Porter Five-Forces Model

The word “Strategy” is common now a days in business world or even in daily life you may heard lots of time people discussing about strategies to achieve something.  You must be thinking that strategies are developed in dreams or common sense by higher management of the company but this is not the case, best strategies always comes after proper evaluation of internal and external environment of the company.

The strategies are made by strategist to achieve objective or goals to allow the business to compete in industry. Porter five forces model of competitive analysis is widely used approach for developing strategies in many industries. The intensity of competition varies across industry. The intensity of competition is higher in low return industry as compared to high return industry due to less requirements of capital and common products that requires minimum R & D and efforts for production.

According to porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces.

  1. Rivalry among competitive firms
  2. Potential entry of new competitors
  3. Potential Development of Substitute Products
  4. Bargaining power of suppliers
  5. Bargaining power of consumers

porters-five-forces-model

Rivalry Among Competitive Firms

Rivalry among competing firms is the most powerful of the five competitive forces.The ongoing war between firms competing in the same industry for gaining customer share to increase revenues and profits. The competition is more intense if firm pursue strategies that gives competitive advantage over the strategies pursued by rivals.

Developing new strategies is more easier than retaining the uniqueness of the strategies to gain competitive edge over rivals in the industry. Changes in strategy by one firm may be met with retaliatory countermoves, such as lowering the prices, enhancing quality,adding features,providing services, extending warranties and increasing advertising.

Examples,

– In telecommunication industry firms are lowering their prices to increase consumer call ratio by minimize per minute profit margin but increasing overall company revenues.

– In the past few years number of new features were added in the mobiles now it not only give the functionality of cell phone but able to take pictures, make videos, watch streaming and use Internet. The firms like Nokia, Siemens, Samsung and other are following each other strategies to minimize the differentiation in the product so customer can easily switch brands.

– In the past television companies offer maximum one year warranty but now competition is tough other market player Samsung, LG, Haier, Philips and others enter in the market with their high quality products to compete Sony, that’s the reason customer is getting more services in the form of extended warranty periods.

– Pepsi Vs Coca Cola are competing by increasing advertising and offering new beverages in the market.

We discuss about offline business when it comes to online business on Internet the competition is more fierce, consumer get more control over its purchasing by sitting at home on computer and comparing the similar and substitute products on bases of features and prices.

Amazon.com is the best selling online book store offering huge library containing millions of books on variety of subjects. People come to amazon because they enjoy user friendly design, products, books and search capability of the site but when it come to purchase the product customer move to other site such as buy.com for purchase on discounts. Buy.com CEO says, ” The Internet is going to shrink retailers margins to the point where they will not survive.”

Examples,

– Dell.com offer computers and laptops of high quality at low prices as compared to the competitors.

– EBay.com is a place where people like to go to purchase products online at low price.

The rivalry among competing firm increase as the number of competitors increases, as competitors more equal in size and capability, as demand for the company products decline, products are undifferentiated, product prices decline,consumer brand switching cost is less, number of supplier available for raw material, low price substitute products are available and entry into market is easy due to less constraints.As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive.

Potential Entry of New Competitors

Potential entry of new competitors is also the factor to intense the competition in the industry. Larger the pool of new entrants result in more changes of intense competition. Barriers to entry, however can restrict the firms from entering the market, more number of entry barriers will make it difficult for the new entrants to exploit the opportunity of new market.

Barrier to entry, however, can include the need to gain economies to scale quickly, strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate distribution channels, government regulatory policies, tariffs,lack of raw access to raw material,possession of patents, undesirable locations, counterattack by entrenched firms and potential saturation of the market.

If existing firms producing at economies to scale then new entrants must ensure to makes it entry into the market with large production scale capability to lower it fixed and variable cost per unit to compete with the competitors product otherwise new entrants will face exceeding cost problems. Government policy creates hurdles for new entrants by heavy taxes and interest rates. New firms must get to know the Government regulations and policies before making entry decision into the country.

Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices and substantial marketing resources. The strategist’s job, therefore, is to identify potential new firms entering the market, to monitor the new rival firms strategies to counterattack as needed and to capitalize on existing strengths and opportunities.

Potential Development of Substitute Products

Firms mostly monitoring the trends within the industry to track the strategies but competition not only arise within the similar industry but also in different industry. Companies in other industry offer products with similar features and functionality or even better act as substitute for the products. For Instance, the producers of eyeglasses and contact lenses are facing mounting competitive pressures from growing consumer interest in laser surgery. Newspaper are feeling competitive force of the general public turning to cable news channels for late-breaking news and using Internet sources to get information about sports results, stock quotes, and job opportunities.

The firm face intense competition by substitute products producers firms when the customer cost of switching is lower, substitute product is better in quality and functionality , end user grow more comfortable with using substitutes. The competitive strength can be determine by market share, sales pattern, producers adding capacity for more production, rise in profits.

Bargaining Power of Suppliers

Suppliers and producers relation always matter specially in manufacturing industries. Suppliers play have an important role in production of good and services, better the raw material better the final product. Bargaining power of supplier effect the intensity of competition especially if there are huge number of supplier, less availability of raw material and the cost of switching supplier or raw material is high. These attributes in the industry gives power to the supplier to enforce term and conditions on manufacturers and charge high cost of raw material.

For Examples,

The bargaining power of Microsoft and Intel in more because they are the huge suppliers of software and hardware.Microsoft enforce computer manufacturers to load Windows in their computers and place their logo on laptops,desktops and server machines. Intel on the other hand also demands computer manufacturers to place their logo on machines using Intel processor. Intel and Microsoft enforcing their terms and conditions also charging high cost from the computer manufacturing companies.

Manufacturer needs to build relationship with the supplier to improve the quality and reduce the prices of the product by working together for improvement in processes and reduce time to market by implementing just-in-time inventory.

For Example,

Dell computer known for low cost and best quality computer,laptop and server manufacturer in the industry. The key behind dell success is maintaining better relationship and collaboration with the supplier of computer hardware and software.

To gain control or ownership over its suppler backward integration strategy is adopted by most of the companies.This strategy will help both suppliers and companies to work together for improvement in product quality, reduce cost, reduce time to market and earn good reputation in the industry.

 Bargaining Power of Consumers

Consumers are the final user of the products, performance of the companies totally depend upon the consumers. Bargaining power of consumers is more especially when they are huge in number and consumers purchase in large quantity. Rivals firms offer discounts, warranty and services to switch the consumer from one brand to another in same industry.

The bargaining power of consumers is also more when products are undifferentiated and widely available. In this case consumer can ask for more discounts, extended warranty and services. As the satisfaction level of consumer goes up more the intensity level of competition increases. Firms should monitor the competitors strategies and also take care of the consumer like and dislike by maintaining good relation by implementing CRM processes in the company.

For Example,

P & G have online portal to ask the customer about their views and new ideas about the products of their desire.

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