Competitive 5 Forces and Forms of Corporate Structure
Modern organizations operate in an extremely competitive environment. As a result, they are consistently required to scan and understand their micro and macro environments to understand their rivals, and changes in consumer behaviour. The process requires marketing research and analytical skills backed by models such as Porter’s five forces (Hitt, Ireland & Hoskisson 2016). In addition, the management should understand the impact of the organizational structure on its competitiveness. Whereas the five forces analysis helps understand the external environment and how competitors are positioning themselves to attract and retain more customers, the organizational structure ensures effectiveness in the use of vital resources within the organization. Combining these two models is quintessential in creating lean organizations, that are adaptable thus can easily strategize to outdo competitors. In addition, lean corporate structures optimize functionality and performance thus positioning them for sustainable competitive advantage (David & David, 2016). It is upon this backdrop that this essay seeks to achieve two goals. First, it will critically discuss Porter’s five forces model. Secondly, the essay will discuss the strategic disadvantages and advantages of different forms of organizational structures.
Question Two: Competitive 5 Forces
The five forces model was developed in 1979 by Michael Porter. According to Hitt et al. (2016), the model identifies and evaluates five factors that influence the profitability of a business in relation to its rivals in the same industry. The five forces model is classified as a macro tool that enables analysis of the external environment. By doing this, it aids a business to understand sources of competitiveness, underlying causes of profitability and anticipated changes that might influence the future of the industry and businesses. The information collected through this analysis can be used in making strategic decisions and developing competitive strategies that enhance the position of an organization in the industry (Dobbs, 2014) and evaluating entry decisions in an industry. The five forces are; competitive rivalry, bargaining power of suppliers, bargaining power of customers, threat of new entrants and threat of substitute products.
a. Competitive Rivalry
This factor describes the intensity or level of competition and the ability of competitors to undercut each other. According to Grundy (2016), the intensity of rivalry is determined by the number of competitors, size of the industry, and switching costs among consumers. Organizations are in a constant struggle to maximize their market share. As a result, they adopt different strategies to outsmart their rivals. These strategies range from price based to non-price based. Price competition often makes it difficult for new firms to enter the market as it undercuts profit margins. On the other hand, non-price competition entails differentiating products and services. According to Wright (2020), the intensity of rivalry in UK retail industry is high. Most firms including Tesco use the price-based strategy. This strategy has enabled Tesco to outdo its competitors thus taking the market leadership position and the third largest retailer globally. The UK retail indsutry has powerful competitors especially discounters such as Lidl and Aldi which constantly engage in price-wars with Tesco (Wright 2020). To counter this intensity, Morrison (2018) reports that Tesco took over Booker in a £4bn deal that has seen it realize better economies of scale.
b. Threat of New Entrants
This factor describes the possibility of attracting new firms into an established industry. Grundy (2016) argues that industries with less barriers such as low regulations and less capital investment attracts more new entrants than those with high entry costs and barriers. Entry of new firms weaken the position of incumbents. The threat of new entrants in the UK retail industry is low. This is attributed to the capital intensiveness of the industry. Tesco is not worried about new entrants because it achieves economies of large-scale operations (Morrison, 2018). New entrants might not afford such privileges as economies of scale, and access to lean distribution networks, to compete the incumbents.
c. Threat of Substitutes
Substitutes are products or services offering same benefits as the products produced in a given industry. This threat not only lowers the profit margins for the incumbents but also reduce their demand and increase competitiveness. Hitt et al. (2016) identify three types of substitutes; product-for-product substitutes, substitution of need, and generic substitution. In the UK retail industry, this threat is moderate because there are alternative outlets where customers can access similar products. These substitute outlets include local stores, pop-up shops, food trucks, farmers markets, kiosks, mobile retail units and e-commerce platforms. To counter these substitutes, Tesco has increased switching costs of customers by producing own labels which continue to attract loyal customers (Barrie, 2018; Cocozza, 2019). Its brands include Everyday Value, Freedom and Organic.
d. Supplier Power
The bargaining power of suppliers is determined by factors such as their concentration in the market, fragmentation of firms in the industry, switching costs and threat of competition among available suppliers. Fewer suppliers have high bargaining power. Similarly, the intensity of fragmentation influences bargaining power in the sense that when firms work collaboratively, they can force suppliers to lower prices (Grundy 2016). In addition, high costs of switching between suppliers increases suppliers bargain. The power of suppliers in the UK retail industry is low. Tesco has more than 2,500 suppliers across the UK and others from abroad. This translates to low switching costs and high bargain for Tesco which reduces the power of suppliers. Poulter (2016) reports that Tesco has in the past been accused of using this advantage to act like a ‘mafia’ and squeeze suppliers into making price cuts.
e. Buyer Power
This factor describes the ability for customers to bargain or negotiate prices. Customers have high bargaining power when they are few and concentrated. Secondly, low costs of switching between suppliers can influence the intensity of bargains among buyers (David & David 2016). The buyer power in the UK retail industry is high because of the large number of suppliers. Tesco competes against many other retailers such as Lidl, Aldi, Iceland, Sainsbury, Morrisons, Waitrose, and ASDA which reduces switching costs (Wright, 2020). Customers demand the best bargains forcing firms to lower prices. The intensity of bargaining has reduced profitability for Tesco, which has reacted by adopting a lean supply chain.
