Service Marketing is the marketing of intangible products, such as hairdressing, cleaning, insurance and travel.
Marketing a service-base business is different from marketing a goods-base business.
There are several major differences, including:
1.The buyer purchases are intangible
2.The service may be based on the reputation of a single person
3.It's more difficult to compare the quality of similar services
4.The buyer cannot return the service
Service
What is a Service?
•A service is the action of doing something for someone or something. It is largely intangible (i.e. not material). A product is tangible (i.e. material) since you can touch it and own it. A service tends to be an experience that is consumed at the point where it is purchased, and cannot be owned since is quickly perishes.
•The term Service is used in so many other industry buzwords, namely Web Services, Service Oriented Architecture (SOA), Enterprise Service Bus (ESB) and Application Service Provider (ASP). It's an extremely overloaded term. However, Services marketing is marketing based on relationship and value. It may be used to market a service or a product. It's a strange almost mythical combination of competing requirements, which is it is both isolated and interoperable.
Characteristics of a Service
There are five characteristics to a service which are considered below:
•Lack of ownership.
You cannot own and store a service like you can a product. Services are used or hired for a period of time. For example when buying a ticket to the UK the service lasts maybe 9 hours each way , but consumers want and expect excellent service for that time. Because you can measure the duration of the service consumers become more demanding of it.
•Intangibility
You cannot hold or touch a service unlike a product. In saying that although services are intangible the experience consumers obtain from the service has an impact on how they will perceive it. What do consumers perceive from customer service? The location and the inner presentation of where they are purchasing the service?
•Inseparability
Services cannot be separated from the service providers. A product when produced can be taken away from the producer. However a service is produced at or near the point of purchase. Take visiting a restaurant, you order your meal, the waiting and delivery of the meal, the service provided by the waiter/ress is all apart of the service production process and is inseparable, the staff in a restaurant are as apart of the process as well as the quality of food provided.
•Perishibility
Services last a specific time and cannot be stored like a product for later use. If travelling by train, coach or air the service will only last the duration of the journey. The service is developed and used almost simultaneously. Again because of this time constraint consumers demand more.
•Heterogeneity
It is very difficult to make each service experience identical. If travelling by plane the service quality may differ from the first time you travelled by that airline to the second, because the airhostess is more or less experienced.. Generally systems and procedures are put into place to make sure the service provided is consistent all the time, training in service organisations is essential for this, however in saying this there will always be subtle differences.
Tuesday, November 24, 2009
Wednesday, November 11, 2009
How Effective and Efficient is your Pricing Strategies
First will shall be taken a look at the meaning of Pricing and Pricing Strategies this will gives us a good and clearer meaning of the topic.
What is pricing? Pricing is a method adopted by a firm to set its selling price. It usually depends on the firm's average costs, and on thecustomer's perceived value of the product in comparison to his or her perceived value of the competing products.
What is pricing Strategies? Price planning that takes into view factors such as a firm's overall marketing objectives, consumer demand, product attributes, competitors’ pricing, and market and economic trends.
The pricing strategy of your business can ultimately determine your fate. As a business owner you can ensure profitability and longevity by paying close attention to your pricing strategy.
Commonly, for many businesses, the pricing strategy has been to be the lowest price provider in the market. This approach comes from taking a superficial view of competitors and assuming one can win business by having the lowest price.
Below are some pricing strategies to consider.
Competitive pricing: Use competitors' retail (or wholesale) prices as a benchmark for your own prices. Price slightly below, above or the same as your competitors, depending on your positioning strategies. Note you must collect competitor pricing information by observation rather than by asking them. Otherwise it could be seen as collusion
•Cost plus mark-up: This is the opposite of competitive pricing. Instead of looking at the market, look at your own cost structure. Decide the profit you want to make and add it to your costs to determine selling price. While using this method will assure a certain per-unit margin, it may also result in prices that are out-of-line with customer expectations, hurting total profit.
•Loss Leader: A loss leader is an item you sell at or below cost in order to attract more customers, who will also buy high-profit items. This is a good short-term promotion technique if you have customers that purchase several items at one time.
•Close out: Keep this pricing technique in mind when you have excess inventory. Sell the inventory at a steep discount to avoid storing or discarding it. Your goal should be to minimize loss, rather than making a profit.
