Porter’s Five Forces
Porter, the Father of Competitive strategies identified five forces that drive competition within an industry (Porter M, 1986). He listed them and explained how they are applied in the industry. These strategies include (1) the threat of entry by new competitors into the industry: this is main problem of the competition. A new competitors comes in there chances that he will go with some of the buyers. Another related problem is entering new market either through geographical or vertical expansion.
(2) The intensity of rivalry among existing competitors that the change of strategies: the current competitors and the task of staying competitive in current market were identified by Porter as another problem that needed strategies. (3) Pressure from substitute products. (4)The bargaining power of buyers. (5) The bargaining power of suppliers. No matter which competitive force is to use the most important thing to keep in mind is the relationship between profit margins or returns and the intensity of competition. The higher the intensity of competition, the low is profits (Varadarajan p and Cunningham H, 1995),
2. 6. 1 Porter’s Five Forces Analysis 1. Buyer Power The companies face the threat of buyers shifting their loyalty to other rival companies’ products while operating in a certain market. This phenomenon according to porter is referred to as backward integration. To curb this threat, the companies operating in the market have to come up with three generic strategies to counter this threat. a) Cost leadership: – It the companies have to reduce the price of there products. Cost leadership provides the best method of companies and remaining competitive in the market.
b) Differentiation strategy: – The Companies in a specific industry have to come up with alternative products that are differentiation of products from the rival firms. These products should be economic and are environmental friendly in terms of pollution and acceptance in the market in question. The customers should be analyzed to know there likings and disliking and the product sold in the market should be able to give the customer a value for there money. This is the major reason why the pricing of a product is done.
The consumer’s decision to purchase a particular product is usually the total value of the sum of utility value and replacement value brought by the transaction. The utility value represents the quantity that is needed by the consumer to satisfaction. While utility value is the customers expectation of the product which is measured by the potential need satisfaction as per perceived by the customer. The influence of price on the customer is extremely important and it is up to the company’s management to determine the price that will attract the consumer.
If the product does not have a good utility value then we expect such a product to loose the purchasing customers, therefore the purchasing power of the customer is important. 2. Supplier Power Companies is faced with the threats of the suppliers being able to control the price of some of the materials they supply. Some may form curtails and come up with stringent price control measures that will affect the performance of the industry.
The labor laws are also stringent and the workers are so unionized that treating of employees in a fair and equitable manner is inevitable. To counter this force, the companies extend its supplier chain making the prices of materials. The generic strategies adopted by the companies against supplier power are by increasing the price of their products. In essence, the extra prices charged for the raw materials are borne by the customers. This is the differentiation strategy. Another strategy to insulate itself from this force is that of focus.
Because of the higher material prices, companies have taken on the differentiation-focused strategy. In this strategy, the methodology has been improving the quality of their products. By so doing, the prices can be increased without harm being made to the customers. 3. Barriers to Entry The other force challenging the businesses is entry of new companies with similar products or even more products. This would pose the threat of neutralizing the company’s profits as well as its market share. The generic positions that the companies have taken has been cost leadership.
Through lowering their production costs and increasing operational efficiencies, companies have been able to lower its products prices while maintaining its profitability. This has deterred potential investors/ entrants into the market (Staw, B. , Sandelands, L. & Dutton, J. , 1983). 4. Rivalry This force emanates from other companies within the same industry. The threat here is that these companies capturing the market. However, the company’s framework/ strategy should be to reduce prices whenever faced with such a threat.
Prices are then reverted to normal after the exit of that company the specific market segment. Lastly, the companies are faced with the threat of rival companies accessing their premises and imitating their production methods. However, the companies should have their headquarters, inaccessible to foreigners in order to safeguard their patents and copyrights. In addition, their employees are well compensated therefore; they do not have thoughts of leaving for rival companies. 5. Threat of Substitutes
From the economist point of view, threat of substitutes arises when the demand of that good is likely to be affected when the price of the substitute changes. This elasticity of price has formed a real force that the companies have to fight if they have to be sustained in the near future. To reduce the strength and danger of this force, the companies strengthen their differentiation generic strategy as their frameworks. Customers would then be loyal to the uniqueness of their products.