Discuss how Porter’s 5 forces model might contribute to a SWOT analysis Created in 1994 and launched in 1995, Amazon. com today is a group which count several websites and search engine such as Alexa or A9, mobipocket. com, the Internet Movie Database (imdb. com) or even the group Abebooks, specialized in ancient and rare books. In 2007, Jeff Besos, Amazon’s CEO, launched the Kindle, made to compete with a whole new range of pads like the Apple Ipad.
Over the years Amazon has diversified its activities and is today competing on a product entirely different from their original service. This is due to the business experience developed over the years which has create opportunities for Amazon. Nevertheless some onlooker are still suspicious on the ability of the company to compete with long-term high technological companies and become a sustainable payer. Although future cannot be predicted, this imply that before engaging the company in such a campaign, the management has surely analysed the business environment.
Investigating the business environment is a crucial step in the decision making process. It has to be updated frequently since a company’s environment is always evolving. A company is affected by many factors and influences which are part of the environment, and the work of the management is to understand and give effect to this environment. The easiest part is to determine all the environmental factors. The tricky part is then to settle a representation that allows to understand which influences have a true impact on the firm.
There are many ways to analyse a business environment but the more used and famous tools are Porter’s five forces model and the SWOT analysis. Besides this is what we will discuss through this paper. As a first part, we will see what are the features, advantages and drawbacks of the SWOT analysis, and for a second part we will introduce the Porter’s model. This in order to discern in what way does the Porter’s model could assist the SWOT analysis. As well we will show how the two tools can act in conjunction to get valuable outcomes.
Let’s start with the SWOT analysis which is often described as an image of the company at a certain time and is an inevitable step in the strategic-decision making for a company that allows to have a digest of the resources and condition in order to have a picture of its position and potential strategies to come (Mintzberg 1994). This model has been credited to Alfred Humphrey but there is not an establish as a theory so it remains still a lot of different appraisal and point of views on it, and since the structure has no real basis there is no clear steps to follow when building a SWOT analysis (Valentin, 2005).
The SWOT model analyse the internal and external factors of a company or a project. The internal environment comprehend the weaknesses and strengths that the firm will bequeath on the project, as the external forces comprehend the opportunities and threats of the project itself. The aim is then to include the internal and external factors into the strategy, meaning to work on decreasing the effects of the threats and weaknesses and the meantime improving their strengths and opportunities. A company should create competitive edges through its internal situation.
A firm has at first to evaluate the different elements of its marketing mix (Product, Position, Price and as well the brand equity). The analysis should then focus on the location and the performance of a product. Then the market shares, the distribution channels, the sale force and the presence on the market, which constitute the position of the company on a certain market. As well as the relative and absolute value of its product. As for the brand equity the company should consider elements related to their customers, such as its sales department, the marketing strategy and practice, its logistic and its communication.
On the other hand elements like the financial situation, the number of year of presence on the market, its knowledge about the production and technology and its R&D and the innovation capability. As we have seen the external environment has positive (opportunities) and negative (threats) possibilities. A company should take advantage whenever it is possible of its opportunities coming from its current weaknesses and strengths. An opportunity is usually completely or marginally out of the ange of the company’s influence, meaning for instance the development of a new way of making business for the firm, like the development of the e-business a few years ago. While the threats are a problem in the environment which can then get worse and become hazardous for a firm’s growth, such as new competition for example. As we have seen previously the SWOT analysis can be consider as a picture of the company, which can show some movements but will not provide the next pictures, or even a lead to know which way things are moving. As an example we can use the case of IBM which was a leader in the IT industry.
A SWOT analysis conduct by the Yankee Group showed that IBM was immovable from its leader position, but since that time the company has been overtaken by firms like Microsoft or Intel. This shows one of the lack of this analysis which did not lead the firm into strategic decisions when a different situation appeared (money loosing situation). And compared to its competitors IBM reacted less adequately which conducted the firm to loose market shares, because the analysis lean on unmoving factors more than on how the company shall move toward.
We can then impute to the SWOT analysis different limits such the fact that it does not help to make strategic-decisions, the lack of dynamic between external and internal factors and the risk to lead a company into a narrowed analysis failing to focus on futures advantages for the competition. Moreover this analysis must be carried realistically so the firm has an actual image of itself. Finally we can say that in order to create a sustainable competitive advantages through the SWOT analysis, a company must act on its weaknesses more than its strengths, and try to detect opportunities where the competition sees threats.
The Porter’s five forces model allows a better understanding of exterior factors’ effect on a firm, and as well an understanding of the attractiveness and the value of this same firm, or business unit and its area. The aim of this model is to lead the firm to perform and face its competition, this through its five forces. The model allows to evaluate: – the new entrants and the barriers for them to come and compete on a certain market the existing players of the market, if there is a weak or strong competition on the specific market, and if there is a dominating firm . The buyers, what is the size of the orders and who has the more bargaining power, the buyers or the industry? – The suppliers, as well as for the buyers who has the most powerful bargaining power, in what number are they present (is there any monopoly situation) – the substitutes, is there any easy way to copy or enhance the product (can be a service too) or to make it more available or less expensive. Regulations must be taken into account, like the tax scheme, work legislation and in some particular areas such as gaming or health it tends to have more rules. So we can think to another factor influencing companies: the government, does it have a crucial effect on the market and its entrance, prices, financial and social laws and competition. This tool (Porter’s model) is one of the most exploited in term of commercial strategic-decision making, because its composition allows to understand and capitalize from the different influences. We can explain these diverse influences. The threat of the entry of new competitors is possible if a market is highly profitable it will induce new competitors to enter it and this could affect the profitability of the industry and its existing firms.
