Five Forces Model
Dr. Michael Porter of Harvard
University) serves as a framework for examining competition that transcends industries, particular technologies, or management approaches. The underlying fundamentals of competition go beyond the specific ways individual companies go about competing (i.e. StrengthsWeaknesses-Opportunities-Threats
(SWOT) analysis; the 4P’s of marketing: product, price, place, promotion). The underpinning of this framework is the analysis of the five competitive forces acting upon an industry and their strategic implications (Fig. 2)
The Five Forces Model looks at five areas of competition in the marketplace:
• Threat of new entrants (Barriers to entry) • Bargaining power of suppliers
• Bargaining power of buyers
• Threat of substitute products or services • Rivalry among existing firms
In addition to the five forces, a sixth force, governmental policies is added to Porter's model because of its influence on all the other forces.
By understanding the competitive forces within the redcedar industry, participants in the market can develop successful strategies to influence the forces for their own benefit.
The five forces mentioned above are very significant from point of view of strategy formulation. The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because they shape the prices which can be charged, the costs which can be borne, and the investment required to compete in the industry. Before making strategic decisions, the managers should use the five forces framework to determine the competitive structure of industry.
Let’s discuss the five factors of Porter’s model in detail: 1. Risk of entry by potential competitors: Potential competitors refer to the firms which are not currently competing in the industry but have the potential to do so if given a choice. Entry of new