Porters Five Forces and Its Application in International Business - Essay Example

Porters Five Forces and its Application in International Business: A Case Analysis of the Entry of Hong Kongs Hang Seng Bank into South Africa Introduction International business expansion always require some degree of knowledge of the local markets and local conditions. Thus, before a firm enters a foreign market, it would need to undertake a critical examination and evaluation of the local systems and conditions. This paper examines one of the main methods of doing critical analysis of the local markets, Porters Five Forces. It would involve a critical examination of the concept and how it can be used by an international business to garner information and insight into the local market conditions. The paper would also examine some important elements and aspects of the concept. It would use it to provide insight into how the concept can be used and a critical example of how the theory can be invoked. Porters Five Forces In his book, Competitive Strategy, Porter identifies some important elements that are necessary for the attainment of competitive advantage. Porter stated that competitive advantage arises when a firm provides the highest level of value to consumers, and hence attract the highest prices from them. Porter argues that this can only be internalised if a firm identifies some external elements in the business environment and internalize them in order to form a strategy based on them. In order to attain competitive advantage, a business needs to examine the unique positions and capabilities of competitors and players in an industry. When this is done, a firm can identify a business strategy and after that, designs its functional systems. Industry analysis involves the examination of the key players and the key threats to a given firms quest to attain competitive advantage. This is done by examining five main forces of the industry. These elements are: 1. Risk of entry by potential competitors 2. Intensity of rivalry of established entities in the industry 3. Bargaining powers of buyers 4. Bargaining power of suppliers and 5. Closeness of substitutes to an industrys products (Hill and Jones, 2009). Every industry exists to produce some kind of value to the wider society. The industry would always exist and there is some kind of balance and stability that comes up naturally as the industry thrives and grows. The risk of entry of potential competitors refers to the situation whereby some third party businesses can enter the industry and produce services that can change the dynamics. The risk of potential competitors entering a given industry is strongly related to the presence or absence of barriers in a given industry. If there are no barriers in the industry and new entrants can easily enter, and this would make the sector extremely problematic. This is because a firms competitive advantage can be easily threatened. However, if there are high barriers like high capital requirement and other regulations, then an industry might be highly protected and this would give the businesses power and authority to come up with important changes and control over the industry. The intensity of rivalry in an industry refers to the kind of rivalry that exists amongst the main players in a given industry. Normally, this refers to the leaders in a given industry. Thus, the concept describes the fact and the way within which the businesses in an industry interact with each other to compete and attain results. From another angle, the intensity of rivalry can be examined from a subjective angle. In other words, the niche that a given business or planner operates in, would become the yardstick for the investigation of competitive rivalry of similar firms or companies in the industry. The intensity of rivalry shows the kind of structures that similar businesses or competitors with similar characteristics with the business in question operate and fare on the market. This provides a framework for the ascertaining of the kind of competition that exists in an industry. This allows people to get a fair idea of how competitive and tight an industry is. If this is high, it means that there would be a lot of competition and a business would have to remain dynamic to survive, capture market share and hold on to the market share. Bargaining power of buyers provides a threat of horizontal integration. This is because in an industry where the bargaining power of buyers is high, it suggests that buyers have a lot of power or control. This happens where there are dominant wholesalers or buyers with major capital or financial capabilities. Hence, there is a risk that such buyers would evolve and become competitors. This shows that there is a higher risk to competitive advantage for businesses in such an industry. However, when there are small groups of buyers with limited power and control, then a business might not be under so much competitive threat. Bargaining power of suppliers also shows a different threat of suppliers becoming dominant enough to acquire and control affairs in an industry. There is therefore the need for people in a given industry to consider the extent of such powers. This is because if it is very high, it means that suppliers can become competitors and this would affect the competitive strategy of a given company. However, if it is low, a company would have the ability and opportunity to grow, expand and hold on to competitive advantage over time. Closeness of substitutes refers to the the potential and the propensity of consumers turning to other possible substitutions and offerings on the market. If an industry is such that so many substitutes exists, then there is a high risk of operating in that industry. This is because the industry is likely to lose its appeal to consumers if the substitutes become more attractive to the consumers. Hence, such an industry might be quite tough to attain competitive advantage in. On the other hand, if there are limited and few substitutes or the substitutes are more expensive than the offering, then there is a low risk of substitutes and this means that it would not be too difficult to attain competitive advantage in such an industry. The Porters five forces affects economies of scale. In other words, it affects collective decisions on matters and situations in a given industry (Hill and Jones, 2008). The Porters five forces also enhances brand loyalty and determines whether a given brand would work or not (Hill and Jones, 2008). Porters Five Forces & Competitive Strategy When a firm conducts the five force analysis, there is the opportunity for the company to formulate an appropriate strategy that would enable it to survive and grow and thrive in the industry. A firm would assess the attractiveness of the industry and decide whether to enter the industry or not (Henry, 2008). After that, the company would build on its strengths and position itself in a way and manner that its strengths would bring it optimum results. To this end, Porter identifies three generic strategies that