Porter's Five Forces Model Application for Malaysian SMEs Analysis

This report examines the application of Porter's Five Forces Model to analyze the competitive environment of Small and Medium Enterprises (SMEs) in Malaysia. It delves into the five key forces: bargaining power of suppliers and buyers, threat of new entrants and substitutes, and existing industry competition, to determine the strengths and weaknesses of companies within the Malaysian SME landscape. The report further explores the implications of applying this model for industry analysis, the potential impact on SMEs, and the 3-H model of holistic marketing (Heart, Head, and Hand). It also addresses the limitations of Porter's model while emphasizing its continued relevance in assessing the current state of Malaysian SMEs. The report also discusses the development of the Small and Medium Enterprises in Malaysia, the government policies and the impact of the bargaining power of the suppliers and buyers.

Running head: PORTER’S FIVE FORCES MODEL APPLICATION
PORTER’S FIVE FORCES MODEL APPLICATION
Name of the Student
Name of the University
Author note

1PORTER’S FIVE FORCES MODEL APPLICATION
Executive Summary
In this paper the Porter’s Five Force Model, The Small and Medium Enterprises in Malaysia
and the application of the Five Force Model is discussed. The Paper also addresses the
implications of the application of the model to analyse the industry and how it affects the
industries. The Five Factors are Bargaining Power of the Supplier, Bargaining Power of the
Buyer, Threat of the New Entrant, Threat of the Substitutes and the Existing Competition.
The Paper also addresses the 3H model of Holistic Marketing that is the Heart, Head and the
Hand. It also discusses the drawbacks of the Porter’s model and how the model is still useful
in analysing the current situation of the industry that is of the Small and Medium Enterprises.

2PORTER’S FIVE FORCES MODEL APPLICATION
Table of Contents
Introduction................................................................................................................................4
Discussion..................................................................................................................................5
Development..........................................................................................................................5
Bargaining Power of Suppliers..............................................................................................6
Pricing Pressure..................................................................................................................6
Supply Problems................................................................................................................7
Quality Concerns................................................................................................................7
Encourages Alternatives.....................................................................................................7
Bargaining Power of Buyers..................................................................................................7
Threat of New Entrants..........................................................................................................8
Threat of Substitutes..............................................................................................................9
Competition in the Industry.................................................................................................10
Avoiding Uncertainty...........................................................................................................10
3-H Framework for Holistic Management...........................................................................11
Heart.................................................................................................................................11
Head.................................................................................................................................12
Hands................................................................................................................................13
Arguments against the Porter’s Five Force Model..............................................................15
Conclusion................................................................................................................................17
Recommendations....................................................................................................................18

3PORTER’S FIVE FORCES MODEL APPLICATION
References................................................................................................................................19

4PORTER’S FIVE FORCES MODEL APPLICATION
Introduction
Porter’s Five Force model is a framework that can be used to analyse the competitive
environment of a company. The model helps in determining the strength and weakness of a
company. It is can be used to determine the system of the industry and how a corporate
strategy can be made for it (Mathooko & Ogutu, 2015). It can be applied to all the segments
of the of the economy that is, small, medium and large. The central idea of this model is to
obtain a competitive advantage that can be used to increase the profitability of the company
in its segment (AYDIN, 2017). The primary work of the strategic management is to know the
high profitability industries by analysing them using the five forces. The model has a global
and serious impact on the formulation of the corporate strategy. The Porter’s model is an
amalgamation of different factors that are put in a simpler model to understand and analyse
the industry and its competition, strengths and weakness. The five forces of the model are:
 Bargaining Power of Suppliers: The bargaining power of the suppliers is
how they can drive up the cost of the product by increasing the cost of the raw
materials. The bargaining power of the suppliers depends on the uniqueness of
the inputs that the company uses to manufacture its good and services. The
more unique the product the more the cost of the raw material. It also depends
on the amount of suppliers in the market, the fewer the suppliers the less the
company has an upper hand in the negotiation of the price of the raw material.
 Bargaining Power of Buyers: The consumers or the buyers can also drive
down the price of the product. The power depends on the number of buyers
the company has and how significant they are. The more significance a buyer
has the more power they have to decease the price of the product. Huge
companies have a huge client base; however, they are not that significant thus
they do not have much impact on them.
 Threat of New Entrants: The new entrants in the economy can pose a serious
threat to the existing companies in the economy. An industry where there are
strong barriers to enter is the one that is ideal and favourable to the existing
companies that are there. The new entrant could come up with a new
technology and potentially disrupt the market.
 Threat of Substitutes: The substitute goods that are there in the market can
pose serious threat as they can be substituted. The customers might favour the

