Industry analysis using Porter’s five forces attempts at examining the level of competition within an industry and predicts a favorable business strategy development. It borrows from the economics of an industrial organization to formulate the five essential marketing forces that determine the industry’s competitive nature and likely profitability; thus its attractiveness (Lehr, 2015). ‘Marketing attraction’ in this context refers to “the overall industry profitability.” An ‘unattractive’ sector is one in which “the combination of these five forces drives down the overall profitability” (Altuntaş, Semerciöz, Mert & Pehlivan, 2014). Hence, a very ‘unattractive industry’ would be one approaching “pure competition,” whereby the ‘available profits’ for all firms are normalized.
Porter’s five forces include “three forces from ‘horizontal’ competition: threat of substitute products or services, the threat of established rivals, and the threat of new entrants; and two forces from ‘vertical’ competition: the bargaining power of suppliers and the bargaining power of customers” (Altuntaş et al., 2014). Porter developed his five forces analysis in reaction to the then-popular SWOT analysis, which he found non-rigorous and ad hoc (Lehr, 2015). This model has been widely used to various situations, and is found to assist businesses to improve their competitiveness.
Porter’s Five Forces
Threat of New Entrants
Since the hotel sector falls under the “profitable markets,” it is characterized by high returns; thus attracting new participants (Cheng, 2013). This occurrence eventually reduces profit margins for all the players (Altuntaş et al., 2014). Unless the implementation of the new technology being considered by Ritz Carlton Hotel Group aims at hindering new arrivals, the ‘abnormal profit rate’ will continue trending towards the zero line in what is commonly referred to as “perfect competition.” Some of the factors dictating the threat caused by newcomers, which the stakeholders need to understand and particularly incline their technology towards, include (Cheng, 2013; Altuntaş et al., 2014):
- The existence of barriers to new entries. An attractive business or sector (for this matter) is characterized by stringent entry requirements with low exit conditions. Therefore, very limited number of companies can enter with the non-performing ones given clear exit routes.
- The investment capital to start such ventures are so high
- They require ‘economies of scale’
- Product differentiation are in large scale
- No brand equity
- Strict government policies and control measures
- Established brands enjoy customer loyalty, thus difficult to compete with them
Threat of Substitute Products or Services
Availability of similar products and services by competing firms increases the likelihood of consumers to opt for them, especially if the organization treats them better than their previous choice. Therefore, Ritz Carlton Hotel Group should consider implementing a technology that offers the following possibilities effectively (Neuhofer, Buhalis, & Ladkin, 2015):
- The possibility of holding onto the exiting buyers and enticing potential customers
- User friendly and cheaper when compared to those used by competitors
- Unique and classy in nature (properly differentiated)Difficult to
- Non-depreciative in quality and performance
Bargaining Power of Customers (Buyers)
Buyers play critical roles in every industry through their consumption input. Their bargaining capabilities are widely known as “the market of outputs: the ability of customers to put the firm under pressure, which affects the customer’s sensitivity to price change” (Neuhofer et al., 2015). In this regard, Ritz Carlton Hotel Group can develop a technological product that enables it to reduce buyer power, such as one which facilitates a loyalty program. According to Lehr (2015), the buyer power is high if the buyer has many alternatives.
Bargaining Power of Suppliers
Similar to buyers, this category of industry players impacts the cost of products significantly. Specifically, their negotiation abilities are often referred to as “the market of inputs, since the supply of raw materials, components, labor, and services such as expertise to the firm automatically becomes a source of power over the firm, especially if there are a few substitutes” (Neuhofer et al., 2015). Therefore, Ritz Carlton Hotel Group needs to develop or implement a technological product which ensures the following possibilities effectively (Neuhofer et al., 2015):
- Ease of switching suppliers at affordable costs
- Facilitating robust differentiation of supplies
- Improves the strength and reliability of the channel of distribution
- Facilitation of competition among the existing industry suppliers
Intensity of Competitive Rivalry Within the Industry
Usually, the level of competition in the hotel industry is what makes it an attractive business. An excellent technology should enhance the following objectives (Lehr, 2015):
- Sustainable and competitive edge through design and innovation
- Effective competition between and among both online and offline players
- Effective management of the advertisement costs
- Provision of high transparency levels
According to Mihalic and Buhalis (2013), they might “use value chain or another type of analysis in conjunction.” Therefore, Ritz Carlton Hotel Group should only use the five forces model at ‘the line-of-business industry level; it is not designed to be used at the industry group or industry sector level’ (Mihalic & Buhalis, 2013). Moreover, Neuhofer et al. (2105) argues that for a diversified company, such as Ritz Carlton Hotel Group, the first fundamental issue in corporate strategy is the selection of industries in which the company should compete; and each line of business should develop its own industry-specific, five forces analysis.
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Altuntaş, G., Semerciöz, F., Mert, A., & Pehlivan, Ç. (2014). Industry forces, competitive and functional strategies and organizational performance: Evidence from restaurants in Istanbul, Turkey. Procedia-Social and Behavioral Sciences, 150, 300-309. https://doi.org/10.1016/j.sbspro.2014.09.066
Cheng, D. S. (2013). Analyze the hotel industry in porter five competitive forces. Journal of Global Business Management, 9(3), 52-57. Retrieved from http://www.jgbm.org/page/7%20David%20S.%20Y.pdf
Lehr, D. D. (2015). An analysis of the changing competitive landscape in the hotel industry regarding Airbnb. Retrieved from https://scholar.dominican.edu/cgi/viewcontent.cgi?referer=https://scholar.google.com/&httpsredir=1&article=1189&context=masters-theses
Mihalic, T., & Buhalis, D. (2013). ICT as a new competitive advantage factor-Case of small transitional hotel sector. Economic and Business Review for Central and South-Eastern Europe, 15(1), 33-56. https://www.researchgate.net/profile/Tanja_Mihalic2/publication/269113660_ICT_as_a_competitive_advantage_factor_-_case_of_small_transitional_hotel_sector/links/55b61f1008ae9289a08a9da4.pdf
Neuhofer, B., Buhalis, D., & Ladkin, A. (2015). Smart technologies for personalized experiences: A case study in the hospitality domain. Electronic Markets, 25(3), 243-254. https://doi.org/10.1007/s12525-015-0182-1
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