FIVE COMPETITIVE FORCES

Porter Five Competitive Forces



Porter Five Competitive Forces

Introduction

It is crucial to invest in companies benefiting from sustainable competitive advantages, which will remain profitable. Porter's five forces are the key to understanding and evaluating the competitive advantage. "The Competitive Advantage" by Michael Porter published in Harvard Business Review is an essential reference in corporate strategy. In this article, Harvard professor provides an outline for understanding competitive behaviour and the strategic positioning of a company within its sector. Essentially, Porter proposes a model of five "forces" that can be used to understand the dynamics of competition in an industry. Since every society strives to develop sustainable competitive advantages over others, the first four strengths help to assess the fifth, which is the level of rivalry in the sector (Porter 2008, 1 - 17).

In order to evaluate the attractiveness and competition in an industry, Porter's five forces model is used. The diagram below shows the basic porter's five forces model. Michael Porter explains in his forces model that any industry's long run profitability and attractiveness is determined by the five forces which he mentioned in his model.

The five forces that are termed as competitive forces by Porter are:

Bargaining power of buyers

Bargaining power of suppliers

Degree of rivalry between existing competitors

Threat of new entrants

Threat of substitutes

The diagram that is shown above tells us the factors that are needed to know the attractiveness and competitiveness of a specific industry or a sector. The objective of this model is to identify key success factors of the environment, that is to say, the strategic elements which must be reduced to obtain a competitive advantage. For this, it is necessary to prioritize the five (or six) force to determine what strategic actions should be undertaken in priority to not be influenced by them and see profitability decrease. The section below will explain in detail the Porter Five Forces Model (Porter 1998, 154 - 167).

Porter Five Forces Model

Bargain Power of Buyers

Price elasticity of any product in any specific industry is influenced by the bargaining power of the buyer. If the bargaining power of the buyers in any market is high then the price of the product is most likely to be low. When there is a wide range of substitutes or alternate choices available in the market or industry for any product then the bargaining power of the buyer tends to go up. In this case, as the alternatives are available and the switching cost is quite low then the chances are that the buyer will move to some other brand. High bargaining power of the buyer signifies lower price and high competition the industry or market. As a consequence of the high bargaining power the industry loses its attractiveness and hence the companies operating in it loses their profitability. In the below mentioned scenarios the bargaining power of the buyers is quite high (Porter 1991, 143 - 154).

Buyers intimidate to integrate rearward into the industry

Demand is determined by the customers and high buyer volume

Large ...