Porters Five Forces Model and Strategies in Competitive Advantage - Assignment Example

Name: Lecturer: Course: Date: Porter’s Five Forces Model and Strategies in Competitive Advantage 3 b) Competitive Rivalry that Exist Within the Industry Competition exists between firms and businesses. This competition determines how attractive a sector is. The main reason why business competes is because businesses are struggling to maintain their power. Competition changes depending on the sector development, diversity and entry barriers. Here there is focus on how many competitors, products, brands, strengths and weaknesses as well as strategies, market shares (Porter 9). Middlesex Airlines faces competition for other airlines companies that exist. The airlines try to share the market. Reduced market share means reduced profits Threats of New Entrants Existing companies normally create barriers that prevent competitors from entering the market. When the barriers are high new entrants are normally faced with retaliation. There are six barriers to entrance; economies of scale which makes new entrance either have a cost disadvantage of enter market in high scale. Product differentiation which gives customers identifies with. Huge capital requirements needed to acquire equipment’s, cost disadvantage, access to distribution channels and stringent policies by government that lower of new competitors entering the industries (Porter 3). As new Airlines emerge Middlesex Airlines they will bring new capacity and desire to gain market share already occupied by Middlesex Airlines Threats of Substitute Products Substitute products normally provide alternative to existing products in the market. They limit the growth potential of an organization or a firm. This will force upgrade of existing products or differentiating it through marketing. Without doing this the industry will suffer in earnings and growth. Substitute products come in more attractive packaging in terms of quality and price. Substitute’s products other than limiting the profits in normal times also lower the benefits during boom time. Substitutes products that need more strategy are produced by industries that earn more profits and those that meant to improve their price performance (Porter 7). Through availability of other airlines Middlesex Airlines face competition and sharing of outcomes is witnessed. This is because customers will use other airlines to travel thus reducing the benefits or profits enjoyed by Middlesex Airlines. In attempt to modify their package the Airlines capture customers information through company website and call bookings, such information provides them with customer preference. Power of Suppliers Powerful suppliers normally affect price, quality and quantity of products. They can raise or lower the price and change the quality of goods and services. Supplier is powerful if they are dominated by a few companies are more concentrated that other industries they are selling to, offers unique products or it can be easily differentiated (Porter 5). Middlesex Airlines is portrayed as a powerful supplier because of the established networks and regional offices not only nationally but in its entire destination. Through this the company is able to affect the product and services it offers, either lower the price or increase the price. The Bargaining Power of Customers High bargaining power of customers influences profitability of the market. They will influence price, quality and service type offered. Choosing different clients is important in order to avoid over depending on one (Porter 6). Middlesex Airlines for instance has a wide range of customers, booking made for both consumer and business. By having such a wide range of customers, the Airlines lower their dependency to a given particular customers only. This will reduce the bargaining power of customers in terms of lowering the price 3 c) Strategies to Achieve Competitive Advantage Focus strategy. Here Middlesex Airlines can achieve competitive advantage by targeting a given market segment. For instance targeting only business people and packaging their products in order to specialize in this section and reap profit. Cost leadership strategy, here the airlines will try and lower the overall running cost while serving a large market share. Lower management operations cost will enable the company to have cost advantage over the other competitors and thus having a competitive advantage over them. Differentiation is another strategy the airlines can implement, here the company can specialize in a given kind of service unique to other Airlines that is valued and appreciated by the target market (Porter 12-16). 4 a) part I Focus Strategy Focus strategy makes firms identify a smaller competitive scope in industry and selects a special target segment in that particular industry strategizing to provide services to it better than other competitors could do. Through maximum adoption of the strategy a firm seeks to achieve a competitive advantage in the target segment though not guaranteed. The targeting segment needs has to be unique to enable the firm get an advantage over the other segments while serving it. Cost focus and differentiation focus are the two variants of this strategy (Porter 12-16). By implementing cost focus firms aim at attaining a cost advantage in its target segment through the low cost production in its industry whereas differentiation focus is where aims at being distinguished from others in its industry by selecting an attribute that buyers in an industry believes to be important and striving to achieve the needs and in return is rewarded with a premium price. These variants are dependable on the difference existing between target segmented by a firm and those segmented by others competitors in the industry. It’s mandatory to have a target segment with buyers having unique needs otherwise, production and delivery modes must be unique from that of other industry segments to be on the better side (Porter 12-16). Cost strategy takes advantage of pricing behavior in other segments whereas differentiation focus gains by making use of the special and unique needs of buyers in other segments. This shows that these segments are poorly served by competitors who do not dedicate and concentrate their services to a specific segment and their sole interest is to serve a large size of the population. Focus in itself is not enough for the desired performance but the importance of target segmentation is to allow exploitation of target differences from the balance of industry (Porter 12-16). IBM has used the strategy focus to gain competitive advantage over other IT companies such as HP. In 2009 for instance the company was improved its margins and profits even when the sales were reducing this proved that Big isn't better. IBM slimmed down while a company like