Examining the Strength of Firms through Competitive Elements - Essay Example

PORTERS FIVE FORCE MODEL ANALYSIS Porters Five Forces Model Analysis Introduction Porter’s five forces model was developed by Michael Porter in 1980 as a technique for industry analysis. An industry consists of a group of firms which are involved in the production of commodities which are close substitutes for one another. Essentially the five forces model provides corporations with a means of analyzing their fellow competitors within the market (Porter, 1998). It examines the strength of firms through five distinct competitive elements which collectively are key in determining the long-term profitability and competitiveness of firms within an industry. These forces or elements are: 1. Bargaining power of suppliers 2. Bargaining power of buyers 3. Threat of new entrants 4. Threat of substitutes 5. Rivalry amongst competitors Industry overview As is the case with other businesses, globalization of trade has led to a shift in the way in which businesses operate. In addition to their concerns for profitability, firms have to pay cognizance to other factors within both their internal and external environment so as to maintain competitiveness and overall relevance of organizational objectives and goal-setting (Palmer, 2011). Consequently, market success of multinational business appears dependent on the firms’ ability to maximize efficiency in all operations and the creation of new sources of revenue generating services so as to counteract the effect of lowering returns due to rising and emergent competition and falling prices (Baron, 2009). The global postal industry has survived despite the high criticisms that heralded the digital age at the turn of this century. Despite this sustained resilience, the industry has suffered major setbacks in light of the recent financial crisis; the global economic slowdown that arose due to this crisis and the exponential growth in demand for digital alternatives (Accenture, 2011). As a consequence, the volumes from mail users dropped, profitability crumbled, and prices of core services, by postal corporations, shot up. Therefore, it is evident that, the larger the player in the industry, the greater the negative impact due to the crisis. Mail volume in billions (Accenture, 2011) Swiss TNT Finland Norway Royal Mail Spain United States Canada DPWN-DHL 2008 5.1 4.7 3.0 2.6 19.7 5.1 201.1 11.6 20.0 2009 5.0 4.5 2.8 2.3 18.6 4.6 175.7 10.7 18.9 Change -0.9% -4.7% -7.0% -12.1% -5.5% -9.6% -12.7% -8.2 -5.9% The impact of recession on the mail volumes within postal services within the United States (Accenture, 2011) A significant characteristic of this latest financial downturn was that it was non-discerning in its impact; both large and small-scale firms within the postal and parcel industry were equally impacted. The highest negative impact was felt in the United States where mail volumes went to lows similar to those during the Great Depression. Perhaps a further point of concern to industry players would be the predictions that the industry would not recover. Historically, volumes display a re-growth after periods of economic contractions have ended. The essential challenge with the 2008-2009 economic downturn is that a reversal in growth is unforeseeable; instead predicting (based on e-substitution rate) negative to significantly negative growth over the next decade (Accenture, 2011). However, the best performing postal firms in 2011 were seen to respond to the markets frugality and trends through the adoption of a clear diversification strategy. This diversification was largely exercised in two forms: 1. Geographic diversification. This concerns the spreading of operations to new or emergent markets. This was, however, applied in limited proportions since although the strategy proved highly successful in overcoming local economic downturns, it proved difficult in surviving the global recession that was a widespread phenomenon especially within the traditional, strong markets in Europe and the United states. 2. Service diversification. This concerns the increased types of services being offered by the postal firms in both existing and new markets. In light of the shortcomings of the geographical diversification strategy, the service diversification strategy was relatively favored. The most prominent form of this diversification process was seen through digitization that is driven by all major consumer segments of the postal market i.e., government, households and businesses. Postal and parcel corporations are now faced with the essential challenge of raising service delivery while minimizing costs of their provisions to the firm. This pressure appears significantly stronger in Europe with the anticipated deregulation expected to lower the prices of ordinary mail by 30-35 percent and additionally cutting back on jobs within the industry by up to 25 percent (Plunkett Research Ltd, 2010). The subsequent discussions examine how the operating environment within the postal industry has influenced the competitive strategies of three multinational postal firms i.e., UPS, DHL and DPD as highlighted by Porter’s five forces model. Discussion Bargaining power of suppliers Porter defines this force as the ability of suppliers to dictate product quality and significantly influence prices. A conglomerate of suppliers has even more power over an industry; or where the industry is characterized by few suppliers and few or no substitutes; or where the