Porter’s five forces

6 June 2016

Porter’s five forces model is an outline for the market analysis and business strategy development, it includes five forces that decide the competitive power and attractiveness of a market which in turn affect profitability. However the pure competition model implies that risk adjusted rates of return should be constant across firms and industries while different economic studies have opposed the model going on to state that different firms can have varying profitability levels from one given time to another. Henry E Porter, a havard lecturer and economist was among those who opposed the model and through numerous studies, he came up with the notion that in a particular industry various forces, specifically five, affect a firm’s capability to serve its consumers and make profit. A change in any of the forces make a business unit to re-assess the marketplace.

Tough industry may look attractive to start a business, it does not mean that every company in the industry will earn the same profitability. Some business may have better market place and earn higher profit whilst another business in the same industry may end up at break even point. To overcome this an organization must apply their core competencies, business model or network to achieve a profit over the other competitors. This model of Porter’s five forces include – threat of existing rivals, threat of new entrants, threat of substitutes, bargaining power of suppliers and the bargaining power of customers or buyers. Porter’s Five Forces Analysis shows that there are five important elements that verify competitive control in a business location and market attractiveness.

Porter’s five forces Essay Example

Organisation Amaya Resorts & Spa brings guests authentic Sri Lankan experiences. Architecture, arts, music, dance, cuisine – Amaya incorporates each aspect of local culture into its retreats. Amaya Resorts & Spas is a subsidiary of Connaissance Holdings. Under Amaya Resorts & Spa they have three hotels. Amaya Lake, Amya Hills and Amaya Reef Hotel locate at three deferent locations. In this assignment I have chosen Amaya Lake hotel at Dambulla to study and apply Porter’s five forces model.

Porter’s 5-Forces 1 Threat of New Entrants Demand for Restaurants, Guest Houses and motels are still under the spot

light. Yet majority of large chain hotels have established their authority with operating efficiency, and key marketing-mix outflow. This influential force has an immense impact on the small ordinary Hotels, Restaurants, bakers, Guest Houses and motels etc. Therefore, it possesses a tough obstacle for new companies who wish to enter in to the hospitality industry. For instance, it becomes rather complicated for new competitors to raise adequate resources and establish extremely developed service. This is also evident in vast investments done by large chains like Amaya Resorts & Spa, on advanced technology for check-ins, checkouts and stock control systems that blow new competitors and the existing ones. Amya Lake has overcome threat of new entrance with their insistent operational strategies in product development, promotional activity and better service. Threat of new entrants for Amaya Lake – Up coming Restaurants, Bars, clubs, guest Houses, boutique hotels, ect…. 2 Bargaining Power of Suppliers

This force stands for the control of suppliers towards hotels. Suppliers can be the holy owners of the decision making in terms of price. Yet that can be influenced by foremost hotel chains. By creating fear of losing their business to other suppliers’ hotels can still have the control over them. By having number of suppliers as an option and also by bargain improved promotional prices that small individual hotels are unable to compete will enable the control over the suppliers. On the other hand suppliers are also vulnerable by the rising capacity of large hotels to resource their supplies from overseas at better deals. At Amaya Lake they have well controlled the supplier power choosing many numbers of suppliers using their growing ability in hotel industry and as well as having and strong and better relationship with the other suppliers. Suppliers of Amaya Lake – Most vegetables and fruits are harvested in their own garden, apart from that they have chain of suppliers to supply other main materials. 3 Bargaining Power of Customers

Porter said that more the service become uniformed consumers find many options to chose, hence more power is given to buyers. If a hotel does not identify customers need and break the informality of the service, retaining customers will become bit of a hard task. At this point Amya Lakes famous loyalty card remains the most successful customer maintenance strategy that drastically increases the profitability of there business, also by taking care of customer needs, providing customized service, ensuring low prices, implementing better choices, adding value additions, having constant promotions they have attract many numbers of customers under their wing. This has contributed to retain their customer base over the period of time. Ecologically kind and ethically sound food and beverage products makes customers more glued to Amya Lake than the competitors in the market. Customers of Amaya Lake – mostly the leisure market have been targeted by Amaya Lake, and by maintaining a better customer relationship portfolio they kind of have their own market segment. Since customers mostly get their desired experience at Amaya Lake they prefer to stay with them. 4 Threats of Substitutes

