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External Environment

Porter’s Five Forces

The model developed by Michael Porter has become a critical tool in examining and evaluating the industry-level competitive environment especially in evaluating the ability and potential of companies in the respective industries to set prices hence minimize costs. Porter’s model put forward five dimensions to examine industry-level competitiveness namely; the threat of new entrants, bargaining power of supplies, bargaining power of buyers, threat of substitute products and services, and intensity of rivalry among competitors in an industry. All of the factors hereby mentioned affect a firm’s competitiveness in the market since together they determine the profit potential of any given industry (McNamara & Eisner, p. 51-53).

Threat of new entrants: This factor is used to determine the possibility that profits and revenues of established companies in a given industry can be reduced by the entry of new competitors. The combined reactions from existing competitors and the existing entry barriers play a significant role in defining the extent of the barrier. For instance, when entry barriers are high and the perceived retaliation from established companies is sharp, then the threat if entry will definitely be low. This factor therefore identified at least six sources of threats of entry to newcomers to the industry. Economies of scale; referring to the spreading of production costs over a number of units manufactured is one source of entry barrier. The other barriers of entry include product differentiation, capital requirements, switching costs, cost disadvantage independent of scale, and access to distribution channels (McNamara & Eisner, p. 43).

It is however common practice to see managers of various companies in respective industries to overestimate the barriers of entry. There are many instances where new entrants find innovative ways round the entry barriers to enter the market and revolutionize the market. Some newcomers can mix and match cleverly the existing technologies to find a way into the industry. By combining software components available to everyone, it is possible to create valuable significant technological results in the various industries. For instance, the juice industry where Jamba Juice is a player has limited barriers to entry of new firms. The start-up capital is reasonably small hence the possibility of new firms entering the scene to pose competition (McNamara & Eisner, p. 54).

The bargaining power of buyers: buyers make up an important stakeholder in any organization and therefore affect decision-making to a greater extent. The buyers are in fact the reason why a firm exists because they consume the products created by the individual firms. Buyers can hence force an industry to revise its products’ prices downwards. Besides bargaining for lower prices, buyers have the power to bargain for increased product quality as well as putting competing entities against each other. Large buyer associations’ bargaining power heavily depends on the attributes of the situation in the market as well as the significance of purchases compared to the business of the industry. A buyer’s group gets more powerful if it is involved in the purchase of large volumes of products as compared to the sales of sellers (McNamara & Eisner, p. 54-55).

If a significant portion of a supplier’s sales are bought by a single group of buyers, the importance of the buyer’s business to the supplier greatly increases. In industries that have high fixed costs such as steel manufacturing, large-volume buyers possess great power. Additionally, if the buyer knows that the seller faces high switching costs, then the bargaining power of purchasers significantly intensifies. Firms can also at times increase their buyers’ bargaining power by using third-party entities in the marketing and distribution of their products and services. For instance, online marketing software and companies enable large industrial buyers to organize online auctions for the sale of certain products and services. There is customer power in the case of Jamba Juice Company as they constantly put pressure on the management to introduce new products as well as improve the quality of the products and services.

Bargaining power of suppliers: suppliers supply important raw materials and input to the production of certain goods and services. The suppliers knowing their importance in the supply chain, can threaten to raise prices or reduce the quality of purchased services and goods. Powerful suppliers have the potential of squeezing the profitability of entities such that they are not able to recover the costs of raw materials and other inputs. The bargaining power of suppliers is determined by the number of companies involved in the industry, the terms of contract between the contracting partners, the importance of the relationship between the supplier and the firm, the level of differentiation, and availability of substitutes. Suppliers can coalesce to form a larger association with increased capacity to control the market of major inputs. Forward integration produces supplier groups that will put pressure on the producers of products and services through costly inputs (McNamara & Eisner, p. 56-58). 

The threat of substitute products and services: all the entities within a given industry have to compete with firms creating substitute services and products. Substitutes reduce the returns attributable to a firm through placing a ceiling on the prices that the players in the industry have to profitably charge. The identification of substitutes entails the search of products that can perform the same function as a firm’s. Jamba Juice is faced with the threat of substitute products that are produced by fast food chains, yogurt shops and other small firms dealing in non-juice products.

The intensity of rivalry among competitors in an industry: rivalry among competitors can lead to the employment of tactics such as price competition, customer service or warranties, product introduction, and advertising battles to compete. Rivalry intensifies when organizations have sensed an opportunity or felt the pressure to act on an investment idea in a bid to improve their position. Certain forms of competition can be highly destabilizing, for instance price competition reduces the average profitability of an industry (McNamara & Eisner, p. 56-58).

