Strategies refer to high-level plans aimed at achieving one or many goals in conditions whereby the position of uncertainty exists. Strategies are derived from the essence of coping up with competition from other business in a market. Understanding the structure of the industry as well as the existing competition are very crucial for an effective strategic setting. Competition in an industry goes beyond rivalry from other businesses, to include competitive forces such as customers, substitute products, suppliers, as well as potential entrants to the market. This essay explores the five forces tools, which creates an understanding of where power exists in an industry thereby forming a basis under which strategies are formulated.
The threat of entry into the market is a major factor that determines strategic issues. The presence of new businesses in a market leads to the desire of gaining a market share, which in turn creates much pressure on elements such as prices, rates of investments and costs of products and services. When competitors are many, businesses are forced to hold down their costs. Entry into the market by other firms, therefore, decreases the profit potential of other companies in the market. Barriers to market entry can rise from various sources such as economies of scale, demand and supply, capital requirements, restrictive policies by the government and inequality access to distribution channels.
The suppliers power is another factor. In a market, suppliers benefit most from the market through charging higher prices for their products or by shifting costs to other participants the industry. When setting out business strategies it is important to assess the degree of ease in that the suppliers can drive up the prices of products. The increase in the prices by suppliers is dependent on various factors such as the number suppliers available in a market and the control they possess over businesses. Evidently, the fewer the number of suppliers for business, the more the business is dependent on the supplier thus increasing the suppliers power.
Setting up successful business strategies requires a full analysis to be conducted on the power possessed by buyers in a market. Buyers in a market capture more value by acts such as forcing down prices, driving costs by demanding better quality products. They also play participants an industry against each other, which is at the expense of the profitability in the industry. The number of buyers is important for business as influential consumers often dictate the terms to the industry, which affects a business profitability Margin as well as its functionality.
The threat of substitute products is additionally important. Substitute products are those that serve the same purpose as industrys product by vary means. Threats of substitutes goods are maybe indirect . Thus, the alternatives may replace the industry product. Where there exist high substitute threats from substitute products, industrys profit margin is significantly affected. Therefore, it is necessary for strategists to be alert to changes that occur in other industries that may render them as substitutes that are more attractive.
Rivalry that exists between competitors determines the extent to which organizations formulates their strategies. This force examines the intensity of competitor in the market which has some determiners. Rivalry competition is at its peak when there exists only a few business that sells identical products or services. With increased competition between firms, this ultimately leads to higher costs of advertising as well as price war, which lead to a small-profit margin for businesses. Therefore, to create a competitive advantage firms are required to formulate strategies aimed at reducing competition from rival companies.
Business strategies are mostly designed to create a competitive advantage for business giving them an upper hand in their activities. I order to create business strategies aimed at giving the business a competitive advantage. Thus, it is important to explore factors that make up the business environment. These factors are inclusive of, the buyers, suppliers, substitute products from other firms, as well as the threats that exist with entry of market by additional companies. By exploring these factors, strategist can understand competition and eventually device strategies aimed at coping with competition.
However, like most models there exist some limitations associated with the model proposed. One such limitation is that the model can only be used on the border levels of the whole industry. When assessments are conducted for the small levels of the industry, the results achieved do not provide strategically significant information. Further, the proposed framework has a high degree of uncertainty. This is because the five forces framework is debatable and subject to discussion and false conclusions can be made therefore the structure lacks facts thus; the primary purpose of the framework is brainstorming. The proposed framework is also prone to adaptability and evolution. The framework is static thereby representing present day aspects. Strategic planning requires long-term objectives; hence, the model is too static thereby proving to be unreliable outside the short-term goals.
By examining other proposed frameworks such as the oval model, Heeks-Nicholson model, and offshore attractiveness framework, it is quite clear that that the five fundamental factors are considered in these models. Therefore, this model does not apply any new factors. The Five Forces model assigns the business managers with the task of making the right decisions and thereby choosing the most appropriate strategies to manage the five forces for improving the business position. Despite the limitations, the model is relevant as it helps the business management team both the top ad low-level management teams on evaluating their market environments. In addition, the framework provides an excellent foundation for research required in formulation of future business strategies. However, more research is needed to enable application of the model in different lines of business, as each line requires of development its particular industry-specific framework.
The structure provides the idea that there exists a relationship between the five forces and that they are the core determiners of competition in industries. The performance of the firms using this framework is based on theory rather than statistics thereby it lacks statistical evidence. Some of the aspect of the of the frameworks are such on the need to examine the suppliers, buyers, business rivals by applying this central aspect this will create the profit margin of the firm. The model can work in a business located in the Middle East as business environment consists of the same factors in various states, this would, therefore, enable the application of the model.
In conclusion, the framework is better for prescribing the best way of shaping the future events, however; it does to guarantee the achievement of a lasting and defensible competitive advantage. The framework is a holistic model because it provides a holistic understanding of businesses in the industry. The framework is also an analytical tool that analyses the various factors that make up a business environment.
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