Substitution is having other Medias to full fill once needs. For example in-house guest who wants to enjoy a meal have many choices. One is going to hotel restaurant and have the meal or order room service and have meals or go to an out side restaurant and have his meal. Having third option chosen reduces the demand, as there is a threat of consumers switching to the choices .In the hospitality industry this can be seen in the form of service-for-service or the substitute of need, and this takes place by new developments such as the way small hotels, restaurants, bars, clubs ect… this happens in a way of convenience, tailor maidens, easy access and proper customer care ect…. Amya Lake has overcome this by adding few value additions such as Bar, Restaurants, Gym, and Spots complex, DJ club for residents and non residence for affordable price with better service. Substitutes to Amaya Lake – Restaurants, motels, sports centers, bars , ect 5 Threats of Existing Rivals

Traditional economics model illustrate perfect competition as a result of competition among rival firms. Today however, competition is more of a driver towards competitive edge rather perfect competition. Generaly, the concentration ratio (CR) is at most used as a measure of rivalry intensity in a given industry by the use of industry concentration as an indicator whereby, a high CR indicates a large percentage of the market share is held by the largest firms in the industry thus a less competitive landscape and a low CR indicates a presence of a very fragmented market with many rivals none of them with any significant market share leading to a very competitive landscape. Still, an industry’s trend analysis doesn’t only rely on marketshare but can also be defined in a way that it portrays additional information vapart from the use of concentration ratio.

A lower rivary among firms in a given industry is ussualy a sign of discipline within the industry, this harmonious environment may be a result of an informal compliance of certain generally understood code of conduct or simply the role played by the leading firm. Any competitive moves are informally constrained but a maverick firm may rise to the occasion and shift the given harmonious market into a different direction, likely competitive. On the other hand when a rival acts in a way that calls for counter responsive acts from other firms then rivalry intensifies in an aggressive manner, this aggressiveness can be distinguished as weak, moderate, intense or cutthroat (guerilla) depending on the responsiveness.

Rivarly scenario in the beverage industry In the beverage (soft-drinks) industry competition intensifies whenever; Presence of a number of firms though Pepsi is a key player in the industry the company has to compete for market share among others to ensure maintainance and growth of its share. With high fixed costs involved in the industry, PepsiCo is not exception to the fact that production is at almost capacity thus major emphasis to product movement and target attainment which works up-down on the organizational structure to ensure competitive edge at market place over rivals.

High market growth for soft drinks is also a factor that intensifies the industry’s competition. Low switching costs for customers are another cause for intense reivarly in the industry as its as easy as the alphabet for a customer or consumer to switch from pepsi to Azam cola or a Coke thus Pepsi stays focused to quality control and assurance. Switching as a result of product differentiation being at low levels in the industry, in turn calls for branding efforts as the recent pairing with Beyonce, a worldwide mega artist for it’s advertising campaign from late last year up to date. The industry is permanently characterized by high exit barriers due to the extensively specialized nature of its investment, its not as easy to leave since abandonment of the product costs as much as acquiring it thus competiton is intense and need for creativity at reaching competitive edge. The growing market as an advantage but an influencing force for intense rivalry in the industry, 90% of the young population

Pepsi on pursuing an advantage over its rivals in the industry has been able to make various competitive moves as; Changing prices Improving product differentiation Creative use of distribution channels Exploiting supplier relationships

Having many competitors in the market for the same industry which provides uniformly neat service make little control over the condition, where suppliers and buyers have the power to choice with whom they need to deal with, if they do not get a good deal. On the other hand, if only you provide one particular service and no one can do what you do, then you can often have a wonderful force over suppliers and buyers which leads them to have no choice but to retain with you. Hospitality trade has seen a considerable growth in the size and market power of the larger groups and small groups, with greater size it may attract reasonable number of guest who are utilizing range of value additions, which are now important characteristics of the segment. Yet some guest prefers small or mid size hotels with more privacy, affordable and more religious, as it was mentioned above, the power of choosing the place where a guest might want to go depends on competition among the industry.

