Wednesday, November 11, 2015

Influence of Buyer Power and High Entry Barriers: Porter's Five Forces

Michael E. Porter defined a model that analyzed five competitive forces that have been determining the structure and very existence of industries. The five forces play a vital role in shaping competition, domination of suppliers and buyers, influence of substitute products and potential industry growth, whether a new entrant or an incumbent, in order to maintain an industry position and a strategic competitive advantage. Porter added four additional aspects to this model, the role of customers, the power of suppliers, influence of entrants and substitute products and sales cannibalization.

Porter’s emphasis on the importance of new entrants is particularly interesting. He argues that ambitious entrants equipped with high finances can challenge incumbents and in a way force them to change their game plan. I disagree with Porter’s argument on the increased power of new entrants and contend that new industry players in a well established market are not able to make a significant amount of difference towards the current incumbents. The threat of entry and influence depends on the height of entry barriers. For instance, in the power sector it will be difficult to change the rules of the market as an entrant. Aspiring entrants require more than just the availability of resources to challenge the existing market players. It is the combination of industrial advantage and the end value proposition, which is required, to compete against old rivals [1]. Today, Venture Capitalist firms in the power sector are shifting away from capital-intensive investments and into consumer-focus start ups that use cloud technologies to process data, automate processes and improve from traditional power sector functions to unlock a fresh set of values different from those of the incumbents [1]. We observe that this is strategic investment in value add firms. In addition to this, Brick and Mortal stores such as Walmart and Costco have built an enormous position for themselves, making it almost impossible for new entrants to step into the market. In this case, new firms, solely with strong financials and resource backing, will not be able to compete without effective supply chain integration and optimized logistics, aggregated on customer tastes [5]. Highly competitive entrants with strategic technical and financial advantages will be able to influence the rules of the game, and not the majority others with access to resources alone. It is essential to realize that it is the combination of strategic technical advantage and financial resources that will ‘ratchet up the investment’ for existing opponents.

Another element that has particularly stuck with me, is the role of customers and how they can use their position to manipulate adversaries in the industry. Competitors play against each other to offer more valuable products to it’s customers. It is the strategy of customer retention that has forced industry adversaries to strike each other at every opportunity to lure customers towards their product line. This is especially prevalent in the Food & Beverage market, where firms such as Pepsi Co., Kraft Foods, Coca Cola & Anheuzer Busch implement attack tactics to retain customers [2]. For example, when one of these firms offers a good discount on one of their product lines, the rivals will jump in to adjust their own offers to provide the same benefits but at a more compromised discount to cannibalize buyers. Narrowing down to Coke and Pepsi, we observe that they both have the resources and global presence, which they have established through aggressive marketing strategies; in spite of this, the two giants have experienced flagging CSD sales across the globe which has forced them to constantly innovate. We notice that through the last couple of decades, the two rivals have frequently re-structured their strategies based on low prices, acquisitions, innovation & diversification and re-negotiation with bottlers and retailers. Such strategies have changed and evolved with the sole aim to better existing customer experience and acquire a larger consumer base. Due to various social, cultural and health factors, Pepsi and Coke have been compelled to design their strategies around customer needs and more recently been encouraged to leverage their acquired brands to promote sales of ‘healthier beverages’. It is fair to conclude that, customer purchase patterns in the market network greatly determine competitor strategies. Each firm is trying to protect its future by laying down the groundwork for long term profitability & success and a huge part of that relates to and leads from their overall customer retention.

3. The Five Competitive Forces That Shape Strategy, Harvard Business Review

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