Porter's Five Forces

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Porter’s 5 forces summary

According to Porter, in order to achieve competitive advantage over its competitors, analysis of current industry structure is vital because the structure of an industry determines the nature of the competition and the form that a sustainable competitive advantage takes and the industry structure is determined by the five competitive forces; the treat of substitute, the treat of entry, bargaining power of buyer, and bargaining power of supplier and the intensive of rivalry.

Porter work simplified to identify five forces and then, to select one of the generic strategies. Last step of his framework is using the value chain from identifying and enhancing the business activities. His concept is based on the idea that forces facing the industry play a key role in determining success and profitability of an organisation. The analysis of five forces tells how management should respond to and try to influence those forces in a favourable way.

Threat of entrants: according to Porter new entry into the industry certainly reduces the existing firm’s profitability. How high the entry barrier of the industry affects the degree of new entry:

Simply, internet banking dramatically lowers the entry barrier of bank industry. It is because entry barriers such as ‘economics of scale’, ‘brand identity’ and ‘access to distribution’ do not work any longer. Physical size can only mean high operating cost as well as in efficient and limited degrees of flexibility. The banking market is likely to see the emergence of new small banks that use internet to compete on equal ground with the financial giants.

Power of buyer: buyer power affects the prices that firms can charge. Porter theorised that the more products that become standardised or undifferentiated, and hence more power is yielded to buyers.

The products of banking market are getting similar therefore it increases the bargaining power of buyers. Also, buyers have full information on...
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