5PORTER’S FIVE FORCES MODEL APPLICATION
substitute than the company’s product, which will decrease the sales of the
company and reduce the power in the market.
 Competition in the Industry: The more the competition in the industry the
more the ability for one to undercut the other. The suppliers and the buyers
seek out the competition of the company for their own betterment and thus the
more the competition in the market the more the company has to do in order to
be at the top.
In Malaysia, there are more number of Small and Medium Enterprises and they are
the major players in building of the economy. The most recent definition of the Small and
Medium Enterprises can be segregated into two different categories that manufacturing and
services, on the basis of these aspects that is total sales turnover in a year, or the number of
full time employees that are employed by them (Burns & Dewhurst, 2016). A small-medium
enterprise can be defined as an enterprise whose sales turnover cannot be more than RM25
million annually and has not more than 150 full time employees. More than 98.5% companies
in Malaysia are Small and Medium Enterprise in all the sectors of the economy (Fakha &
Saed, 2014). The Small and Medium Enterprises have grown enormously in the present years
with the help of the Malaysian government and their rules and regulations for Small and
Medium Enterprises. The government to uplift the economy promotes the Small and Medium
Enterprises to benefit all. The Small and Medium Enterprises are the major resources in the
economy of Malaysia. The internationalisation of the Small and Medium Enterprises is a
necessity because the economy is moving towards globalisation (Chittithaworn, 2011). These
Small and Medium Enterprises have thrived under pressure and have expanded to compete in
the global market. These Small and Medium Enterprises are the backbone of the Malaysian
economy in the manufacturing and service sector. They have employed the majority of the
people and have made a huge impact on the economy to boost it.
In this paper, the impact of Porter’s Five Forces on the Small Medium Enterprise in
the Malaysian economy is discussed. The 3-H holistic model of marketing and its application
is also discussed in the paper.
Discussion
Development
Porter’s Five Forces can be used to understand the external forces that affect the
company and its working. All the aspects of the business are analysed to understand the

6PORTER’S FIVE FORCES MODEL APPLICATION
workings of the company and how they can be do more better in the economy (Juliana &
Nyoman, 2019). The development of these Small and Medium Enterprises was done by the
government to develop the economy of the country. There are four core components that can
be used to explain the development of the Small and Medium Enterprises,
 Enhancement of the competitiveness of the Small and Medium Enterprises.
 To encourage the Small and Medium Enterprises to get outside capital.
 To make Small and Medium Enterprises more established by the help of
technology, innovation knowledge and having more cohesive policies.
 To have a supportive and regulatory framework for the Small and Medium
Enterprises.
In the year 2010, the government came up with an Economic Transformation
Programme that was focused on the achieving a status of high income by the year 2020. It is
now one the critical guideline or the Small and Medium Enterprises 3 policy direction for the
upcoming years (Abdullah, 2019). It is advanced to increase the market and infrastructure
development to build a strong base of Small and Medium Enterprises in Malaysia.
Bargaining Power of Suppliers
When a supplier has more bargaining power it restricts a company to serve the
customers in numerous ways. The supplier scan affect the price that the consumers of the
product or the service has to pay, the quantity and the quality of the product and how it will
affect the position of the company in the market place (Utami & Lantu, 2014). Small
companies utilise their relationship with the suppliers to connect their external and internal
capabilities that help in improving their innovation. Small and Medium Enterprises have
developed more progressive mind-sets with the suppliers, by working together for the benefit
of both the parties (Burns & Dewhurst, 2016). The creation of dense relationships by the
Small and Medium Enterprises with the suppliers increase the stability of the supply that they
get, which in turn reduces their risk of supply shortage. Having a successful relationship with
the supplier has helped the Small and Medium Enterprises to move forward and get help from
the supplier whenever there is shortage in the supply of the company (Mathooko & Ogutu,
2015). It also helps the company in meeting the specification of the company.
Pricing Pressure
One of the main results that will be there because of the increased bargaining of the
supplier will be the increase in the price of the product or the service. The Small and Medium

