Michael Porter model is still a theory considered a force to reckon with when it comes to strategic management. Simply referred to as Porter’s five forces the model is based upon industrial organization (I/O) and Michael was able to show that five forces that basically determine a firm profitability (Porter, 1980). He mainly explores environment that a company can operate and have competitive edge. It is pertinent to note at this level that a business success depends on environment and environment in this context may be external or internal (Chak, 2003). These five forces are entry threat, buyer’s power, supplier’s power, substitute’s threat and of course business rivals or competition.
Since the inception of the model, of course from Michael Porter book Competitive Strategy, managers in one way or another have tried to analyze their companies using them to try and lay down a foundation in strategic planning (Miles, 2003). In an overview I will briefly discuss but on the same note give facts about each of the forces.
The first force sends a question as to how hard it is for a company to get into specific business. With a very profitable product many companies will try and enter such market leading to very high rates of competition. however, this is not the case since there are forces that controls how easy or hard it is to get into a specific businesses and they include the following; resources scarcity, legislation or government policies, protection which is normally in the form of patents and rights (Chak, 2003), capital involved, loyalty to existing major brands among others (Porter, 1980) .All these factors will in one way or another limit entrance to the market, depending on the company background (Miles, 2003). When any business tries to venture new market it is wise, that this force is rigorously studied so as to end up with background information regarding operating such business (McAfee, 2002).as many companies try to enter the market there is blocking of profit potential of the industry, incumbents need to deter this(porter, 1998)
Force two of Porter’s five is the substitute threats. Customers may switch and start using substitute products especially when they are cheaper. There are factors that generally affect this threat and they include the following; fashion and fads, cost this is in comparison, performance in substitute prices, propensity by buyer to the substitute and innovation as in technology changes. In this case issues of similarity greatly play a big role (Kotlerand Gary, 2010). For example, if coffee prices skyrocket probably the consumers will switch to tea since it is a product that is quite close.
Customer power is another force and basically it is a question as to how can customers pressure a business. Customers with very big impact on a business to influence margins and production volumes can be considered as key during planning since they can easily control the company success. There are many factors that empower buyers (Miles, 2003). Those that are listed here are just some and thus they are not limited to these factors only. Customers are powerful when they are small in numbers, if buyers are purchasers of large volumes, if switching is easy, if product can be done away with for some time, buyers are less as compared to firms as well as price sensitivity (Hamel, 2000). In many business scenarios customers are often considered as the force behind the either success or failure of a company (Chak, 2003).
Another factor or force is the supplier’s power. Like customers, suppliers are able to put pressure on a business, thus this is a question as to how much pressure the company supplier or suppliers can put on such company. For example, if a supplier has a lot of impact to influence companies margin’s and production volumes, then they have enough powers (Kotlerand Gary, 2010). Suppliers mainly draw their power from the following factors; If supplies for a specific products are few, If no substitutes are available, When product is very important for the company (Chak,2003), When the supplier is profitable than client, suppliers numbers as compared to clients is small. The differentiation degree of the inputs, prices of inputs being high in relation to finished products. Porter’s force of supplier is considered as an external environment.
The last of the Porter’s forces but not the least is competition. Some literature often calls it competitive rivalry. It tries to describe the rate or intensity of the competition within existing firms. It is logical that competition is very expensive and so highly competitive companies will in turn earn low revenue due to this high cost of competition (Porter, 1980). It is pertinent to note that several factors play a role resulting in high competition. They include; many businesses or players of same size with no one who is dominant, when there is little or no differentiation between competitors in their products, little growth in an industry which is very mature and the fact that growth is based on stealing customers. In some instances rival companies can aggressively compete in other dimensions rather than price. An example is in marketing and innovation. The degree of rivalry indicates the competition intensity as well as outlining the competition basis (porter, 1998).
The tools Michael porter considered in strategic management often finds application in business management in most cases proving great insight and success. However, this is not the case because in some instances there have been lack of explanation using the same model (McAfee, 2002). It is evident that it is necessary to apply different models to different business cases. Most importantly is the need to understand that every model have criticisms, However these criticism do not seek to pull down such theories and models but they provide greater insight and in many cases acts as eye opener such that managers are made to work harder in figuring out many facts and factors that will eventually lead to success (Miles, 2003). This has greatly to establishments that are unshakable from factors proving threats to the business environment. It is also of utmost importance to keep the cost of running business as low as possible to realize maximum profits (porter, 1996) the following provided case can be used to shed light on the application of theories that try to explain and assist on strategic management. Following is the case of Fortescue Metals Group (FMG).
The company founded in 2003 and can be shown as an example of successful companies. With main goal to be low cost producer of iron ore, its entry in to the market was well planned and hence no major hiccups were encountered. It is clear that the company was entering a clearly established industry. This definitely shows the appropriate analysis of market before entrance (Hamel, 2000) .This is demonstrated by the fact that upon inception it managed to enter the top three suppliers of iron ore in Australia. In five years duration it got the accolade as the year producer. It was able to build infrastructure across the three main sites targeted. This shows feasibility of capital requirements were well analyzed as the growth aspect can show this.
