Porter's Five Competitive Forces
Micheal E. Porter is a professor at Harvard University. He is the head of the Institute of Strategy and Competitiveness. He derived what is known as the five competitive forces. It challenges the old strategies once employed by industries, that the only competition is your direct competition. But as Porter shows, there is much more to it. Below is an outline of the five forces that shape the strategy of a corporation.
By Grahams Child [GFDL (www.gnu.org/copyleft/fdl.html)] from Wikimedia Commons
Threat of New Entrants
New companies that enter an industry come with a drive to gain market share. Some companies are just starting out in an industry, but others are larger corporations that have the financial leverage to become a big threat to existing companies. The competitors themselves do not necessarily put pressure on costs, prices, and profitability. The actual threat of new entry does though because if there are not big barriers preventing new entrants, the entire approach and strategy must be developed to anticipate future competitors.
Bargaining Power of Suppliers
Companies in an industry must be able to depend on a supplier (or multiple) in their supply chain, and the leveraging power of these suppliers are critical to the profitability of a company. If a supplier has many clients and is largely depended on for materials, they have more negotiating ability in supply prices and terms. These suppliers will try to maximize their profits and that could have an enormous impact on a company's strategy.
Another big part is switching costs. Many companies work very closely with their suppliers to obtain an end product that meets the needs of the consumer. It takes an abundance of R&D and other types of investments to derive such products. This makes it more unlikely for a company to change suppliers.
Bargaining Power of Buyers
Large purchasers from suppliers also can hold significant bargaining power over their suppliers. These buyers can demand better quality products and force down the prices of these supplies which can drive up the costs to the supplier. Suppliers are especially at risk from buyers if there is more than one supplier in their industry. If the materials offered by the supplier are relatively common, the switching costs are minimal to the purchaser which can lead to fierce price competition between suppliers of an industry.
Threat of Substitutes
Substitutes can present a threat to an industry because it can perform the same or similar function by a different means. Substitutes have always been around but sometimes they are not easy to spot or associate with a product. That is because a seemingly unrelated action or product can have a significant impact on a different industry. For example, the increase in internet speeds around the globe with the advent of high speed cable, led to more calls being placed online and less being made using a landline. Phone companies are continuing to suffer less profitability because a price ceiling has capped off the industry.
Rivalry Among Existing Competitors
This force nearly goes without saying because rivalry among businesses of the same industry has been around for a very long time. Price competition, continuous new products, and advertising all have an effect on the profitability of a company in any industry. The intensity of competition differs in each industry but high intensity has many common factors such as: numerous competitors, high exit barriers, high fixed costs. Examples include the relatively new industry for smartphones. Apple came out with the iphone which has been an amazing success story, but it opened up an entire industry of fierce competitors vying to be a better choice. Companies such as Samsung, Research in Motion, and Nokia have come out with great substitutes that are as powerful if not more powerful than the iphone. Along with the continuous technological improvements on each phones is the price competition among them.
Sources:
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