•Membership or trade discounting: This is one method of segmenting customers. Attract business from profitable customer segments by giving them special prices. This could be in the form of lower price on certain items, a blanket discount, or free product rewards.
•Bundling and quantity discounts: Other ways to reward people for larger purchases are through quantity discounts or bundling. Set the per-unit price lower when the customer purchases a quantity of five instead of one, for example. Alternately, charge less when the customer purchases a bundle or several related items at one time. Bundle overstocks with popular items to avoid a closeout. Or, bundle established items with a new product to help build awareness.
•Versioning: Versioning is popular with services or technical products, where you sell the same general product in two or three configurations. A trial or very basic version may be offered at low or no cost.
Avoiding the Lowest Pricing Strategy
Having the lowest price isn't a strong position for business. Larger competitors with deep pockets and the ability to have lower operating costs will destroy any small business trying to compete on price alone. Avoiding the low pricing strategy starts with looking at the demand in the market by examining three factors:
1. Competitive Analysis: Don't just look at your competitor's pricing. Look at the whole package they offer. Are they serving price-conscious consumers or the affluent group? What are the value-added services if any?
2. Ceiling Price: The ceiling price is the highest price the market will bear. Survey experts and customers to determine pricing limits. The highest price in the market may not be the ceiling price.
3. Price Elasticity: If the demand for your product or service is less elastic, you can then have a higher ceiling on prices. Low elastic demand depends on limited competitors, buyer's perception of quality, and consumers not habituated to looking for the lowest price in your industry.
The low price strategy is best avoided by small business but there are conditions such as a price war that can drag a company into the lowest price battle.
Evading a Price War
A price war can wreck havoc in any industry and leave many businesses, out of business. Care should be taken to avoid a Price war.
Take these tips to evade a deadly price war:
•Enhance Exclusivity: Products or services that are exclusive to your business provide protection from falling prices.
•Drop High Maintenance Goods: There may be products or services in your business that have high customer service and maintenance costs. Drop the unprofitable lines and find out what customers don't want.
•Value-added: Find value your business can add to stand out in the marketplace. Be the most unique business in the category.
•Branding: Develop your brand name in the market. Brand name businesses can always stand strong in a price war.
Carefully, consider your price decisions. Your business depends on it.
What is pricing? Pricing is a method adopted by a firm to set its selling price. It usually depends on the firm's average costs, and on thecustomer's perceived value of the product in comparison to his or her perceived value of the competing products.
What is pricing Strategies? Price planning that takes into view factors such as a firm's overall marketing objectives, consumer demand, product attributes, competitors’ pricing, and market and economic trends.
The pricing strategy of your business can ultimately determine your fate. As a business owner you can ensure profitability and longevity by paying close attention to your pricing strategy.
Commonly, for many businesses, the pricing strategy has been to be the lowest price provider in the market. This approach comes from taking a superficial view of competitors and assuming one can win business by having the lowest price.
Below are some pricing strategies to consider.
Competitive pricing: Use competitors' retail (or wholesale) prices as a benchmark for your own prices. Price slightly below, above or the same as your competitors, depending on your positioning strategies. Note you must collect competitor pricing information by observation rather than by asking them. Otherwise it could be seen as collusion
•Cost plus mark-up: This is the opposite of competitive pricing. Instead of looking at the market, look at your own cost structure. Decide the profit you want to make and add it to your costs to determine selling price. While using this method will assure a certain per-unit margin, it may also result in prices that are out-of-line with customer expectations, hurting total profit.
•Loss Leader: A loss leader is an item you sell at or below cost in order to attract more customers, who will also buy high-profit items. This is a good short-term promotion technique if you have customers that purchase several items at one time.
•Close out: Keep this pricing technique in mind when you have excess inventory. Sell the inventory at a steep discount to avoid storing or discarding it. Your goal should be to minimize loss, rather than making a profit.
•Membership or trade discounting: This is one method of segmenting customers. Attract business from profitable customer segments by giving them special prices. This could be in the form of lower price on certain items, a blanket discount, or free product rewards.
