BUSS3 A* Performance - The Value of Porter’s 5 Force Model

For Christmas 2012 I asked Santa for a brand new BUSS3 case study. The truth is, like many of you, there is nothing I enjoy more than analysing and thoroughly deconstructing a BUSS3 case study and the accompanying appendices.For many of you the SunTravel case study, used during the tutor2u revision workshops, was an early Christmas present and nothing short of an exceptional revision material. Whilst delivering a session on A performance to the students in Manchester and Leeds we discussed the value of using a SWOT and Porter's 5 force model in helping to really get under the skin of a BUSS3 case study. Utilising these two models can provide an over-arching structure to ensure you better understand the case as well as helping you to grasp the severity, necessity and importance of the competing and conflicting issues that the examiner includes. In short, Porter's 5 force model is better than a gift from Santa, it is a gift from the Agods!

To use Porter's own words, the 5 force model allows a business (in this case you) to better understand 'the underlying economic drivers which shape the market'. Put simply, using Porter's model will allow you to understand the external market forces which impact upon and influence the business at the centre of the BUSS3 case study.

Porter suggests that 5 forces broadly shape the competitiveness and attractiveness of a market. The reason this is so useful is that all of the BUSS3 papers so far have required students to consider the attractiveness of a market and judge the proposed strategy for success. The great thing is the model is really easy to apply and intuitive. Here goes…

Intensity of Rivalry

Here you should consider how intense the rivalry is. So often I hear students proclaim 'Ryan the data tables say there are only 3 or 4 competitors in this market so rivalry is low'. Wrong. I ask them to consider the likely size or market share of rivals if so few exist and suddenly it becomes clear that this is a rather intense market which is dominated by a few large operators. In this instance you should consider the implications of this. Take the SunTravel case. The information outlined that they faced one main rival in the form of GoStay Travel as well as an increasingly competitive number of specialised online providers. Clearly although the number of rivals is generally low the pressure of competing with GoStay is intense because of their superior market share and hugely more impressive revenue per sale and operating profit margin. The trick here is to not just look at the number of rivals but how large, strong, effective, lean and efficient they are in comparison to the case study firm.

The Threat of New Entrants

Having considered the current rivalry now consider the likely risk, probability and severity of new entrants in to the market. The case study nearly always provides information on rivals i.e. whether the market is likely to expand or contract, the number of operators or market share percentages and projections. All of these factors provide indicators of how real the threat of new entrants actually is. Again using the SunTravel case as an example it referred to the fact that customers were increasingly preferring to book online (rather than traditional travel shops) and package their own holidays using various holiday providers for the different components (e.g. flights, transfers and accommodation). Clearly these changes in consumer preference had given rise to a huge influx of specialist, niche and component entrants, many of which were online with lower fixed costs than Sun Travel. Clearly this makes the market more competitive and reduces the attractiveness of the market making SunTravel's challenge even more difficult.

With 2 out of the 5 forces considered we are already starting to understand that the holiday market in which SunTravel operates is fiercely competitive and not overwhelmingly attractive. My students and I like to grade a market or industry. The easiest way to do this is by giving it a star rating out of 5. So far, having considered 2 of the 5 factors, the UK and EU holiday market has a 0/2 star rating for attractiveness.

Power of Suppliers

Supplier power refers to the firms upon which the BUSS3 business relies. Clearly this takes on additional prominence when dealing with product or manufacturing businesses rather than service-based organisations. Consider how reliant the business is upon its suppliers. If reliant upon a small number of suppliers or specialised suppliers then the business is likely to be exposed. However you should also consider the volume of supplies needed. Innocent smoothies are a cracking example given the astronomical amount of fruit needed to mass produce their smoothies. A supplier price hike would have significant implications upon their operating costs, pricing flexibility and operating profits. The easiest way to comprehend how this factor shapes the market is ask yourself who has more power, the BUSS3 business or their suppliers. As SunTravel is a vertically integrated business their exposure to this competitive force is not alarming high for this reason I would now give the market a 1 out of 3 star rating. Cunning students could consider SunTravel's staff as suppliers (as they operate the service) the fact they are likely to strike reduces SunTravel's security.

Power of Buyers / Customers

This refers to the power of customers and buyers. For SunTravel this is simple. The customers have a large and growing level of choice and therefore power. This is exemplified by the number of customers packaging their own holidays and turning to online providers or GoStay. SunTravel is therefore at the mercy of consumer preference and their price sensitivity. The market now appears to be a 1 out of a possible 4 star rating. No good!

Threat of Substitutes

You can think about this two ways. Firstly the number of holiday substitutes is currently limited but growing – not good. Secondly, consumers wanting an international holiday require a holiday company as it involves specialist services like aircraft flights meaning customers need a holiday company like SunTravel – which is good news for them. With this balance in mind I would award this force half a star making, in my opinion, the UK and European holiday market in which SunTravel operate, and 1.5 Star industry. Judge for yourself whether or not you consider 1.5 out of 5 to be attractive! Personally I think the market in relatively unattractive and SunTravel requires a significant change of strategy. Anyway you get the idea and hopefully you see how this model could be deployed in January.

As for my Christmas wish, sadly there was no new BUSS3 case-study under the tree on Christmas morning. The great news though is that on the 15^th of January 2013 AQA will provide what Santa could not and I can't wait.

The clock is ticking ladies and gentlemen so re-tweet this blog and get back to the revision.