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Competition: Smriti Bajaj Sahni

Porter's five forces model analyzes five competitive forces that determine the intensity of competition in an industry: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, and rivalry among existing competitors. The model is used to evaluate a company's competitive position and identify strengths and weaknesses to strengthen that position. If the five competitive forces are strong in an industry, it will result in lower overall industry profits.

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Aditya Shukla
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32 views

Competition: Smriti Bajaj Sahni

Porter's five forces model analyzes five competitive forces that determine the intensity of competition in an industry: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, and rivalry among existing competitors. The model is used to evaluate a company's competitive position and identify strengths and weaknesses to strengthen that position. If the five competitive forces are strong in an industry, it will result in lower overall industry profits.

Uploaded by

Aditya Shukla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Competition

Smriti Bajaj Sahni


• Porter’s five forces model is an analysis tool
that uses five industry forces to determine the
intensity of competition in an industry and its
profitability level
• Five forces model was created by M. Porter in
1979 to understand how five key competitive
forces are affecting an industry. The five
forces identified are:
• These forces determine an industry structure and
the level of competition in that industry. The
stronger competitive forces in the industry are
the less profitable it is. An industry with low
barriers to enter, having few buyers and suppliers
but many substitute products and competitors
will be seen as very competitive and thus, not so
attractive due to its low profitability.
• It is every strategist’s job to evaluate
company’s competitive position in the
industry and to identify what strengths or
weakness can be exploited to strengthen that
position. The tool is very useful in formulating
firm’s strategy as it reveals how powerful each
of the five key forces is in a particular industry.
• 1 Threat of new entrants. This force
determines how easy (or not) it is to enter a
particular industry. If an industry is profitable
and there are few barriers to enter, rivalry
soon intensifies. When more organizations
compete for the same market share, profits
start to fall. It is essential for existing
organizations to create high barriers to enter
to deter new entrants. Threat of new entrants
is high when:
• Low amount of capital is required to enter a
market;
• Existing companies can do little to retaliate;
• Existing firms do not possess patents, trademarks
or do not have established brand reputation;
• There is no government regulation;
• Customer switching costs are low (it doesn’t cost
a lot of money for a firm to switch to other
industries);
• There is low customer loyalty;
• Products are nearly identical;
• Economies of scale can be easily achieved.
• Bargaining power of suppliers. Strong
bargaining power allows suppliers to sell higher
priced or low quality raw materials to their
buyers. This directly affects the buying firms’
profits because it has to pay more for
materials. Suppliers have strong bargaining
power when:
• There are few suppliers but many buyers;
• Suppliers are large and threaten to forward
integrate;
• Few substitute raw materials exist;
• Suppliers hold scarce resources;
• Cost of switching raw materials is especially
high.
• Bargaining power of buyers. Buyers have the
power to demand lower price or higher
product quality from industry producers when
their bargaining power is strong. Lower price
means lower revenues for the producer, while
higher quality products usually raise
production costs. Both scenarios result in
lower profits for producers. Buyers exert
strong bargaining power when:
• Buying in large quantities or control many
access points to the final customer;
• Only few buyers exist;
• Switching costs to other supplier are low;
• They threaten to backward integrate;
• There are many substitutes;
• Buyers are price sensitive.
• Threat of substitutes. This force is especially
threatening when buyers can easily find
substitute products with attractive prices or
better quality and when buyers can switch
from one product or service to another with
little cost. For example, to switch from coffee
to tea doesn’t cost anything, unlike switching
from car to bicycle
• Rivalry among existing competitors. This force is the
major determinant on how competitive and profitable
an industry is. In competitive industry, firms have to
compete aggressively for a market share, which results
in low profits. Rivalry among competitors is intense
when:
• There are many competitors;
• Exit barriers are high;
• Industry of growth is slow or negative;
• Products are not differentiated and can be easily
substituted;
• Competitors are of equal size;
• Low customer loyalty.
• Although, Porter originally introduced five forces
affecting an industry, scholars have suggested
including the sixth force: complements.
Complements increase the demand of the
primary product with which they are used, thus,
increasing firm’s and industry’s profit potential.
For example, iTunes was created to complement
iPod and added value for both products. As a
result, both iTunes and iPod sales increased,
increasing Apple’s profits.
Thankyou

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