5 Forces Of Porter

INTRODUCTION

An industry is a group of firms whose products are close substitutes for each other (e.g. the car industry, the travel industry).

Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.

The external environment of an organization is marked by intense competition between rival firms. The components of external environment include economic, socio-cultural, and global issues. In order to gain sustainable competitive advantage, the organization needs to study its external environment and exploit the opportunities prevailing therein.

The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described below:

Michael Porter described a concept that has become known as the "five forces model" to help understand how competition affects your business. Porter's 5 forces analysis is a framework for industry analysis and business strategy development developed by Michael E. Porter in 1979 of Harvard Business School. It uses concepts developed in Industrial Organization (IO) economics to derive 5 forces that determine the competitive intensity and therefore attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace.

Strategy consultants use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. The framework is textbook material for modern business studies and therefore widely known.

Porter's Five Forces include three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers, bargaining power of customers.

Each of these forces has several determinants:

WHY ARE THESE 5 C.F. SO IMPORTANT?

5 competitive forces define industry's structure and shape the nature of competitive interaction within an industry.

the job of the strategist is to understand and cope with competition

there is a strong relationship between the 5 c.f. and the industry's profitability. When 5 c.f. are intense we have low profitability and when they are benign the profitability is high.

In the long-run is the industry's structure that drives profitability.

the intensity of the 5 c.f. varies from the one industry to the other. And it is the most intensive force that determines profitability and which the strategist should take into account in the process of strategy's formulation.

So the goal of any company is to defend against the 5c.f. and shape them in favor of the company!!

TREAT OF ENTRY

Profitable markets that yield high returns will draw firms. The results is many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level. New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry and the reaction that potential entrants expect from incumbents.When the are not many and strong barriers to entry and the aspiring entrants do not expect vigorous reaction from incumbents then the treat of entry is low. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants).

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