Porter's Five Forces Analysis

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In the current dynamic economic environment, each business organization is striving to evaluate its performance in the market on a regular basis. In ensure survival, firms are implementing initiatives to expand their market share through gaining access to new markets, making price and products more appealing, improvising new styles and strategies, and satisfying the customers. Therefore, business executives and managers are looking for appropriate techniques and tools to aid in investigating the external and internal cost of their goods or services, analyse needs of customers, get market information, ensure competitive advantage, and assess and predict organizational performance (Afonina, 2015). What is evident is that strategy development tools can be applied to different areas of business. Tools used in general management enable managers and executives to make effective resolutions for business survival. Tools employed in the management of marketing activities are responsible for recognizing and addressing the needs of customers, while those used in operations management are aimed at ensuring competitive advantage in the production and distribution of products and services (Afonina, 2015). Even though there are many strategy development tools, the current paper will focus on Porter’s five forces, PESTEL, resource-based view and SWOT analysis, and explain how they are used in business.

Discussion

PESTEL

PESTEL analysis refers to the examination of the external setting in which a business exists. PESTEL analysis is an important tool for comprehending the political, economic, social, technological, environmental, and legal elements of the environment in which a company operates (Carruthers, 2009). PESTEL analysis can function as a checklist to indicate whether a firm has effectively considered all the macro aspects that affect business. In business, PESTEL analysis is often used to evaluate market growth or a decline in market share, as well as the direction, potential, and current position of an organization. The political aspect in PESTEL analysis identifies all the political factors that affect a company or the industry at large. Such political factors can include political stability, trade restrictions, and government regulations such as tax policy and employment laws (Carruthers, 2009). On their part, economic factors determine the purchasing ability of an entity and the related cost of capital. Economic factors comprise interest rates, the overall economic growth, currency exchange, and the inflations rate. The social factors in PESTEL analysis impact the potential market size for the products or services of a business along with the consumer’s willingness to buy. Although they vary from market to market, social factors typically include age demographics, population growth, and attitudes towards health (Ha and Coghill, 2006). Technological factors are related to the barriers to entry, investment in innovations, and make or buy decisions, while environmental factors comprise all those aspects that are determined by the surrounding environment. Environmental factors have especially become important to business as a result of the increasing pollution, scarcity of raw materials, carbon footprint targets, and the need for operating as a sustainable and ethical company (Ha and Coghill, 2006). Finally, the legal aspect of PESTEL analysis incorporates the laws that govern business operation. Legal factors comprise in among others consumer rights, equal opportunities, product safety, advertising standards, and product labelling. For success, companies should understand all the laws that govern business in the country of operation. In actual scenarios, the six components of PESTEL analysis are conducted independently, though many events transcend the borders of a single category. In this light, business strategies are developed by integrating all the factors.

Five Forces

The five forces analysis was advanced in 1979 by Porter Michael, a professor at the Harvard School of Business (Grundy, 2006). It is a more simplistic framework for appraising and assessing the competitive situation of a firm or its strength in business. This strategy development tool is founded on the concept that there exist 5 forces which determine the intensity of competition and attractiveness of a given market. The five forces comprise the threat of substitute services/ products; power of suppliers; the threat of new entrants; the power of customers; and the industry (Dobbs, 2012). With regard to the threat of new entrants, markets that are profitable have a higher likelihood of attracting new entrants and, in turn, eroding profitability. In this light, incumbents firms have to devise robust and lasting barriers to such entry through patents, government policies, high capital requirements, and economies of scale (Dobbs, 2012). Concerning the threat of substitute products, it is argued that in case close substitute are available within the market, it raises the prospect of consumers shifting to other options in case of price increases. This reduces the power that suppliers have as well as the desire for investing in the market.

The power of suppliers refers to the assessment of the ease of suppliers hiking prices. This is determined by the distinctiveness of the service or product, the number of companies specializing in the production of a given input, the cost to the consumer of switching suppliers, and the relative strength and size of the supplier (Dobbs, 2012). The power of customers is an assessment of the possibility of buyers driving down prices. This is controlled by the significance of each buyer to a company, the number of buyers in the market, and the cost to the buyer of switching suppliers. Simply put, if the business has fewer but more powerful buyers, then they typically have the ability to dictate price. Finally, the industry is a more comprehensive analysis focussing on the capabilities and number of competitors in the market (Dobbs, 2012). In that, many competitors who offer undifferentiated services and products reduce the market attractiveness. Taken together, the five forces analysis helps to determine where power is situated within a business, which is essential for recognizing the strengths of the position that an entity is aiming to move into and the organization current competitive position (Dobbs, 2012). The five forces analysis is often used in business to determine whether new services and/or products would be profitable. By recognizing where power is situated, Porter’s theory can be utilised to improve on the weaknesses, identify the areas of strengths, and avoid making business mistakes.

SWOT Analysis

SWOT analysis is a strategy development tool that helps managers and executives evaluate a project or idea to effectively formulate a business plan (Gretzky, 2010). SWOT stands for strengths, weaknesses, opportunities, and threats. In this light, SWOT can be utilized to understand the internal weaknesses and strengths of an organization and the external threats and opportunities. When properly executed, this tool can provide organizations with ideas about how to improve business performance, or simply determine whether a new business or product will perform in the market (Gretzky, 2010). Even though different businesses are affected by varying factors, the strengths of a business relate to what the organization does better than others, the unique selling points, what clients or competitors in the market perceive as the competences of the company and the actual competitive edge of the firm. Weaknesses summarize what other businesses in the industry do much better than the organization, the elements of the business that contribute no or little value, and what clients and competitors perceive to be the flaws of the business (Helms and Nixon, 2010). The opportunities of a business are the changes in PESTEL factors that favour a business, gaps in the market that can be filled by the firm, and new innovations that the business could bring to the market. Threats refer to the changes in PESTEL aspects that are unfavourable to a business and what competitors are doing that negatively impacts the business (Helms and Nixon, 2010). Business organizations use SWOT analysis to identify the areas where the company performs well, as well as the target areas that need further improvement. When used effectively, SWOT analysis helps a company focus on its strengths while concurrently reducing and eliminating weaknesses.

Resource-Based View (RBV)

Resource-based view is a tool for strategy development that analyses the resources of a company to determine the competitive advantage of the business. Competitive advantage particularly refers to the edge that a company has over its competitors (Lockett, Thompson, and Morgenstern, 2009). The RBV considers the characteristics of the company resources. To attain a competitive advantage, a business should strive to have resources that are valuable, rare, inimitable, and organized (VRION) (Lockett et al., 2009). Resources that are valuable decrease production costs and increase differentiation, hence augmenting their value to customers. Resources that are rare are those that only a very small number of firms or one company possesses. Inimitable resources are difficult to replicate and unique to a given firm. Finally, a company’s resources should be well-organized. However, the organization trait is sometimes replaced by non-substitutability, changing the acronym to VRIN. Resources that are non-substitutable are those that cannot be easily substituted by the competitors of a company. Examples of resources that possess the VRIN or VRIO attributes include experience, brand equity, reputation, and intellectual property. While each of the attributes is beneficial individually, a resource has to possess all the attributes so as to contribute to the competitive advantage of a company (Lockett et al., 2009). A company that has resources that satisfy all the VRIN or VRIO attributes will realize long-term competitive advantage. Therefore, by examining the resources available in different areas including current prices, marketing strategy, employee satisfaction and retention and the current website, a business is able to develop effective strategies for growth and survival.

Reference

list

Afonina, A., 2015. Strategic management tools and techniques and organizational performance: Findings from the Czech Republic. Journal of Competitiveness, 7

(3), pp. 19-36.

Carruthers, H., 2009. “Using PEST analysis to improve business practice.” In Practice 31, pp. 37–39.

Dobbs, M.E., 2012. Porter's five forces in practice: Templates for firm and case analysis. Competition Forum, 10 (1), pp. 22-33.

Gretzky, W., 2010. Strategic planning and SWOT analysis. JP Harrison, Essentials of Strategic Planning in Health Care, p. 97.

Grundy, T., 2006. Rethinking and reinventing Michael Porter's five forces model. Strategic Change, 15 (5), pp. 213-229.

Ha, H. and Coghill, K., 2006. “E-Government in Singapore—A SWOT and PEST Analysis.” Asia-Pacific Social Science Review, 6 (2), pp. 103–30.

Helms, M.M. and Nixon, J., 2010. Exploring SWOT analysis–where are we now? A review of academic research from the last decade. Journal of Strategy and Management, 3 (3), pp. 215-251.

Lockett, A., Thompson, S. and Morgenstern, U., 2009. The development of the resource‐based view of the firm: A critical appraisal. International Journal of Management Reviews, 11 (1), pp. 9-28.

January 19, 2024
Category:

Business Economics

Subject area:

Company

Number of pages

7

Number of words

1705

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