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Porters Five Forces. Innovation through Business, Engineering and Design

How does rivalry in a market as well as customer expectations influence the process of a design concept from a business perspective?

Hausarbeit (Hauptseminar) 2016 22 Seiten

BWL - Offline-Marketing und Online-Marketing

Leseprobe

Contents

Summary

1. Introduction
1.1. Background
1.2. Problem
1.3. Method

2. Theory

2.1. Market competiveness according to Porter’s Five Forces
Porter’s Five Forces
2.2. Customer expectation according to Miller

3. Empirical findings
3.1. Interview with The case company’s designer
3.2. Observation in the manufacturing facilities and artefact analysis
3.3. Secondary research

4. Analysis of design concepts from a business perspective
4.1. Competitor analysis
4.2. Customer expectation analysis

5. Results and further analysis
5.1. Results from the perspective of competiveness
5.2. Results from the perspective of customer expectations

6. Conclusion

7. Appendix
7.1. Table of Figures
7.2. The case company Products visualized
7.3. Visualization of competitors products
7.4. SWOT analysis of The case company and their products
7.5. Brainstorming ideas with cardboard
7.6. Brief by The case company
7.7. Bibliography
7.8. References from the World Wide Web

Summary

This report describes the importance of market research and awareness of customer expectations from a business perspective in the design process for a new product.

To develop a successful product knowing competitors and customer needs can avoid many obstacles where market demands are not met.

In this report a papermill, The case company is discussed as an example. The company wants to launch a new product range of home office stationary, entering a new market for products made by fiber board.

Porter’s five forces method is presented as a tool to analyze market rivalry among competitors within the market of stationary. This method is used to determine profitability and chances of a product launch on the marketplace of home office supplies. Afterwards Millers insights on customer expectations are applied on the design concepts.

The analysis showed that there is very high rivalry among competitors in the home office accessory market and little chance for The case company to enter successfully. Furthermore is there a clash of the companies own idealization of their products and customer perception of The case company’s products.

However, there are opportunities in further markets for fiber board products that look more promising, e.g. in the packaging industry.

These finding emphasizes how important it is to base a product development not only on emotions and assumptions, but on facts and a well-done market research.

1. Introduction

In the first chapter, the background of the report will be set, introducing the project and company The case company. Then, the context of the project task is described, explaining why competitor analysis and customer expectations are crucial for a product launch.

1.1. Background

To create a meaningful, successful product, market insights and knowledge about customer expectations are needed. Knowing the customer’s desires helps to develop meaningful products that meet market demands. Besides being aware of the motivation for a product introduction, knowing the products market is crucial. Competition can make or break a products future. The desire to expand or enter a new market can lead to many avoidable mistakes. These hurdles can be circumvented by doing a thorough competitor analysis so that no unpleasant surprise waits around the corner.

In this project a papermill, is discussed. The case company has a more than 200 year tradition of making stable, high quality paper products such as boxes and cardboard suitcases. It has strong associations to its roots in Småland. The company went bankrupt several times throughout their history and managed to successfully restart from scratch. Its peak reached the company in the 1960s to 1970s when more than 200 employees worked in the factory and a signature box, the Unica box was created. Today The case company wants to break free from its dusty image and restart after yet another bankruptcy. This is intended to be done by creating a new line of high quality home office supplies that should be distributed via a to-be-set-up webshop putting emphasis on the Swedish craftsmanship of their products1.

1.2. Problem

This report will critically analyse the design concepts for the case company by competiveness and customer expectations. Finally it will be critically reflected up on the case company’s current situation and opportunities for the future.

How does rivalry in a market as well as customer expectations influence the process of a design concept from a business perspective?

1.3. Method

Information for this report was gathered through primary sources such as interviewees and observations as well as secondary sources such as literature research.

