Five force model explaining competitive environment
Prof. Michael Porter from Harvard identified five force model that explained competitive environment strategies. They include:
Threat of new entrants or potential competitors or barriers to entry:
A business person requires a complex set of permissions to open a restaurant. For example licenses, health reports, sanitation, good infrastructure etc. Then have a role of having unique products in order to outshine from the competitors who may include multinational chains. Any entrepreneur may hesitate to enter into such a business because the determinant of the low threat of these new entrants is the requirement of a number of permissions which are tough barriers to the entry and established products therefore being an advantage to fast-food joints.
Threat of substitute products
Restaurants and other eateries are quite capable of selling the type of foods sold by fast food joints. For example sandwiches, burgers etc. This threat of substitute of product is very high for fast food restaurants and the determinant of high threat of substitutes is lack of differentiation on the products that are available.
Bargaining power of buyers: Low pressure
The buyers or consumers have a high bargaining power in places where there is fast foods joints because they can choose the type of food they want. For instance if customers find that the queue is too long or the food is substandard, they can probably go to another outlet across the road or the next outlet which is near. The determinant of high buyers bargaining power in this case is the high number of sellers to cater to the buyers though the high bargaining power is a disadvantage to a fast-food operating at that place.
Bargaining power of suppliers
Main suppliers in the fast food industry are dairy produce, dough and meat vendors. Their bargaining power is low because there has to be a number of suppliers for these products. Therefore the determinant of low suppliers’ bargaining power is lack of differentiation among the suppliers’ products especially those who are reliable suppliers and hence an advantage to the fast –food outlet.
Competitive rivalry among competitors
The industry of fast food is a chock-a-block with competitors where big brands like McDonalds and KFC, medium and smaller brands which include local restaurants, bakeries, cafes’ which sell a variety of snacks and fast foods. The determinant of high competition is the number of eateries selling quality products and therefore this is a disadvantage to a fast-food eatery.
Key competencies of McDonalds
Pitt and Clarke define core competencies as assets and skills that are knowledge based distinctive firm specific and difficult to imitate. Therefore the key competencies of McDonalds include:
- Minimizing costs and maximizing value to customers: McDonald has provided their customers with affordable menus that their customers can be able to buy. This has helped the company to be distinct from other competitors.
- Philosophy of quality, service, cleanliness and value is a guiding force behind McDonald’s service to the customers. This has helped the company have a competitive advantage over its competitors.
- McDonald’s products are prepared using the most current state-of- the-art cooking equipment in order to ensure quality and safety.
- McDonald’s restaurants provide a clean, comfortable environment especially suited for families. This has been a competitive advantage over the competitors because a family can come in their restaurants regardless of small children and can get the food that they want and these families do not get ashamed with the environment since it is clean and accommodating.
- McDonald restaurants have trained and experienced staff who provide customers with superior customer service.
- Their restaurants are located in excellent locations: McDonald’s restaurants are located where their customers can easily find, see their restaurants. In this case, we see that this has helped them have competitive advantage from their competitors.
Five Force model evaluating competitiveness of Coca Cola Company.
The Coca Cola Company was established in 1892. Michael E. Porter’s five forces measure the competitiveness of firms and its market therefore making a firm being attractive. The analysis is an outline analyzing levels of competition within a business and corporate strategy development.
The model includes: Threat of new entrants, threat of substitute products, bargaining power of buyers, bargaining power of suppliers and intensity of competitive rivalry.
Threat of new entry
- Not too expensive to enter the Industry
- Experience needed but training easily available
- Low barriers to entry
- No entry protection
- Some economies of scale
Supplier power / Buyer power
- Moderate number of suppliers / Few, large supermarkets, very large orders
- Large suppliers, similar products / Homogeneous products
- Able to substitute and change / High buyer power
- Neutral supplier power / Ability to substitute
Competitive rivalry / Threat of substitution
- Very many competitors / Some cross-product substitution
- Commodity products / Ability to import food
- Low customer loyalty / Some substitution
- High costs of leaving market
- Low switching costs
Threat of new entrants/ Potential Competitors: Medium pressure:
In the beverage industries, there are many drinks that people may opt to take. Therefore as new entrants of new beverages enter the market in order to compete with the Coca Cola Company, already Coca Cola Company has made its name through branding and the new entrants will need skills like human resources and enough capital. In the meantime Coca Cola has been having the biggest market share for a long time and the loyal customers cannot leave Coca Cola to try another brand.
Threat of substitute products: Medium to high pressure:
The main substitutes of Coca Cola beverages are Pepsi, energy drinks, fruit juices, smoothies, yoghurt, water, tea, coffee etc. Coca Cola has a unique taste and flavor to Pepsi and customers can tell a great difference between Coca Cola and Pepsi. The number of the substitutes may be very high and therefore adjusting to costs for low level customers could be a threat to Coca Cola. Sometimes the substitute products are good especially when it is cold and people want to take either hot tea, coffee this could be a threat to Coca Cola. Based on these factors threat to substitute products could be strong and avoid people from taking Coca Cola.
