Strategic analysis is very essential in ensuring continuous success in an organization. In order to have a better strategic plan, it is important to have a better analysis of the organization in order to get to making informed choices. For us to have a better understanding of this concept, we will have a closer look at Johnson Matthey which is known globally for selling of chemicals. This company has over the years adopted very high levels of technology and science development in its operations. Johnson Matthey has its operations in over 30 countries and its employment population is around 11,000 persons (Weaver &Reidy, 2002). .
Since 1817 to date, the company has been refining and developing products by use of precious metals. The company has also been involved in manufacturing of high technology products as well as very sophisticated chemicals. One of the company’s notable products is the catalytic converter that reduces vehicle emissions (Weaver &Reidy, 2002). This is a very essential product that plays a great role I reduction of air pollution. It is important to note that the company has over the years strived to ensure that it has positive impact to the society and the environment. Apart from being actively involved in pollution control, Johnson Matthey has also been actively involved in production of pharmaceutical products which plays a great role in the healthcare sector (Weaver &Reidy, 2002). .
2.1 Overview & Critique of Porter’s Models of Competition
Porter’s five forces model is a very important analytical tool named after its developer Michael porter. It is involved in analysis of macro environment within which an organization operates. Proper industry analysis using five forces model is critical in determining an organizations competitive edge. The porters model is concerned with five key areas which include; the bargaining power of the buyers, the bargaining power of suppliers, threat of new entrants and the threat of substitutes, and the rivalry in the industry (Weaver &Reidy, 2002). . The organization should analyse all these factors to determine its position in the industry. This analysis is also important for making critical decisions involving pricing, costs and level of investment (Warner, 2010).
Porter asserts that the buyers’ bargaining power influences the prices that organizations can charge for their products as does the availability of substitutes. Buyers bargaining power also has great influence on cost and investments because different buyers demand different services. Powerful buyers will demand costly services while the less powerful buyers will demand less costly services (Weaver &Reidy, 2002). On the other hand, bargaining power of the suppliers is a great determinant of the raw materials costs and other important industry inputs. The threat of new entrants influences prices and shapes amount of investment organizations needs to put in place to prevent entrants. Competitive rivalry influences the costs of competing in the industry and eventually the prices for the products. The costs of competitions may range from plant, product development, advertisings and sales and promotions. Increased rivalry may result in low prices for products (Weaver &Reidy, 2002).
The porter’s theory asserts that firm’s competitive environment has a common structure consisting of the above discussed five forces. The forces are described as major determinants of the industry attractiveness. The five forces are critical as they can help the organization to identify its strengths and weaknesses in relationship with the actual market situation or state of competition. When an organization is conversant with the five forces, it can then be able to have offensive or defensive measures that can help achieve a competitive advantage.. Therefore, the actions of the company can shape the forces because not only the companies in the industry are competitors, but also additional competitors may arise from customers, potential new entrants and substitutes (Weaver &Reidy, 2002).
2.2 Critique of Porters Five Forces
Porter’s theory is based on assumption that the industry structure is stable, but it can change over time as the industry evolves. As a result of the dynamic nature of the industry, the constant changes in competitiveness can result positive or negative change in the firms’ profitability (Weaver &Reidy, 2002). In essence, the five competitive forces a function of intrinsic industry characteristics, then the competitive strategy would not be on the actions of the company, but instead would be choosing the right industry. Competitiveness in the industry would also mean understanding the five forces better than the competitors; this would be detrimental to firms since they become slaves of the industry structure. In essence, firms are capable of influencing the five forces as described by the theory, which would in turn change the industry attractiveness either positively or negatively. Thus, the rules of the competition can be shifted through strategic actions of the firm. Thus, they cannot remain static as provided by porters (Webster, 2010).
