Question

(THIS IS A MARKETING B2B QUESTION)

Discuss the assertion that the requirement of the supply chain is that each participating firm adds value in some way to the goods flowing down it. While discussing this assertion explain the model suggested by Porter (1985) using appropriate examples.

Answer 1

Porters five foeces model helps companies understand where the power lies in a business situation.

It is a business strategy tool that helps analyze the attractiveness of an industry.

The model assumes that there are five forces that determine the competitive power of a company in businesss situation.

The five competitive forces identified by Michael Porter are as follows:

Threat of substitute products

It refers to how easily a companys customers can switch to its competitors products.

Rated on a scale from high to low, the threat of substitute products is high in the following situations:

• Many substitute products are avilable in the market
• customers can easily find the product or service at the same or lower price compared to the companys product or service
• The quality of competitors product is better than that of the company

If the threat of substitute products is high, products offered by a company become less attractive and the company needs to closely monitor price trends to avoid any significant impact on its revenue and profits.

Example 1

Choosing a budget airline over driving to another city

Indirect- choosing taxi services to personal vehicles

Example 2

Solar energy companies for traditional energy providers

Threat of New Entrants

It refers to the entry of new players into the market, reducing the companys market share. The threat of new entrants primarily depends on the industrys entry and exit barriers.

Rated on a scale from high to low,the threat of new entrants is high in the following situations:

• The capital requirement to start a business in the industry is low
• Economies of scale
• Products have a low switching cost
• Products are non differentiated
• There is easy availability of the required technology in the market.

When both, entry and exit barriers, are high, the profit margin is also high. However, companies face more risk because poorly performing companies stay in the industry and try to improve performance. When these barriers are low, firms easily enter and exit in the industry, and profitability is low.

Example:

Electric car companies like Tesla

Industry Rivalry

It refers to the intensity of competition among the existing players in an industry

Rated on a scale of high to low, industry rivalry is high in the following situations:

• There are large number of competitors
• Switching costs are low
• The industry is growing
• Exit barriers are high, and industry rivals stay in the industry and compete
• Fixed costs are high, resulting in higher production to achieve economies of scale and reduce prices

High industry rivalryresults in advertising wars, price war and differentiation, which ultimately increases costs and makes it difficult to sustain profits.

Bargaining power of suppliers

It refers to the degree of power suppliers have over raising the price of inputs

Rated on a scale from high to low, the bargaining power of suppliers is high in the following situations:

• Suppliers are concentrated and well organized
• Few substitute products are available
• The existing product is effective or unique
• Switching cost is high

Examples from the automotive industry:

Bosch

Continental

Michelin

Bargaining power of buyers

It refers to the degree of power buyers have to bring down the prices of products

Rated on a scale of high to low, bargaining power of buyers is high in the following situations:

• Too many suppliers offer the same product at similar prices
• There are few buyers seeking to purchase a large number of goods
• Bulk purchases are involved
• Switching cost is low

The bargaining power of buyers can be brought down by offering differentiated products

Examples:

Car manufactures

Dealership

Rental/ leasing companies