A Report On Porters Five Forces English Language Essay

Conducting a strategic industry analysis is an informative method in understanding the mission and motivations underlying the for-profit sector and can result in additional industry insight (King, M. A., n.d.). Porter’s Five Forces are the most broadly used business tool for the strategic industry analysis.

Diagram 1 was design by Michael Porter in defining the industry analysis. King’s studies (as cited in Porter, 2008) mentioned the Porter’s Five Forces contain the competitive rivalry within the industry, threat of new entrants, bargaining power of customers, threat of substitutes, and bargaining power of suppliers.

Competitive Rivalry within the Industry

Rivalry among competing firms is the most powerful of the five competitive forces. In gain the customer’s share to increase the firm’s revenues and profits, the firms have to endlessly compete with each other in the same industry. The competition is more intense if firm pursue strategies that give competitive advantage over the strategies pursued by rivals. (Porter, 2008)

Malaysia has a total of 690 private colleges, 14 private universities and university colleges and 4 foreign university branch campuses (Wong, P. W., 2003). In 2001, these private institutions had 270,900 students with 90% enrolled in private colleges (Wong, P. W., 2003). Though competition is intense throughout the private higher education industry, the bulk of the student enrolment in private colleges is concentrated within a few major players. Wong’s studies (as cited in SEGi investors website) mentioned the notable ones are SEGI, INTI Universal, Stamford, PTPL, Informatics, Olympia Colleges, Sedaya College, KDU, Taylors College, Sunway, KBU, and HELP Institute – “Big 12”

Besides private, SEGI also faces competition form both listed, non-listed colleges or universities and also the college or university that located around the branches area. For example SEGI College Subang Jaya, their main competitors are those colleges or university that located around the Subang Jaya area such as INTI, Monash, Taylor’s, Sunway, Optima, Metrowealth, and Metropolitan college.. XXX, (2009, December 2). Head of Marketing Department, SEGi College Subang Jaya. Interview.

Other SEGI competitors in the listed companies such as INTI and Stamford offer similar courses except that SEGI more emphasis on the adult market and vocational courses that gives good growth potential (Yaw, C. S., 2004). Formerly, SEGi was well-known for its professional and technical accountancy courses expanded its course structure with the reverse takeover of Prime Group by Systematic Education Group in 2001. Therefore, SEGi expanded its field of studies from pre-university to doctorate level and increased its tie-ups with foreign university. This reverse takeover lifted SEGI profile and in 2004, it listed as a largest private education provider with 18,500 students. (http://segi.investor.net.my/pdf%20files/TA_SEGi_040119.pdf)

As the dominant competitor in the private education industry, SEGI stands apart from hundreds of small private institutions. Nevertheless, the competition is still intense between the top ranked education providers that estimated command for 30% of the total enrolled students in private college in 2001. The so-called “Big-12” which include listed competitors SEGI, INTI and Stamford.

SEGI strength lies in the location of its colleges. In contrast to many notable colleges which operate on big campuses, SEGI’s colleges are scattered in residential areas across the country, from large urban areas to smaller towns and villages. For example, The Systematic Group of colleges has campuses in Georgetown, Petaling Jaya, Kuala Lumpur, Klang, Johore Bahru, Subang Jaya, Serian, and Kuching in Sarawak, while the Prime Group has campuses in Alor Star, and Bukit Mertajam, Meanwhile, the new flagship campus in Kota Damansara is also expected to attract more students. The new campus can cater up to more than 12,000 students. (http://www.segi.edu.my/campus/sckd/)

Rivalry will increase in the future due to entry of new low cost providers into the industry. Besides that, there is high possibility that current institutions will become more competitive. Distance learning removes the capacity restriction that universities have traditionally operated under, so physical facilities no longer need limit the size of the student body. This will lead to increased competitive overlap between institutions, particularly as geography becomes less of a restriction.

Barriers of Entry

Public universities and colleges are usually very large organizations with extensive administrative operations, pervasive facilities and grounds, invaluable brands and a alumni base that can have a legacy well over a hundred years old. These characteristics, the capital and endowments required to support these long-term assets, including land grant entitlements, almost per se define large economies of scale, which certainly represent formidable barriers to entry.

