Porter’s Five Forces Free Essays

Porter’s 5 forces summary According to Porter, in order to achieve competitive advantage over its competitors, analysis of current industry structure is vital because the structure of an industry determines the nature of the competition and the form that a sustainable competitive advantage takes and the industry structure is determined by the five competitive forces; the treat of substitute, the treat of entry, bargaining power of buyer, and bargaining power of supplier and the intensive of rivalry. Porter work simplified to identify five forces and then, to select one of the generic strategies. Last step of his framework is using the value chain from identifying and enhancing the business activities. We will write a custom essay sample on Porter’s Five Forces or any similar topic only for you Order Now His concept is based on the idea that forces facing the industry play a key role in determining success and profitability of an organisation. The analysis of five forces tells how management should respond to and try to influence those forces in a favourable way. Threat of entrants: according to Porter new entry into the industry certainly reduces the existing firm’s profitability. How high the entry barrier of the industry affects the degree of new entry: Simply, internet banking dramatically lowers the entry barrier of bank industry. It is because entry barriers such as ‘economics of scale’, ‘brand identity’ and ‘access to distribution’ do not work any longer. Physical size can only mean high operating cost as well as in efficient and limited degrees of flexibility. The banking market is likely to see the emergence of new small banks that use internet to compete on equal ground with the financial giants. Power of buyer: buyer power affects the prices that firms can charge. Porter theorised that the more products that become standardised or undifferentiated, and hence more power is yielded to buyers. The products of banking market are getting similar therefore it increases the bargaining power of buyers. Also, buyers have full information on demand and cost with internet, it implies that they can play the game more rationally with significant bargaining power. As more new comers are expected to enter the industry, banking customer are facing more alternatives. This is evidenced by the fact that internet banking services are now free of charge. How to cite Porter’s Five Forces, Papers Porter’s Five Forces Free Essays Micheal Porter’s five forces is a structure that analyzes the situation and strategy of a company in accordance to its industry. (Porter, 2008) Bargaining power of customer: Broadway cafe has been satisfying its customers since 1952; however there has been a decrease in its customers for last few years therefore one can analyze the bargaining power of customers is increasing with the passage of time. Also the cafe is not using technology and this can be one of the main reasons for losing of its customer therefore we can analyze that the bargaining power of customers have increased today as they would prefer cafes that offers quick services along with exceptional quality. We will write a custom essay sample on Porter’s Five Forces or any similar topic only for you Order Now Bargaining power of suppliers: Because of the fact that Broadway cafe offers variety of coffees and teas along with bakery products, sandwiches, salads and soup therefore there would be different suppliers for the company hence the bargaining power of supplier would be less because if these suppliers demand more than the company can change its suppliers. Also because Broadway has been in the market for so long and everyone is aware about the brand therefore one can predict bargaining power of supplier to be low. Though, because the company uses special beans as ingredients for preparing coffee therefore only the coffee bean suppliers would be having high power. However, because of Broadway itself being so important for these suppliers therefore this power would be offset and the coffee suppliers would be having moderate bargaining power. Threat of new entrants: With not so much investment required in this type of business, Broadway cafe faces high threats of new entrants. Also because there is variety of goods offered by the company along with high turnover of customers and not much differentiated products, so the threat of new entrants increases and any new competitor can easily enter into the industry. Threat of substitute products As the cafe offers variety of products to its customers and each product has its alternatives. Therefore the company faces high threat of substitute goods. However, there are some substitutes already offered by Broadway cafe like tea is the substitute of coffee and the cafe offers both tea and coffee to attract all types of customers. Competitive rivalry within an industry There are many other coffees bars, cafes that offer tea and coffees and bakeries so Broadway cafe faces stiff competition in the industry. Strategies for e-Business Incorporating Technology in business processes One of the major strategies that Broadway cafe needs to do is to incorporate technology in the business processes. Today customers demand for better services, efficient and quick process, and technology definitely helps in this regard (Paul, 