supplier’s product is essential to the industry. For United Parcel Service (UPS), this power arises from its dominance arising from a combination of financial muscle and sheer size of operations. Universal Parcel service is the world’s largest package distribution company transporting in excess of three billion parcels and documents annually (Boulton, 1999). As per 1999, it operated 500 aircraft couriers, 157,000 vehicles and 2400 packaging and sorting centers that generated an annual net income in excess of $499 million for the first quarter of 1999. With such a vast scope of operations, UPS is the world’s largest private consumer of cellular technology presently. This reliance on technology to deliver efficient services, providing new customer services and keeping prices fairly stable has seen Universal Parcel services invest almost $11 billion in information technology e.g. UPSnet and satellite (Boulton, 1999). What does this mean? That Universal Parcel services is the most desired firm in the postal and parcel industry. Its infrastructure layout further strengthens its bargaining power by making it not only difficult but costly as well for consumers to shift to other providers (Porter, 1998). Dalsey, Hillblom and Lynn (or as it is commonly referred to as DHL Express) is part of the world’s leading logistics group, Deutsche Post DHL. It has four broad divisions each run under their own divisional headquarters. The company’s bargaining power arises from the centralization of internal services, which in turn support the entire DHL group’s operations (www.dhl.com, 2012). DHL offers logistical solutions that have pitted it as the leading supplier of 3PL-services in the specific industrial sectors they are engaged in. How so? The focus of DHL solutions is in completion based on competencies, as opposed to pricing (Stefenson, 2004). Essentially, it has become able to focus on its core competencies thus emerging as the most cost efficient provider that have appealed to many organizations suffering economic downturns. This has been extended to periods of prosperity as well helping to strengthen the desirability of the firm within the industry. The bargaining power of DHL is affected primarily by two sources. Policies by the European Union and Swedish government regarding the freight of food and pharmaceutical products. Such policies have introduced stringent regulations requiring a high degree of traceability for such products (Stefenson, 2004). However with its strategic mergers and acquisitions, DHL has been able to curve a strong and stable position as a logistics and solutions provider making it a common and strong player within the postal and parcel services. DPD express is yet another leader in the parcel and postal delivery particularly within The United Kingdom (www.dpd.co.uk, 2012). It is part of GeoPost, a subsidiary of Frances La Poste with over 40 depots in UK and Ireland and 1700 courier vehicles. The stronghold position of GeoPost in Europe is largely attributable to the vast networks and leadership within the local or domestic markets. It is also a member of the Transported Asset Protection Association which is heavily involved within local legislations regarding cargo and parcel freight within the United Kingdom in particular giving it an upper hand in its bargaining position (www.dpd.co.uk, 2012) Bargaining power of buyers The bargaining power of buyers is interpreted to mean the ability of consumers to determine the type of goods supplied in the market and to a certain extent the prices prevailing for such products. It regards the influence with which the consumers have on the organization’s profitability. This power increases where purchases are large, and the consumer size is large as well (Palmer, 2011). Other factors, which enhance the bargaining power of the buyers, include where the industry comprises small scale suppliers and the buyers are few and large; product has many close substitutes; customers have access to and are in possession of market information; low brand-switching costs for consumers. Within the post and parcel industry, this power has vividly displayed itself through the diminishing volumes of traditional mail services. Individual consumers have shifted en masse from the use of these traditional services to the digitized forms including email, fax and teleconference (McKinnon et al., 2003). Digital alternatives are increasingly diverting volumes from the physical media (seen through traditional postal services) as consumers increasingly shift focus to communications media that are more reliant, fast and most importantly cost efficient. Such media are seemingly at pace with the new devices that serve both business and informal needs to consumers e.g. iPhones The most efficient way by which post and parcel service providers can keep up with these cost-efficient demand forms begins with the minimization of manual handling in the processing of packages and letters. The UPS, DPD, and DHL have effectively undertaken upon this challenge through the adoption of bar codes and RFID tags. This has been of benefit in two critical ways: Firstly, it is a faster and most accurate means of identifying and sorting the mail pieces. Secondly, the inherent accuracy and low-cost readability of the technology makes it highly appropriate as a tracking system by both customers and staff members further increasing popularity of these courier firms. RFID tags are used to provide better securities similar to anti-shopping systems