The first method applied was a semi-structured interview according to Bryman and Bell (2011) with The case company’s designer, using a predefined questionnaire with open questions. At the same time observations of the manufacturing facilities, archives and artefacts of the case company were made. The gathered information was then validated and evaluated by secondary research, especially literature research.

2. Theory

In this chapter the theoretical framework will be set by describing Michael E. Porters approach on competitiveness among market participants. Afterwards customer expectation insights by J.A. Miller will be presented.

2.1. Market competiveness according to Porter’s Five Forces

Competiveness is often looked at by considering who are the competitors in a market and how do they act to maintain or expand their strength (Aaker & McLoughlin, 2010). The degree of competition can shape a market and has dramatically risen over the last fifteen years when globalization became the fuel for rivalry (Trout & Rivkin, 2010). Michael E. Porter discovered the importance of awareness of competition early on and developed methods to analyse the degree of competition within an industry.

Porter’s Five Forces

Michael E. Porter (1979) claims that competition within an industry is based on five forces that influence rivalry: Threat of new entrants, bargaining power of suppliers and buyers as well as the threat of substitution. Companies need to be aware of these forces to be able to act and establish a strategic agenda on how to deal with rivals. The method is usually applied to incumbent organizations, but can also be used for companies to determine whether or not to enter a certain industry (Henry, 2011).

The threat of new entrants describes the ease of rivals to enter into existing markets. The likelihood of entry is based on the significance of entry barriers into a market (Porter M. E., 2004). Porter (2008) identified seven entry barriers:

– Supply side economies of scale, when cost per unit declines, the higher the output quantity. This threat is especially common in industrial businesses and logistics.
– Demand side barriers of scale, when network effects increase the buyer’s power (Porter M. E., 2008).
– In industries where established brands exist in the market it will be difficult to influence customer loyalty through differentiation. New entrants will need to spend disproportionally much to change customer awareness (Henry, 2011).
– Needing capital to enter a market can prove difficult. This is especially true for sunk cost like research and development and companies with limited access to funding (Porter M. E., 1979).
– Cost advantages independent of size, like first-mover advantages or patent ownership (Henry, 2011).
– When entering a new market, the products need to be sold. These distribution channels cannot always be accessed by new entrants due to a lack of network, financial backup or competitor opposition (Porter M. E., 2004).
– The government can regulate markets to protect customers as e.g. the liquor market (Porter M. E., 2008).

The power of suppliers becomes visible when there are few suppliers in the market being able to dictate prices (Porter M. E., How competitive forces shape strategy, 1979). When purchasers depend on the products suppliers sell, the bargaining power of suppliers becomes stronger (Henry, 2011). This might be because the product the supplier offers is unique with high switching costs.

When products are standardized and customers buy them in high volumes, bargaining power of buyers is high (Porter M. E., 2008). Their bargaining power is enhanced when consumers face low switching costs and quality is less important to them (Henry, 2011).

Threat of substitute is present when consumers face low switching costs and products can be replaced easily (Henry, 2011). The more attractive the price-performance ratio of a substitute, the lower the profitability of an industry (Porter M. E., 1979).

2.2. Customer expectation according to Miller

Customer expectation is closely linked to customer satisfaction. Customer satisfaction is a serious key performance indicator and therefore customer expectations need to be a starting point in a design process (Yang, 2007). Expectations perform as comparable standard for a customer pre purchase, using a product or service as well as post purchase (Buttle, 2004).

Miller (1977) discovered four levels of customer satisfaction when customer expectation is met:

– The ideal level, the maximal possible level of satisfaction a product can reach
– The predictable level, the assumptions and hopes of a products function,
– The minimum tolerable level, the minimal function a product should at least have,
– The deserved level, the level which a product should reach concerning the effort, price, etc. spend on it.

The area where customer expectation is exceed to where customer expectation is hardly met, is the zone of tolerance (Berndt & Brin, 2008). A company should offer its product within this range to not dissatisfy customers. This zone can be influenced by price or willingness to accept the products level of expectation (Berndt & Brin, 2008).