•Bundling and quantity discounts: Other ways to reward people for larger purchases are through quantity discounts or bundling. Set the per-unit price lower when the customer purchases a quantity of five instead of one, for example. Alternately, charge less when the customer purchases a bundle or several related items at one time. Bundle overstocks with popular items to avoid a closeout. Or, bundle established items with a new product to help build awareness.
•Versioning: Versioning is popular with services or technical products, where you sell the same general product in two or three configurations. A trial or very basic version may be offered at low or no cost.
Avoiding the Lowest Pricing Strategy
Having the lowest price isn't a strong position for business. Larger competitors with deep pockets and the ability to have lower operating costs will destroy any small business trying to compete on price alone. Avoiding the low pricing strategy starts with looking at the demand in the market by examining three factors:
1. Competitive Analysis: Don't just look at your competitor's pricing. Look at the whole package they offer. Are they serving price-conscious consumers or the affluent group? What are the value-added services if any?
2. Ceiling Price: The ceiling price is the highest price the market will bear. Survey experts and customers to determine pricing limits. The highest price in the market may not be the ceiling price.
3. Price Elasticity: If the demand for your product or service is less elastic, you can then have a higher ceiling on prices. Low elastic demand depends on limited competitors, buyer's perception of quality, and consumers not habituated to looking for the lowest price in your industry.
The low price strategy is best avoided by small business but there are conditions such as a price war that can drag a company into the lowest price battle.
Evading a Price War
A price war can wreck havoc in any industry and leave many businesses, out of business. Care should be taken to avoid a Price war.
Take these tips to evade a deadly price war:
•Enhance Exclusivity: Products or services that are exclusive to your business provide protection from falling prices.
•Drop High Maintenance Goods: There may be products or services in your business that have high customer service and maintenance costs. Drop the unprofitable lines and find out what customers don't want.
•Value-added: Find value your business can add to stand out in the marketplace. Be the most unique business in the category.
•Branding: Develop your brand name in the market. Brand name businesses can always stand strong in a price war.
Carefully, consider your price decisions. Your business depends on it.
Tuesday, November 10, 2009
Benchmarking
What is Benchmarking?
•Benchmarking is the process of comparing the business processes and performance metrics including cost, cycle time, productivity, or quality to another that is widely considered to be an industry standard benchmark or best practice. Essentially, benchmarking provides a snapshot of the performance of your business and helps you understand where you are in relation to a particular standard. The result is often a business case and "Burning Platform" for making changes in order to make improvements.
•Benchmarking can be simply defined as a continuous process to find and implement best practices that will lead to superior performance. As the definition implies, benchmarking is a process that will make a company s operations lean, and improve quality and productivity
In the quest for increased competitiveness, companies often ask themselves the question, "How are we doing?" Asking this question leads logically to the next question, "Compared to what?" To fully answer this second question involves an examination of a company's own operations, and subsequently comparing the operations with those of other organisations identified to be leaders in the field. Such comparisons are at the heart of benchmarking.
There are three major reasons for an organisation to embark upon benchmarking. These are:
•Benchmarking provides an objective evaluation of a company's business processes against similar processes in other organisations
•Benchmarking serves as a vehicle to source for improvement ideas from other organisations
•Benchmarking broadens an organisation's experience base by providing insights into systems and methods that work and those that don't. It therefore supports the notion of a learning organisation.
The benchmarking process can be applied to all facets of a company's business, be it in products, services or business processes. However, the focus of most benchmarking projects is on business processes because the effective management of these processes, including quality, speed, and service, is of vital importance to achieve superior performance and he more competitive.
There is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to various benchmarking methodologies emerging. The first book on benchmarking, written by Kaiser Associates, offered a 7-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989) developed a 12-stage approach to benchmarking.
The 12 stage methodology consisted of 1. Select subject ahead 2. Define the process 3. Identify potential partners 4. Identify data sources 5. Collect data and select partners 6. Determine the gap 7. Establish process differences 8. Target future performance 9. Communicate 10. Adjust goal 11. Implement 12. Review/recalibrate
Types of Benchmarking
Depending on the objectives and scope of benchmarking, different types of benchmarking processes can be distinguished depending on what is compared and to whom it is being compared.
Let take a good look at this.
Benchmarking of What?
•Performance benchmarking is a brief evaluation process that compares company performance measures against a standard or target that has been established, or performance data of other organisations.
