Introduction

There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s (Porter, 1998) were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector (Thurlby, 1998).

As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry¶s likely profitability is conducted in Porter¶s five forces model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1980a) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.

Main

Aspects

of

Porter¶s

Five

Forces

Analysis

The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organization¶s behaviour in a competitive market. These include the following:

y y y y y

The rivalry between existing sellers in the market. The power exerted by the customers in the market. The impact of the suppliers on the sellers. The potential threat of new sellers entering the market. The threat of substitute products becoming available in the market.

Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998).

Force

1:

The

Degree

of

Rivalry

The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's ³five forces´ framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.

y

This force is located at the centre of the diagram;

Distribution channels: for example. a certain brand that cannot be copied (The Champagne) Force 3: The Threat of Substitutes The threat that substitute products pose to an industry's profitability depends on the relative price -toperformance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. benefits associated with bulk purchasing. alcohol). 1998) The most common forms of entry barriers. the costs in areas such as retraining. Cost advantages not related to the size of the company: for example. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Government legislations: for example. adjusted for the cost of capital. It also involves: y y y Product-for-product substitution (email for mail. Sanderson. Cost of entry: for example. In contrast. fax). 1980b. Force2:TheThreat of Entry Both potential and existing competitors influence average industry profitability. retooling and redesigning that are incurred when a customer switches to a different type of product or service. introduction of new laws might weaken company¶s competitive position. entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents¶ position (Porter. ease of access for competitors. rise above zero. y Differentiation: for example. Force 4: Buyer Power Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer to the diagram). Generic substitution (Video suppliers compete with travel companies). Kippenberger (1998) states that it is often useful to . The threat of new entrants is usually based on the market entry barriers. contacts and expertise.y Is most likely to be high in those industries where there is a threat of substitute products. Substitution that relates to something that people can do without (cigarettes. The most important determinants of buyer power are the size and the concentration of customers. The threat of substitution is also affected by switching costs ± that is. is based on the substitution of need. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits. investment into technology. are as follows: y y y y y Economies of scale: for example. except intrinsic physical or legal obstacles. and existing power of suppliers and buyers in the market.

Bargaining power of suppliers exists in the following situations: y y y y Where the switching costs are high (switching from one Internet provider to another). As a result. y Low cost of switching between suppliers. The stronger the power of buyers and suppliers. organizations would be expected to compete less fiercely. Indeed. and the predictions of the SCP model need to be modified accordingly. small suppliers. y This force is relatively high where there a few. Force 5: Supplier Power Supplier power is a mirror image of the buyer power. High power of brands (McDonalds. However. such as small farming businesses supplying large grocery companies. the more intense competition is likely to be within the industry. Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).distinguish potential buyer power from the buyer's willingness or incentive to use t at power. large players in the market. willingness that h derives mainly from the ³risk of failure´ associated with a product's use. such as from one fleet supplier of trucks to another. these five factors are not the only ones that determine how firms in an industry will compete ± the structure of the industry itself may play an important role. How to write a Good Porter's 5 Forces analysis The Porter¶s Five Forces model is a simple tool that supports strategic understanding where power lies in a . The nature of competition in an industry is strongly affected by the suggested five forces. the histories and cultures of the firms in the industry also play a very important role in shaping competitive behaviour. and the stronger the threats of entry and substitution. Tesco). 1998). the whole five-forces framework is based on an economic theory know as the ³Structure-Conduct-Performance´ (SCP) model: the structure of an industry determines organizations¶ competitive behaviour (conduct). as Haberberg and Rieple (2001) state. y Present where there is a large number of undifferentiated. Possibility of forward integration of suppliers (Brewers buying bars). which in turn determines their profitability (performance). However. British Airways. In concentrated industries. the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. than in fragmented ones. according to this model. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter. as it is the case with retailers an grocery stores. and make higher profits.