Although porters’ five forces model is an important analytical tool, its effectiveness in the present dynamic business environment is reduced by its historical context in which it was developed. At the inception of the theory, cyclical growth was the centre-stage of the global economy while profitability and survival of the organization remained the primary corporate objective (Webster, 2010). In fact, at its formulation the industry growth was stable and predictable unlike today’s dynamics. The assumption of a classic perfect market has rendered the theory meaningless. The theory has more concentration on competition where there is general assumption that firms are always competing for competitive edge against their rivals. However, the model does not take into consideration other strategies like joint ventures, strategic alliances, virtual-enterprise networks and electronic linking of information (Webster, 2010).
The theory has also been criticized due to the modern global economy and internet. The advance which has turned the globe into a village has significantly killed the aspect of industries to an extent it becomes meaningless to talk about the industries. During strategy formulation, it should be understood that the five forces do not eliminate creativity of finding new ways to compete in the industry (Webster, 2010). The manager should use the model to develop creative solutions to the aspects of the industry structure that are most significant to profitability. In fact, strategies that influence the industry structure such as new products that undercut entry barriers and increase rivalry may affect the industry profitability in the long run. In addition, sustained price reductions as a result of increased competition may also undermine differentiation in the industry (Webster, 2010).
In summary, porters five forces model has some limitations that make it irrelevant in modern market environment. The model is static and not dynamic enough to take into consideration new business models adopted by companies such as Amazon and eBay. Nevertheless, the model remains a crucial tool for the manager to think about their current situation and act in a way that would lead to increased competitive advantage based on the current market situation (Webster, 2010).
2.3 Company Analysis
In the modern business structure, there is several analysis tools used in analysis for informed decision making and determining the firms position within the industry. This section of the paper analyses Johnson Matthey organization using porters five models to establish if the model fits with the practitioner’s experience (Webster, 2010). The major aim of using the model is to analyze the ability of the firm to generate and maintain competitive advantage in an industry. Johnson Matthey which has been operational since 1817 has been a global leader in chemical industry. The company has been a leading company in refining and distribution of gold, silver and platinum group metals. It has also been recognized as the largest platinum producer through its precious metal products division (Stoupin, Rivera, 2008). It has also been actively involved in production of emission control products, fuel cells and process catalysts. The organization operates in over 30 countries on six continents (Webster, 2010).
Threat of new entrants (low)
The chemical manufacturing industry is a sophisticated industry. It is for this reason that entry into industry is not an easy task especially due to the bureaucracy and level of risks involved. The business requires very high initial capital, and the competition among the existing companies is intense and dominated by well established companies (Webster, 2010). However, it is also important to understand that the market has few legal barriers that protect the existing companies from new entrants. In addition, the competing firms have well established brand names and a reputable image. Johnson Matthey is a well known brand, it has a large market share in various segments, and its large size makes it very competitive over new entrants in the chemical industry (Webster, 2010). The existing players in the industry enjoy economies of scale which may not be easily achieved by new entrants.
Suppliers bargaining power (weak)
The bargaining power of supplier is deemed weak in the chemical manufactures and precious metal industry. This is because there are many suppliers and few companies that deal with such kind of supplies (Bogue&Buffa, 2012).. The different companies can use different materials because the materials are widely accessible and there is no threat from suppliers engaging in forward integration. The competition by suppliers has resulted to timely supplies and good relationships which has led the company having a competitive advantage.Johnson Matthey is one of the companies that enjoy strong relationships with its suppliers. Thus, its effective way of monitoring the supply chain lowers the bargaining power of the suppliers (Webster, 2010).
Buyers bargaining power (low)
The buyers bargaining power in the industry is substantially weak given that there are many buyers. The increased demand for motor vehicles has resulted to increase in demand for emission control products. Most of the company’s customers are auto dealers and other corporate bodies that are environment sensitive (Bogue&Buffa, 2012).The demand for precious metals has also been on the rise and the limited number of players in this sector has reduced the buyers bargaining power significantly. Johnson Matthey has for several years dictated prices for its products and consumers have only been price takers (Webster, 2010).
