Porters Five Forces Model of Strategy - Case Study Example

Your full full January 04, Porter’s Five Forces Model of Strategy Michael Porter developed theFive Forces Model in 1979. In the model, Porter revealed the five forces that are able to affect a company’s business. The Porter’s Five Forces Model of strategy is a tool that helps the companies recognize the major sources of power. Porter’s model not only helps the companies understand their current standings in the market but also helps them achieve competitive advantage over their competitors. A company can use Porter’s five forces model to analyze its current ratings and competitors in order to design a well-structured and competitive business strategy. Companies need to re-examine its market strategy if a change occurs in any of the five forces. Various companies make use of Porter’s Five Forces Model for increasing the effectiveness of their business strategies by considering the environment of their businesses. Porter focused on power of competition in the market whereas blue ocean strategy, developed by Kim and Mauborgne in 2005, makes the companies move towards growth and higher profits through innovation. Porter’s model focuses more on those powers, which can affect the business of a company whereas blue ocean strategy focuses on the concept of innovation and improvement. Blue ocean strategy values innovation in all aspects of a business whereas Porter’s model focuses more on analyzing the forces that have the ability to affect the business. The five forces which help a company determine its power in a business situation include supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entry. Let us discuss all of these forces in order to get a better understanding of the Porter’s model. 1. Supplier Power Supplier companies are those companies, which supply raw material, labor, and some other services to a company. Supplier power is one of the forces, which directly influences a company’s business. It is extremely important for a company to do a thorough analysis of the suppliers in order to design a competitive business strategy. Suppliers play an important role in setting the prices for a company’s products. The price they charge to a company for delivering the raw material affects the prices of the company’s products. The bargaining power of suppliers can act as a power source over a company with a few suppliers. The suppliers become more powerful if a company has a limited number of available suppliers. In such cases, the supplier’s charge high prices to the company which results in increasing the product prices. Therefore, we can say that supplier power is one of the major powers influencing a company’s business. 2. Buyer Power Buyer power is another power source, which affects the business of a company. Porter’s Five Forces model is geared towards the need to analyze the buying power in order to achieve competitive advantage whereas Blue Ocean strategy makes the companies achieve higher profit through low cost and differentiation. Analysis of the buying power is extremely important because buying power adversely affects the companies by driving down the prices of the products. There are a number of factors, which play an important role in raising the buyer power. Some of those factors include total number of buyers, financial strength of the buyers, and importance of buyers for a company. In any market, when the buyer power becomes stronger, monopsony occurs. Monopsony is a term used to describe the state of fewer buyers and more suppliers. In such cases, the prices of the products of a company are set by the buyers because of increased competition. Some of the reasons why buyer power increases include concentration of buyers, backward integration threat, purchase of a significant proportion of output by the buyers. When the buyer power increases, the companies are forced to set the prices in accordance with the buyers in order to avoid the risk of failure associated with the newly manufactured products. Risk of failure is one of those risks, which affect a company’s profitability and productivity. Therefore, companies need to consider the buying power while setting the business strategies in order to avoid all sorts of customer related risks. 3. Competitive Rivalry Competitive rivalry is another force affecting a company’s business. Structure of the industry and competitive positioning of the company determine the profitability of the company (Hax 208). The number of competitors, which a company has in any specific market, helps in determining the success of the company in that market. If a company has a large number of competitors, the chances of success in the market become less. Whereas the chances are increased if a company has a less number of competitors in the market. The reason behind this is that a customer is likely to go to some other company if he does not find a suitable package from the first company. Companies using blue ocean strategy focus on improving their business performances instead of focusing on the threats of new entrants and competitors. Porter’s five forces model helps the companies achieve competitive advantage by analyzing the five forces affecting their businesses whereas blue ocean strategy focuses on achieving competitive advantage creating new market spaces for business. Blue ocean strategy deviates from competition because competition reduces the profit margin for the companies. High competition can drive a company’s profits to zero because the companies must set lower prices in order to attract more customers. Low product differentiation, low switching costs, high fixed costs, and high strategic stakes are some of those factors, which result in increasing the competition in any specific market. In case of high competition, a company takes the most appropriate decision from the pool of options, which include change in prices, selecting the suitable channels of distribution, making improvement in the product distribution, and improving the product differentiation. A company needs to analyze the strengths and weaknesses of its competitors in order to develop a competitive business strategy, which should be able to lead the company’s way towards success in any competitive market. 