7PORTER’S FIVE FORCES MODEL APPLICATION
Enterprises have no choice, than to pay more for the raw materials to suppliers (Dobbs,
2015). To keep the profit margin the Small and Medium Enterprises pass on the extra cost to
the consumers, however there are many cases when the buyers do not support the increase in
the price and thus the extra cost makes a dent in the profit of the Small and Medium
Enterprises (Altuntas, et. Al, 2014). Since the Small and Medium Enterprises are small and
do not have much power in the market, they have to incur the extra cost from the suppliers,
that increases the price of the product and the service. Since they are small and medium in
size they have less power to negotiate from their suppliers.
Supply Problems
The shortage of the suppliers not only increases the bargaining power of the suppliers
it also reduces the quantity that a company can produce. The quantity if fixed there may be a
shortage of demand (Aithal, 2016). This can happen during the peak seasons when a
company has limited quantity to produce the goods. When this happens, the demand increase
and the supply decrease, which increases the price of the products.
Quality Concerns
Suppliers that have increased bargaining power might decide to skip the quality of the
product to focus on the quantity of the products that increase the profit margin. This can lead
to increase returns and complaints from the consumers and to even leave the brand for some
other brand that meets their needs and wants.
Encourages Alternatives
The bargaining power though has a lot of power in the market; it cannot hold the
ground for long. If the demand increases, new entrants will enter the market to fill the gap in
the market, which reduces the bargaining power of the suppliers (Zhao, et.al, 2016). The
Small and Medium Enterprises as are large in number can control some of the bargaining
from the suppliers when they come together. They also try to diversify their product range in
order to have more suppliers and cut the cost of switching to a different one.
Bargaining Power of Buyers
The buyers have a significant power to reduce the price of the product, demand a
better quality of the product and services and pit competition against each other that can all
result in the downfall of the industry (Kharub & Sharma, 2017). They exercise more power
when they are more in number and have a significant impact on the industry. Customer
relationship ranges from attracting the consumers, interacting with them and creating loyalty

8PORTER’S FIVE FORCES MODEL APPLICATION
with them. Small and Medium Enterprises most probably have a small customer base, which
results in fewer customers therefore, it is of utmost importance to maintain the relationship
with the customers (Toro-Jarrin, et.al, 2016). Most of the Small and Medium Enterprises
demand is dominated by the major customers, which gives the bargaining power to the
consumers. They try to build long term, permanent and closer relationships with the
customers. As Small and Medium Enterprises, depend severely on the consumers only in a
limited area to generate sufficient profit to grow their business by delivering to a niche
segment of the society irrespective the size of the market share of the segmented group.
Having a close customer relationship is important for understanding the needs of the
customers and their requirements (Gassmann, Frankberger & Csik, 2014). Such frequent
communication is the major cause of having a strong relationship with the customers that
creates trust and positive reinforcements. There are many authors that have stated that
customer relationships should solely focus on the integration and customer service
management that is based on segmentation on the basis of needs, on time delivery of the
product and the feedback that is received by the consumers (Robson, 2015). This helps in
building a strong customer base that is satisfied with the company and are then converted into
loyal customers. Small and Medium Enterprises as have a strong relationship with the buyers
the power dynamics between them is similar and the buyers do not have the sole power to
fluctuate the price (Wang, 2014).
Threat of New Entrants
The threat of new entrants in an industry can disrupt the whole industry and is hugely
dependent on the barriers that are there on the entry (Van Alstyne, Parker & Choudary,
2016). There are six major barriers that are identified by Porter. These six barriers decide
whether a new entrant can enter or not.
 Economies of Scale: It is the decline in the cost of the product per unit, which
forces the new entrant to enter on a large scale. This will create a reaction
from the firms that are already existing in the economy or be in a disadvantage
of operating on a small scale.
 Product Differentiation: It is the brand identification and the customer
loyalty that a consumer has towards the brand.
 Capital Requirements: The capital that is required for the entry of the new
company in the industry, There has to be a huge capital invested in the starting
of the new business which can be seen as a threat and a risk.

9PORTER’S FIVE FORCES MODEL APPLICATION
 Switching Cost: It is the cost that the company has to undergo when
switching from one switching from one supplier to the other.
 Distribution Channels: The new entrants have to establish and make a
distribution channel to have a place for their product in the market.
 Cost Disadvantages: The companies that are already established have the
product technology, the raw material, knowledge about the market,
government support and the experience, which the new entrant does not have,
thus it is a risk for it to enter into the market.
In Malaysia the government provides a lot of subsidiary and has a minimum rules for
the Small and Medium Enterprises which help them in growing (Mat Nawi, 2015). The
switching cost of is also not a huge amount thus it is easier for the new entrants to enter the
market in Malaysia as it is favourable towards the growth and establishments of Small and
Medium Enterprises. The threat of the new entrant is huge in Malaysia as the barriers are not
that strict.
Threat of Substitutes
Substitutes in any industry is a result for the competition, yet they do not enough
profitable place in the industry. It is the search for a product that can be used to perform the
same functions that the original product (Gary & Heiko, 2015). The Substitutes limit the
industry in reaching the full potential. The price performance is more attractive that are
offered by the substitutes. It is difficult for the firms to make profit when there are substitutes
offered in the market. Substitutes create an intense competition that will result in the
reduction of the profit. The substitutes that must be given more importance is:
 Being the subject to trends that can be helped to improve their performance
that can cause trade off within the industry’s product.
 The substitutes that are produced by industries that earn high profits.
Development in the industry causes price reduction and performance
improvement.
The threat of substitutes in the Small and Medium Enterprise industry is huge as there
are more number of people that are doing similar things because of the leniency in the rules
and regulations of the government regarding the Small and Medium Enterprises (Omar &
Azmi, 2015). These enterprises have a serious threat from the substitutes as the cost of

