Prospective investor with interest in Zambia transport sector has approached you for an advice.

You are required to assess the environment and select either passenger or freight market the

investor should enter.

 Apply Porter’s five forces Model to assess the sector and select the most viable market full of

opportunities.

 Examine the marketing philosophy you would recommend to the foreign investor to adopt in the

provision of the preferred transport service and justify why?

Question 1

Overview of Michael E. Porter’s Five Forces

Porter’s five forces model is an analytic tool developed by Professor Michael E. Porter of

Harvard Business School in 1979 to assess the profit potential of industries (Scholes and

Whittington 2006 p.78). Porter (1980) provides a framework that models an industry as being

influenced by five industry forces which are (1) Bargaining power of buyers, (2) Bargaining

power of suppliers, (3) Threat of substitute products or services , (4) threat of new entrants,

and (5) rivalry among existing competitors in the industry. The Porter Five Forces adopts an

outside-in approach in understanding competitive advantage. It views competitive advantage as

stemming from these five industry forces. This approach is based on an assumption that firms

within an industry posses identical or homogeneous resources. As a result, a firm success

depends on how to react to market signals and how to foresee the progress of the industry

structure

Transport Industry in Zambia overview

In Zambia road passenger transport involves buses, taxis and car rentals, providing efficient

ways to get passengers to their destinations as well as freight operators for goods. In quantitative

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terms the passenger operators lead the way but of great contribution to the economy of the

country are the freight operators, whose viability cannot be over emphasized (Ibid). The country

has witnessed a growing number of minibuses and mid-heavy buses as well as taxi operators.

The mini buses remain principal mode of transport for people making the daily trip to work or

school. Mini buses, taxis, car hire as well as the freight have all benefited from the improved

road network system. New areas have been opened up throughout the country; this has created

valuable links between regions and economic activities (Tembo, 2013). In addition, the newly

constructed roads have reduced travelling hours for example freight and buses are now able to

make more frequent trips to and from the destination thereby increasing revenue. Another factor

contributing to increased revenue is the reduction on the maintenance costs incurred by road

transport operators

Porter’s Five Forces Analysis of Passenger Transport in Zambia

(1) Threat of Entry of New Competitors

Barriers to entry are low: taxi permit is all what is needed and to operate a minibus service

require licensing. – the government of republic of Zambia does not imposes the limit on the

amount of the taxi licenses and the supply exceeds demand in this case. Barriers to exit are low:

minimum of long-term liabilities of any kind (no preordered production, minimal staff, capital

needs are minimal – no need for financial leverage by borrowing money), capital investments

(car) can be used in private life as well. Customer loyalty high – in the taxi market the overall

quality offered is not uniform, service is significantly distinguished – the minibus stations are

designated across the industry and the prices have a set minimum. There is not much space for

differentiation and so the customer might well just chose by finding the taxi at the stand

randomly or use telephone number he has obtained from somewhere. Capital requirements are

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low; only need a car, place for an office and telephone + computer with an Internet connection.

Capital requirements of the competitors are higher as every driver has to have own vehicle plus

telecommunication infrastructure of taxi services is more extensive than that of minibus service.

Brand equity is low – customers usually use the taxi, which is available regardless of its brand.

In case of minibus transport system, there are brands, but they are also not important from the

customer’s point of view.

Overall the barriers to entry and exit are low, however big amount of players already on the

market and relatively low profitability of the industry as a whole make the threat and probability

of entry of new competitors lower.

