Article reading notes:The Five Competitive Strategies that Shape Strategy

Article reading notes:The Five Competitive Strategies that Shape Strategy

The article “The Five Competitive Strategies that Shape Strategy” by Michael E. Porter is an article that focuses on establishing competitive strategies that organizations can make use for maximum benefit from their business activities. A strategist is employed by organizations to observes and come up with strategies that will enable the organization to sore high in the market. They have to study the trends in the market and come up with the best strategies that will help their organization become more competitive in the market. Managers in industries have defined competition in different ways. The managers have viewed completion as a narrow element in their day to day running of an organization. Today, competition has proved to be a significant element in the success of any business. Competition to increase profits of an organization has determined to go beyond the traditional rivalry in the industries. Organizations in the same industry are doing the much they can so that they can be able to outdo their competitors in terms of profits while operating in the same industry. Managers have employed other competitive strategy mechanisms to ensure that their organizations become more competitive in the market.  The other competitive force mechanisms used by the managers apart from the competition for profits include; suppliers, customers, new entrants in the business, and also the substitute products that are in the market. With the existence of the five competitive forces, an industry’s structure is more defined, and even the nature of the competition within the industry is more defined.

As much as there is the existence of various industries that are different from each other, the status of the profitability drivers remains the same. The forces that are used to determine the profitability in any given industry are the same since the functional units of the industry do not change from one to another. For instance, as provided by the author of the article, there is a big difference between the automotive industry and the art industries in the world. But for one to understand the profitability in these two different industries, one has to consider the competitive forces highlighted. The underlying structure of the two sectors can be analyzed through the competitive forces, which are the driving forces for the profitability of any given industry.

When analyzing the underlying structure of industries, the intensity of the competitive forces will determine the profitability of the companies in a given industry. For instance, in sectors such as airlines, hotels, and textiles, the competitive effects are very intense, which makes it hard for the companies operating in those industries to gain maximum benefit. In sectors such as soft drinks, toiletries, and software, the competitive forces are benign, which allows the majority of the companies in the industries to realize exceptional profits. Then the structure of the sector is the crucial player in determining the earnings in the industry. Factors such as the innovation of new products and the emergence of new technologies are part of the industry structure, and they play a role in shaping the structure of the industry.

In the competitive forces of industry, the threat of new entrants is one of the driving forces. The new firms in the industry come with the desire to gain a formidable market share in their new area of investment. As a result of their urge to gain shares on the market, they exert pressure on the costs, investments’ return rates, and the prices of the goods or services they offer to the consumers. New entrants come with competitive strategies such as diversifying into new markets, which enables them to capitalize and gain more profits in the process. New entrants pose a threat of decreased profits for the established companies since they demand a share in an already limited market. The established firms in the market will depend on the entry barriers to keep away any possible investor from entering the industry. Such restrictions include; high amounts of required capital, switching costs among the customers, demand and supply-side economies of scale, restrictive government policies.

The power of the suppliers is a determinant in the profitability of an industry. Some potent suppliers can quickly shift most of the costs to the sector hence taking away a more significant chunk of the industry’s revenue. For instance, the labor supply to an industry can be expensive to acquire, which makes it more costly to run a firm in a given industry. Suppliers draw their strength against the industries in circumstances where the supplier is higher than the industry, and when the supplier does not solely depend on a single sector.

The power of the buyers is the other side of the power of suppliers. Some potent buyers can influence the profitability of an industry. The buyers will determine the profitability of industries through the demands they set up for the industry. For instance, when they demand higher quality goods will mean that the firms will have to invest more so that they can meet the quality of the products demanded.

Substitutes create a sort of freedom for the consumers to choose the products that they want. Such will either influence the profitability of an industry positively or negatively. When consumers favor products from a specific sector, they will improve the profits of the particular industry. The threat brought about by the substitute is real when the substitute product offers better satisfaction than the products of a given industry. Other forces that determine the profitability of industry include rivalry among firms of the same industry, government policies, adoption of new technology and innovation, and also complimentary services and products in the market.

Using the forces of profitability, it is easy to conduct an industry analysis. The primary reason for doing industry analysis to declare the industry suitable or unsuitable for investment. With the report, the strategists can figure out the profitability and the costs that are incurred in the sector before suggesting the way forward. In the analyses, the first step towards analyzing the industry is understanding the best time frame to do the analysis. The best time to do the analysis is when the economy is stable. The competitive forces are likely to affect the costs of operation in a given industry, depending on their strengths. A great industrial analysis will be able to identify every key factor in the industry rather than establishing the positives and the negatives of the industry. The industry is a system where every part of the system has to be functional so that the maximum profits can be realized. When the strategists well utilize the competitive forces, they will be able to identify an industry that has a promising future and identify the pitfalls that the sector may face in the near future.