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Analyzing the Austrian fashion industry according to Porter´s five forces

Term Paper 2010 21 Pages

Business economics - Operations Research

Excerpt

Table of Contents

Table of Figures

1. Introduction

2. Industry Structure and Trade Competitions

3. Five Competitive Forces

4. Critical Resume

5. Porter's Approaches to Competition

6. The Jeans and Lifestyle Industry in Austria

7. Strategic Groups on the example Jeans and Lifestyle Industry

8. Five Competitive Forces in the Jeans and Lifestyle Industry
8.1 Bargaining Power of Buyers
8.2 Bargaining Power of Suppliers
8.3 The Threat of New Entrants
8.4 The Threat of Substitute Products
8.5 Rivalry in the Industry

9. Conclusion

Works Cited

Table of Figures

Figure 1: The Five Competitive Forces That Shape Strategy

Figure 2: U-Curve

1. Introduction

In this paper, Austria’sjeans and lifestyle branch will be analyzed with particular reference to Porter’s competitive strategies. The first part of this paper takes a look at Porter’s five competitive strategies and their context. The second part deals with the jeans and lifestyle branch in Austria and the influence of the five competitive strategies on this industry. Competitive strategy provides a comprehensive framework for understanding the forces at the basis of the competition in the industry - summarized by the five competitive forces. This framework illuminates the important branch-specific differences, shows the development of industries and helps companies in finding a unique competitive position. Industries change with increasing pressure and thus industry structures as well as borders between industries are reconfigured. While companies of the nineties are substantially different than in the seventies or eighties, high profitability is still based on cost advantages and differentiation. One might believe that faster development cycles or total quality management are the key to the competition, but the crucial point to determine to what extent these methods influence the competition and the relative cost position of a company as well as its ability to differentiate and to enforce surcharges.

Successful strategies require a clear decision, otherwise they are easily limited.

The industry structure - embedded in the five competitive forces - provides an approach which explains how value is created and spread among the current and potential players in the sector. It highlights the fact that competition is more than just a contest between present competitors.

The value of resources and knowhow is inextricably linked to strategy.1

Michael E. Porter’s work deals with the possibilities for companies to achieve long-term competitive advantages and to optimally position themselves in a certain branch, since the attractiveness and profitability of an industry greatly influence the competitive strategy. Porter determines the attractiveness and profitability of an industry with his five competitive forces - the Five Forces are:

Bargaining Power of Buyers, Bargaining Power of Suppliers, Threat of New Entrants, Threat of Substitute Products and Rivalry in the Industry.

In this paper, this approach will be illustrated on the example of the jeans and lifestyle industry, since it is a considerable industrial sector in Austria. Service companies as well as customers in this sector are of vital importance for the manufacturers and strategic groups can be easily identified and explained.

2. Industry Structure and Trade Competitions

An industry is defined as a group of companies which provide products that could closely substitute each other.

The industry structure strongly influences the rules of the competition as well as the strategies potentially available to a company. The competition is rooted in the economic structure at the base of the industry and exceeds by far the performance of the present competitors. The state of competition in an industry is dependent on five basic competitive forces. The cumulative power of those forces determines the industry’s profit potential, expressed in the long-term return on invested capital.2

High returns on investment due to high barriers to market entry, make the entry into an attractive industry relatively difficult and are thus established not least by the established companies themselves in order to prevent or impede the entry of new competitors into the market.

3. Five Competitive Forces

The five competitive forces - market entry, threat of substitute products, bargaining power of customers, bargaining power of suppliers and rivalry among the competitors - illustrate the fact that the competition in an industry goes far beyond the established actors. Customers, suppliers, substitute products and potential new suppliers are all ‘competitors’ of the companies in the industry and can be of greater or lesser importance, depending on the circumstances. In this broader sense, competition can be referred to as ‘extended rivalry’.

Those five competitive forces combined, determine the intensity of the competition and profitability of the industry, whereby the strongest force is the determining factor, also with regard to the strategy formulation.

When the threat to the competition becomes stronger through those five forces, an industry becomes unattractive and it becomes harder to gain lasting competitive advantages. Therefore the aim of many company managements is a good positioning of their company within the industry and to protect it against the competitive forces.

In detail, those five competitive forces are:

THE BARGAINING POWER OF BUYERS

Competitors play themselves off against each other through exercising downward pressure on the prices and demanding higher quality or better performance, everything at the expense of the industry’s profitability.

Customers, the buyers within an industry, are in a strong position, due to the high proportion of their purchases in an industry’s total sales or also when standardized products are sold which can be purchased from every competitor and only involve low conversion costs.

The bargaining power of the buyers becomes noticeable through price cuts, higher quality of products and a higher range of services.

The higher the bargaining power of the buyers, the lower becomes the attractiveness of an industry.

The own production of certain parts is referred to as partial integration. Through this, the companies possess a detailed knowledge of the costs, which benefits them in negotiations.3

THE BARGAINING POWER OF SUPPLIERS

Suppliers can play on their bargaining power by threatening to raise the prices or lower the quality. Thereby, powerful suppliers can lower the profitability of industries which are not able to integrate cost increases into their prices.

The conditions which empower the suppliers usually mirror the conditions empowering the buyers.

