Positioning Approach was suggested by Porter during the nineteen eighties which stated that market structure plays an important part in determining a firm’s profitability. Market structure therefore influences the conduct and strategy of a firm and directly affects the firm’s performance. On this structure – conduct – performance relationship, Porter identified 5 forces namely threat of entry, power of supplier, degree of rivalry, power of buyer and threat of substitutes to understand the industry environment and suggest strategies to be adopted according to this environmental analysis to achieve a competitive industry position. His suggestion is named as 5 Forces model which provides a means of analysing the strength of the influence and power of these forces. The stronger the competitive force in the market, the higher the threat to the profitability of a firm.
1.Threat of entry
Threat of entry represents the strength of industry barrier for potential new competitor to enter into the industry. This factor is determined by the level of entry costs and cost advantages to be enjoyed by the newcomers. Entry barrier is considered high for industries like manufacturing which are capital intense and required high capital investments for building up production sites or industries like pharmaceutical which required high level of knowledge and investments in research and development. Entry barrier for supermarket is also high given the existing players have already enjoyed lower operating costs from the economic of scale.
2.Bargaining power of supplier
Bargaining power of supplier represents the level of reliance on souring raw materials from suppliers and the strength of the firm to negotiate terms of the sourcing. Supplier is considered powerful when (a) there are few suppliers in the market; (b) there are few substitutes of the material sourced and (c) the switching cost of a firm to change supplier is high. High bargaining power of supplier will result in high prices of the supplies. Foxconn is a major supplier of Apple Inc. for the manufacturing of mother board and clips of iPhones. Given that Foxconn is knowledgeable on the iPhone’s techniques and is sizeable enough to meet high demand from Apple Inc., Apple Inc. relies the supplies from Foxconn and the cost on switching to other manufactures will be very high due to quality control issue and the problem of lack of knowledge of other manufactures.
3.Degree of rivalry
Degree of rivalry represents the level of competitions within an industry. Competition is considered high if the market is highly fragmented with many marker players competing around. Footwear market is highly fragmented and therefore competitive as there are different brands existing in the market. In China’s causal footwear market, none of a single brand can occupy more than 2% of market share. Exit barrier is also a factor affecting the degree of rivalry. High exit barrier resulting from high capital investment and exit costs increase the level of competition as market player fails to leave the market even though the industry is declining....