HP made several acquisitions in the recent years. This made HP realizes profit of $ 1.7 billion higher than that of IBM but it was 17 % from previous quarter. IBM strategy to slim is better than that of HP because the HP chief executive was fascinated by size. IBM is focusing on the strong demand that exist for softwares which will see to it that companies and corporations lowers computing complexity and their costs, demand too exist for business intelligence software which will help companies make better sense of the data they normally collect. Profit Margin of IBM Company increased primarily as a result of slimming down to software and services (Hamm). In 2014 IBM has put strategy on focusing on big data cloud engagement. IBM is intending to focus on higher-value opportunities in order to remain the key player in the industry. The company is on the forefront in meeting demand for big data, cloud and mobile requirement which no other company can provide or are in a position to provide such technologies. IBM focuses on high performance and high-ended systems, storage and cognitive computing technology an continues to invest in R&D for semiconductor technology (Taft) 4 a) part II Strategies Competitive advantage is the lead role of all strategies and to achieve this, firms are expected to choose the type of competitive advantage it seeks to attain and how it will achieve it. With the advances of technology today, there are many other response strategies a company can adopt and the two main strategies used are cost leadership and differentiation. Cost Leadership strategy Through this strategy, firm aims to produce at lower cost in its industry in which it has a broad scope and at the same time serving many segments and related industries with importance in area coverage which is important to its cost advantage. The sources of cost advantage encompass the following technology, economies of scale, as well as access to raw materials which varies depending on the structure of the industry. These sources of cost advantage are used by low cost firm and then sell a standard product placing a considerable emphasis on getting absolute cost advantages from all sources and by so achieving cost leadership given that it will command the market prices without ignoring differentiation. A firm using this strategy must get proximity based on differentiation which in turn translates its cost advantage to greater profits than its competitors and where necessary discounts do not affect the advantage cost (Porter 12-16). An example of cost leadership in action is shown by two airline companies Texas instruments and Northwest Airlines which are both low cost airline firms. Texas instruments had problems with differentiation and could not cater for the market needs, thus left the industry whereas Northwest Airlines managed to solve its differentiation problem in time by making efforts in improving their marketing strategies, improving the quality of passenger services and giving proper service to the travel agents and thus making its product at level with their competitors (Porter 12-16). Differentiation A firm seeks to differentiation in order to be distinguished in the industry. This is attained by identifying characteristics or attribute that buyers in an industry believes to be important and striving to achieve the needs and in return is rewarded with a premium price. It is based on the product, delivery system and marketing approach, when a firm manages its differentiation and the price is higher than the extra costs incurred in being different. The firm must therefore have ways of differentiating that leads to a price greater than the expense cost without ignoring the cost position by reducing cost in areas that do not affect differentiation. An example of differentiation if from Caterpillar Tractors differentiation which is based on product durability, services, availability of spare parts and good dealership network (Porter 12-16). 4 b) Barriers to Entry These are conditions which prevent companies or businesses start-ups from entering a particular market. Barriers to entry are among the forces that influence how intense the competition in the market will be. Industry rivalry, bargaining power of buyers and suppliers and threats of substitutes. The barriers to entry can be innocent for instance by a company which has a cost advantage over the others or it can be intentional such as competing companies advertising heavily making the new industries have difficulty entering the market. Barriers to entry normally deter new competitors from entering the market in real sense they act as defensive mechanism. business that are starting up need to understand the barriers in order to enter the market when there are high barriers and even after entering the market with low barriers or no barriers at all, they business need to come up with ways to protect their position by building barriers to entry (Porter 3). A number of entry barriers to entry are there is economies of scale characterized by reduction in cost of production per unit while there is increased production in a given period of time. Product differentiation which establishes product identity which customers identify with. Through these branded products companies dominate the market, high capital intensity required for machinery infrastructure and advertising, intellectual property for instance patents and other types of intellectual property limit entry into the market, government policies also causes entry barriers. Government can prevent impose various controls which will deter new competitors from entering the market such as licensing or limit access to resources (Porter 3). Google for instance is seen to offer digitized books which are both un-copyrighted books, commercially available books and in-copy right books are not available to consumers on commercial basis. Those books that are copyrighted are normally accessible when searched in Google and are also available for sale through Google. Google competitors can also provide books which are copyrighted but are not available to users on commercial terms. There is high cost incurred during digitization of the books, high cost of t of locating the books and negotiation with the right holders. All these cost create entry barrier (Elhauge). Works cited Elhauge, Einer. “Why The Google Books Settlement is Procompetitive.” Journal of Legal Analysis 2.1 (2010): 1-68. Print. Hamm, Steve. “IBM's Strategic Focus Beats The Tech Slump.” Businessweek.com. N. p., 2009. Web. 8 May. 2014. Porter, Michael E. Competitive Advantage. 1st ed. New York: Free Press, 1998. Print. Porter, Michael E. How Competitive Forces Shape Strategy. 1st ed. Harvard Business Review, 1997. Web. 8 May. 2014. Taft, Darryl K. “IBM Focuses On Big Data, Cloud, Engagement In 2014 .”eweek.com. N. p., 2014. Web. 8 May. 2014. Read More