Michael Porter's Five Forces That Shape Strategy
Using The Five-Forces Model of Competition to Determine What Competition is Like in a Given Industry Involves:
Building the picture of competition in three steps: (1) identifying the specific competitive pressures associated with each of the five competitive forces; (2) evaluating how strong the pressures comprising each competitive force are; and (3) determining whether the collective strength of all five competitive forces is conducive to earning attractive profits.
Michael Porter's 5 Forces Model Explained
Five Competitive Forces Analysis Using Nu Skin Enterprises as An Example
The five competitive forces that shape strategy as presented by Harvard Professor Michael Porter has been an instrumental way for companies to analyze the attractiveness of their industry. It is especially useful in identifying the threats that exert pressure on a company. These five forces namely: competitive rivalry, the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, and the threat of substitutes is used to perform a detailed analysis of Nu Skin Enterprises, Inc.
The company has operated as a producer of health and beauty products for over 30 years and according to Morningstar.com (2018), they are a direct-selling company with a comprehensive line of skin care, personal care, and nutritional supplements. According to the company’s 2017 10K Report, Nu Skin generated $2.3 billion mainly through person-to-person marketing of its two primary category brands. The company’s beauty and personal care items fall under the category brand known as Nu Skin, and nutritional products are under the category brand, Pharmanex. The company also leans on its scientific expertise to create anti-aging products that are sold under the two previously mentioned categories but are recognized by the brand category ageLOC.
Driving Forces Analysis Entails:
The Best Test of Whether Potential Entry is a Strong or Weak Competitive Force is:
How formidable the entry barriers are for each type of potential entrant and whether most companies already in the industry are making money or losing money.
Potential entrants are more likely to be deterred from actually entering an industry when: industry incumbents are willing and able to launch strong defensive maneuvers to maintain their positions and make it harder for a newcomer to build a clientele.
The Threat of New Entry
According to Morningstar.com (2018), the company operates in approximately 50 countries. The company’s 10K Report (2018), underscores that 90% of the company’s revenue is generated outside of the U.S. China represents a country of particular significance because the company generates 32% of its revenue in the mainland. China provides nearly a third of the company’s revenues, therefore, the threat of new entrants poses the greatest cause for fear in this market. However, the threat of new entrants is dampened by the fact that China is one of the most difficult places to do business. China is ranked 93rd out of 190 places to start a business. (Doingbusiness.org, 2018). The difficulties involved in entering the Chinese market protects Nu Skin’s market share and revenues. The company’s brand name is also well established, and their innovative proprietary products require scientific expertise with years of testing, research and development in order to meet stringent regulations throughout the industry. For new entrants to be successful they will have to create an economy of scale, all these factors present high barriers of entry. Therefore, the threat of new entrants is low.
Competitive Pressures Stemming From the Threat of Entry are Stronger When:
The industry's outlook is uncertain or highly risky, entry barriers are low, and very few existing industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence.
Bargaining Power of Suppliers
According to Nu Skin’s 2017 Annual Report (2018), the company depends on third parties to source and manufacture the majority of its products except for in China where almost everything is done in-house. Suppliers pose a major threat because they possess significant bargaining power. The company acquires more than 10% of its ingredients and products from three suppliers to support the Nu Skin personal care line. An even more concerning supplier relationship exists between Nu Skin and a single manufacturer-supplier that has proprietary ownership of the ageLOC spa and the Tru Face Essence products. Nu Skin is heavily invested in acquiring licensing from vendors as a way of keeping up with research and development and this dependence on supplier relationships could be an Achilles heel for Nu Skin. Suppliers seek out Nu Skin for their distribution channels because of the effectiveness of the company’s person-to-person marketing and sales. The person-to-person model also means that employees of the company can be considered suppliers of customers. The dependence is mutual but nevertheless, a high-level threat exists because suppliers can affect prices buyer pay, as well as the quality and availability of products.
Bargaining Power of Buyers
According to Porter (2008), customers have strong bargaining power when switching cost is low, many sellers are available in the market, buyers are well educated about the product and are price sensitive, and when buyers can easily backward integrate. These are the conditions that Nu Skin Enterprise, Inc. faces. The threat of bargaining power of buyers is very strong because the cost of switching is low. Customers are well educated about the products and their ingredients. They are price sensitive and capable of making the products themselves and substitutes are also available. For example, Stevenson Personal Care (2016) states that “interest in natural ingredients is on the rise as more people dare to roll up their sleeves and get involved in the process of creating beauty products.”
Rivalry among competing sellers is generally more intense when: buyer demand is growing slowly and competing sellers are active in launching fresh actions to boost their market standing and business performance.— Michael Porter
The Threat of Substitutes
Porter (2008) states that “a substitute performs the same or similar function as an industry’s product by a different means.” For example, Nu Skin sells fluoride-free toothpaste which can easily be substituted for by baking soda which is traditionally sold in stores as a cooking ingredient. Lip balm, skin lotion, and hair dress could all be replaced by petroleum jelly. The company’s 2017 Annual Report (2018) discusses the negative impact that online retail of its merchandise has on its sales force which creates difficulty for employees to make sales. This results in hardship for the company to recruit sale leaders. Here we can clearly see that a substituted distribution channel is severely affecting the viability of Nu Skin’s direct-selling capabilities and while the company tries to actively prevent the sale of its items online it cannot prevent other online vendors from putting pressure on its direct-selling capabilities.
The Threat of Rivalry
The threat of rivalry is the central pressure that shapes strategy. (Porter, 2008) Nu Skin acknowledges that it has several competitors who are better known, have a longer history in the marketplace and are also much more robust financially. The key competitors are leading global direct-selling companies such as Avon, Amway, Mary Kay, and Herbalife. The company also competes with local direct-selling companies. For example, in China; Perfect, Joymain and Infinitus are market leaders in direct-selling. These companies compete with Nu Skin for market share, employees, product offerings, business opportunities, management and geographic operations. The threat of rivalry at Nu Skin is also internal as it competes with its own employees to keep products within the person-to-person distribution channel versus offering products online. All these factors contribute to a very strong threat of rivalry.
An Industry's Key Success Factors:
Are the strategy elements, product attributes, resource strengths, competitive capabilities, and market achievements with the greatest impact on future competitive success in the marketplace.
Nu Skin Enterprises, Inc. faces a weak threat of new entry because of the high barriers to entry such as tight industry regulations, lengthy delays between product development and market-ready products, existing economies of scale and fierce defensive minded rivals. On the other hand, the bargaining power of suppliers is strong because of the company’s dependence on vendors to provide ingredients and licenses to sell products they manufacture. The company also depends on employees to deliver customers and products. Bargaining power of buyers is also strong because customers can easily switch to other brands with similar items, make the product themselves or find substitutes. The threat of substitutes is also strong because the company’s direct-selling channel could be undermined by various online vendors. Rivalry in the direct-selling industry is intense and Nu Skin faces off with some big players such as Avon, Amway, and Mary Kay. See figure 1 for a snapshot of how these five forces affect Nu Skin.
Doing Business in China - World Bank Group. Doingbusiness.org. (2018).
NUS Nu Skin Enterprises Inc Class A Stock Quote Price | Morningstar. (2018). Morningstar.com.
Nu Skin - Investor Relations - Annual Reports. (2018). Ir.nuskin.com.
Porter, M.E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 79-93. Retrieved from Business Source Complete.
Stephenson Personal Care, (2016). Retrieved from http://www.stephensonpersonalcare.com/blog/2016-06-22-5-key-trends-in-cosmetics-personal-care-infographic
© 2018 Angelo