Poter's Five Forces

Porter

“Strive for competitive advantage and the forces that affect it.”

Strategic Management

Dr. Cassell

By: Ashleigh Bender

Table of Contents:

I .) Executive Summary pg.

II.) Porters Five Forces Defined pg.

• Supplier Power pg.

• Buyer Power pg.

• Threats of New Entrants pg.

• Substitutes Products pg.

• Degree of Rivalry pg.

III.) Advantage and Disadvantage of Porter’s Five Forces Model pg.

IV.) Application of Porter’s Five Forces pg.

V .) Porter’s Generic Strategies pg.

• Cost Leadership pg.

• Differentiation pg.

• Focus Strategy pg.

VI .) Advantage and Disadvantage of Porter’s Generic Strategies pg.

VII .) Application of Porter’s Five Forces pg.

VIII.) Bibliography pg.

Executive Summary:

Michael Porter created two concepts used by industries to either achieve greater competitive advantage or can be used as an over all strategy in the market. Both of these concepts work in conjunction with each other to work towards the ultimate goal of generating revenue and stockholders wealth. In this paper these concepts will be discussed in-depth to explain what they are, how they are an advantage and disadvantage and how to apply them.

Introduction:

When a company is formulating a strategy, the framework for such an analysis is the environment. In order to fully assess what the company is capable of a manger needs to look at both external and internal forces that affect the company in order to effectively develop a strategy. A company can formulate a strategy based on the forces that affect the industry as a whole.

The structure of the industry has a large influence on a company and their ability to compete and the strategies that are available to them. Forces that are outside of the industry affect all firms in the industry and the key to effectively compete is the differing abilities of firms to deal with these forces.

Competition in an industry is inevitable and is created through the underlying economic structure that goes beyond the behavior of the competitors. The state of competition in an industry is based on five competitive forces. These forces combined determine the profit potential in the industry.

On a broader sense of things, a company can choose to pick one of three generic strategies. These strategies require a commitment to one strategy. Also, these are designed to outperform competitors in the industry to earn higher revenues. When combined, a company can choose what to do within the five forces to create an ultimate strategy within the given environment.

Porters Five Forces:

The Five forces is a model created by Michael E. Porter of Harvard Business in 1979. The five forces is a framework for an industry analysis and the business strategy development. This framework uses concepts developed within the industrial organization economics. The forces determine the competitive intensity and attractiveness of a market.

These forces affect the company and their ability to serve its customers and produce a profit. This means that a change in such forces will require the company to reassess their efforts to shift with the market. These forces also help a company in making a qualitative evaluation of the firm’s strategic position. A strategic manager may use this model to better understand the industry in which the firm operates, in order to create a greater competitive advantage.

In an industry with two or more competitors, competitive intensity increases. As this increases the average industry return falls. When the bargaining power of buyers and suppliers is high, the threat from new entrants and substitute products is high thus creating an intense rivalry among firms. Within this the five forces are created, as illustrated in Figure 1.

In each of these forces there are circumstances that increase the power of each of the forces. These can be used as tools by a strategist to create an “edge” over competition and can be used to boost a company’s profitability and take away from other competitors in the industry. These circumstances will be further discussed further in the paper and can be seen in figure 2.

Supplier Power:

Supplies in an industry are raw materials, labor, machinery, services and capital. These are all necessary inputs to the firm’s production process. These materials are all supplied by different interest groups within the industry.

The strength of suppliers affects the industry’s profit potential. Suppliers have the power over companies in an industry by threatening to raise prices or reduce the quality of purchases goods and services. They