2000). By using technology the cafe can maintain the data of the customers. Besides this the cafe can improve their internal business process and maintain employee data and end result will be less waiting time for the customers and it would result in more satisfied customers. By using technology the cafe can reduce time per customer and hence it can serve more customers in a given day. Company Website Today every business has an internet presence and is available on the internet so that customers can interact, give their feedback and even place their orders. So it is important that Broadway should also have a company website. Create a Forum Broadway cafe can also create a forum where customers can interact with each other and in this way they can know the customers feedback and what they want. Challenges Aware customers After incorporating technology in the business producers the company have to face the challenge of making its customers aware regarding the website of the cafe and online orders and special offers that cafe gives. Train employees With new methods and use of technology, Broadway cafe would have to train its employees how things would work to its employees because many of them would not know how to use it. If employees are not trained then this change of incorporating technology will be of no use (Lior, 2005). Risk As the cafe has to increase its investment for using technology and preparing website, so with increased cost at a time when customers are declining this can be a gamble for the cafe. Benefits Saves time One of the main advantages of using technology is that it saves time of employees and when employees will be free then they will give more attention to customers hence the end result will be more satisfied customers. Also because waiting time of the customers will be reduced, this will allow employees to deal with more customers in a given day. Increase sales With online orders, the cafe can increase its sales provided that it uses the technology to good effect. Reduce Cost Many jobs that were done manually could be performed with the help of advancement of technology for instance, accounting can be done easily and there will be no need of using books and ledgers and a dedicated employee named as accounts manager. So all this will reduce the cost of the company and hence it will be able to earn more profits. Customer Relationship Management Many organizations have used Customer Relationship Management to good effect and in the same way; Broadway cafe can utilize the services of CRM to market customers in a better way. There are number of benefits of using CRM in the business process and some of the advantages are as follows: Pros: Customer Relationship Management helps businesses to know their customers better and this allows the company to produce exactly what they need and demand. Market products accordingly Another advantage of CRM is that the company can market or promote their offerings according to the type of customers. Company can segment their customers into different categories and then market accordingly. This would lead to more effective marketing campaigns. As company will know more about their customers and hence this data can be helpful in producing what exactly the customers want plus the cafe can innovate new products if they know what type of products are preferred by customers. Cons: One of the disadvantages of Customer Relationship management is that this would increase the company cost. Currently the cafe is not in a position to increase its expenditure because it is losing its customers and increasing cost would lead to more risk for the company and if company do not get sufficient return for its investment in the CRM activates then it might backfire (Bose, 2002). Maintaining the current business process is itself a headache and with maintaining and evaluating the CRM data can add up to this if it is not appropriately used. New Challenges Constantly have to improve technology As the company will be starting e-business then it would be a challenge for the company to improve its technology constantly. Providing customer friendly services would be the idea behind improvement of technology. If the ordering process is not friendly for the customers then cafe would not be able to gain much from this additional investment. Marketing Broadway cafe initially has to allocate good amount of budget for its marketing campaigns so that the cafe creates awareness regarding the new website and new methods of businesses to the customers and this will be a challenge for the company. Ethical Issues Keeping confidential the information of the customers is one of the major challenges for every organization. Many customers rely on organizations and provide their personal information to them, but it is the responsibility of the organizations to not misuse these data and because of misusing of data customers today are a little reluctant to give their information (Singer, 2000). Therefore this can be one of the main challenges that the cafe would be facing to provide such a platform so that customers share their information. Innovation and Improvements in the processes If the Broadway cafe needs to attract more customers then it would have to do some innovations and improvements in the way they operate. Traditionally methods of working are no more