Porter's 5 forces model is a powerful way of analysing the competitive forces that shapes every industry in general. This was developed by Michael E. Porter of Havard Business School in 1979. This tool helps you to identify whether a new product, investment, services or business have the potential to be profitable.
The 5 competative forces that are taken into consideration are:
Competition in the Industry
Potential of new entrant into Industry
Power of Suppliers
Power of Customers
Threat to substitute products
Lets discuss each of these points in detail:
Competition in the Industry:
This describes the competition between the existing firms in an industry. Greater the competitive riverly (companies providing equally good
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Huge inital expenditure and lower price leave very less profit margin. The bottom line is a competitor's single innovation can change the whole senario of the industry.
Lets take an example of a monopoly industry. Chocklate industry in India has just one big player Cadbury. Go to any Big Bazaar or a D-Mart outlet you will find 90% of chocklate by Cadbury. When you go to purchase chocklate what you look for ...Dairy Milk, Perk, Eclairs, Temptation, Celebration,Halls all are produced by Cadbury. As far as I remember I have seen Dairy Milk's ad on TV when I was 5 years old and its still there in market and in all probability it will be there for next 20 years.The current market share of Cadbury stands at impressive 71% even the 2003 worm were not able to eat its market share. What we can conclude a monopoly and a great business!!
Potential of new entrant into Industry:
Its not only the existing players in an industry pose threat to each other, a new entrant can also affect the competition. The easier it is for a new firm to enter in a business, the more cut-throat competition there will be.The factors that can limit threat of new entrant are called as Barriers to Entry. Following are some some barriers to entry:
Government Restrictions and legislations: Although government's job is to preserve free competitive market, it restricts competition through regualtions and restrictions. Oil sector in India is an example. Pre liberization era it was a
Porter has identified five (5) competitive forces that shape every industry and every market. The forces determine the intensity of competition and hence the profitability and attractiveness of an industry. Based on the information derived from this analysis, management can decide how to influence or to exploit particular characteristics of this industry.
Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
Businesses are not only faced with competition within the industry they operate in. They also face competition from businesses in other industries.
The threat of new entrants is moderate. It is relatively easy for a company to enter this market because there are not a lot of legal barriers. But a smaller company that has just entered the market would have a tougher time competing with some of the larger companies – an obvious reason being that larger companies can have larger inventories. Another reason is that larger companies can do things to weaken the smaller companies, such as offer discounts, sales promotions, and increase spending on advertising. Since most of the companies in this industry are competing on
The competition among rivals is very high due to price and non-price factors. Companies try to attract customers to their products by introducing
Fresh Direct got their start in New York City in July 2001, when co-founders Joseph Fedele and Jason Ackerman started the company. Since the start of the company in 2001, they have been through many changes in the leadership of the business, eight changes to the CEO over the last thirteen years. The most current CEO that is leading the business through the industry is Richard Braddock, he took the position in 2008, he took the position after serving as CEO for priceline.com because, he saw the potential for increasing growth within the company (Strategic Manangement). After searching many sites such as yahoo and google finance, as well as etrade etc., I was unable to find any actual profit or losses data for the last year due to the fact
Michael Porter’s Five Forces Model is a useful tool to aid organizations facing the challenging decision of entering a new industry or industry segment. The Five Forces Model helps determine the relative attractiveness of an industry and
A recent issue has arouse regarding the role of government in our economy. I believe that we, as a people, need strict regulations on our businesses a prevent things like pure monopolies. As a nation we need to give our people the best lives possible and with things like price-fixing that makes our job significantly more difficult. If we look at the company Luxicotta, we see that prices for glasses are so high that people have problems buying them because they are a pure monopoly. If we let one company control the market for a good, then we will fare far worse than if we had not let this occur.
As number of firms in the industry keeps increasing, greater competition force firms to earn more market share, innovate substitutes, produce differentiate products and be cost leadership to keep or improve their position in the industry. For example, some of the products of Billabong and Quiksilver are similar, consumer will choose to buy the one with lower price if they have similar function, or buy the one with higher price if the product is different from others. Thus, a firm could run well if it has different products and lower cost compared with rivals.
Competition within the industry is a competitive pressure that arises from the existing rivals
Industry Rivalry: Intense (high). As there is low entry barriers in the industry, it adds more competitors/rivalry.
Existing Competitors. Rivalry among competitors within an industry use price discounting, new products, marketing, and other techniques to be competitive. Profitability of an industry suffers from high rivalry. The intensity with which companies compete and the basis on which they compete determine to which degree rivalry brings down an industry’s profitability (Porter, 2008). Pure competition is considered by economists as a competition with a high
Not only do the current competitors represent a threat to any organization, but they also convey the possibility of bringing new competition to the industry. Some industries have stronger barriers for new companies to enter the market, making it more difficult for competitors to join in, increase the competition and affect the organizations’ profits.
Porter 's Five Forces Model is a critical instrument to break down an outer aggressive environment of the business. The model incorporates threat of entry, the threat of rivalry, the threat of suppliers, the threat of purchasers and threat of substitutes.
If an industry is profitable, it will become a magnet to attract more competitors looking to do same business with us. If it is easy for these new entrants to enter the market, this poses a threat to the firms already competing in that market. Threat of new entrants is one of the forces that shape the competitive structure of an industry (Marc, 2014). A high threat of entry means new competitors are attracted by the profits of the industry and can enter the industry easily. New competitors entering the marketplace can make the market share and profitability of existing competitors more threaten cause the existing competitor to make some changes to existing product quality or price levels. A high threat of new entrance can make an industry more competitive and decrease profit potential for existing competitors whereas a low high threat of new entrance can make an industry less competitive and increases profit potential for the existing