Strategic Management: Porters Five Forces Framework Essay Example

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Strategic Management: Porter’s Five Forces Framework

STRATEGIC MANAGEMENT: PORTER’S FIVE FORCES FRAMEWORK

Executive Summary

The role of strategists in an organisation is to comprehend and cope with competition. However, most managers define competition too narrowly as it occurs among modern direct competitors only, yet competition for profits surpasses established industry competitors to include other competitive forces. These forces include buyers, suppliers, substitutes and potential entrants. The extended rivalry that comes as a result of the five forces defines the structure of an industry besides shaping the temperament of the competitive interaction within an industry. Based on extensive literature review and analysis of the UK banking industry, this report assesses the relevance of Porter’s Five Forces Model as a strategic decision making too. Porter’s five forces is not outdated but still applicable as a strategic decision making tool within the present market conditions. Notwithstanding that technology is most crucial driver of change in the modern business environment, the fundamental idea is that every company operates in a network of competitors, new entrants, substitutes, suppliers and buyers. Although Porter’s Five Forces model has attracted a lot of criticism challenging it is applicable as a strategic decision making tool in the modern internet economy, the model is still relevant in the banking industry.

Table of Contents

Introduction…………………………………………………………………………………………………………..4

2.0 Discussion…………………………………………………………………………………………………………….4

2.1 Porter’s Five Forces Model………………………………………………………………………………………4

2.2 Importance of the Porter’s Model……………………………………………………………………………..5

2.3 Critique of Porter’s Model in Strategic Management………………………………………………….6

3.0 Evaluation of Applicability of Porter’s Five Forces: The UK Banking Industry…………..7

3.1 Competitive Rivalry……………………………………………………………………………………………….8

3.2 Supplier Power………………………………………………………………………………………………………8

3.3 Buyer Power………………………………………………………………………………………………………….9

3.4 Threat of Substitutes……………………………………………………………………………………………..10

3.5 Threat of New Entrants…………………………………………………………………………………………10

4.0 Findings………………………………………………………………………………………………………………11

5.0 Conclusion…………………………………………………………………………………………………………..12

6.0 Reference List……………………………………………………………………………………………………..14

1.0 Introduction

The last few decades have seen increased advancement in Information Technology. Information Technology has become more and more significance in attainment of competitive advantage. In the contemporary business environment, firms hold an improved access to more information regarding their competitors, customers and suppliers. Advancement in IT also augments the likelihood of improved competition and co-operation amid firms. Given that Porter’s Five Forces Model was established in 1979, critics doubts the relevance of this model as a strategic decision making tool within the current market conditions.

2.0 Discussion

2.1 Porter’s Five Forces Model

Porter’s Five Forces Model is a straightforward but strapping tool that helps in grasping the potency of a firm in a business environment (Porter 2008, p.80). The model identifies five forces in the microenvironment that compel competition besides threatening a firm’s capacity to make profit. The model helps firms in grasping the potency of their present competitive stance and understanding the power of the position that organizations wishes to move into. Porter’s Five Force Model considers five critical forces that help a firm in determining its competitive strength. The five forces in include supplier power, buyer power, and competitive rivalry, threat of substitution and threat of new entry (See Figure 1).

Figure 1: Porter’s Five Forces Model

Professor

Note: (Source Grigore 2014, p.32)

2.2 Importance of the Porter’s Model

The basic idea behind Porter’s Five Forces Model is that attractiveness of market and its profitability can be determined through the market structure. According to Porter, understanding the five forces helps firms to stake out a stance in its industry that is less susceptible to attack. Schmidt (2010, p.97) asserts that Porter’s framework of an industry analysis offers a systematic approach to defining an industry structure, designing strategy to impact industry structure, predict industry profitability and determined major success facets. The model highlights the central role of business in creating value and emphasizes how firms are interdependent with their customers and suppliers.

2.3 Critique of Porter’s Model in Strategic Management

Porter claimed that the essence of the explanation of the competition strategy depends on linking a firm to the environment in which it undertakes its business (Grigore 2014, p.32). A firm’s environment is very intricate, consisting of both environmental and social forces. For the banking industry in the UK, the central component of a firm’s environment is represented through the sector that it operates in. The organisation of a given sector yields a strong influence over the development of competition rules (Grigore 2014, p.32). However, the constitution of the Porter’s five forces depends on the industry. For instance, in the business of commercial aircraft with fierce rivalry amid dominate producers such as Boeing and Airbus, the airlines bargaining power is strong while the supplier’s power, threat of substitutes and threat of entry are more compassionate. As a result, the most powerful competitive force determines the profitability of a firm and hence become crucial in strategy formulation.

