Understanding the Five Forces

Porter regarded understanding both the competitive forces and the overall industry

structure as crucial for effective strategic decision-making. In Porter's model, the five

forces that shape industry competition are:

1. Competitive rivalry

This force examines how intense the competition currently is in the marketplace,

which is determined by the number of existing competitors and what each is capable

of doing. Rivalry competition is high when there are just a few businesses equally

selling a product or service, when the industry is growing and when consumers can

easily switch to a competitor's offering for little cost. When rivalry competition is high,

advertising and price wars can ensue, which can hurt a business's bottom line.

2. Bargaining power of suppliers

This force analyzes how much power a business's supplier has and how much

control it has over the potential to raise its prices, which, in turn, would lower a

business's profitability. In addition, it looks at the number of suppliers available: The

fewer there are, the more power they have. Businesses are in a better position when

there are a multitude of suppliers.

3. Bargaining power of customers

This force looks at the power of the consumer to affect pricing and quality.

Consumers have power when there aren't many of them, but lots of sellers, as well

as when it is easy to switch from one business's products or services to another.

Buying power is low when consumers purchase products in small amounts and the

seller's product is very different from any of its competitors.

4. Threat of new entrants

This force examines how easy or difficult it is for competitors to join the marketplace

in the industry being examined. The easier it is for a competitor to join the

marketplace, the greater the risk of a business's market share being depleted.

Barriers to entry include absolute cost advantages, access to inputs, economies of

scale and well-recognized brands.

5. Threat of substitute products or services

This force studies how easy it is for consumers to switch from a business's product

or service to that of a competitor. It looks at how many competitors there are, how

their prices and quality compare to the business being examined and how much of a

profit those competitors are earning, which would determine if they can lower their

costs even more. The threat of substitutes are informed by switching costs, both

immediate and long-term, as well as a buyer's inclination to change.

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Understanding the Five Forces

Porter regarded understanding both the competitive forces and the overall industry

structure as crucial for effective strategic decision-making. In Porter's model, the five

forces that shape industry competition are:

1. Competitive rivalry

This force examines how intense the competition currently is in the marketplace,

which is determined by the number of existing competitors and what each is capable

of doing. Rivalry competition is high when there are just a few businesses equally

selling a product or service, when the industry is growing and when consumers can

easily switch to a competitor's offering for little cost. When rivalry competition is high,

advertising and price wars can ensue, which can hurt a business's bottom line.

2. Bargaining power of suppliers

This force analyzes how much power a business's supplier has and how much

control it has over the potential to raise its prices, which, in turn, would lower a

business's profitability. In addition, it looks at the number of suppliers available: The

fewer there are, the more power they have. Businesses are in a better position when

there are a multitude of suppliers.

3. Bargaining power of customers

This force looks at the power of the consumer to affect pricing and quality.

Consumers have power when there aren't many of them, but lots of sellers, as well

as when it is easy to switch from one business's products or services to another.

Buying power is low when consumers purchase products in small amounts and the

seller's product is very different from any of its competitors.

4. Threat of new entrants

This force examines how easy or difficult it is for competitors to join the marketplace

in the industry being examined. The easier it is for a competitor to join the

marketplace, the greater the risk of a business's market share being depleted.

Barriers to entry include absolute cost advantages, access to inputs, economies of

scale and well-recognized brands.

5. Threat of substitute products or services

This force studies how easy it is for consumers to switch from a business's product

or service to that of a competitor. It looks at how many competitors there are, how

their prices and quality compare to the business being examined and how much of a

profit those competitors are earning, which would determine if they can lower their

costs even more. The threat of substitutes are informed by switching costs, both

immediate and long-term, as well as a buyer's inclination to change.

Example of Porter's Five Forces

There are several examples of how Porter's Five Forces can be applied to various industries online.

As an example, stock analysis firm Trefis looked at how Under Armour fits into the athletic footwear

and apparel industry.

Competitive rivalry: Under Armour faces intense competition from Nike, Adidas and newer

players. Nike and Adidas, which have considerably larger resources at their disposal, are making a play within the performance apparel market to gain market share in this up-and-coming product category. Under Armour does not hold any fabric or process patents, and hence its product portfolio could be copied in the future.

Bargaining power of suppliers: A diverse supplier base limits bargaining power. Under

Armour's products are produced by dozens of manufacturers located across multiple countries.

