Corporate strategy during economic recession using Porter's Five Forces

Corporate Strategy

Over the last several years, the current recession and global financial crisis has caused a number of firms to fail. As names such as Lehman Brothers and Bear Stearns would become cautionary tales of the excesses that occurred in the run up to these events. Now that the economy is dealing with the lingering effects of the bubbles that developed in asset prices, means that many companies and investors have been sitting on the sidelines waiting, for the economic situation to improve. This is problematic, because during times of economic contraction, is when many organizations were able to take advantage of the weaknesses, to redefine their business model or start new corporations all together. Some good examples of organizations that were able to seize upon the opportunities presented during recessions include: Hyatt, IHOP, GE, Fortune Magazine, Microsoft, Burger King and MTV Networks just to name a few. (Famous Companies Founded During an Economic Recession 2009) This is significant, because it shows how those organizations that are vigilant, can be able to find opportunities to build their businesses well into the future. To fully understand how to adapt to the recent economic recession requires, looking at strategies that can help companies be able to identify outstanding opportunities. To achieve this objective, you must examine: Porter's Five Forces Model, the parts of the model that are most relevant, the internal environment and the external environment. Together, these different elements will provide the greatest insights, as to how a company can be able to take advantage of the conditions presented by an economic recession, to become successful in the future.

Porters Five Forces Model

When you look at the world of business, it is clear that change is one of the most important areas that a company must be prepared for. This can come in the form of various product innovations or could it be through new competitors redefining the market. In either case, the opportunities presented by the markets, can help a variety of organizations be able to take advantage of the changes that are taking place. The recent economic recession, is increasing the chances of being able to take advantage of the vast disparities that are occurring. For prudent businesses, this means that they can be able to seize upon these opportunities to increase their overall bottom line in the long-term. To achieve this objective, most organizations will often analyze the industry and competitors. One tool that helps them effectively understand the sector is Porters Five Forces Model. (Jones 2008, pp. 38- 45)

This is where you will look at the underlying industry and the changes that are taking place, by examining a number of different variables to include: the entry of new competitors, the bargaining power of buyers, the threat of substitutes, the bargaining power of suppliers and the effects of competitors. The entry of new competitors into the market is when: there is the possibility that new companies could be entering the industry. Where, they may be offering a product or service that will compete directly / indirectly against the firm. For example, the cable television industry could be competing directly against satellite T.V. providers, as they both will offer the same services and products. In this situation you would want to examine, the impact that the introduction of new technology and other factors could have, in bringing new competitors into the market directly or indirectly. As a result, a company will look at a number of different factors that could have an impact on determining what competitors are entering the industry the most notable would include: economies of scale, brand loyalty, absolute cost advantages, customer switching costs and government regulations. This is significant, because all of these different elements will have an impact, in determining what competitors are entering the markets and the possible effect they could have on an organization. (Jones 2008, pp. 38- 45)

The bargaining power of buyers is often viewed as threat. This is when buyers will have the ability to cause prices, to rise or fall for particular products or services. This is problematic, because buyers can drive up the price for those good and services that have high demand. At the same time, they can drive down the prices of competing goods and services, based on lower demand. Over the course of time, this will have the ability, to affect the profit margins of different companies. As those organizations that are delivering a superior product or service, will more than likely see an increase in profits, because buyers are increasing prices from higher demand. Thanks in part to the perception, that a particular product or service is of higher quality in comparison with competitors. (Jones 2008, pp. 38- 45) A good example of this can be seen within the auto industry, where there a hundreds of suppliers that are going after the same the customers (such as: Toyota, Ford or BMW). These different manufacturers can be able to extract large price discounts, by playing the various competitors against each other. At which point, they can reduce their costs dramatically, by naming the prices that they are willing to pay for a variety of parts. While this is good news for the manufacturers, it is bad news for the auto parts suppliers. As they must, be able to cope with the intense competition, just to remain competitive. (Peng 2009, pg. 42) This is significant, because it shows how the buyers can be able to have an impact upon prices, based upon demand and what they perceive to the best value. In the case of consumers, this value would be in the forms of good quality products or services. While businesses, would be interested in seeing lower prices.