•Process benchmarking analyses and compares the methods and practices of a participating company's processes in order that another company can learn from the best and improve their own processes. In effect, it involves the identification of best practices that lie behind superior performance.
•Strategic benchmarking is an in-depth analysis aimed at identifying fundamental areas for improvement, i.e. a company's strengths and weak points. Information concerning other company's strategic choices is collected in order to improve a company's own strategic planning and positioning.
Benchmarking against Whom?
•Internal benchmarking is the comparison between a company's different departments, units or subsidiaries, including those based in different countries.
•Competitive benchmarking entails the direct comparison of a company's own performance against its competitors. This is easier in some respects because many external factors that affect performance are similar between the benchmarked companies, but it may be more difficult because of the competitive relationship between the companies, which can make data collection difficult.
•Functional benchmarking involves the comparison of processes against non-competitor companies within the same industry or service area that share common technological or market characteristics. Compared to competitive benchmarking, it is easier to find benchmarking partners, since the relationship between companies is not one of direct competition.
Generic benchmarking focuses on the comparison of a company's own processes against best processes, irrespective of industry or service sector. It studies innovative methods or technologies with the aim of identifying technologies that will lead to breakthroughs. This is particularly relevant for environmental benchmarking because best environmental practices are rarely industry-specific.
Benefits from Benchmarking
•Improving communication
•Professionalizing the organization / processes, or for
•Budgetary reasons
•In outsourcing projects
Cost of Benchmarking
There are costs to benchmarking, although many companies find that it pays for itself. The three main types of costs are:
•Visit costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labour time.
•Time costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
•Benchmarking database costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice
Limitation of Benchmarking
•Benchmarking is a tough process that needs a lot of commitment to succeed.
•Time-consuming and expensive.
•More than once benchmarking projects end with the 'they are different from us' syndrome or competitive sensitivity prevents the free flow of information that is necessary.
•Comparing performances and processes with 'best in class' is important and should ideally be done on a continuous basis (the competition is improving its processes also...).
•Is the success of the target company really attributable to the practice that is benchmarked? Are the companies comparable in strategy, size, model, culture?
•What are the downsides of adopting a practice?
•Benchmarking is the process of comparing the business processes and performance metrics including cost, cycle time, productivity, or quality to another that is widely considered to be an industry standard benchmark or best practice. Essentially, benchmarking provides a snapshot of the performance of your business and helps you understand where you are in relation to a particular standard. The result is often a business case and "Burning Platform" for making changes in order to make improvements.
•Benchmarking can be simply defined as a continuous process to find and implement best practices that will lead to superior performance. As the definition implies, benchmarking is a process that will make a company s operations lean, and improve quality and productivity
In the quest for increased competitiveness, companies often ask themselves the question, "How are we doing?" Asking this question leads logically to the next question, "Compared to what?" To fully answer this second question involves an examination of a company's own operations, and subsequently comparing the operations with those of other organisations identified to be leaders in the field. Such comparisons are at the heart of benchmarking.
There are three major reasons for an organisation to embark upon benchmarking. These are:
•Benchmarking provides an objective evaluation of a company's business processes against similar processes in other organisations
•Benchmarking serves as a vehicle to source for improvement ideas from other organisations
•Benchmarking broadens an organisation's experience base by providing insights into systems and methods that work and those that don't. It therefore supports the notion of a learning organisation.
The benchmarking process can be applied to all facets of a company's business, be it in products, services or business processes. However, the focus of most benchmarking projects is on business processes because the effective management of these processes, including quality, speed, and service, is of vital importance to achieve superior performance and he more competitive.
There is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to various benchmarking methodologies emerging. The first book on benchmarking, written by Kaiser Associates, offered a 7-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989) developed a 12-stage approach to benchmarking.
The 12 stage methodology consisted of 1. Select subject ahead 2. Define the process 3. Identify potential partners 4. Identify data sources 5. Collect data and select partners 6. Determine the gap 7. Establish process differences 8. Target future performance 9. Communicate 10. Adjust goal 11. Implement 12. Review/recalibrate
Types of Benchmarking
Depending on the objectives and scope of benchmarking, different types of benchmarking processes can be distinguished depending on what is compared and to whom it is being compared.
Let take a good look at this.
Benchmarking of What?
