Five Forces Model

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The Five Forces Model (developed by
Dr. Michael Porter of Harvard
University) serves as a framework for
examining competition that transcends
industries, particular technologies, or
management approaches. The underlying
fundamentals of competition go beyond
the specific ways individual companies
go about competing (i.e. StrengthsWeaknesses-Opportunities-Threats (SWOT) analysis; the 4P’s of marketing:
product, price, place, promotion). The
underpinning of this framework is the
analysis of the five competitive forces
acting upon an industry and their
strategic implications (Fig. 2)
The Five Forces Model looks at five areas of
competition in the marketplace:
• Threat of new entrants (Barriers to
entry)
• Bargaining power of suppliers
• Bargaining power of buyers
• Threat of substitute products or
services
• Rivalry among existing firms
In addition to the five forces, a sixth force,
governmental policies is added to Porter's
model because of its influence on all the
other forces.
By understanding the competitive forces
within the redcedar industry, participants in
the market can develop successful strategies
to influence the forces for their own benefit.

The five forces mentioned above are very significant from point of view of strategy formulation. The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because they shape the prices which can be charged, the costs which can be borne, and the investment required to compete in the industry. Before making strategic decisions, the managers should use the five forces framework to determine the competitive structure of industry. Let’s discuss the five factors of Porter’s model in detail: 1. Risk of entry by potential competitors: Potential competitors refer to the firms which are not currently competing in the industry but have the potential to do so if given a choice. Entry of new players increases the industry capacity, begins a competition for market share and lowers the current costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry. The various barriers to entry are- * Economies of scale

* Brand loyalty
* Government Regulation
* Customer Switching Costs
* Absolute Cost Advantage
* Ease in distribution
* Strong Capital base
2. Rivalry among current competitors: Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to profitability. The strength of rivalry among established firms within an industry is a function of following factors: * Extent of exit barriers

* Amount of fixed cost
* Competitive structure of industry
* Presence of global customers
* Absence of switching costs
* Growth Rate of industry
* Demand conditions
3. Bargaining Power of Buyers: Buyers refer to the customers who finally consume the product or the firms who distribute the industry’s product to the final consumers. Bargaining power of buyers refer to the potential of buyers to bargain down the prices charged by the firms in the industry or to increase the firms cost in the industry by demanding better quality and service of product. Strong buyers can extract profits out of an industry by lowering the prices and increasing the costs. They purchase in large quantities. They have full information about the product and the market. They emphasize upon quality products. They pose credible threat of backward integration. In this way, they are regarded as a threat. 4. Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to the industry. Bargaining power of the suppliers refer to the potential of the suppliers to increase the prices of inputs( labour, raw materials, services, etc) or the costs of industry...
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