Porter`s Five Competitive Forces
Michael Porter in 1979 laid out the five competitive forces model that was intended to apply in shaping business strategies. According to Porter the five forces proposed were microeconomic in nature and not macroeconomic. In addition, three of the forces were internal in nature and two were external. In a sense, a business firm could control the internal forces and only cushion itself against the effect of the external forces. The paper briefly discusses the five competitive forces.
Threat of entrants (new competitors)
Ordinarily, a business would want the status quo retained at all costs. An additional entrant means more competition as the entrant often comes loaded with new technology and ideas. In monopolistic competition, where entry and exit is free, businesses would always fear the threat of a new entrant. Any business should be wary of new entrants emerging into the market. This force is external and beyond the control of the business. The best cushioning mechanism entails strategy that is up to date with current trends in the market.
Threat of substitutes
Most products often have alternatives. Businesses must be wary of the customer’s chances to employ the use of substitutes in satisfying the needs derived from a product. Indeed, according to Porter, customers could be lost easily if the alternative product addresses the needs of the customer more satisfactorily. The threat of substitutes pushes businesses to produce their best so as to increase their ability to satisfy insatiable appetites of customers. This force is, however, external to businesses and hence beyond their control.
Bargaining power of customers
This force refers to the ability of customers to affect the prices of products. Ordinarily, the price setting determines the volumes of sales by the business. In cases where the product is a necessity, the degree of shifting price is higher. Additionally, the bargaining power of customers is generally lower. This is because they would need the product and would be compelled to buy it at any costs. The converse also holds. However, it should be noted that the bargaining power of customers can be controlled by the business and should be manipulated in favour of the business interests.
Bargaining power of suppliers
Closely related to the customer’s bargaining power, is the supplier bargaining power. This is also within the control of the business. A business ought to be able to structure its agreement with the supplier so that they (business) decide the purchase prices. In cases of rare or scarce raw materials, suppliers may take advantage and demand high prices. This threat must always be taken into consideration and wise counsel is that businesses ought to have alternative supply bases for remedial purposes in the event one defaults or demands high prices.
Rivalry among existing competitors
Finally, Porter’s five forces is completed by the intensity of the rivalry among competitors. Strategists ought to consider the abilities and handicaps of competitors already in the market. Naturally, businesses thrive to do their best. In that strain, it is essential not only to position oneself strategically, but to have an idea of what rivals have at their disposal. The competitive nature of markets compels businesses to be cognizant of rivals. In addressing this force, business strategists would be better placed to keep their abilities on the low but know as much of the rivals.
In conclusion, the Porter’s Five Forces operate complimentarily. They also operate in the business environment and are subject to several other factors. The forces ought to be reconciled with the macroeconomic factors. It remains the task of strategists to position businesses well through a coordinated balancing of all factors, both macro and microeconomic in nature.
References
Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Wiley Interscience, 15(2), 213-229.
Porter, M. E. (2008, January). The Five Competitive Forces that Shape Strategy. Havard Business Review, 78-94.
