In the contemporary business environment, organizations are exposed to various external factors which can have prominent influence in their business operations. As a student of business management, you must learn to identify these key forces through industry analysis before you are able to design new strategies for your chosen organization. The Porter's five forces model is one of the most popular theoretical frameworks which is used for analyzing the external forces in an industry.
Pioneered by Michael Porter, this model segregates the external industrial environment into the five different categories or forces, and each of them focuses different key factors present in the industry that can influence the business performance of the company. These forces involve the buyers, suppliers, substitute products, new entrants in the industry and the rival brands. Therefore, it is imperative for an organization to identify these forces and take necessary actions to counter them. In the following sections the five different forces have been explained which can help to implement Porter's five forces model in your own marketing essay.
Bargaining Power of Buyers: The bargaining power of buyers can be determined by their switching costs. In an industry where the customers have a lot of product options to choose from, can enjoy high bargaining power, as they can easily switch from one brand to another. Thus, the low switching cost leads to high bargaining power for the customers. This type of situation can be found in the smartphone industry, where there are so many brands to choose from. It should also be noted that in certain industries the switching cost may be relatively higher even though there are a number of available options. Network service providers often hold their customers captive with their carrier lock in schemes, where the customer is compelled to use the network for a fixed period of time. While discussing the bargaining power of buyers, always try to identify the switching cost for the customers. If the customers can easily change from one brand to another without any sacrifice or paying additional price, then the switching cost is low, which leads to higher bargaining power. The bargaining power of the customers can restrict the companies to increase the prices of their product which as a result impacts their revenue.
Bargaining Power of Supplier: The bargaining power of the suppliers depend on the switching cost for the marketing players. The presence of several supplier companies in the industry offering identical goods, services or raw materials allows the market players to easily switch from one supplier to another, whenever they find a more lucrative deal.On the other hand, in certain industries the number of suppliers can be very limited, where the market players have limited choices, which as a result increases their switching costs, thereby increasing the bargaining power of the suppliers. For example, in case of the grocery industry, the market players can procure their products from various different suppliers or independent farmers. This allows them to easily switch from one supplier to another depending on their price of the products. However, on the other hand, the smartphone manufacturers, have very limited options when purchasing microprocessors. In fact, currently they only have one viable option which is Qualcomm. This as a result allows Qualcomm to have high bargaining power over the market players, as they cannot easily switch to another microprocessor supplier.
Threat of New Entrants: The threat of new entrant is determined by the barrier to entry of an industry. There can be several barriers that a company can face while trying to enter in an industry. The higher these barriers are, the more difficult for the new firms to enter and operate in the chosen industry. These barriers mostly involve cost of business establishment, governmental regulations, industry lobbies, etc. These barriers vary greatly from one industry to another. For example, entering into the restaurant sector is much easier compared to entering in to the car manufacturing sector. This is mostly because of the fact that establishing a restaurant cost much less compared to establishing a car manufacturing plant. While discussing the threat of new entrants, you may talk about how new companies can face difficulties in entering in the industry. In should be noted that barrier to entry can also be lowered by various factors such as ease of doing business and government support. Local governments often provide financial support to small business owners to startup their own venture, this as a result can encourage many new companies to enter into the industry, thereby posing a threat to the existing companies. While discussing the threat of new entrants, showcase the points which highlights how easy or how difficult it is for a new company to enter into the chosen industry.
Threat of Substitute: The threat of substitute refers to the competitive threat posed by substitute product categories in a market. For example, the substitute product for smartphones can be landlines or feature phones, and substitute for commercial cars can be public transportation or car lease. The simplest way to determine the threat of substitute is to find out alterative products and services which offers the same core value. However, it should be noted that in most cases, you may not find any direct substitute in your chosen sector, or the substitute product cannot compete with the attractive value propositions of the industry. In such cases, the threat of substitute can be considered to be very low. On the other hand, there are certain industries where the threat of substitute can be high, where the alternative options offer almost identical value. For example, in case of the streaming services, the direct substitute can be illegal free downloads of media content. Therefore, whichever industry you have chosen, the threat of substitute can come from any product or service which offer the same core value to the customers, and the customers have the option to choose between them.
Rivalry Among Firms: Finally, the rivalry among firms refer to the competitiveness among different market players in the operating in the industry. In this case, it should be noted that the rivalry among firms is usually found to be high in sectors where there are large number of market players and each of them are trying to cater to the same target customer group. The high rivalry in an industry can pose as a pose as a serious threat to the companies, as it can have adverse impact on their sales and revenue. While discussing about rivalry among firms, you can start by covering the top market players in the industry and the nature of competition in the market. In this case, you can also mention is the industry presents an example of monopoly, duopoly, oligopoly or perfect competition.
The Porter's five forces analysis can be made more comprehensive, if you rank each individual force and provide respective spider charts for visual aid. For more details, check out the example of Porter's five forces in the UK Coffee Industry Analysis. This should provide you with a clear idea on how to you can implement this framework in any industry of your choice. It should be noted that the Porter's five forces can be related to an individual company as well, we you can discuss about how the industry forces are influencing the business operations of the firm. The five forces play a crucial role while developing a business plan for a chosen organization. As a management student, you can use the five forces model to assess the industry environment, before you can devise strategies for setting up your business. Assessing the industry should help in designing a business model that can pacify the external forces and foster long term development and sustenance.
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