Forming a business strategy is an essential part of starting a business and be successful. It is, however, necessary for businesses to select the best model that it can use in formulating a business strategy with success being determined by its applicability to the business and the environment where it will be hosted. Without understanding the models, businesses may end up factoring in the wrong elements to gauge how well the business may fair on once the business picks up. One such strategy is the six-forces model. Porter’s six models is a new strategic tool adopted by businesses seeking to expand their operations in new regions and markets. The model is used to measure how competitive and attractive a market may be for the business. There are several elements or factors of the business that the strategy will highlight, which the business owners will have to consider in the planning phase of the business. The strategic tools have been in use or many years with many successful cases, but this is not the case in all situations. Improper use of the strategy has led to some companies counting losses. The strategy has its associated advantages and disadvantages that business owners need to factor in as they make the final decision about the existence of the business in the location of their choice.
six forces which are factored in by the strategy
These six six forces which are factored in by the strategy are competition, new entrants, power of buyers, power of suppliers, availability substitutes. The competition segment involves multiple players who might be trying to undercut each other, which will be reflected in profit margins — for example, airline industry where carriers try to steal customers from one another by introducing competing routes. New entrants will provide information about how easy or hard it is for new players to enter the market — companies operating in markets that contain high regulation, high-cost face low competition, for example, Oil and gas exploration industry. This is because this sector requires a lot of capital to cushion against risks in case of unprofitable drilling. In an industry that involves moving products through distributors or retailers, then the buyer will use its power to exert pressure to maximize profit margins. For example, if Wal-Mart is your retailer, then you will have to give up a significant volume discount for your product to be listed their otherwise someone else willing to will take your place(Canning & Kelly, 2013, September 8). In a market with limited supplies, then supplies will have a lot of power in terms of price over their clients. For example, in the 1990s, when Microsoft had such an advantage, they made huge profits through their Microsoft Operating System. In the market will alternative products and services, customers have the power to decide where to buy from. For example, if a cup of coffee is expensive at Java House as compared to the same cup of coffee in Vida E Cafe, then the customer will make an independent choice to make.
The six-forces model has several advantages and disadvantages that can be used to gauge how successful and applicable the strategy is to the business and the environment operating in. The first advantage of the strategy is that it is capable of evaluating a company’s strategic position in a particular market without necessarily having operations running in the industry. The strategy is also capable of providing information on how competitive the industry is, and even the number of competitors the business is likely to face in sustaining its operations. The strategy is also quite easy to use for first-time business owners and managers(Harvard Business Review, 2020). This is because it is direct, and the user can enter the information about the factors mentioned above wit very little ease. A disadvantage of the strategy is that as much as it factors in the company’s position in the industry, the strategy fails to provide information on the company against the market conditions(Kenton, 2020, January 30). The strategy is only reliable, where the users of the industry are familiar with the market. It may be challenging to collect all valid information about the market if it is relatively new for the users. The strategy does not provide information about all the factors that can affect the conditions of a business within that market. For example, if Starbucks wants to enter the market in a relatively new but competitive market, the firm will look to use the available data as a guide for its market strategy(Kenton, 2020, June 20). From the strategy, some of the possible competitors who are likely to be seen are either other coffee houses within the market. The products offered by Starbuck are unique, and this means that once the products have been introduced into the market, it would be impossible to replace or replicate them
Core competencies consist of factors that allow businesses to deliver value to their clients and maintain a competitive advantage over the rest. However, these are hard to identify, copy, and develop.
An example of this is a tech company designing efficient internet search algorithms or high-speed microprocessors for their business, which is hard to copy. A business to succeed can develop these factors through internal strength identification and invest in what customers’ value. An innovative company will always be ahead of the rest in the market. An example of this is Apple’s products in the market. For a while now, Apple has been able to produce quality and cool designs for its products. Its introduction of iPod to capture the attention of its customers as a cool way to download music was a game-changer(Canning& Kelly, 2013, September 8). Apple has continued to innovate even after having such success. Google as well has been a constant success even against formidable competitors in its sector because of the success in developing a new computing paradigm.
Quality and reliability are another core competence strategy that guarantees business success. Many businesses have gained a market-leading advantage because their customers are always expecting and receiving high-quality products and services from them. For example, Dell has a strong position in the computer market because of its unique products that are difficult for competitors to imitate and have reliable products and distribution quality with competitive prices(Lopez, 2015, June 29). Automakers from Japan is another good example that has taken over the market by making quality one of its core competence in business. They have incorporated quality in their automotive designs and manufacturing with concepts like just-in-time manufacturing. Their prices might be high, but they have gained customer loyalty because of their quality products.
Businesses with high-quality customer service have gained a competitive advantage in the market. A management consulting firm, for example, has to efficient and complete clients’ services on time for it to be a success. Similarly, if customers have to wait on the line for a long time to be served, then that business will lose its customers to a competitor. Costco has the largest warehouse chain in the world, with billions worth of sales every year. Their success story is centered around return policy, which gives them a reputation for its famous customer service(Nielson, 2014).Costco deals with high volume and bulk sales as their model, which has enabled them to charge very low prices even for its quality products and services. This model has gained stable customer loyalty and is still attracting new customers. Another example of a company with exceptional customer service is Tesco. Tesco supply systems have a reliable and delivery infrastructure in terms of product picking and customer handling.
