In the first article, Michael Porter's five competitive pushes were presented and were used to analyze the surroundings of the bank industry in Tanzania.
This essay is approximately evaluating the five force's viability in today's technological business era. It will go through the three general strategies introduced by Michael Porter as a solution for the firms to compete in their establishments. The essay will compare on the uses or great things about the five makes construction and the strategies as well as the downside or constraints of these pushes. Finally you will see conclusion stating whether the model does apply to today's business environment.
The essay begins with a short reminder of the five competitive forces and then explores the viability or feasibility of the forces in the current swiftly changing environment which is the aim of this second essay.
As introduced in article one, the five competitive forces were introduced by Michael Porter in order to examine the appeal and profitability of various industries on the market. In his publication Competitive Strategy: Techniques for analyzing companies and competition (1980), Michael Porter pointed out that any industry is surrounded by five main elements and their collective effect affects the success of that business particularly Threats of new entrants, Dangers of substitutes, Bargaining vitality of the purchasers, Bargaining vitality of the suppliers and the entire rivalry or competitiveness.
Once the organizations have examined their business environment, they might use the universal strategies introduced by Michael Porter to create a competitive gain and also compete successfully of their respected industry.
Let us now look at these universal strategies and also how bankers apply them in their daily procedures. The below is a diagram that summarizes these strategies:
Source: Michael. E. Porter, (1980) Competitive Strategy-Techniques for inspecting industries and competitors.
This is a business level strategy in which a business is the lowest-cost manufacturer in its industry. It will try and retains all its over head expenses at the very least and the company does everything to decrease costs. An example of finance institutions, they can apply this plan and reduce a few of their costs by giving services predicated on charging low rates like customers opening accounts with least deposits and the also by the utilization of new technology can reduce other administrative costs like saving all the relevant data in the software used instead of using papers and files. This plan targets the broad market or all the clients. Various lenders like US loan company of America, Bankers Trust Corporate, Chemical substance Bank, Run after Manhattan Bank, Citibank, Morgan Guaranty Trust Corporation and Wells Fargo utilize this strategy in presenting loans to their corporate customers and they compete with each other with the rates of interest charged. (Anon, 2011)
A company differentiates itself from its competitors by giving something unique that is valuable to customers. (Musika et al, 2008) Here the firms give the customers some other product or service than provided by its challengers. For example banking institutions providing different facilities to its various customers like loan, credit or over-draft services which differs from other financial institutions, it might put in a bit more services that help the customers track their ventures. The banks introduce various impressive and diverse products and services to make themselves not the same as their fellow lenders. Another example could be the advantages of Visa credit cards. In Tanzania this center had not been there before but just began recently. This is a business level strategy that is directed at all the customers.
As Michael Porter (1980) pointed out that this common strategy is focusing on a specific buyer group, section of the product brand or geographic market. Quite simply this can be a combination of a cost-leadership and differentiation strategy. It simply means concentrating on a small portion or a distinct segment market or product like bankers centering the retail customers only or commercial customers only. Many bankers provide special makes up about students who are studying so that they could save because of their education, small children who are growing up and who are trained about personal savings and also women who've various tasks like the Exim lender (T) limited presented Tumaini account especially for working women to help them cut costs. Diamond Trust lender (T) limited has a Junior Jumbo take into account young children. It could either be considered a cost-focus strategy or a differentiation-focus strategy targeted on the narrow portion.
(eximfinancialservices. com, dtbafrica. com)
All the three strategies are related to business level. The managers or the people retaining authority available choose what technique to pursue to be able to build a competitive advantage in the market. Regarding to Michael Porter, most organizations use either one of these strategies or combine them together to make a position in the market in particular.
Let us now go through the benefits of the five forces and the universal strategies provided to the companies in the industry:
USES OR GREAT THINGS ABOUT THE FIVE Makes FRAMEWORK :
The information obtained by the five causes examination can help the companies in their corporate planning strategies like these causes provide statistical research. Using the framework, various companies and their opponents are considered and hence the firms doing the examination get a good deal of information on the actions taking place in the market. The analysis provides an idea on the elegance and success of the business. It can help the firms to decide whether to enter in or leave from a specific industry. For example the banks utilize this framework to know the performance of all financial institutions to see where in fact the customers are definitely more demanding and introduce strategies so as to take good thing about this example.
The information from the platform provides the businesses with various choices that they can know which push is at their favor and which is not and thus they can create a technique which can give them advantages in creating a competitive position in the market. So in simple words, the five causes give the managers different alternatives.