A critical analysis of the five forces shows that where as the model has been useful to Tesco, as it guides them in scanning the macroenvironment , it is notable that the model pays little attention to external players such as the government (Hitt et al. 2016). This follows a recent case where Tesco is accused of blocking rivals from opening nearby stores. Failure to acknowledge such external factors makes it less effective in understanding the environment.
Question Two: Strategic Pros and Cons of Various Forms of Organizational Structure
Organizations have to be structured in a manner that fits their strategic environment. For this reason, organizations adopt different corporate structures. According to Andrade (2016) organization structure refers to systems outlining how activities are organized and directed within an organization to achieve set goals and objectives. Organization structures provide frameworks used by companies to distinguish authority and power, responsibilities and roles and the manner in which information is accessed and within an organization (Hitt et al. 2016). There are three main structures; simple, multidivisional and functional structures.
a. Simple Structure
The simple structure is characterized by centralized authority, little formalization, little specialization, and low departmentalization. It is preferred by small and medium sized organizations. It is a bureaucratic structure where the business owner makes all the decisions and performs monitoring duties (George, 2020). The owner can delegate duties and responsibilities to few individuals who act as leaders for the different departments namely salesperson and cashier. This model is illustrated in figure 1 below. This model is applied in most IT start-ups or small retail businesses such as Yapster (Platt 2019). This start-up provides services to support the gig economy and flexible working. Simple organizational structures enable the business owner to control all the activities of the business. As a result, such organizations are flexible and can make rapid decisions to counter competitors. This structure allows companies to respond quickly to changes in the micro and macro environment since it eliminates layers of management that delay decision making. Its main disadvantage is that it overwhelms the business owner, who has to make all the decisions. Secondly, the absence of the owner could paralyze all operations in the organization (George, 2020). In addition, the focus on day-to-day operations of the firm might divert the attention of the owner from making long term strategic decisions.
Figure 1: Simple Organization Structure (Hitt et al. 2016)
b. Functional Structures
The functional structure entails departmentalization of business functions based on specialty. They could be divided into marketing departments, finance and accounting, production, human resource management, maintenance department and materials management as evident in figure 2 below (Hitt et al. 2016). These departments are headed by a dedicated team of managers who control the departments and the organization.
Figure 2: Functional Corporate Structure (Hitt et al. 2016)
The advantages of this structure are that it ensures efficiency and stability since the upper management controlling the other departments are highly skilled and experienced. In addition, their expertise helps the organization make informed and balanced strategic decisions that enable organizational growth and development (Ahmady, Mehrpour and Nikooravesh, 2016). This structure is also characterized by standardization of repetitive tasks therefore it encourages specialization. The routine involved in performing these tasks reduces instances of errors thus cost saving for the firm.
On the contrary, functional corporate structures have demerits such as the lack of accountability since each department functions independently. This may be problematic when the organization is required to pursue collective goals. The management might find it difficult to unite and organize all the departments to work in unison. In the case of Yapster, its growth will necessitate introduction of functional departments thus forcing the management to transition from the simple structure to a functional structure. This will likely happen as the organization has registered strong and admirable growth since it started its operations in 2015. In anticipation of this change, Jaakkola and Hallin (2018) caution that organizations should be careful not to destroy value adding processes by introducing bureaucratic procedures. Instead, the transition should be done seamlessly to enhance the competitiveness of Yapster.
c. Multidivisional (M-form) Corporate Structure
Multidivisional structures are organized based on dynamics such as marketing areas, geographical segment or product lines served. Each division integrates people from each of the areas. For instance, as Yapster grows into a multinational, its European division might be composed of all the different divisions including marketing areas, product lines, accountant teams, research and development teams, human resource teams and sales teams (Platt 2019). All these teams will be required to report to the division head for the European region. Jaakkola and Hallin (2018) add that in multidivisional structures, an organization groups its operations-based on operating divisions and corporate offices, where each division represents a separate business. The divisions are self-contained, distinct and have their functional hierarchies.
Figure 3: Multidivisional Corporate Structure (Hitt et al. 2016)
Assuming that Yapster grows to other geographic regions including the USA, Asia and Africa, then it will have to adopt the multidivisional corporate structure (Platt 2019). According to Bai, Feng, Yue and Feng (2017), this structure promises benefits such as simplifying control since it enables an organization to accurately monitor the performance of the different divisions. Secondly, the multidivisional structure enables comparison of the different divisions therefore enabling the organization to introduce internal measures to enhance performance and resource allocation across all the divisions. Third, organizations using this structure can benchmark against performing divisions thus allowing managers of underperforming decisions to engage in internal performance improvement initiatives to better their management scores (Yai et al 2017). Fourth, each of the divisions can easily engage in specialized services that ensure they are less distracted by competing interests across other divisions.
The only disadvantage with multidivisional structure is that when mismanaged, it could trigger unhealthy competition between divisions thus discouraging internal learning (Ahmady et al. 2016). For instance, mismanagement could result into internal politics where some divisions want to hold onto their best practices to prevent other divisions from performing better than them.
This two-part essay addresses two questions. The first question uses Tesco to illustrate discussions on the Porter’s five forces of competition. This section identifies five forces and their impact on the competitiveness of Tesco. For instance, Tesco experiences high intensity of rivalry, moderate threat of substitutes and low threat of new entrants. The bargaining power of suppliers is low while the power of customers is high. The second part of the essay identifies three corporate structures; simple, functional and multidivisional. Yapster is used to illustrate the advantages and disadvantages of each structure.
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