PORTERs FIVE FORCES MODEL IN ACTION 4% ASSIGNMENT

Michael Porters five forces model helps managers isolate particular forces in the external environment that are potential threats:

The level of rivalry among organizations in an industry. The degree of rivalry is the extent of the competitionthe more that companies compete against one another for customers. Co-opetition is a term used to describe arrangements in which firms compete vigorously with one another, while also cooperating in specific areas to achieve economies of scale.

The potential for entry into an industry. This refers to how easy it is for another firm to enter the industry. The easier it is for companies to enter an industrybecause, for example, barriers to entry are low (see Chapter 2)the more likely it is for industry prices and therefore industry profits to be low.

The power of suppliers. If there are only a few suppliers of an important input, then (as discussed in Chapter 2) suppliers can drive up the price of that input, and expensive inputs result in lower profits for the producer.

The power of customers. The bargaining power of your customers is affected by their size and how much revenue they generate for your company. If only a few large customers are available to buy an industrys output, they can bargain to drive down the price of that output. As a result, producers make lower profits.

The threat of substitute products. Often, the output of one industry is a substitute for the output of another industry (e.g., plastic may be a substitute for steel in some applications).Companies that produce a product with a known substitute cannot demand high prices for their products, and this constraint keeps their profits low. On the other hand, industries that have few, if any, substitutes can command very high profits as long as there remains a demand for the product.

How to apply the Porters Generic Strategies?

According to Michael Porter there are four Generic Business Strategies:

1. Cost Leadership

You target a broad market (large demand) and offer the lowest possible price. There are 2 options within this course. You can opt to keep costs as low as possible; or ensure that you have a larger market share with average prices. In both cases, the point is to keep the company costs as low as possible. The consumer price is a different story.

Organizations that apply this strategy successfully usually have substantial investment capital at their disposal, efficient logistics and low costs when it comes to materials and labour. The organization is generally focused on internal processes.

2. Differentiation

You target a broad market (high demand), but your product or service has unique features. With this strategy, you make your product as exclusive as possible, making it more attractive than comparable products offered by the competition. Succeeding using this strategy requires good research & development, innovation and the ability to deliver high quality. Effective marketing is important, so that the market understands the benefits of your unique product. Its important to be flexible and to be able to adapt quickly in a changing market, or you risk the competition beating you at it. Such an organization is focused on the outside world and has a creative approach.

3. Cost Focus

You target a niche market (little competition, focused market) and offer the lowest possible price. In this strategy, you choose to target a clear niche market and through understanding the dynamics of the market and the wishes of the consumers, you can ensure that the costs remain low.

4. Differentiation Focus

You target a niche market (little competition, focused market) and your product or service has unique features. This strategy often involves strong brand loyalty among consumers. Its very important to ensure that your product remains unique, in order to stay ahead of possible competition.

YOUR TASK:

For each of the scenarios below, identify at least 3 out of the 5 PORTER FORCES (from above) that most significant impact and explain why. In addition, identify and explain which PORTER STRATEGY you believe would be best suited for each.

Scenarios:

A new diet app is coming to help people cope with weight gained over the pandemic. You enter food you consume during the day and if you exceed the calories you are allowed or make poor food choices, it sets off an alarm that is very embarrassing. (See solution below on how to complete the exercise).

A coffee shop/caf is opening in a small town (5,000 people). Presently, there is a Tim Hortons in the town. The town is located five minutes from a major highway.

A new environmentally friendly automobile is launching in the Spring. It runs on compost and bio waste and will have a zero carbon emission. Its called the Eco. The price tag will come to $125,000 and it will have a range of 1000 miles.

EXAMPLE SOLUTION: A new diet app is launching on the internet.

Force #1 impact & why: Threat of Substitute Products

There are so many options for monitoring your diet these days or losing weight. From books to beverages, supplements, calorie control programs, clinics, gyms, personal trainers, fad diets, etc. this is one of the most significant forces that will have to be dealt with since any one of these can substitute your product.

Force #2 impact & why: Potential for entry

Anyone can come up with a very similar app if not exactly the same to compete directly with yours. If you look at diet apps available through the App Store, there were 325,000 in 2017 alone! You would really need to stand out if you wanted to be successful.

Force #3 impact & why: Power of Customers

Luckily, there are millions (if not billions) of people who have access to a smart phone who are potential customers for the app. This could be why there are so many apps for dieting! If your app is priced right or even if its free initially, and starts trending, then there is great potential for it to do well as there are quite a few who could download it. Think about it how many apps do you have on your phone right now?

Strategy to use & why: Differentiation

This would be the best approach as there is a high demand for weight loss products and if you have a unique approach, then you can market the diverse features of your app to potential customers. This will require you to do extensive research and review what the current products are offering and make sure yours offers something more. Pricing the app just below the average will ensure it is attracting the money-conscious.

Coffee Shop/Cafe

Force #1 impact & why:

Force #2 impact & why:

Force #3 impact & why:

Strategy to use & why:

Eco Car

Force #1 impact & why:

Force #2 impact & why:

Force #3 impact & why:

Strategy to use & why: