If you find this article to be of interest why not check out our latest work:
Porters 5 forces
How competitive is the industry? How attractive is it?
The Porter’s 5 Forces tool is a simple tool for understanding where power lies in a business situation. It helps you understand both the strength of your current competitive position, and the strength of a position you’re considering moving into.
If you understand where the balance of power lies, you can take advantage of a strength, improve a situation of weakness, and overall, avoid taking wrong steps. This makes it an important part of your planning toolkit.
Conventionally, Porter’s Five Forces is used to identify whether new products, services or businesses have the potential to be profitable.
Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:
Supplier Power: Ask – how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers’ help, the more powerful your suppliers are.
Buyer Power: Ask – how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
Competitive Rivalry: Ask – what is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
Threat of Substitution: Ask – how easy is it for your customers to find 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 by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
Threat of New Entry: Ask – how easy is it for new people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favourable position and take fair advantage of it.
Market opportunities for a new or existing business
The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below:
Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets.
Market penetration seeks to achieve four main objectives:
• Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling
• Secure dominance of growth markets
• Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors
• Increase usage by existing customers – for example by introducing loyalty schemes
A market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.
Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets.
There are many possible ways of approaching this strategy, including:
• New geographical markets; for example exporting the product to a new country
• New product dimensions or packaging: for example
• New distribution channels
• Different pricing policies to attract different customers or create new market segments
Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.
Diversification is the name given to the growth strategy where a business markets new products in new markets.
This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience.
For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.
Business audit (Strengths, weaknesses, Opportunities, Threats)
A SWOT analysis helps find the best match between environmental trends (opportunities and threats) and internal capabilities.
- A strength is a resource or capacity the organisation can use effectively to achieve its objectives.
- A weakness is a limitation, fault, or defect in the organisation that will keep it from achieving its objectives.
- An opportunity is any favourable situation in the organisation’s environment. It is usually a trend or change of some kind or an overlooked need that increases demand for a product or service and permits the firm to enhance its position by supplying it.
- A threat is any unfavourable situation in the organisation’s environment that is potentially damaging to its strategy. The threat may be a barrier, a constraint, or anything external that might cause problems, damage or injury.
In general, an effective strategy is one that takes advantage of the organisation’s opportunities by employing its strengths and wards off threats by avoiding them or by correcting or compensating for weaknesses.
The first part of any SWOT analysis is to collect a set of key facts about the organisation and its environment. This will include facts about the organisation’s markets, competition, financial resources, facilities, employees, inventories, marketing and distribution system, R&D;, management, environmental setting (e.g. Technological, political, social, and economic trends), history and reputation.
The second part of a SWOT analysis is to evaluate data to determine whether they constitute strengths, weaknesses, opportunities or threats for the organisation. This may be done independently by the individuals in a group, results being compared afterwards. It is important to note that any given fact may give rise to more than one evaluation, and so to ask – ” How may this fact be considered as an opportunity as well as a threat?”; “How may this apparent strength turn out to be a weakness?”; “How does this weakness really represent a strength?” The answers to these and similar questions may give managers new insights into choosing appropriate strategies
Boston Consulting Group Matrix
You would look at each individual product in your range (or portfolio) and place it onto the matrix. You would do this for every product in the range. You can then plot the products of your rivals to give relative market share.
This is simplistic in many ways and the matrix has some understandable limitations that will be considered later. Each cell has its own name as follows.
Dogs. These are products with a low share of a low growth market. These are the canine version of ‘real turkeys!’. They do not generate cash for the company, they tend to absorb it. Get rid of these products.
Cash Cows. These are products with a high share of a low growth market. Cash Cows generate more than is invested in them. So keep them in your portfolio of products for the time being.
Problem Children. These are products with a low share of a high growth market. They consume resources and generate little in return. They absorb most money as you attempt to increase market share.
Stars. These are products that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income. Keep and build your stars.
Look for some kind of balance within your portfolio. Try not to have any Dogs. Cash Cows, Problem Children and Stars need to be kept in a kind of equilibrium. The funds generated by your Cash Cows is used to turn problem children into Stars, which may eventually become Cash Cows. Some of the Problem Children will become Dogs, and this means that you will need a larger contribution from the successful products to compensate for the failures.
Problems with The Boston Matrix. There is an assumption that higher rates of profit are directly related to high rates of market share. This may not always be the case. When Boeing launches a new jet, it may gain a high market share quickly but it still has to cover very high development costs. It is normally applied to Strategic Business Units (SBUs). These are areas of the business rather than products. For example, Tata owns Landrover in the UK. This is an SBU not a single product. There is another assumption that SBUs will cooperate. This is not always the case. The main problem is that it oversimplifies a complex set of decisions.
Maslow’s Hierarchy of needs
Theory of Reasoned Action
TORA posits that individual behaviour is driven by behavioural intentions where behavioural intentions are a function of an individual’s attitude toward the behaviour and subjective norms surrounding the performance of the behaviour.
Attitude toward the behaviour is defined as the individual’s positive or negative feelings about performing a behaviour. It is determined through an assessment of one’s beliefs regarding the consequences arising from a behaviour and an evaluation of the desirability of these consequences. Formally, overall attitude can be assessed as the sum of the individual consequence x desirability assessments for all expected consequences of the behaviour.
Subjective norm is defined as an individual’s perception of whether people important to the individual think the behaviour should be performed. The contribution of the opinion of any given referent is weighted by the motivation that an individual has to comply with the wishes of that referent. Hence, overall subjective norm can be expressed as the sum of the individual perception x motivation assessments for all relevant referents
A market is defined by what is addressing it, be it a product, company, organization, brand, business unit, proposition, idea, etc, so be clear about how you define the market being analyzed, particularly if you use PESTLE analysis in workshops, team exercises or as a delegated task. The PESTLE subject should be a clear definition of the market being addressed, which might be from any of the following standpoints:
- A company looking at its market
- A product looking at its market
- A brand in relation to its market
- A local business unit or function in a business
- A strategic option, such as entering a new market or launching a new product
- A potential acquisition
- A potential partnership
- An investment opportunity