Porter's Five Forces Analysis Tutorial - Visual Paradigm

Five Forces Analysis Live Example ... The Five Forces are the Threat of new market players, the threat of substitute products, power of customers, power of ... Home Tutorials Current:Porter'sFiveForcesAnalysisTutorial Porter'sFiveForcesAnalysisTutorial ThePorterFiveForcesanalysismodelfirstappearedinaHarvardBusinessSchoolprofessorMichaelEPorterpublishedinHarvardBusinessReviewin1979.Thepublicationofthispaperhashistoricallychangedtheunderstandingofstrategyamongenterprises,organizations,andevencountries.ItwasnamedoneofthetenmostinfluentialpapersofHarvardBusinessReviewsinceitsinception. AFiveForcesanalysiscanhelpcompaniesassessindustryattractiveness,howtrendswillaffectindustrycompetition,whichindustriesacompanyshouldcompetein—andhowcompaniescanpositionthemselvesforsuccess. FiveForcesAnalysisisastrategictooldesignedtogiveaglobaloverview,ratherthanadetailedbusinessanalysistechnique.Ithelpsreviewthestrengthsofamarketposition,basedonfivekeyforces.Thus,FiveForcesworksbestwhenlookingatanentiremarketsector,ratherthanyourownbusinessandafewcompetitors. WhatistheFiveForcesModel? Themainideaofthismodelisthatthekeytoanenterpriseobtainingacompetitiveadvantageliesintheprofitability(industryattraction)oftheindustryinwhichtheenterpriseislocatedandtherelativecompetitivepositionoftheenterpriseintheindustry.Therefore,theprimarytaskofstrategicmanagementistoselectpotentiallyhighlyprofitableindustriesbyanalyzingfivefactorsincludingsuppliers,buyers,currentcompetitors,alternativeproducts,andpotentialentrants.Afterselectingindustries,enterprisesshouldchooseoneofthreestrategies,suchaslow-cost,productiondissimilationorcentralization,astheircompetitivestrategy,basedontheirstrengthandthecomparisonofthefiveforces. Porter’sfive-forceanalysismodelhasaglobalandprofoundimpactoncorporatestrategyformulation.Applyingittotheanalysisofcompetitivestrategycaneffectivelyanalyzethecustomer’scompetitiveenvironment.Itsapplicationrangefromtheinitialmanufacturingindustrygraduallycoversalmostallindustriessuchasfinancialservices,hightechnologyandsoon. ThePorterFiveForcesmodelbringstogetheralargenumberofdifferentfactorsinasimplemodeltoanalyzethebasiccompetitivelandscapeofanindustry.ThePotterFiveForcesmodelidentifiedfivemainsourcesofcompetition,namely: Bargainingpowerofsuppliers BargainingpowerofBuyers ThreatsofNewEntrants ThreatsofSubstitutes Competitionofexistingcompetitorsintheindustry (A)Thebargainingpowerofsuppliers Whentheinputelementsprovidedbythesupplierconstitutealargeproportionofthetotalcostoftheproducttothebuyer,thepotentialbargainingpowerofthesupplierisgreatlyincreased.Ingeneral,supplierswhomeetthefollowingconditionswillhavestrongerbargainingpower. Thesupply-sideindustryisforsomecompaniesthathavearelativelystablemarketpositionandarenotplaguedbyfiercecompetitioninthemarket. Supply-sideproductshavecertaincharacteristics,buyersaredifficulttoconvert,orconversioncostsaretoohigh Thesupplierfacilitatesforwardintegration,orotherwiseimposeanadditionalcosttotheproductionprocess (B)Thebargainingpowerofbuyers Buyersmainlyinfluencetheprofitabilityofexistingcompaniesintheindustrythroughtheirabilitytolowerpricesandrequirementstoprovidehigherproductorservicequality.Ingeneral,buyerswhomeetthefollowingconditionshavestrongbargainingpower: Thetotalnumberofbuyersissmall,andeachbuyerpurchasesalargeamountandaccountsforalargepercentageoftheseller’ssales Theseller’sindustryconsistsofalargenumberofrelativelysmallcompanies Thepurchaserpurchasesastandardizedproduct,anditiseconomicallyfeasibletopurchasetheproductfrommultiplevendorsatthesametime. Suppliersfacilitateforwardintegration,whilebuyersfinditdifficulttocombineorintegratebackward. (C)Threatsofnewentrants Newentrants,whilebringingnewproductioncapacityandnewresourcestotheindustry,hopetowinaplaceinthemarketthathasalreadybeendividedbyexistingcompanies.Thismaycausecompetitionwithexistingcompaniesinrawmaterialsandmarketshare,resultingintheexistingindustry.Thelevelofcorporateprofitsisreduced,eventhreateningsurvival. Theseverityofcompetitiveentrythreatsdependsontwofactors:thesizeofthebarrierstoentryintonewareasandtheexpectedresponseofexistingbusinessestoentrants. Barrierstoentrymainlyincludethefollowingfactors: Economiesofscale