Federal and state governments also regulate the establishment of publicly supported schools based on policy needs and budget restriction. While public sources of student loans continue to decline, one unintended consequence is increasing barriers to entry as related to the for-profit sector. In Malaysia, some 90 of private higher education institutions are reportedly for-profit. [http://www.albany.edu/dept/eaps/prophe/publication/paper/PROPHEWP05_files/PROPHEWP05.pdf] Approximately 93 percent of for profit institutions’ cash flow consists of tuition and fees. The crucial point is 64 percent of the tuition and fees consist of federally backed student loans. http://www.sedsi.org/Proceedings/2009/proc/p080930002.pdf

As the federal backed student loan industry continues to spiral towards crisis, for-profit higher education firms have noticed weaker earnings, sporadic enrolment drops, and falling stock prices, all of which signal extreme caution to any potential new entrant (Value Line, 2008). An additional barrier to entry, although tangential, is the existence of intellectual property and technology transfer offices within most university systems. These offices protect and monetize university research, which represents addition cash flow, and benefit from existing economies of scale and departmental synergies.

In addition, perhaps one of the most controversial barriers to entry into specific areas of higher education is the requirements and restrictions imposed by accrediting associations. These organizations, while promoting curriculum standards, affinity group branding and visible education outcome metrics, also cleverly protect the incumbent members with an “accredited by” license. The success and reputations of business schools, medical colleges and law schools are critically interwoven with certification and accreditation (see www.aacsb.edu for example).

A high fixed cost structure, extensive federal and state regulation, enormous economies of scale and restrictive curriculum accrediting processes, all act as higher barriers to entry and serve the incumbent schools well by protecting their current market shares.

In the past, barriers to entry in higher education were high, primarily because of the cost of building a campus and years needed to build a reputation to attract students and faculty. Technology, however, promises to be a vehicle for easier entry into the higher education arena, because much of the educational experience can be replicated by technology at very low marginal costs.

Threat of Substitutes

In 2007, there were 20 public universities compared to more than 500 private institutions, of which 30 are currently categorised as universities or university colleges. Looking at their respective roles as higher education providers, public and private institutions display characteristics of being substitutes while at the same time serving complementary roles to one another. This dichotomy between public and private higher education institutions can, in fact, be seen as inclining towards a hybrid model that allows both to operate within a single system of higher education provision in the country. Such a hybrid model is evident in how the clientele is being divided between public and private higher institutions. It is also evident in the different roles played by the respective faculty members as well as in the programmes being made available in either type of institutions. [http://myais.fsktm.um.edu.my/9237/]

At first, one may think that the options or alternatives related to earning a college degree or obtaining additional higher education would be constrained by location, level of income or possibly cultural influences. Although possibly true 20 years ago, these limitations to higher education are significantly less relevant today. At present, the variety of educational “products” is extensive and continues to increase as influenced by the exponential advances in information technology. Classic economic theory classifies information technology as product compliment, because the existence of the product or service augments the features and benefits of an incumbent’s product offering (Walker, 2004).

Switching costs between products and services are a concrete aspect of the abstract concept of product substitution. As an example, the process of transferring between universities or colleges is relatively fluid such as INTI or Taylor students to SEGI. More specifically, moving between one business school and another is an example where the tangible and intangible switching costs are low because of the availability of compatible curriculums. Obviously, one could get caught in the details of transfer credits, course descriptions, and degree requirements.

Not to over generalizing but, younger adults are more disposed to change than older adults. Youth brings out the attitude of “what do I have to lose” as contrasted to the “anchors of age” associated with older adults. It is not a stretch to conclude that younger adults have a higher propensity to substitute than older adults do, within the same population of higher education students. Of course, these examples are hypothetical and best measured by transfer rates and graduation rates.

Price points widely differ between the public and private higher education segments. For-profit universities deliberately price their degree programs between the public and private tuition schedules. In economic terms, the for-profit sector overall, prices at the price elastic point of the higher education demand curve. However, this strategy does have some weaknesses, including the unintended consequence of effectively minimizing switching cost between a public university and a for-profit institution. In addition, since for-profit tuitions are high relative to public universities, the student is already price conditioned which makes transferring to a more expensive private school a realistic option. The overall assessment of the threat to substitute is high and not beneficial to the industry incumbent.

