Five Forces Model Essay
1499 Words6 Pages
Professor Michael Porter of the Harvard Business School developed a framework that aids in the development of an organizations competitive advantage.
Porter identified five basic forces that act on the organization;
I. The bargaining power of suppliers;
II. The bargaining power of buyers;
III. The threat of potential new entrants;
IV. The threat of substitutes;
V. The extent of competitive rivalry.
The bargaining power of suppliers.
Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods or services.
In every industry there are suppliers; Porter put forward the idea that suppliers are more powerful under the following…show more content…
The organisation has little or no choice but to bargain with buyers, as there are few alternative buyers in the industry.
« The products it purchases from the industry represent a significant fraction of buyer¡¦s costs or purchases. Buyers will shop around and get a better price and purchase selectively.
« The products it purchases from the industry are standard or undifferentiated. If the buyer can easily switch products, without any great difficulty, then they will switch.
« Buyers pose a creditable threat of backward integration. As with suppliers above, the buyers bargaining power is increased if the buyer is able to backward-integrate and take over the role of the organisation.
« The buyer has full information. When the buyer has full information about the product (demand, market prices, supplier costs), being supplied they can exert their power to ensure they receive a favorable price.
The threat of potential new entrants.
New entrants to an industry bring new capacity, the desire to succeed and gain market share, and new ideas. New entrants will enter an industry where the profit margins are attractive and the barriers to entry are low. Porter put forward seven major barriers to entry;
« Economies of Scale: refer to the declines in unit costs of a product as the absolute volume per period increases. Economies of scale deter entry by forcing the entrant to come in at large scale
Show MorePorter’s 5-Force Analysis
Michael Porter’s 5-forces can be used to analyze an industry and help shape and create a “competitive strategy” (Porter, 6). Understanding each of the five forces and how they interact with one another provides a clear picture of the degree of competition being faced within an industry, and therefore its relative attractiveness. The understanding cannot provide an advantage; it is what you do with the understanding. Without the understanding, a strategy can be at risk of being unrealistic. Michael Porter’s 5-force Analysis is a tool for the structural analysis of industries. There are 5 forces that always shape the competitive structure of an industry: Supplier Power, Barriers to Entry, The Threat of…show more content…
8) Threat of forward integration by suppliers – The supplier power is low, if the company can easily switch to a different supplier.
Examples of high supplier power industries are operating system and office productivity software suppliers to the PC Industry because it is dominated by few companies such as Unix, Microsoft. On the other hand, an example of a low supplier power industry is the computer hardware industry. Suppliers should make their products meet the worldwide standard so that products are compatible.
II. Barriers to Entry
Barriers to entry deter new competitors from entering the market and creating more competition for established firms. There are several major barriers to entry and they include economies of scale, capital requirements, product differentiation, switching costs, cost disadvantages independent of scale, access to distribution channels, and government policy. One example of an industry with high barriers to entry is computer chip manufacturing. The extremely high cost of building a fabrication plant makes entry into this industry very risky. The resturaunt industry on the other hand has considerably fewer barriers to entry since almost everything can be leased and employees need not be highly experienced and trained. (Porter, 7).
Economies of scale exist when per unit costs of a product decline as production volume increases. This puts new companies at a disadvantage because they are forced to either