can be applied in a given industry and the include: 1. Cost Leadership 2. Differentiation 3. Focus (Ahlstrom and Burton, 2009). Cost leadership means cutting down cost to attract consumers. In this way, the company can manage its pricing in such a way that the company would be more attractive to consumers who want to purchase from the industry. In another angle, a firm can decide to differentiate by providing a unique or distinct offering to consumers and this would allow consumers to become more pleased with the improved offerings that they would get. Finally, a firm can focus on a given niche. Through this, the firm can gain some specialities and this would allow the firm to become more attractive and appealing to a section of the market and this would be the source of competitive advantage to the company. International Industry Analysis & The Porters Five Forces Entry into a foreign market is very important because there is the need for the management to get a good understanding of the foreign market and the risks and other things they need to be sensitive to. In that sense, it is important for international businesses to undertake a much more rigorous analysis of the industry that they seek to operate within. In that case, it might be necessary to use a combination of business tools and analysis to examine the foreign market before entering the market. The research conducted indicates that Porters Five Forces is a fundamental element and aspect of the critique of a foreign business environment. However, the analysis must be conducted with different tools like: 1. General Analysis of Foreign Markets (Knight, 2011) and 2. Yips Framework These tools work with Porters Five forces to give a thorough understanding of the foreign market or niche. This brings the practicality to do international business analysis and critique of matters and situations. General Analysis of Foreign Markets A business needs to have a fair view of the socio-economic items and elements of a foreing market that it intends to enter. This include the Geographics, Industry Features and Industry Development (Knight, 2011) Geographics Before one enters the market of a given nation, the business must know the various geographical components of the industry. They would have to identify the local elements and how the product or service is attained or sold to the individual on the ground. Thus, the business must identify the elements of the local and community level of the host country. There is the need to examine the regional grouping and the regional structures to get an understanding of how trends and elements exist and operate to provide results. After that, the company must identify the national trends and national elements and then figure out how the national weaves into the international. At any level, the aspiring international business must identify the core stakeholders in order to get a broad and fair picture of the elements and players in the Porters Five Forces. Industry Dynamics After that, there is the need for the aspiring international business to examine the major trends in the industry that it intends to operate within in the country it hopes to enter. It would need to have a general appreciation of the industry size and the market and demand and the form that the demand takes. Relevant Trends The business would have to undertake a thorough study of the dominant trends like the regulations, innovation, environmentalism and technology. This would include the conclusive element of the market research and this would provide the background for further analysis of the international market. Yips Framework Yip provides a structured method and system of examining a new market that a business or firm hopes to operate within. This include the examination of four drivers that shape and determines the elements of a given industry (Stonehouse et al, 2007). They include: 1. Government Drivers: This include the regulation and wider rules that exists to either help or restrict competitors in the industry. 2. Market Drivers: This include the demand conditions and other factors that provide the impetus for the operation of businesses. 3. Cost Drivers: These are the costs and bills that businesses in the industry need to face. 4. Competitive Drivers: This are the main elements that determine the competition and competitive advantage in the local and national setting. Porters Five Forces in the International Environment When applied to international businesses, Porters Five Forces needs to identify the two points and elements above as a background research. The business aspiring to go into a given industry or sector would need to get a strong market research of the general conditions that are relevant and also identify the four drivers in the Yip Framework. This would provide a context of the application of Porters Five forces. Thus, the Porters Five Forces would not be applied in the generic format as identified in above. Threat of New Entrants This would be done by examining the capital requirements necessary to enter the markets of a host country. It would outline the amounts of money that is specifically required to enter that market. Obviously, it would be cheaper to enter the markets of a developing country than that of a developed country like USA where factors of production are expensive. Also, the existence of economies of scale is important. A business must examine the economies of scale that would be available to different businesses and different stakeholders. Finally, there would be the need to examine how easily these economies of scale can be identified. Finally, the regulation of the industry is important. If there are high regulations, then it is difficult for competitors to enter the market. If it is lose, then there is a high risk of having other competitors enter the market to compete. The existence of support services would also determine how a given nations economy can take in new entrants into the specific industry. Bargaining Power of Buyers There should be an examination of the rules and regulation that relate to buying in the country. If there are rules like rationing or the existence of small companies, then the threat of buyers becoming competitors would be less radical (Daft et al, 2011). However, in a nation where governments provide support and loans to buyers and wholesalers who want to become competitors, there is a high risk that the market could be choked and an aspiring international business must be a bit careful in entering such a market Bargaining Power of Suppliers There is the need to examine the ability fo suppliers to become competitors. This includes the examination of the rules and regulation relating to suppliers and the existence of credit facilities and monopoly laws. Also, the presence of support services and possible mergers and growth can present a case of whether a given nation is less competitive or more competitive. Threat of Substitutes There is a threat of substitutes. This relates to how easily international products or substitutes get into a given nation. It would also