Threat of substitutes (moderate)
Chemical manufacturing industry has very sophisticated products. For instance, Johnson Matthey has very sophisticated products which may not get close substitute. Emission control products and pharmaceutical products manufactured by the company may not be easily substituted (Bogue&Buffa, 2012). This makes the industry immune from any threat of substitutes. Although there could be elements of close substitutes, the quality of products offered by Johnson Matthey would make the switching costs to be unbearable to consumers thus giving the company a competitive edge. The company s also in extensive research and development thus producing new products that meets consumer demands.
Rivalry among the competitors (high)
Rivalry in this industry is high as the companies in the industry compete for the market share. Continuous competition is fuelled by the high consumer expectation and anticipation of lower prices. In the industry, Johnson Matthey remains the low cost manufacturing due to its production systems that is efficient. Thus, it has a competitive advantage over its competitors in the industry. Moreover, the company has strived to increase brand loyalty among its consumers which has made the company a competitive one in the industry (Bogue&Buffa, 2012).
Summary and Interpretation of the Analysis
From the analysis, it is evident that the five forces model is a crucial analytical tool in making strategic decisions. The information gathered from this analysis can be very essential in strategic planning on how profit maximization and achieving competitive advantage can be achieved. The five forces analyzed the chemical manufacturing industry so that the players in the industry may align their actions to benefit from the analysis. According to the porter’s theory, the players in an industry are not always expected to conform to the industry but ay act in a manner that they achieve organizational success. Johnson Mattheyis very innovative and its creativity allows it to introduce differentiated products in the market every time. This action, often changes the industry structure because differentiated products always kill competition (Bogue&Buffa, 2012).
After proper understanding of the analysis, the firm is expected to engage in the process of pursuing strategies that would help position themselves against the competitive forces in the industry and achieve higher market share or profitability (Bogue&Buffa, 2012). Actually, porters five forces model is a powerful tool that helps the organization to know exactly where power lies in a given business situation. This can help the company understand its strength and its competitive position. Thus, with the understating of the power in the industry, it is easier for the company to take the advantage of the situation and improve its strength and avoid taking wrongful steps. Thus, it is an important business planning tool even today (Perrow, 2000).
From the above chart, it isevident that the level of emmisions has been on the rise. With the governments objective of minimizing such emmisons, the sale of emmision control products from Johnson Matthey is lkely to increase immensely. All transport modes ranging from roads, air and maritime are prone to such emmisions and thus expand market for Johnson Matthey’s products.
3.0 Does this Theory and Practice Work?
In the modern business environment, there is great confusion on whether or not this theory really works in practice. As a result, numerous researches have been undertaken by different scholars in order to ascertain this question. This part of work will outline how porters’ five forces model and practice are working even today (Perrow, 2000). Porter’s five forces model is one of the best tools to analyze the industry where a company operates. It helps in giving the general view of the external forces or factors that help determine the industry attractiveness or profitability. The information from this analysis can be very helpful to managers in making critical decisions on whether or not to enter an industry based on the power or strength the company has in the industry (Perrow, 2000). Nevertheless, it is important to understand the various limitations that could hinder strategic planning in an organization. It is important for managers to understand that there are other external factors that affect the industry apart from the five forces asserted by porter. Thus, this model alone is not perfect until it is combined with other models such as SWOT, PESTEL model, and competitive generic strategies. This was the case with Johnson Matthey when entering new markets (Perrow, 2000).
The major aim of companies is to satisfy the customer needs as this is the prerequisite for the company profitability. However, the company must determine its sustainability and perpetuity as well as maintain its value for customers (Dransfield, 2001). Scholars have argued thatthe industry structure determines who captures the value and the threat of entry determines the probability of new firms entering the industry to compete away the value. It is important to understand that at the inception of the porter’s model, the industry structure was static. However, this has changed over the years in terms of competitiveness which has drastically changed in the modern economy.Internationalization has drastically changed the market environment since competitors can come from any side of the world (Dransfield, 2001). In addition, the information age has transformed the value chain as the organization takes all the roles of manufacturer, wholesaler, and retailer. Despite the changes, porters model remain an important analytical tool for industry analysis.The industry analysis through porter’s model is essential for making decision on whether or not to enter the industry and how well one can position herself in the industry (Dransfield, 2001).
