Porters Five Forces Analysis Marketing Essay

Introduction

The main purpose of applying the five forces analysis is to identify the key factors in the industrial environment that influence the organization’s capabilities to position itself in order to merit competitive advantage. It is a framework for industry analysis and business strategy development formed by Michael Porter.

An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the hotel industry).Some industries are more profitable than others, the answer lies in understanding the dynamics of competitive structure in an industry. Porter’s Five Forces Model is one of the most influential analytical models for assessing the nature of competition in an industry.

Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five “competitive forces” are the threat of new competitors’ entry, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the degree of rivalry between existing competitors.

Porter’s five forces diagram.

http://www.b2binternational.com/china/images/stories/sections/porters_five_forces.gif

Source: www.valuebasedmanagement.net

Introduction to hotel industry

A hotel is an institution that provides a short-term paid residence. In the past, hotels were just a small room with a bed, cupboard, and a table, but now it has totally changed to something else. Nowadays hotels are luxurious residences that include different types of facilities. Most of the hotels now include spas, swimming pools, fitness centers, conferences’ rooms and international restaurants. Even the rooms are now bigger and include many comfort facilities.

Malaysian Association of Hotels (MAH) was established in 1974. It is now being officially recognized as a National Hotel Association. Now it sets the regulations and minimum acceptable levels for being a legal verified hotel in Malaysia. It has 2,184 registered members and 17 more hotels in the next 3 years.

Table: Hotels and rooms supply 2010/2011

Bargaining power of suppliers

The term ‘suppliers’ comprises all sources for inputs that are needed in order to provide goods or services. The two key suppliers to the Hotel industry are labors and real estate

Over all the suppliers in this market are defined as property owners, developers and real estate companies, interior design and furnishings companies, architects, management and training service providers, marketing companies, industry consultants and ICT manufacturers.

Category

Rating 1-10

Remarks

Number of suppliers

6 (medium)

– Considerable no. of local and Chinese contractors

– Small number of quality training providers and skilled employees.

Availability of substitute

6(medium)

– Substitutes for property (real estate agents), designers, and employees are available.

Switching cost category

2 (low)

-substitute for hotel are few..

Suppliers threat of forward integration

2 (low)

– Suppliers are highly unlikely to forward integrate into the hotel business

Industry’s treat backward integration

5 (high)

-hotels could backward integrate to own real estate company.

– They could have their own training wing.

Contribution to quality

5 (high)

-Property development and real estate companies add to the quality

– so does skilled labor and quality training

Contribution to cost

2 (low)

-Most suppliers are much smaller companies compared to hotel companies.

-Hence hotel companies have a much higher bargaining power.

– suppliers contribution to cost is low

Overall, the number of suppliers for the Hotel industry is quite large and each supplier is very small in size compared to the leading players in the industry. These few powerful players are indispensable to the suppliers. Substitutability of the suppliers is also quite feasible and inexpensive. Switching between real estate agents is not goingto affect a particular Hotel company significantly. However in terms of quality, training centers for employees and ICT manufacturers who provide IT systems thatfor property management are relatively more difficult to replace. Therefore in terms of substitute suppliers industry attractiveness is moderately high.

Unlike the supplier is threat of forward integration, Industry is threat of backwardintegration is pretty high since large hotel chains like ITC or IHCL would have no qualms expanding into the real estate business or developing employee training facilities in-house. Similarlythe industry is contribution to both cost and quality isrelatively high. Overall bargaining power of suppliers is low and industry is attractiveness in terms of supplier bargaining power is high (4).

BARGAINING POWER OF BUYERS

The bargaining power of buyers determines how much customers can impose pressure on margins and volumes.

The end-users of the high-end hotel industry are:-

Leisure traveler

Business traveler

Customers who require space for conferences or other events

Category

Rating 1-10

Remarks

-Number of Buyers

7(high)

-Buyers are numerous and small in size.- Losing one customer cannot going to make a difference.

– Their bargaining power is low

-Availability of substitutes:

(medium)

-Multiple substitutes for a given hotel or brand is available

-Informal accommodation for friends and family is available alternative

-Corporate guest houses for the business traveler

-Switching cost:

2(low)

-Switching costs arenegligible

– Buyers are price sensitiveexcept in the

-Buyer’s threat of backward integration:

5(high)

– Customers are will notconstruct a hotel or buy a place of residence for each place they visit.

