Michael Porter's Five forces model Flashcards
what do most people think of business competition?
a tug of war between rivals, with each competing for more sales or market share
what did Porter believe about business competition?
not about who is the biggest, but who is the most profitable
profitability is defined by 5 forces:
1.buyers
2.suppliers
3.substitute products/services
4. new entrants
5.existing rivals
what are buyers always happier to do?
pay less and get more
what do suppliers ideally like to do?
get paid more and deliver less
what do substitute products/services do?
meet the same basic needs as other businesses do
new entrants example:
Southwest Airlines
what did Southwest Airlines do?
challenged the industry by flying just one kind of plane
what did Southwest Airlines do by flying just one type of plane?
reduced costs
what did southwest airlines flying just one type of plane allow them to do?
allowed them to offer better ticket fares
how did this affect other airlines?
pushed other carriers to spend more to retain their customers
what does existing competition do?
reduces everyone’s profitability
who have been in a position of competition for years?
airlines e.g Ryanair
what does this position mean for airlines?
forces them to defend increasingly narrow profit margins with fees for exit-row upgrades, checked bags + snacks
once these forces are understood, a business can:
- make better predictions
- create more competitive strategies
- increase profits
