Porter’s Five Forces Analysis
Michael Porter provided a framework that analyses an industry as being influenced by five forces. It has been suggested that management, attempting to establish a competitive marketing advantage over rivals, can use this model to understand the industry context in which the business operates and take appropriate strategic decisions.
Threat of entry
This means the ease with which other firms can join the industry and compete with existing businesses. The threat of entry is greatest when:
economies of scale are low in the industry
technology needed to enter the industry is relatively cheap
distribution channels are easy to access, e.g. retail shops are not owned by existing manufacturers in the industry
there are no legal or patent restrictions on entry
The importance of product differentiation is low, so extensive advertising may not be required to get established.
The power of buyers
This refers to the power that customers have on the producing industry. For example, if there are four major supermarket groups that dominate this sector of retailing, their buyer power over food and other producers will be great. Buyer power will also be increased when:
there are many undifferentiated small supplying firms, e.g. many small farmers supplying milk or chicken to large supermarket businesses
the cost of switching suppliers is low
Buyers can realistically and easily buy from other suppliers.
The power of suppliers
Suppliers will be relatively powerful compared with buyers when:
the cost of switching is high, e.g. from PC computers to AppleMacs
When the brand being sold is very powerful and well known, e.g. Cadbury’s chocolate or Nike shoes.
Suppliers could realistically threaten to open their own forward-integration operations, e.g. coffee suppliers open their own cafés.
Customers have little bargaining power as they are small firms and fragmented, e.g. dispersed around the country as...
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