Porter Five Forces Model

9 September 2016

Porter’s Five Forces Model: an overview Porter’s Five Forces Model: an overview Abstract Porter’s Five Forces Model is a structured framework for analyzing commerce and business establishment. It was formed by Michael E. Porter of the Harvard Business School between 1979 and the mid 1980’s. Porter developed the Five Forces model in opposition to the SWOT (strengths, weaknesses, environmental opportunities, threats) analysis that was an industry standard for businesses to determine how they compared to other businesses in a certain market or if there was opportunity to expand into different markets.

Porter’s Five Forces Model: an overview Porter’s Five Forces Model is a structured framework for analyzing commerce and business establishment. It was formed by Michael E. Porter of the Harvard Business School between 1979 and the mid 1980’s. Porter developed the Five Forces model in opposition to the SWOT (strengths, weaknesses, environmental opportunities, threats) analysis that was an industry standard for businesses to determine how they compared to other businesses in a certain market or if there was opportunity to expand into different markets.

Porter Five Forces Model Essay Example

Porter’s original model identified five forces that could have potential impacts on any business’ activities in a market. The Porter forces included: – the rivalry among competing sellers in the industry; – the market attempts of companies in other industries to win customers over their own substitute products; – the potential market entry of new competitors; – the bargaining power and leverage exercisable by suppliers of inputs; and – the bargaining power and leverage exercisable by buyers of the product. The rivalry among competing sellers in the industry

Rivalry among firms varies considerably between industries. It is influenced, for instance, by the number of competitors, market growth, fixed costs, switching costs, exit barriers and diversity of rivals. The higher the degree of rivalry in an industry, the lower the average return on investments. Concentration ratios are popular measures for gaining initial insights into the degree of rivalry in an industry. (Niedderhut-Bollman, Theuvsen, 2008) Wal-Mart is an example of a retailer who has successfully incorporated cost leadership as a core business model and has forced suppliers to operate accordingly.

However, retailers such as Target with innovative and exclusive store brands have influenced Wal*Mart to differentiate their apparel store brand offerings with the George apparel brand. (Fratto, Jones, Cassill, 2006) The market attempts of companies in other industries to win customers over their own substitute product A threat of substitutes exists when price changes in other industries influence product demand in the industry being analyzed. Close substitutes generally restrict a firm’s ability to raise prices and thus limit profitability.

Due to changing consumer behavior and tastes, substitute products have become a major threat for German breweries. Increasingly consumers are replacing beer with other beverages, such as wine and soft drinks, that better reflect their changing lifestyles and attitudes. The family-owned Karlsberg brewery focuses mainly on the growing threat of substitutes by introducing innovative mixed beers into the market, such as Mixery (beer plus cola), Radler (beer plus Sprite), and Desperados (Tequila-flavored beer).

The potential market entry of new competitors The threat that new competitors may enter an industry depends on barriers to entry. When barriers to entry are low, excessive profits will quickly attract new competitors, and price competition will become more intense. (Niedderhut-Bollman, Theuvsen, 2008) The Internet allows smaller companies to seize and/or create a niche in a market that allows for it to seize a small advantage and potentially to set a new agenda for existing companies.

In the Swedish retail banking industry, part of the success of the new entrants was associated with new products they offered and the bargaining power they represented for customers, i. e. the products of insurance companies and the convenience of retail stores. (Bostrom, Wilson, 2009) The bargaining power and leverage exercisable by suppliers of inputs Powerful suppliers can deliver raw materials at a high price to capture some of their customers’ profits. Suppliers are powerful when they can credibly threaten their customers with forward integration, are more concentrated than their customers, sell differentiated products (instead of commodity products), provide important and difficult to replace inputs or when customers face high switching costs. (Niedderhut-Bollman, Theuvsen, 2008) The bargaining power and leverage exercisable by buyers of the product When buyers are powerful, they set prices and limit the supplying industry’s profitability. Buyers are powerful when they are concentrated, possess credible backward integration options, purchase a significant portion of the supplier’s output or can easily and cheaply switch to other suppliers or substitutes.

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