•Performance benchmarking is a brief evaluation process that compares company performance measures against a standard or target that has been established, or performance data of other organisations.
•Process benchmarking analyses and compares the methods and practices of a participating company's processes in order that another company can learn from the best and improve their own processes. In effect, it involves the identification of best practices that lie behind superior performance.
•Strategic benchmarking is an in-depth analysis aimed at identifying fundamental areas for improvement, i.e. a company's strengths and weak points. Information concerning other company's strategic choices is collected in order to improve a company's own strategic planning and positioning.
Benchmarking against Whom?
•Internal benchmarking is the comparison between a company's different departments, units or subsidiaries, including those based in different countries.
•Competitive benchmarking entails the direct comparison of a company's own performance against its competitors. This is easier in some respects because many external factors that affect performance are similar between the benchmarked companies, but it may be more difficult because of the competitive relationship between the companies, which can make data collection difficult.
•Functional benchmarking involves the comparison of processes against non-competitor companies within the same industry or service area that share common technological or market characteristics. Compared to competitive benchmarking, it is easier to find benchmarking partners, since the relationship between companies is not one of direct competition.
Generic benchmarking focuses on the comparison of a company's own processes against best processes, irrespective of industry or service sector. It studies innovative methods or technologies with the aim of identifying technologies that will lead to breakthroughs. This is particularly relevant for environmental benchmarking because best environmental practices are rarely industry-specific.
Benefits from Benchmarking
•Improving communication
•Professionalizing the organization / processes, or for
•Budgetary reasons
•In outsourcing projects
Cost of Benchmarking
There are costs to benchmarking, although many companies find that it pays for itself. The three main types of costs are:
•Visit costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labour time.
•Time costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
•Benchmarking database costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice
Limitation of Benchmarking
•Benchmarking is a tough process that needs a lot of commitment to succeed.
•Time-consuming and expensive.
•More than once benchmarking projects end with the 'they are different from us' syndrome or competitive sensitivity prevents the free flow of information that is necessary.
•Comparing performances and processes with 'best in class' is important and should ideally be done on a continuous basis (the competition is improving its processes also...).
•Is the success of the target company really attributable to the practice that is benchmarked? Are the companies comparable in strategy, size, model, culture?
•What are the downsides of adopting a practice?
Wednesday, November 4, 2009
Porter’s Five Forces Analysis
Porter's five forces analysis is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".
Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competences, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models have been able to make a return in excess of the industry average.
Main Aspects of Porter’s Five Forces Analysis
The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization’s behaviour in a competitive market. These include the following:
•The rivalry between existing sellers in the market.
•The power exerted by the customers in the market.
•The impact of the suppliers on the sellers.
•The potential threat of new sellers entering the market.
•The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market.
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.
•This force is located at the centre of the diagram;
•Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
•Economies of scale: for example, benefits associated with bulk purchasing;
•Cost of entry: for example, investment into technology;
•Distribution channels: for example, ease of access for competitors;
•Cost advantages not related to the size of the company: for example, contacts and expertise;
•Government legislations: for example, introduction of new laws might weaken company’s competitive position;
•Differentiation: for example, certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes
The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:
•Product-for-product substitution (email for mail, fax); is based on the substitution of need;
•Generic substitution (Video suppliers compete with travel companies);
•Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer to the diagram). The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.
•This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;
•Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies;
•Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
•Where the switching costs are high (switching from one Internet provider to another);
•High power of brands (McDonalds, British Airways, Tesco);
•Possibility of forward integration of suppliers (Brewers buying bars);
•Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).
The nature of competition in an industry is strongly affected by suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete – the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the “Structure-Conduct-Performance” (SCP) model: the structure of an industry determines organizations’ competitive behaviour (conduct), which in turn determines their profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haberberg and Rieple (2001) state, the histories and cultures of the firms in the industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to be modified accordingly.
Strengths of the Five Competitive Forces Model Benefits
•The model is a strong tool for competitive analysis at industry level. Compare: PEST Analysis
•It provides useful input for performing a SWOT Analysis.
Limitation of Porter’s Five Forces Model
•Care should be taken when using this model for the following: do not underestimate or underemphasize the importance of the (existing) strengths of the organization (Inside-out strategy).
•The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations.
