Porter's Five Forces of Competitive Position Analysis

Porter's Five Forces is a simple framework for assessing and evaluating the competitive strength and position of a business organisation. Resources Tools Essentialtoolsformanagementaccountants Porter’sFiveForcesofCompetitivePositionAnalysis Porter’sFiveForcesofCompetitivePositionAnalysis   Whatisit? Framework/theory Porter'sFiveForcesofCompetitivePositionAnalysisweredevelopedin1979byMichaelEPorterofHarvardBusinessSchoolasasimpleframeworkforassessingandevaluatingthecompetitivestrengthandpositionofabusinessorganisation. Thistheoryisbasedontheconceptthattherearefiveforcesthatdeterminethecompetitiveintensityandattractivenessofamarket.Porter’sfiveforceshelptoidentifywherepowerliesinabusinesssituation.Thisisusefulbothinunderstandingthestrengthofanorganisation’scurrentcompetitiveposition,andthestrengthofapositionthatanorganisationmaylooktomoveinto. StrategicanalystsoftenusePorter’sfiveforcestounderstandwhethernewproductsorservicesarepotentiallyprofitable.Byunderstandingwherepowerlies,thetheorycanalsobeusedtoidentifyareasofstrength,toimproveweaknessesandtoavoidmistakes. Porter’sfiveforcesofcompetitivepositionanalysis:   Thefiveforcesare: 1.Supplierpower.Anassessmentofhoweasyitisforsupplierstodriveupprices.Thisisdrivenbythe:numberofsuppliersofeachessentialinput;uniquenessoftheirproductorservice;relativesizeandstrengthofthesupplier;andcostofswitchingfromonesuppliertoanother. 2.Buyerpower.Anassessmentofhoweasyitisforbuyerstodrivepricesdown.Thisisdrivenbythe:numberofbuyersinthemarket;importanceofeachindividualbuyertotheorganisation;andcosttothebuyerofswitchingfromonesuppliertoanother.Ifabusinesshasjustafewpowerfulbuyers,theyareoftenabletodictateterms. 3.Competitiverivalry.Themaindriveristhenumberandcapabilityofcompetitorsinthemarket.Manycompetitors,offeringundifferentiatedproductsandservices,willreducemarketattractiveness. 4.Threatofsubstitution.Whereclosesubstituteproductsexistinamarket,itincreasesthelikelihoodofcustomersswitchingtoalternativesinresponsetopriceincreases.Thisreducesboththepowerofsuppliersandtheattractivenessofthemarket. 5.Threatofnewentry.Profitablemarketsattractnewentrants,whicherodesprofitability.Unlessincumbentshavestronganddurablebarrierstoentry,forexample,patents,economiesofscale,capitalrequirementsorgovernmentpolicies,thenprofitabilitywilldeclinetoacompetitiverate. Arguably,regulation,taxationandtradepoliciesmakegovernmentasixthforceformanyindustries. WhatbenefitsdoesPorter’sFiveForcesanalysisprovide? Fiveforcesanalysishelpsorganisationstounderstandthefactorsaffectingprofitabilityinaspecificindustry,andcanhelptoinformdecisionsrelatingto:whethertoenteraspecificindustry;whethertoincreasecapacityinaspecificindustry;anddevelopingcompetitivestrategies. Actionstotake/Dos ActionstoAvoid/Don'ts Usethismodelwherethereareatleastthreecompetitorsinthemarket Considertheimpactthatgovernmenthasormayhaveontheindustry Considertheindustrylifecyclestage–earlierstageswillbemoreturbulent Considerthedynamic/changingcharacteristicsoftheindustry Avoidusingthemodelforanindividualfirm;itisdesignedforuseonanindustrybasis     Inpractice: Porter'sFiveForcesofCompetitivePositionAnalysis     AnalysisoftheIndianbusinessenvironment Downloadfullcasestudy IntheJune2010issueofFinancialManagementmagazine,theFiveForcesmodelwasappliedtotheemergingIndianbusinessenvironmentincomparisonwithmoredevelopedmarkets.TheanalysisfoundthatfactorssuchasstateprotectionismandalackofinfrastructurearegreaterbarrierstoentryinIndiathantheyareinmoredevelopednations,wheremarketforcesaremorepowerful. Theanalysishighlightedmanyissuesaffectingcompetitioninemergingeconomiesandcomparedthemtothosethataremoreprevalentinmoredevelopedmarkets. OnefactorthatcouldplayacrucialroleinIndiaispublicopinion,whichexertsaconsiderableinfluenceonthegovernment.AgoodexampleofthisisacampaignbylocalretailersagainstWalmart,whofeelthatthearrivaloftheUSretailgiantcouldputthemoutofbusiness.WalmarthasmadehugeinvestmentsinIndia,butishavingtofindwaysaroundstringentregulationsthatpreventitfromdoingthingsasbasicasputtingitsbrandnameonstores.     Relatedandsimilarpractices PESTanalysis AdditionalresourcesforPorter'sFiveForces   Quiz:  HowwelldoyouknowPorter’sFiveForces? Tools:  StrategicPlanningTools Tool:  BalancedScorecard Tool:  StrategyMapping Article:  Porter’sFiveForces - UnderstandingCompetitiveForcestoMaximizeProfitability Article:  Porter’sFiveForces-Amodelforindustryanalysis     TOPICS Strategyandinnovation RelatedArticles 95oftheworld'stop100brandschooseCGMA Learnmore> InterestedintheCGMAFinanceLeadershipProgram? 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