used in the supermarket and retail shops. They are set at points of entry and exit within the storage warehouses to protect specific items or parcels from unauthorized movements. Once proper processing has been done, the alarm features within these RFID systems can then be put off (Worthington & Britton, 2006). Perhaps the two most obvious means of conformity to consumer demands would be through the introduction of express mail and parcel delivery and opening of more depot operations. A major application of express parcel automation is through the extended platform that allows customers and businesses access to tracking and self-service freight applications (McKinnon et al., 2003). The number of depots of operations for the three logistical firms in this study has grown tremendously as the firm’s seek to expand geographically and gain better access into new and emerging markets. United Parcel Service has also integrated a mobile point-of-sale platform (POS) that has accommodated the varying customer demands for more efficient systems especially during peak hours or in emergency situations. Despite the concept seemingly futuristic for traditional post offices, the concept has successfully been implemented in franchise mail service centers. DHL response to rising bargaining power of consumers has been through the introduction of a timed delivery service across all major business centers within the European Union so as to meet the 24-hour business needs of the market within developed states. This was an advancement of their next-day express delivery service therein enhancing the efficiency and reliability of the service provider. Threat of new entrants and threat of substitutes The two factors are closely associated although they origin is fundamentally different. The threat of new entrants entails the barriers to entry of new firms into an industry. This threat is especially real where the new firms are relatively small-medium scale such that they encounter difficulties in accessing the market. These barriers to new entry include: Firstly, economies of scale where these industry leaders within their local markets naturally experience low and declining unit costs of operation. Secondly, product differentiation and brand differentiation. There is little product differentiation within this industry as the services involved are essentially similar. However, the efficacy in the provisioning of these services is the primary differentiator. Access to distribution channels are a major inhibitor for new entrants. The established providers have vast networks in the form of depots that increase their market presence, therefore, preventing new entrants from setting themselves in the market. The UPS increases its product differentiation through features such as service mapping and shipping and handling services that enable clients to customize their rates therein comparing charges for various UPS services. This gives the consumers increased flexibility in decision making and thus granting it more competitive edge (Plunkett Research Ltd, 2010). The threat of substitutes refers to the resultant effect of competition within the industry. Within the postal and parcel industry the operations of the industry leaders mainly influence the adoption processes of industry followers i.e., where industry leaders such as UPS and DHL set the benchmark in terms of efficient services and followers have to adjust operations appropriately. These two factors combined effectively ‘lock up’ the consumers in the market (Plunkett Research Ltd, 2010). Rivalry amongst competitors This refers to the rivalry between competitors and is often the strongest amongst the five forces (Porter, 1998). Where it is weak, competitors can easily influence both product quality and prices so as to make higher profit margins. Where it is strong, there is a need for increased product benefit to maintain customers. Competitor rivalry can be enhanced as firms try to attain the market leadership; where market is expanding slowly or is shrinking; high perishability of products or high degree of homogeneity of products. These market leaders try to minimize the competitor rivalry especially within their local markets by product differentiation as mentioned above and forming stronger links and loyalty with the customers. Additionally, UPS has taken the relationship approach in building consumer loyalty through the UPS foundation oriented towards global giving (www.community.ups.com, 2010). Another common aspect of managing rivalry amongst the three competitors is the use of the Internet for global brand development by UPS; the use of cable television for brand marketing by DHL and policy lobbying for DPD. Reference Accenture, 2011. Achieving High Performance in the Postal Industry. Accenture. Baron, D.P., 2009. Business and Its Environment. Prentice Hall. Boulton, W.R., 1999. United Parcel Service: Moving at the Speed of Business. USW and William R. Boulton. Fleisher, C.S. & Bensoussan, B.E., 2007. Business and Competitive Analysis: Effective Application of New and Classic Methods. FT Pres. McKinnon, A., Button, K. & Nijkamp, P., 2003. Transport Logistics (Classics in Transport Analysis Series). Edward Elgar Pub. Palmer, A., 2011. Business Environment. Mcgraw Hill Higher Education. Ph.D., .D.B.H., 2009. Business Environment. CreateSpace. Plunkett Research Ltd, 2010. United Parcel Service, Inc. (UPS) Profile & Transportation Industry Trends Analysis 2010. 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