what are the five porter forces? Explain how each affect strategy
1) The rivalry among competitors in the industry
2) The potential entrants
3) The substitute products
4) The bargaining power of suppliers
5) The bargaining power of buyers
1) Threat of New Entrants
Entry of a firm in and operating in a market is seen as a threat to the established firms in that market. The competitive position of the established firms is affected
because the entrants may add new production capacity or it may affect their market shares. They may also bring additional resources with them which may force the
existing firms to invest more than what was not required before. Altogether the situation becomes difficult for the existing firms if not threatening always and therefore they resort to raising barriers to entry.
2) Bargaining Power of Suppliers
Business organizations have a large dependency on suppliers and the latter influence their profit potential significantly. Suppliers’ decisions on prices, quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry.
3) Bargaining Power of Customers
Customers with a stronger bargaining power relative to their suppliers may force supply prices down or demand better quality for the same price and may demand more
favourable terms of business. For instance, there will always be a difference in the bargaining power between an individuals buying different construction material like cement, steel or bricks and a real estate builder buying them for the number of properties he may have been building over so many years.
4) Threat of Substitutes
Often firms in an industry face competition from outside industry products,which may be close substitutes of each other. For example, with the new
technologies in place now the electronic publishing are the direct substitutes of the texts published in print. Similarly, newspaper find their closest substitutes in their online version, though it may be a smart strategic move to position them as complementary products.However, the competitive pressure, which any industry may face, depends primarily on three factors:
a) whether the substitutes available are attractively priced;
b) whether buyers view substitutes available as satisfactory in terms of their quality
c) how easily buyers can switch to substitutes.
Generally it is observed that the availability and acceptability of substitutes determine an upper price limit to a product. When relative prices of the product in question rise above that of the substitute products, customers tend to switch away from them.
5) Competitive Rivalry
The level of rivalry is minimum in a perfectly competitive market where there are large number of buyers and sellers and the product is uniform with everyone. Same is
true for a monopoly market where there is only one player and the type of product is also one. However in case of oligopoly or monopolistic competition, where you will
find few players and the market conditions allow them to differentiate their products and services, competition if found to be fierce.