(2) The Intensity of Competitive Rivalry

Innovation in the industry is overall low – the taxi services are standardized and do not evolve

over time in any significant matter – usually the services offered are personal transport, and

sometimes parcel/package delivery. Competitive strategies used within the industry are

specialization and focus strategies that often overlap. The focus is in most cases geographic –

company operates within one city/city part/village/important traffic connection (Airport Taxis,

etc.). Specialization strategy then demonstrates in more ways – some businesses offer transport

of bigger amounts of customers at once (through use of vans and minibus), other specialize

through their car park (by using exclusive, luxury cars); while other might specialize is one

group of customers. The structure of the industry with many small players indicates, that the

competition might push the prices down, however due to partitioning of the taxi companies along

the whole country, the taxi companies can also function as local monopolies. This on the other

hand eliminates a big part any pressures on price. The biggest competitive pressure is in the big

cities, where there are more taxi operators on relatively small area. Level of advertising expense

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– taxi operators in Zambia do not usually use aggressive forms of marketing and overall

marketing expenses tend to be low –most popular forms of advertising While the overall

expenses are comparatively to other industries low, its importance on the market with largely

uniform product is high. A customer is not going to use the services of the company of whose

existence he does not even know. This has serious implications for company offering taxi

service. In taxi service market, the customer is going to use either the taxi he can see or the one

whose telephone number he remembers.

Overall, the level of competition is medium – high, depending on the area

(3) The Bargaining Power of Customers

Customers for minibus transport services do not have any form of propensity for bargaining; the

prices are firmly set and available to the customer before and during the ride. Customers are

individual and many – that lowers their bargaining power in comparison to the service providers.

Buyer information availability is high – the customers are well informed about the prices and

offering of the minibus operators through publications in local newspaper and taxi services either

through the internet or through the bartenders. Availability of existing substitute products is high

– customers can use other modes of paid transport. An important note here is the fact, that the

availability of substitutes is variable in time. During the day the biggest availability of individual

transport, services are between 6:00 hrs to 21:00 for minibus operators. During these hours the

minibus transport system works at full capacity, person in need of travel can also count on

friends/acquaintances/family members for transport better than during later hours. The

availability of minibus transport services is also not evenly spread geographically and in later

hours, there are large areas that are not serviced at all. Appeal of the travel by bicycle/on feet

also decreases during the night hours (because of the cold weather, psychological reasons etc.).

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Taxi services run more or less at stable rate throughout the day, however their availability during

the nighttime is lower than optimal. Therefore, during the day, the availability of direct

substitutes is very good, but in the night, it is low. As taxi service is to operate during the night

hours, the availability of substitutes during that time is low. Buyer price sensitivity is medium to

high – existence of unlicensed taxi operators suggests that the customer is price sensitive to the

point of risking breaking the law. This might also be increased due to effects of increased

number of unemployed in the whole country and led to cut backs in customer spending.

Overall, the bargaining power of customers is low during the intended period of operation of

minibus service (late night/early morning, weekends) and high during the daytime.

(4) Threat of Substitute Products or Services

Buyer propensity to substitute is medium. Customers will be more prone to use substitute

services during the day. Relative price performance of substitute is likely to be high for minibus

transport services and low for taxi services. During the night time taxi services charge same

prices no matter how far the customer travels. As private minibus bus services are aimed as a

direct competitor of taxi services, its prices will have to be similar or lower than theirs. The

buyer does not lose any money for not using minibus services. He can freely choose any other

mode of transport. Switching cost occur only when it comes for the customer to use another

mean of transport during late night of early hours which none of other services offer. This is

what the operator of minibus needs to accent in his marketing communication to increase

perceived value of minibus service for prospective customers. Perceived level of product

differentiation is low – the purpose of transportation is to get from one place to another with best

public transport system available the differentiation is even harder for taxi operators. Number of

substitute products on the market is high, however during the nighttime, their availability is low.

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Ease of substitution is low, in case of taxis, which are primary substitutes of minibus transport

services; there is no difference if customer orders taxi service over the phone. In case of minibus

transport services, the substitution is not as easy as the customer has to get to the nearest station

and wait for the transport mean to arrive according to the timetable. As such the ease of

substitution lowers in the late night, early morning hours.

Overall, the threat of substitute products is high.

