Five Forces Model

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Porter’s Five Forces Analysis is based on the concept that the key objective for any organization should be to gain advantage over its competitors, it is not the industry that an organization is in that counts, but where it wants to compete in terms of the nature of the competition. This competition is provided by the nature of the rivalry between existing firms, the threat of potential entrants and substitutes and the bargaining power of both the suppliers and buyers (Lowson, 2002). The five-forces model is extremely helpful in systematically diagnosing the principal competitive pressures in a market and assessing how strong and important each one is. This straightforward approach is the most widely used technique of competition analysis.

The rivalry among competing sellers. The most powerful of the five competitive forces is usually the competitive battle among rival firms. How vigorously sellers use the competitive weapons at their disposal to jockey for a stronger market position and win a competitive edge over rivals shows the strength of this competitive force. Competitive strategy is the narrower portion of business strategy dealing with a company's competitive approaches for achieving market success, its offensive moves to secure a competitive edge over rival firms, and its defensive moves to protect its competitive position. As noted by Fleisher and Bensoussan (2003), Porter’s fifth force, competitive rivalry, is also an element addressed by the strategic group analysis where it considers competitive rivalry and how this force both impact and it is impacted by other four forces. Porter (1980, taken from Bowman, 1998) suggests that the level of rivalry, the actual competition between existing producers, varies according to a number of factors.

The market structure for example will be a major determinant in the intensity of rivalry. In a monopolistic market for example, where one firm has the total control of the market, quality, availability, price but mainly product differentiation will be a priority. In relation to this it must be noted that an article by Business World (2005) suggests that the law concerning the abuse by companies of dominant market positions will be reviewed and ultimately changed in the near future. On the other hand, firms operating under conditions of oligopoly may find considerable variation in the identity, number and size distribution of competitors internationally, as for example Burger King and McDonald (John et al, 1997). The slow growth of demand, or a declining demand, the high fixed costs involved that do not vary with the level of outputs, are also factors which will ultimately impact on the level of rivalry. The competitive force of potential entry. New entrants to a market bring new production capacity, the desire to establish a secure place in the market, and sometimes substantial resources with which to compete. How serious the threat of entry is in a particular market depends on two factors: barriers to entry and the expected reaction of incumbent firms to new entry. A barrier to entry exists whenever it is hard for a newcomer to break into a market and/or economic factors put a potential entrant at a disadvantage relative to its competitors.

Even if a potential entrant is willing to tackle the problems of entry barriers, it still faces the issue of how existing firms will react. Will incumbent firms react passively, or will they aggressively defend their market positions with price cuts, increased advertising, product improvements, and whatever else will give a new entrant (as well as other rivals) a hard time? A potential entrant often has second thoughts when incumbents send strong signals that they will stoutly defend their market positions against entry and when they have the financial resources to do so. A potential entrant may also turn away when incumbent firms can use leverage with distributors and customers to keep their business....
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