Porter's Generic Forces

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Connexions module: m35356


Business models and marketing Business to business marketing models ∗

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Abstract Business Fundamentals was developed by the Global Text Project, which is working to create opencontent electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot aord them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editors: Salvador Treviño and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez

1 Models of industry attractiveness; the strategic perspective In order to be successful in business, we must understand what our customer's needs and wants are and deliver them in an ecient and protable manner. In order to do so, we must also understand the industries in which the companies are immersed and what makes them attractive from the general point of view. Industry attractiveness was initially described by Michael Porter in his book,

Competitive Strategy

(Porter 1980). Porter's well-known Five Forces Model is often used as an analytical tool by companies when they are deciding whether or not to enter a particular industry. According to Porter, what makes an industry attractive or unattractive is determined by 5 forces: 1. Rivalry: This force is measured by how intense the rivalry/competition relationship in an industry is. The factors aecting rivalry are: number of competitors, slow market growth, low levels of product dierentiation, how aggressive competing companies are, etc. For example, retailing has always had the reputation of being a highly competitive industry, while the rail road industry is thought to be less competitive. 2. Threat of substitutes: In Porter's model, substitute products refer to products that can be substituted for your own. Substitute products can be found within own or other industries. For example, if you decide to start an inter-city bus company, you have to consider all the other options your customers have to get from one city to another, for instance, city trains, small shuttle service, shared private cars, among others. ∗ Version

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Connexions module: m35356


3. Buyer power: The power of buyers is the impact that customers have on a producing industry.


general, when buyer power is strong, the buyer has the ability to set the price because usually there are very few buyers and many suppliers. Grain farmers are often used as an example. In most countries, there are many small farmers who grow grain, but few large buyers who have the power to set the price a farmer receives. 4. Barriers to entry: Barriers to entry are unique oerings of companies in an industry that any company wishing to enter that industry must be prepared to overcome. Examples from developed economies are online banking and ATM services for banks and frequent yer programs for airlines. In many cases, development of these expected products or services is quite expensive for a new entrant, and, thus, it s a barrier to entry. 5. Supplier power: Suppliers are powerful when there are few suppliers for a company to purchase necessary items from. In a situation where there are few suppliers, it is typically dicult for a buyer to get a lower price from another supplier. An example is the oil industry, where they are many buyers, but relatively few suppliers, and most of the suppliers are members of the OPEC...
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