it provides an opportunity to identify the strength of the position and the ability to make a sustained profit in the industry (Mind Tools. or for a force strongly against. Porter argues that five forces determine the profitability of an industry. and the strength of a position a company is looking to move into. and then check against the factors presented for each force in the diagram above. it will enable a company to take fair advantage of its strengths. it also emphasizes exten ded competition for value rather than just competition among existing rivals. whereas the competitive environment is changing turbulently. and avoid taking wrong steps. improve weaknesses. and summarize the size and the scale of the force on the diagram. leading to the consideration of suppliers and buyers as threats that need to be tackled. for instance. services or businesses have the potential to be profitable. and the simplicity of its application inspired numerous companies as well as business schools to adopt its use (Wheelen and Hunger. With a clear understanding of where power lies. it is important to understand the situation and to look at each of the forces individually. but. pricing or advertising. or is the goal to become part of the ongoing commerce with the intention to produce innovative ideas that will expand the size of the industry? Is it true that the environment poses a threat to the organisation. for example. 2006). ³+´ and ³-" to represent the forces moderately in company¶s favour. or does it offer the ground for a constitutive industry player co-operation? By thinking through how each force affects a company. and by identifying the strength and direction of each force. it is important to look . In conducting an analysis of Porter¶s Five Forces. Therefore. Are the five forces able to foresee industry expansion? Is it the corporate strategist's goal to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favour. The next step is to highlight the key factors on a diagram. At the heart of industry are rivals and their competitive strategies linked to. After identifying favourable and unfavourable forces for the company¶s performance and industry¶s attractiveness. It is suggested to use relevant signs. Limitations of Porter¶s Five Force Model Porter¶s model is a strategic tool used to identify whether new products. It also helps to understand both the strength of a firm¶s current competitive position. to apply this planning tool effectively. One of the critical comments made of the Five Forces framework is its static nature. it is important to analyse the situation and examine the impacts of the forces. Despite the fact that the Five Force framework focuses on business concerns rather than public policy.business situation. he contends. it is required to brainstorm all relevant factors for the company¶s market situation. However it can also be very illuminating when used to understand the balance of power in other situations. 1998).

however. it is not advisable to develop a strategy solely on the basis of Porter¶s models (Kippenberger.. 1998). by forcing either cost increases or price decreases. the computer and software industry is often considered as being highly competitive. or merges with. . 1998. Company annual reports and its publications on the main suppliers and distribution network. such as technological innovations and dynamic market entrants from start-ups that will completely change business models within short times. customer loyalty. Finally. Haberberg and Rieple. Anything that will give the exposure to the market situation. a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption (Luffman and et al. There may also be the potential threat of new entrants. when the company acquires. Based originally on the economic situation in the eighties with its strong competition and relatively stable market structures. This relates to the strategic option of vertical integration. Therefore. and cans for packaging soft drinks. For instance. but to examine it in addition to other strategic frameworks of SWOT and PEST analysis. 2001). techniques and theories. Nevertheless. as it assumes relatively static market structures. Analyst reports and trade organisations. it is important to appreciate that companies purchase from suppliers and sell to buyers. new emerging companies in the industry. business articles on the industry performance. This approach. 2001). If they are powerful they are in a position to bargain profits away through reduced margins. It is important to be aware that this model has further limitations in today's market environment. as far as they can. An example would be plastic bottles. is advisable for the application of every business model (Recklies. What needs to be done is to adopt the model with the knowledge of its limitations and to use it as part of a larger framework of management tools. that does not mean that Porters theories became invalid. The industry structure is constantly being revolutionized by innovation that indicates Five Forces model being of limited value since it represents no more than snapshots of a moving picture.beyond one¶s immediate competitors as there are other determinates of profitability. there might be competition from substitute products or services. Wheelen and Hunger. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. Where to find information for Porter's 5 Forces analysis In conducting the analysis it is crucial to examine the existing literature: y y y y Periodicals. 1996. Specifically. etc. competitors present in the market. it is not able to take into account new business models and the dynamism of the industries. although some competitors will see this as an opportunity to strengthen their position in the market by ensuring. glass bottles.

and particularly appreciates which one is the most important. The situation is fluid.It is important to make sure that the sources are reliable and relevant to the current condition of the industry. and the nature and relative power of the forces will change. in order to conduct a good analysis of the model. and strategic recommendations for the action a company should take in order to develop barriers to competition. Some issues during the implementation of these Five Forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. and the amount of detailed information required. Successful use of the Porter Model Analysis includes identifying the sources of competition. the need to monitor and stay aware is continuous. the strength and likelihood of that competition existing. It has to be viable. . Consequently. Conclusion Anycompany must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. reliable and valid. it will be in a stronger position to defend itself against any threats and to influence the forces with its strategy. the level of competitor information required is very detailed and may not always be available. This can be prohibitive to its practical use. Further limitations could be present in the nature of market forces that reduce the applicability of the information sources to present situations. For example. the gathered data and information has to be checked and be applied to the current business conditions. For this purpose. If a company fully understands the nature of the Porter¶s five forces.

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