Porter’s five forces model

QUESTIONS:

Porter’s five forces model is a valuable tool for analysing the forces of change in the hospitality and tourism business environments. Explain the model and show how it can be applied to a company known to you.

1. INTRODUCTION

“Porter’s five Forces is a framework for the industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979.”

(Wikipedia, 2010)

“Porter’s Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you are considering moving into.”(Mind Tools Ltd. (1996-2010)

Michael porter is the most expensive management consultant in the world. He produced many business tools and ideas to improve the level of the business and helps to create a business successful by applying the tools. One of the most famous tools of Michael porter is the 5 forces model. This model is a simple but very powerful tool for the business. It is a valuable tool for analysing the forces of change in the hospitality and tourism business environments. Is plays a vital role in the hospitality and tourism industry. It helps to determine the position of the business in the market.

This is very useful to the hospitality business because it helps you understand the current strength and weakness of the business. By this you can take a best decision towards the business and can avoid the wrong step which can affect the business.

In the hospitality and tourism industry the most important part is to provide the good service to the customer. So, if they find out the weakness of their industry and understand of where the power lies, they can easily solve the problem. The porter’s 5 forces out the weakness and strength of the business. It can help to make a decision how to find out the successful way to enter in the market and help to find out the best partner with in any enterprise. Because if the company can join one of the best and popular enterprise as a partner it is very helpful and positive for the particular business.

Nowadays, there are many hospitality industries in the world. Out of this most of the hospitality industry gets the success by applying the porters 5 forces. It shows the right and effective way to run the hospitality business successfully in the market. In the hospitality business, the tools are used to identify whether the new products, services have the potential to be profitable or not. To run the business there should be profit otherwise the business will collapse. So, the Porter’s 5 forces is very useful to the hospitality and tourism industry. It helps to change the position of the business in the market.

2. GRAPHICAL PRESENTATION OF THE PORTER’S FIVE FORCES MODEL

Porter’s analyse the immediate competitive environment into five competitive forces;

• Threats of new entrants
• Threats of substitutes
• Bargaining power of suppliers
• Bargaining power of buyers or customers
• The rivalry among current competitors

3. BRIEFING OF PORTER’S FIVE FORCES:

Force 1: The threats of new entrants

Each and every business there is a competition between the companies. To expand the business and want to stay in the higher position (among the rival company) nature of the business man creates a competition between the companies. The new entrants bring extra capacity into an industry. It is a threat as the existing business may lose the market share. The new entrants may cause major change into the market environment. Every business person should attract for the profitable business in the market. If there is a high profits in the one industry, all the people wants to spend some money to joining the business or make a place in the business. It creates many new entrants, which directly affect the other firms in the industry. There are always the threats of the new entrants because when one company is running smoothly and gaining the profit in that time if another company will establish infront of the old one and similarly providing the same product or services in lower price towards the customer. Customer will definitely change their mind and choose the new products. So, in the market there are the threats of new entrants.

(E.g. in the UK British airways came under increased pressure from low-cost carriers)

(Recklies Management Project GmbH, 2001)

The threats of new entries will depend on the extant to which there are barriers to enty.These are typically

• Economies of scale (minimum size requirements for profitable operations)
• High initial investments and fixed costs
• Cost advantages of existing players due to experience curve affects of operation with fully depreciated assets
• Brand loyalty of customers
• Protected intellectual property like patents. licences etc
• Scarcity of important resources,e.g.qualified
• Access to raw materials is controlled by existing players,
• Distribution channels are controlled by existing players,
• Existing players have close customer relations, e.g. from long-term service contracts,
• High switching costs for customers
• Legislation and government action

Force2: Threats of Substitutes

The product or services that are produced in one industry are likely to have substitutes produced in aother.They pose a threat as they limit the ability to charge of a firm to charge high price. If there are alternative products with lower prices of better performance then the high prices products for the same purpose, people prefer for the low price products. By this the high price product possibility of exists from the market.So, there are the threats of substitutes in the market for the compamy.Threats of substitutes are depend on differences of the price. Because if the people are getting the product which is for same purpose and there is price differences between the products. Then the customers prefer for the low price product rather than the high price products.