Bargaining power of buyers/ customers: Low pressure:
There are different channels where Coca Cola distributes its products from small retailers, supermarkets, wholesalers etc. The bargaining power of customers is low because the customers have a very strong brand of loyalty and may buy in small volumes but continue to purchase the products though the market could not be concentrated in one place. International retailers like Wal-mart have a bargaining power because of their high volume of quantities that are always sold out though retailers’ bargaining power becomes less because of the end consumer’s brand loyalty to Coca Cola.
Bargaining power of suppliers: Low pressure:
The key ingredients for a soft drink are carbonated water, caffeine, sweetener and phosphoric acid. Because of the simple ingredients and are easily available, suppliers generally do not have a bargaining power since the suppliers are neither concentrated nor differentiated. In this case, Coca Cola can switch over to another supplier because switching costs are low.
Competitive rivalry among existing firms: High pressure:
The two major players in the soda industry are Coca Cola and Pepsi and there is an extreme rivalry between the two. Though there are other few smaller players in the soda industry, Coca Cola and Pepsi are the major players with almost the same size and still have similar products and strategies.
Complementary products: Low pressure:
Complementary products are those that may be used together with other products that enhance their features i.e. when it produces a more desirable benefit when used together with another product therefore it is necessary for it to be used together with another product.
VRIO Frame analyzing Safaricom’s strategic capabilities.
VRIO Frame is a tool used to analyze a firm’s internal resources and capabilities to find out if they can be a source of competitive advantage. VRIO frame was developed by Barney, J. B. (1991) in his work ‘Firm Resources and Sustained Competitive Advantage’, where he identified four attributes that a firm’s resources must possess in order to become a source of sustained competitive advantage. According to him, the resources must be valuable, rare, imperfectly imitable and non-substitutable.
Competitive Disadvantage – NO
Competitive Parity – Yes
Costly to imitate?
Temporary Competitive Advantage
Organized to capture value?
Sustained Competitive Advantage
Temporary Competitive Advantage
Adopted from Rothaermel’s (2013) ‘Strategic Management’ p.91
Valuable products in Safaricom include: Financial resources, human resources, marketing expertise and operations management.
Safaricom has over 100,000 agents across the country while the second competitor who is Airtel has an agency network of about 10,000 agents meaning that, though Airtel Money has a lower transaction costs, it is 10 times difficult to get agents where one can send or receive money while Safaricom one can get money very quickly.
Brand alliances where Safaricom has created alliances with other established brands like Commercial Bank of Africa, Kenya Commercial Bank, Cooperative bank etc. These banks have led to almost ubiquitous presence of mobile money platform and M-pesa which has led to convenience to both consumers and merchants in different levels and sectors of the economy. One can pay for any service from health, insurance, school fees, shopping through M-pesa in all manner of outlets.
Investment in Safaricom network upgrade from 2G to 3G and now 4G/LTE meaning customers experience on the device-on-the-go is.
Through skiza tunes and Niko na Safricom live shows Safaricom has embedded value by adding services that appeal across the board. One can download favorite music and video, trending issues and social medias.
Safaricom has endeared itself to citizens in times of need spending over 3 billion on health, education and financial inclusion through Safaricom.
Safaricom has created over 4,000 direct jobs and more than 100,000 jobs indirectly.
Safaricom putting its customers first, branding, promotions, offering relevant product and services.
Safaricom focuses on innovation and future growth streams leveraged in its brand name and equity to grow.
Rare products in Safaricom include: Safaricom Frontier needs to know whether resources are are rare or costly to attain. If they are not than both present competitors and new entrants will be able to get access to them and enter competitive landscape.
Innovation of Mtiba: Safaricom has launched Mtiba which is a mobile centric medical management platform that seeks to provide better coordination between sponsors, patients and providers in the health sector.
Innovation of Fuliza: Fuliza is a micro credit product that was launched on January 5, 2019 in partnership with two banks namely Commercial Bank of Africa and Kenya Commercial Bank where Mpesa users who ran out of cash can borrow up to 70,000 cash instantly.
Costly to imitate: Currently, most industries, companies are facing threats of being disrupted by their competitors. According to the data provided by Safaricom 2018: The Emerging – Markets Payments Battle – it seems that there is core differentiation of Safaricom Frontier is difficult to imitate. On a broader scale – imitation of products of Safaricom Frontier can happen in two ways i.e. duplication of the products of the company and competitors coming up with substitute products that will disrupt the present industry structure.
Organized to capture: Are an organization’s competence and capabilities that an organization makes most of the resources. It measures how much the company has been able to harness the valuable, rare and difficult to imitate in the market place. The exploitation level analysis for Safaricom Frontier products can be done in two perspectives. Is the firm able to fully exploit the potential of the resource, or it still has lots of upside.
Often the exploitation level is highly dependent upon execution team and execution strategy of the firm. So exploitaion is a good barometer to assess the quality of human resources in the organization. Capabilities tend to arise or expand over time as a firm takes action that builds strategic resources.
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