Many suppliers work in various industries which strengthens their competitive position in branches which are not particularly important for them. Thus, the attractiveness of an industry decreases with the increasing ability of the suppliers to influence the purchase prices. Suppliers who integrate forward and could thus manufacture the end product themselves in the future pose a great threat, since such a supplier would not be dependent on the buyers and could market their own products or substantially pressure the buyers.4

As in the case of buyer power, it is sometimes possible to improve a company’s situation through strategic measures.5

An effective competitive strategy takes offensive or defensive measures in achieving a protected position in regard to the five competitive forces.

- positioning of the company for best possible defense against existing pools of competitive forces
- influencing the balance through strategic measures to improve the company’s position
- discovering new strategies before the competitors, in order to be able to foresee trends and changes in the competition6

NEW COMPETITORS

New competitors often create the problem of overcapacities or they aggravate it. They try to gain (often very important) positions in the industry, and the established companies do not yield.7

New suppliers create new capacities within an industry. In order to use these to their advantage, however, they have to take substantial measures, with the aim of defending themselves against the existing competitors in the industry.

Therefore, potential new suppliers will evaluate the chances and risks of their entry into the market, such as for example advantages of mass production (economies of scale), customer loyalty and high conversion cost of a change in suppliers for the buyers. Thus, the attractiveness of an industry is dependent on the height of the entry/exit barriers for suppliers. If the entry barriers are low, new suppliers can enter the respective market almost unimpeded. If the entry barriers are high, however, and the exit barriers low, high profits can be expected in this industry, since only very few suppliers manage to enter the market, and unsuccessful suppliers can exit it quickly.8

PRESSURE THROUGH SUBSTITUTE PRODUCTS

Substitute products limit the profit potential of an industry by creating a maximum price limit the companies can charge without endangering their profits.9The demand for a product is influenced by the cost and quality of substitute products. When the relative costs of a substitute product go down or when its ability to satisfy the customer increases, the respective industry’s growth is negatively influenced.10

Substitute products pose a particular threat to industries, where the customer loyalty to a certain product or brand is low. Suppliers of such products can increase their market shares relatively quickly.

THE DEGREE OF RIVALRY AMONG EXISTENT COMPETITORS

We encounter rivalry among existent competitors in the familiar form of positional bargaining - meaning in the form of tactics such as price competition, advertising battles, the introduction of new products and improved service or guarantees. The rivalry arises, because one or several competitors feel pressured or see a possibility to improve their position. In most industries, one company’s measures noticeably affect its competitors and thus often lead to retaliatory action.11

The degree of rivalry is influenced by several strategic groups.

Differences in strategy and in the environmental conditions lead to different preferences of the individual companies in regard to their willingness to take risks, time horizon, price and quality level etc. This makes it harder for the companies to understand and adjust to the intentions of their competitors, which increases the relativity of repeated competitive battles. The severity of the rivalry between the strategic groups in an industry in respect to the battle for customers is determined by four factors:

- market interdependence of various groups
- product differences
- number of strategic groups
- strategic distance between the groups

The clearer the individual customer bases can be delineated, the more similar this rivalry becomes to a situation in which the groups are situated in different industries.

illustration not visible in this excerpt

Figure 1: The Five Competitive Forces That Shape Strategy

4. Critical Resume

Porter’s Model of the five competitive forces is one of the most influential theories in the field of sector analysis and at the same time one of the most controversial. Often, the criticism is founded in the fact that Porter developed this model in the early eighties and that the economic framework conditions have changed in many areas since then. Economically, the eighties were characterized by a strong competitive situation, a cyclical economic trend and a stable market situation. The increasing use of the internet, and especially of e-commerce applications, has substantially influenced the structure and growth potentials of many industries. Porter’s theory is mainly based on factors in the current situation of an industry, such as buyers, suppliers, competitors and foreseeable trends as well as potential competitors or substitute products.

According to Porter, the achievement of competitive advantages comes from a permanently favorable positioning within an industry and the five forces system. Therefore this model is not suitable for elaborations on the dynamic restructuring of a whole industry, as it often can be found for example in the new economy.

A further point of criticism regarding Porter’s five forces model is, that so-called external effects, such as state interventions in economic activities, are completely disregarded. Such external effects, such as laws which can regulate the sale of certain goods, can influence an industry considerably.

An alternative or development of Porter’s theories was published by the American management consultant Larry Downes. In his book, he presents three new competitive forces: digitization, globalization and deregulation.12 With this approach, Downes develops Porter’s ‘Five Forces Model’ further and appropriates it to today’s information society in which worldwide communication and rapidly changing technologies are essential driving forces of the competition.

[...]


1Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 10ff

2Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 35ff

3Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 59ff

4Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 62ff

5Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 64

6Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 66

7Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 410

8Cf.: Kotler/Bliemel; Marketing-Management, 9. Auflage, 1999, Schäfer-Poeschel; S. 399

9Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 58

10 Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 223

11 Cf.: Porter, Michael E.; Wettbewerbsstrategie, Methoden zur Analyse von Branchen und Konkurrenzen, 11. Auflage, 1983, 1999, 2008 by Campus Verlag, Frankfurt/Main; S. 51

12 Cf.: Downes, Larry / Mui, Chunka; Auf der Suche nach der Killer Applikation ± Mit digitalen Strategien neue Märkte erobern, 1999 Campus Verlag, Frankfurt / New York; S. 76ff

Details

Pages
21
Year
2010
ISBN (eBook)
9783640657667
ISBN (Book)
9783640658138
File size
640 KB
Language
English
Catalog Number
v153571
Institution / College
Stuttgart Institute of Management and Technology
Grade
B
Tags
Analyzing Austrian Porter´s

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Title: Analyzing the Austrian fashion industry according to Porter´s five forces