In the modern context the business operating environment has become increasingly complex. With the advancement of globalization and the integrated information technology platforms, it is incumbent for businesses to strategize in order to position themselves for opportunities in the market. A number of approaches can be applied by firms in positioning themselves strategically. One such recommended approach is the five forces model. Under the five forces model, the five main considerations include the buyer power, rivalry in the industry, supplier power, substitutes and new entrants. This paper shall briefly discuss the five forces model and examine their application to the coffee industry.
The firm ought to consider the buyer power. Under the buyer power, it is essential to consider some aspects in evaluating the buyer’s potential and capacity in the market. The buyer’s degree of independence determines the level of control the firm can exert on the buyer. Within the buyer power is the possibility of backward integration. This is a threat to the firm and must be nipped in the bud. It is critical to consider aspects such as the buyer financial muscle, the buyer’s sensitivity to changes in prices and the overall switching tendencies of the buyer. With such information, the firm would be in a position to strategize well relative to the buyer’s circumstances and position. The same applies to other buyers who together form the market for the firm’s products.
Secondly, it is essential to consider the rivalry in the industry. Industrial rivalry considers the competitors in the market. In this case, of critical consideration would be the competitors in the coffee industry. One critical factor ought to be the degree of differentiation. In other words, it is essential to consider the degree of similarity among the firms. In order to position the firm strategically, it is often recommended that the firm differentiates its products so as to lower the degree of similarity. This reduces the overall competition in the industry and sets the firm aside from the other competitors. Another critical consideration in this context is the number of players. The more the number of players in the industry, the more intense is the competition and hence the need for differentiation. In addition, the market structure should be examined in order to understand the market dynamics. A monopoly market structure would be preferable as the same lacks competition while a monopolistic market structure puts the firm on its toes due to the competitive nature of the market.
The third element under the five forces model is the supplier power. In this element, consideration is placed on aspects to do with the supplier. These include matters such as supplier independence, supplier possibility of forward integration, availability of substitute products and the supplier’s market size. These aspects determine how to relate with the supplier. It is in the interest of the firm that the supplier’s independence is on the low and that the possibility of forward integration by the supplier is equally low. In addition, the firm needs to have substitute products and or suppliers so as not to depend fully on one supplier. The firm equally needs to have knowledge of the supplier information of the market dynamics and demand as the same would be useful in bargaining for the prices of the raw materials. An informed supplier would probably demand more for his products as opposed to a non-informed supplier.
The forth element of the five forces model entail the substitutes. In essence, substitutes are alternatives of the products. The market demand for the product is often reactionary to the substitutes’ availability. On that context, it is in the interest of the firm that substitutes remain at higher prices and or remain unavailable in the market. The firm needs to have information on the developments by firms offering substitute products. In overall, the substitutes are threats to the firm’s products and it is necessary that options are in place to tackle any developments. Some of the options include possible integration, buyout and reductions in prices. The latter best works where the market is price sensitive and would prefer the cheaper of the two options.
Finally, under the five forces model, it is cardinal to consider the threat of new entrants. The threat of new entrants anticipates the nature of competition to be witnessed in the near future. It is often preferred that the market structure is as closed as possible thereby making entry into the market difficult if not impossible. However, the nature of the market structure is beyond the firm’s capacity. On that context, the firm needs to prepare strategically for any anticipated competition. Where the market structure is a perfect monopoly, the firm would not be threatened by new entrants as the same is near impossible. However, where the market is a monopolistic one, the firm often has to be prepared for new entrants as entry and exit is free and easy. In overall, the new entrants keep the firms on their toes.
In conclusion, it is this paper’s postulation that the five forces model is critical in strategic planning and management of firms especially in light of the competitive nature of the business industries. The operating environments today demand for awareness and information in decision making and implementation.
Reference
Grant, R. (2010). Contemporary Strategy Analysis: Text Only. New York: John Wiley and Sons.
