3.4 Sector and Industry: The Porter´s Five Forces Model
The Porter five forces framework: rivalry existing competitors, the threat of new entrants, power of suppliers and buyers, substitute products and services, is based on the perception that every organizational strategy encounters a fair share of opportunities and threats from its external environment. A competitive strategy is often dependent on the industry structures and the ability to assess their change. Porter argues that a strategist aims to ensure they recognize and handle a competitive environment by keeping their eyes on the rivals or by contemplating a broader perspective that competes against those organizations (Bruijl, 2018). It is significant that an organization that intends to expand to a new environment understands these forces, how they influence the sustainability of the business, and how to play around them in gaining a competitive edge in the new market. Without careful analysis of these forces, it is almost impossible to get ahead of rivals and capitalize on a unique brand.
The five forces framework is quite an influential and straightforward tool. Organizations must identify certain powers in line with their business situation using an outside-in perspective (Scholes et al., 2008). It distinguishes the five forces that drive competition and the potential effect on profitability. The market structure affects the strategic behavior of organizations. For instance, market success depends on the competitive strategy. Subsequently, organizational success is partly dependent on the market structure. Mohapatra (2012) says that “Individual forces and their collective impact will change as the government policies and macroeconomic and environmental conditions change” (p. 274). It is vital for industry analysis. The organization can get a deeper understanding of how profitability depends on the forces in a specific industry. This framework could help in the analysis of the consumer discretionary products industry and provide insight into competitors. It could also help in identifying the rules and in getting a better view of the industry trends.
Figure 1 Porter’s five forces model (Wu & Xu, 2013, p. 7)
3.4.1 Threat of New Entrants
In China, retailing has been a highly protected industry. The state- and collective-owned retailers remained crucial players with almost absolute entry barriers, hence felt almost no threats from the new entrants even though the performance was generally poor. This situation started to change after the government initiated many reforms in the economic system, progressively relaxing its control over the country’s distribution channels. This relaxation happens over 4 years (Zhuang et al., 2003). According to Zhuang et al., the country began by abolishing the traditional procurement and selling systems. According to Zhuang et al., the number of consumer goods directly controlled by the government decreased by over ten times between 1978 and 1994. The government relaxed its control over prices. In 1978, the prices of 97% of consumer goods were decided and controlled by the government-initiated plans but this number declined to almost 6.3% by 1996.
The next thing that happened in the country was that the government restored and developed free markets in rural and urban areas. Even though China had some free markets in the 1970s, they were mainly not welcome to foreign countries (Zhuang et al., 2003). The government not only restored the old free markets but also aided in the development of new ones in the cities and countryside. It allowed more businesses to enter the market. The government encouraged and supported individuals and private enterprises to do business in the channels. These relaxations decreased entry barriers in the Chinese market, leading to an increased number of participants entering and consequently changing industry composition. Three new entrants, namely individuals, producers, and foreigners, were crucial in various transformation stages.
Manufacturers in China had a long history of selling most of their products directly to the final consumer. Businesses relied on their retail institutions to sell products, accumulated experience along the way, and used the experience of other companies. The retail institutions that were in existence during this period were a major force outside the industry. However, their impact has been weakening over the years. Before 1978, the retail sector had no foreign or Chinese/foreign joint ventures (Zhuang et al., 2003). Yet, individuals, foreigners, and overseas Chinese could enter the market through joint ventures, retail arms of manufacturing joint ventures, franchising, and distribution. Some popular retailers in developed countries, such as Walmart from America, Carrefour from France, and Metro from Germany, entered the market, becoming the existing competitors. In consumer discretionary products. Companies from other countries also had an interest in the exponentially growing China market. By 1996, foreign companies in China had increased sharply. Today, the Chinese are adopting an even more open policy towards foreign companies in the industry as one of its commitments to the World Trade Organization (WTO). After the country joined the WTO, the government started changing policies to open the economy to foreigners. For instance, Qixun Siebers states that after China joined WTO, “Foreign retailers began a phase of aggressive expansion in China encouraged by an increasingly open business environment. All the restrictions on foreign ownership and the number of branches that non-Chinese retailers could open were lifted by 2004. Foreign retailers benefited from preferential treatment and faced fewer obstacles when operating in China” (2011, p. 29). This trend suggests that with time, the market will get more entrants and may become the main threat to existing companies, including Viega Holdings.
Both potential and existing companies will influence the profitability of Viega Holdings in the Chinese market. The entry barriers are the key factor when analyzing the threat of new entrants. E-commerce is among the fastest-growing industries in China. It is vital to understand that new entrants into the industry will not only improve the production ability and generate new resources, but also take control over a share of the market. Consequently, this will result in a conflict of production materials and a decrease in the profit level. Without profits, it would be necessary for the long run for the company to either change its strategy or abandon the market. The threat of new entrants depends on the entry barriers and a reflection of existing companies to new entrants. “The threat of new entrants is a function of the height of entry barriers. The higher the entry barriers are, the weaker is this competitive force. The sources of the entry barriers include economies of scale, brand loyalty, cost advantages, customer switching costs, initial capital requirement, government regulation, etc” (Lee et al., 2012, p. 1784). Several entry barriers could be of significance in this context, such as capital demand, sales channel development, government behavior and policy, and so on.