According to Grigore (2014, p.33), the academic dispute over the Porter’s model is irrelevant because this model has been utilised by several professional for accessing their business. Schmidt (2010, p.97) maintains that Porter’s Five Forces blueprint has regularly been used by researchers and practitioners. He confirms that Porter’s model is one of the best recognised models widely used in strategic management. Ettlie (2007, p.97) asserts that strategy making is the process of matching a firm’s internal resources with the environmental prospects and risks to accomplish goals. Most firms in different industries make strategic decisions based on the analysis of a firm’s microenvironment.Witcher and Chau (2013. P.110), on the other hand, criticizes the applicability of Porter’s model in strategic management. According to Witche and Chau (2013, p.110), Porter’s model underplays the significance of other facets such an innovation, technology, government and growth rate. On the contrary, Porter argues that the above factors cannot be considered as competitive forces given that they provide prospects and threats for profitability of an industry (Porter 2008, p.80). However, Porter’s model downplays the importance of industry co-operation and collaboration.

Although firms in the current competitive market are looking for means of using computerised systems to support strategic decision making Rudani (2013, p.99) claims Porter’s model is a useful blueprint to formulate corporate level strategy. However, the model is ineffective for reaction to turbulent markets (Baugh 2008, p.25). While Porter’s model is still relevant in modern business environment, hypercompetitive business settings have established more competitive strategists to change focus on the micro aspects of firms or industries. Scores of competitive vibrant researchers’ do not focus on making strategic decision through Porter’s model lens but centre more on action-reaction dynamics. The model is not operational but descriptive and does not enter into strategic decision making in a firm (Baugh 2008, p.25). The theory does not define managerial rules but the external environment, hence not effective in decision making. However, Porter claims that comprehending the competitive forces and their causes discloses the foundation of an industry’s or a firm’s profitability while offering a blueprint for influencing and anticipation competition.

3.0 Evaluation of Applicability of Porter’s Five Forces: The UK Banking Industry

The banking industry in the UK has continuously applied Porters’ Five Forces to understand where its strengths and weaknesses fall and to make strategic decisions. The industry experiences periods of swift competition and basic change when novel services and products are both consequences and agents of change. The banking sector experiences scores of crises. In 2007, scores of nations across the world, including the UK, experienced the worst economic crisis. The short-range strategies caused the economic crisis because financial organisations failed to consider the long-standing strategies for growth and sustainability and that helps firms in remaining competitive in the current competitive market. The competitive environment in the banking industry is under serious challenge from other non-banks firms providing financial services (Thompson & Martin 2010, p. 75). In order to succeed in the banking industry, banks need to comprehend the basic industry trends and hold the management stability to implement their selected course of action. According to Thompson and Martin (2010, p. 75), companies’ strategies are greatly influenced by the external environment. Strategic positions are linked to the firm’s capacity to create and add value and added value can be examined in relation to Porter’s Five Forces.

3.1 Competitive Rivalry

Competition in the UK banking industry is very far above the ground. Apparently, financial services have been used for numerous years. The competition in the banking industry is instigated by scores of non-financial, cooperative, public and private institutions functioning within the industry. All these institutions fight for the same client. Given the globalisation and government liberalisation policy, the banking sector has become open to everyone. New foreign and private firms are establishing their branches in the UK thereby increasing competition. Competition in the UK banking sector has been on the rise because of increased in players, reduced switching costs, increased market growth and undifferentiated services (Siaw & Yu 2004, p.520). With the knowledge of factors that intensify competition among rivals, firms establish strategies to keep up competition or strategies to help them win a competitive edge. For instance, banks lower their charges, mount aggressive advertising campaigns and introduce new services to attract more customers.

3.2 Supplier Power

The suppliers for banks are depositors. They include people with excess money and who prefers safety and regular income. However, in the banking industry, suppliers hold reduced bargaining power because of their temperament. Apparently, for banks suppliers, bank is the most favourable place for them to keep their surplus money. They consider banks to be safer compared to other investments options. In addition, there are few alternatives because most bank suppliers are risk averters who want regular income. Banks decisions in the UK are made through the BBA (British Bankers Association), an association that represents the opinion of those engage in the financial and banking sector and other approved bodies. According to Lomnicka & Hare (2011, p.20), BBA promotes the interests of the United Kingdom banking industry and negotiate on behalf of members in dealing with official bodies.

3.3 Buyers Power

Bank customers include people who take loans and utilises the banks services. Bank customers hold a high bargaining power because the banking industry holds a huge number of players thereby providing increased alternatives to buyers. There are numerous banks that want to offer their services to bank customers and there are scores of non-financial establishments offering similar services (Pock 2007, p.15). Bank buyers hold high bargaining power because of reduced cost of changing from one bank to another. Additionally, easily accessible information regarding the market increases the bargaining power of banks’ buyers. Given the high bargaining power, buyers can force down prices and interest rates and demand higher quality services. As a result, banks can develop strategies that will help them retain and attract customers.

