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Porters Five-Forces Porters Five-Force model is an industry analysis tool a strategist can use to evaluate the competitive forces

that influence profitability within an industry. The competitive forces outlined in the model are threat of new entrants, threat of substitutes, existing rivalries, buyer power and supplier power (QuickMBA.com). Threat of new entrants. If an industry is attractive enough meaning the profitability is worth entering the market and the barriers to entry arent prohibitive enough to deter entry then the threat of new entries could be high. This will put pressure on existing companies within that market. A new entrant can affect price, resource availability, supply chain costs and other costs such as marketing capital spent in order to retain market share. Threat of substitutes. A substitute performs the same or a similar function as an industrys product by a different means (Porter, 2008, p.84). One example of substitution is the way we receive entertainment. In particularly how we get movies. Getting in the car and driving to Blockbuster or Hollywood Video is a thing of the past. Now we can rent movies through the mail with Netflix or get movies on demand via multiple sources such as Amazon or a cable provider or you can rent a movie from a Redbox vending machine for little more than a dollar a night. These substitutes have all but eliminated the existence of movie rental stores with very few locations left in existence. Existing Rivalries.

Rivalry among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements (Porter, 2008, p.85). Rivalry can be seen in many industries and in particular the consumer products line where competition for customers can be fierce. Some examples are HP and Dell in the personal computer industry, McDonalds and Burger King in the fast food industry and the many car manufacturers such as Ford, GM and Honda in the automobile industry. Whenever there are multiple similar products competing for a share of the market there will be rivalry. The intensity of the rivalry will lead to the level of impact on industry profits. When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms aggressiveness in attempting to gain an advantage (QuickMBA.com). Buyer power. The power of the consumer of a good or service can impact the profitability of an industry. Some factors that influence buyer power can be buyer concentration, switching costs, and buyer volume. The buyer can have leverage over a supplier if it is the only buyer of the product, can switch to a suppliers competitor at low to no cost, can go with a substitute product, or is the largest buyer of a product. Supplier power. Supplier power is the other side of the chain to buyer power. Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. Powerful suppliers, including suppliers of labor, can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices (Porter, 2008, p.82). If a company is the only supplier then they have leverage over the buyer.

Microsoft is an example of a supplier of computer software that has leverage over personal computer manufacturers. When a firm is looking at the possibility of expansion into foreign markets utilizing the five forces model can help develop a strategy for market entry. The manager can evaluate these forces along with the barriers to entry and formulate a plan that can identify answers to the following questions. Is there already existing competition for the product and what level of retaliation from entrenched firms may be expected? What buyer and supplier power exists? What other possible new entrants may lay on the horizon or is there a viable substitute to the product the firm will be offering. Strategic market analysis is crucial to the success of business, and models such as the five forces model can prove an invaluable tool. However, the five forces model is not without its critics and shouldnt be the only tool used in strategy planning. Overall, Porters Five Forces Model has some major limitations in todays market environment. It is not able to take into account new business models and the dynamics of markets (Recklies, 2001). But despite the criticism claiming the model is dated and limited it still holds value in business strategic planning.

References

Porter, M (2008, January). The five competitive forces that shape strategy [Electronic version]. Harvard Business Review, 86(1). 78-93. QuickMBA. Porters five forces a model for industry analysis. Retrieved May 9, 2012, from http://www.quickmba.com/strategy/porter.shtml

Recklies, D. (2001, June). Porters 5 forces. Retrieved May 11, 2012, from http://www.themanager.org/models/P5F_2.htm