successful today because of change in people attitude, lifestyle, perception and taste. People prefer quick service along with exceptional quality products. Therefore, Broadway cafe needs to bring in improvements in its process to attract more customers as well as maintain their existing customers and it is just the right time for them because currently it is losing its customers with the passage of time. Works Cited Bose, R. (2002). Customer relationship management: key components for IT success. Industrial Management Data Systems, 102, 2, 89-97. Lior, A. (2005). Understanding the Fatal Mistakes: Passionate and Profitable. John Wiley Sons, Inc Paul, T. R. (2000). Electronic Commerce – strategies models for business-to-business trading. John Wiley Sons, Ltd, pp. 31. Porter M. (2008). The Five Competitive Forces that Shape Strategy, Harvard Business Review. Singer, P. (2000). Writings on an et How to cite Porter’s Five Forces, Papers Porter’s Five Forces Free Essays string(134) " order to resist the financial crisis; they reduced the number of workers or using different methods to cut the production cost\[5\]\." International Business (C11IB1) How has the global financial crisis impacted upon MNCs? Name: Kanam Liu Reg number: 095922098 Module lecturer: Dr Colin Turner Date: 19th October 2012 Introduction Since world trade began and the economy grows quickly, Multinational Corporations (MNCs) are playing a very important role in the global economy in the last few decades. They produce and allocate goods and services for different nations, also help to share ideas, technology and increase innovations throughout the world. Nowadays, there are more than 82,000 MNCs and around 810,000 affiliates operating all over the world and 500 biggest corporations controlled 70 per cent of the international trade, they are very powerful of influencing in both economy and political way[1]. We will write a custom essay sample on Porter’s Five Forces or any similar topic only for you Order Now (Share The World’s Resources, 2012) They operate productive assets in more than one country; they normally based their headquarters in a single country (mostly in US, Western Europe and Japan) and invest their facilities which are located in other countries. Ovidius University, 2010) In order to see how global financial crisis will put an impact on these MNCs, we first need to establish the key factors which caused the global financial crisis. Background of the global financial crisis Financial crises happen very often but when it comes, people are still very surprised and are not prepared. Crises happens almost every 10 years from 19th century, the most important financial crises are the Great Depression in 1929, Asian Crisis in 1997, crisis in Argentina during 2001-2002 and the current financial crisis started from 2007. According to the Reinhart and Rogoff (2008), they indicated that crises were usually led by credit booms and real estate bubbles; it result to fall in house pricing and output, increase unemployment and government debt. I am going to focus on the recent financial crisis (2007-2009) since economists think it was the most serious financial crisis after the Great Depression. This time is different compared to the previous crises because it is affected globally and causes a significant decrease in economic activities. There are a few factors causing the current crisis: firstly, the central bank used the low interest rate policies; secondly, the Asian central banks needed to reach the lax credit requirements by buying debt securities; thirdly, the rapid increased in the housing demand in the US and others nations. In addition, the demand by poor credit rating borrowers increased significantly, there was a high incentive to lend to those high risk borrowers. Therefore, when the house prices started to drop in 2006, it affected the subprime mortgages to be downgraded. Afterwards, the inter-bank lending dried up and central banks needed to inject liquidity into the market. The real effect began when Lehman Bros failed[2] and majority of institutions were affected; inflation, unemployment and falling economic activity started to appear. How global financial crisis affect MNCs Many companies were surprised by how fast the mortgage crisis led to crash of the whole financial system, it was hard for them to keep and predict the information since the situation was changing in a day to day bases. Most of the MNCs were financed by large financial institutions, but since investors withdrew their money from the financial market and liquidity dried up, there was so much uncertainty and risk involved assessing the market. Bank distress led to businesses even harder to raise funding, so many MNCs changed their investment plan. They have been cancelled or slowed down the foreign investment projects and the performance of the ongiong project was declined, some of the MNCs got fewer orders from overseas because of the downturn business cycle. Furthermore, MNCs experienced liquidity problems, capital outflows from the financial markets; this will increase the uncertainty to invest in new projects. (Butt, 2010) Some MNCs are planning to change their strategies, concentrate more on clients in developing countries because they can have lowered production cost, gain greater foreign market shares and higher