Porter’s Five Forces Model (Competitive Analysis)

Porter five forces model, developed by Michael E.Porter of Harvard University in 1979, holds the purpose to analyze the industry in order to determine the level of intensity regarding the competition and attractiveness of the industry. The attractiveness of an industry is measured in terms of profit; more profitability means a more attractive industry and low profitability means a low attractive industry.

Porter referred to these forces as micro environment rather than macro environment because these forces are nearest in the sense of affecting the organization. Organizations have to re-assess the market if any of the forces change, it does not necessary that the  organization should leave the industry if the profitability is low, because most of the organization are making good profits by applying their core competencies to gain competitive edge over their rivals and increase their profits.

The word “Strategy” is very common in this advanced era of the business and technological world, it is used even in our daily life routine, you may have heard at times that lots of people discuss about strategies (plans) to achieve something.  You must be thinking that strategies are developed in dreams or common sense by higher management of the company but that is not the case, even the best of the  strategies always comes after proper evaluation of internal and external environment of the company.

The strategies are made by strategists to achieve objective or goals to allow the business to compete in industry. Porter five forces model of competitive analysis is a widely used approach for developing strategies in many industries. The intensity of competition varies across the industries. The intensity of competition is higher in low return industry as compared to high return industry due to less requirement for capital and common products that require minimum R & D (Research & Development) and efforts for production.

According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of the following five forces:

1. Rivalry among competitive firms
2. Potential entry of new competitors
3. Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of consumers

Rivalry Among Competitive Firms

Rivalry among competing firms is the most powerful of the five competitive forces i-e the ongoing war between the firms competing in the same industry for gaining customer share in order to increase their revenues and profits. The competition is more intense if the firm pursues strategies that gives it a competitive advantage over the strategies pursued by its rivals.

Developing new strategies is easier than retaining the uniqueness of the strategies so as to gain a competitive edge over the rivals in the industry. Changes in strategy by one firm may be met with retaliatory countermoves, such as lowering the prices, enhancing quality, adding features, providing services, extending warranties and increasing advertising.

Examples,

– In the telecommunication industry, firms are lowering their prices in order to increase their consumer call ratio by minimizing  their per minute profit margin but this strategy is increasing the overall company revenues.

– In the past few years a number of new features were added in the mobiles, now it not only gives the functionality of cell phone but we are also able to take pictures, make videos, watch streaming and use Internet. The firms like Nokia, Siemens, Samsung and other are following each other’s strategies to minimize the differentiation in the product so customer can easily switch brands.

– In the past television companies offered maximum one year warranty but now due to the tough competition in the media market, players as Samsung, LG, Haier, Philips and others enter in the market with their high quality products in order to compete with Sony, that’s the reason customers are getting more services in the form of extended warranty periods.

– Pepsi and Coca Cola are competing by increasing their advertising and offering new beverages in the market.

We discussed about the offline business, when it comes to online business on the Internet, the competition is more fierce, consumer get more control over its purchasing by sitting at home on computer and comparing the similar and substitute products on bases of features and prices.

Amazon.com is the best online book selling site, offering a huge library containing millions of books on a variety of subjects. People visit to amazon because they enjoy user friendly design, products, books and search capability of the site but when it come to purchase the product customer move to other site such as buy.com for purchase on discounts. Buy.com CEO says, ” The Internet is going to shrink retailers margins to the point where they will not survive.”