Porters Five Forces Model of Competition

Porter's Five Forces Model of Competition · Threat of new potential entrants · Threat of substitute product/services · Bargaining power of suppliers · Bargaining ...   Home Library Marketing StrategicManagement Porter’sFiveForcesModelofCompetition Porter’sFiveForcesModelofCompetition MichaelPorter(HarvardBusinessSchoolManagementResearcher)designedvariousvitalframeworksfordevelopinganorganization’sstrategy.Oneofthemostrenownedamongmanagersmakingstrategicdecisionsisthefivecompetitiveforcesmodelthatdeterminesindustrystructure.AccordingtoPorter,thenatureofcompetitioninanyindustryispersonifiedinthefollowingfiveforces: Threatofnewpotentialentrants Threatofsubstituteproduct/services Bargainingpowerofsuppliers Bargainingpowerofbuyers Rivalryamongcurrentcompetitors FIGURE:Porter’sFiveForcesmodel Thefiveforcesmentionedaboveareverysignificantfrompointofviewofstrategyformulation.Thepotentialoftheseforcesdiffersfromindustrytoindustry.Theseforcesjointlydeterminetheprofitabilityofindustrybecausetheyshapethepriceswhichcanbecharged,thecostswhichcanbeborne,andtheinvestmentrequiredtocompeteintheindustry.Beforemakingstrategicdecisions,themanagersshouldusethefiveforcesframeworktodeterminethecompetitivestructureofindustry. Let’sdiscussthefivefactorsofPorter’smodelindetail: Riskofentrybypotentialcompetitors:Potentialcompetitorsrefertothefirmswhicharenotcurrentlycompetingintheindustrybuthavethepotentialtodosoifgivenachoice.Entryofnewplayersincreasestheindustrycapacity,beginsacompetitionformarketshareandlowersthecurrentcosts.Thethreatofentrybypotentialcompetitorsispartiallyafunctionofextentofbarrierstoentry.Thevariousbarrierstoentryare- Economiesofscale Brandloyalty GovernmentRegulation CustomerSwitchingCosts AbsoluteCostAdvantage Easeindistribution StrongCapitalbase Rivalryamongcurrentcompetitors:Rivalryreferstothecompetitivestruggleformarketsharebetweenfirmsinanindustry.Extremerivalryamongestablishedfirmsposesastrongthreattoprofitability.Thestrengthofrivalryamongestablishedfirmswithinanindustryisafunctionoffollowingfactors: Extentofexitbarriers Amountoffixedcost Competitivestructureofindustry Presenceofglobalcustomers Absenceofswitchingcosts GrowthRateofindustry Demandconditions BargainingPowerofBuyers:Buyersrefertothecustomerswhofinallyconsumetheproductorthefirmswhodistributetheindustry’sproducttothefinalconsumers.Bargainingpowerofbuyersrefertothepotentialofbuyerstobargaindownthepriceschargedbythefirmsintheindustryortoincreasethefirmscostintheindustrybydemandingbetterqualityandserviceofproduct.Strongbuyerscanextractprofitsoutofanindustrybyloweringthepricesandincreasingthecosts.Theypurchaseinlargequantities.Theyhavefullinformationabouttheproductandthemarket.Theyemphasizeuponqualityproducts.Theyposecrediblethreatofbackwardintegration.Inthisway,theyareregardedasathreat. BargainingPowerofSuppliers:Suppliersrefertothefirmsthatprovideinputstotheindustry.Bargainingpowerofthesuppliersrefertothepotentialofthesupplierstoincreasethepricesofinputs(labour,rawmaterials,services,etc)orthecostsofindustryinotherways.Strongsupplierscanextractprofitsoutofanindustrybyincreasingcostsoffirmsintheindustry.Suppliersproductshaveafewsubstitutes.Strongsuppliers’productsareunique.Theyhavehighswitchingcost.Theirproductisanimportantinputtobuyer’sproduct.Theyposecrediblethreatofforwardintegration.Buyersarenotsignificanttostrongsuppliers.Inthisway,theyareregardedasathreat. ThreatofSubstituteproducts:Substituteproductsrefertotheproductshavingabilityofsatisfyingcustomersneedseffectively.Substitutesposeaceiling(upperlimit)onthepotentialreturnsofanindustrybyputtingasettingalimitonthepricethatfirmscanchargefortheirproductinanindustry.Lesserthenumberofclosesubstitutesaproducthas,greateristheopportunityforthefirmsinindustrytoraisetheirproductpricesandearngreaterprofits(otherthingsbeingequal). ThepowerofPorter’sfiveforcesvariesfromindustrytoindustry.Whateverbetheindustry,thesefiveforcesinfluencetheprofitabilityastheyaffecttheprices,thecosts,andthecapitalinvestmentessentialforsurvivalandcompetitioninindustry.Thisfiveforcesmodelalsohelpinmakingstrategicdecisionsasitisusedbythemanagerstodetermineindustry’scompetitivestructure. Porterignored,however,asixthsignificantfactor-complementaries.Thistermreferstothereliancethatdevelopsbetweenthecompanieswhoseproductsworkisincombinationwitheachother.Strongcomplementorsmighthaveastrongpositiveeffectontheindustry.Also,thefiveforcesmodeloverlookstheroleofinnovationaswellasthesignificanceofindividualfirmdifferences.Itpresentsastagnantviewofcompetition. ❮❮   Previous Next   ❯❯  RelatedArticles PersonalSWOTAnalysis CompetitorAnalysis WhatisCompetitiveAdvantage? StrategicLeadership SomePitfallstobeAvoided ViewAllArticles Authorship/Referencing-AbouttheAuthor(s) ThearticleisWrittenBy“PrachiJuneja”andReviewedByManagementStudyGuideContentTeam.MSGContentTeamcomprisesexperiencedFacultyMember,ProfessionalsandSubjectMatterExperts.WeareaISO2001:2015CertifiedEducationProvider.ToKnowmore,clickonAboutUs.Theuseofthismaterialisfreeforlearningandeducationpurpose.Pleasereferenceauthorshipofcontentused,includinglink(s)toManagementStudyGuide.comandthecontentpageurl. 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