4. Threat of Substitutes Substitution of a product or a product’s manufacturing process also affects a company’s business strategy. When the demand of a product is affected by a substitute product or a price change, the threat of substitutes occur. Due to availability of more substitutes, the demand for the products becomes more elastic which results in affecting the product price elasticity. Product substitution occurs when some other products with the same features are introduced in the market and a large number of customers are attracted towards those products. In such cases, the old products become less attracted to the customers resulting in deceasing the profitability of the companies which manufacture those products. Therefore, the companies need to analyze the market and customer trends constantly in order to develop a product, which should be able to generate profits for the companies for a long time. 5. Threat of New Entry The last force affecting a company’s business is threat of new entry. When some new company or a new product enters a market, it causes threat for the companies that are already operating in that market. The possibility of emergence of new companies in a market also affects the level of competition among the companies. There exist some barriers for the new companies to enter a new market. In some industries, these barriers are very difficult to cross for the new companies, whereas in some industries like real estate industry and hotel industry, the companies find it very easy to enter into the industry. Let us now discuss Kim and Mauborgne’s Blue Ocean Strategy (BOS) model in some detail in order to get a better view of the differences between the two models. Kim and Mauborgne’s Blue Ocean Strategy (BOS) model Blue ocean strategy is a book written by Kim and Mauborgne in 2005. Blue ocean strategy demonstrates that a company can generate higher levels of profits and productivity by creating new demands for the customers in any existing market. The authors of this book show different angles of businesses as compared to the Porter’s Five Forces model. Blue ocean strategy focuses on reaching beyond the existing demands and reconstructing the market boundaries. Porter’s model focuses more on those powers, which can affect the business of a company whereas blue ocean strategy focuses on the concept of innovation and continuous improvement. Blue ocean strategy values innovation in all aspects of a business whereas Porter’s model is geared towards analyzing the five forces that have the ability to affect the business. Blue ocean strategy makes use of differentiation and low cost factors to create new market spaces. Companies make use of blue ocean strategy to achieve highly profitable growth instead of getting into competitions. Porter focused on power of competition in the market whereas blue ocean strategy moves the companies towards growth and higher profits through innovation. A large number of people which include professors and researchers support blue ocean strategy instead of porter’s five forces model because of the blue ocean’s sustainability and positive impact on profitability. Porter’s model helps the companies understand their business positions and develop competitive business strategies whereas blue ocean strategy helps the companies find untapped markets. Differentiation and low cost are two factors which help the companies achieve competitive advantage in a market. These two factors not only help the companies achieve competitive advantage but also help in sustaining the achieved advantage. Using blue ocean strategy, companies do not compete with each other rather they try to improve their individual performances in the existing markets. Companies also try to create new market space using innovative strategies. Companies using blue ocean strategy focus on improving their performances rather than focusing on the threats of new entrants and suppliers. Porter’s five forces model helps the companies achieve competitive advantage by analyzing the five forces affecting their businesses whereas blue ocean strategy focuses on achieving competitive advantage using low cost and differentiation methods. Summing it up, we can say that Porter’s Five Forces Model of Strategy is different from the Kim and Mauborgne’s Blue Ocean Strategy (BOS) model in many aspects. The five forces of the porter’s model help the companies develop a suitable business strategy in order to achieve success in the market. Porter’s model helps the companies understand their current positions in the market and assists them achieve competitive advantage over their competitors. Both Porter’s Five Forces model and Blue Ocean strategy are of extreme importance for the companies because both of them help the companies achieve competitive advantage in the market. However, blue ocean strategy is somewhat more beneficial for the companies because it focuses on continuous improvement instead of concentrating on different threats associated with the companies. Work Cited Hax, Arnoldo. The Delta Model: Reinventing your Business Strategy. New York: Springer, 2010. Print. Read More