A strategy is “the direction and scope of an organization over the long-term” (Johnson and Scholes, 2002), these plans are then often used to fulfill the desired goals in order to achieve and attain the expectations of the stakeholders. This is an inclusive plan which can be determined by various factors such as the businesses nature; the stakeholders involved; the long-term goals and the resources that are available for the business. These factors and the overall strategy can determine and measure the success of a business, the reason for this is a business may seem to be doing well to their consumers and the general public, however they may not be reaching their short-term goals or performing the way the manager would personally admire. In this case, it can be argued that the business as a whole and their strategy was not very successful.
One of the ways in which the strategic competition of a business can be assessed, is through the Five Forces of Competition Framework. This framework was created by Michael Porter who decided to create this to analyse a businesses ability to serve their consumers and to also create a profit. Together with his knowledge of economics and the industrial organisation as a whole he was able to first published this in 1979 and further featured in his book ‘The Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980’.
These competitive forces are evaluated within microeconomics and are categorized as: the competition from substitutes; threat of new entrants; rivalry amongst existing firms; the bargaining power of suppliers and the bargaining power of buyers (Figure 3.2).The overall layout of the Five Forces shows that even though a business is in constant competition with their existing competitors, the impact on a businesses profit is also determined by the other four forces. For greater understanding of these competitive forces, their influential strength and structural determinants will be evaluated alongside the airline industries (Figure 3.3).
The rivalry amongst existing firms is a great determining factor of competitiveness in the industry, the strength of this force is stated to be very strong. If the company is aware of the pricing and services available from their rivals they can then be able to adjust their services and pricing where possible. The determining strength and influence of the force depends on the number of competitors in the market an the influence they have on the market. The larger the amount of competitors who provide similar products of services the weaker the influence the company would have on the consumers. In the case of the British Airline company, EasyJet, the competition in the industry is strong from both low-cost airlines such as Ryan Air as well as premium airlines such as British Airways. Suppliers will be drawn to help the company who is performanly greatly in terms of profit and therefore they would be drawn to the more premium airlines as they are more likely to produce a profit with fewer sales and therefore more likely to receive their payments on time. In the case of the consumers, dependant on their preference they are more willing to pay for a cheaper ticket as long as similar services are provided. The disadvantage of having great competition is the companies all have similar strategies and therefore the one thing that would most likely stand out would be the price brackets and therefore EasyJet are at an advantage as they tend to set their prices lower than the average airline company.
The threats of new entrants is linked to the behaviour of a consumer and therefore this force has a moderate strength in the competition. This force is dependant on how fast and cost effectively a new business is able to enter the market. The less time and money it cost for an airline to join the market the greater its strength. In the UK, laws allow all airlines owned by EU citizens to operate freely within Europe and this is an advantage for EasyJet as the founder is Greek. Also, new airlines need to build the consumer awareness to compete with the existing airlines in the industry.
The power of suppliers has a great influence of strength in the competitive market. This force benefits the suppliers and how easily they can adjust the price of the goods they provide. Its affected by the amount of customers they as a supplier hold. The greater the number of suppliers and the less a company depends upon a supplier, the less power a supplier holds. However EasyJet has many suppliers for each f the services they provide, but depending on how well this products and services perform, other airlines are likely to use them therefore producing similar outcomes, even though changing their suppliers would be a more unique option, EasyJet would have to take into consideration how much that would cost them to do, if the benefits don't outweigh the negative then they are likely to stay with them.
The bargaining power of customers and buyers has a moderate strength in the competitive market, the reason for this s because it is affected by how many customers a company has and how loyal they are. The greater and less powerful a client base, the less power they hold. The two determining factors of this is the buyers price sensitivity. The buyers price sensitivity is how much a buyer is willing to pay dependent on the time it is provided and the importance for the product, for example, EasyJet are more likely to make money from family customers during term times and therefore will be increasing their prices, however a family may not be willing to pay this price and therefore EasyJet may reduce their price. The reason this force has a moderate strength is EasyJet may also leave their price unchanged because they know there are customers willing to pay this price due to customer loyalty.
The competition from substitutes has quite a weak impact in the competitive market. This is in the case that if the service or product the customer relies on can be substituted with a different service that provides a similar outcome. A substitute of EasyJet’s destination to France for example would be that of a coach or train service such as Eurostar which could be cheaper but produce the same outcome. The reason that this is quite a weak impact on EasyJet is that flights are often used occasionally and customers with a close relationship with the airline could be drawn to it due to brand loyalty. Other airlines can also be a substitute, however it can be threatening to a company, in the case of EasyJet, they are at an advantage in comparison to the more premium airlines as they provide similar services but are able to keep their prices low. They keep their prices low because they also do not provide the exact same service that other airlines for example, EasyJet customers must pay extra if they want to check-in in advance, whereas British Airways provides this at no extra costs; EasyJet does not provide free food and beverages to its short-haul flight customers, these are one of the ways they are able to keep their costs low.
Porter’s framework was created in the early 1980s and the competitive market and its structure has vastly changed and become more complexed since then, this leads on to further developments and critiques of his framework. Initial critiques of this framework are produced by Kevin P. Coyne and Somu Subramaniam in which they claim that the force of the buyers, competitors and suppliers do not interact with one another and are treated fairly separately when in fact they should work smoothly with one another. Another critique is that the analysis of this framework does not take into consideration that the uncertainty is low which then allows other companies in the market to adjust and plan for the response to changes in the consumer behaviour. Further critiques of this framework is the extension to a potential ‘6th force’ created by Adam Brandenburger and Barry Nalebuff in 1996 also known as ‘game theory’. The game theory added to the concept of having complementors within Porter’s framework, these complementors are shown to be the reason or the idea of the impact caused by related products and services already in the market. This was developed further by Martyn Richard Jones in 1993 which included the impact of the Government and social pressure groups on a business.
The reason for some of these criticisms arising was due to the fact that Porter based his framework on the idea of having a perfect market and in today's modern society, not all industries have a perfect market due to all the economical differences and imbalances. However this then shows that his framework could be used for a simpler markets with fewer rules and regulations such as your local supermarket stores, in comparison to the pharmaceutical industry.
To conclude, Porter's framework has a various amount of limitations in today’s industrial market as it is not able to take into consideration new businesses and complex markets effectively. This framework does not have much strength or influence on its own, however with further analysis and consideration from the critiques it is certainly a good place to start to analyse a market structure.