Industry analysis is crucial because the various forces identified by Porter have different effects in different industries. Some scholars argue that although Porter provided that collective understanding of forces is crucial for the company competition; each force has its own effect on the industry (Hall, 2002). For instance, one force may be strong to an extent that it acts as a barrier to enter in the industry. On the other hand, the other four forces may be strong while one is weak and cannot hinder the organization from entering the industry. Therefore, if an organization is using the model to analyze the industry; it should do it frequently because the model assumes that the industry structure is static and does not change. Thus, the model is the beginning point, and it has to be adjusted to today’s industrial environment that is so dynamic with the growth of globalization and the internet. The model should be flexible and adaptive to the modern dynamic economy (Hall, 2002).
It is important to note that although the five forces model is effective in simple market structure analysis; its effectiveness in dynamic and complex market structures is at times compromised. In complex markets, technological breakthroughs, and dynamic market entrants can change the market structure, the supply chain and other marketing activities within a very short time. This implies that the model can be used in industry analysis but it lacks sufficient information since the model mainly concentrates with competition. Thus, it will hardly give meaningful information about preventive actions a company may take (Das, 2013). The introduction of the internet economy in the recent years puts the models under critique. Practitioners, policy makers and business strategists may find the models important in some situations, but the changes in economic condition since the 20th century render the models ineffective in some market situations. For instance, the rise of internet and e-business has influenced almost all the industries. Therefore, the five forces model cannot explain or analyze today’s dynamic forces that can transform the whole industry (Das, 2013).
In addition, there has been increase in information accessibility as a result of increased digitization. The increased information access by new players from outside the industry has enabled them to enter the industry and change the market competition quickly by changing the basis of competition. For instance, the introduction of the electronic shopping malls that make use of credit cards do not depend on the assumptions of porters five forces (Das, 2013). In addition, globalization has led to the development of effective distribution logistics and communication. These new changes in the industry have enabled firms to act globally rather than in the industry context. Thus, customers are able to compare prices globally and make decisions based on the global prices (Das, 2013). This makes locally oriented companies to find themselves in the global market, as well. Global business requires that organization to employ better strategies other than the ones suggested by Porter because the global business environment is not static, but complex and dynamic. With globalization, the competitive advantage does not lie on the industry forces suggested by Porter, but on the ability of the company to maintain and satisfy the needs of global and mobile customers and manage their networks for continual relationships (Hall, 2002).
Although the economic environment has changed over time, Porters five forces model still plays a significant role in strategic analysis. The five forces play a critical role in providing the guidelines for the managers to develop strategic plans for an organization. It should be understood that the development of an effective business strategy depends on many things and not one model. In fact, in early 1980, the strategy was built on nothing but Porters five forces model and Value chain models (Hall, 2002). Thus, each strategy should be developed based on careful evaluation of the internal and the external factors that affect the organization. Organizations future development is highly dependable on this factors and calls for proper analysis. Creativity and innovation are critical for company to gain competitive advantage. It is also important to involve the several analytical tools such as SWOT and PESTLE in strategic management
From the case study, it is crystal clear that the porters five forces model is an important analytical tool. Despite the several challenges and limitations associated with model, it is evident that the theory works in practice (Hall, 2002). However, the constant changes in the business world have rendered the model practicality in jeopardy. The model has however proved to be a very critical tool since almost every business operates in an environment where buyers, suppliers, competitors, new entrants and substitutes are inevitable. The firms are obliged to have customer value increased and this can only be achieved through a systematic industry analysis.
From the analysis, it is crystal clear that porter’s five forces model still remains an important strategic analysis tool. Although the tool has been greatly affected by the dynamics and complexities in the modern economy, it is true that the analysis still has a lot to offer to modern management in terms of strategic planning. As a result, the following recommendations are suggested;
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