Porter Five Forces Analysis
Porter Five Forces Analysis STRUCTURE AND REMAIN CONCEPTS: The threat of the entry of new competitors Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition). The existence of barriers to entry (patents, rights, etc. The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. Economies of product differences, Brand equity, Switching costs or sunk costs, Capital requirements,Access to distribution, Customer loyalty to established brands, Absolute cost,Industry profitability; the more profitable the industry the more attractive it will be to new competitors. The threat of substitute products or services
The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives ,Buyer propensity to substitute,Relative price performance of substitute,Buyer switching costs,Perceived level of product differentiation,Number of substitute products available in the market,Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product. ,Substandard product,Quality depreciation
The bargaining power of customers (buyers) The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution,Bargaining leverage, particularly in industries with high fixed costs,Buyer volume,Buyer switching costs relative to firm switching costs,Buyer information availability,Ability to backward ntegrate,Availability of existing substitute products,Buyer price sensitivity,Differential advantage (uniqueness) of industry products,RFM Analysis The bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e. g. , charge excessively high prices for unique resources.
Supplier switching costs relative to firm switching costs,Degree of differentiation of inputs,Impact of inputs on cost or differentiation,Presence of substitute inputs,Strength of distribution channel,Supplier concentration to firm concentration ratio,Employee solidarity (e. g. labor unions),Supplier competition – ability to forward vertically integrate and cut out the BUYER The intensity of competitive rivalry For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
Sustainable competitive advantage through innovation Competition between online and offline companies,Level of advertising expense,Powerful competitive strategy. How will competition react to a certain behavior by another firm? Competitive rivalry is likely to be based on dimensions such as price, quality, and innovation. Technological advances protect companies from competition. This applies to products and services. Companies that are successful with introducing new technology, are able to charge higher prices and achieve higher profits, until competitors imitate them.
Examples of recent technology advantage in have been mp3 players and mobile telephones. Vertical integration is a strategy to reduce a business’ own cost and thereby intensify pressure on its rival… IMPLICATION FOR BUSINESS STRATEGIES: According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers.
A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business). OPINION:
Porter’s Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations. It works by looking at the strength of five important forces that affect competition: Supplier Power: The power of suppliers to drive up the prices of your inputs. Buyer Power: The power of your customers to drive down your prices. Competitive Rivalry: The strength of competition in the industry.
The Threat of Substitution: The extent to which different products and services can be used in place of your own. The Threat of New Entry: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down). By thinking about how each force affects you, and by identifying the strength and direction of each force, you can quickly assess the strength of your position and your ability to make a sustained profit in the industry. You can then look at how you can affect each of the forces to move the balance of power more in your favor.