This theory claims that the sustainability in any industry depends on how they measure on the criteria given by Porter. Porter’s theory comprises the following measurement forces:
Table 3.8: Porter’s theory and measurement forces
Measurement 1 Measurement 2 Measurement 3 Measurement 4 Measurement 5 Threat of new entrants Threat of substitute products Bargaining powers of buyers Bargaining powers of suppliers Rivalry among competing industries Source: Porter (1980)
In the article, “Gurus of marketing”, Kermally (2003) defines the relevance of this theory to be its ability to determine the intensity of industry competition and profitability, and the strongest force or forces that is governing and becoming crucial from the point of view of strategy formulation.
Based on the above, the researcher argues that this theory is relevant as it provided the basis upon which one can determine whether the tourism industry has potential to sustain Tshwane tourism township SMEs or not, and whether those who enter the industry will be able to run the business sustainably over time due to the perceived value and opportunities that exist.
According to Porter (1980), the likelihood of organisations making a profit in a given industry depends on five factors. These are introduced below and schematically presented in Figure 3.4.
The likelihood of new entry - refers to the extent to which barriers of entry exist. The more difficult it is for other firms to enter a market, the more likely it is that existing firms can make relatively high profits.
The power of buyers - the stronger the power of buyers in an industry, the more likely it is that they will be able to force down prices and reduce the profits of firms that provide that product.
The power of suppliers - the stronger the power of suppliers in an industry, the more difficult it is for firms within that sector to make a profit because suppliers can determine the terms and conditions on which business is conducted.
The degree of rivalry - measures the degree of competition between existing firms. The higher the degree of rivalry, the more difficult it is for existing firms to generate profits.
The substitute threat - measures the ease with which the buyers can switch to another product that does the same thing. The ease of switching depends on the costs that would be involved and how similar the customers perceive the alternatives to be.
Figure 3.4: Schematic representation of Porter’s Five Forces Model Source: Porter (1980)
Further to Porter’s Five Forces of Industry Analysis, Porter developed distinct questions to be asked during industry analysis. These are presented in Table 3.9.
Table 3.9: Key questions regarding Porter’s industry and competitive environment
Porter’s Five Forces model
Threat of new entrant
Bargaining power of suppliers Threat of substitute product Bargaining power of buyers
Rivalry among competing firms in industry
Key questions regarding the industry competitive environment
What are the industry’s dominant economic traits? How strong are the competitive forces?
Which forces are driving change in the industry? What are the key factors for competitive success?
How attractive is the industry from an economic perspective? Source: Porter (1980)
When using this theory, the questions assist in asking the right questions as a way of understanding the forces and the industry in question.
Wilson (2003) also quoted Porter’s Five Forces theory, stating that these forces govern the nature and intensity of competition within an industry and are the background against which the choice of generic strategy should be made. Hence, in using Porter’s theory in this study, not only is the SME industry analysed but the choice of competitive strategy suitable for survival and sustainability of township tourism SMEs is informed. The theory thus assisted in designing and developing an SME framework.
Making use of this theory requires one to determine the defendable position to be taken in this competitive environment. Wilson (2003) argues that this strategy can either be defensive or offensive to competitive forces. The researcher maintains that a defensive strategy is one that takes the structure of the industry as given and positions the company to match its strengths and weaknesses, whereas an offensive strategy is designed to do more than simply cope with each of the competitive forces. The adoption of this strategy requires that one alters the underlying cause of such factors, thereby altering the competitive environment itself.
Porter (1980) suggests three broad strategies that could be chosen to create a defendable position in the long run and to outperform competitors. These generic strategies are represented in Table 3.10 below.
Table 3.10: Porter’s three broad generic strategies to create a defendable position
Generic strategy Description Type
Cost leadership Having lowest cost relative to your rivals
Defendable strategy Differentiation The product offering becomes or is
perceived to be unique
Defendable strategy Focus or niche strategy The company focuses on a
particular buyer group, product segment or geographical market
Defendable strategy
‘Stuck in the middle’ Failure to choose one position ending up applying a mix of the three above
Non-defendable strategy
Source: Porter (1980)
These strategies can be regarded as choices that are available to SMEs in their pursuit for sustainability. The next section reports on other theories that could be used in analysing the industry.