and objectives. Designing projects and programs to achieve organizations objectives by developing strategies and assigning resources to implement the strategies done by strategic management. To full fill organizations Mission, vision and objectives, an organization must know its current market position. By carrying out market analysis, an organization can identify its attractiveness and competitive power in the market. To analyze competitive position in the market Michal Porter's five forces frame work have been recommended.
EXPLAIN PORTER'S FIVE FORCES MODEL
Porter's five forces model is an outline for the market analysis and business strategy development, developed by Michael E. Porter in 1979, it includes five forces that decide the competitive power and attractiveness of a market.
Porter referred those forces affect once capability to serve its consumers and profitability. Change in any of these forces makes a business unit to re-assess the marketplace. Though industry may look attractive to start a business, it does not mean that every company in the industry will earn the same profitability. Some business may have better market place and earn higher profit whilst another business in the same industry may end up at break even point. To overcome this situation an organization must apply their core competencies, business model or network to achieve a profit over the other competitors.
- Number of competitors
- Quality differences
- Other differences
- Switching costs
- Customer loyalty
- Costs of living market
Threat of New Entry:
- Time and cost of new entry
- Specialist knowledge
- Economies of scale
- Cost advantages
- Technology protection
- Barriers to entry
The model of Porter's five forces include - threat of existing rivals, threat of new entrants, threat of substitutes, bargaining power of suppliers and the bargaining power of customers or buyers.
Threat of New Entry
- Number of suppliers
- Size of suppliers
- Uniqueness of service
- Your ability to substitute
- Cost of changing
- Number of customers
- Size of each order
- Differences between competitors
- Price sensitivity
- Ability to substitute
- Cost of changing
Threat of Substitution
Threat of substitution:
- Substitute performance
- Cost of change
Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries, whereas other industries are very easy to enter (e.g. restaurants). Key barriers to entry include
- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.
Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes
Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:
- There are many buyers and few dominant suppliers
- There are undifferentiated, highly valued products
- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)
- Buyers do not threaten to integrate backwards into supply
- The industry is not a key customer group to the suppliers
Bargaining Power of Buyers
Buyers are the people / organizations who create demand in an industry
The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry
- Products are standardized
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend on:
- The structure of competition
- The structure of industry costs
- Degree of differentiation
- Switching costs
- Strategic objectives
- Exit barriers
SELECTING AN ORGANIZATION
When selecting an organization I have looked for a place where I can study and apply Porter's Five Forces model, by carrying out a market research I have chosen Amaya lake hotel (Under Amaya Resorts & Spa),
"Amaya Resorts & Spa brings guests authentic Sri Lankan experiences: Architecture, arts, music, dance, cuisine". Amaya incorporates each aspect of local culture into its retreats. Amaya Resorts & Spas is a subsidiary of Connaissance Holdings. Under Amaya Resorts & Spa they have three hotels. Amaya Lake, Amya Hills and Amaya Reef Hotel located at three deferent locations. In this assignment I have chosen Amaya Lake hotel at Dambulla to study and apply Porter's five forces model.
APPLY PORTER'S FIVE FORCES MODEL
Porter's Five Forces Analysis shows that there are five important elements that verify competitive control in a business location and market attractiveness. Study and application of Porter's five forces for Amaya Lake Hotel shows below,
1. Threat of New Entrants
Demand for Restaurants, Guest Houses and motels are still very high in the industry. Yet majority of large chain hotels have been established their authority with marketing-mix outflow and operating efficiency. Improved promotional prices that small individual hotels are unable to compete with make small individual business entities survival difficult in the market. These influential forces have an immense impact on the small ordinary hotels, restaurants, bakers, guest houses and motels etc. It possesses a strong obstacle for new companies who wish to enter in to the hospitality industry, it becomes rather complicated for new competitors to raise adequate resources and establish extremely developed service. This is also evident in vast investments done by large chains like Amaya Resorts & Spa, advance technology for check-ins, checkouts and stock control systems that drive away new competitors and the existing ones. Amya Lake has overcome threat of new entrance with their insistent operational strategies in product development, promotional activity and better service.
Threat of new entrants for Amaya Lake - Up coming Restaurants, Bars, clubs, guest Houses, boutique hotels, ectâ€¦.
