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Among the primary issues discussed using porters five forces model is industrial attractiveness. This is a model that investigates profitability through the integration of the five models where a market is termed as attractive if the five forces combined result to profitability (Dobbs, 2014 pp. 33). However, in cases where profitability drops after the five forces have been aligned the industry is said to be unattractive.
Your business idea?
The report focuses on industrial attractiveness concept using the model to determine if the decision to venture into the driving school industry in East London is viable.
Your industry and some of the competitors?
The driving school training is an industrial has gone through exponential growth in the past decade due to increase in cars this requiring more drivers. The industry is wide as every individual needs knowledge on driving at some point in their life. However, the industry is highly seasonal as most customers are teenage students who are only availability for training during school holiday seasons such as summer, spring and fall. The main competitors in this industry are schools that are more advanced thus providing commercial driving training. These companies pose a stiff competition as they are considered to be better equipped for training. Seer company and defensive driving school hold about 48% of the market share and are thus the biggest competitors.
In analysis of the market the analysis model that shall be incorporated is porter’s five forces theory. Michael Porter’s five forces present a framework for market analysis that helps in the determination of the appropriateness of the market when making investment decisions. These forces are used to analyze the external environment and the effect it is expected to have on the business. The forces include supplier bargaining power, competition, buyers bargaining power, the presence of close substitutes and ease of entrance into the market by new firms (Dobbs, 2014 pp. 33).
Ease of new entrants in the market presents one of the five forces in porter’s model. The proposed investment is in a new driving school to be located in east London. This is an industry where there is no restriction on entry into the market. The threat of new entrants is thus very high posing the issue of competition.
The other area of focus is on buyer bargaining power where buyers are seen to have little influence on the market price. In instances where buyers have high bargaining power, they can control the market thus forcing businesses to engage in price wars which leads to a decline in profits (Dobbs, 2014 pp. 36). To deal with the challenges associated with high bargaining power companies can incorporate loyalty programs that provide incentives to consumers. Incentives can be presented through the provision of gifts among other advantages that help in the development of customer loyalty (Dobbs, 2014 pp. 39).
Supplier bargaining power, on the other hand, refers to the extent to which suppliers can influence the price of services, raw materials, and labour (Dobbs, 2014 pp. 39). Supplier bargaining power is influenced by the size of the market and the number of suppliers available. When there are few suppliers available their bargaining power is very high allowing them to increase the price of materials required (Dobbs, 2014 pp. 40). In this case scenario there are numerous suppliers, and thus they have low bargaining power which makes the market attractive.
Competition is another Factor incorporated to determine market attractiveness using Porter’s model. In competition, the model measures the intensity of rivalry among firms in the market that deal with homogenous products (Dälken, 2014). High rivalry in the market leads to a decline in profit margins as it pushes forms towards reactive strategies such as price wars (Dälken, 2014). However, rivalry and competition are essential in the market as they foster indusial growth and brand development. The level of rivalry seen in this industry is quite high thus forcing companies to develop unique services which foster industrial growth (Dälken, 2014).
Availability of close substitutes in the market also determines its attractiveness. When they are numerous substitutes to a product at a lower price, consumer tends to prefer the substitute in order to save money (Dälken, 2014). The driving school industry has no substitutes as individuals are expected to learn through these schools before acquiring a license. This makes the market quite attractive as there is a high population of young people in the area who need driving lessons.
According to Porter’s model on market analysis an attractive market has low supplier bargaining power, low threat of new entrants joining the market, low consumer bargaining power, low intensity of competition, and decreased threat of close substitutes. According to the discussion above the market is seen to be attractive but also requires more focus in some areas such as competition. However, the discussion brings out the industry as attractive thus making the business venture viable.
Dälken, F., 2014. Are porter’s five competitive forces still applicable? a critical examination concerning the relevance for today’s business (Bachelor’s thesis, University of Twente).