There are several critical barriers to entering the market that can be essential in understanding the situation of Viega Holdings in the Chinese market. Supply-side economies of scale are one factor that could create a barrier. If a company is required to provide large quantities of goods, it has to invest a lot. Those firms that lack such capabilities are likely to get unsustainable. Notably, it also prevents small firms from entering the market. It is the case with the consumer discretionary products industry in China. As discussed in the industry analysis section of this paper, it is clear that most rivals of Viega Holdings possess massive resources. They are companies that have been in the industry for years or have substantial support from market share or home companies. Companies such as TOTO and JOMOO Group have been in existence for a period and record an incredible number profit-wise. It might not be favorable to Viega, but it is an added advantage because new entrants have to compete on that level, which reduces potential rivals substantially.
Customer-switching cost in the industry is relatively low because companies charge products depending on demand. In other words, it is not like a subscription-based market where customers get locked in and are unable to break the demand mid-way of the contract. Residential consumers can demand house fittings, plumbing equipment, and heating and cooling systems from whatever brand they perceive as better in the market. Commercial demand is also contract-based. A real estate company may decide to order systems from TOTO or Viega Holdings as long as they meet the need at that particular time. It does not depend on whether they ordered or purchased from the given company before because efficiency, quality, and professionalism are all factored into consumer choice in the consumer discretionary product industry. Notably, consumer choice is influenced by many factors so Viega must keep innovating and researching to understand the cause of a change in customer loyalty for a particular brand.
Restrictive government policy is a crucial entry barrier in the industry. The Chinese government seeks to maintain order in the market, so every company must adhere to some rules and regulations. These regulations intended to protect consumers and companies impede potential entrants that would otherwise have entered with selfish goals or engage in unlawful dealings that seek to disadvantage the competitors. By considering all the discussed elements of entrant threats, entrepreneurs must devise ways to evade current restrictions.
3.4.2 Industry Competitors
Industry competitors explain that a given company has to overcome the intensive competition between existing companies. In any given industry, the majority of benefits the companies enjoy are closely related to each other. The goal of any firm in the market is to improve its competitive advantage. As a result, companies continually conflict strategically to create more competitive power and earn a larger market share. Competition in most industries occur in advertising, the introduction of products and after-sale service, and price. Companies leverage this by engaging in a series of differentiation strategies to create a unique proposition in the market. For China’s consumer discretionary products industry, numerous firms are offering similar products. But, they are differentiated based on quality, brand perception, market reach, price, and other elements. Understanding how the best-performing companies in the market attract customers could be crucial for Viega Holdings to increase its footprint in China. Overall, the threat of competition in the industry is relatively high.
The rivalry among the existing companies in the industry will likely become more intense because of more entrants and their accelerating expansion. According to Zhen (2007), China is lifting a series of restrictions on partnerships and geographical locations for multinational companies, raising the prospect of stiffer competition. Over the past years, the market has gotten more saturated with domestic and foreign companies seeking to expand their operations and capture the growing market associated with urban and countryside developments. Fortunately, Viega has been operating in the country for a while now and has vital information that it can use to forecast potential changes. The situation necessitates closing the gap between market leaders as soon as possible to impede entrants in the long run and address the challenge of a decline in consumption.
Although China’s consumption rate relative to production has decreased, it is evident that the market for consumer discretionary products gets saturated with top brands. As the number of companies becomes high in the domestic market, the market structure becomes increasingly perfectly competitive. Notably, a perfectly competitive market entails price-setting using the forces of demand and supply. With a high number of firms, it is easy to have an excess supply, especially if the demand cannot sustain all the firms. Similarly, the firms will be forced to lower their production or lower the prices further to attract extra demand. In most cases, however, brands use differentiation to set their products and services apart from the rest. Viega Holdings must consider the implications of investing substantial amounts in the market to deal with this competition. If the expenses go beyond a certain point, the company would be affected negatively.
Companies have similar competitive strategies in the e-commerce and consumer discretionary products industry. As past analysis has shown, most companies rely on advertising using social media, celebrities, corporate social responsibility, and strategic integrated marketing campaigns for the case of international brands. The resemblance of a firm’s competitive strategy to another makes it even harder for the consumers to make a rational choice of spotting the best or quality brand. It is usually necessary to have a unique competitive strategy, and Viega must innovate and seek ways to improve its operations to set itself apart. Without doing so, it is easy for the brand to lack an appeal in the market. Eventually, it could even its current market share to those brands continuously improving and innovatively transforming their processes.