10PORTER’S FIVE FORCES MODEL APPLICATION
switching is minimal and the consumers can chose the product or the compay that they like
better and provides them with better options and criterias.
Competition in the Industry
The competition in the industry is a result of the changes that are caused by the chain
practices. The competitiveness can be emphasised on the cost and product differentiation that
can be used to understand the strategic position in the marketplace (Al-Tahat, Jalham, 2015).
The cost and product differentiation are not the only factors in the competition to distinguish
the firms within themselves. There are other initiatives that are also used to understand the
competition such as quality, delivery, flexibility, delivery reliability, the innovation of the
product and the after sales service (Ariffin & Sahid, 2018). The threats can be increased in
the market when it becomes connected globally and the trade barriers are removed, the
intellectual property rights are there for the limited period of time and not a long period of
time. The supply chain is one of the most powerful strategy that can be used to enhance the
organisational competitiveness. The integration of the supply chain is powerful as it creates a
differentiation the performance of the firm and the competition in the industry. Small and
Medium Enterprises have to face a lot of competition from the existing competition as well as
the rate of the new entrants (Gary & Heiko, 2015). Small and Medium Enterprises have to
come up with different marketing strategies and supply chains to make themselves different
from the competition. A differentiation in a highly competitive environment is vital as it
creates brand awareness and a brand image for the company.
Avoiding Uncertainty
Uncertainty avoidance is summarised as the amount of threat the people in a group
perceive facing uncertain or unknown situations. The uncertainty avoidance dimension is
used as the measure to learn the level of tolerance a society has for ambiguous and
unforeseeable circumstances (Singh & Mahmood, 2014). The uncertainty avoidance deals
with the tolerance that the society has and the search of the society towards truth. Small and
Medium Enterprises in Malaysia do not face uncertainties to that extent as there are laws and
regulations put up by the government that are in the favour of the small and medium
enterprises of the country. The only uncertainties that the companies have to face is that of
the natural kind, for example, earthquakes, tsunamis or any other such calamity. The try their
best to avoid the uncertainties in order to gain a competitive edge and ne on the top place in
the market and the industry.

11PORTER’S FIVE FORCES MODEL APPLICATION
There have been many attempts in the past and the present bridge the gap that the
Porters model and the Hofsted National cultural dimension has (Wan Yusoff, et. Al, 2015).
The porters model provide a national competitive advantage to describe the role that the is
made by the role of the national environment in the process of gaining a competitive edge.
They believe, however, that the influence of national culture on the competitive advantage of
any nations is not given that much of importance in this model.
Avoiding Uncertainty is important for any business as it is one of the biggest threats
in the surviving of the company in the market place. The company must be able to avoid the
uncertainties that are there in the market by the help of having certain back items ready
whenever there is an uncertainty or risk in the market.
3-H Framework for Holistic Management
The 3-H framework process that is used for managing people and the organisational
issues in an all-inclusive way to ensure the individual performance and the entire
organisational performance can be managed in an effective and efficient manner
(Jagannathan, Camasso & Delacalle, 2018). The three Hs are Heart, Head and Hand that are
used to represent the people, organisation and competence respectively (Freeman & Steefel,
2018). The concept of Effectiveness is the degree in which the goals are achieved and the
amount to the problems that are targeted is solved. It is the doing the things that is right. The
concept of Efficiency is the idea of producing the finest outputs in the lowest possible input
factors that is time, required resources and the effort (Mezihorák, 2017).
Heart
It is related to the organisational behaviour, leadership, management, communication,
managing the groups and the teams. The Heart refers to the people who are emotional and
tend to make decisions from their emotions rather than logic (Flumerfelt, 2014). It aims to
motivate the employees in order to commit to their goal. It is the dealing with the people and
is the most difficult among the three. It requires to change the attitudes of the people and their
behaviours that would benefit the organisation. Positive influence skills can be improved
through the coaching on leadership, management theories, communications and the skills to
manage change that is happening in the organisation be it internal or external (Astuna, 2016).
This dimension must be first tackled and then should any of the strategies for management be
implemented. The people must be first informed, to reduce the resistance for change. The
understanding of the motivation theories and to have new insights on these theories is