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Discussion on: Effect of Porter’s competitive force to the external environment of an organization

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Angel Paudel

One must look into several factors before starting a business among which industry’s competitiveness is one of the major ones. A Harvard professor by profession, Michael E. Porter came with a model which would help analyze the industry’s competitive forces. The framework is called as Porter’s Five Forces which includes of competitive rivalry, the threat of new entrants, bargaining power of suppliers, bargaining power of customers, and threat of substitute products (Grundy, 2006). All these elements in some way have an effect on organization relating to the external environment, more on each of those are as explained below:

Considering that the competitive rivalry is high in an industry, the profitability takes a slice as well. As with higher competition, the overall cost to survive in the industry increases as well. It makes the growth slow and also reduces the customer loyalty towards the particular brand as the products or services on offer would be more or less same (E. Dobbs, 2014). Let’s take an example of an investment venture in Angel Investments which looks out for entrepreneurship ventures to make investments on. We’ll build on the same example throughout the post. The company first need to check if there is space in the investment industry for another company to exist and be profitable. The businesses trying to enter this space would require a good amount of money at hand and with the development of the industry, the capital requirement increased as well. They had the funds and this could care less about the little competition around to get on with it.

The threat of new entrants gives an idea of how difficult or easy it is for any other business to enter into that industrial space. Like in the case of Nepal, it’s quite difficult for any industry to enter into the Hydropower space however same is not true when it comes to web development companies. Thus, the ones in the industry already try to tighten their grip on it and make it as difficult as it can be for any other business to enter their space. External factors like regulations from the government, actions for pre-established brands, investments, and customer loyalty all play a part in it (Porter, 1989). Building on the same example as above. Angel Investments was presented with an offer to invest in a football kit manufacturing company. This space has a huge competition and a good number of pre-established brands like Nike, Adidas and as such. The company thus looked into the market structure, difficulties like with regard to trademark, patents, customer loyalty, and other factors to consider this investment to be too risky and thus not invest.

Whenever there too fewer things, the demand of it is often higher. Same is the case in the bargaining power of suppliers. With a limited number of suppliers, they have the control. There’s no or little room for negotiation and the buyers are left with very fewer options. In addition to it, even by paying what the supplier has quoted, chances are the buyer may have to wait for the product to arrive. Example of an investment opportunity for Angel Investment for this case would be that they’re presented with an option to buy a company that refurbishes vintage cars. In the research and discussion, they discovered that there is only one supplier for its part in the entire nation and the production of the required parts is scare worldwide as well. The cards on high demand have its part available in very few parts. The company thus decides based on the bargaining power of the supplier being too high not to invest.

Just reverse of what we looked above, bargaining power of the customer puts the customer at charge and the supplier at a disadvantaged position. With buyers all joining hand to demand lower price and if they stop purchasing or move to other product, the power of customer would be higher. This often drives the price down. Looking at the same example as above, Angel Investments and the offer on the table to invest in a vintage car. The market had a limited number of buyer as well so they could join hands and boycott the suppliers which would charge anything over reasonable to them. They could stop using the product altogether and move to other cars. Considering that the vintage car is just the hobby which is easy to change, buyers have a great power in this case.

It alerts the investors if a customer can switch to another product with little cost. It is also called a threat of substitute products. In an industry, if the substitute products exist and the company decides to hike the price, the chance of their customer moving to substitute product is a lot higher. Angel Investments, when they looked into the possibilities of investing in a company which makes football kits, it is common for customers to switch to other producers. There’s no mechanism that’s stopping them from doing so either. So, only if the company can bring something that’s unique to them rather than entering the business which is full of other substitute product, chances of success increases.

As seen through the examples and all the elements, each of them can provide an essential information needed for developing a competitive strategy and to even enter a business space. The forces also help in identifying the strengths and weaknesses of any business already operational. This is why it’s important to also analyze all the five forces.

References

E. Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review , 24 (1), 32-45.

Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change , 15 (5), 213-229.

Porter, M. (1989). How Competitive Forces Shape Strategy. Readings In Strategic Management , 133-143.