Michael Porter’s 5 forces model

Potential Entrants
Michael Porter, an authority on competitive strategy, contends that a
corporation is most concerned with the intensity of competition within its
industry. Basic competitive forces determine the intensity level. The stronger
each of these forces is, the more companies are limited in their ability to raise
prices and earned greater profits.
Threat of new entrants
New entrants are newcomers to an existing industry. They typically bring
new capacity, a desire to gain market share and substantial resources. Therefore
they are threats to an established corporation. Some of the possible barriers to
entry are the following.
1. Economies of scale
2. Product differentiation
3. Capital requirements
4. Switching costs
5. Access to distribution channels
6. Cost disadvantages independent of size
7. Government policy

Rivalry among existing firms

Rivalry is the amount of direct competition in an industry. In most
industries corporations are mutually dependent. A competitive move by one
firm can be expected to have a noticeable effect on its competitors and thus
make us retaliation or counter efforts. According to Porter, intense rivalry is
related to the presence of the following factors.

1. number of competitors
2. rate of industry growth
3. product or service characteristics
4. amount of fixed costs
5. capacity
6. height of exit barriers
7. diversity of rivals

Treat of substitute product or services

 Substitute products are those products that appear to be different but can
satisfy the same need as another product. According to Porter, “Substitute limit
the potential returns of an industry by placing a ceiling on the prices firms in the
industry can profitably charge.” To the extent that switching costs are low,
substitutes may have a strong effect on the industry.
Bargaining power of buyers
Buyers affect the industry through their ability to force down prices,
bargain for higher quality or more services, and play competitors against each
other.
• Buyers are more powerful when
– Buyers are concentrated and they are few of them
– If the product offering is undifferentiated
– Backward integration is possible
– If the selling price is unimportant to the total costs of the buyer

Bargaining power of supplier

Suppliers can affect the industry through their ability to raise prices or
reduce the quality of purchased goods and services.
• Suppliers are more powerful when
– they are few suppliers
– There are no substitutes to the supply they offer
– Suppliers' prices form a large part of the total cost of the product
cost
– Supplier can undertake the value-added process of the (your)
organisation
 VALUE CHAIN ANALYSIS

Michael Porter published the Value Chain Analysis in 1985 as a response to criticism that his
Five Forces framework lacked an implementation methodology that bridged the gap between
internal capabilities and opportunities in the competitive landscape. This framework focused
on industry attractiveness as a determinant of the profit potential of all companies within that
particular industry. However, significant differences in performance exist between companies
operating within the same industry that can be explained either by the company's
participation in a successful strategic group or by a firm's specific competitive advantages.

Value Chain Analysis helped identify a firm's core competencies and distinguish those
activities that drive competitive advantage. The cost structure of an organisation can be
subdivided into separate processes or functions assuming that the cost drivers for each of
these activities behave differently. Porter's strength was to condense this activity based cost
analysis into a generic template consisting of five primary activities and four support
activities. The nine activity groups are:

Primary activities:

1. inbound logistics: materials handling, warehousing, inventory control, transportation;

2. operations: machine operating, assembly, packaging, testing and maintenance;

3. outbound logistics: order processing, warehousing, transportation and distribution;

4. marketing and sales: advertising, promotion, selling, pricing, channel management;

5. service: installation, servicing, spare part management;

Support activities:

6. firm infrastructure: general management, planning, finance, legal, investor relations;

7. human resource management: recruitment, education, promotion, reward systems;

8. technology development: research & development, IT, product and

    process development;

9. procurement: purchasing raw materials, lease properties, supplier contract negotiations.

 
By subdividing an organisation into its key processes or functions, Porter was able to link
classical accounting to strategic capabilities by using value as a core concept, i.e. the ways a
firm can best position itself against its competitors given its relative cost structure, how the
composition of the value chain allows the firm to compete on price, or how this composition
allows the firm to differentiate its products to specific customer segments.

EXTERNAL ENVIRONMENT ANALYSIS

Environment features
 Changeability
 Complexity
 Novelty
 Predictability
 Rate of change
 predictability
Levels of Environment
 Mega
 Micro
 Operating
 Techniques / methods of environment analysis
 PESTEL- political, economic, social, technological, environmental, and
legal analysis.
 SWOT
 ETOP- environmental threats opportunities profile
 QUEST – quick env scanning technique
 EFE MATRIX – external factor evaluation matrix
 CPM – competitive profile matrix.

Sources of Ethics
1. Genetic Inheritance : the qualities of goodness is a product of
genetic traits strengthened over time by the evolutionary process.
2. Religion : religious morality is clearly a primary focus in shaping
our societal ethics.
3. Philosophical Systems : the quality of pleasure to be derived
from an act was the essential measure of its goodness.
4. Cultural Experience : individual values are shaped in large
measure by the norms of the society.
5. The legal system : laws represent a rough approximation of
society’s ethical standards.