Porters Five Forces

Porters Five Forces

Porter's five forces was introduced by Michael S. Porter in his first article in Harvard Business Review marts-april 1979. The title of the article was “How Competitive Forces Shape Strategy”.

About the model

The model identifies five competitive forces which affect the company's competitive position – these are

•Existing competitors in the industry

•Threat of new entrants coming into the industry

•Bargaining power of the suppliers to our firm

•Bargaining power of buyers and

•Threat of substitute products or services. 

An example:  an air service can substitute a high-speed rail line. Both meet the need for transport between two cities.

Each force

Now we shall review each of the five market forces 

First we consider the existing competitors in the industry

Rivalry among existing competitors takes the familiar form of jockeying for position – using tactics like price competition, product introduction, and advertising.

Intense rivalry is related to the presence of a number of factors.

 

Now we consider the threat of new entrants

The seriousness of the threat of entry depends on the barriers present and on the reaction that the entrants can expect from existing competitors.

Some of the major sources of barriers to make entry in an industry are

When firms in an industry have Economies of scale in fields like production, research, distribution, and marketing. Then it is difficult for a new competitor to enter the industry. 

Examples are firms such as McDonald in the fast-food industry or Amazon with sales and distribution over the internet.

 

Now we consider Bargaining power of suppliers in relation to the industry

If suppliers are powerful they can raise prices or reduce the quality of goods and services. A supplier group is powerful; if the following circumstances are present

Few companies dominate the group of suppliers.  An example is grain - five companies control almost the whole world’s trade.

A supplier has a unique position. We can’t buy the product elsewhere or it is very expensive to change supplier. By choosing a specific computer software supplier - many firms place themselves in this situation

Now we consider Bargaining power of buyers

A buyer group is powerful in the following situations

Customers purchase in large volumes. An example is Government purchase of large quantities of office standard products such as paper. They are powerful in this negotiation.

The products the costumers purchase from the industry are standard products. The buyers, sure that they can always find alternative suppliers, may play one company against another, as they do in the trucking industry.

If our product represents a significant fraction of the buyer's total cost. The buyer is likely to shop for a favorable price. If it represents a small fraction of buyer’s cost, the buyer is usually much less price sensitive.

 

The last of the five competitive forces is threat of substitute products or services

Threat from substitute products means that firms from other industries completely or partially can capture our customers.

Another industry’s product coverage the need of our customers.

We have seen this in the camera industry. Today many needs for pictures are covered using the camera integrated in the mobile phone. 

There's almost no sale of cheap and middle class cameras anymore – the camera industry today consists only of high end cameras.

Once you have completed the industry analysis using the five competitive forces.

 

Criticism of model

Now we shall review a criticism of Porter's Five Forces

The model is often accused of being a static model in an environment that is constantly evolving.

Michael Porter has responded to this criticism by stating that the model can analyze how the relationship between companies, customers, competitors, suppliers and substitutes will develop over time. You can make predictions of the future 'Forces'

 

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