2. Bargaining Power of Suppliers
This force stands for the control of suppliers towards hotels. Suppliers can be the holy owners of the decision making in terms of pricing. Anyhow this can be influenced by well established hotel chains. Creating fear of losing their business to other suppliers' and having number of suppliers as an option can earn suppliers control. Improved promotional prices for goods that small individual hotels are unable to compete with will leave no choice for suppliers but to stick with the hotel. On the other hand suppliers are also vulnerable by the rising capacity of large hotels to resource their supplies from overseas at better deals. At Amaya Lake they have well controlled the situation by having strong and better relationship with supplier and choosing many numbers of suppliers as there service providers. Using their growing ability in the hotel industry Amaya Lake have implemented better deal with suppliers where other business can not match with.
Suppliers of Amaya Lake - Most vegetables and fruits are harvested in their own garden, apart from that they have chain of suppliers to supply other materials.
3. Bargaining Power of Customers
Porter said that more the service become uniformed consumers find many options to chose, hence more power is given to buyers. Based on this if a hotel does not identify customers need and break the formality of the service, retaining customers will become a difficult task. At this point Amya Lakes famous loyalty card remains the most successful customer maintenance strategy that drastically increases the profitability of there business and also by taking care of customer needs, providing customized service, ensuring low prices, implementing better choices, adding value additions, having constant promotions they have attract many numbers of customers under their wing. This has contributed to retain their customer base over the period of time. Ecologically kind and ethically sound food and beverage products have made customers glued to Amya Lake than the competitors in the market.
Customers of Amaya Lake - mostly the leisure market have been targeted by Amaya Lake, and they maintain a portfolio of corporate clients. Since customers' needs are well identified and satisfied by the hotel, maintenance of client base has not been a difficult task.
4. Threats of Substitutes
Substitution is having other medias to fulfill once needs. For example in-house guest who wants to enjoy a meal have many choices. Use hotel restaurant, out side restaurant, go to another hotel restaurant. Except first option, other medias can reduces the demand to the hotel restaurant, as there is a threat of consumers switching to the choices .In the hospitality industry this can be seen in the form of service-for-service or the substitute of need, and this takes place by new developments such as small hotels, restaurants, bars, clubs ectâ€¦ this happens in a way of convenience, tailor maidens, easy access and proper customer care ectâ€¦. Amya Lake has overcome this by adding few value additions such as Bar, Restaurants, Gym, and Spots complex, DJ club for residents and non residence for affordable price with better service, verity of meal choices, different room categories.
Substitutes to Amaya Lake - Restaurants, motels, sports centers, bars , etc
5. Threats of Existing Rivals
Having many competitors in the market for the same industry make competition, to sustain and progress in the market one must adopt tailor maid and neat service. On the other hand suppliers and buyers have the power to choice with whom they need to deal with. Same way if it is only you who provides one particular service and no one can do what you do, and then you can often have a wonderful force over suppliers and buyers which lead them to have no choice but to retain with you.
Hospitality trade has seen a considerable growth in the size and market power of the larger groups and small groups, with greater size it may attract reasonable number of guest who are utilizing range of value additions, which are now important characteristics of the segment. Yet some guest prefers small or mid size hotels with more privacy, affordable rates and more religious atmosphere. As it was mentioned above, the power of choosing the place where a guest wants to go depends on competition among the industry. At Amaya Lake customers mostly tend to choose them, since they have different room categories at different locations, and guests have choices of there own.
Competitors of Amaya Lake - Sorrowwa Resorts & Spa, Gimanhala Hotel, Chaya Village, Heritance Kandalama Hotel, Thilanka Hotel
Operating in an established market makes growth hard mainly because of the competition among businesses. Yet competition makes nourishing industry by speed up level of growth, ensuing in a circumstance in which hospitality sector may have to be innovative to maintain and build market share. Such innovation can be seen in the development of a variety of operating systems, in reaction to alter in consumer behavior. Market leaders have reacted by focusing on service, price and value additions. Amaya Lake is one of the chain hotels having its own customers in the market with other competitors by providing better service and value additions to its customers. .
ADDITIONAL THEORIES WHICH DEVELOP PORTER'S IDEA
Porter's Diamond of National Advantage Theory
In this theory, Porter highlighted that comparative advantage inhabit in the factor donation that a nation may be lucky enough to inherit. Factor aids contain property, natural resources, labor, and the size of the local residents.
Michael E. Porter said that a nation can generate new highly developed factor contributions such as technology, skilled labor and knowledge base, government support, and culture. Porter implemented a diamond shaped map as the foundation of a structure to demonstrate the determinants of national advantage. This diamond stands for the national playing field that countries set up for their trades.
