Porter’s Five Forces Analysis
Last modified: October 26, 2015
Writing a term paper in business studies or management studies and even marketing usually involves writing an analysis of the company and its competition using Porter’s Five Forces analysis. This free essay paper discusses the framework of the analysis that was developed by Michael Porter to identify the five forces that act together to increase or decrease the forces of competition in an industry.
The bargaining power of the buyers or customers, the threat of new entrants into the industry, threat of substitute products or services, the bargaining power of the suppliers, and the competitive rivalry among the players in the industry are Porter’s Five Forces. The objective of any industry is to gain advantage over its competitors and assess the strength and importance of each of these five forces (Thompson & Strickland, 2003).
Supplier Power: When the company is dependent on a few suppliers, they may drive up the costs because of the number of suppliers of the materials, the uniqueness of the service or material supplied, their size and strength, and costs that will be incurred by substituting them. The fewer the suppliers, the more control and power they have over the company.
Buyer Power: The number of customers for the products, their importance to the company, the size of their orders, the costs incurred by them if they switch or change to other rivals’ products are some of the factors that determine the buyer power. Again, the less the number of customers, they more powerful they are in driving down the prices for the products by threatening to switch their loyalties.
Competitive Rivalry: The number and quality of the competitors are very important to decide the company’s success in overcoming the rivalry. The switching costs incurred by the customers, their loyalty and their perception of the quality of the product or service over that of the rival firms are also significant factors.
Threat of Substitution: If the competitors are able of offer substitutes for the company’s products and at a lower cost, the company’s power is weakened. But again, the buyer’s must be convinced of the comparative performance of the substitute to the original and the cost of changing to the substitute product.
Threat of New Entry: New entrants can quickly occupy and compete for the product or service using cost advantages, economies of scale, lack of adequate protection of the technology, and overcome other barriers of entry.
By the analysis of Porter’s five forces, the manager or entrepreneur can find out the intensity of competitive rivalry in the industry and take steps to modify or decrease the threats and change weaknesses into strengths to increase the profits of the company.
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