Question

Using Porter’s model of competitive forces discuss how a wholesale, Sefalana (Pty) Ltd can conduct situation analysis to determine the competitive structure of the retail industry in the new markets.

Answer 1

The essence of formulating competitive strategy is relating a Company to its new or proposed environment. The study of Michael Porter’s five forces for Industry analysis helps a firm to defend against the Competitive forces. The five Competitive forces are as follows:

1. The threat of entry by new entrants: If the industry offers good returns on investment, it will attract new entrants. These new entrants bring new capacities, increase competition and reduce profitability. The barriers to entry include Economies of scale, product differentiation, capital requirements, and access to distribution channels. The Cost disadvantages independent of scale includes Proprietary product technology, favourable location and access to raw materials, Government subsidies and high exit barriers.

2. Rivalry among current competitors: The level of competition among the existing industry players also affects the positioning and the tactics used by competitors like price competition, new launches, advertising battles etc contribute to the positioning of the firms in the industry. The rivalry occurs because one sees opportunity or feels the pressure to react. The following factors affect rivalry like slow industry growth, high fixed or storage costs, diverse competitors, high strategic stakes, high exit barriers, lack of differentiation or switching costs etc.

3. Threat of substitutes : Availability of substitutes limit the potential returns by placing a ceiling on the prices. Identifying substitutes is similar to searching for other products that can perform the same function.

4. Bargaining power/ threat of buyers: The following factors would make the buyers stronger and thus have high competitive pressures.

1. The product buyers purchase represent a significant fraction of the purchase cost.
2. They dace few switching costs
3. Buyers industry earns less profit
4. They pose a considerable threat of backward integration
5. Buyer has full information
6. The products purchase are standard and undifferentiated

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5. Bargaining power/ Threat of suppliers: Supplier’s bargaining power can also become a source of competition. The following factors support this argument:

1. The industry is not an important customer of the supplier group.
2. Suppliers are dominated by a few companies and are more concentrated
3. The supplier’s product is an important ingredient to the buyer.
4. The supplier poses a credible threat of forward integration.
5. The supplier’s product has inbuilt switching costs.

The structural analysis and Competitive strategy analysis helps the manufacturing Company Sefalana (Pty)Ltd in the following ways:

1. Helps in identifying the strengths and weaknesses.
2. Helps in diversification and exploit change
3. Helps in proper position and combating of forces
4. Helps in taking proper offensive and defensive strategy.
5. Helps in anticipate changes and the factors affecting the changes.