FIVE COMPETITIVE FORCES OF INDUSTRY
Michael Porter has postulated that the intensity of competition in an industry is determined by its underlying economic structure1. And he further contends as we saw above, that the industry structure is shaped by five basic competitive forces: the threat of new entrances into the industry, the bargaining power of suppliers to the industry, the threat of substitute products or services, the bargaining power of customers or buyers, and the Rivalry among Existing Firms. The figure shows these competitive forces.
The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).
buyer propensity to substitute
relative price performance of substitutes
buyer switching costs
perceived level of product differentiation
The threat of the entry of new competitors
Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).
the existence of barriers to entry (patents, rights, etc.)
economies of product differences
switching costs or sunk costs
access to distribution
absolute cost advantages
learning curve advantages
expected retaliation by incumbents
The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.
number of competitors
rate of industry growth
intermittent industry overcapacity
diversity of competitors
informational complexity and asymmetry
fixed cost allocation per value added
level of advertising expense
Economies of scale
Sustainable competitive advantage through improvisation
The bargaining power of customers
Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.
buyer concentration to firm concentration ratio
bargaining leverage, particularly in industries with high fixed costs
buyer switching costs relative to firm switching costs
buyer information availability
ability to backward integrate
availability of existing substitute products
buyer price sensitivity
differential advantage (uniqueness) of industry products
The bargaining power of suppliers
Also described as market of inputs. Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.
supplier switching costs relative to firm switching costs
degree of differentiation of inputs
presence of substitute inputs
supplier concentration to firm concentration ratio
threat of forward integration by suppliers relative to the threat of backward integration by firms
cost of inputs relative to selling price of the product
This 5 forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.
E-Commerce or Electronic commerce, refers to use of the Internet to conduct business transactions. But it is important here to distinguish the difference between e-business and ecommerce. E-commerce focuses on efficiency in selling, marketing, and purchasing, while e-business focuses on effectiveness through improved customer, service, reduced costs and streamlined business process E-business...
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