The article gives us an insight on the five forces model which was advocated by Michael E. Porter. It goes on to explain how the specific forces identified in the below model can help a firm to create a better business strategy and place a firm foot in the respective industry. The article further analyses the five force model in detail stating the benefits and the disadvantages that come along with it. It further explains it with a case study on IKEA. The article further stresses on the composition of these forces. It states that every industry has a different set of forces. Hence, it is crucial to develop individual model for different companies based on their influencing factors. The articles also quotes an example of airline industry and the film industry. It states how the threat of substitutes, high penetration and exit ratios influence the strategies. Here the article is introducing the concept of five force model and also further explains the importance and relevance of the entire concept.
The next section covered in the article is the history and the source of the model. Porter (1979) developed the model and was a Harvard Business School professor. The model came with an objective to find an innovative method to apply the differentiating strategy to select, manage and examine the external forces that affect the performance of the firm. The five forces are basically divided into: Horizontal and vertical forces.
Horizontal: Threat of substitutes, threat of new entrants, competitive rivalry.
Vertical: Bargaining power of buyers and bargaining power of customers
The article then explains each of the force in detail.
Competitive rivalry is one of the key force influencing both the performance and the profit of a firm. The number of competitors will equally make a difference to the underlying competition. The existence of too many companies simply implies the struggle of every firm to earn a good market share. The article then illustrates the meaning of competitive rivalry. It states that the existence of too many smaller firms operating with the same kind of strategies leads to slow growth thereby affecting the overall performance of the firm as well as the industry. Even though the entry barriers will be low the exit barriers will be high and expensive to the business players.
The article then focuses on threat of new entrants. Even though this will not pose as an issue to the already established players the new entrants will definitely have a lot of challenges to tackle. If the industry is in a stage where new entrants can enter with low barriers and make a lot of difference then it is a good strategy. However, if the industry is already on a saturation mode with tough entry barriers then it will prove to be expensive to the new entrants. The ideal situation for a new firm is when the entry barriers are high entry barriers but very low exit barriers. The article then articulates the reasons for high entry barriers. Some of them being: patents and proprietary knowledge access to specialized technology or infrastructure economies of scale or government driven obstacles high initial investment needed high switching costs for consumers.
The next factor discussed in the article is the threat of substitutes. The number of substitutes directly affects the profitability quotient of the firm. The substitutes may pertain to other industries but might essentially fulfil the need of the customer. The article explains the concept with the example of boxed juice producer, fresh juice, water and soft drinks which fall under different industries but are close substitutes. The buyer can pick and choose either one of them every time he is thirsty. There is a close competition amongst the businesses to attract the consumers and sell their respective products. The strategies form an important element for such firms. The article has carefully structured explaining the key definitions and the concerns that follow these factors. It also covers some of the important questions associated with the same. These heavy substitutes directly create an impact on the pricing policy thereby affecting the profit margins. The article then lists out the factors affecting the threats of substitutes being brand loyalty, switching costs, relative prices, trends and fads.
The article further discusses the next factor which is bargaining power of buyers. Here buyers are people who buy the products in bulk. The wholesalers and distributors who buy in heavy quantities. If they are not satisfied with the service or the product they can easily change their loyalty. These buyers can heavily influence the prices of the products and services delivered.
The next factor taken into consideration is the bargaining power of the suppliers. The suppliers are necessarily people who provide raw materials required for production purposes. They play a very crucial role and to maintain steady relationship with them becomes a crucial task for the buyers. At times in few industries the suppliers are in such a position that they can dictate the terms for the buyers. This bargaining power forms a major impact on the business strategy and has to be handled with extensive care. They can affect the prices and the variation of the prices and can also impact the availability of goods. The article further states that the number of suppliers in the market describes the power that they hold. If there are very few players in the market the buyers either have to compromise or agree to the terms or else choose an alternate which will not serve the purpose. Due to the fact that that there are no practical alternatives to the buyers the suppliers can hold huge quantities of goods with them and can change the prices frequently.
The article then goes on describing the procedure as to how the model has to be applied in actuality. It states that the model is usually used in the initial stages where the firm will analyse and understand its stand in the real market. The model however is suitable for simpler industries as complex one will have more factors to be considered and analysed. It further puts the stages that are required to do during the analysis:
Information gathering: In this level the firm collects the much needed data as per the model and covers all the aspects of data collection in the industry.
Data analysis and interpretation: This is the next stage to be applied. The information collected must then be scrutinised to make sense out of it. The five factors must be kept in mind during the analysis as this will further lead to strategy formulation and business decision making. The data must be analysed individually without comparing it to any other industry’s information as the factors vary from one industry to other.
Strategy formulation: The analysis done in the previous stage will indicate the necessary action that the firm has to undertake. Based on this the strategies will be created and applied respectively.
The article then stresses on the fact that while utilising the Porter’s five factor model it is important to be prepared for analysis at various levels of application. Some of the things to be considered are:
Before: Be clear about the analysis, expectations of the analysis, understanding the scope of analysis, and encourage open brainstorming sessions to get concrete answers.
During: Be future focussed with an aim to streamline and improve the processes, be open for new ideas and do a thorough SWOT analysis.
After: Understand the conclusions and implement them smartly. Choose the best practices and track the analysis and results to be used in future.
The article then describes the dos and don’ts of the model which clarifies the doubts. It states that the analysis but not be targeted to a specific firm but must be done to the entire industry. The conclusions found during the analysis must be utilised to create strong business strategies for the firm. The change of regulations implemented by the Government or related governing body must be kept into consideration. Another influencing factor is the life-cycle of the said industry and the stage in which it exists. This will change the whole scenario of the analysis. The five factor model must also take into account the changes and the fluctuations that the industry and the market is prone to. A complete analytical mind will help the researcher understand the exact influence and will be able to formulate the strategies accordingly.
The article covers Porter’s five factor model thoroughly and covers all the elements that come with it. It points out the needed information for each of the factors, how the model must be applied, what needs to be done and what needs to be avoided. All in all it is well drafted and gives the reader an overall idea about the model. But it lacks intrinsic details and complexities that are associated with the same.
Reference:
Porter, Michael E. (1979). "The Five Competitive Forces That Shape Strategy." Harvard Business Review, March issue.