3. Empirical findings

This chapter includes a short description of the case company and all the information that was collected during the company visit, interview and observations.

3.1. Interview with the case company’s designer

The interview gave insights in the company’s background as well as their current struggles and desires for the future.

The case company filed for bankruptcy one and a half years ago. Since then The case company stopped their operations, marketing activities and visibility on the market place. Only already placed orders are processed and ensure the company’s current survival. That is why the company wants to create a new strategy to re-enter the market and she has been brought on board 8 month ago.

The case company wants to emphasize their craftsmanship, high quality and “made in Sweden” in relationship to their products.

She claimed that the home office line should look like HAY’s (a competitor) products and be a flat pack solution to be distributed via a webshop in Scandinavia only. Customer relationships should be long-term with retention effects.

The customers that the case company currently has are long-term customers that have been buying their products since the 1960s. However these customers are rapidly decreasing. Another kind of customers is the ones that want an individual solution as display, accessory or “show-off” storage for e.g. shop windows. They actively searched for a manufacturer like The case company and contacted them with their individual needs. The case company is not favouring these customers, because they want their customer to use the products for their initial purpose such as e.g. travelling for the suitcases. The case company has close customer relations when creating a product for them, being able to make a prototype within two days and then discussing possible changes with the customer to ensure all wishes are met. Product delivery can be face-to-face if possible.

3.2. Observation in the manufacturing facilities and artefact analysis

The case company’s products are manufactured by hand from big sheets of fibre board, which are sourced from Austria. It is then cut and folded in machines and riveted. It is not possible for the process to include glue in the production. Products come ready assembled due to the riveting. Products looks and parts have not been changed since the 1960s.

The products surface can be treated to create structure or colours. Colours are usually subtle, but can be adjusted to customer needs. Details on the products include leather and metal.

When touching the products the quality and thickness of the fiber board becomes tangible. By looking at the boxes, it is not possible to estimate the materials strength. It does not look very trustworthy.

3.3. Secondary research

The market of stationary was closely analysed. It is one of one of the least profitable retail industries” (Biery, 2013) with digital distribution channels increasing the pressure (GfK, 2015). The market for home office accessories has stagnated across Europe by -0,1% (GfK, 2014), consolidating the mature, western markets it has decreased by 4,5% annually during the last couple of years (IBISWorld, 2015). Online commerce is putting increased pressure on stationary retailers throughout Europe (GfK, 2015).

The biggest markets for stationary are Russia, France and Germany, with Sweden and the other Scandinavian countries ranging on place 12 to 15 in market size (GfK, 2015). Of the total stationary market, only 22% is assigned to accessories and storage products (IBISWorld, 2015).

Major competitors are HAYs, Vitra and Granit quality and target customer wise. Bigso and Ikea in regards to price pressure, Montblanc and Chevobre in regards to substitute materials such as leather.2 Bigso is an interesting competitor as they are a spin-off of The case company, copying the exact same style and emphasis on “originating from Sweden”, but produce at lower prices in China.

4. Analysis of design concepts from a business perspective

In this chapter rivalry in the market the case company prefers to enter are discussed as well as a short insight on the market for further design concepts. Afterwards customer expectations for the case company’s fiberboard based products are presented.

4.1. Competitor analysis

Porter’s five forces determine the attractiveness and profitability of a market (Henry, 2011). As the to-be-developed-product should be a part of stationary, a deeper look at the stationary is needed to avoid the design of a meaningless product. Possible products for a home office line would include, e.g. folders, pen holders, paper baskets, small storage solutions, etc. Conducting a competitor analysis for the market of stationary, Porters five forces was used. It reflects on the micro perspective of a company and how it is influenced by the five forces and what this means to possibilities and the company’s strategy as summarized in figure 1.

illustration not visible in this excerpt

Figure 1: Porters Five Forces applied on the home office accessory market and the case company (self-made)

The threat of new entrants is not very present since the market is saturated and already declining with competitors harvesting the little that is left in revenues. The stationary market has struggled since digitalization grew and considered to be “one of the least profitable retail industries” (Biery, 2013). The market is in decline, especially in the biggest economies in Europe (GfK, 2014). It is difficult for small companies to survive whereas profit is consolidated in known brands and superstores (Messe Frankfurt Group, 2015).