•From a more theoretical perspective, the model does not address the possibility that an industry could be attractive because certain companies are in it.
•Some people claim that environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation. Sometimes it may be possible to create completely new markets instead of selecting from existing ones.
Porter's Six Forces model and its relationship to the standard Five Forces model
Porter’s Five Forces model actually has an extension referred to as Porter’s Six Forces model. It is considerably less popular than the Five Forces model as its acceptance has been less positive than the Five Forces model. The Six Forces model though is very similar to the Five Forces model with the only difference being the addition of the sixth force in the framework. This sixth force in the model is termed as the relative power of other stakeholders, and can refer to a number of other groups or entities, depending on the factor which has the greatest influence including:
• Complementors – One school of thought looks at the sixth force to be complementors, which are businesses offering complementary products to the sector in focus and being analysed (Grove 1996). The author states that these complementary businesses, as a sixth factor, affect the industry as changes in these businesses (such as new techniques, approaches or technologies) can impact on the dynamics between the industry and the complementors.
• The government – The sixth force in the framework can also be considered to be the government, and is included in the framework if it has potential to impact on all the other five forces (Gordon, 1997). Thus, the government can have direct impact in the industry as the sixth force, but can also have indirect impact or influence by affecting the other five forces, whether favourably or unfavourably.
• The public – Yet other viewpoints look at the public as the sixth force in the model, particularly if the public has a strong influence in the dynamics of the sector resulting in changes to the other forces or in the sector as a whole.
• Shareholders – This group can also be considered potentially as the sixth force. This is more important in recent years where shareholder activity has increased significantly in the boardroom, and management of firms has been scrutinised much more and even given ‘threats’ if certain actions favoured by the shareholders were not pursued.
• Employees – Employees could also be considered as the sixth force if they wielded extraordinarily strong influence on the firm in a particular sector. The status of employees seems to follow similar rules in certain sectors, and thus could be considered a strong influence in these sectors. For example, in the automobile sector in the US, a large part of the work force are unionised, and thus could be considered the sixth force instead of the government or complementors.
While a sixth force has been added to Porter’s original Five Forces model, the acceptance of this framework has been somewhat limited. This could be for two reasons. First, is that there is no definite and specific sixth force in all sectors, as it is different for each sector. Second, while a sixth force could be defined for all sectors, the influence of this factor can also be captured in the other five forces and thus the necessity of having it in the framework is less compelling.
Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competences, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models have been able to make a return in excess of the industry average.
Main Aspects of Porter’s Five Forces Analysis
The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization’s behaviour in a competitive market. These include the following:
•The rivalry between existing sellers in the market.
•The power exerted by the customers in the market.
•The impact of the suppliers on the sellers.
•The potential threat of new sellers entering the market.
•The threat of substitute products becoming available in the market.
Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market.
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.
•This force is located at the centre of the diagram;
•Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
•Economies of scale: for example, benefits associated with bulk purchasing;
•Cost of entry: for example, investment into technology;
•Distribution channels: for example, ease of access for competitors;
•Cost advantages not related to the size of the company: for example, contacts and expertise;
•Government legislations: for example, introduction of new laws might weaken company’s competitive position;
•Differentiation: for example, certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes
The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:
•Product-for-product substitution (email for mail, fax); is based on the substitution of need;
•Generic substitution (Video suppliers compete with travel companies);
•Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer to the diagram). The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.
•This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;
•Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies;
•Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
•Where the switching costs are high (switching from one Internet provider to another);
•High power of brands (McDonalds, British Airways, Tesco);
•Possibility of forward integration of suppliers (Brewers buying bars);
•Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).
The nature of competition in an industry is strongly affected by suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete – the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the “Structure-Conduct-Performance” (SCP) model: the structure of an industry determines organizations’ competitive behaviour (conduct), which in turn determines their profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haberberg and Rieple (2001) state, the histories and cultures of the firms in the industry also play a very important role in shaping competitive behaviour, and the predictions of the SCP model need to be modified accordingly.
Strengths of the Five Competitive Forces Model Benefits
•The model is a strong tool for competitive analysis at industry level. Compare: PEST Analysis
•It provides useful input for performing a SWOT Analysis.
