Michael Eugene Porter (born May 23, ) is the. Bishop William Lawrence University Professor at The Insti- tute for Strategy and Competitiveness, based at . PDF | Goold () has argued that the Porter () five-forces framework for industry analysis is not applicable to nonprofits. In light of recent. young economist and associate professor, Michael E. Porter. “Porter's five forces” have shaped a generation of academic research and business practice.
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How Strong Are Competitive Forces? ▫ Objectives are to identify. ▫ Main sources of competitive forces. ▫ Strength of these forces. ▫ Key analytical tool. ▫ Five. 5. Critique. 1 Introduction. The model of the Five Competitive Forces was developed by Michael E. Porter in his book. „Competitive Strategy: Techniques for. Porter Five Forces Analysis – (Industry Analysis) Ibrahim Mohammad Rihan Porter five forces analysis is a framework to analyze level of competition within an .
Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re- assess the marketplace given the overall change in industry information.
The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average.
A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average. Porter's five forces include - three forces from 'horizontal' competition: the threat of substitute products or services, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.
Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc.
An Interview with Michael Porter Porter's five forces is based on the Structure- Conduct-Performance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries.
Other Porter strategic frameworks include the value chain and the generic strategies. Competition and Crisis in Mortgage Securitization Threat of new entrants Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry.
Unless the entry of new firms can be blocked by incumbents which in business refers to the largest company in a certain industry, for instance, in telecommunications, the traditional phone company, typically called the "incumbent operator" , the abnormal profit rate will trend towards zero perfect competition. The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.
Substitutes not only limit profits in normal times; they also reduce the bonanza an industry can reap in boom times. In the producers of fiberglass insulation enjoyed unprecedented demand as a result of high energy costs and severe winter weather.
These substitutes are bound to become an even stronger force once the current round of plant additions by fiberglass insulation producers has boosted capacity enough to meet demand and then some. Substitutes often come rapidly into play if some development increases competition in their industries and causes price reduction or performance improvement. Jockeying for position Rivalry among existing competitors takes the familiar form of jockeying for position—using tactics like price competition, product introduction, and advertising slugfests.
Intense rivalry is related to the presence of a number of factors: Competitors are numerous or are roughly equal in size and power. In many U. Industry growth is slow, precipitating fights for market share that involve expansion-minded members. The product or service lacks differentiation or switching costs, which lock in downloaders and protect one combatant from raids on its customers by another. Fixed costs are high or the product is perishable, creating strong temptation to cut prices.
Many basic materials businesses, like paper and aluminum, suffer from this problem when demand slackens. Capacity is normally augmented in large increments.
Exit barriers are high. Excess capacity remains functioning, and the profitability of the healthy competitors suffers as the sick ones hang on. As an industry matures, its growth rate changes, resulting in declining profits and often a shakeout. In the booming recreational vehicle industry of the early s, nearly every producer did well; but slow growth since then has eliminated the high returns, except for the strongest members, not to mention many of the weaker companies.
The same profit story has been played out in industry after industry—snowmobiles, aerosol packaging, and sports equipment are just a few examples.
Technological innovation can boost the level of fixed costs in the production process, as it did in the shift from batch to continuous-line photo finishing in the s. While a company must live with many of these factors—because they are built into industry economics—it may have some latitude for improving matters through strategic shifts.
A focus on selling efforts in the fastest-growing segments of the industry or on market areas with the lowest fixed costs can reduce the impact of industry rivalry. If it is feasible, a company can try to avoid confrontation with competitors having high exit barriers and can thus sidestep involvement in bitter price cutting.
Where does it stand against substitutes? Against the sources of entry barriers? I shall consider each strategic approach in turn.
Strategy can be viewed as building defenses against the competitive forces or as finding positions in the industry where the forces are weakest. If the company is a low-cost producer, it may choose to confront powerful downloaders while it takes care to sell them only products not vulnerable to competition from substitutes. The success of Dr Pepper in the soft drink industry illustrates the coupling of realistic knowledge of corporate strengths with sound industry analysis to yield a superior strategy.
Dr Pepper chose a strategy of avoiding the largest-selling drink segment, maintaining a narrow flavor line, forgoing the development of a captive bottler network, and marketing heavily. The company positioned itself so as to be least vulnerable to its competitive forces while it exploited its small size.
Dr Pepper coped with the power of these downloaders through extraordinary service and other efforts to distinguish its treatment of them from that of Coke and Pepsi. Many small companies in the soft drink business offer cola drinks that thrust them into head-to-head competition against the majors. Dr Pepper, however, maximized product differentiation by maintaining a narrow line of beverages built around an unusual flavor.