3.4 Threat of Substitutes

Rivalry from non-banking financial sector is augmenting in the UK. Apparently, the UK government is dedicated in promoting a powerful, competitive and diverse banking sector. This approach has led to the introduction of substitutes in the banking sector. According to Pock (2007, p.15), substitutes are services and products that can perform similar function as the original product. Substitutes account for an upper price limit in the industry. Products such as life insurance, government securities, debentures, shares, mutual funds investment houses and credit are examples of substitutes in the banking industry (Geddes 2002, p.285). As a result, the threat of substitutes in the banking industry is enormous. Substitutes lower the potential of the banking industry by lowering favourable margins and prices. However, through understanding the nature of substitutes in the market, the banking industry in the UK can increase the perceived quality of its services to ensure growth and profitability.

3.5 Threat of New Entrant

According to Pock (2007, p.14), new market entrants augments the ability within an industry and exercise pressure on the industry profits and market prices. The possibility of novel entrants depends on the anticipated reaction of already existing market players and barriers to entry. Barriers to entry in the banking industry do not exist in the UK. Therefore, scores of foreign and private banks are entering the UK bank sector. Exit is intricate while product differentiation is low. As a result, every bank in the UK strives to survive with some banks merging to ensure profitability.

4.0 Findings

The UK banks are classified in three categories as follows commercial banks, cooperative, savings banks. The UK banks have conventionally remained confined to lending and borrowing but the future of these banks lies in becoming financial service providers. This requires the banks to broaden their business definition by extending on the needs of clients, alternative technologies dimension and customer groups. Banks need to broaden their range of services to include services such as mutual fund schemes, insurance, pension schemes and credit cards (Pock 2007, p.15). Through studying the external environments which include suppliers, buyers, substitutes, new entrants and competitors, banks in the UK banking industry are reorienting their strategies where each strategic group appears to be doing it in a distinct way to win a competitive edge. For instance, Barclays a blue chip UK retail and international Bank that had lost its ways sometimes back appears to be coming back with a commanding stance in the corporate market and a powerful position in retail banking through establishing cards and investment banking. This is courtesy of studying the firm’s external environment and coming up with practical strategies. Additionally, Lloyds Bank, an English retail bank has managed to prevent distractions of investment banking and has exercised strategic management and tight costs to establish a productive retail banking operation (Croxford & Jablonowski 2011, p.67). In this regard, numerous banks are establishing new business strategies that focus on relationship banking, debit and credit cards. As a result, Porter’s Five Forces Model is still relevant and meaningful in determining the strategic decision of banks, hence a relevant tool within current market conditions of the banking industry. Apparently, Porter’s Five Forces model helps in determining competitors’ likely response to environmental and industry changes; anticipate the reaction of each competitor and establish possible strategic changes to ensure growth and profitability.

5.0 Conclusion

Banks in the UK banking industry have been reorienting their strategies and adopting internalisation facilitated through the application of models such as Michael Porter’s Five Force Model in order to remain competitive in the contemporary business environment. The banks measure and understand the competition in the industry through assessing the power of buyers and sellers, threats of new entrants and substitute and competition from already existing firms. The banks conduct competitor and industry analysis that tackles the reactions and actions of individual banks within the banking industry. The Porter’s Five Forces Models helps firms to determine every competitor’s potential response to the environment and industry changes and anticipate the reaction of every competitor to the potential strategic moves by other firms. The competitor’s analysis also facilitates development of a profile of the temperament and success of the possible strategic shifts every competitor might undertake. In this regard, Porter’s Five Forces Model is a feasible strategic decision making tool in the contemporary banking industry.

6.0 Reference List

Baugh, J 2008. Deregulation and management strategies: A case study of Georgia system operations corporation. UK: Proquest.

Croxford, H & Jablonowski, A 2005. The art of retail banking: Supportable predictions on the future of retail banking. UK: John Wiley & Sons.

Ettlie, J 2007. Managing innovation. UK: Routledge.

Geddes, R 2002. Valuation and investment appraisal. USA: Global Professional Publishing.

Grigore, A 2014, ‘ Book publishing business in Romania: An analysis from the perspective of Porter’s Five Forces Model’, Review of International Comparative Management, Vol.15, no.1, pp. 31-46.

Lomnicka, E., & Hare, C 2011. Ellinger’s modern banking law. UK: Oxford University Pres.

Pock, A 2007. Strategic management in Islamic finance. USA: Springer Science & Business Media.

Porter, M 2008, ‘The five competitive forces that shape strategy’, Harvard Business Review, Vol. 86, no.1, pp.78-93.

Rudani, R 2013. Principles of management. India: Tata McGraw-Hill Education

Schmidt, B 2010. The dynamics of M&A strategy: Mastering the outbound M&A wave of Chinese banks. UK: Peter Lang.

Siaw, I & Yu, A 2004, ‘ An analysis of the impact of the internet in competition in the banking industry using Porter’s Five Forces model’, International Journal of Management, Vo.21, no.4, pp. 514-523.

Thompson, J & Martin, F 2010. Strategic management: Awareness & change. UK: Cengage Learning.

Witcher, B & Chau, V 2010. Strategic management: Principles and practice. UK: Cengage Learning EMEA.