However, the entry barriers for new entrants are what is bothering The case company right now. The case company has little chance to compete on the economies of scale and reduce costs per unit, as they are not intending to move manufacturing to a low labour cost country or change their manufacturing processes to more effective ways. Another disadvantage is that their products so far are non-flat-pack solutions. It might be an opportunity to create a flat-pack-solution and increase the economies of scale in a logistic context.

The capital needed to enter the home office supplies is comparably low as machinery and knowledge exists within the company. However, The case company lacks distribution channels. They want to set-up a webshop, but have an unexplored network where to retail their products beside the webshop.

A positive aspect is the little regulation by the government in the home office supply market.

The threat of substitutes is existent since consumers face low switching costs in the market of home office supplies. There are plenty of products form different companies to choose from. Price is one factor in choosing substitutes. One example is “Bigso”, an The case company spin-off offers the same products as The case company style-wise at a much lower price. The substitution is not only on price, it is also the material that competes with The case company’s paperboard. Substitutes in the high quality to luxurious segment are often made in wood, leather or metal, giving the customer a more stable and durable product choice.

Since the growth of digitalization more and more customers store documents digitally, reducing the usage of paper or avoiding it all together.

The case company lacks differentiation. They themselves claim that they want their home office products to be the same as HAY’s regarding price, style and quality. The market already offers a product that the case company wants to place on the market, making itself redundant.

The power of suppliers is not very high. Even though The case company relies on fiber boards, they can be sourced from different suppliers with a good selection of options across Europe (PricewaterhouseCoopers , 2012).

Since fibreboard is a standardized product which is easily available from different suppliers, The case company may have a good bargaining power as buyer. However, compared to other companies that use fibreboard, the case company does not purchase large quantities. Moreover is the quality important to them which leads to reduced negotiating influence by The case company.

The Intensity of competitiveness rivalry is very high in the market for stationary. The biggest markets for stationary are Russia, France and Germany (GfK, 2015) with Sweden and the other Scandinavian countries not ranging in the top. This implies little market share if The case company keeps on insisting to offer the home office accessories in Scandinavia only. Furthermore, only 22% of the home office supply market is accessories and storage products (IBISWorld, 2015).

Even the market of high quality home office supplies has been grazed during the last couple of years. Home décor companies such as “Bloomingville”, “HAY” or “IbLaursen” and “Granit” entered into the stationary market. There is little room left, especially for unknown brands with low visibility that do not want to compromise on the retail price.

4.2. Customer expectation analysis

Besides being knowledgeable about the market to sell products in, customers make the decision to buy or not buy and hence determine a company’s success inevitable.

Customer expectations can be described as the consumers wishes (Berndt & Brin, 2008). However it is more about the customers perception on how his/hers expectations are met than what he/she gets in reality. Often it is hard to differentiate customer want and need (Solomon, Bamossy, Askegaard, & Hogg, 2010).

Ideally the customer expects a product with the highest quality and functionality at the lowest price. Since this is not realistic the consumer then lowers their expectations gradually or refuses the product. Therefore it is important for a company to offer a product within the affordable-but still meeting expectation zone of tolerance of a customer’s perception as described in chapter 2.

The case company wants to build on quality and value. This is a critical value when building long-term customer relations, but difficult to obtain in the beginning (Ferrell & Hartline, 2011). Developing a long-term relationship build on trust can prove especially difficult for companies such as The case company that are unknown in the market and try to enter it without much budget for a marketing strategy.

