Porters five forces

PORTERS FIVE FORCES

The whole point of competitive strategy is to relate a business, or company for that matter, to its environment. In as much as that environment is going to be broad.

Porters five forces show that businesses will always compete and that has nothing to do with coincidence or luck rather the underlying economic structure.

According to Michael porter the state of competition depends on five basic forces.

Which forces you ask?

#1 Threat of entry

New entrants bring new capacity, desire to gain market share, and often substantial resources

Remember companies diversify through acquisition into various industries, for instance Google’s decision to acquire YouTube was a new entrant even though no entirely new entry has been created

The threat of new entry into a given industry will depend on barriers to entry in that market together with reaction for existing competitors

These are thing like:

• Amount of capital required
• Retaliation by existing companies
• Legal barriers (patents, copyrights, etc.)
• Brand reputation
• Product differentiation
• Access to suppliers and distributors
• Economies of scale
• Government regulation

#2 Intensity of rivalry among existing competitors

These often come in the form of price wars, advertisement wars or even constant launch of products, something that Samsung and IPhone seem to be always doing even. The rivalry is often as a result of the companies seeing an opportunity to improve their position or just pressure to do so

Intensity rivalry is the result of a number of interacting structural factors such as;

• Number of competitors
• Cost of leaving an industry
• Industry growth rate and size
• Product differentiation
• Competitors’ size
• Customer loyalty
• Threat of horizontal integration
• Level of advertising expense

#3 Pressure from substitute products

Whatever business you are in you will, in a broader sense, be competing with industries producing substitute products.

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Substitute limit how much a firm can make in terms of profit. So ask yourself:

• What are some of the of substitutes to you products or services
• How do they perform?
• What are their costs?

#4 Bargaining power of buyers

Buyers become powerful in the sense that they can force down prices, bargain for higher quality or more services or even play competitors against each other.

Remember all this is at the expense of the industry profitability.

Buyers’ power will depend on;

• Number of buyers
• Size of buyers
• Size of each order
• Buyers’ cost of switching suppliers
• There are many substitutes
• Price sensitivity

#5 Bargaining power of suppliers

Suppliers can exert power by threatening to raise prices or reduce the quality of purchase goods and services

Suppliers can therefore make a business unable to recover cost increases in it own prices.

This, for instance was the case between Unilever and Tesco, one of the aftermath of the referendum that saw Britain exit the European Union seeing the fall of Britain Pound Sterling falling substantially and Unilever increasing its prices

The conditions making suppliers powerful tend to mirror those making the buyer powerful such include:

• Number of suppliers
• Suppliers’ size
• Ability to find substitute materials
• Materials scarcity
• Cost of switching to alternative materials

CONCLUSION

The collective strength of these forces determine the ultimate profit potential in the industry, where profit potential is measured in terms of long run returns on capital invested

Then again remember companies differ and so does their potential