Porter Five forces model
Porter five forces are very important from the view point of strategy formulation. The potentiality of these forces varies from industry to industry. These forces jointly determine the profitability of industry because they form the prices which can be obtained, the costs which can be borne and the investment required to compete in the industry. Before taking effective strategic decisions, the managers can use the five forces porter’s framework to fix the competitive structure of the firm.
Let’s discuss the five factors of Porter’s model –
01. Risk of entry by potential competitors
Potential competitors refer to the group of firms which are not currently competing in the industry but have the opportunity to do so if there has a choice. Entry of new ones increases the industry capacity that begins a competition for market share and lowers the present costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry.
The various obstacles to entry are presenting below
>> Economies scale
>> Brand loyalty
>> Government Rules and Regulations
>> Switching Costs
>> Cost Advantage
>> Distribution Ease
>> Strong Capital form
02. Rivalry among current competitors
Rivalry means to competitive situation for market shares among the number of firms in an industry. Extreme rivalry situations among established firms holds a strong threat to profitability. The strengthens of rivalry among settled firms within an industry is a function of many factors some of them are showing here
>> Exit barriers extents
>> Amount of fixed cost
>> Competitive structure of industry
>> Presence of global customers
>> Growth Rate
03. Bargaining Power of Buyers
Buyers indicates that the customers who finally consume the product or the firms who distribute the industry’s product to the ultimate consumers. Bargaining power of buyers refer to the potential of buyers to bargain down the prices taken by the firms in the industry or to increase the firms cost in the industry by demanding better quality as well as service of products. Strong buyers can obtain profits out of an industry by lowering the prices and increase the costs. They purchase in large volumes also they have full ideas about the product and the market. They concentrate upon quality goods. They pose credible threat of backward integration. In this way, they are regarded as a threat.
04.Bargaining Power of Suppliers
Suppliers means the firms or group of firms that provide raw materials to the industry. Bargaining power of the suppliers means the potential suppliers increase the prices of inputs( labor, raw materials, services, etc). Good suppliers can obtain profits out of an industry by increasing costs of firms in the industry. Good suppliers products are always unique. Their switching cost is high. Their products is vital input to buyer’s product. They pose credible threat to forward integration. Buyers are not too much important to strong suppliers. In this case, they are regarded as a threat.
05. Threats from Substitute products
Substitute products indicates those products that have ability to satisfy customers needs effectively. Substitutes imposes a ceiling (upper limit) on the potential returns of an industry by putting a setting a specific limit on the prices that firms can charge for their product in an industry.
The power of Porter’s five forces varies on the types industries. These five forces influence the profitability as they affect the prices, costs, and capital investments essential for survival. These five forces model also help taking strategic decisions as it is used by the top level employees as well as managers to determine industry’s competitive structure. Also, the porter’s five forces model overlooks the role of innovation as well as the significance of individual firm differences.Porter Five Forces.