The availability of and the demand for substitutes for higher education is increasing. Perhaps most significant is that many employers no longer regard the one-time provision of an undergraduate (or graduate) degree as sufficient for the lifetime learning needs of their workforce. Increasingly, they are meeting these ongoing training needs in-house or with third party suppliers. There is also a proliferation of new courses and initiatives available to students of all ages beyond the traditional extension schools or adult education programs associated with universities.

Bargaining Power of Suppliers

The degrees of supplier concentration and supplier importance, in respect to the higher education industry are essentially the same side of the economic coin. If there are few suppliers to an industry and these suppliers sell an essential component or service to the industry, then supplier power will be high relative to other industries. A classic example of this principle is the clout and influence Intel has over the personal computer manufacturing industry. There are effectively only two CPU manufacturers supplying the most important component to the industry. Within the higher education industry, there are numerous suppliers of a variety of products and services, fragmented across the industry. Even highly regarded textbook publishers, clamour for faculty time and compete for each text approval and unit sold.

Universities and colleges frequently represent large stable contracts to vendors, so the ensuing competition for bids among these vendors is typically frenzied. Based on the observation of numerous vendors selling essentially generic products and services, and low motivation by these suppliers to vertically integrate into higher education “delivery,” suppliers’ ability to influence the industry is low.

The power of faculty as a supplier for higher education is in a state of flux. On one hand, the faculty superstar phenomenon has increased competitive bidding among universities for talent, and ratcheted salaries upward. On the other hand, the use of part-time faculty as a less expensive (and more flexible) source of labour has been rising steadily.

Bargaining Power of Customers

In today’s information age, the contents of an undergraduate record of course descriptions is only a mouse click away. School search and evaluation data is a frictionless, symmetrical and essentially free process. Of course, this not was always the case. Twenty years ago, a high school student had to patiently wait weeks to receive a university record by mail to assist with college evaluations. It is axiomatic that the more information a buyer has, the more balanced the transaction or exchange will be.

Two additional components that influence the degree of buyer power are the rate of growth for the specific industry and the strategic value of the buyer to the industry as a whole. A growing market diminishes buyer power relative to a market with an average growth rate and along that same argument, the more distributed buyers are over a given geographic location, the less power they accrue (Walker, 2004).

Buyers are widely fragmented across the market and in general, these potential students have limited influence on the higher education industry. As discussed previously, this observation does not hold for the top 25 percent of high school seniors graduating from the most respected high schools across the United States. Universities, whether public or private, feverishly recruit this target market in anticipation of sustaining high SAT, GPA admission averages, and consistent graduation rates, all of which enhance and distinguish their brand. In contrast, the for-profit sector heavily recruits from the underserved inter-quartile of graduating seniors and is generously rewarded for its efforts (Symonds, 2003).

The role of freely available and instantaneous information relating to course descriptions, college amenities, and school rankings most certainly shifts the information asymmetries of a generation ago, giving potential students more power of choice. This shift, to a degree, offsets the effect of market fragmentation and consequently gives buyer power an overall neutral assessment.

The more options the buyer has to choose from, the more power the buyer has. New substitutes and new entrants erode the monopoly that traditional colleges and universities have enjoyed.

Buyer power is also increased to the extent that firms themselves become suppliers of higher education, as they introduce lifelong learning programs for employees, reducing the ability of the universities to capture value.

References

• King, M. A. (n.d). A Strategic Assessment of The Higher Education Industry: Applying the Porter’s Five Forces for Industry Analysis. Retrieved November 20, 2009, from www.sedsi.org/Proceedings/2009/proc/p080930002.pdf
• Wong, P. W., (2003). SEG International Bhd. Education: Lifelong Investment. Retrieved November 18, 2009, from http://segi.investor.net.my/pdf%20files/Mayban-070703.pdf
• Porter, M. E. (2008). “The Five Competitive Forces That Shape Strategy.” Harvard Business Review 86(1): 78.
• Yaw, C. S. (2004). SEG INTERNATIONAL BHD. Business Mind And Social Responsibility A Good Mix. Retrieved November 21, 2009, from http://segi.investor.net.my/pdf%20files/TA_SEGi_040119.pdf