Porter Five Forces Analysis

Topics: Economics, Monopoly, Perfect competition Pages: 5 (1230 words) Published: June 30, 2013
Running head: PORTER’S STRATEGIC FRAMEWORK

Porter Five Forces Analysis
Managerial Economics – MBA 500
Instructor: Professor Franklin
By: LaTonya Perryman
Submitted in partial fulfillment
of the requirements for the degree of
Master of Business Administration
Concordia University Wisconsin
November 1, 2011

Table of Contents

Introduction……………………………………………………………………………3 Michael Porter’s Strategic Framework…...……………..……………………..………3 The Long-run Efficiency Implications of an Oligopoly……………………………...4 Advantage and Disadvantage of the Oligopoly Market Structure…………………...4 The Reason for the Rapid Spread of Global Oligopolists.……………………………3 Summary………………………………………………………………………………3

Introduction
Porter’s Five Forces is a framework for industry analysis and business strategy that was formed by a Harvard Business School affiliate, Michael E. Porter in 1979. This framework is used for identifying the five structural determinants of intensity of competition and of profitability of firms in oligopolistic industries.

This paper will discuss these Five Forces in detail and apply all relevant microeconomic concepts to explore the relationship between Porter’s framework and the oligopolistic industries and its effects on today’s market.

Michael Porter’s Strategic Framework
Michael Porter’s five forces that make up his proposed strategic framework include the threat from substitute products, the threat of entry, the bargaining power of buyers, the bargaining power of suppliers, and lastly, the intensity of rivalry among existing competitors. Because Porter’s references are in reference to oligopolistic industries, we must first start out by defining exactly what an oligopoly is. The definition given in the text Managerial Economics in a Global Economy by Dominick Salvatore states that Oligopoly as the form of market organization in which there are few sellers of a homogeneous or differentiated product. It further states that Oligopoly is the most prevalent form of market organization in the manufacturing sector of industrial nations, including the United States.

The five forces of Porter’s strategic framework represent strategic challenges facing firm managers as they seek to maximize profits in oligopolistic markets. The firm will earn higher than average industry profits if it does not face much of a threat from substitute products and from the entry of potential competitors, if buyers and suppliers do not exert much market power of the firm, and if there is low intensity of rivalry and competition among existing firms. Economics has showed us that if an organization raises its prices, the demand for substitute products will increase. In an oligopoly, if much of the market is owned by the oligopoly institutions, then there will not be much competition and therefore is not a concern in this area. Additionally, the greater the differentiation and uniqueness of a product the firm sells and the greater the brand loyalty of consumers for the firm’s product, the higher is the markup that the firm can apply and the greater the profits of a firm.

According to Porter, New entrants to an industry bring new capacity to desire to gain market share, and often substantial resources. To deter this, Porter states that there are six major sources of barriers to entry which are Economies of scale, Product differentiation, Capital requirements, Cost disadvantages independent of size, Access to distribution channels, and government policy. The potential rival’s expectation about the reaction of existing competitor also will influence its decision on whether or not to enter the market.

The Long-run Efficiency Implications of an Oligopoly
Cost curves may differ under various forms of market organization. You can make a few generalizations to be interpreted cautiously. To begin, the perfectly competitive firm and the monopolistically competitive firm break even in long-run equilibriums. Therefore,...

Cited: Porter, M. (1979). How Competitive Forces Shape Strategy. Harvard Business Review, 1, 1-10. Retrieved October 29, 2011, from http://www2.fiu.edu/~ikhurana/Porter%27s%205%20Forces.pd
Salvatore, D. (1996). Managerial economics in a global economy (6th ed.). New York: McGraw-Hill.
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