PORTER’S FIVE FORCES MODEL analysis (Woolworths strategic changes).

PORTER’S FIVE FORCES MODEL ANALYSIS EXAMPLE (Woolworths) including strategic changes.

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Introduction to Woolworths:

Woolworths is one of the biggest Australian Company that provides extensive retailing products to the people of Australia as well as New Zealand. The company was founded in the year 1924 by Percy Christmas, Ernest Williams and other colleagues with the name Woolworths Limited and its headquarter is at Bella Vista, NSW, Australia (Bloomberg.com, 2019). The company have many divisions as Supermarkets, Woolworths online, finance, hotels etc. and the revenue of company from all businesses came to AUD 55.669 billion in the year 2017. The scope of this report is to get thorough knowledge of industry analysis and the major tool of Porter Five Force Analysis in context of Woolworths. It will help to know the effect of various industry forces on the operations of company and what changes needs to made for facing the industry challenges.

The above analysis provides that every business needs to do industry analysis in order to know its current position and the future scenario. There are various tools of industry analysis but Five force model is most famous as it explains the competitive advantage and disadvantage to the companies by analyzing five factors related to industry. Further, the five force analysis of Woolworths shows that it has relatively strong position in the market due to increased market share. However, it is facing difficulties due to bargaining power of customers as there are some competitors that provides products at lower prices. In order to remove those limitation, Woolworths needs to focus on innovation and differentiation in its products.

Industry analysis:

Industry analysis can be understood as an activity performed by the business owners or managers to access the current business situations. The major focus is to analyze the various economic pieces of marketplace which may help the company to acquire competitive advantage. This analysis can be done at any instant i.e. before starting the business and during the business operations. It is basically a market assessment tool that helps to know the competitive dynamics present in an industry (Corporate Finance Institute, 2019). It provides knowledge about what trends are going on in the industry in terms of demand and supply, state of competition, future prospectus, technological changes and other external factors that influence the industry. There are many tools of industry analysis that can be used by a company to know its position as comparison to other similar companies in the industry. These tools help to know the opportunities as well as threats that provides view on the future scenario and understand the differences of strategies among different companies. The major tools of industry analysis are:

All these models have their own importance and are useful to know the internal as well as external factors that may influence the company. Further, following three elements are considered in each of the different approaches of industry analysis:

Elements of industry analysis  
Facts In case of new and small business, this analysis helps to collect the information about competitors, substitute availability, target market etc. so that it can secure financing to start the business (Corporate Finance Institute, 2019).
Features The features of analysis include review of various political, environmental as well as economical underpinnings. It review the business cycles that help in knowing the state of business, governmental regulations and taxes etc.
Consideration Under the five force model, the company use analysis to know the power of suppliers, barriers to entry etc. that can help to make the strategies by the management to deal with these factors.
Time frame Businesses may conduct industry analysis at various intervals of time due to dynamicity in the environment.
Expert insight There is always need of seeking help from outside consultants and analysts who are experts in market research so that valuable information can be extracted.

Industry analysis through porter 5 forces Tool:

As already discussed, there are three main tools of industry analysis which explore the industry form different perspectives. Among all these tools, Porter Five Force is the major tool that is used to know the competition among the companies (Bruijl, 2018). It can be applied in industry analysis to know the:

  • Time and cost to enter the new market, government restriction on entry and key technology by new companies
  • Number of customers for products, volume of orders and their cost of switching
  • Number of suppliers, alternatives suppliers, switching cost etc.
  • Number of competitors, quality and differentiation of products etc.

Analysis of all these elements help the companies to know the recent trends and intensity of competition in the industry (Competition, 2019). Further, the business managers can form the policies and strategies by considering these points so that competitive edge can be created.

porter-five-forces-analysis

Porters 5 forces tool:

Porter’s Five Force Model is the famous model which was introduced by Michael Porter in order to make the accurate analysis of industry in an easy way. There are five elements present in this model which helps to know the position of company against other companies in the industry.

porters-five-forces-tool

The given diagram shows the five competitive forces and are explained as:

  • Intensity of competitive rivalry:

    This element describes number of other participants or companies in the similar business that can affect the competitiveness in industry. Industry rivalry is effected by following elements such as presence of differentiation, cost of products, restrictions by government, trade unions etc. that act as the basis of competitive advantage for a company (Cdn2.hubspot.net, 2019).

  • Threat from new entrants:

    This element indicates the ease of entering the new businesses in an industry. If there will be lower restrictions, new entrants can easily take over the market and pose risk to the existing companies. Difficulty in entry can act as a competitive advantage to the existing company as it can easily reap the revenues for a long period of time without any fear.

  • Bargaining power of buyers:

    If the buyers are greater force in the market they can enjoy the benefits of negotiating prices, demand quality products as well as additional services attached to product etc. Buyers can easily switch from one product or company to another where they get more benefits (Cdn2.hubspot.net, 2019). Thus, buyers are main factor of competitiveness as they benefit company in term of sales.

  • Bargaining power of suppliers:

    It there will be limited suppliers of material in the industry, they will definitely have the power to bargain the prices and thus, enjoy high position in the market. If there will be more competitors, the suppliers can easily switch to other companies which will provide offered price to the suppliers.

  • Threat of substitutes:

    There is also competition by other industries which produce similar products that can be used a substitute for the industry products. To illustrate, tea and coffee are the major substitutes of each other. Substitute can take over the customers of particular industry by two ways either by providing similar products at lower prices or better quality products are same prices.