However, advertising battles have the impact of expanding overall demand of products. It has also the power to enhance product differentiation for the benefit of all firms involved. Rivalry between firms is often based solely on price, but it can involve other factors. There is increased rivalry in this industry especially with the creation of similar products by other players such as Starbucks, McDonalds, Burger King and other smaller players. The juice shops are also producing smoothies and juices that are gaining popularity in the market way ahead of Jamba Juice leading to the use of unfair pricing tactics to gain a considerable market share.

General Environment

The general environment comprises of factors that are external to an industry and are always beyond the control of a firm hence can affect the firm’s competitive strategy. The general environment therefore consist of demographic, sociocultural, political, legal, technological, economic, and global factors (McNamara & Eisner, p. 42).

Demographic segment: the impact of demographic trends vary across different industries. For instance, Fast-food restaurants depend on minimum-wage employees to operate efficiently, but the competition for labor intensifies as more attractive employment opportunities become prevalent, thus threatening the employment base for restaurants. Customers have become sensitive to their diet and what they consume. As such, Jamba’s consumer messaging is more focused on the theme ‘Blend in the Good’. The message is meant to inform consumers of the health benefits of consuming fresh vegetables and fruits. More importantly, Jamba makes its smoothies, bowls, and juices are made from 100% natural ingredients. However, the company has introduced another smoothie targeted to the children. The fact that the company’s marketing campaign is executed over multiple media sources such as print, radio, TV, public relations, social, and digital platforms (McNamara & Eisner, p. 43).

The sociocultural segment: this segment entails trends such as the increase in women in active labor, more temporary workers, greater concern for fitness, concern for the protection of the environment, postponement of family formation. The factors described have the potential enhancing sales forces in many industries. The increased trends for healthier foods and fitness have had their share of helping industries that deal in exercise equipment and healthy foods experience more demand while unhealthful foods industries reduced demand for their products.

Political/legal environment: organizations operating in different industries have to comply with certain regulations. State regulations have a significant role in impacting the governance of different entities (McNamara & Eisner, p. 43).

Technological environment: technological advancements lead to the creation of new products and services which definitely improve the well-being of customers. Technological advancements such as internet technology has improved the manner in which companies design, produce, market and get feedback from their loyal clients. Jamba Juice has effectively applied technology especially in creation of marketing message. The company has amassed over 2 million Facebook followers. In 2017 alone, the company through Jamba Insider Rewards’ e-mail marketing program rewarded at least 2 million loyalty members with promotional offers such as in-store events, free products, and discounts. Additionally, the company has been able to witness at least 100 million visits annually to its stores (McNamara & Eisner, p. 46)

The economic environment: Originally, Jamba Juice Company had followed a strategy of expanding its store locations in existing markets and only opening stores in select new markets. Jamba soon began acquiring the assets of Jamba Juice franchised stores in an attempt to gain more control over growth direction. Under CEO Paul E. Clayton, Jamba acquired several franchise stores and expected to continue making additional franchise acquisitions as part of its ongoing growth strategy. However, the company-owned franchises were not as productive and accounted for a disproportionately low portion of company revenues.

Internal Environment

Value Chain Analysis

Under this dimension, the organization is viewed as a sequential process of activities that create value. The value-creating activities are used to build an entity’s competitive advantage as described fully by Michael Porter. The approach defines value as the much that buyers are willing to for in order to acquire what a firm has to offer. This value is measured by total revenue which is a reflection of the price a firm’s product commands and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Thus creating value for buyers that exceeds the costs of production (i.e., margin) is a key concept used in analyzing a firm’s competitive position.

As such, Porter chose two different categories of activities that are important in a firm acquiring competitive advantage. The activities according to Porter are primary and secondary or support activities. Primary activities include marketing and sales services, outbound logistics, operations, and inbound logistics while support activities include things like general administration, human resource management, technology development, and procurement. Effectively, primary activities refer to the sequential activities of the value chain that are involved in the physical production goods and services. On the other hand, support activities essentially include those activities that add value by themselves or through the association with primary activities create value.

Primary Activities

Inbound logistics: basically associated with receiving, storing, and distributing inputs to the product. It includes material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers. In determining a firm’s inbound logistics one has to consider the location of distribution facilities to minimize shipping times and warehouse layout and designs to increase efficiency of operations for incoming materials.

