Porter’s Five Forces Analysis of Samsung

Industry Rivalry

This element is especially significant for Samsung as the other White Goods multinationals like LG, Nokia, and Motorola not to mention Apple are engaged in fierce competitive rivalry. Indeed, Samsung cannot take its position in the market for granted as all these and other domestic white goods players operate in a market where margins are tight and the competition is intense. Apart from this, Samsung faces the equivalent of the “Cola Wars” (the legendary fight for dominance between Coke and Pepsi) in emerging markets like India where Samsung has to contend and compete with a multitude of players domestic and global. This has made the impact of this dimension especially strong for Samsung.

Barriers to Entry and Exit

The White Goods industry is characterized by high barriers to entry and low barriers to exit especially where global conglomerates like Samsung are concerned. Indeed, it is often very difficult to enter emerging markets because a host of factors have to be taken into consideration such as setting up the distribution network and the supply chain. However, global conglomerates can exit the emerging markets easily as all it takes is to handover and sell the business to a domestic or a foreign player in the case of declining or falling sales. This means that Samsung has entered many emerging markets through a step-by-step approach and has also exited the markets that have been found to be unprofitable. This is the reason why white goods multinationals like Samsung often do their due diligence before entering emerging markets.

Power of Buyers

The power of buyers for white goods makers like Samsung is somewhat of a mixed bag where though the buyers have a multitude of options to choose from and at the same time have to stick with the product since they cannot just dump the product, as it is a high value item. Further, the buyers would have to necessarily approach the companies for after sales service and for spare parts. Of course, this does not mean that the buyers are at the mercy of the companies. Far from that, they do have power over the companies, as most emerging market consumers are known to be finicky when deciding on the product to buy and explore all the options before reaching a decision. This means that both the buyers and the companies need each other just like the suppliers and the companies, as we shall discuss next.

Power of Suppliers

In many markets in which Samsung operates, there are many suppliers who are willing to offer their services at a discount since the ancillary sectors are very deep. However, this does not mean that the companies can exert undue force over the suppliers as once the supply chain is established; it takes a lot to undo it and build a new supply chain afresh. This is the reason why white goods makers like Samsung invariably study the markets before setting up shop and also take the help of consultancies in arriving at their decision.

Threat of Substitutes

This element is indeed high as the markets for white goods are flooded with many substitutes and given the fact that consumer durables are often longer term purchases, companies like Samsung have to be careful in deciding on the appropriate marketing strategy. This is also the reason why many multinationals like Samsung often adopt differential pricing so as to attract consumers from across the income pyramid to wean them away from cheaper substitutes. Further, this element also means that many emerging market consumers are yet to deepen their dependence on white goods and instead, prefer to the traditional forms of housework wherein they rely less on gadgets and appliances. However, this is rapidly changing as more women enter the workforce in these markets making it necessary for them to use gadgets and appliances.

Stakeholders

This is an added element for analysis as the increasing concern over social and environmentally conscious business practices means that companies like Samsung have to be careful in how they do business as well as project themselves to the consumers. For instance, white goods makers are known to decide after due deliberation on everything from choosing their brand ambassadors to publicizing their CSR (Corporate Social Responsibility) initiatives.

Conclusion

As the diagram above indicates the relative strengths and the weaknesses of each element, we can now conclude this analysis with the theme that as the global economy integrates and more emerging markets open up, companies like Samsung are at an advantage because they have already established themselves in many markets. However, it must also be noted that each market is unique and hence, Samsung must not adopt a one size fits all strategy and instead, must approach each market differently. In conclusion, Samsung can take pride from the fact that being an Asian conglomerate, it has managed to break into and hold its own against many western multinationals that have been in this business for decades.

Porter's Five Forces

What is the Competitive Forces Model?

Competitive forces model is an important tool used in a strategic analysis to analyze the competitiveness in an industry. This model is more commonly referred to as Porter’s Five Forces Model, which includes five forces — intensity of rivalry, threat of potential new entrants, bargaining power of buyers, bargaining power of    suppliers, and threat of substitute goods and/or services. In our competitive forces model, we include a sixth force, power of complementary goods and/or services providers. This model helps company understand the risks in the industry it is operating in and decide how it wants to execute its strategies in response to competition.

Intensity of Industry Rivalry

There are multiple factors which can impact the intensity of rivalry within an industry.

• Concentration of rivals – the more competitors, the more intense the rivalry
• Product homogeneity – industries selling very similar products are likely to be more competitive
• Consumer switching costs – if it costs consumers a lot to switch from one company’s product to its competitor’s, the company is likely to face less competition
• Excess production capacity – when there is excess production capacity available in an industry, there is a higher chance of increased rivalry as companies find the industry more attractive to enter
• Brand loyalty – rivalry is high when customers have low brand loyalty
• Network effects – refers to the positive effect on the value of a product when there is an additional user of the product. When a network effect exists, the value of a product or service increases as more people are using it.

 Threat of Potential Entrants

Threat of potential entrants are impacted by things such as:

• Brand loyalty
• Cost advantage or economies of scale – threat of potential entrants tends to be higher when companies can realize economies of scale by mass production
• Switching costs
• Network effects
• Excess production capacity
• Government regulation – industries with strict government regulation pose higher barrier to potential entrants
• Barriers to exit – when exiting an industry requires a high costs, companies are less likely to enter the industry in the first place
• Investment in specialist equipment – companies also consider the amount of capital need to be invested in specialist equipment when entering an industry
• High fixed costs – things like specialist equipment, properties and land are examples of high fixed costs
• Specialized skills – when entering an industry required specialized skills or techniques, there is a higher barrier to entry for potential entrants

 Bargaining Power of Buyers

The bargaining power of buyers is high when:

• Buyers are large or concentrated, so their decisions to purchase a product/service have bigger impacts on the company
• Buyers purchase a large percentage of volume
• Buyers have good information about the product, such as product pricing and demand

Buyers are price sensitive when:

• There are many industry competitors, giving the buyers more choices with lower prices and better product attributes
• There are many substitutes available
• Switching costs are low, so buyers are indifferent between purchasing products from the company or its rivals
• Product homogeneity is high

 Bargaining Power of Suppliers

The bargaining power of suppliers is high when:

• Suppliers are large or concentrated
• Suppliers can credibly threaten forward integration in the industry
• Rivals purchase small percentage of the suppliers’ products

Purchasers’ price elasticity is high when:

• There are few alternative suppliers available
• There are few substitute inputs available
• Switching costs are high for purchasers

                                  Threat of Substitute Goods/Services

High threat of substitute goods or services are harmful to businesses because they limit profit potential. Companies are likely to experience high threat of substitute goods/services when:

• Switching costs are low for customers
• Substitutes have superior pricing relative to the current products
• Substitutes have better attributes or performance characteristics

                        Power of Complementary Good/Service Providers

Complimentary goods or services can add value to the existing products in an industry. However, when complements have unattractive features or do not provide any value to consumers, they can actually become an issue for the industry by slowing growth and limiting profitability. When developing strategies for a business, decision makers should consider how they can potentially encourage complement providers to integrate and become a part of the business. Successful integration with complement providers is likely to expand market opportunities and bring profit-enhancing benefits to the business.