-Contribution to quality

2(low)

– Additional facilities suchas spas, gyms etc. are usedmy hotels to improve thequality of customer’s stay

-contribution to cost

5(high)

– Brand image is veryimportant in this industry and leads to extra cost, Additional amenities,training of staff, locationrent (like close to airport)etc.

-Buyers profitability

2(low)

– Low buyers profitability- In the mid

-segment, there are numerous buyers, of very small profitability

– In the premium segment, buyers are very affluent, and they have greater bargaining power comparedto the mid-segment

Industry’s threat of forward integration.

4(medium)

-low chances or forward integration

 

This industry has many customers who are relatively very small in size. Loss of a single customer has little impact on a hotel company and this drives down the buyers bargaining power. Similarly buyer’s threat of backward integration is almost impossible and so the industry is under threat of forward integration. However the industry does have several substitutes such as camping and recreational vehicles for tourists, corporate guesthouses for business travelers and other informal means of accommodation with friends and family. Switching cost for all these options is very low, except for the RV. Apart from the provision of accommodation, hotels also provide additional facilities and services such as restaurants, gyms, spas, conference halls, ball rooms, lounges etc. Therefore their contribution to quality as well as cost for the buyer is very high.

Barriers of entry

Category

Rating 1-10

Remarks

Economies of scale

5(high)

High economies of scale- Very important to operatea chain of hotels in multiplelocations, especially for the premium segment. This reduces thedependence on tourismtrends at any given location

Product differentiation

4(medium)

Highly differentiated- Brand names and valuesare very important in attracting and retaining customers

-brand identity

4(medium)

Brand is very important.

-switching cost

2(low)

-low switching cost

-capital requirement

4(medium)

-capital intensive.

-staff, décor, infrastructure e.t.c is very expensive.

-Access to technology

3(moderate)

-ICT is very important for property management.

-Access to raw material

4(medium)

-Labor, land and other essentials are easy to obtain.

-government protection

3(moderate)

-The tourism industry receives government.

-exit barriers

2(low)

-High exit barriers.

Specialized assets for the industry.

Brand names are very important in the hotel industry. Companies use their strong brand names to attract new customers and retain old ones. Besides, economies of scale are also a huge factor in this industry. Profitability of hotel chains is drastically higher than individual operations. A new entrant cannot compete with established players in terms of quality, price and even services. If they cannot establish significant economies of scale.Being a capital intensive industry with a large amount of it tied down in fixed costs, makes entry more difficult. Similarly high exit barriers due to specializedassets make the industry less attractive.The hospitality industry is strongly influenced by travel and tourism trends. Government protection for the tourism industry is very high and this in turn rubs off on the hotel industry making it thereby making the industry attractive in general.

Competitive power of rivalry players

This aspect describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results or leads to pressure on price margins and on profitability for every single company in the industry. The following table shows the analysis of the rivalry between hotels.

factors

Ratings (5)

Remarks.

No. of competitions

4 (high)

Small number of large operators

Industry growth

3 (medium)

Annual growth rate of 15%

Fixed cost

1 (low)

Highly capital intensive

differentiations

4 (high)

Strong brand name commands a very high price premium.

Switching cost

2 (moderate)

Low cost switching to similar brands

Openness to terms of sale

4 (high)

Price, taxes etc. are known

Excess capacity

2 (moderate)

Only 70% rooms occupied

Strategic stakes

2 (moderate)

Although large hotel companies have diversified they still have a majority stake in the hotel industry.

Summary – Porter Five Forces

Factor

Current

Future

 

Rating(5)

Key Rationale

Rating

Key Rationale

 

 

 

Threat of New Entrants

reasonable 

 5

sensible 

 

 

 

 

 

 

 

Competitive Rivalry

reasonable 

5

sensible 

 

 

 

 

 

 

 

 

Threat of Substitute Products

3

average 

4

reasonable 

 

 

 

 

 

 

 

 

 

Supplier – Relative Buying Power

sensible 

4

reasonable 

 

 

 

 

 

 

 

 

 

Buyer – Relative Buying Power

   reasonable

4

 reasonable

 

 

 

 

Conclusion

Porter five forces analysis was used effectively to determine the hotel industries in Malaysia based on treat of new entrants, competitive rivalry, and treat of substitute products, suppliers-relative buying power, and buyer-relative buying power. Hotel is a very flourishing industry in Malaysia with not so many substitutes so the treat of substitute products is very low. Rivalry between hotels is not very high because rivalry is based on classification (5-star hotels compete against other 5-star hotels). Finally in the future relative buying powers will decrease because there will be many new entrants.

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