Business Strategy:the Porters five-forces model - Research Paper Example

Business Strategy: the Porter’s five-forces model Introduction It is critical for a business to identify the competitive forces that shape the industry it is operating in. Competitive forces have been identified as critical determinants of the level of profitability of any business. Experts have highlighted that a business should understand both the nature and the strength of different competitive forces so that it can draw its strategies. On the other hand, driving forces are of critical importance in necessitating a change in business strategy. Therefore, businesses should analyze driving forces that have an impact carefully (Lin, 2011). This paper will focus on describing the Porter’s five-forces model, and how it shapes the Snack Food Industry. In addition, the paper will describe the most significant driving forces to Snack Food Companies. Porter’s Five-forces Model Michael Porter described five competitive forces that define the structure of any industry. He identified the factors as follows. Threat of new entrance to a market Threat of substitute products Bargaining power of suppliers Bargaining power of customers Degree of competitive rivalry (Rice, 2011) Threat of New Entrance to a Market Existing businesses face a salient threat of new entrance into the market. This is because new entrants compete for a position in the market and eventually gain a percentage of the market share. This serves to introduce a more rigorous competition. New entrants are likely to face barriers to the market, a factor that serves as an advantage to the existing businesses. It is important for a business to identify whether there are any barriers that can keep away new entrants. These barriers include cost of investment, legal restrictions, access to supplier, lack of access to distribution channels, and the potential retaliation by the existing products. Unless these barriers exist, new entrants find their way into the market easily triggering increased competition (Rice, 2011). Snack food companies face an evident threat from new entrants that promise customers healthier and natural products. Threat of Substitute Products Businesses face threats from the availability of substitute products that target the same need and niche. This is because the existence of substitute products limits the potential prices for products and eventually reduces the level of profits. Therefore, snack food companies must analyze the price and the performance of the existing substitute products and recognize how they compare to other existing products in the industry. Moreover, it is of significant importance to determine whether customers are willing to try out the substitute products or they exhibit loyalty. In a case whereby customer loyalty is high, then the threat is minimized and a business can enjoy the profits (Rice, 2011). Bargaining Power of Suppliers Businesses have to be wary of the potential power of suppliers to alter certain things in the market. Suppliers may place themselves in a strategic position to gain the capacity of exploiting industry profits. This means that they can choose to supply products at relatively higher prices. This is especially the case in the snack food industry, which a few suppliers of some of the ingredients used, and when the product in question has limited availability. In other cases, suppliers take advantage of the fact that it is expensive for businesses to switch to new suppliers and increase the prices (Rice, 2011). Therefore, a business must understand the level of power exhibited by the suppliers. Bargaining Power of Customers Evidently, customers are the most important group of people in any business. There are instances when customers can exhibit a high level of bargaining power and introduce pressure in the market, compelling businesses to reduce prices. Customers can have such power when alternative suppliers are many, and when they can place large volumes of the product. According to experts, the number of customers is inversely proportional to their bargaining power. For example, large supermarkets can exhibit a high bargaining power of customers because they order large volumes of snacks. This may compel suppliers to lower prices (Rice, 2011). Degree of Competitive Rivalry Snack food companies must understand the intensity of rivalry in the industry. When the intensity is high, they are compelled to engage in competitive price reductions as well as focus on innovation and further differentiation. High intensities of rivalry also mean that snack food companies have to invest in advertising and promotion (Rice, 2011). This implies that increased rivalry in the industry serves to increase the costs for businesses hence lowering the profit margins. Therefore, snack food companies have to understand the structure of the industry carefully if they are to thrive and make profits. Driving Forces Operating in the Snack Food Industry The following factors have been identified as having the greatest potential of initiating the need for changes in business strategy for many snack food companies. Regulatory and Government Restrictions The Snack Food Industry is highly affected by government regulations through different policies. There are regulatory bodies that ensure that snack food companies ensure food safety and are considerate of the health of consumers. Other regulations involve the need or labeling and the provision of information on whether the product may have any allergen. Many snack food companies are subject to litigation because of compliance issues determined by the existing policies (Van den Bossche, 2014). Moreover, there are stringent regulations in snack food companies that engage in manufacturing because of the workplace safety policies and environmental protection acts. All these policies compel snack food companies to develop new strategies that ensure they are not subject to litigation. Marketing and product innovation Innovation in either marketing or the creation of new products is an expensive venture for any company. Snack Food Companies that intend to rely on innovation as a strategy of gaining competitive advantage should consider the cost involved. Moreover, the companies should be aware of the potential effects of indulging in product proliferation (Van den Bossche, 2014). Changing Societal Concerns, Attitudes, and Lifestyles This driving force has had an immense impact in the snack food industry. The focus on healthy eating lifestyles in an era where nutritional choices have been associated with the risks of different diseases compels businesses to define new strategies. This places immense pressure on snack food companies that must produce products, which prove to be healthy and natural (Lin, 2011). This increases the cost of production for many companies and affects the prices. Therefore, snack food companies have to strategize on how to meet the expectation of customers with emerging lifestyles and new attitudes towards snack food (Van den Bossche, 2014). Changes in who buys the Product and how they use it The snack food industry relies on the tastes and the preferences of consumers to determine their products. Any changes in the tastes of the consumers or the target group compel snack food companies to reformulate their products. There is an evident pressure to understand the changing demographics and altering products to suit the tastes and uses of the customers. Unfortunately, some companies are unable to keep up with the pace of changing trends in the behavior of those who buy products (Van den Bossche, 2014). Entry or Exit of Major Firms The Snack Food Industry is highly competitive and the entry of new firms only serves to increase the level of competition compelling existing companies to result to further differentiation. On the other hand, the exit of major firms may present a better opportunity for the other companies. Exit of major firms can be viewed critically as a warning that the industry structure is unbearable. Therefore, companies should understand the level of impact created by new entrants (Van den Bossche, 2014). References Lin, C. (2011). Global Food Safety: Exploring Key Elements for an International Regulatory Strategy. Virginia Journal Of International Law, 51637. Rice, J. F. (2011). Adaptation of Porter's Five Forces Model to Risk Management. Defense AR Journal, 17(3), 375-388. Van den Bossche, P. (2014). Six Driving Forces in Manufacturing. Supply Chain Management Review, 18(1), 50-51. Read More