Porter's Diamond of National Advantage Frame work
Four components of the diamond framework have an effect on national comparative advantage. Those components are,
The accessibility of resources and skills,
Information to decide which prospects to follow with those skills and resources,
The goals of individuals in business,
The force on businesses to innovate and invest.
Components of the diamond frame work are explains as follows.
I. Factor Conditions
A nation generates its own significant aspects such as technological support and skilled resources.
The reserve of factors at a given time is less significant than the extent that they are improved and deployed.
Local shortcomings in factors of production force improvement. Unfavorable circumstances such as labor shortages or limited resources force firms to develop new methods, and this improvement leads to a national comparative advantage.
II. Demand Conditions
When the marketplace for a particular product is better in locally than in overseas markets, the local firms dedicate more concentration on that particular product than foreign firms. This will lead to a competitive advantage when that product starts to export.
Challenging local market leads to national advantage.
A strong local market assist local firms look forward to global markets.
III. Related and Supporting Industries
Availability of related and supportive industries to maintain the business
When local businesses are aggressive, industry has the benefit of more cost effective and innovative contributions.
This effect make stronger when the suppliers are strong with international competitors.
IV. Firm Strategy, Structure, and Rivalry
Local circumstances influence the strategy. For example, some businesses have a tendency to be hierarchical. Some companies tend to be smaller and are run more like extended families. Such strategy and structure helps to decide which types of industries are good in nation.
Can the structure of the business exist in environment
Porter's Five Forces model says, at the beginning of an industry little rivalry makes an industry striking. Though at time an industry prefers a smaller amount of rivalry, in the long run more rivalry is good since it build weight on a business to be more creative and become more advance. And also, the more local rivalry a nation has less global rivalry will enter in to the market.
Local rivalry pushes business to move beyond fundamental advantages that the country can enjoy, such as low costs.
v. Change Events
Troublesome developments beyond the control of firms and governments. This allows players to make use of opportunities arising from a reshaped industry structure. For example, radical innovations, unexpected oil price rises, revolutions, wars, etc.
VI. Government's Role
Encourage companies to raise their performance, for example by enforcing strict product standards.
Stimulate early demand for advanced products.
Focus on specialized factor creation.
Stimulate local rivalry by limiting direct cooperation and enforcing antitrust regulations.
Provide proper infrastructure
Strategic group Analysis Theory
Hunt invented the phrase strategic group in 1972 while carrying out a study of the appliance industry, later on he himself revealed a higher amount of competitive rivalry in the industry than expected, and he recognized this as an existence of subgroups within the industry that compete along different proportions. These unbalanced strategic groups root the industry to have more fast innovation, higher quality, lower prices and lower profitability than customary economic models would forecast.
Strategy is the path and capacity of an organization to achieve rewards for the business while directing how the business will make money. A strategic group is a concept used in strategic management for businesses within an industry that have related business models. For example, a hotel can be categories based on the service they provide, Geographic coverage, Market segments served, Branding, Pricing policy. They all under one industry, but all of those hotels do not compete with one another in the industry. By strategic group analysis hotels can identify which group they fall in to and on what basis they compete, by which they can understand their market position. When a business is well established in its own group it can diversified or advanced its services to match with a higher group, possibility of moving from one strategic group to another.
In an industry there can be many entities conducting the same type of businesses competing with most close behavioral similarity businesses. That similar behavioral business falls in to one group. And there can be another one with different characteristics, yet they are not the main competitors for aforesaid group. They are only sub groups that effects market portion.
Strategic group map of the hotel industry
Low Facilities / Low Price
Middle Facilities / Middle Price
High Facilities/ High Price
Success of the Amaya Lake shows how far competitive power and attractiveness of a market can leads towards its productivity. Amaya has proven their identity by making their servicing concept into a various channels such as cultural aspects, geographical, and nature friendly experience.
In a fast changing business atmosphere with high competition businesses have to identify there competitors well and adopt new expansion strategies and diversified the existing business in order to maintain its primary market place in an already established hotel sector. Amaya Lake has continuously adapted to the fast changing conditions. Strategy formulation has been observed as a practice of continuous learning, which contains learning about the goals, effects of trials towards these goals and how to put into practice and carry out these trials. The excellence of an invented strategy and the speed of its completion will therefore directly depend on the quality of Amaya Lakes' behavioral learning processes.
In large organizations like Amaya Lake, strategy should be analyzed and applied at different levels within the industry. These different levels of strategy should be related and mutually supporting one another. Amaya Lake's strategy at corporate level defines the scope of the businesses in which Amya Lake will compete, by which it focus resources to convert distinctive competence into competitive advantage.