Porter Five Forces

1.0 INTRODUCTION

In today's dynamic and competitive business environment, survival, growth and profitability are the essence goals of all industries. Nowadays, Porter's Five Forces model is currently being adopted as the powerful management tool of choice by many organizations. The essence of this model is that it can help senior managers to make right decision and build and sustain competitive advantages in the organization level. This document presents the overview approach of PorterÐ'ÐŽÐ'¦s five forces framework across organizations. And critically evaluation of porterÐ'ÐŽÐ'¦s five forces model mainly focused on identifying the benefits and limitations of it and exploring some perceived issues or problems regarding implementation. Finally the analysis of the five competitive forces of Orange Juice From Concentrate industry in KSA is concluded in the last section of this document.

2.0 MICHAEL PORTERÐ'ÐŽÐ'¦S FIVE FORCES

2.1 PorterÐ'ÐŽÐ'¦s Five Forces Model

The economic structure of an industry is not an accident. Its complexities are the result of long-term social trends and economic forces. But its effects on business managers are immediate because it determines the competitive rules and strategies managers are likely to use. Michael Porter has identified five forces that are widely used to assess the structure and competition of any industry (Anonymous. Module MN 7037/D. Strategic Marketing Management). Fig 1 summarizes PorterÐ'ÐŽÐ'¦s five forces:

Figure 1 Porter's five forces source: Module MN 7037/D. Strategic Marketing Management

Together, the strength of the five forces determines the profit potential in an industry by influencing the prices, costs, and required investments of businessesÐ'ÐŽXthe elements of return on investment. Stronger forces are associated with a more challenging business environment (Backer, Michael. J. Marketing Strategy & Management).

2.1.1 Power of Suppliers

Any business requires inputsÐ'ÐŽXlabour, parts, raw materials, and services. The cost of companyÐ'ÐŽÐ'¦s inputs can have a significant effect on its profitability. Whether the strength of suppliers represents a weak or a strong force hinges on the amount of bargaining power they can exert and, ultimately, on how they can influence the terms and conditions of transactions in their favour. Suppliers would prefer to sell to customers at the highest price possible or provide customers with no more services than necessary. If the force is weak, then customers may be able to negotiate a favourable business deal for themselves. Conversely, if the force is strong, then customers are in a weak position and may have to pay a higher price or accept a lower level of quality or service (Porter, Michael E., Competitive Strategy).

Suppliers have the most power when:

Ð'„Ð'« Industry is dominated by a few suppliers.

Ð'„Ð'« Suppliers are more concentrated than the buyers.

Ð'„Ð'« No substitutes.

Ð'„Ð'« Supplier has more important customers.

Ð'„Ð'« SupplierÐ'ÐŽÐ'¦s input is critical.

Ð'„Ð'« Differentiated product.

Ð'„Ð'« High switching cost.

Ð'„Ð'« Potential forward integration (Porter, Michael E., Competitive Strategy).

2.1.2 Power of Buyers

The power of buyers describes the effect that customers have on the profitability of suppliersÐ'ÐŽÐ'¦ business. The transaction between the seller and the buyer creates value for both parties. But if buyers (who may be distributors, consumers, or other manufacturers) have more economic power, suppliersÐ'ÐŽÐ'¦ ability to capture a high proportion of the value created will decrease, and they will earn lower profits (Porter, Michael E., Competitive Strategy).

Buyers have the most power when:

Ð'„Ð'« Buyers are more concentrated than the suppliers.

Ð'„Ð'« Standardized or undifferentiated products.

Ð'„Ð'« Low switching cost.

Ð'„Ð'« Low profit margins.

Ð'„Ð'« Potential backward integration (Porter, Michael E., Competitive Strategy).

2.1.3 Threat of New Entrants

The threat of new entrants is the possibility that new firms will enter the industry. New entrants bring a desire to gain market share and often have significant resources. Their presence may force prices down and put pressure on profits. Analyzing the threat of new entrants involves examining the barriers to entry and the expected reactions of existing firms to a new competitor (Porter, Michael E., Competitive Strategy).

The following factors tend to raise barriers to market entry by new entrants:

Ð'„Ð'« Economies of scales.

Ð'„Ð'« Differentiation (brands loyalty).

Ð'„Ð'« Capital requirements.

Ð'„Ð'« Switching cost.

Ð'„Ð'« Access to distribution.

Ð'„Ð'« GovernmentÐ'ÐŽÐ'¦s policy.

Ð'„Ð'« Unique technology (Porter, Michael E., Competitive Strategy).

2.1.4 Threat of Substitutes

Products from one business can be replaced by products from another. If company produce a commodity product that is undifferentiated, customers can easily switch away from its product to a competitorÐ'ÐŽÐ'¦s product with few consequences. In contrast, there may be a distinct penalty for switching if companyÐ'ÐŽÐ'¦s product is unique or essential for its customerÐ'ÐŽÐ'¦s business. Substitute products are those that can fulfil a similar need to the one current product fills with lower price or/ and better services