Porter Five Forces Assist an Organisation in Their Strategic Planning

Topics: Strategic management, Porter five forces analysis, Management Pages: 7 (2673 words) Published: March 24, 2013
How does Porters Five Forces Model assist an organisation in their strategic planning?

Before understanding “how” we must know “what” Porters Five Forces model really is (Michael E. Porter, 2008). Company strive to secure a competitive advantage over their rivals, I mean who doesn’t want to be the best? Although the intensity of rivalry varies within each industry and these differences can be important in the development of strategy, but rather the five forces (Porter, 2008) being a strategy of any sort, it acts a framework in securing a strategy. The only time where strategy is irrelevant, would be when you have no competitors where ultimately the environment is a monopoly, or when you have a ton of money to throw around and waste. But having said that, it is not likely at all. Without framework, strategy will inevitably collapse, as they both come hand in hand. Thus a chain arises as the five forces (Porter, 2008) acts as a framework in assisting an organisation in their strategic planning, where strategic planning leads to a competitive advantage over their competitors which then leads to ultimate success of the company. Before proceeding to the question at hand on how Porters Five Forces can assist an organisation in their strategic planning, first we have to know two things, what are the Five Forces that Porter (2008) proposed, and ultimately what strategy really means? To ease this journey, let’s start with the Five Forces (Porter, 2008). Before any company enters a certain market, one must first analyse the competitive nature of the market, and this is exactly what the Five Forces (2008) aids to do, to provide a framework to determine the intensity of competition within an industry where three of the five competitive forces comes from an external sources, and the remainder coming from an internal sources. These external sources includes: Threat of potential entrants, threat of potential substitutes and rivalry of existing firms in the industry. Now these sources are external due to the fact that it is simply impossible to temper with. But what we can control, are the two internal sources: the bargaining power of suppliers, and the bargaining power of buyers. Being aware of the five forces can aid firms into identifying existence and the importance of each of the five forces, as well as the roles that each force plays into the success of the firms. The threat of potential entrants: Although it is possible for any company to enter and exit a market of their choice, each market has their own unique barriers to go in and out of. Therefore the essence of this force deals with the level of difficulty that a company can enter into an industry which will ultimately impact competition within the industry. Whenever a new company enters an industry, the competitive climate changes; it provides more alternatives to consumers, therefore reducing its attractiveness and the competition within the industry increases as each company is trying to come out on top. As each industry have their own unique characteristics it allows them to build a barrier from other industries protecting them from profitability while restraining additional rivals from entering the market. These restraints and characteristics that industries create are referred to as barriers of entry. Barriers of entry are a characteristic acquired uniquely to each industry. It attempts to reduce the rate of entry of new companies which maintains the level of profitability for all current industry competitors, where if new companies enters the industry, the profit is shared amongst the original and the newly developed companies in the industry, ultimately decreasing overall profits of each company, which isn’t ideal. Conversely when profitability of an industry is high, companies will attempt to come into the industry to get a piece of the action, which then will eventually result in reducing profits due to the fact that it is divided up into more quarters. Where...
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