3.4.3 Threat of Substitute Products or Services
All firms in the industry are competing, in a broad sense, with industries producing substitute products. These substitutes limit the potential returns by placing a ceiling on the prices firms in the industry can profitably charge (Porter, 1980). “Similar customer needs can be fulfilled by the products or services of different businesses or industries. The degree of the threat of substitute products and services is determined by the number and closeness of substitutes as well as existence of other technologies” (Lee et al., 2012, p. 1784). Product substitution happens mainly because a firm’s customers believe that a similar product can perform the same function at a better price. For example, a consumer may opt for Viega’s heating and cooling systems over JOMOO products, if they believe that by doing so, they can save money and still achieve the same operational objective. It may happen for any company at any given time in the industry. What matters most is not reducing the prices to attract more customers. Instead, a company can form a deep understanding of the customer and create demand specifically for their products.
A threat from substitutes results from having alternative products with lower prices or better performance parameters for the same purpose. It can attract a significant portion of the market share, reducing the potential sales of the existing players. It is also crucial to consider complementary products because these influence the impact of having close substitutes. Factors essential in determining the threat of substitutes include brand loyalty, close customer relationships, switching costs for customers, the relative price for performance of substitutes, and current trends. A firm prefers to operate in a market with minimum close substitutes as this could imply a larger market share than having numerous companies dealing with the same product. Viega Holdings may have to focus on differentiation and innovation because China’s market has many manufacturers of the same products, such as heating and cooling systems, plumbing equipment, fittings, and wall fixtures.
Viega Holdings must adopt innovation to address the decline in consumption in mainland China relative to other developed countries, more so because of stiff competition. The company has to develop a better link between itself and the newly developing cities and commercial centers. It must leverage technology improvements in China to minimize costs and increase value to the customer. It should be able to enhance distinctiveness using the internet, optimize the delivery of products, and gain a better understanding of the customers to reduce the impact that close substitutes can render on the business.
3.4.4 Bargaining Power of Buyers
Similar to suppliers, the buyers or customers can successfully bargain some of the profits. In an open market where demand and supply determine the prices of products, customers can bargain openly to obtain lower prices, whereas, in most store-based retail operations, the price is fixed. The power of the customer to bargain depends on several factors, such as the number of alternatives available to choose from, the number of goods the customers buy at an instance, and the customer’s ability to bargain (Porters, 1980). In the future of China’s market, the winner will be the company that best and most efficiently satisfies the consumer’s needs. Notably, customers are increasingly aware of the 1993 Consumer Rights Protection Law. Together with the consumer laws at the city and province level, the National government of China has passed other legislation to offer extended legal protection to consumers. These laws include the General Principles of Civil Law, the Product Quality Law, the Unfair Competition Law, and the Advertising Law (Yang, 2013). By understanding how to protect themselves and by actually using these laws to protect themselves, consumers will further enhance their power.
3.4.5 Bargaining Power of Suppliers
The relationship between the manufacturers and suppliers is two-sided: cooperation and competition. Competition between the suppliers and firms in the market is on how a profit “pie” gets divided. A significant portion is likely to go to the party having the greater bargaining power. Several factors can influence bargaining power, for instance, the dependency degree between the parties, the alternatives available for each party to choose from, production quantities, and financial capabilities (Porter, 1980). Western countries differ from China in many ways. For instance, in Western countries, there is a tendency for big retailers to become more powerful relative to the producers. On the contrary, In China, the bargaining power of suppliers was high because of shortages. Despite this, they could not raise the price as they wished in the traditional system. They could decide to either supply or not supply and also specify the volume they would distribute. As the economy developed after the 1970s and the government gave up the planned price system, market conditions have shifted from the seller’s market to a buyer’s market. During the 1990s, supply grew exponentially to a point where the bargaining power reduced substantially. According to a survey done by the Domestic Trade Ministry of China shows that in 1997, 84.7% of 609 items important to people’s life and production were in a balance between supply and demand (Zhuang et al., 2003). It signals that the situation of China’s market has gotten transformed into a buyer’s market.
Under these conditions, the power of the companies selling consumer discretionary products is increasing gradually. Some suppliers of parts used in making cooling and heating systems, for instance, require the companies to pay only after they have secured a market for their products. Yet, the bargaining power of some famous brand producers is still strong. The companies in this industry will likely adopt a strategy that will increase their power. Viega has similar market conditions as most domestic companies selling the same products. However, Viega has relatively better supplies because most of focusing on quality products. Yet, there is a need to continuously adapt a strategy that further secures more suppliers and increases its bargaining power. It could help lower the cost and increase the profit margin.
| Force | Effect | Cause(s) |
| The Bargaining Power of Suppliers | High | The Chinese market has been a buyer’s market, and they will face more retailers.More choices in their shopping than ever. |
| The Bargaining Power of Suppliers | Moderate | The lifting of import quota control.The lower tariffs.The large quantity of procurement volume can reduce the suppliers’ profit margin further. |
| The Threat of Entrants | High | Easier entry into the market. |
| The Threat of Substitutes | High | Multinationals can enter Chinese retailing with both physical stores and those selling through online platforms. The undeveloped Chinese e-tailing may get lost to foreign operators. |
| The Competitive Rivalry | High | More entrants and their accelerating expansionChina is lifting a series of restrictions on Joint Ventures partnerships and geographical locations for multinational companies, raising the prospect of stiffer competition. |
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