Withtheexpansionofbusinessscale,theindustrialcharacteristicsofthedeclineinunitproductcosts,thehighertheindustry’slowesteffectivescale,thegreaterthebarrierstoentry. Differentiationdegree Differentiationreferstotheuniquetargetingofproductsandservicestocustomerneeds.Thehigherthedifference,thegreaterthebarriertoentry. Conversioncost Theconversioncostofacustomerorbuyerreferstotheextracostthatthecustomermustpaytochangethesupplier. Technicalobstacles Includespatentedtechnology,proprietarytechnology,andlearningcurve. Controlofsaleschannels Thecompany’sself-builtdistributionchannels,goodpartnerships,andreputation,brands,etc. PolicyandLaw Nationalpoliciesprotectcertainindustries,suchasthefinancialindustry. (D)ThreatsofSubstitutes Twocompaniesindifferentindustriesmaygeneratecompetingproductsbecauseoftheproductstheyproducearealternativeproducts. Increasedsellingpriceandprofitabilityofexistingproductswillbelimitedduetotheexistenceofalternativesthatcanbeeasilyacceptedbyusers. Duetotheintrusionofalternatives,existingcompaniesmustimproveproductqualityorreducecosts. Theintensityofcompetitionfromproducersofalternativeproductsisaffectedbythecostoftheconversionofproductbuyers. (E)Competitionamongexistingcompetitorsintheindustry Enterprisesinmostindustriesarecloselylinkedtoeachother’sinterests.Aspartoftheiroverallstrategy,theirgoalistomaketheirowncompaniesmorecompetitivethantheircompetitors.Thereareconflictsandconfrontations,oftenmanifestedinprices,advertising,productintroductions,andafter-salesservices. FeaturesofthePorterFiveForcesTool PorterFiveForcesprovidestoolsforin-depthanalysisofthecompany’sindustry,helpingcompaniesunderstandthecompetitiveenvironment,correctlygraspthefivecompetitiveforcesfacingthecompanyandformulateastrategythatisbeneficialtothecompany’scompetitiveposition.Ingeneral,thePotterFiveForcesmodelhasthefollowingcharacteristics: Competition-oriented Studyingexistingindustries Payattentiontotheprofitpotentialoftheindustry HowtoapplytheFiveForcesModel? Porter’sfive-forceanalysismodelisapowerfultoolforcompaniestoconductenvironmentalanalysis,especiallyindustryanalysis,butitisnotallofthecompany’sstrategy.EnterpriseappliesPorter’sfive-forcemodelalsoneedstobebalancedbothinternallyandexternally. BasedonPorter’sfiveforcesanalysis,thedegreeofmatchingofitsresourceswiththeindustryisexamined.Undertheconditionsofintensifiedmarketcompetition,anyenterprisehascertainrisksinenteringunfamiliarareas.Whethertoseizetheseopportunities,enterprisesmustconsidertheircorecapabilitiesandadvantages. BasedonPorter’sfiveforcesanalysismodel,itexaminesmarkettrendsandthedegreeofstrategicflexibility.Thereisnoimmutablemarket,andthereisnostrategyonceandforall.Strategyformulationisadynamicprocessofconstantfeedbackandconstantadjustment.Itisnecessarytomaintainacertaindegreeofstrategicflexibility. Evenifthereisagoodstrategy,itneedsgoodstrategiclandingcapability.Theroleofpeopleincurrententerprisesisbecomingmoreandmoreimportant.Inspiringpeoplehasbecomethemostimportantfactorinthesustainabledevelopmentofenterprises,howtodesignasetofeffectiveanddiversifiedincentivemechanismsystemisparticularlyimportantforemployeesatdifferentlevels. FiveForcesAnalysisLiveExample TheFiveForcesaretheThreatofnewmarketplayers,thethreatofsubstituteproducts,powerofcustomers,powerofsuppliers,industryrivalrywhichdeterminesthecompetitiveintensityandattractivenessofamarket. PerformingFiveForcesAnalysisinVisualParadigm Let’sseehowtoperformtheFiveForcesAnalysisinVisualParadigm.WewilluseasimpleFiveForcesAnalysisexamplehere.Youmayexpandtheexamplewhenfinishedthistutorial. SelectDiagram>Newfromthemainmenu. IntheNewDiagramwindow,selectFiveForcesAnalysisandclickNext. YoucanstartfromanemptydiagramorstartfromaFiveForcesAnalysistemplateorFiveForcesAnalysisexampleprovided.Let’sstartwithablankdiagram.SelectBlankandclickNext. EnterthenameoftheFiveForcesAnalysismodelandclickOK. DragtheFiveForcesAnalysis shapefromthediagramtoolbaranddropitontothediagram. TheeditingoftheFiveForcesAnalysismodelisdoneviatheInfoArtshape.ClickontheFiveForcesAnalysisshapetoshowtheInfoArtshape. StartenteringthecontentinInfoArt. ThisisthefinalFiveForcesAnalysis: Turneverysoftwareprojectintoasuccessfulone. TryVisualParadigmFree Weusecookiestoofferyouabetterexperience.Byvisitingourwebsite,youagreetotheuseofcookiesasdescribedinourCookiePolicy. OK