The most attractive market would be one with high barriers to entry and low barriers to exist. Some example of barriers could be, brand equity, the capital requirements, the access to distribution channels and more. The competitors fight within industry to increase or simply maintain their position. There is a struggle between the firms of the more or less intense power, depending to the strategic nature of the sector, the attraction of the market, its developmental perspectives, the existence of barriers at the entry and the xit, the number of existing companies, of the size and the diversity of the competitors, the importance of the standing fixed overheads, the possibility of making economies of scale, banal or perishable character of the products, etc The principal influence of the customers on a market appears through their capacity to negotiate. Their influence on the price and the conditions of sale (terms of payment, associated services) determines the profitability of the market.
The level of concentration of the customers grants power more or less to them; customers very few facing multiple producers have greater possibilities of negotiation (mass retail for instance ). The power of the customers is all the more large as the products are standardized or that there exist substitute products easily available (cost of change of low supplier) The capacity of the suppliers to impose their conditions on a market (in terms of cost or quality) has a direct impact and oppositely proportional to that of the customers.
A small number of suppliers, a good brand equity, very differentiated products are as many factors which increase the cost of changing suppliers and thus the power of those. The substitute products are not part of the market, but represent an alternative to the offer. They can be different products meeting the same need (for instance downloading MP3/Compact disc), is products influencing the request (electric vehicles/ fossil fuel vehicules). The substitute products are characterized by a positive cross elasticity.
Indeed, the price increase of a good consequently induces an increase of the sales of an other one. Although the public authorities (State, European Commission, local government agencies etc) do not appear explicitly in the model suggested by Porter, their influence is taken into account and can affect each of the five forces. The policy and the legislation operating can indeed condition the way in which each force is exerted on the market. For example, the entry on the market can be subjected to an approval and user license or being the object of subsidies.
To carry was opposed to the addition of this sixth force, at the same time for ideological reasons (not interventionism) and owing to the fact that according to him the role of the public authorities can be taken into account in the barriers at the entry. The controversy however always exists between the authors. In this last part we will highlight the contributions of the Porter’s model to a SWOT analysis. As we have previously saw, a SWOT analysis can be split up in two parts, external (opportunities, threats, O/T) and internal (strengths, weaknesses, S/W).
We can noticed that the external factors can be interpreted though a Pest analysis or through Porter’s model. While the value chain can be a good referential for the internal factors. Since Porter’s model seems suitable to understand the environmental factors, it can also help to analyse the firm’s opportunities and threats. Analysing “opportunities” and “threats” allows to centre on external outputs such as politics, economical situation, the culture with a general perspective, and also approaches the competition present on the market..
The two methods are said to be “strategic” and they both are long-term oriented. But when the SWOT analysis focuses more on an evaluation of the value of the factors composing the company’s situation. The Porter’s model tries to understand the link between the external and internal factors of a firm, and that is why the two methods complete each other. As well we can notice that the S/W part of the SWOT analysis can be related to the power of consumers and suppliers expressed in the 5 forces model.
SWOT analysis enables to evaluate different aspects of the company’s environment, such as does the SWOT analysis and there are as well other methods providing figured values regarding a business’s environment. It can be more easy to understand the steps a company will follow through a SWOT analysis. (e. g. get rid of the threats and cease every opportunity, rectify their weaknesses and enhance strengths). On the other hand the 5 forces model offers a large focus on the dynamics of the competition and this model heritages of Porter’s trust in a fierce functioning of the economy and its market mechanism.
Through this essay we have been interested in two models, which main purpose is to understand and point out a firm’s capability to create sustainable benefits. Shortly a company will be capable to control key factors of success in its environment, or put a kind of pressure in order to influence them. The SWOT analysis allows to confront good and bad, internal and external factors. The models we have presented can help a company to design a scheme of its position in the competition and its potential evolutions. Porter’s model can as well be used to classify the key factors of success, which can help the company to overtake the competition.
The image offered by the SWOT analysis is often said too subjective, and this is why the 5 forces model make the SWOT analysis more accurate regarding opportunities and threats, enabling the company to know their quantities. The main purpose for strategic management is be aware and control the different forces surrounding the company. It has been debated that theses forces, the companies with the more favourable environment are probably the ones that will get good results, without taking strategies into account. The strategy would then be induced if we follow this way of thinking.
Meaning that a company’s strategic abilities have to come through a defined environmental opportunity. This has been discussed over the years, some state the experience and the assets of a firm are more important since there is no way to exactly copy them, highlighting then why companies have different performances and results. Some researchers claim that a firm must create strategies based on their own abilities, then it is important to point out or design markets so to maximise the exploitation of resources and to make the difference between the companies abilities.