On substitutes being a threat, the company really had well considered. As this case indicates, the time the company entered the market the iron is shown to be very stable against other metals especially for steel production and rail industry (Chak, 2003). Being heavily relied upon on heavy construction threat of substitute is farfetched since up to now it is not clear that substitute for iron is discovered. Though there are other metals they are not very equal substitutes and will obviously take long time to become viable threat to iron in the heavy construction industry (Hamel, 2000). It is therefore clear that iron for now doesn’t face a big threat from substitutes. In this regard it is worth noting in strategizing, it was very impressive regarding the aspect of substitute threats.
On competition, normally this is where the bulk lies. Australia being rated third biggest producer of iron ore with only 15% there is big competition from big producing countries, Brazil and China normally subject the group to stiff competition (Miles, 2003). However, being considered as non open network it is given advantage as it is not subjected to government control (Kotlerand Gary, 2010). It is clear competition is a big threat and that’s why even Chinese millers are not for the idea of Rio Tinto and BHP merger.
On customer power, China is the most sought after country for iron ore. Due to growth explosion China is expected to increasingly need more ore for steel. It is clear that the Chinese millers of steel can be seen to be getting a lot of bargaining power and as expected this will have direct effect, of course pressurizing the company to their demands. As noted earlier this pressure is not good to the company and may lead to the customer even dictating the prices that they consider fair for them (Hamel, 2000). This is devastating. Hunan Valin which is given a go ahead to invest in FMG present a customer and a shareholder. Powerful customers and decreased demand for ore due to financial crisis globally is what saw fall in prices.
Supplier power is not in great force in the FMG case. This is due to various reasons, First of all is because the iron ore is not largely tied to suppliers. On discovery and taking up of iron ore the company is protected from this force. However, this is not final since the company sources among others machinery needed for mining and these companies knowing the necessity of the machines have some control on the group (Hamel, 2000). It is however not of greater importance since this is well under control and the company is not adversely affected by this force .For this case supplier force is not putting a lot of pressure on FMG that would cause alarm and in this regard it does not suffer from this force significantly. It can be clearly seen that there is no big differentiation of ore for resale, Substitutes do not play any major role and backward integration strategy is helping the company overcome (Hamel, 2000). This is one of the case that supplier is not having a lot of power. In this light it is important to remember that in many other business environments especially the manufacturing ones, cases of supplier power play to great extent that may greatly affect the company operating in such an environment (Miles, 2003).
In conclusion the company can be said to be doing good based on the fact that it is a new entrant and is rapidly spreading both in infrastructure and growth (Chak, 2003). However, competition remains as most tangible threat to the new company especially with the expected merger of big companies controlling the market. This is still not out of hand since the merger is being ferociously fought. As this case indicates there is clear explanation that the porter model can’t be set straight throughout and some forces can be beneficial for analysis but for some criticism is still valid. It will be interesting and exciting to see how businesses hold on to the new wind of change. The Porters model allows analysis of market. It can be applied to some companies, some market segments and regions (Miles, 2003). Drawing from micro economics the model considers the supply and demand, substitutes and complimentary goods and the relationship between production and the production cost as well as market structures. Influencing these forces in favor of the company is the management work and this often has an impact on whether the company will be a success story or not (Hamel, 2000). In the formulation of the model Porter must have held all these factors constant but of course, they stand a chance of happening and thus having an effect on the outcome of the business (Porter, 1980).
For proper strategic management it is necessary to merge many models so as to achieve highest degree of prediction (Kotlerand Gary, 2010). Coupled with clear understanding of where power is managers can take advantage of the strength, work on weakness and prevent making wrong decisions (Hamel, 2000). On the other hand cutting cost is necessary for businesses success this will even include on the human resource factors (porter, 1996).This is very critical in business planning. All said and done businesses need innovation and new ideas so as to remain relevant in the competitive and ever changing world.
Porter, M.E., 1980. Competitive Strategy, New York: Free Press.
Porter, M., 1996 .What is Strategy? Harvard Business Review, Nov-Dec, pp 61- 78.
Porter, M E., 2008. The Five Competitive Forces that Shape Strategy. Harvard Business Review, January, pp. 79-93.
Miles, R., 2003. Organizational Strategy: Structure and Process. Stanford: Stanford University Press.
Kotler, P and Gary, A.2010. Principles of Marketing 13E, New Jersey: Pearson Prentice Hall.
Hamel, G., 2000. Leading the revolution. Boston: Harvard Business School Press.
Chak, A., 2003. Submit now, Peachpit: New Riders Press.
McAfee, R. 2002. Competitive Solutions, Preston: Princeton University Press.