It also supplies the businesses with a dynamical evaluation to be able to determine the changes that might take place in the future. They could view the external environment and the five causes together and can find the direction of what might change in the competitive makes.
Also the use of the fives pushes helps the organizations in getting information how are different competition afflicted by these makes. All the firms within the industry are different and are affected differently. Some organizations are of large size and capital while some are small or medium and so their industry structures aren't same. Just like in banking industry there are retail finance institutions, corporate banking institutions, and European unions. The commercial examination conducted could reveal these affects so the firms might well have strategies to persist on the market.
(Johnson et al, 2009)
Another profit provided by the five pushes is that they offer the firms with a knowledge of sense of competition and then to look for a way to develop a tactical position in the market associated with the firms concerned. Hence it will be known what or which drive is and only whom and solutions could be found to guide the firms consequently. Again the banking industry can give us a good example, as the bankers corporate customers possess some extent of power; the banking institutions offer them various services like momentary loans or overdraft facilities with good rates in order to lessen the energy.
USES OR BENEFITS OF THE General STRATEGIES:
The cost-leadership strategy contributes to the firm producing and also offering products at minimal prices and hence increases the market share in the industry. This plan is widely used by various financial institutions; they start various branches at different locations so that they can reach many people and hence get a great deal of market share.
The businesses can also achieve economies of level as it would be producing in large amounts so as to avoid the unit costs.
The differentiation strategy helps the businesses in the industry to produce good quality products that are appreciated by customers and hence increase customer basic.
It also creates recognition among the customers for products which are different from that made available from everyone in the industry and thus creates a good image or reputation.
The Emphasis strategy helps the organizations to identify a niche market from the complete big market and the firm can then specialize to provide that portion creating its competitive position.
(Musika et al, 2008)
Apart from the huge benefits it offers, Porter's competitive causes and the strategies have limits on the other hand. Many scholars have criticized the model according to their research results. Let us now take a look at these limitations to see whether the framework is sensible or not. The following are the downsides of these competitive makes and strategies:
LIMITATIONS OF THE FIVE Causes AND GENERIC STRATEGIES:
It does not determine the right industry. It takes industries all together while there are sections involved to produce a whole industry. For instance in the bank industry, there are sections like the standard banking services involved in the country and the ones associated with beyond your country and also there are different customer sections like retail customers and commercial customers. So these makes will probably act differently in these segments and Michael Porter's pushes did not consider this.
The Converging establishments are also not considered in the construction. Nowadays due to the scientific and technological era, many establishments seem to be to converge or overlap each other where before they used to be independent. So when doing the industrial research, this matter is not taken care of in the model. Hence it restricts the businesses in their proper information gathering. Here again we may take exemplory case of the banking institutions, nowadays all the banking companies have IT systems that help in converging a lot of its pursuits like branch communication, customer concerns.
The competitive pushes model has one force that discusses the replacement goods, but it generally does not take into account the other category of goods or services called the complementary goods. These goods or services are those that can be utilized together than separate. Hence when conducting a competitor analysis, the complementary products should also be looked at. The firms in the industry might consider doing business with those firms providing complementary services like bankers and the DHL or FedEx services.
(Johnson et al, 2009)
The basic idea from the model was to make a strategy that helps organizations to compete in the industry. Regarding to Michael Porter it looked that the primary aim of the business enterprise was competition but this isn't true. You will find many other targets of the businesses apart from fighting with each other. Some business give high attention to customer service, providing quality products, maintaining economic stableness by creating job opportunities.
According to Adam Brandenburger and Barry Nalebuff in their 1990's research, they discovered that the companies could use their concept of game theory to come quickly to create the strategies that will assist them in their firms. Unlike the Porter's causes, the game theory includes two main elements of co-operation and competition which are both necessary and appealing in conducting business. The Porter's model just concentrates on competition. (provenmodels. com, 2005). Nowadays many companies join together to create mutual partnerships like they form proper alliances, joint ventures in order to eliminate unnecessary competition and also benefit from each other's resources.
Another group called Sylloge Company, an Indian marketers group criticized the five forces framework stating that they offer the proper options and not the exact ways of be implemented. (Wikipedia. org, 2010) According to this declaration, this means that the model explains to the industries included of the actions occurring and their benefits but it does not show any solution or direction that the companies in these business might want to follow. Quite simply, we can simply say that the model explains to the concerned people about the situation but it generally does not give an answer to that problem.
