1 (i) Strength and Weakness of the ‘Six Forces Model’ for Formulation of Business Strategy
The six forces model refers to one of the strategic business tools that help the business in evaluation of attractiveness and the competitiveness of the market (Chou et al., 2015). The model represents an extension of Porter’s five forces model put forward by Michael Porter. The additional force was introduced in the year 1990s. The six forces model provided a framework for the six vital forces that required consideration while defining the corporate strategy for determining the attractiveness of the industry. These include competition, new entrants, end users/buyers, substitutes, suppliers and complementary products. The strength of the model lies in representing a framework that enabled the companies in identifying the threats and evaluates a suitable strategy of moving forward in increasing the competitiveness and profitability (Dobbs, 2014). The weakness of the model lies in its criticism where strategist has helped in identifying three assumptions that defines the forces (Hill, Jones & Schilling, 2014). These include:
ii. Six Forces Analysis of the Airline Industry
Threat of Newer Entrants refers to the potential barriers and competitors for entering a given market. The new entrants create pressure on the current organization within the industry with the desire of gaining a market share (Porter & Heppelmann, 2014) This puts pressure on the cost, price and rate of investment necessary for sustaining the business within industry. The threat of the newer entrants are particularly intense when they diverse from some other market as they are able to leverage the cash flow, brand identity and the existing expertise thereby putting strain on the profitability of the company. In the airline industry, the space for the newcomer’s remains squeezed to an extent that there is hardly any option left for the new markets. The reasons includes higher cost of the entry barriers due to the complex and the expensive nature of the industry in terms of leasing or buying of aircrafts, their maintenance and demand for the higher sophisticated technological system for operation. The other barrier includes the restrictions of the government on the air traffic and already existing bigger giants within the industry. This implies that the threat of entrant in lower in case of the airline industry.
Threat of Substitutes refer to the availability of the alternatives. Industry profitability suffers with higher threat of substitutes (Yunna & Yisheng, 2014). The threat of the substitute is higher when the switching cost is lower and a tradeoff between price and performance. In the airline industry, the possible substitutes include travel by bus, train or car and these are significantly diverse depending on the factors of the customer’s preference. The competition of the substitutes in the airline industry depends upon ease of the traveler in shifting to the substitute travelling service with price acting as the key factors revolving in switching towards the substitute product. Here, the threat level is considered medium due to the uncertain preference of the traveler over the substitutes.
Competition referred to the assessment of direct competitors within the given market. There are various dimensions in the industry that rivals find suitable for competition that includes the strategy of cost leadership, introduction of the newer services and products and improvement of the service quality (Arshed & Pancholi, 2016). Higher competition between the rivals represses the profitability of the industry. Intensity of the competition is the highest when the competitors have equal size and power, slower industry growth, higher exit barriers and competition amongst the competitors based on the price. As far as competition is concerned, the airline industry faces an immense competition because of the greater saturation of the rival airlines who undertakes continuous competition in realm of the price, technology and the customer service. Thus, the degree of rivalry is quite higher in the airline industry that might result in slower growth of the market. .
End Buyers or Users refers to the consideration of the bargaining power of the buyers that involves consideration of the cost of the switching. Powerful consumers are capable of driving the companies off against one another for driving down the price or demand higher quality service (Moatti et al., 2015). The bargaining power of the consumer is higher when there are limitation in the number of buyers, unique products and lower switching cost. The airline industry fights for same customers that help in strengthening the power of the buyers. The customer travelling from one destination to another has alternative for airline service and he will only grab the option that provides maximum benefit at same or lower prices. Thus, the bargaining power of buyers or customers in airline industry is quite higher due to the higher sensitivity of price.
Suppliers refer to the bargaining power of the suppliers where powerful suppliers are able to influence the profitability of the industry through limiting the service quality, charging higher prices and shifting the cost of industry participants (Puranam, Gulati & Bhattacharya 2013). A supplier group is powerful if it remains more concentrated, lesser reliance on industry, higher switching cost, produces unique products and legitimately threatens the forward integration. The supplier of the airline industry is concentrated since its sole suppliers are Boeing and Airbus. The level of the supplier concentration dictates the airline companies in having higher bargaining power on supplier side since the primary operation is solely dependent on the suppliers. Thus, airline companies do not have alternatives in switching the aircraft supplier even at a higher cost.
Complementary product refers to the influence of the related products and services within given market. In other words, it refers to the services or the products that remains compatible with what the industry sells (Wiesner, Padrock & Thoben, 2014). The influence of the complementary goods on the profitability of the industry depends on the reliance of the product or service on compatible product. In the airline industry, the complementors include the shareholders, government, public and the employees. These stakeholders exercise considerable power in the airline industry. Tourism services represent one of the complementors of the airline industry whose effectiveness leads to the efficiency of the airline industry. The government as the complementors directs the taxation policies and airfares thereby directly influencing the airline companies. Hence, the power of the complementors is higher in the airline industry compared to the other industries.
