Michael Porter Five Forces Analysis essay
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Porter brings out five forces determining the competitive intensity of a firm and the level of attractiveness of a market which refers to the general profitability in a market. On the same note, unattractive industry is that which the combination of five forces drives down the level of profitability of an industry. This implies that an industry characterized to be unattractive is one that approaches pure competition whereby the profits available are driven to normal profits in the firm. Of the five forces outlined by Porter, three are meant for competition from external sources while the rest regard internal threats. According to Porter, these forces are part of micro-environment contrasting macro environment as the general term. They are made up of forces that are close to a company affecting the ability to make profit and serve the customers appropriately. It comes to light that any change in any of the five forces need re-assessment from a business unit on the marketplace that is given the general change happening in the industry information. Attractiveness of an industry hardly implies that all the firms existing in the industry would give back the same profitability. In conjunction, Firms are able to apply business model and core competencies or network in achieving a profit exceeding the average industry. One good example of this scenario is the airline industry with low profitability and yet individual companies are able to make excess returns of the average industry by employing application of business models.
The five forces Porter coined include; threat of substitute, established rivals and new entrants (from horizontal competition) and the other two namely; bargaining power of suppliers and customers (from vertical competition). In the article; Cluster and the New Economics of Competition, Porter indicates that firms join clusters in the bid to ensure that the five forces act in their favor. Porter portrays that affect competition in 3 broader ways namely, increasing companies’ productivity operating within the area, directing the pace and direction of innovation which fortifies future productivity growth and stimulating business formation and the aftermath is strengthening the cluster. For instance, in the article, “Is Baja California, Mexico, wine industry a cluster?” passed the most challenging curve of gaining the chains of supply of member’s cohesion as a cluster. When the main producer of wine stopped buying grapes from the region, the cluster was able to rise above the challenge and focused more on strengthening industry organization, product quality and number of firms.
Threats of new competition is a force arising by increase of entrants due to noticeable profitability from the business which decreases industrial profitability such that the abnormal rate of profits would tend towards zero unless the incumbents block new entrants leading to perfect competition. This force is eminent in the article; “Is Baja California, Mexico, wine industry?” The authors bring to light the point that this wine industry is on the routes of extending operations to international levels. It implies that the scope and number of competitor would expend and increase respectively. To counter both local and international competition, California wine industry works best as a cluster. Besides, with increased participation of governmental authorities, grape producers and wine industry, the industry can block new entrants locally and strengthen the product quality and the industry organization. According to Porter, the capacity for this force to cause effect depends on a number of factors namely; economies of differences in products, sunk costs, barriers of entry through rights and patents, brand equity, absolute cost, capital requirements, profitability of an industry, capital requirements, customer loyalty normally established through brands and profitability of industry whereby; the more an industry is able to gunner profits the more attractive it becomes in the face of the new competitors. Baja California wine industry is able gunner more profits as a cluster hence is able to attract more competitors even globally. With 30% domestic share of the market, it is authentic that most of the upcoming industries would be attracted to join the cluster overtime.
The threat of substitute commodities works by increasing customers’ propensity to change to the available alternatives. This is different from competition with similar products. For instance, spirits can be substitutes for red wine whereas the real competitors can be sherry. Nevertheless, when marketing of energetic drinks is at the peak, both sherry and red wine can be overshadowed. According to authors of the article, red wine segment is the fastest growing wine category in whole of Mexico particularly Cabernet Sauvignon accounting for 55% of total shares of sales. Soft drink is depicted to be the most selling substitute product. Wine is the most fragmented in the category of alcoholic drinks. Therefore, this cluster suffers threat of substitute products such as beer, spirits and soft drinks. Nonetheless, the quality of wine produced from the cluster gives an upper-hand in managing this force.
Buyer’s bargaining power refers to the ability of a customer to pressurize a firm to affect the sensitivity of the customer to changes in price. Porter illustrate that customer bargaining power is normally determined by concentration on the ration of firm’s sensitivity, price sensitivity of a buyer, degree of dependency on channels of distribution, switching of costs by the buyer depending on the firms position, availability of a substitute product and bargaining leverage more in industries having high fixed costs and availability of information to the buyer.
Suppliers’ bargaining power is also explained as market inputs. Porters illustrate that the effect of this force depends on degree of input differentiation, availability of substitute inputs, employee solidarity, impact of input on differentiation, competition between suppliers (the ability to vertically forward, integrate and cut out the buyer) and switching of costs between the two in a relative proportion. From the article, “Is Baja California, Mexico, wine industry a cluster?” it comes to light that companies only deal with the threat of customers’ bargaining power but not suppliers. This is because the members of cluster own 85% of grape firms hence they hardly need any supplier to bargain about the prices. Besides, the companies never rely heavily on customers since they are the biggest suppliers to hotels, firms and households as well as exports. It implies that they have advantage to determine prices of their commodity.
