Question

Helen Croker owns Divine Denim, a growing company making made to measure, designer denim jeans and jackets. She uses organic yarn-dyed cotton denim of different weights depending on the garment that she is making. Although she prefers to take the measurements herself, she is now making denim clothes for international customers using the self-measuring system she has developed and put online. For her custom clients, she takes measurements or uses the measurements supplied through her customers’ online application. She uses these measurements to alter the pattern for the design chosen by the client. The pattern is sent to the Cutting Department and the cut material then transferred to the Machining Department. Helen has recently expanded into a Ready to Wear (RTW) collection which is made in Australia and sold online at a cheaper price point than the made to measure clothing. Helen designs the RTW clothes and sends the designs to a pattern maker. She previously had two machinists working for her and has just expanded to 8 machinists and a cutter in an expanded factory to manufacture the RTW clothing. One of the machinists uses the riveting and buttonhole machines. Helen has the latest computerised machines enabling her to complete a single setup for all machines from an iPad. She has an administrator who manages the payroll, orders, creditors, delivery and invoicing. An IT expert works 2.5 days a week and manages the company's website, other IT issues and online presence including monthly podcasts. A bookkeeping service is used for basic bookkeeping, GST returns and preparing information for the tax agent. Helen decided that she needs better cost control and regular information and has asked your firm of accountants, Good Numbers, to provide her assistance to maintain and grow her expanding business. Question 1 Business background As part of your initial meeting with Helen, you are concerned to find out as much as possible about the business and the strategies that she plans to use. To start this discussion, you explain to her Porter’s Five Forces and Porter's Strategy Model and how these can affect her costs and sales. You ask Helen to explain to you how she thinks the forces in Porter's model affect the custom clothing and the RTW businesses and the strategies she will take with these different products. Required: Prepare an explanation of Porter's Five Forces model and of Porter's broad-based organisational strategies for Helen. Prepare a statement from Helen setting out how she sees the forces affecting both the made to measure clothing and the RTW business and the general strategies that she is adopting for each of these businesses. Ensure that you use the background information above to support Helen’s approach to Porter's Five Forces model and Porter’s broad-based organisational strategies.

Porter's Five Forces and Organisational Strategies (PFFOS) Summary

How PFFOS affect the made to measure business

How PFFOS affect the RTW business

Answer 1

Porter's Five Forces and Organisational Strategies (PFFOS) Summary

The tool was created by Harvard Business School professor Michael Porter, to analyze an industry's attractiveness and likely profitability. Since its publication in 1979, it has become one of the most popular and highly regarded business strategy tools.

Porter recognized that organizations likely keep a close watch on their rivals, but he encouraged them to look beyond the actions of their competitors and examine what other factors could impact the business environment. He identified five forces that make up the competitive environment, and which can erode your profitability. These are:

1. Competitive Rivalry. This looks at the number and strength of your competitors. How many rivals do you have? Who are they, and how does the quality of their products and services compare with yours?

   Where rivalry is intense, companies can attract customers with aggressive price cuts and high-impact marketing campaigns. Also, in markets with lots of rivals, your suppliers and buyers can go elsewhere if they feel that they're not getting a good deal from you.

   On the other hand, where competitive rivalry is minimal, and no one else is doing what you do, then you'll likely have tremendous strength and healthy profits.

2. Supplier Power. This is determined by how easy it is for your suppliers to increase their prices. How many potential suppliers do you have? How unique is the product or service that they provide, and how expensive would it be to switch from one supplier to another?

   The more you have to choose from, the easier it will be to switch to a cheaper alternative. But the fewer suppliers there are, and the more you need their help, the stronger their position and their ability to charge you more. That can impact your profit.

3. Buyer Power. Here, you ask yourself how easy it is for buyers to drive your prices down. How many buyers are there, and how big are their orders? How much would it cost them to switch from your products and services to those of a rival? Are your buyers strong enough to dictate terms to you?

   When you deal with only a few savvy customers, they have more power, but your power increases if you have many customers.

4. Threat of Substitution. This refers to the likelihood of your customers finding a different way of doing what you do. For example, if you supply a unique software product that automates an important process, people may substitute it by doing the process manually or by outsourcing it. A substitution that is easy and cheap to make can weaken your position and threaten your profitability.

5. Threat of New Entry. Your position can be affected by people's ability to enter your market. So, think about how easily this could be done. How easy is it to get a foothold in your industry or market? How much would it cost, and how tightly is your sector regulated?

   If it takes little money and effort to enter your market and compete effectively, or if you have little protection for your key technologies, then rivals can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.