Operations: include all activities associated with transforming inputs into the final product form, such as machining, packaging, assembly, testing, printing, and facility operations. Creating environmentally friendly manufacturing is one way to use operations to achieve competitive advantage. Shaw Industries (now part of Berkshire Hathaway), a world-class competitor in the floor-covering industry, is well known for its concern for the environment. It has been successful in reducing the expenses associated with the disposal of dangerous chemicals and other waste products from its manufacturing operations. Its environmental endeavors have multiple payoffs. Shaw has received many awards for its recycling efforts—awards that enhance its reputation. Efficient operations can also provide a firm with many benefits in virtually any industry including the juice industry.

Outbound logistics: associated with collecting, storing, and distributing the product or service to buyers. These activities include finished goods, warehousing, material handling, delivery vehicle operation, order processing, and scheduling. Jamba has transitioned existing stores in selected markets to a fresh-squeezed juice emphasis. This addressed competition from both Juice It Up! And Starbucks, who were expanding their premium juice bar businesses. 

Marketing and sales: associated with purchases of products and services by end users and the inducements used to get them to make purchases. They include advertising, promotion, sales force, quoting, channel selection, channel relations, and pricing. For instance, to become a top-of-mind brand by simplifying and sharpening Jamba’s healthy food and beverage marketing message to better clarify value and make the brand more relevant through brand activation and leadership happens to be the top priority for Jamba Juice.

Service:  includes all actions associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment. Jamba also capitalized on the openings of new sites as opportunities to reach out to the media and secure live local television coverage, radio broadcasts, and articles in local print media. Openings were also frequently associated with a charitable event, thus serving to reinforce Jamba Juice Company’s strong commitment to its communities. Jamba also re-launched its corporate social responsibility initiatives under the banner of “Team Up For a Healthy Whirl’d,” a platform that encouraged consumers, partners, and employees to join in the company’s efforts to inspire healthy people, products, planet, and community. Through Team Up For a Healthy Whirl’d Jamba led sustainability initiatives, programs to inspire healthier employees, and a number of community engagement activities in the markets it served.

Support Activities

Procurement: relates to the purchase of important inputs applied in an organization’s value chain thus including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings.

Human Resources Management: relates to activities involved in the recruitment, training, development, and compensation of all types of personnel. It therefore supports both individual primary and support activities and the entire value chain. For instance, Jamba’s “asset-light” franchise model had several efficiencies that translated to increased profitability. When a company placed most of the risk for running a business in the hands of a franchisee, the franchisor, Jamba Juice in this case, did not have to pay for employees, rent, or upkeep on the store assets. The franchisee was expected to put his or her capital to work, running the business. In this case, store management was “more likely to act in the best interest of shareholders because the franchisee’s net worth is more often directly correlated with the outcome” of his or her store.

General Administration: consists of a number of activities, including general management, planning, finance, accounting, legal and government affairs, quality management, and information systems. For instance, Jamba had set out to strengthen its customer reach by offering ready-to-drink products, and hot food and drink items to attract customers during the cold-weather months, plus a range of breakfast and lunch food items to complement its juice-based offerings and satisfy customer desires all day and all year-round (McNamara & Eisner, p.90 (nd.).

Resource-Based View of the Firm

The approach classifies a firm’s resources into tangible, intangible, and organizational capabilities. Tangible resources include financial, physical, technological, and organizational while intangible resources comprise human resources, innovation resources, work teams effectiveness, and reputation resources. On the other hand, organizational capabilities are not specific tangible or intangible assets, but rather the competencies or skills that a firm employs to transform inputs into outputs. The juice and smoothie bar industry had seen a reduction in growth since 2012 as competition increased from fast-food chains and yogurt shops. The category of smoothies and juices had seen increasing consumer acceptance as health claims become more commonplace, especially as the “cold press” juice option, yielding highly nutritious juice from chopped spinach, kale and ginger, gained in popularity.

However, the juice category was still relatively expensive compared with other refreshment options, and more informed consumers became concerned about the high sugar content from natural fructose. This, combined with the fact that the regular quick-serve restaurants such as McDonald’s and Burger King were reported to make up nearly 40 percent of the juice and smoothie bar market, meant that the pure juice and smoothie providers such as Jamba Juice, Planet Smoothie, and Smoothie King were facing difficult growth options.

Reference

McNamara, D. & Eisner. L. (nd.). Strategic Management: Text and cases. 9th edition. McGraw    Hill Education.

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Tags: External Environment, Porter’s Five Forces, Threat Of New Entrants, The Bargaining Power Of Buyers, Bargaining Power Of Suppliers, General Environment, Demographic Segment, Sociocultural Segment, Political/legal Environment, Technological Environment, E

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