The model of the Five Competitive Forces was developed by Michael E. Porter in his book „Competitive Strategy: Techniques for Analyzing Industries and Competitors¡° in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes.
Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.
2 The Five Competitive Forces
The Five Competitive Forces are typically described as follows:
2.1 Bargaining Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. Supplier bargaining power is likely to be high when:
• The market is dominated by a few large suppliers rather than a fragmented source of supply, • There are no substitutes for the particular input, • The suppliers customers are fragmented, so their bargaining power is low, • The switching costs from one supplier to another are high, • There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when • The buying industry has a higher profitability than the supplying industry, • Forward integration provides economies of scale for the supplier, • The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products), • The buying industry has low barriers to entry.
In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization.
2.2 Bargaining Power of Customers
Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high when
• They buy large volumes, there is a concentration of buyers, • The supplying industry comprises a large number of small operators • The supplying industry operates with high fixed costs, • The product is undifferentiated and can be replaces by substitutes, • Switching to an alternative product is relatively simple and is not related to high costs, • Customers have low margins and are price-sensitive, • Customers could produce the product themselves, • The product is not of strategical importance for the customer, • The customer knows about the production costs of the product • There is the possibility for the customer integrating backwards.
2.3 Threat of New Entrants
The competition in an industry will be the higher, the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for...