Finally, Dr Pepper met Coke and Pepsi with an advertising onslaught emphasizing the alleged uniqueness of its single flavor.
This campaign built strong brand identification and great customer loyalty. Thus Dr Pepper confronted competition in marketing but avoided it in product line and in distribution. This artful positioning combined with good implementation has led to an enviable record in earnings and in the stock market.
Influencing the balance When dealing with the forces that drive industry competition, a company can devise a strategy that takes the offensive. This posture is designed to do more than merely cope with the forces themselves; it is meant to alter their causes. Innovations in marketing can raise brand identification or otherwise differentiate the product. Capital investments in large-scale facilities or vertical integration affect entry barriers.
Exploiting industry change Industry evolution is important strategically because evolution, of course, brings with it changes in the sources of competition I have identified. In the familiar product life-cycle pattern, for example, growth rates change, product differentiation is said to decline as the business becomes more mature, and the companies tend to integrate vertically.
These trends are not so important in themselves; what is critical is whether they affect the sources of competition. Consider vertical integration. In the maturing minicomputer industry, extensive vertical integration, both in manufacturing and in software development, is taking place.
This very significant trend is greatly raising economies of scale as well as the amount of capital necessary to compete in the industry. This in turn is raising barriers to entry and may drive some smaller competitors out of the industry once growth levels off. Obviously, the trends carrying the highest priority from a strategic standpoint are those that affect the most important sources of competition in the industry and those that elevate new causes to the forefront.
In contract aerosol packaging, for example, the trend toward less product differentiation is now dominant. The framework for analyzing competition that I have described can also be used to predict the eventual profitability of an industry. In long-range planning the task is to examine each competitive force, forecast the magnitude of each underlying cause, and then construct a composite picture of the likely profit potential of the industry.
The outcome of such an exercise may differ a great deal from the existing industry structure. Today, for example, the solar heating business is populated by dozens and perhaps hundreds of companies, none with a major market position. Entry is easy, and competitors are battling to establish solar heating as a superior substitute for conventional methods.
These characteristics will in turn be influenced by such factors as the establishment of brand identities, significant economies of scale or experience curves in equipment manufacture wrought by technological change, the ultimate capital costs to compete, and the extent of overhead in production facilities. The framework for analyzing industry competition has direct benefits in setting diversification strategy.
Multifaceted Rivalry Corporate managers have directed a great deal of attention to defining their businesses as a crucial step in strategy formulation. Theodore Levitt, in his classic article in HBR, argued strongly for avoiding the myopia of narrow, product-oriented industry definition. One motive behind this debate is the desire to exploit new markets. Another, perhaps more important motive is the fear of overlooking latent sources of competition that someday may threaten the industry.
Many managers concentrate so single-mindedly on their direct antagonists in the fight for market share that they fail to realize that they are also competing with their customers and their suppliers for bargaining power. Meanwhile, they also neglect to keep a wary eye out for new entrants to the contest or fail to recognize the subtle threat of substitute products.
Porter's analysis tool is known as being a better tool than SWOT because it considers your competitors actions.
The five factors that Porter considers is competitive rivalry, threat of new entrants, threat of substitutes, bargaining power of suppliers, and bargaining power of customers.
Porter's five factors are not meant to be used on a wide range of products. A new analysis must be used on different products. This book then breaks down each factor discussing each factor individually. Competitive rivalry made a lot of sense to me.
It does seem important to study and truly understand your competitors if you want to beat them. Both of these were new to me, so I was glad the book thoroughly explained them both.
CRx shows how much of the market a certain number x of the largest firms control. It is followed by a percentage of the number that the largest firms control of the market. The book puts this into really simplified terms and also gives an example that is easy to understand.
Competitive rivalry can be increased by having a large number of firms, slow market growth, high fixed costs, high storage costs, low switching costs, low levels of product differentiation, and high exit barriers.
The threat of new entrants is always a problem. There is always the possibility for new companies to form and their growth rate needs to be accounted for. The threat of a substitute also needs to be accounted for or it can come as a shock if you are not prepared.
I liked the example that was used about the newspaper. It helped me see exactly what the book was explaining. I think it is important to look outside of your market while looking for substitutes, like the book states.
Bargaining the power of suppliers is important because they can dictate the price for the entire market. Suppliers can also determine the quantity of the product that they send out, which can be devastating to your company. The last factor to take into consideration is the bargaining power of the customer. Customers can dictate, to some extent, prices and the quality of goods in a market.