The five competitive forces that shape strategy
The five competitve forces that shape strategy also know as Porter’s five forces was first pubilshed in 1979 in the Harvard Business Review by a young associate professor at the Harvard Business School, Michael E. Porter. This article started a revolution in the strategy field and has since than shaped a generation of academic research and business practise. Throughout the last thirty years Porter’s Five Forces Analysis has been the most used strategy tool in academics as well as management training. (Porter, 2008) Porter used a certain structure for his study, called framework. In a framework only the smallest number of core elements are used to capture the full richness of a phenomenon. (Henry, 2008) I’ve chosen to work on Michael Porter’s Five Forces Analysis because I think it can provide us with the necessary knowledge about the structure of the electronic manufacturing services industry and help us implementing a strategy that leads Xeltronics to success.
An analysis of Porter’s Five Forces
Porter’s Five Forces framework is undertaken from the perspective of an existing business. Even though every business is different, the forces that affect each business’s performance and profitability are common to all organisations within one industry. Porter’s model can, despite developed form the view of an incumbent firm, be as well used for the decision to enter a new market or refrain from doing so. (Henry, 2008)
Porter’s analysis is a tool for assessing the competitive environment in a certain industry. Understanding the competitive forces, and their causes, exposes the roots of an industry’s profitability and provides an outlook for the future. The five forces are crucial for a company’s strategy. Michael E. Porter (2008) defines the five forces that shape strategy as following: (1) threat of new entrants, (2) the bargaining power of buyers, (3) bargaining power of suppliers, (4) the threat of substitute products and services and (5) the intensity of rivalry among firms in an industry. Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force. The strongest competitive force or forces drive the profitability of an industry and impact importantly on strategy formulation. Michael Porter points out that the strongest force might not be the most obvious one. It is important that the five forces anaylsis is repeated regularly to detect changes in the competitive environment and adjust strategy earlier than the competitors. (Porter, 2008)
Threat of new entrants
The threat of new entrants exists to the extent that new firms decide to enter a market and reduce the level of profits being earned by existing firms in that industry. This threat puts a cap on the profit potential of an industry. With their desire to gain market share new entrants to an industry put pressure on prices, costs and the rate of investment necessary to compete. When the threat is high existing firms have to focus on price leadership or invest strongly into their business to deter competitors. The threat of entry depends upon the height of certain entry barriers and the reaction of incumbent firms. (Porter, 2008) There are six major entry barriers:
1. Economies of scale occur when the individual costs per unit fall as the total number of produced units rise. Economies of scale deter new competitors by either forcing them to enter the market on a large scale, which means high investment and therefore a high risk, or starting with a low volume and experiencing a cost disadvantage. Economies of scale can also occur in so called network effects, which means that buyer’s willigness to purchase products increases with the number of other buyers trusting in a product. That discourages new entrants by limiting the price of products until the company has built up a strong customer base. 2. Switching...
References: Anthony Henry (2008) Understanding Strategic Managment 68-80, Oxford University Press, Oxford UK
Michael E. Porter (2008) The five competitve forces that shape strategy, Harvard Business Review
George Stonehouse, Bill Houston (2013) Business Strategy (134-142), Routledge, Oxford UK
Michael E. Porter (1979) How competitive forces shape strategy in: Strategic Planning: Readings, P. J Smith (102-116) Juta and Company Ltd, 2000
Joan Magretta (2012) Understanding Michael Porter: The Essential Guide to Competition and Strategy, Harvard Business Press
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