Acting as a business consultant, evaluate the business environment for your sneakers company in order to analyse gaps between desired and actual performance. Using the Ansoff Matrix, make recommendations for the business’s future strategy
Acting as a business consultant, evaluate the business environment for your sneakers company in order to analyse gaps between desired and actual performance. Using the Ansoff Matrix, make recommendations for the business’s future strategy identifying how the business will achieve sustainable competitive advantage.
Michael Porter’s five forces framework
Threat of entry
- How easy is it to enter the industry?
- Barriers to entry are factors that discourage new entrants, including:
- economies of scale
- high investment requirements
- access to supply or distribution channels
- expected retaliation
- legislation or government action
Threat of substitutes
Substitutes are products or services that offer a similar benefit to an industry’s products or services.
- Important even if it is more expensive when it is considered a ‘better’ product or service
- Substitutes can come from outside the industry
Power of buyers
Buyers: the organisation’s immediate customers. Powerful buyers can demand cheaper prices or product/service improvements either are likely to reduce profits.
Buyers are powerful when:
- there are a few large customers making up the majority of sales
- if a product or service accounts for a high percentage of the buyers’ total purchases – they will be more likely to ‘shop around’
- where it is easy for buyers to switch from one supplier to another
- if the buyer can supply itself (backward vertical integration
Power of suppliers
Suppliers: those who supply the organisation with what it needs to produce the product or service.
Suppliers are powerful when:
- there are a few large producers who make up the majority of supply
- where it is expensive or disruptive to switch from one supplier to another
- if the supplier can cut out middlemen buyers (forward vertical integration)
With many suppliers, analysis should concentrate on the most important ones.
The other four forces directly impact on the competitive rivalry between an organisation and it most immediate rivals. Rivals are organisations with similar products and services aimed at the same customer group.
In addition to the four forces, there are further factors that affect the extent to which organisations will face more competition:
- where competitors are approximately the same size they are likely to jockey for position
- where the industry is growing only slowly or is in decline, any growth in one firm’s sales will likely be at the expense of another firm’s sales (compare five forces to industry life cycle)
- industries with high fixed costs (investment in equipment/research & development) or where extra capacity can only be added in large increments
- high exit barriers e.g. high redundancy costs, high investment in industry-specific assets
- low differentiation, where a customer cannot easily distinguish one firm’s product or service from another firm’s product or service
Analysing an industry using Porter’s five forces framework should allow a judgement to be reached about how attractive an industry is to compete in. Based on such analysis, informed decisions can be made on which industries to enter or leave; strategies can be formulated on how the five forces can be influenced; competitors can be identified as more or less vulnerable to the five forces. Consideration needs to be given to the level of analysis – is it the industry as a whole that is of interest, which markets, which market segments; the boundaries of an industry change – some converge, others diverge; perhaps organisations that are complementors as well as competitors should be considered.
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