investment return. (People’s Daily Online, 2009) Impact on MNCs’ finance Since the banking crisis began, banks tighten their lending; some of the MNCs withdrew parts of the revenue or cash reserves in China or other developing ountries to their troubled parent companies. As a result China’s FDI inflows decreased by around 17 per cent in the first half of 2009; Russia’s FDI fell by more than 50 per cent in the first quarter 2009. (News, 2009) Problems were more serious in the US and Europe, MNCs in these countries were more difficult to access credit from financial institutions as the inter-bank ne twork was damaged by the global financial crisis. In addition, most of the banks in developing countries relied on funding from banks in the developed countries. However, since the financial crisis started, they were even harder to get subsidies from those institutions and it affected MNCs’ operation in these countries because of the restriction of getting loans. Many of the MNCs could not resolve their liquidity problem fast enough because of the short of cash reserve and difficulties of borrowing from banks. As a result, they suffered from the financial crisis; the best example of this problem will be AIG. The credit default swaps (CDS)[3] almost led to AIG bankruptcy and damaged the global financial system. This was a very risky business; however, the company was treating it as safe[4]. The profit margin was 83% and the portfolio of CDS was over 500 billion in 2007. Although, when the real estate bubble popped, AIG suddenly needed to pay out the securities which it had insured and began to make losses. After the losses became more significant, it found out that it could not increase funding fast enough to cover their losses. Therefore, AIG shot up from $20 billion to more than $80 billion. (Share the World’s Resources, 2012) Change in employment rate There was lots of news about the increasing in unemployment rate in different countries especially in Europe and the US after the global financial crisis started. Many MNCs wanted to reserve more capital in order to resist the financial crisis; they reduced the number of workers or using different methods to cut the production cost[5]. You read "Porter’s Five Forces" in category "Essay examples" Now, I am going to list out some examples and data to show these methods that companies used to reduce costs. Table 1: Job losses gains in MNCs in Ireland (full time employment), 2000- 2009 | |2000 |2001 | |Aldi 650 Jobs |Dell 1900 Jobs Hewlett Packard -133/ +500 | |IKEA 500 Jobs |SR Technics 1100 Jobs |IBM -120/ +100 | |Hewlett Packard 500 jobs |Intel 300 Jobs |Option Wireless -150/ +145 | |IVAX Phara 165 Jobs |Hibernian 600 Jobs |Pfizer -180/ +100 | |Pfizer 100 Jobs |Tyco 320 Jobs | | |IBM 100 Jobs |Waterford Crystal 250 Jobs | | Source: Gunnigle, et al. As the figures from above, table 1 showed the growth of employment remained stable from 2001 to 2008 but dropped significantly in 2009 and during the crisis full time employment rate fell by 9. 8 per cent in MNCs. Table 2 pointed out that MNCs were having a big restructuring within the organisation in different sectors, it is one of the important effect from the global financial crisis. (Gunnigle, et al. , n. d. ) In addition, because the dropping of handset price and sales which was hit by the spread of global financial crisis. Nokia announced to cut 1700 jobs in 2007 to balance their losses. (Kioskea,  2008) In the recent year, it announced again that will lay off 10,000 jobs worldwide and stop R projects in Germany and Canada (Guardin, 2012). The US and Europe were the most affected area by the global financial crisis. For the US MNCs, the employment rate decreased by 4. 1% to 31. million workers over the world and the job cuts were heavier in home than overseas. (Business,  2011) In Europe, the European banks’ employees such as UBS and Dutsche Bank, they were threatened they would lose their job because of the recession and the problem were more serious in those banks which had close relationship with the US banks. Moreover, since the banking crisis started and Eurozone was the major market for the US businesses to provide direct funding. (ABC  News,  n. d. ) Apart from cutting jobs, some MNCs also launched different methods to reduce their costs. According to the data in Gunnigle’s paper, it showed that average working hours per week dropped 3. 3 per cent in 2009. For example, Waterford Crystal, it closed the plant for three weeks; Bausch and Lorrb, its employees took unpaid leaves for one week per month for six months. The other method to cut cost is freezing pay such as Irish Life and Permanent, it reduced bonuses significantly including cut all the bonuses for chief executive, directors and senior managers, also reduced 75 per cent bonuses to all staffs. (Gunnigle, et al. , n. d. ) Change in sales and export When the financial crisis started, MNCs tried to cut costs to cover their losses. People’s income decreased, so demand and export fell, economies began to shrink and it was hard for companies to pay back their debts. Ford recorded it got 306 billion dollars losses in Europe, therefore, less profits to invest in other countries or products (The  New  Youk  Times,  n. d. ). Moreover, in 2008, Carrefour Romania reported sales decreased in all European markets and there