(5) The Bargaining Power of Suppliers

The most important suppliers in case of taxi services are the drivers whose payroll expenses will

represent the largest share of the operator’s operational overhead. Secondary suppliers are the

telecommunication service provider (principal means of contact will be through the phone),

internet service provider (secondary means of contact), landlord (at least one office will be

needed), diesel/petrol provider e.g. the petrol will be used to refuel his taxi, if the need be by the

drivers after their ride with the customers is over. For purposes of the analysis only the drivers

are important, rest of the suppliers are not an important factor. Supplier switching costs relative

to firm’s switching costs are expected to be low, for the company it is more costly to replace a

driver, then for a driver to find a new employer/start his own company. Indeed the drivers who

will over time attain a stable clientele may be prone to cut his overhead by eliminating

intermediaries (operator) and provide his services directly to the customer. Impact of inputs on

costs maybe high – most of operator’s expenses will be payroll and most of revenues will come

from the drivers, this dependency will increase their bargaining power when dealing with

operator as their employer. Supplier concentration – ability to vertically integrate and cut the

operator out is high as the drivers are in direct contact with the customer and their costs to

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become competitors are low. Employee solidarity – unknown at the time before starting the

company, however might be an important factor – the working conditions of the drivers will not

be very pleasant and if united, their claims for better pay (to offset the negative effects of the

working conditions) might drive the prices of taxi services to levels where operator might lose

competitiveness.

According to Díaz, Martínez, and Barea (2000), 13 the capacity of public transport operation

companies to influence their suppliers’ price fixing mechanism is very limited owing to the lack

of bargaining power that they have when confronted with their main suppliers, which is

particularly patent in the case of fuel, vehicles and tyres. It is necessary to stress these

companies’ high degree of dependency as regards the price of fuel, over which they have

absolutely no influence. In general, the number of suppliers is highly reduced, and they are of

huge dimensions, thus reducing the operating companies’ bargaining

Overall, the bargaining power of suppliers is very high.

Porter’s five forces analysis has shown that:

Industry of minibus service is highly competitive, with low barriers to entry and exit; a

competitor might come and leave at any time. Competition among the players in the industry is

high, albeit geographically limited. At all times, there is threat of substitute products. During the

daytime, this threat is represented mainly by public transport services and during the nighttime

by taxi services. Customer bargaining power is low, however they are price sensitive and the

offered service is not differentiated. Suppliers represented mainly by the drivers are very

powerful. These outcomes show that the conditions for newcomers in the industry are difficult

and any new player will have to have well prepared and implemented strategy in order to

succeed.

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Opportunities

Untapped market – market is served by indirect substitutes, primary need is not entirely satisfied.

Low capital expenses will give the company a maneuvering space in the first months of

existence of the company. It can operate for relatively long time even with low amount of

customers. That increases chances of company surviving its first year. Customer loyalty is high –

this will make getting new customers from the competitors easier. The substitute products do not

cover the Capital area evenly – the company might exploit the areas with low presence of

competitors as a starting point. The services offered by the taxi competitors are not differentiated

– the company can solidify its position by showing to the customers, that it is not another taxi

service. Innovation in the industry is low – by utilizing of modern communication channels

(internet, social networking) the company can differentiate itself from the competitors and attract

customers. There are less registered taxis in use and this is one of the main reasons of popularity

of unregistered taxi pirates. This means that there is a market segment in which the needs of the

customers are not satisfied by current operators – and it is close to company’s target group.

Possibility market service as a safer alternative to the pirate taxis – use of unregistered pirate

taxis although not illegal is connected with a risk of being robbed, or taken advantage of while

under the influence. The investor can take the customers form the same pool as the pirate taxis.

The company can use its legal operation and form as a form of safety for the customers that use

services of pirate taxis. Vice-versa it can use this as a safety against cheating customers, that are

connected with the use of pirate taxis.

In Zambia, Taxi industry is one of the sectors that have experienced exponential growth in the

recent past. Zambia has the highest number of unregulated taxi routes. Taxi operators face

competition not only amongst themselves but also from other modes of transport available in the

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city, these include minibus services that are available throughout the country. With these intense

levels of competition taxi owners have come out with competitive strategies aimed to counter

competition and thereby increase their chances of survival and also increase profitability.

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