The five force analysis is one of the most recognized frameworks for the business strategy. Porter, the guru of modern day business strategy, used theoretical frameworks derived from Industrial Organization economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry that influence the way in which firms compete, and so the industry’s likely profitability is conducted in Porter’s five forces model.
A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services.
This describes the attributes of an attractive industry and thus suggests when opportunities will be greater, and threats less, in these of industries. The industry that I have chosen for my five force analysis is the banking industry. I have chosen CIMB Group as the organization of my choice. CIMB Group operates as a universal bank offering a full range of financial products and services, covering corporate and investment banking, consumer banking, treasury, insurance and asset management. CIMB Group offers products and services on a dual banking basis, giving customers a choice of both conventional and Islamic solutions.
As a universal bank, it is able to serve everyone from all walks of life in Malaysia as well as throughout the region, including large regional corporations, domestic listed companies, entrepreneurial start-ups, high-net worth individuals, pensioners and children. Today, CIMB serves over eleven and a half million customers in over 1000 locations through over 37,000 staff. At present, its main markets are Malaysia, Indonesia, Singapore and Thailand, countries in which CIMB Group has full universal banking capabilities.
CIMB Group's presence in 13 countries covers South East Asia and major global financial centres, as well as countries with which their South East Asian customers have significant business and investment dealings. In addition, CIMB extends its regional reach and range of products and services through strategic partnerships. Partners include the Principal Financial Group, Aviva plc, Sunlife Financial, Allianz Malaysia Berhad, Mapletree Capital Management, Bank of Tokyo-Mitsubishi UFJ, Standard Bank plc, Daewoo Securities, the Kanoo Group, Malaysia Airlines, International Currency Exchange, EDS, Pos Malaysia, 7-11, Singer Malaysia and many more.
One of the five force is the competition among existing industry businesses. The competitors of CIMB Group are Malayan Banking Berhad, Public Bank Berhad, Hong Leong Bank, RHB Bank, and AmBank Berhad. These organizations are the competitors of CIMB Group. These banks also compete in many ways such as their products and services. Maybank Banking Berhad is the main competitor of this bank. They have many business strategies to defeat CIMB Group. The competition in this industry is very high which can bring to higher level of advertising expense and powerful competitive strategy.
Competitive rivalry is likely to be based on dimensions such as price, quality, and innovation. Technological advances help to protect companies from competition. This applies to products and services. Companies that are successful with introducing new technology are able to charge higher prices and achieve higher profits, until competitors imitate them. For example, Malayan Banking Berhad uses statement slip instead of bank book. This instead can be call a new innovative idea that is being used by this bank to bring in customers. Next point is the threat of new entrants into the industry.
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero. Threats of new entrants can be seen often in the banking industry because of the profits that this industry gives. For example we can take Al-Rajhi Bank. It started with a few branches in Malaysia, but now the branches have been increased. This is due to demand by the customers and the demand on this industry.
This can be a big threat to CIMB Group. The threat of new entrants is mainly caused with the existence of barriers to entry. The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. This gives new ways for new organizations to enter. Besides that, economies of product differences also leads to the entrants of new rival. For example, if Al-Rajhi Bank provides different service and products from CIMB Group, it can give an impact to CIMB Group by giving a big threat to this industry.
Customer loyalty is also very needed to established a brand. If the customer is loyal to one organization, then it will be difficult for a new entrants to succeed well. The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. This is also one of the analysis that is threat of substitute products. Customers have the propensity to substitute their products if they feel that the products are not valid to the price they pay. For example, RHB Bank provides the Easy RHB booth for customers to deal with them.
This will be more convenient for the customers and the customers will be happy with the treatment that the bank gives.
- Relative price performance of substitute
- Buyer switching costs
- Perceived level of product differentiation
- Number of substitute products available in the market
- Ease of substitution.
Information-based products are more prone to substitution, as online product can easily replace material product.
- Substandard product
- Quality depreciation
- Absolute cost
- Industry profitability; the more profitable the industry the more attractive it will be to new competitors.
Competitive Strategy (20%)
Low cost strategy is a pricing strategy in which a company offers a relatively low price to stimulate demand and gain market share. It is one of three generic marketing strategies that can be adopted by any company, and is usually employed where the product has few or no competitive advantage or where economies are achievable with higher production volumes. Low cost strategy is also called low price strategy. Differentiation strategy is a marketing technique used by a manufacturer to establish strong identity in a specific market; also called segmentation strategy.
Using this strategy, a manufacturer will introduce different varieties of the same basic product under the same name into a particular product category and thus cover the range of products available in that category. For example, a soda company that offers a regular soda, a diet soda, a decaffeinated soda, and a diet-decaffeinated soda all under the same brand name is using a differentiation strategy. Each type of soda is directed at a different segment of the soda market, and the full line of products available will help to establish the company's name in the soda category.
This technique is quite costly to the advertiser because each individual product must be marketed independently, since separate marketing strategies are necessary for each market segment. One local company that demonstrates low cost strategy is Air Asia. Air Asia is known as a low cost airline. Air Asia demonstrates low cost strategy through many ways. For example, we can see that Air Asia is one of the cheapest airlines in the world. This can be proven when Air Asia won the World's Best Low-Cost Airline at 2010 World Airline Awards by Skytrax.
Air Asia also demonstrates low cost strategy when they cut down the cost on international offices, frequent flyer points, free food and beverages, in flight magazines, club lounges and the use of secondary city airports. When the cut down cost on the following things they can bring down the cost that have to be paid by the passenger. Air Asia focuses more on saving cost. They don’t focus on passengers comfort. Air Asia demonstrates low cost strategy through the Tune Hotels which were introduced in 2006. This chain of hotel prepares all the basic need of a hotel at a very low price.
Tune Hotels also is located at very strategic locations. This strategy is most appropriate when the demand for the product is high, the product is suitable for a mass market and have enough demand. It also has room to reduce its price to compete with substitute products in the industry. One local company that pursues a differentiation strategy is Gardenia Bakeries. This company pursues differentiation strategy. Gardenia Bakeries introduces different variety’s of bread under the same brand name is using a differentiation strategy.
This can be proven through the Twiggies, Breakthru, Delicia, and many more types of bread they have. These products are all different, but they are still categorized as bakery foods. Differentiation strategy is also applied in this company when the introduced the Delicia bread they bring it out in different flavours such as vanilla, chocolate and corn. Each type of flavours is directed at a different segment in the bread industry. Thus all this examples shows that Gardenia Bakeries pursue differentiation strategy. This business strategy has a few advantages and disadvantages.
The advantage of this strategy is protected from rivals for the brand loyalty and customer loyalty. The disadvantages of this are substitutes can be a possible threat and it is difficult to maintain a product’s uniqueness in customers’ eyes for a long time. For a conclusion, I would like to say that in my opinion low cost strategy is more better and efficient. I say this because, low cost strategy really works in our country. Low cost strategy has more advantages compare to disadvantages. That is why I said low cost strategy is better than differentiation strategy.