Limitation of Porter’s Five Forces Model
•Care should be taken when using this model for the following: do not underestimate or underemphasize the importance of the (existing) strengths of the organization (Inside-out strategy).
•The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations.
•From a more theoretical perspective, the model does not address the possibility that an industry could be attractive because certain companies are in it.
•Some people claim that environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation. Sometimes it may be possible to create completely new markets instead of selecting from existing ones.
Porter's Six Forces model and its relationship to the standard Five Forces model
Porter’s Five Forces model actually has an extension referred to as Porter’s Six Forces model. It is considerably less popular than the Five Forces model as its acceptance has been less positive than the Five Forces model. The Six Forces model though is very similar to the Five Forces model with the only difference being the addition of the sixth force in the framework. This sixth force in the model is termed as the relative power of other stakeholders, and can refer to a number of other groups or entities, depending on the factor which has the greatest influence including:
• Complementors – One school of thought looks at the sixth force to be complementors, which are businesses offering complementary products to the sector in focus and being analysed (Grove 1996). The author states that these complementary businesses, as a sixth factor, affect the industry as changes in these businesses (such as new techniques, approaches or technologies) can impact on the dynamics between the industry and the complementors.
• The government – The sixth force in the framework can also be considered to be the government, and is included in the framework if it has potential to impact on all the other five forces (Gordon, 1997). Thus, the government can have direct impact in the industry as the sixth force, but can also have indirect impact or influence by affecting the other five forces, whether favourably or unfavourably.
• The public – Yet other viewpoints look at the public as the sixth force in the model, particularly if the public has a strong influence in the dynamics of the sector resulting in changes to the other forces or in the sector as a whole.
• Shareholders – This group can also be considered potentially as the sixth force. This is more important in recent years where shareholder activity has increased significantly in the boardroom, and management of firms has been scrutinised much more and even given ‘threats’ if certain actions favoured by the shareholders were not pursued.
• Employees – Employees could also be considered as the sixth force if they wielded extraordinarily strong influence on the firm in a particular sector. The status of employees seems to follow similar rules in certain sectors, and thus could be considered a strong influence in these sectors. For example, in the automobile sector in the US, a large part of the work force are unionised, and thus could be considered the sixth force instead of the government or complementors.
While a sixth force has been added to Porter’s original Five Forces model, the acceptance of this framework has been somewhat limited. This could be for two reasons. First, is that there is no definite and specific sixth force in all sectors, as it is different for each sector. Second, while a sixth force could be defined for all sectors, the influence of this factor can also be captured in the other five forces and thus the necessity of having it in the framework is less compelling.
Ecological Model of Competition
The ecological model of competition is a reassessment of the nature of competition in the economy. Traditional economics models the economy on the principles of physics (force, equilibrium, inertia, momentum, and linear relationships). This can be seen in the economics lexicon: terms like labour force, market equilibrium, capital flows, and price elasticity. This is probably due to historical coincidence. Classical Newtonian physics was the state of the art in science when Adam Smith was formulating the first principles of economics in the 1700s.
According to the ecological model, it is more appropriate to model the economy on biology (growth, change, death, evolution, survival of the fittest, complex inter-relationships, and non-linear relationships). Businesses operate in a complex environment with interlinked sets of determinants. Companies co-evolve: they influence, and are influenced by, competitors, customers, governments, investors, suppliers, unions, distributors, banks, and others. We should look at this business environment as a business ecosystem that both sustains, and threatens the firm. A company that is not well matched to its environment might not survive. Companies that are able to develop a successful business model and turn a core competency into a sustainable competitive advantage will thrive and grow. Very successful firms may come to dominate their industry (referred to as category killers).
According to the ecological model, it is more appropriate to model the economy on biology (growth, change, death, evolution, survival of the fittest, complex inter-relationships, and non-linear relationships). Businesses operate in a complex environment with interlinked sets of determinants. Companies co-evolve: they influence, and are influenced by, competitors, customers, governments, investors, suppliers, unions, distributors, banks, and others. We should look at this business environment as a business ecosystem that both sustains, and threatens the firm. A company that is not well matched to its environment might not survive. Companies that are able to develop a successful business model and turn a core competency into a sustainable competitive advantage will thrive and grow. Very successful firms may come to dominate their industry (referred to as category killers).
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