Intensity of rivalry from competitors determines how competitive a company can be. In this context, competition from other industries offering substitute drinks instead of wine throbbed an alliance between wineries in Baja California regions. Prior to this alliance, firms were affected by level of expenses put on advertisements, power competitive strategy, sustainability of competitive advantage through innovation and rivalry between offline and online companies and flexibility through variety, customization and volume. Under Baja California cluster, industries were able to mitigate the negative effect of this force.
A cluster refers to a geographical concentration of interconnected institutions and companies in a certain field to promote cooperation and competition. It entails an array of linked entities and industries that are important in competition. Sometimes, clusters extend to customers and downstream channels and to manufacturers of complementary products laterally and to companies having similar technologies, skills and common inputs. Baja California cluster is the best example of this. Renowned wine regions that are known to be mature wine cluster include; Barossa valley in Australia, Bordeaux in France, Colchagua valley in Chile and Napa valley in United States. The cluster in context produces 85% of Mexican wine. Clusters alleviate the problems arising in relationships without necessarily imposing management challenges or vertical integration as well as keeping up formal linkages such as alliances, partnerships and networks. Such a cluster is a form of robust organizations offering advantages in effectiveness, efficiency and flexibility. Baja California wine market is been recognized internationally for quality and being a peculiar organization. This is owed to the fact that the wineries clustered to further effective management and expand operations to the international grounds.
Clusters are very critical in competition. Currently, competition relies on productivity instead of scale of individual enterprises. Baja California wine industry is illustrated to have successfully achieved competitive advantage by combining ideas and information to employ the use sophisticated methods or use advanced technology in offering unique commodity.
Companies have managed to increase their productivity through this cluster. First, it has enhanced accessibility to employees. In this case, the integration of wine industries in vibrant cluster has enabled companies to enjoy a pool of experienced and specialized employees thereby lowering costs of transaction in recruitment and search. Due to the golden opportunity this organization offers, it is attractive to talented and skilled people from different locations. Baja California cluster offer an effective means to obtain useful inputs by offering specialized and deep base of suppliers. Besides, formal alliances formed with suppliers of grapes are due to mitigate negative energy and faults from distant outsourcing. Secondly, Baja California is depicted to enable access to specialized information. For instance, companies in this cluster are able to get information on how to gain international recognition. By virtue of sharing supply chain, individual companies are able to get information on market trend as well as government policies applying to the business. This is because; members of clusters have privilege to access competitive, extensive market and technical information. Thirdly, complementarities helps members of clusters is developing strong brand of products. They come in diverse forms and the most common one is complementing the needs of another product. Coordination of activities across all companies helps optimization of productivity in those companies. Complementarities increases attractiveness of buying for customers since the buyer gets the opportunity to have a look at the vendors existing in a single trip. Besides, they can also be able to perceive accurately the risk associated with buying. In other words, complementarities give customers the chance to multisource or even change to another vendor whenever a need arises.
Innovation also came by formation of Baja California cluster. Apart from just enhancing productivity, clusters are at the heart of companies seeking to innovate. Innovations bought about by Baja California cluster have promoted productivity and growth in a short period of time. Owing to the fact that clusters are made of sophisticated buyers, the companies get open market opportunity as compared to the competitors. The cluster is portrayed to offer flexibility and capacity for a company to act more rapidly in a business. Consequently, companies under this cluster are able to successfully experiment by incurring slightly lower cost and thereby delaying a large commitment until the time when they have full assurance a certain innovation would materialize.
Additionally, Baja California cluster is depicted to assure of better motivation and measuring standards. It makes it easier to measure since the local rivals normally become part of general circumstances such as local market access and labor costs. Companies under this cluster must have intimate knowledge of the costs at which suppliers offer their products. Such knowledge is used in monitoring services. Experimentation can also be done relatively lower costs.
Indisputably, clusters are very helpful and significant in achieving competitive advantage and setting a stronger network. Therefore, the government should pass policies enforcing clustering of related companies in an area as a way of balancing the economy in a country. With clusters, manufacturing companies can work together on measures to cut down costs that are favourable to consumers in a country. When strict policies regarding clustering exist, companies would have no choice but conform to government’s request. Through this approach unhealthy competition will be a history in countries, and consumers would benefit from quality and variety of products and a relatively good price. With a cluster, a group of companies can also petition for their requests to be heard in matters regarding tax, custom duty or easier access to new commodity the government intends to bring in the country.
Secondly, it is best for the government to relocate related industries and companies in a close area. This would set a platform for companies to join clusters even if some of them may not be willing. Centralization of industries would ensure ease in monitoring and evaluation of performance of all companies. Besides, unscrupulous activities would be automatically eliminated from industrial sector. It is due to the fact that with clusters, companies can be accountable to another in terms of standards, quality and prices. It also gives consumers a chance to find all that they want in a centralized location. Therefore, with clustering of companies through a government law defining locations, the country would benefit from better commodity and fostered international trade.