Companies’ main objective in every market is always to remain competitive to attract more customers. Small businesses can take advantage of business where large, and big competitors are not pursuing or even team up with other businesses to broaden their market. A rapidly changing business environment and changing customer preference should act as an eye-opener for bigger businesses to be flexible. Engaging the capabilities of other partners in the market as your core competencies will give a business the competitive advantage it is after. A good example of broadening your market is in the aviation industry, where airlines like Ryanair and Jet Airways have explored. These two airlines have used their domestics success to expand into regional markets with great success(Wilkinson, 2013, July 23). They based their expansion on their strong brand and customer service to start their operations in the region. Their success was because they were flexible enough to overcome complex factors that arose like customer service requirements and regulatory requirements. Turkish Airlines, which is one of the most successful airlines in the world today, not long ago, was known for its poor customer service and bad safety reputation. To counter this reputation, they made a move to overhaul its fleet and improve customer service by revealing a new brand image. They came up with a new logo, a modern fleet of airlines, and they increase their advertisement budget, especially in new markets. Their flexibility acceptance improved the image of the Airline and is now one of the best airlines in the world.
Strategic innovation refers to the plans that an organization may have or use to boost its market shares of profits through product and service innovation. The process of innovation may involve different levels of product improvements to satisfy the market’s needs while improving the firm’s profitability in the business environment(Lopez, 2015, June 29). Much focus is placed on the product, but the types of changes may vary depending on the firm and what it seeks to achieve with the process of product innovation. Most companies do not understand the concept as they may end up copying other company’s products just to be similarly competitive rather than focusing on how it can improve on the state of its products(Nielson, 2014). Companies have to understand the different types of innovations that may be undertaken to see which of the strategies is the most effective, depending on the business model being adopted by the business.
Strategic innovation can be categorized into four categories. These categories are as follows; proactive, active, reactive, and passive. Companies using proactive strategic innovation usually have strong research, always first to introduce a product to the market and lead in technology(Satell, 2017, June 21). They tend to take a big risk because they have access to knowledge from many sources — for example, Apple, Amazon, Fly Emirates Airlines. Emirates Airlines have been able to maintain its leading role in the aviation industry by applying new technology ahead of competitors by becoming the first international Airline to use biometric boarding on its system. Active strategy innovation players protect their existing technology and market and, at the same, can quickly respond to competition(Sky News Australia, 2020).These companies have a bigger pool of knowledge to access and take a medium to low risks — for example, British Airways and Microsoft. Companies using reactive strategy approaches tend to take a back seat approach as they wait and see what is happening in the market. They used the already proven innovation to strategies. For example, Ryanair Airlines, which is a low-cost airline, has copied successfully the service model (no-frills) being used by Southwest Airlines as its strategy(Wilkinson, 2013, July 23). Passive companies will wait for their customers to recommend a change in their products to effect it. For example, automotive companies have employed this strategy successfully for long and have been changing their specifications based on customer recommendations.
Effective strategic management is a required element for any business in any market to ensure its long-term success. It provides ideas and knowledge to manage an organization effectively, and at the same time, it provides the art of knowing when to apply your creativity. Strategies evolve, and the knowledge and art of strategic management are essential. A business should have its vision, mission, objectives, and organizational structure for it to be a success.
Canning, M., & Kelly, E. (2013, September 8). The European Business Review. The European Business Review. http://www.europeanbusinessreview.com/dynamism-and-discontinuity-eight-trends-in-the-business-environment-that-will-shape-strategy/
Harvard Business Review. (2020). The Five Competitive Forces That Shape Strategy [YouTube Video]. In YouTube. https://www.youtube.com/watch?v=mYF2_FBCvXw
Kenton, W. (2020, January 30). Understanding the Six Forces Model. Investopedia. https://www.investopedia.com/terms/s/six-forces-model.asp
Kenton, W. (2020, June 20). Business-to-Consumer: What You Need to Know. Investopedia. https://www.investopedia.com/terms/b/btoc.asp
Lopez, J. (2015, June 29). Types of Innovation | Constant Contact Tech Blog. Constant Contact Tech Blog. https://techblog.constantcontact.com/software-development/types-of-innovation
Nielson, J. (2014). Four Types of Innovation and the Strategic Choices Each One Represents – Innovation Excellence. Innovationexcellence.Com. https://www.innovationexcellence.com/blog/2014/01/12/four-types-of-innovation-and-the-strategic-choices-each-one-represents
Satell, G. (2017, June 21). The 4 Types of Innovation and the Problems They Solve. Harvard Business Review. https://hbr.org/2017/06/the-4-types-of-innovation-and-the-problems-they-solve
Sky News, Australia. (2020). Good Strategy/Bad Strategy – who succeeds in business? [YouTube Video]. In YouTube. https://www.youtube.com/watch?v=tL_sQddBtU4
Wilkinson, J. (2013, July 23). The Strategic CFO. The Strategic CFO. https://strategiccfo.com/complementors-sixth-force-of-porters-five-forces/
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