Porter's Five Competitive Forces

This article has started revolutionary thinking about what are the different forces in addition to direct competitors that affect competitive strategy of an organization and how better understanding of industry structure and these forces, also known as " Porter 's Five Forces", derive organization 's strategy to achieve sustainability and higher profitability. Author has explained the other factors that contribute for industry structure like industry growth rate, technology and innovation, external factors, government & regulations and complementary products and services. Industry structure changes while responding to changes in competitive forces. Author also discussed the framework to perform industry analysis and avoid common pitfall while conducting analysis. In this review I will summarize five competitive forces explained by Micheal E. Porter and their implication on organization 's strategy. Further, I will discuss the relevancy of Porter 's five forces framework in current scenario.

Bargaining Power of Suppliers: The bargaining power of suppliers in the industry is low. There are numerous suppliers in this industry, and the large department stores have the ability to negotiate for the lowest prices. In addition, the switching costs are low, as the products are not highly differentiated. There are a large volume of purchases in the industry, allowing the department stores to exert even more power over the suppliers.

Most businesses strive to attain competitive advantage, whether they explicitly realize this or not. The concept of competitive advantage was propagated by Michael Porter, in his landmark book Competitive Strategy. He defined competitive advantage as “Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm 's cost of creating it.” (Porter, 1985) The concept provided a new paradigm for looking at the role of competition in firm’s success or failure in the long term. The succinct definition encapsulates number of related concepts that help firms identify and analyze their competitive advantage. In normal parlance, competitive advantage is described as the advantage a firm has that helps it get ahead of competitors or gain higher market share. Whether the management explicitly realizes this fact or not, they usually are focused on identifying and developing traits that help their firm get ahead of competition and have sustained growth in the long term. Many organizations that do not have strategic separate strategic thought process, try to attain the same advantage through micro decisions like product portfolio, cost cutting, pricing decisions, location selection, etc. However, their final objective is competitive advantage. Barney (1991) explained number of internal resource that help the firm in attaining competitive advantage in the long term. In this analysis, the author defines key terms related to competitive advantage, and

Due to the fact of price sensitivity is high, consumers are willing to consume identical product with lower price; they stand on a strong bargaining position. On the contrary, suppliers have relative strong bargaining power because the high concentration of the industry.

But Firstly, we will start this part by talking about the importance of a deep analysis of the industry’s structure. A deep knowledge of the industry the company is in, is extremely important. The industry structure is unique and varies from industry to industry of course. It will determine the level of competitiveness and attraction of the industry. With the Five Forces model (Porter) and PESTEL (Political, Economic, Social, Technological, Environmental, Legal) analysis, the organization will get a better understanding of the market will allow you to know the requirements for the possible creation of sustainable competitive advantages and take the right strategic decisions. According to Porter, to create an efficient competitive strategy, it is important to understand the rules of competition that determine market attractiveness.

“Powerful suppliers increase the cost of purchased materials.” (Miltenburg). The next force is the bargaining power of buyers. The more options buyers have for a certain product the more power they have. “Powerful customers decrease prices for finished products.” (Miltenburg). The last force is the rivalry among competitors in the industry. “Tough competition decreases prices and increases costs such as marketing and new product research and development.” (Miltenburg).

The bargaining power of buyers stands in a direct relationship with the bargaining power of suppliers. If the bargaining power of buyers is substantial it increases the opportunity cost of suppliers. The greater the buyers concentration the greater their bargaining power. This bargaining power is also increased in markets where the suppliers’ concentration is high. The bargaining power is also increased when the cost of switching from one supplier to another is low. In instances where backward vertical integration is possible i.e. buyers setting up their own chains of suppliers the bargaining power of the buyer increases in that their prices may become more competitive. In a market where the buyers are more concerned over quality than price their bargaining power decreases as they are less inclined to shop

Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing strategies in many industries. Generally, Porter’s Five-Forces provide a good, simple yet powerful, framework for developing an understanding of the competitive forces or pressure either increase or reduce within DiGi’s industry that influence its pricing decision. Great competitive forces put more pressure on it while weaker competitive forces get over the pressure.

The Porter’s five forces of competitive position analysis helps firms to understand and appreciate factors that impact on profitability in an industry, which assist management in formulating decisions on whether to enter an industry, how long to stay and if there is the need to increase capacity and develop competitive edge.

This generic strategy then leads to Porters five industry force. Porter five forces analysis is a framework to analyze level of competition within an industry and business strategy development. It draws up an industrial organization to develop five forces that determine the competitive intensity and the attractiveness of a market. Attractiveness refers to the overall business profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. An unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. The five forces include; risk of entry, bargaining power of suppliers, threat of substitutes, rivalry among established companies, and bargaining power of buyers. As each of these forces grows stronger, it limits the ability of established companies to raise prices and earn greater profits. Power is affected by the ability of people to enter the market. If it costs too little in time or money to enter a market and compete effectively, if there are few economies of scale in place, or if there is little protection for key technologies, then new competitors can quickly enter the market and weaken the

“Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitor’s” (Porter 1980:47). A successful business plan requires first and foremost the formation of an appropriate strategy. Through the implementation of a suitable strategy, the company is able to obtain its own industry niche and gain an understanding of its customers (Porter 1985). Whichever strategy is adopted it must be adequately integrated within the firms goals and missions to achieve a competitive advantage (Parker and Helms 1992).

According to Michael E. Porter, 2008, a specific industry may change the configuration of the five forces. This essay will focus on the original model of 'The Five Forces That Shape Industry Competition ' (Fig.1) to which Porter views that profit potential is determined by the collective strength of these five forces (Porter, 1980). You can see in relation to Apple and Samsung that the rivalry among existing competitors is high in comparison to the threat of new entrants. However, as much as the two companies compete against each other, they still can at times collaborate - one aspect where this

Power of buyers: The power of buyers in this industry is high. The main reason for this is that several of the buyers have multiple choices to choose from. Many competitors are offered discounts and gifts in order to attract buyers. Another reason is online shopping. It has increased the bargaining power of buyers. Buyers are price sensitive and demand very high quality.

Supplier power: The suppliers for Company G’s iStir are limited and could drive up the prices. Because of the commitment to high quality and 100% American made materials, the iStir’s part suppliers could use their power to increase the price of each part. Driving up the price on the

The bargaining power of suppliers is likely to be high when: suppliers are concentrated and well organized; the number of suppliers is small or their services are in short supply; you bearing a high switching cost and you are not an important customer to supplier etc.