The case company checks all boxes on the customer expectation for high quality: close customer care, quick and sometimes face-to-face delivery and physical evidence of high quality in the product. However, quality is not an automatic success factor, it is necessary to outperform competitors on meeting the customers need (Ferrell & Hartline, 2011).

Currently customers do not perceive the quality The case company is offering in their products and therefore do not meet customer expectation on the predictable level according to Miller (1977). It is not visible to customers why a paper box is more stable and enduring than a wood or leather box when comparing products among competitors.

Turning their products towards home office accessories might help The case company, since cardboard is a traditional material for stationary. However, this is usually true for products at low prices. There is a big gap between The case company’s awareness of their own products and customers perceived reality. Most of the positive customer satisfaction is based on experience with the product. This also means that the customer needs to buy it and will then be surprisingly satisfied. However, even though customer satisfaction among The case company’s customers is high, there are very few customers who are willing to jump over the threshold of uncertainty of purchasing a product they don’t trust. This is one of The case company’s major issues. Customer expectations need to meet before or during the decision process of buying a product not after the purchase.

To move into the customer tolerance zone, there needs to be adjustment on either on the price-end or the quality/value-end to move into the zone of tolerance. In the mass market of stationary it will be impossible for The case company to survive if they don’t change their product offer as they currently only meet the minimum tolerable level of customer expectations according to Miller (1977).

5. Results and further analysis

This chapter consists of the findings derived from the analysis of market competition and customer expectation in chapter 3.

5.1. Results from the perspective of competiveness

Since the market for home office accessories did not look very appealing, the project team decided that it would be unnecessarily hard for The case company to enter in the market of home office supplies. Especially since the brand is unknown among customers, they are trying to enter a niche market of high quality stationary in a generally declining market segment with low margins. Therefore the project team discussed which options are available with ease of market entry and high profitability as well as a prospect for the future.

The team decided to take a new approach to design a meaningful product and discover new opportunities for The case company.

The next step was to look into The case company’s strength to discover the appeal of the company. Whereas Porter’s five forces is industry explicit, a SWOT analysis is company specific (Henry, 2011). A SWOT Analysis was conducted.3

The strongest feature of the company is its possibility to create products exactly tailored to the customer’s wishes, at low quantities and quick response times.

As a starting point to investigate further was to take a look at the material of cardboard, an unchangeable boundary in the design process. The project team brainstormed possible ideas with cardboard for The case company4. The strongest outputs were two concepts: furniture made from cardboard for the use of a short time frame which can be disposed afterwards or packaging solutions for luxurious goods, which can be offered in a business-to-business relationship.

Since packaging is closer to the current concept of The case company, it was decided to dig deeper into the market of luxurious packaging and company gift packaging.

Paper and cardboard packaging assign for 34% of the global packaging industry (Ernst & Young limited, 2013) with expected growth in the luxury section of 4,4% per annum (Cakebread, 2015). One major trend in the packaging industry is the development of a mass luxury section, the masstige category for consumer products (Ernst & Young limited, 2013). Consumers are willing to pay more for prestigious packaging (Solomon, Bamossy, Askegaard, & Hogg, 2010).

With the recession in the paper industry, the growth of paper-based packaging seems like a bright outlook for the future of pappermills (Qureshi, 2015). Moreover is this a business where not the end consumer is served, but usually other companies who produce or sell the to be packaged product. In a Business-to-Business market, price is less relevant than when catering to the end-consumer (Wright, 2004). This can help The case company to sell their products at a comparably high price, but generating profitable margins at the same time.

Paperboard is especially applied in the markets for secondary packaging of alcoholic beverages, perfume and cosmetics, tobacco as well as confectionary. Paperboard is the most common material for luxurious secondary packaging with a 41,9% market share, which is not the case for mass market goods (Allen & Adams, 2015). According to Cakebread (2015) “Paperboard is considered luxury when it is stiff, durable and both the inner and outer surface is white.”.