were an increase in MNCs stated their losses after the financial crisis[6]. Impact on currencies and debt The Euro crisis had a great impact in the global economy and affects many of the MNCs. Since Europe is the biggest trading partner to the US, over 20 per cent of the US exports go to Europe. Therefore, European banks have a close link with the US banks, when the European banks were affected by the currency crisis, they were exposed to bad debt problem. Many MNCs based their headquarters in Spain since the labour is cheaper, but the fluctuation of the currency put an impact on the export and import prices. (Business Insider, 2012) Export became cheaper and import became more expensive and the increasing uncertainty of the change in currency, it made MNCs more difficult to pay back loans or borrowing in foreign currency to reinvest. As a result, companies reduced their investment to lower their financial risk. For example, Prakiker’s sales decreased by 15. 6% as the currency depreciation related to the Euro. (Ovidius  University,  2010) Other related effects to MNCs The additional impacts to MNCs were share prices, market value of equities and asset price declined rapidly because the failure of the banks and the incline development of the crisis. Government actions also increased the difficulties of the situation for the MNCs, such as restricted trade or controlled currency and inflation by changing prices or tax laws and tariffs. Conclusion As we can see from the discussion above, the 2007-2009 global financial crisis had a great impact to the MNCs, many companies were struggling from the situation. Although many of them are starting to recover, the process will take a very long period[7] and since it was a global situation, companies were having difficulties to look for capital aboard. Therefore, MNCs are changing their strategies to focus on developing countries such as BRIC[8] as they can see greater opportunities. Since these countries have large resources, low cost labour market with highly skilled workers and higher rate of investment return provided, they can help the businesses growth faster and entry to the bigger market. Appendix A The world’s largest industrial multinational corporations S/No. Company Home nation Industry % of foreign sales 1 Exxon Mobil Corporation USA Petroleum 69. 4 2 General Motors USA Motor Vehicles 26. 1 3 Ford Motor Company USA Motor Vehicles 30. 4 4 Daimler Chrysler Germany/USA Motor Vehicles 32. 0 5 Royal Dutch/Shell Group UK/Netherlands Petroleum 54. 4 6 British Petroleum UK Petroleum 71. 3 7 General Electric USA Electronics 38. 1 8 Toyota Japan Motor Vehicles 49. 6 Chevron Texaco USA Petroleum 55. 5 10 Total Fina ELF France Petroleum 78. 0 Reference ABC  News,  n. d. Five  ways  the  European  debt  crisis  could  affect  the  U. S.. [Online] Available  at:  http://abcnews. go. com/Business/ways-european-debt-crisis-affect-us/ story? id=14830462 [Accessed  14  October  2012]. Alvarez,  R. ,  H. ,  2007. MULTINATIONALS  AS  STABILIZERS? :  ECONOMIC  CRISIS  AND  PLANT  EMPLOYMENT  GROWTH. [Online] Available  at:  http://www. bcentral. cl/eng/studies/working-papers/pdf/dtbc412. pdf [Accessed  14  October  2012]. Barefoot,  K. ,  R. ,  2010. U. S. Multinational  Companies:  Operations  in  the  United  States  and  Abroad  in  2008,  s. l. :  s. n. Business  Insider,  2012. Weaker  Euro  Can  Help  Spain  Fight  Unemployment. [Online] Available  at:  http://www. businessinsider. com/weaker-euro-can-help-spain-fight-unemployment-2012-4 [Accessed  14  October  2012]. Business,  2011. U. S  Multinationals  Increasingly  Hiring  Abroad,  Firing  At  Home. [Online] Available  at:  http://www. huffingtonpost. com/2011/04/19/multinationals-hire-abroad-fire-at-home_n_851094. html [Accessed  14  October  2012]. 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Multinational  business  finance  in  times  of,  http://documents. eu-japan. eu/seminars/japan/fdi/report_10_june. pdf:  EU? Japan  Centre  for  Industrial  Cooperation. Guardian,  2012. Nokia  to  cut  10,000  jobs  by  end  of  2013. [Online] Available  at:  http://www. guardian. co. uk/technology/2012/jun/14/nokia-to-cut-10000-jobs [Accessed  14  October  2012]. Gunnigle,  P. ,  Lavelle,  J.   Monaghan,  S. ,  n. d. Weathering  the  storm? Multinational  companies  and  human  resource  management  through  the  global  financial  crisis,  Limerick:  Kemmy  Business  School  University  of  Limerick. Kioskea,  2008. Nokia  to  cut  another  1,700  jobs  worldwide. [Online] Available  at:  http://en. kioskea. et/news/12310-nokia-to-cut-another-1-700-jobs-worldwide [Accessed  14  October  2012]. Ma,  Z.   Cheng,  L. ,  2005. The  Effects  of  Financial  Crises  on  International  Trade. [Online] Available  at:  http://www. nber. org/chapters/c0196 [Accessedà ‚  14  October  2012]. News,  2009. The  Global  Financial  Crisis  Affects  Foreign  Direct  Investment  (FDI)  into  Russia  and  China. [Online] Available  at:  http://www. skolkovo. ru/public/en/press/news/item/1737-2009-09-10-14/ [Accessed  14  October  2012]. Ovidius  University,  2010. ECONOMIC  SCIENCES  SERIE. OVIDIUS  UNIVERSITY  ANNALS,  X(2),  pp. 176-182. Patnaik,  I.   Shah,  A. ,  2010. Multinational  corporations  and  crisis  transmission,  s. l. :  s. n. How to cite Porter’s Five Forces, Essay examples