TyroCity

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

Collapse
 
dipadhungana profile image
DIPA_DHUNGANA

The external environment in which the company operates consists of competitive and industrial forces that affect the decision regarding long-term objectives, strategy formulation and business model. The assessment of competitive and industrial environment helps to find out dominant industry characteristics, competitive forces affecting the industry, forces driving industrial changes, position of rival companies and key factors of competitive success that determine what type of strategy the company needs to implement to take the advantage of prevailing market scenario (Gamble, Petaraf, & Thompson, 2015).

Porter’s Five Forces Model is a widely used tool for accessing the strength of competitive forces affecting the industry’s attractiveness. As per Porter (1979), bargaining power of buyers, bargaining power of suppliers, threats of new entrants, threat of substitute products and competitive rivalry determine the attractiveness of an industry. If the collective impact of these forces is higher, lower will be the profitability of the industry participants and vice-versa. The industry with weak bargaining power of buyers and suppliers, high barrier of entry for new products, unavailability of good substitute products and moderate competitive rivalry offer superior profit to its participants (Gamble, Petaraf, & Thompson, 2015).

These factors are beyond the control of the company. However, proper analysis of competitive forces will highlight strengths and weaknesses of the company along with the opportunities and threats and provide a clear picture about where the company stands in terms of competition. This will help to formulate new strategies or make adjustments in the existing strategies to help the company use them in its favor (Porter, 1979).

If there are few well-informed buyers who purchase in large quantity and can switch to other products at relatively lower cost, their bargaining power will be stronger. They can ask the company to reduce the cost or increase the quality/ quantity of products keeping the price constant giving the threat to buy from the rival companies. In such situation, the company should work on the strategy to minimize the cost of production as they cannot hike the price of their products.

Similarly, the suppliers exert higher bargaining power if there is short supply of materials or the materials are not readily available and the company has no option of switching the supplier. In such case, the suppliers may demand higher price for the supplies so the strategy should be to look for alternative ways of acquiring the commodities or producing some of the materials by self so that it does not have to pay higher price to suppliers and charge higher with the customers to cover the additional cost.

If there are different substitute products available and the market competition is fierce, a slight increase in price may cause the customers to switch. In addition, if we try to increase sales through discounts and offers, the competitors can easily copy our strategy and provide more offers and discounts. Thus, the company should work on the strategy that will help in retaining the customers and is difficult for the competitors to copy.

If the new entrants can easily enter in the market, the industry attractiveness will decrease. It will definitely increase the competition and provide buyers with more choices as a result of which the company has to focus on differentiation, diversification and growth to outperform the new entrants and maintain their competitive advantage.

To conclude, all the forces of competitive members are to be looked into thoroughly to develop relevant and effective strategy for business continuity and growth.

References

Gamble, J. E., Petaraf, M. A., & Thompson, A. A. (2015). Essentials of Strategic Management: The Quest for Competitive Advantage (Fourth ed.). New York: McGraw Hill Education.

Porter, M. E. (1979, March). How Competitive Forces Shape Strategy. Harvard Business Review . Retrieved from hbr.org/1979/03/how-competitive-fo...