include the culture and the views of the people in the nation in question. Industrial Rivalry The traditional firms that pioneered the service in the country is important and how the people relate to that company is very crucial in determining whether the company would succeed in the nation or not. Also, rules on monopoly and competition is important and gives an idea of how friendly or unfriendly a country is Case Study: Entry of Hang Seng Bank to South Africa The Hang Seng Bank of Hong Kong is a major commercial bank in Hong Kong that traces its history to the early days of British colonial rule (Goodstadt, 2005). Hang Seng Bank was established in 1933 and it has continued to grow in reach and extent throughout the Asia Pacific (Koon-Hoo, 2009). The bank has several branches in other nations around the Asia-Pacific region and it has the potential to expand to different parts of the world including South Africa. If the Hang Seng Bank decides to move into South Africa, it could make use of the Porters Five Forces to examine the South African banking industry and make decisions that could be beneficial to the company and its expansion drive. Here, we examine some of the factors and matters that are relevant to such an assessment and evaluation drive. Threat of New Entrants At this point Hang Seng Bank would examine how easy would it be for new banks like Hang Seng to enter the South African banking industry. To ascertain this, the management of Hang Seng Bank would have to examine the rules and regulations that are required by new entrants. They would famously examine the bank capitalization standard for commercial banks in South Africa and whether this could change in any time soon. If it is too low, it means there is a major threat that new entrants could choke up the market. If it is high, then Hang Seng can be assured that South Africas banking sector is quite air tight and they would not face competitions soon. Also, the existence of attractive elements in South Africa would define whether it would be easy for banks to enter or not. Things like the existence of banking support services which would guarantee the growth of a bank in the country needs to be examined. The ability of other foreign banks to enter South Africa and operate must be examined. If it is very easy, then the risk is high since banks from countries like India and Nigeria could easy enter the market and become popular with the Indian and Nigerian populations of South Africa and create a competition for market share. Bargaining Power of Buyers Typically, commercial banks have various savings and loans companies that bank with them and acquire banking services from them. These savings and loans companies often start as NGOs and they grow to become financial institutions and eventually become commercial banks. The question Hang Seng Bank needs to ask is whether there are a lot of such savings and loans companies in South Africa or not. They would have to examine how these small companies exist and whether they are popular with the poor and uneducated or not. If they are pervasive and common in the country, then Hang Seng might need to identify that these small financial institutions are major threats and might have a strong local presence which can make them formidable local contenders. Thus, they should adjust to compete with them on the local level and draw a medium term plan for them since the industry would be choked with such small entities that would grow from being clients of existing commercial banks to financial institutions and commercial banks. Bargaining Power of Suppliers In the banking sector, suppliers might include the Central Government and the Central Bank. Although the Central government and Central banks do not normally become commercial banks, they have the regulatory power. In expanding to South Africa, the Hang Seng Bank would have to examine the risks of the South African Reserve Bank becoming an impediment. Also the risk that the African National Congress government can make rules and regulations that would expropriate or nationalise commercial banks as it occurred in Venezuela might be examined critically before Hang Seng moves to South Africa. Threat of Substitutes Here, Hang Seng would have to examine what substitutes exist. In doing this, they would have to examine the kind of banking and saving services existed under Apartheid. What are the alternatives that existed when Blacks were not allowed to bank in mainstream banks? They would have to examine what they players in the financial sector operate. What are the alternative savings and loans system that exist? What are the investment products and financial houses and securities houses that exist which could compete with an international commercial bank like Hang Seng if they move to South Africa. They would have to also examine the presence of internet banks and international banks and how easy it is for locals to gain access to them. Competitive Rivalry Aside these factors, there are some core commercial banks that are large enough to become at threat to Hang Seng Bank. This include the primary banks like Nedbank, ABSA Bank, Standard Bank and Capitec Bank which are major financial intermediaries in South Africa. Hang Seng would have to examine their functions and major financial features and then plan on how best to compete and operate in the market. Conclusion Every industry has its own unique features. This determines the competition in the sector and the industry. This include the threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and competitive rivalries. This demands some consideration and analysis before a given firm enters to industry. It would enable the firm to build an appropriate strategy to gain and maintain competitive advantage. In the international front, a business seeking to enter a new market would have to be very careful to analyse this after a critical review of major industrial trends and activities in the market. This would provide guidance on how to enter the new market and operate to attain the best results. References Ahlstrom, D. and Burton, G. D. (2009) International Management: Strategy and Culture in the Emerging World Mason, OH: Cengage Daft, P., Kendrick, M, Kershinina, N. (2011) Management – International Edition Mason, OH: Cengage Goodstadt, L. F. (2005) Uneasy Partners: The Conflict between Public and Private Interests Hong Kong: Hong Kong University Press. Henry, A. (2008) Understanding Strategic Management Oxford: Oxford University Press. Hill, C. and Jones, G. R. (2009) Strategic Management Theory: An Integrated Approach Mason, OH: Cengage Knight, W. (2011) How to Grow your International Business London: Warner Knight Koon-Hoo, R. L. (2009) Growing with Hong Kong, Honk Kong: University of Hong Kong Press. Porter, M. E. (1998) Competitive Strategy New York Free Press Schermerhorn, J. R. (2011) Exploring Management Hoboken, NJ: John Wiley & Sons Stonehouse, G., Campbell, D., Hamil, J. and Purdes, T. (2007) Global and Transnational Business Strategy and Management Hoboken, NJ: John Wiley & Sons Read More