Porter’s Competition Model

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Porter's Competition Model

Porter's Competition model was designed by Michael Porter (Harvard Businesses school of management researcher) who made various vital frameworks for developing an organization's strategy. One of the most famous is "5 competitive forces" model that determines industry structure. According to Porter, the nature of competition in any industry is personified in the following five force:
  • Threat of new potential entrantsImage result for porter's five forces model
  • Threat of substitute product / service
  • Bargaining power of suppliers
  • Bargaining power of buyers
  • Rivalry among current competitors

The 5 model

The five forces mentioned above are very significant from point of view of strategy formulation. The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because they shape the prices which can be charged, the costs which can be charged, the costs which can be borne, and the investment required to compete in the industry. Before making strategic decision, the managers should use the five forces framework to determine the competitive structure of industry. Let's discuss the five factors of Porters model in detail:

Risk of entry by potential competitors

Potential competitors refer to the firms which are not correctly competing in the industry but have the potential to do so if given a choice. Entry of new players increases the industry capacity, begins a competition for market share and lowers the current costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry. The various barriers to entry are:
  • Economies of scale
  • Brand Loyalty
  • Government Regulation
  • Customer Switching Costs
  • Absolute Cost Advantage
  • Easy in distribution
  • Strong capital base
Rivalry among current competitors Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to profitability. The strength of rivalry among established firms within an industry is a function of following factors:
  • Extend of exist barriers
  • Amount of fixed cost
  • Competitive structure of industry
  • Presence of global customers
  • Absence of switching costs
  • Growth rate of industry
  • Demand conditions

Bargaining power of buyers

Buyers refer to the customers who finally consume the product or the firms who distribute the industry's product to the final consumers. Bargaining power to the potential client is important to make down the prices.  People who buy can extract profits out of an industry by lowering the prices and increasing the costs,  they purchase in large quantities and they have full information about the product and the market. They pose credible threat of backward integration and emphasize up quality of products.

Bargaining power of suppliers

Before we start to talk about power of buyers now is time for Suppliers refers to the firms that provide inputs to the industry. Also this refer to the potential of the suppliers to increase the price of input (Labor, Raw, materials, service, ect) or the costs of industry in the other ways. Strong suppliers can extract profits out of an industry by increasing costs of firms. Product have a few substitutes. The most strong product are also the most unique in their own class. They have high switching cost and it is  important input to buyer's. They pose credible threat of forward integration but they are not significant to strong suppliers.

Threat of substitute product

Substitute products refer to the products having ability of satisfying customers needs effectively. Substitutes pose a ceiling (upper limit) on the potential returns of an industry by outing a setting a limit on the price that firms can charge for their product in an industry. Lesser the number of close substitutes a product has, greater is the opportunity for the firms in industry to raise their product prices and earn greater profits (other things being equal). The power of porters five forces varies from industry to industry Whatever be the industry, these five forces influence the profitability as they affect the prices, the cost, and the capital investment essential for survival and competition in industry. This five forces model also help in make strategic decisions as it is used by the managers to determine industry's competitive structure. This term refers to the reliance that develops between the companies whose products work is in combination with each other. Strong commentators might have a strong positive effect on the industry. Also, the five forces model overlooks the role of innovation as well as the significance of individual firm differences.   This article also might be interesting for you: https://blog.planb-cambodia.com/strategic_management/tactical-vs-strategy-planning/

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