At Amaya Lake targeted customers mostly tend to choose them, since they have different room categories at different locations, and guests have choices of there own. Operating in an established market makes growth hard mainly because of the competition among businesses. And on the hand highly competitive market has speed up level of growth, ensuing in a circumstances in which hospitality sector may have to be innovative to maintain and build market share. Such innovation can be seen in the development of a variety of operating systems, in reaction to alter in consumer behavior. Market leaders have reacted by focusing on service, price and value additions. Amaya Lake is one of the chain hotels having its own customers in the market with other competitors by providing better service and value additions to its customers. . Competitors of Amaya Lake – Sorrowwa Resorts & Spa, Gimanhala Hotel, Chaya Village, Heritance Kandalama Hotel, Thilanka Hotel

Additional theories Porter’s Diamond of National Advantage Theory, In this theory Porter highlighted that comparative advantage inhabit in the factor donation that a nation may be lucky enough to inherit. Factor aids contain property, natural resources, labor, and the size of the local residents. Michael E. Porter said that a nation can generate new highly developed factor contributions such as technology, skilled labor and knowledge base, government support, and culture. Porter implement a diamond shaped map as the foundation of a structure to demonstrate the determinants of national advantage. This diamond stands for the national playing field that countries set up for their trades. Porter’s Diamond of National Advantage Frame work

Four components of the diamond framework have an effect on national comparative advantage. Those components are, The accessibility of resources and skills, Information to decide which prospects to follow with those skills and resources, The goals of individuals in business, The force on businesses to innovate and invest. Components of the diamond frame work are explains as follows. I. Factor Conditions A nation generates its own significant aspects such as technological support and skilled resources. The reserve of factors at a given time is less significant than the extent that they are improved and deployed. Local shortcomings in factors of production force improvement. Unfavorable circumstances such as labor shortages or limited resources force firms to develop new methods, and this improvement leads to a national comparative advantage. II. Demand Conditions

When the marketplace for a particular product is better in locally than in overseas markets, the local firms dedicate more concentration on that particular product than foreign firms, this will lead to a competitive advantage when that product start to export. Challenging local market leads to national advantage.

A strong local market assist local firms look forward to global markets. III. Related and Supporting Industries When local businesses are aggressive, industry has the benefit of more cost effective and innovative contributions. This effect make stronger when the suppliers are strong with international competitors. IV. Firm Strategy, Structure, and Rivalry

Local circumstances influence the strategy. For example, some businesses have a tendency to be hierarchical. Some companies tend to be smaller and are run more like extended families. Such strategy and structure helps to decide which types of industries are good in nation. Porter’s Five Forces model says, at the beginning of an industry little rivalry makes an industry striking. Though at time an industry prefers a smaller amount of rivalry, in the long run more rivalry is good since it build weight on a business to be more creative and become more advance. And also, the more local rivalry a nation has less global rivalry will enter in to the market. Local rivalry pushes business to move beyond fundamental advantages that the country can enjoy, such as low costs. Hunt Strategic group Analysis Theory,

A strategic group is a concept used in strategic management for businesses within an industry that have related business models. For example, a hotel can be categories based on the room types such as standard, deluxe or suits and based on the value added facilities, eco type hotels, colonial type hotels or modern architectural hotels. They all under one industry. Strategy is the path and capacity of an organization over the period of time to achieve rewards for the business while directing how the business will make money. Hunt (1972) invented the phrase strategic group while carrying out a study of the appliance industry, later on he revealed a higher amount of competitive rivalry than expected by the industry. He recognized this as existence of subgroups within the industry that compete along different proportions. These unbalanced strategic groups root the industry to have more fast innovation, higher quality, lower prices and lower profitability than customary economic models would forecast.

Conclusion In a fast changing business atmosphere with high competition businesses have to adopt new expansion strategies and diversified the existing business in order to maintain its primary market place in an already established hotel sector. Amaya Lake has continuously adapted to the fast changing conditions. Strategy formulation has been observed as a practice of continuous learning, which contains learning about the goals, effects of trials towards these goals and how to put into practice and carry out these trials. The excellence of an invented strategy and the speed of its completion will therefore directly depend on the quality of Amaya Lakes behavioral learning processes. In large organizations like Amaya Lake, strategy should be analyzed and applied at different levels within the industry. These different levels of strategy should be related and mutually supporting one another. Amaya Lake’s strategy at corporate level defines the businesses in which Amya Lake will battle, by which it focus resources to convert distinctive competence into competitive advantage.

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