It power of suppliers, the power of buyers,

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It power of suppliers, the power of buyers,

It is human
nature to plan for everything we have. So, it only makes sense to use strategy
to plan for the business to be successful. Strategy, according to the Oxford
Learner’s Dictionaries (2017), defines strategy as “the process of planning
something or putting a plan into operation in a skillful way”. Therefore, I go
to say that all companies use different strategic tools to ensure that their
company is successful and profitable. This essay seeks to introduce Porter’s
Five Forces as a strategic tool. Throughout the essay, I will explain what this
strategic tool is meant to achieve, expound on the five forces and analyse HSBC
Retail Banking business using this strategic tool. I will also demonstrate the
limitations Porter’s five force has when dealing with contemporary issues and
the problem that emerges. Finally, I will introduce a concept known as
Strategic Myopia, explain how this concept relates to the Porter’s Five Forces’
limitations and how it could be avoided.

            According
to Oxford Reference (2017), Porter’s five forces is a “Framework for analysing
the balance of power within a particular industry and hence overall
profitability”. They further explain that this framework identifies how
competition and profitability of the firm are driven by the five forces: Threat
of new entrants, the power of suppliers, the power of buyers, the threat of
substitution and rivalry among the existing competitors. The last four forces
are believed to feed back into the first force by driving the rivalry between
existing competitors up. This will be discussed at much length later in this
essay. This strategy tool of industry analysis was first developed by Michael
Porter in 1979. It was the used to see where the power of the company lies in a
business situation by highlighting the strengths and weaknesses of the company
(Porter, 1979).  This is thought to be
one of the widely-used strategy tools in strategic management planning and
industry structure analysis.

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            The
overall aim that Porter’s five forces are meant to achieve is to see how the
collection of strengths of these forces help determine the optimal profit
potential of an industry (Porter, 1979). The main uses of this strategy tool
can be divided into three aims: statistical analysis, dynamic analysis and
analysis of options (Recklies, 2001). Statistical analysis helps determine how
attractive the industry is by focusing on how profitable the company could
estimate to be. The second aim is dynamic analysis. This helps the companies
identify who among them is driving change in an industry. The final aim is an
analysis of options. This the development of options due to the insights they
have about how attractive an industry could potentially be due the intensity
and power of the forces (Recklies, 2001). This could make an organisation take
a different or new direction in strategy. All in all, Porter’s five forces aims
to allow a structured and systematic market structure analysis and competition
(Recklies, 2001).

    Porter’s five forces consist of five
components. The first force is the threat of new entrants. This focuses on how
these new entrants bring new capacity, a desire to share the market and in most
cases substitution (Porter, 1979). The second and third forces are the power of
suppliers and buyers. Supplier power is defined as the ability of the suppliers
to raise or drive the prices in the market up or reduce the quantity. (CGMA,
2013). Buyer power is defined as the ability of the buyers to lower or drive
the prices in the market down (CGMA, 2013). The fourth force is the threat of
substitution. This is how close the alternatives to existing products or
services are in the market and their influence of making the market prefer
these substitutes (CGMA, 2013). The fifth force is rivalry between existing
competitors. Usually, the competitors are many and are often approximately the
same size and power (Porter, 1979). Usually, this force shows how indifferent
some products and services by the companies in the industry are and how that
could affect profitability (CGMA, 2013).

            HSBC
is the company I have chosen to demonstrate how Porter’s five forces may be
used. HSBC is one of the world’s top and largest banks in the world. It has an
approximation of 38 million customers worldwide (HSBC, 2017). Its primary
business is Retail Banking(HSBC,2017). The first force is low threat of new
entrants. This is because of regulation. According to the Office of Fair
Trading (2010), new entrants must be authorised by the appropriate regulatory
authority. They continue by establishing that they face uncertainties, and
sometimes difficulties, in the process used to obtain the authorisation. This
is a rigorous process and a delay and makes it hard to raise capital. HSBC is
already an authorised entity that is continually expanding into other regions.

This has helped in maintaining their long-established presence.

             HSBC retail banking has a medium bargaining
power of suppliers and buyers. This is medium. This is because retail banks
source their raw material from different suppliers (Fern Fort University, no
date). If suppliers in the retail banking are not as active, this would
negatively impact margins. However, if they have influenced this will give them
the ability to raise the prices. For the buyers, the demand for retail banking
is high (UK Essay, 2013). This customer wants to buy the best service at the
lowest possible price. If we look at HSBC, they have managed to tackle this
problem by having a smaller but more powerful customer base. This enables HSBC
to have a higher bargaining power over the buyers. In conclusion, we see that
the medium power of suppliers and buyers negatively impacts the overall
profitability of HSBC (Fern Fort University, no date).