(E.g. Eurostar rail passenger service from London to Paris compete with airlines)

(Recklies Management Project GmbH, 2001)

Similarly to the threat of new entrants, the threat of substitutes is determined by factors like

• Brand loyalty of customers,
• Close customer relationships,
• Switching costs for customers,
• The relative price for performance of substitutes,
• Current trends.

Force 3: Bargaining power of Supplier

Bargaining power is the ability to influence the setting of prices. It assesses how easy it is for the suppliers to drive up prices. Supplier can influence the profitability of a firm by exerting pressure for higher prices or by reducing the quality. If there are lots of supplier in the market, the business man prefer for the best quality material for same purpose which cost the low. They can choose the supplier who provides the more profit margins for the business. Because every business became success when they raise their profit.

(Recklies Management Project GmbH, 2001)

Supplier bargaining power is likely to be high when:

• The market is dominated by a few large suppliers rather than a fragmented source of supply,
• There are no substitutes for the particular input,
• The suppliers customers are fragmented, so their bargaining power is   low,
• The switching costs from one supplier to another are high,
• There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when,
• The buying industry has a higher profitability than the supplying industry,
• Forward integration provides economies of scale for the supplier,
• The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products),
• The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization.

Force 4: Bargaining power of buyer or customer

Bargaining power depends on the level of differentiation amongst the products of industry. It depends on the cost of the customer switching from one supplier to another. If the customer get the more profits margin from one supplier it create another exists. Whether a customer’s purchases from industry represent a large or small proportion of customer’s total purchases.

(Recklies Management Project GmbH, 2001).

Customers bargaining power is likely to be high when,

• They buy large volumes, there is a concentration of buyers,
• The supplying industry comprises a large number of small operators
• The supplying industry operates with high fixed costs,
• The product is undifferentiated and can be replaces by substitutes,
• Switching to an alternative product is relatively simple and is not related to high costs,
• Customers have low margins and are price-sensitive,
• Customers could produce the product themselves,
• The product is not of strategically importance for the customer,
• The customer knows about the production costs of the product
• There is the possibility for the customer integrating backwards.

Force 5:The rivalry among current competitors

The intensity of competitive rivalry within tan industry will affect the profitability of the industry as a whole. In the business there is the competition between the companies. A growing there sales, another company will try to down there sales. For this they invest more cost on sales promotion campaigns. Advertising and new product development. They want to make their product better then their competitors.

(Recklies Management Project GmbH, 2001)

Competition between existing players is likely to be high when

• There are many players of about the same size,
• Players have similar strategies,
• There is not much differentiation between players and their products, hence, there is much price competition,
• Low market growth rates (growth of a particular company is possible only at the expense of a competitor),
• Barriers for exit are high (e.g. expensive and highly specialized equipment)

4. PORTER’SFIVE FORCES AT ORIENATLA BUFFET

Oriental Buffet is known as variety of food in one place. With more than 50 dishes available, there should be something to suit every taste. There are Indian and Thai curries alongside traditional Chinese food, as well as range of Singaporean and Malaysian food, including crispy duck, prawns and mussels which are available in the evenings.Amar gurung is the owner of the oriental buffet and there is no share holder of the restaurant. It is located at 18-20 Rendezvous street, folkestone, kent, CT20 1RW which is in the central of town. It is a very successful buffet restaurant and more then five years, it has built an enviable reputation among its loyal customers. [Oriental Buffet, 2010]

Porter’s five forces is a framework for finding out the industry structure, it is built around five competitive forces. It can tell you about the current situation of the Oriental Buffet. Porter’s five forces are useful for Oriental Buffet, because it helps to understand the strength and weakness of the current position in the market which help it for improving the service of the restaurant and controlling the defect part of it. There is some similar restaurant, that’s why the Buffet should be very careful about its service, it should be better then other buffet restaurants. For this Buffet is applying the Porter’s five forces like as follow,

1. The threats of new entrants

New entrants to an industry can raise the level of competition, there by reducing its attractiveness. It is depend on the barrier to entry. High entry barriers exist in some industries.So, there is a threats of new restaurant in Buffet restaurant.Kalala is the another buffet restaurant, there is a threats to the oriental Buffet.Becuase. if the kalala serve the customer better than the Oriental in the cheap price. The customer will prefer the kalala instead of Orienatal.For this oriental will face the loss in their business.