2. Core Competences are an Interesting Idea but Hard to Identify. Explanation with Real Examples
Core competency refers to defining the organizational strength that provides the foundation for the business to grow seize newer opportunities and delivers values to the customers (Li & Liu, 2014). Core competencies of a particular company cannot be replicated by other organization irrespective of whether they are new entrants or competitors. The beginning point of understanding the core competencies lies in understanding that the business requires to possess certain aspects for making better profits and increase their valuation to the customers. There have been arguments that core competencies represented some of the key sources of uniqueness. Companies uniquely did certain things that none is able to copy quickly for influencing competition. Here the examples of companies like the Honda and Canon mentioned since they had a clear idea of what they were unique at that made them grow fast. As these companies focused on the core competencies and continuously worked for building and reinforcing them, their products remained more advanced compared to the competitors. The customers remained prepared for paying them more. When they switched efforts from the weaker areas to further focus on the areas of the strength, the products built generated more market lead.
Core competencies are interesting idea but are hard to identify due to the following reasons:
For example, a company might believe that expertise and stronger knowledge of industry is a core competence in serving the industry. Provided, if one of its competitors possess similar expertise then it is not considered as core competence. This leads to the creation of a difficult situation for the new competitors in entering the market.
1. Using Real Examples, Comparing and Contrasting the Strategic Innovation
Strategic innovation refers to changing and introducing newer value propositions, production process and service to a company (Mootee 2013). There exist four key types of the strategic innovation.
The first type includes the imitation where little or only the marginal innovation remains involved (Brook & Pagnanelli, 2014). This is the scenario where companies mimic business process and value proposition presently known within the industry. The success of the approach depended on the factors external to company such as the industry growth.
For example, in the growing industry of consumer electric goods sector there exists various opportunities for the imitators. Examples of some of the products include portable computer devices, tablets and various brands in the market that includes Samsung’s Galaxy, Motorola’s Xoom and Apple’s iPad. Profits remains transitory in the consumer electronics goods sector since there are non-existent or minimal differences between companies.
The second type of the strategy innovation represents the market-based innovation focused on introducing newer value propositions to industry or through diversification into the neighboring segments and markets (Hartley, Sorensen & Torfing, 2013). This is done by raising demand for different services and products within the sector. For example, the ability of Nintendo in defining success of Wii lay in manufacturing game consoles for the wider market. Instead of simply producing the games, they led to the creation of wider applications that included exercise program and fitness for Wii using the board that weighed and monitored the body movement while standing. However, the technologies that went in creation of Wii were not new but their market definition and value proposition were new to industry. Here the market definition involved issues regarding the customer and his wants in terms of the price, access, delivery and feature.
However, in contrast, the third kind of strategic innovation has been the innovation based on technology that involved the usage of the management technologies and process usually not seen in industry. For example, the reconfiguration of the activity system and chain of Toyota portrayed the critical way in which the company looked at the design, development, manufacturing and retailing of the cars. This led to the development of more efficient as well as effective management practices and the internal practice. This included the just in time approaches that interfaced with the distribution activities and the external supplier. Such approach by the Toyota especially in connection with the manufacturing system shifted the advantage of industry in the favor of the company due to enhanced productivity and efficiency in car plants (toyota-global.com, 2018). The car manufactured by Toyota was not only innovative or had a target towards newer segment but they targeted the same segments of the mass market as the others in the industry. However, the reconfiguration of activity chain allowed Toyota in gaining an advantage through putting forward quality and well-crafted products compared to the offerings of the key competitors.
The final kind of strategic innovation has been the technology and the market based innovation that involves combination of the value propositions that are new to industry or creation of the new market through the help of newer ideas and technology. For example, Groupon is a social network based purchase website that puts forward newer ways of offering discounts to the customers who are already its subscribers (Mourdoukoutas, 2011). The deals involved beauty treatments and meals in the restaurants. The subscribers bought online limited time vouchers for the local business. Groupon kept half of the money and utilized the rest for the business that helped in attracting newer customers. Only specific number of people should sign up for activation of the discount. The success of the company has been due to the users referring it through friends via the Facebook. This resulted in the dramatic growth of the company and reflected the early success in building a leading position in the market on the new frontier of the internet. The company had a pay per performance model made famous by the internet and went beyond traditional methods of marketing for winning over the newer customers. In other words, the company had a sole performance based structure. The company only pays for the customers that come through its door that was unlike any of its competitors. In fact, Groupon makes money by giving the companies newer opportunities of marketing themselves and gaining newer customers through latest technology and social networking.
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