The competitive makes have many assumptions included while in today's age, these assumptions no longer apply. It assumes a static market composition. When Michael Porter learned this construction in the 1980's, the marketplace was secure and one could easily foresee the movements in various market sectors but today this is not the case. In the current age many new scientific development causes the business environment to change therefore do these pushes. A very good example is how the release of internet banking has had an impact in the banking industry; it includes changed the degree of power in one pressure to the other. With technology any player can enter the industry nearly and also reach a big market at the same time. Other changes that the internet appears to have created might be the differ from economies of range to altering guidelines of competition. With It small players in the market can create a competitive gain as they own the data of making use of the technology.
With the internet bank, the lenders are no longer the gatekeepers but they become gateways to the financial loans. The customers can certainly get on a bank's website and find out what products and services are offered. (Siaw I, Yu A, 2004)
The framework recognizes from an outside-in perspective. It doesn't take into account the resource established view of the strategy (inside-out) which is the competitive edge and superior performance of an organization discussed by the distinctiveness of its capabilities. (Johnson et al, 2009) This view includes firm's unique resources that perform the best in the entire industry. They could be the firm's management team, employees or equipment. Michael porter didn't see these as acting within the firm's boundary. They help the firms in the business to make competitive edge. If a firm does something is preferable to all the companies in the industry, then no matter how low the hazards of entrants is or how high the bargaining ability, this will lower down and act in that firm's favor, hence that firm doesn't need to be concerned about the forces within the industry.
A Model of Competitive Advantage by using the Resource based view:
The pushes and the strategies mentioned by Porter are more deliberate than emergent. Nowadays the world is changing rapidly and the businesses have to be prepared to operate in different environment, like just lately there was a major credit crunch or economic crisis that strike all the countries on the planet and due to this truth, even the competitive makes would have altered their power in favor of one player to the other. During the eighties period, the firms possessed a stable environment and there was cyclical innovations in the establishments but this is not the case in the current active environment.
According to Larry Downes the competitive pushes are not suitable in today's period. He recognized three analytical tools that would make the Porter's makes to be susceptible. As per his findings, today's environment is affected by the three elements namely, Digitalization, Globalization and Deregulation. As much firms get affected by the info technology, all the players within the industry can access various information and hence get the data of what is taking place in their respective industry, nothing like before, the buyers or suppliers needed to conduct studies, then only they could get a concept about the general environment of the marketplace.
As Globalization occurs and as many folks of different cultures and backgrounds talk with one another, it is likely that there will be many new methods presented of conducting businesses and therefore the competitive forces will not be able to really give a picture of the elegance or success of a specific industry. An example can be see in the bank industry, a long time before the banks worked well independently on their own however when the european union concept emerged in, many banking companies joined hands with the traditional western union retailers and are now operating in providing the transfer of transactions mutually.
(Recklies. D, 2008)
Michael Porter got founded his knowledge on the prevailing businesses. Relating to his assumptions, if any companies wanted to get into business, they would go through the present industries, He didn't give a thought that the companies might consider to get into new marketplaces.
In their publication, Blue Ocean Strategy, how to set-up uncontested market space and make your competition irrelevant, (2005) W. Chan Kim and Renee Mauborgne criticized Porter's construction because it was too small, it talked about about low cost or specific niche market players while overlooking the worthiness of the merchandise or services that is more important to the clients. Porter's framework performs about the known industries where in fact the boundaries and competitive guidelines are well identified. Here a lot more firms get into the market, the more need develops to outdo the organizations and this will sometimes create issues between the firms, this is referred to as the red sea strategy. While if the firms look around for opportunities and go into new industry, they could effectively achieve a space on the market and also gain revenue, to create the Blue Ocean strategy, indicating the organizations have to find deep and find out the new gaps which have been left out by the existing firms. An example of ING Direct in the 1990s applying this plan shows the way the banks can benefit from it. ING Direct focused more on the personal savings and home loans accounts, unlike other bankers in the industry focusing on the current accounts. Hence it started out serving another segment which was untapped and it also benefitted from it. (Burt. G, n. d)
The below diagram summarizes just what a blue sea strategy is from the red sea one that was the concentrate of the five forces framework.
