Competitive

analysis-
Porter’s five
forces Model
competition

– Competition means rivalry between two or more parties to

achieve a similar goal.

– In business competition generally refers to the fight for

market share which serve the same basic customer needs.
The five forces

– The five forces model developed by Michael E Porter has been the most

commonly used analytical tool for examining competitive environment.

According to this model, the intensity of competition in an industry depends on

five basic forces

– Treat of new entrants

– Intensity of rivalry among industry competitors

– Bargaining power of buyers

– Bargaining power of suppliers

– Threat of substitute products and services

The threat of new entrants

– New entrants bring new capacity and often substantial resources to an industry with a

desire to gain market share.

– Particularly when big new entrants are diversifying from other markets in to the

industry , they can leverage existing capabilities and cash flows to shake competition.

– Therefore, the threat of new entrants puts a cap on the profit potential of an industry.

When the threat is high, existing companies hold down their prices or boost

investment to deter new competitors.

– the threat of entry depends on the height of entry barriers and on the retaliation

form the entrenched competitors

– Barriers to entry : economies of scale, product differentiation, capital
requirements, switching cost, access to distribution channels, cost
disadvantages independent of size, government policy.

– Expected retaliation: how new entrants believe that the existing companies
may react will also influence their decision to enter or stay out of an
industry. If reaction is vigorous and protracted enough, the profit potential
in the industry can fall below the cost of capital for all participants.
– New entrants are likely to fear expected retaliation if

– Existing companies have previously responded vigorously to new

entrants

– Existing companies possess substantial resources to fight back

– Existing companies seem likely to cut prices to protect their market

share

– Industry growth is slow, so newcomers can gain volume only by taking

the market share from existing companies.

 Intensity of Rivalry among competitors

– Rivalry means the competitive struggle between companies in an industry to gain

market share form each other.

– Firms use tactics like price discounting, advertising campaigns, new product

introduction and increased customer service or warranties.

– Intense rivalry lowers prices and raises cost, it squeezes profits out of an industry.

– Alternatively, if rivalry is less intense, company may have the opportunity to increase

prices or reduce spending on advertising etc which leads to higher level of industry.
– The intensity of rivalry is greatest under the following conditions

– Numerous competitors or equally powerful competitors

– Slow industry growth

– High fixed but low marginal cost

– Lack of differentiation or switching cost

– Capacity augmentation in large increments

– High exit barriers

Bargaining power of buyers

– Bargaining power of buyers refers to the ability of buyers to bargain

down the prices charged by firms in the industry or driving up the

costs of firm by demanding better product quality and service.

– By forcing lower prices and raising costs, powerful buyers can

squeeze profit out of an industry. Thus, powerful buyers should be

viewed as a threat.

– Buyers are powerful if they have more negotiation leverage than

the firms in the industry

– According to Porter, buyers are most powerful under the
following conditions
– There are few buyers

– The product are standard or undifferentiated

– The buyer faces low switching costs

– The buyer earns low profits

– The quality of buyer’s products

Bargaining powers of suppliers

– Suppliers are company that supply raw materials,

components, equipment, machinery and associated products.

– Powerful suppliers make more profits by charging higher

prices, limiting quality of services or shifting the cost to

industry participants.

– Powerful suppliers squeeze profit out of an industry and

hence, they are threat.

– A supplier’s bargaining power will be high under the following
conditions
– Few suppliers

– Product is differentiated

– Dependence of supplier group on the firm

– Importance of the product of the firm

– Threat of forward integration

– Lack of substitutes
Threat of substitute products

– A substitute performs the same or a similar function as an

industry’s product.
– All firms within an industry compete with industries
producing substitute products.
– The existence of close substitutes is a strong competitive
threat because this limits the price that companies in one
industry can charge for their product.
– When the threat of substitute is high, industry profitability
suffers.
– If an industry does not ward off the substitutes through
product performance, marketing, price or other means, it
will suffer in terms of profitability and growth potential in
the following circumstances

– It offers an attractive price and performance

– The buyer’s switching costs to the substitutes is low

Merits

– The five forces model is a powerful tool that helps manager

to think strategically.
– It leads manager to think systematically about the way their
strategic choices will be both affected by the forces of
competition and how their choices will affect the five
forces and change conditions in an industry.
– The model helps managers to assess how to improve the
firm’s competitive position with regards to each of the five
forces.
 Limitations

– It assumes the existence of a clear, recognizable industry. As

complexity associated with industry definition increases, the ability

to draw coherent conclusions from the model diminishes.

– The model assumes that industry factors, not firm resources,

comprise the primary determinants of firm profits. This limitation

reflects the ongoing debate between IO theorist who emphasize
Porters model and RBV theorist who emphasize- specific
resources.