Interestingly, paperboard packaging is usually manufactured by hand, which falls right into the field of The case company (Cakebread, 2015).

The biggest competitor for luxurious paperboard packaging is Mayr-Melnhof, a small family business from Austria which manufactures most of the packaging for luxury giants as LVHM (Allen & Adams, 2015). In Sweden, BillerudKorsnäs is a major fiber board packaging producer, however rather for the mass market than the luxury segment (Murray, 2013). Another competitor to keep an eye on is the pulp giant StoraEnso, having entered the market of luxury perfume packing this year. Nevertheless, this shows that specialized, small companies have a good chance to establish themselves in this niche market.

5.2. Results from the perspective of customer expectations

Looking at the suggested concept of luxurious packaging, The case company can gain in customer expectation, because the material of cardboard is taken for granted here and not considered as disturbance. Often the qualities of cardboard are appreciated since it is a lightweight and variable material.

One of the biggest strength for The case company is that they were approached by customers with a need for their customized products as packaging solutions. Even though the company shut down all their marketing activities, contact possibilities, visibility of product offerings etc. the customer had such a high interested in their product that they put enough effort in the search for The case company. Surprisingly the customer wanted to use the product not for its initially intended use as a suitcase to travel, but as a decoration in its luxurious shop window display. It is crucial to consider this customer need instead of ignoring it. It is a luxury for a company to have customers approaching them instead of needing to acquire them. This finding confirmed the assumption that The case company does not know their customer needs and is not picking up on its full potential.

The case company is confronted with customers who present their need on a silver platter and still The case company is not picking up on that. This is mainly due to the fact that the customers do not use their products as initially intended, but give them a new function. This is something currently disliked and romanticised by The case company. Furthermore they prefer end-users over businesses as consumer.

Picking up the niche of customized packaging solutions can be a great possibility without adapting their manufacturing process and products itself too much. The adaption would need to be a change in customers and strategy.

The case company will be able to turn its strength into action by accompanying customers in the selection for their individual packaging. By their expertise in tailoring products to their customer needs, customer expectations can be met quality and uniqueness-wise.

Further positive factors to make the strategic move are that European luxury is based on craftsmanship and history as opposed to American luxury products (Solomon, Bamossy, Askegaard, & Hogg, 2010). Luxury nowadays is not about status and showing off a brand (Solomon, Bamossy, Askegaard, & Hogg, 2010). This can help The case company, not being a strong brand. When manufacturing packaging for businesses, their logo will probably not be visible on the packaging, but their customer’s logo instead.

And there are more possibilities, cooperating with the local glass manufacturers could link The case company back to its roots with customers close by to develop solutions for.

6. Conclusion

Finally a reflection on the case company’s current situation and future outlook are given

The case company is at a breaking point with little to lose. The company has a lot of potential, if they are courageous enough to take a new direction. Instead of romanticizing the idea of their products, the company needs to listen to market needs and have a close eye on their competitors. It is hard to understand for an outsider why the company is prodding for the concept of home office accessories, when they have failed to be successful with a colourful, modernized line just a short time ago and customers are serving their needs on a silver platter

This paper shows how important secondary and thorough research is to reveal realities. Basing a product development on assumptions can lead to big failures.

[...]


1 For a visualization of the case company’s products and the design brief, please refer to 7.2 and 7.6.

2 for a visualization of competitor’s products, please refer to 7.3

3 For the detailed SWOT analysis refer to 7.4

4 For a visualization of the brainstorming, please refer to 7.5.

Details

Seiten
22
Jahr
2016
ISBN (eBook)
9783668209084
ISBN (Buch)
9783668209091
Dateigröße
704 KB
Sprache
Englisch
Katalognummer
v317000
Institution / Hochschule
Linnaeus University
Note
1,0
Schlagworte
Porter five forces marketing product development competition threats SWOT

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Titel: Porters Five Forces. Innovation through Business, Engineering and Design