Woolworths Porter’s 5 Force Analysis:

In this section, competitiveness of Woolworths will be evaluated with the help of Porter Five Force Model. It will help to know the existing strategies of Woolworths and the changes required in them for maintaining competitive position in the market. The elements of model are explained as:

Taking an example of Woolworths:
Porter Five Force Model DETAIL
Intensity of competition:

Coles Group, ALDI, Tesco, Amazon and Wesfarmers etc. provide tough competition to Woolworths in terms of lower prices. However, Woolworths have almost 34 per cent share in the market but it needs to focus on it prices as the competitor companies are also in the race increasing their share and recently raised 62.9 million from their operations (Roy Morgan, 2019). Further, retail industry in market is growing tremendously and thus the competitors will focus on their own operation in presence of positive growth. It will weaken the rivalry among players but on the other side, higher fixed cost can make companies to optimally utilize their resources and enhance productivity which will increase the rivalry a stronger force.

Threat from new entrants:

There is need of high capital to enter the market and it is not easy to achieve the economies of scale easily. Further, the production cost is also higher and there is strong influence of government regulations related to supply chain, food safety, licensing etc. that makes it difficult to enter in this industry. Thus, Woolworths have lower threat from new entrants as it already covers huge market share and achieve economies of scale.

Bargaining power of buyers:

There are huge number of companies in retail industry that provides retail products to customers and customs can easily move to companies that provide similar products at lower prices. Woolworths is facing competition from lower prices of Coles and Aldi which provides bargaining power to the buyers. Further, there is also consideration of products differentiation that makes the switching cost high and thus, weaken the bargaining force.

Bargaining power of suppliers:

There are large number of suppliers in the industry which supply raw material to the retail companies. The major share of material is bought by limited players and thus, suppliers are weaker force to impact the prices. However, the products provided by suppliers have less or no substitutes that makes their position stronger.

Threat of substitute products:

There are limited number of substitutes of products provided by the industry of Woolworths and the companies can earn huge profits. Further, if there are few substitutes that are really expensive and thus, customers prefer to buy only at lower rates. This makes the switching cost of buyers weak and thus, less threat of substitutes to the company.

Strategic changes on the basis of porters 5 forces analysis.

In the above section, we have analyzed the competitive position of Woolworths in its industry. It has been evaluated that the company is under great influence of threat by customers etc. intensity of rivalry among existing players and bargaining power of suppliers. Further, the organization is less influenced by threat from bargaining power of suppliers and threat from substitute products. The strategies of company are conducive to the existing competition among the players of industry. However, it needs to bring some changes in its strategies so it could maintain its position in the market. The following changes can be made according to Porter analysis:

  • Enhance innovation and differentiation:

    It has been analyzed that Woolworths have competitors that provides products at lower prices and thus, can decrease its customer base. In order to retain customers, the company needs to compete under differentiation strategy where it will invest more on technology and innovation so that better quality products can be provided to the customers even at premium prices. Further, technology can also be used in service area at its stores or other business units so that customers can get their products easily. Thus focus on being service oriented would be a better choice.

  • Mergers and Acquisitions:

    As there is increase in competitiveness, Woolworths have the choice to decrease it by teaming up with small players in the industry. It will help the company to increase its market share and also to eliminate the competition along with gaining customers of merged companies.

  • Restructure sales and marketing activities:

    The company needs to lower the cost of products in order to increase the profitability. As most of the part of cost goes to marketing and selling activities, this is the area which needs restructuring. As company is already famous in the country, it can lower the marketing expenses and rather used it to provide discounts in the selling function.

  • Bring new products to market:

    As it is obvious that customers only demand discounts on the existing products. However, if the company started to provide new products in the market they will not demand any discounts which will help to lower their bargaining power. Further, it will also help to creating more competitive position of the company in market.

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Conclusion:

The above analysis provides that every business needs to do industry analysis in order to know its current position and the future scenario. There are various tools of industry analysis but Five force model is most famous as it explains the competitive advantage and disadvantage to the companies by analyzing five factors related to industry. Further, the five force analysis of Woolworths shows that it has relatively strong position in the market due to increased market share. However, it is facing difficulties due to bargaining power of customers as there are some competitors that provides products at lower prices. In order to remove those limitation, Woolworths needs to focus on innovation and differentiation in its products.

Article By:

Lucy Ross

A management professional having her degree from University of Auckland, Lucy Ross is a faculty at Duke University. She loves to spend her quality time proofreading online assignment help of college students.

Lucy Ross

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References
  • Bruijl, (2018). The Relevance of Porter's Five Forces in Today's Innovative and Changing Business Environment. SSRN Electronic Journal. 10.2139/ssrn.3192207.
  • Bloomberg.com. (2019). Bloomberg - Are you a robot?. Retrieved 26 December 2019, from https://www.bloomberg.com/profile/company/WOW:AU
  • Competition, H. (2019). Analyzing the Competition with Porter's Five Forces. Retrieved 26 December 2019, from https://www.businessnewsdaily.com/5446-porters-five-forces.html
  • E. Dobbs, M. (2014). Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45. doi.org/10.1108/CR-06-2013-0059
  • Corporate Finance Institute. (2019). Industry Analysis - Top 3 Methods to Assess and Analyze an Industry. Retrieved 26 December 2019, from https://corporatefinanceinstitute.com/resources/knowledge/strategy/industry-analysis-methods/
  • Roy Morgan. (2019). Woolworths and Aldi grow grocery market share in 2018. Retrieved 26 December 2019, from http://www.roymorgan.com/findings/7936-australian-grocery-market-december-2018-201904050426
  • Cdn2.hubspot.net. (2019). Retrieved 26 December 2019, from http://cdn2.hubspot.net/hubfs/125770/Michael_E._Porters_Five_Forces_Model_E-Book_From_Wikipedia.pdf?t=1446668543121