Michael Porter's pushes derive from the Red sea strategy
Source: http://www. 12manage. com/images/picture_blue_ocean_red. gif
Furthermore you may still find lots of things that Porter's platform doesn't consider like the non-market pushes. Porter hadn't used into view the government's impact on the market of a specific industry. Today the Governments play a dynamic role throughout the market of these country, there are many regulations that the businesses (existing and those planning to enter) must satisfy to be able to efficiently run their business. In the five forces, there is absolutely no reference to this governmental effect. For example as mentioned in article 1, the governments and the central standard bank of the country first audit everything, from the administrative centre requirements to the people heading to maintain the management of the bank.
Also there are alternative activities like the corporate social duties, some firms is probably not carrying out well in their success nevertheless they would be on the top when it comes to providing the society and hence these organizations could take benefit of this and market their organizations and gain a position in the industry. (SPS, 2009)
As discovered in this article by Dagmar Recklies (2008), the competitive causes framework is dependant on the idea of Economics. Michael Porter just based mostly his evaluation on various economical laws and came up with the five causes construction. Now as the time passes by these financial laws also change with the situations and hence this makes Porter's model to be susceptible or less applicable in the transformed surroundings. The below is the diagram that shows how the Porter's framework came into being by checking it with the general economic regulations.
Bargaining Electricity of Suppliers
Supply and demand theory, cost and creation theory, price elasticity
Bargaining Electric power of Customers
Supply and demand theory, customer action, price elasticity
Rivalry between Existing Players
Market structures, quantity of players, market size and development rates
Threat of Substitutes
Threat of New Entrants
Market accessibility barriers
Source: http://www. themanager. org/strategy/BeyondPoter. htm
Apart from these limitations of the five pushes framework, there are hazards mixed up in generic strategies created by Michael Porter as a solution to cope with competition. In his book (1980), Porter will mention about the risks involved in chasing the generic strategies. For instance: in the cost leadership, the businesses may not see an opportunity to spend money on new areas as they might have to spend on the research and development, they could alter the grade of their products anticipated to more focus on lowering the expenses.
In the differentiation strategy, the organizations might adjust their products and reduce the customers brand royalty as the clients were more used to the more aged services provided but the firms would not take note as their main strategy is to distinguish themselves.
In the target strategy, the businesses filter their reach of the market as they just target a small segment and that also they are not sure works because the clients do tend to change their tastes and preferences quite often.
COMPARISON OF THE BENEFITS AND LIMITATIONS IN THE FIVE FORCES Construction AND CONCLUSION
The above reviewed were the benefits gained from using Michael Porter's five competitive causes framework and the constraints of the model in request of the model in the current era.
The five makes construction helps the organizations in analyzing the general environment of the industry. Through executing a research using these five pushes, the fads of the business enterprise and the exterior influences of the industry is pictured. The amount of competition gets disclosed and the businesses create ways of continue in their respective industries. However the framework is kind of static in its software, it explains to the firms about how the competition is but the firms themselves have to find out ways to deal with the competition and continue to survive.
The forces can react or behave in a different way with different players in the industry. Many firms within the same industry have different positions within the marketplace plus they also differ from each other in their capacities, one firm might not be good in a single area but it might be accomplishing well in another area. As the construction takes the industry all together, it is better to disaggregate the business and then evaluate the surroundings using the platform.
When using the platform, the businesses should go through the macro environment as the forces are concentrated more on the inside (micro) surroundings, it is not advisable to make decisions predicated on the framework itself. The organization should also consider applying several other tools like the SWOT research, PESTEL and BCG matrix in order to gain a broader picture. The organizations should decrease the risks and use its talents to take advantage of the strategic space, which is the opportunity in the competitive environment that's not being completely exploited by rivals (Johnson et al, 2009, p 50)
The research question of the essay can be concluded that the model released by Michael Porter in the 1980's does not have much influence in today's changing environment. It had been useful for the reason that period but as today, the situations continue changing, there are numerous new discoveries happening, the e-commerce or the info technology has already established a greater affect on all the establishments, the porter's framework did not see this approaching. However the framework is some sort of analytical tool which can be used by the firms to make their decisions based on more research or knowledge. An excellent and competitive company does not make decisions predicated on one analysis; it must use many tools and frameworks to come to the final decision. The competitive pushes should be utilized together with other business frameworks like the SWOT, PESTEL to give a broader view.
Overall the construction is a tool that helps in scrutinizing the business enterprise environment on the whole and provides a concept but it must be used alongside with other tools as well to be able to get a better final result and formulate a technique or business decision based on sensible research.