2. Threats of Substitutes

There are threats of substitutes in every business which drive profits to Zero for the company. If one company providing the stuff in a low price in the competition to rivalry Company, the profit margin to the company should drive to zero. Because the particular company wants to keep the customer in their side so they are providing the stuff in the low price. By this they can’t make the profits by selling the stuff which creates the loose to the particular company. Like as, Oriental and Kalala are the Buffet restaurants and there service style and the variety of the food are same.So, if the kalala sells the food to the customer cheaper and provide the service better than the Oriental the customer prefer for the better service in the cheap price, they choose kalala.So, to maintain the threats and control the price, there is the price limit in both buffet restaurants.

3. Bargaining power of suppliers

The term‘suppliers’comprises all sources for inputs that are needed in order to provide goods and services. Bargaining power is the ability to influence the setting of prices. This is an important part of the Porters five forces model. If there is lots of supplier in the market, the company can choose the better quality and low price supplier. If the retailers don’t pay the price the suppliers don’t get the goods to sell. The cost of items brought from suppliers can have a significant impact on a company’s profitability. Like as, if the buffet has the many supplier of their restaurant goods or the variety of supplier. They choose the better quality goods which fewer prices then another supplier.Beacause if they brought their goods in a low price and sell it in high price. Then after they can improve their profit margin which helps to run their business successfully.

4. Bargaining power of customers

Bargaining power of customers determines how much customer can impose pressure on margins and volumes. Its depends on the cost of the customer switching from one supplier to another. Buyer’s power acts to force prices down. The bargaining power is high when there are few dominant buyers and many sellers in the industry. If the buffet dinner is expensive then the other restaurant .The customer move to the cheap restaurant rather than the oriental buffet. Because customer only purchase the service which is cheaper.So, they move from one restaurant to another.

5. The rivalry among to competitors.

The rivalry among to competitors is emboldened because it is the central force, which involves all the other forces. Some of the factors may help to create a competition towards the companies, such as, many players of about the same size, having the same strategies, low market growth rates, barriers for exist are high and not more differentiation between players and their products. Oriental buffet is one of successful buffet restaurant. Nowadays there are many buffet restaurants such as kalala,chinese cuisines are open to compete the Oriental buffet. Besides other restaurant oriental is the best and the most profitable buffet restaurant.

In the conclusion, Porter’s five forces is a simple model which helps to understand the strengths and weakness of the oriental buffet. By applying the porter’s five forces model Oriental can run the business by improving their service towards the customer which creates more success in restaurant business.

5. CONCLUSION

On the basis of above mentioned studied, Porter’s five forces is very helpful for the every business. It is a simple model but very powerful tool for the business. It plays vital role in hospitality and tourism industry. By applying this tool, it helps to determine the position of business in the market. It helps to declare the strengths and weakness of the business which is very important for the business. In the hospitality and the tourism business if they known their weakness towards the servicing which they are providing to the customer. They can find out their weakness and try to implement by taking the best decision. And the most important part in the hospitality industry is providing the good services to the customers.

Many hospitality industries are applying the porter’s five forces. In the result they are getting the successful in their business. It is very effective and useful to the hospitality industries.

Oriental buffet is one of the successful buffet restaurants. Providing the good service environment and variety of different countries food in one place to the customer in affordable price scheme. Buffet is also applying the Porter’s five forces tools to improve their services. It can examine their position in the market with the help of the Porter’s five forces model.So, it is very effective and useful to Oriental buffet. It provides the best and quality food to the customers. Day by day the buffet business is growing high and making the more profit in the business.