Porters Five Forces Flashcards
Porter’s Five Forces
Michael Porter outlined five forces or factors which
determine the profitability of an industry. He argued that
the aim of competitive strategy is to cope with and ideally
change those forces in favour of the business.
Where the collective strength of those five forces is
favourable, a business will be able to earn above average
rates of return on capital. Where the collective strength of
the five forces is unfavourable, a business will be locked
into low or wildly fluctuating returns.
Threat of New Entrants
Threat of New Entrants
If businesses can easily come into an industry and leave
it again if profits are low, it becomes difficult for existing
businesses in the industry to charge high prices and make
high profits. This can be countered by erecting barriers to
entry to the industry. These may take the form of:
* Applying for patents and copyright to protect its
intellectual property.
* Attempting to develop strong brands which attract
customer loyalty and make products less price sensitive.
* Spending large amounts of money on advertising.
* Pricing
threat of subsitutes
Threat of Substitutes
The more substitutes there are for a particular product, the
fiercer the competitive pressure on a business making the
product. A business can reduce the number of potential
substitutes through:
* Research and development and patenting the
substitutes themselves. (Sometimes a business will buy
the patent for an invention from a third party and do
nothing with it simply to prevent the product coming to
market.)
* Marketing tactics, such as predator (destroyer) pricing.
Rivalry Among Existing Firms
Rivalry Among Existing Firms
The degree of rivalry among existing firms in an industry
will also determine prices and profits for any single firm.
Businesses can reduce rivalry by:
* Forming cartels or engaging in a broad range of anticompetitive policies. (In UK and EU law this is illegal but
is not uncommon.)
* Taking over their rivals (horizontal integration). (This
is legal, but Competition Law may prevent it from
happening.)
* Not competing on price but competing by bringing out
new products, and through advertising
Bargaining Power of Buyers
Bargaining Power of Buyers
Buyers want to obtain goods and services for the lowest
price. If buyers or customers have considerable market
power, they will be able to beat down prices offered by
suppliers. Strategies to reduce the bargaining power of
customers are:
* Forward vertical integration (taking over a customer).
* Make it more expensive for customers to switch
to another supplier. (For example, games console
manufacturers make their games incompatible with any
other games machines.)
Bargaining Power of Suppliers
Bargaining Power of Buyers
Buyers want to obtain goods and services for the lowest
price. If buyers or customers have considerable market
power, they will be able to beat down prices offered by
suppliers. Strategies to reduce the bargaining power of
customers are:
* Forward vertical integration (taking over a customer).
* Make it more expensive for customers to switch
to another supplier. (For example, games console
manufacturers make their games incompatible with any
other games machines.
