Porter’s Five Forces
In the future| – Can substitute products really do the job that current products do? (is it a true substitute in every aspect? )- Likelihood of current buyers switching if given a viable alternative. – Switching cost incurred by buyer| Bargaining Power of Buyers| – Strength of the negotiating power of the buyers of the firm’s or industry’s output, and what is the impact of the distribution of the value-added by the industry? | – Bargaining Leverage: Relates closely to factors affecting the other forces. Low switching costs and readily avail. Sub.
Give the buyers leverage and help to strength this force for buyers- Buyer’s Price Sensitivity: Depend on qualitative factors such as, brand, product differences, quality and performance. Also, quantitative such as price relative to total purchases and profitability| Bargaining Power of Suppliers| – Strength of negotiating position of supplier of production inputs to the industry. – What is the impact of the distribution of the value-added- Stronger the bargaining power, greater ability to increase share of the value-added in the form of higher prices or the inputs they sell to the industry| – Differentiation of inputs that are acceptable to the industry- Presence of substitute inputs closely related to the differentiation of input- Supplier concentration (a lot of suppliers? )- Importance of volume to supplier. The more volume req. by seller, the harder they will work to maintain this volume and the lower their bargaining power. –
Porter’s Five Forces Essay Example
Threat of forward integration means that supplier may be interested in entering the industry. – Greater switching cost, greater the supplier power. Rivalry Among Existing Competitors| Will existing firms compete away the value added component through lower prices and higher costs to compete? | – No. of competitors (more, greater rivalry)- Industry growth implies demand for the product is strong, and the need to engage in competition, both price and on-price, is reduced- High degree of operating or financial leverage makes it more likely participants will engage in price competition (or respond to such competition) to defend their market share and cover fixed costs. Greater the participant’s commitment to business, the greater likelihood of competitive behavior- Product differences- Product shelf life (shorter shelf life, greater potential for price competition)- The existence of the exit barriers, costly to leave industry, which will mean greater competition- Amount of info complexity can make it difficult for competitors to communicate discretely in ways that can reduce the likelihood of damaging competition| Temporary Factors that may affect an industry, but do not determine industry profitability an structure in the LT: * This factors only affect the Porters 5 forces, therefore analyze how they affect the 5 forces. Temporary Factors| Description|
Industry Growth Rate| – High g diminishes rivalry but does not assure profitability if other forces are detrimental to profits| Innovation and Technology| – Improved tech does not improve profits if it attracts competitors- Low tech industries can be very profitable if the overall effect of the five forces is positive| Government Policies| – Can be good or bad. Prone to change through time| Complementary Products| – Can have +’ve or –“ve effect- Can create or increase barriers to entry and reduce the threat of substitutes, while others can increase industry rivalry to serve the demand generated by purchase of complement| 3 Strategies that Firms can Employ to use Five Forces in its Favor 1. Altering the Firm’s Existing Position Managers should attempt to intentionally create changes in Porter’s Five Forces by reducing: * Customer Power – increase service or bypassing the middleman and sell directly to end users * Supplier Power – use standard parts that can be sourced from many vendors or outsource labor to more favorable markets * Substitutes – make product more widely avail. Or enhance product features * Threat of Entry – raise barriers to entry by raising fixed costs through increased R&D or mechanization * Rivalry – avoid price wars and focus on differentiating products and finding or creating new market niches and geographic segments 2. Capitalizing on Changes in the Industry * These type of change are opportunities to firms that are positioned to capitalized on them * Forward or backward integration External forces such as improvement ot substitutes * Sudden dramatic change 3. Creating Changes in the Industry Structure * Firm can move entire industry in directions that improve industry attractiveness by enhancing industry value-added overall (eliminate inefficiencies in the supply chain or distribution network) * Can move industry in directions that play to its strength and enhance its competitive advantage (create barriers to entry by raising fixed cost and increase econ. of scale) * Can’t engage in practice that improve short term competitive e position at the cost of long term industry attractiveness (price discounting)