The threat of substitutes is when alternative products are introduced that will have a direct or indirect impact, upon a number of different competitors. (Jones 2008, pp. 38- 45) A good example of this can be seen with the sports drink Gatorade. While, it is not a direct competitor against bottled water or soda, it would compete indirectly against these products. Over the course of time, as the product became more popular it would slowly siphon off sales from the large beverage companies. This is significant, because it shows how the introduction of a new product or a substitute product could have ripple effects, in the choices made by consumers. (Luisser 2008, pg. 126)

The bargaining power of suppliers is when those companies that are providing various goods / services to manufacturers, can increase their profit margins by raising prices. Because their goods / services are essential in the production of the final product, means that manufacturers are forced to pay the price increases no matter what. A good example of this can be seen by looking no further than Intel. Where, the company controls 85% of the market for semi-conductors. Due to the fact that Intel has such a large operation and controls so much of the market, means that competitors must follow similar designs as Intel. This is gives Intel pricing power over manufacturers, where price increases will have a ripple effect in the industry. As key competitors, are forced to follow what Intel is doing, because they have larger resources and manufacturing process. (Jones 2008, pp. 38- 45)

The effects of competitors are when you are examining how an industry can be impacted by the actions of rival organizations. Where, you will look at the total effects of: advertising, prices, product design, and promotional offers to increase market share. This can have an impact upon the overall bottom line of the company, as price wars could reduce profit margins dramatically. While the lack of competitive forces, could cause prices to increase. In either case, it is important to examine these effects, as they will tell an organization how they can be able to adapt to the different changes that are occurring. To achieve this objective, many businesses will often examine a number of different elements including: the industry structure, demand conditions, costs and factors that could prevent companies from entering the sector. This is significant, because it shows how an organization can be able to determine what activities competitors are engaging in. (Jones 2008, pp. 38- 45)

Internal Environment

Next an organization must be able to evaluate the internal environment. This is where you are examining various internal issues that could affect the underlying levels of competiveness within an organization. At the same time, you are seeking possible solutions that could address these underlying issues. To conduct an effective analysis of the internal environment requires that you examine the relative challenges in comparison with possible solutions. Then, be able to define these solutions through different tools including: goals / values, resources / capabilities and the overall structure / systems. Goals / values is when you are laying out objectives for the organization and determining what are the most important aspects of the different products / services to customers. Resources / capabilities are: the total amount of materials, man power and financial resources the company has available in the production of different goods / services. The overall structure / system is when you are examining the how the atmosphere and the chain of command; could be help to alleviate or contribute to various underlying issues. This is significant, because it will allow an organization to be able to identify what kind of issues could be affecting their ability, to adapt to changes in the marketplace or the economic conditions. Those organizations that have an effective understanding of the internal environment can be able to design strategies that will help it to identify changes early. This is the key to being able to prosper during time of economic expansion and to seize market share from weaker competitors. When you use this in conjunction with Porters Five Forces model, this will help provide businesses with an overall understanding of: what possible issue could be affecting their organization and how they can overcome them. (Understanding the Internal Environment 2010)

External Environment

The external environment is when you are looking at the total impact that: competitors, customers and suppliers will have on the underlying business. In this particular case, managers / executives would want to examine how the combination of these factors can be changing demand or the marketplace. Competitors provide an excellent way of being able to see how the market place is changing, based upon prices that they are charging for similar goods and services. The customers will highlight how their tastes could be changing and what products or services they are looking for. Suppliers will determine if the cost to produce various goods or services could be rising. As any kind of price increase, could have a ripple effect on customer demand. Once this takes place, it will help an organization identify what changes are occurring and how they can be prepared for them. This could be utilized with Porters Five Forces Model to identify specific issues in the external environment, and then help provide an effective way for adapting to these changes. (Understanding the Internal Environment 2010)

Clearly, the Porters Five Forces Model provides an effective way of identifying changes that are occurring in business. Where, it will help an organization be able to see the overall scope of possible challenges in the future. At the same time, it is conducting an internal and external analysis, which can identify specific issues that could be affecting the company. Once this takes place, is when an organization has the possibility of being able to address these changes, by providing effective strategies that can be implemented into the business model. As a result, those companies that utilize this kind of an approach can see record profits during times of economic expansion. While at the same time, having the ability to, seize upon opportunities during times of economic contraction. This is because those organizations that use this strategy have the ability to adapt to change quickly. In many ways one could argue that this is the key to long-term success in business, as the ability to identify to changes quicker than everyone else will determine how profitable a company will be in the future.