The
fourth and fifth forces somehow relate and high for HSBC retail banking and are
both high. The threats of substitutes and rivalry in existing competitors
largely depend on the kind of innovations and trends that are happening within
the retail industry. There are new innovations coming into the retail banking
that are being influenced by the change of the customer needs, environment and
socio-demography (HSBC, 2017). We see HSBC digitising all their process and
shutting down some of their local banks. There are new products such as mobile
banking that reduce the costs and increase the profitability of the retail
banks (Fern Fort University, no date). HSBC focuses a lot on relationship
management (HSBC, 2017). This has allowed them to focus on what the customer
needs and minimise the threat of substitutes. The competitor rivalry is high
because we see supermarkets such as Tesco expanding into retail banking. The
only way they can manage this is constantly innovating to be able to keep a
competitive advantage. HSBC can manage competitor rivalry by investing more in
sustainable options and ways of creating a sustainable business as we can see
in the sustainability policy papers (HSBC, 2017).

Like
every strategic tool, there are limits to how much this tool can deal with
contemporary issues. Recklies (2001) believed that the main weakness of
Porter’s five forces is how it was developed. It was developed in the late 70s
in a period that macroeconomists saw the global economy is characterised by
cyclical growth. During this time, industries were experiencing stable and
predictable growth and change compared to the economic environment today
(Recklies). The retail banking industry then looked at the profitability and
survival of the company that mattered the most. It was essential that there was
optimization of strategy to be able to achieve the objectives the retail banks
want to achieve. The problem that emerges with this strategic tool is that when
used it focuses on a narrow point of view that makes the planning of the future
the retail industry unclear and uncertain. This could prove problematic for
companies when they are required to change and the most successful of the
competitors tend to survive but not without a blowback.

HSBC
has outlined two-part long-term strategies in their strategic report: Investing
in retail and wealth business with local scale and developing their
international network (HSBC, 2017). This was established to optimise their
capability in the observation that long-term trends such as key drivers of GDP
growth being increasing global connectivity, Asia and Middle Eastern economics
have their expected growth in GDP to be three times more by 2050 and a growing
middle class (HSBC, 2017). Therefore, HSBC focuses on the current long-term
trends and tries to maximise the trends to work. However, I do feel that their
strategy is general in relation to Porter’s five forces. HSBC uses a strategy
called “Managing for growth” (UK Essay, 2015). 
This has aided HSBC by developing and strengthening the company. This
was established in 2004 and was done to encourage profitable growth. We can see
this with the two-part long strategy that HSBC is currently using. Therefore,
HSBC focuses on the current long-term trends and tries to maximise the trends
to work. The question that comes to mind is if this is sustainable enough to
keep the company profitable and growing. If using this strategy to ensure that
the retail banking business will be profitable in all the regions, they will be
more susceptible to lose without a strategy that does help the see the future
(UK Essay, 2015). This is where strategic myopia plays a big role. It is clear
the HSBC does not have a clear idea of what could potentially happen in the
future.

As
an introduction to the concept, I would like to define Myopia. According to the
Oxford Learner’s Dictionaries (2017), it describes myopia as the “inability to
see what the future might be over the longer term”. This also describes the
inability to think beyond the current situation.  It is described as a form of shorts
sightedness. Therefore, we can deduce the meaning of Strategic myopia as the
inability to see the results what the process of planning for the company will
have in the future. This is in line with what was described during the lecture
of strategic myopia. The companies do not see the opportunities beyond their
immediate situation thereby assuming a perfect market.  This concept is relevant to the limitations
of Porter’s Five Forces faces when dealing with today’s contemporary issues.

The HSBC analysis demonstrated early is a perfect exam. Looking at its place in
the retail industry and how bank is affected by the different forces now and a
slight view of the future.

The
limitation of Porter’s Five Forces is that it views the market and the industry
narrowly (Johansson, 2013). We are looking at HSBC’s retail banking industry
while we know that the changes stem from any market within the financial
industries. This means that other forces that can be clearly seen in other
industry that may affect the retail banking industry are not considered. This
is because Porter’s five forces focus its analysis on macro analysis at an
industry level (Grundy, 2006). Using the analysis of HSBC Porter’s Five Forces
as an example, we see that it is focusing on new entrants that are in retail
banks without seeing how other entities that are not in the retail banking
could affect their overall profitability and competitiveness. It also gives a
simplistic view of industry value chains (Grundy, 2006). This encourages
strategic myopia because some industries such as the retail banking industry
have many levels that may affect how far a company can strategies for the
future. This prevents them from seeing and planning accurately using these
forces their profits are affected in the long run. One of the best ways to
ensure that Strategic Myopia is minimised it to combine other strategic tools
such as PEST to encourage specifics that may affect the company’s profitability
in the future. This will the inclusion of other forces will help have a clearer
view of the markets and how other markets that may seem unrelated may be
affecting industries such as retail banking. HSBC is known for using multiple
strategic tools to ensure that the full circle is meet.

In conclusion, Porter’s
Five forces are an easy strategic tool to use as demonstrated earlier with its
use on HSBC’s retail banking. The use of this information to get a broad but
industry narrow view of the retail industry environment has help as gain the
competitive position of HSBC retail banking. From this, I established that the
major problem encountered while using this strategic tool is the fact that it
was developed at a period of cyclic growth in the economy. This gives a false
view that the market today is likely to behave the same. With this, I used the
concept of strategic myopia to show the drawback of Porter’s Five Forces and
how it can be overcome by using multiple strategies. All in all, Porter’s five
forces shows a good overview of the forces in the industry that may affect profitability.

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