Five Forces Model

2268 WordsMar 8, 201110 Pages
Porter’s Five Forces Analysis is based on the concept that the key objective for any organization should be to gain advantage over its competitors, it is not the industry that an organization is in that counts, but where it wants to compete in terms of the nature of the competition. This competition is provided by the nature of the rivalry between existing firms, the threat of potential entrants and substitutes and the bargaining power of both the suppliers and buyers (Lowson, 2002). The five-forces model is extremely helpful in systematically diagnosing the principal competitive pressures in a market and assessing how strong and important each one is. This straightforward approach is the most widely used technique of competition analysis.…show more content…
When the answer is no, potential entry is not a source of competitive pressure. When the answer is yes (as in industries where lower-cost foreign competitors are seeking new markets), then potential entry is a strong force. The stronger the threat of entry, the greater the motivation of incumbent firms to fortify their positions against newcomers to make entry more costly or difficult. the threat of entry changes as industry prospects grow brighter or dimmer and as entry barriers rise or fall. For example, the expiration of a key patent can greatly increase the threat of entry. A technological discovery can create an economy of scale and advantage where none existed before. New actions by incumbent firms to increase advertising, strengthen distributor-dealer relations, or improve product quality can erect higher roadblocks to entry. In international markets, entry barriers for foreign-based firms ease when tariffs are lowered, domestic wholesalers and dealers seek out lower-cost foreign-made goods, and domestic buyers become more willing to purchase foreign brands. Barriers to entry, identified as one of the five forces, presents five structural determinants that affect a company’s ability to enter new markets; economies of scale and product differentiation. The economies of scale, which is a benefit gained from large scale production will keep costs down and ultimately low prices too.
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