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- Date Submitted: 07/20/2012 05:14 AM
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Analysis the Porter’s Five Forces Model of Competition
Michael Porter (Harvard Business School Management Researcher) designed various vital frameworks for developing an organization’s strategy. One of the most renowned among managers making strategic decisions is the five competitive forces model that determines industry structure. According to Porter, the nature of competition in any industry is personified in the following five forces:Threat of new potential entrants
Threat of substitute product/services
Bargaining power of suppliers
Bargaining power of buyers
Rivalry among current competitors
FIGURE: Porter’s Five Forces model
The five forces mentioned above are very significant from point of view of strategy formulation. The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because they shape the prices which can be charged, the costs which can be borne, and the investment required to compete in the industry. Before making strategic decisions, the managers should use the five forces framework to determine the competitive structure of industry.
Let’s discuss the five factors of Porter’s model in detail:
Risk of entry by potential competitors: Potential competitors refer to the firms which are not currently competing in the industry but have the potential to do so if given a choice. Entry of new players increases the industry capacity, begins a competition for market share and lowers the current costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry. The various barriers to entry are-
Economies of scale
Brand loyalty
Government Regulation
Customer Switching Costs
Absolute Cost Advantage
Ease in distribution
Strong Capital base
Rivalry among current competitors: Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to...
Michael Porter (Harvard Business School Management Researcher) designed various vital frameworks for developing an organization’s strategy. One of the most renowned among managers making strategic decisions is the five competitive forces model that determines industry structure. According to Porter, the nature of competition in any industry is personified in the following five forces:Threat of new potential entrants
Threat of substitute product/services
Bargaining power of suppliers
Bargaining power of buyers
Rivalry among current competitors
FIGURE: Porter’s Five Forces model
The five forces mentioned above are very significant from point of view of strategy formulation. The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because they shape the prices which can be charged, the costs which can be borne, and the investment required to compete in the industry. Before making strategic decisions, the managers should use the five forces framework to determine the competitive structure of industry.
Let’s discuss the five factors of Porter’s model in detail:
Risk of entry by potential competitors: Potential competitors refer to the firms which are not currently competing in the industry but have the potential to do so if given a choice. Entry of new players increases the industry capacity, begins a competition for market share and lowers the current costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry. The various barriers to entry are-
Economies of scale
Brand loyalty
Government Regulation
Customer Switching Costs
Absolute Cost Advantage
Ease in distribution
Strong Capital base
Rivalry among current competitors: Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to...