Strategy of the organization can be analyzed using the model developed by Michael Porter known as Porter five forces model of competition. The various vital frameworks determine the structure of the industry and help managers develop their strategy. The five forces are:
‘ Threat of potential new entrants
‘ Threat of products / services substitutes
‘ Bargaining power of suppliers
‘ Bargaining power of buyers
‘ The rivalry among existing competitors
FIGURE: Porter’s Five Forces model
The five forces model is very important in the formulation of strategies. In addition, the effects of these forces will vary from industry to industry. They are also useful to determine the position of the profitability of the industry that shape the costs, the investment required and the price can be charged to survive in the industry.
A. Risk of entry by potential competitors: potential competitors refer to companies that are not currently competing in the industry, but they have the potential if given the opportunity to do so. The entry of new players increases the capacity of the industry, start a competition for market share and reduce costs today. The entry of new competitor’s threat is partially a function of the extent of barriers to entry. The various barriers to entry are
‘ Economies of scale
‘ Brand loyalty
‘ Government Regulation
‘ The cost of customer switching
‘ Advantage absolute cost
‘ Ease of distribution
‘ strong capital base
B. The rivalry among existing competitors: Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry between established companies is a major threat to profitability. The strength of the rivalry between the firms in a sector is based on the following factors:
‘ Extension of exit barriers
‘ The amount of fixed costs
‘ The competitive structure of the industry
‘ Presence of customers worldwide
‘ Lack of switching costs
‘ The rate of growth of the industry
‘ The demand conditions
C. The bargaining power of buyers: buyers refer to customers who ultimately consume the product or companies that distribute products industry for end consumers. The bargaining power of buyers refer to the ability of buyers to negotiate lower prices charged by the firms in the industry or increase the costs of firms in the industry to demand better products and services. Powerful buyers can take advantage of an industry by falling prices and rising costs. They buy in bulk. They have complete information about the product and the market. They focus on quality products. Constitute a credible threat of backward integration. Therefore, they are considered a threat.
D. Bargaining power of suppliers: suppliers refer to companies that provide inputs to the industry. The bargaining power of suppliers refers to the ability of suppliers to raise prices of inputs (labor, materials, services, etc.) or industry costs by other means. Suppliers may extract benefits of a strong industry by increasing business costs in the industry. Products suppliers have few substitutes. Products from solid suppliers “are unique. They have high switching costs. Their product is a buyer of products large entrance. Pose a credible threat of forward integration. Buyers are not significant for solid suppliers. Thus they are considered a threat.
E. The threat of substitute products: Substitute products refer to products that have the ability to meet customer needs effectively. Substitutes have a ceiling (upper limit) on the potential returns of an industry by placing a part of a limit on the price that companies can charge for your product in an industry. Reduce the number of close substitutes a product has, the more opportunity for industry players to increase their product prices and higher profits (ceteris paribus).
In addition, the five forces model does not include the role of innovation and the importance of specific differences in the business. Stagnation competition view is presented.
SWOT analysis is a simple model that analyzes the strengths, weaknesses, opportunities and threats of an organization to create the basis of a strategy. To do this, one consider what the organization can and cannot do as well as possible favorable or unfavorable conditions concerning the products or services of the company.
Importance of SWOT analysis to develop a strategy
Often seen as a key step in the planning, SWOT analysis is deceptively simple despite the tremendous value it offers. The system combines information from the environmental analysis and separate it into two components: internal issues (strengths and weaknesses) and external issues (opportunities and threats).
This level of analysis allows an organization to determine whether there are factors present that will help in the achievement of specific objectives (due to a fortress or an existing opportunity) or if there are obstacles to overcome before desired effect can be performed (because the weaknesses and threats).
What is SWOT analysis?
As mentioned above, the SWOT analysis process evaluates the strengths of the company, weaknesses, opportunities and threats of potential to provide a competitive overview of the problems and criticisms that affect the overall success of the business market potential. In addition, the main goal of a SWOT analysis is to identify and map all the important factors that could positively or negatively affect the success of one of the four categories, providing an objective view and depth in business.
‘ Strengths – internal positive attributes of the organization and within your control. Highlights often include resources, competitive advantages, the positive aspects of individuals within its workforce and aspects of your business that makes it particularly well, focusing on all internal components that add value or offer you a competitive advantage.
‘ Weaknesses – factors that are under our control but affect our ability to obtain or maintain a competitive advantage, as limited, lack of resources, skills or limited technology, poor service or poor physical access location experience. Weaknesses encapsulate internal negative aspects to our business which reduces the overall value of your products or services. This category can be extremely useful in providing an organizational assessment; we always aim to precisely identify the weak points of the business.
‘ Opportunities – Summary of external factors that represent the motivation for the company to exist and prosper on the market. These factors include the specific opportunities available on the market that offer an advantage, including market growth, changes in lifestyle, resolving existing problems or the basic ability to deliver more value compared to competitors promote an increase in demand for products or services. One factor to consider is time.
‘ Threats – The independent external factors beyond our organization that have the potential to put our marketing strategy, or the entire company at risk. The main threat is always present competition. However, other threats may include unsustainable increases in suppliers’ prices, increased government regulation, economic crises, negative press coverage, changes in consumer behavior and the introduction of technology “leap frog” that leaves its products or services obsolete. Though these forces are external and therefore beyond their control, SWOT analysis can also help to create a contingency plan that will allow you to address these issues quickly and efficiently that may arise.
Return SWOT analysis in a strategic plan
Once, we have established specific commercial offers related values in the four quadrants of the SWOT analysis, we can develop a system based on the information we have learned strategic plane. For example, once we have identified our inherent strengths, we can use them to seize the opportunities that best fit our organization, effectively reduce the potential vulnerability to threats. Similarly, identifying the weaknesses of the organization as regards external threats, we can design a plan that allows us to eliminate or minimize while improving defensive strategies related to our offer.
It is important to remember that the SWOT analysis can be influenced (and often strongly) by the analysis. It is therefore a good idea to have a review of outside consultant business results by providing a more objective level.
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