Bargaining power of customers: Under Armour's customers include both wholesale

customers as well as end customers. Wholesale customers, like Dick's Sporting Goods and the Sports Authority, hold a certain degree of bargaining leverage, as they could substitute Under Armour's products with those of competitors to gain higher margins. Bargaining power of end customers is lower as Under Armour enjoys strong brand recognition.

Threat of new entrants: Large capital costs are required for branding, advertising and creating

product demand, and hence limits the entry of newer players in the sports apparel market. However, existing companies in the sports apparel industry could enter the performance apparel market in the future.

Threat of substitute products: The demand for performance apparel, sports footwear and

accessories is expected to continue, and hence we think this force does not threaten Under Armour in the foreseeable future.

Trefis has also completed Porter's Five Forces analyses of companies, including Facebook , Nike,

Coach and Ralph Lauren.

Strategies for success

Once your analysis is complete, it is time to implement a strategy to expand your competitive advantage. To that end, Porter identified three generic strategies that can be implemented in any industry, and in companies of any size:

Cost leadership

Your goal is to increase profits by reducing costs while charging industry-standard prices, or to increase market share by reducing the sales price while retaining profits.

Differentiation

To implement this strategy, make the company's products significantly different from the competition, improving their competitiveness and value to the public. It requires both good research and development and effective sales and marketing teams.

Focus

A successful implementation means the company selects niche markets in which to sell their goods. It requires intense understanding of the marketplace, its sellers, buyers and competitors.

porter's five force model, Exams of Strategic Management

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Partial preview of the text

Download porter's five force model and more Exams Strategic Management in PDF only on Docsity!

Understanding the Five Forces

Porter regarded understanding both the competitive forces and the overall industry

structure as crucial for effective strategic decision-making. In Porter's model, the five

forces that shape industry competition are:

1. Competitive rivalry

This force examines how intense the competition currently is in the marketplace,

which is determined by the number of existing competitors and what each is capable

of doing. Rivalry competition is high when there are just a few businesses equally

selling a product or service, when the industry is growing and when consumers can

easily switch to a competitor's offering for little cost. When rivalry competition is high,

advertising and price wars can ensue, which can hurt a business's bottom line.

2. Bargaining power of suppliers

This force analyzes how much power a business's supplier has and how much

control it has over the potential to raise its prices, which, in turn, would lower a

business's profitability. In addition, it looks at the number of suppliers available: The

fewer there are, the more power they have. Businesses are in a better position when

there are a multitude of suppliers.

3. Bargaining power of customers

This force looks at the power of the consumer to affect pricing and quality.

Consumers have power when there aren't many of them, but lots of sellers, as well

as when it is easy to switch from one business's products or services to another.

Buying power is low when consumers purchase products in small amounts and the

seller's product is very different from any of its competitors.

4. Threat of new entrants

This force examines how easy or difficult it is for competitors to join the marketplace

in the industry being examined. The easier it is for a competitor to join the

marketplace, the greater the risk of a business's market share being depleted.

Barriers to entry include absolute cost advantages, access to inputs, economies of

scale and well-recognized brands.

5. Threat of substitute products or services

This force studies how easy it is for consumers to switch from a business's product

or service to that of a competitor. It looks at how many competitors there are, how

their prices and quality compare to the business being examined and how much of a

profit those competitors are earning, which would determine if they can lower their

costs even more. The threat of substitutes are informed by switching costs, both

immediate and long-term, as well as a buyer's inclination to change.

Example of Porter's Five Forces

As an example, stock analysis firm Trefis looked at how Under Armour fits into the athletic footwear

Competitive rivalry: Under Armour faces intense competition from Nike, Adidas and newer

Bargaining power of suppliers: A diverse supplier base limits bargaining power. Under

Bargaining power of customers: Under Armour's customers include both wholesale

Threat of new entrants: Large capital costs are required for branding, advertising and creating

Threat of substitute products: The demand for performance apparel, sports footwear and

Trefis has also completed Porter's Five Forces analyses of companies, including Facebook , Nike,

Coach and Ralph Lauren.

Strategies for success

Cost leadership

Differentiation

Focus

More information about the generic strategies is available in Porter's 1985 book, Competitive

Advantage (Free Press).