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Porter 5 Forces

Porter 5 Forces

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Published by Emad Aboeleinein

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Published by: Emad Aboeleinein on May 29, 2010
Copyright:Attribution Non-commercial


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Five Forces Model by Michael Porter 
Five Forces model of Michael Porter is a very elaborate concept for evaluatingcompany's competitive position. Michael Porter provided a framework thatmodels an industry and therefore implicitly also businesses as being influencedby five forces. Michael
 Porter's Five Forces model 
is often used in strategicplanning.Porter's competitive
 five forces model 
is probably one of the most commonly usedbusiness strategy tools and has proven its usefulness in numerous situations.When exploring strategic management models,
Why would I need to use Porter's Five Forces model?
In general, any CEO or a strategic business manager is trying to steer his or herbusiness in a direction where the business will develop an edge over rival firms.
 Michael Porter's model of Five Forces
can be used to better understand theindustry context in which the firm operates.
 Porter's Five Forces model 
is astrategy tool that is used to analyze attractiveness of an industry structure.
What is the basic idea behind Porter's Five Forces model?
Porter's Five Forces model is made up by identification of 5 fundamentalcompetitive forces:
Barriers to entry
Threat of substitutes
Bargaining power of buyers
Bargaining power of suppliers
Rivalry among the existing playersSome later economists also consider government as the sixth force in this model.When putting all these points together in a graphical representation, we getPorter's Five Forces model which looks like this:
Force 1: Barriers to entry
Barriers to entry measure how easy or difficult it is for new entrants to enter intothe industry. This can involve for example:
Cost advantages (economies of scale, economies of scope)
Access to production inputs and financing,
Government policies and taxation
Production cycle and learning curve
Capital requirements
Access to distribution channelsPatents, branding, and image also fall into this category.
Force 2: Threat of substitutes
Every top decision makes has to ask:
 How easy can our product or service be substituted?
The following needs to be analyzed:
How much does it cost the customer to switch to competingproducts or services?
How likely are customers to switch?
What is the price-performance trade-off of substitutes?
If a product can be easily substituted, then it is a threat to the company becauseit can compete with price only.Ex.Electric security system replaces a security guardDigital camera replaces the need for filmHandy cam replaces need for digital cameraQuestions?1-how many substitutes' products/services have appeared in your industry in thelast 5 years?2-what are they? how different are the?3-were they introduced by your origination or by others?4-which organization in your industry dose the most R&D?5-what happened to price, profit and MKT share when substitutes areintroduced?
Force 3: Bargaining power of buyers
Now the question is how strong the position of buyers is. For example, can yourcustomers work together to order large volumes to squeeze your profit margins?The following is a list of other examples:
Buyer volume and concentration
What information buyers have
Can buyers corner you in negotiations about price
How loyal are customers to your brand
Price sensitivity
Threat of backward integration
How well differentiated your product is
Availability of substitutesHaving a customer that has the leverage to dictate your prices is not a goodposition.For Example,P & G have online portal to ask the customer about their views and new ideasabout the products of their desire

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