Question: Explain Porter's Five Forces of Competitive Position Through A Diagram. Answer

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Question: Explain Porter’s Five Forces of Competitive Position through a

diagram.
Answer:
Porter's Five Forces is a business analysis model that helps to explain why various industries
are able to sustain different levels of profitability. The model was published in Michael E.
Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors"
in 1980.
Michael Porter’s Five Forces Model is a simple yet effective business analysis tool that is
used to determine whether a strategy has the potential to be profitable in a company’s
competitive environment. When carried out in the right way, with the right tools, the Five
Forces Analysis can provide invaluable insight into your business’s competition and how
much power you hold in the market, so you can adjust your strategy for success
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1.Threat of new entrants

In a sector, new entrants bring new potential and the ability to gain market share. The gravity
of the hazard depends on the obstacles to entering a certain industry. The greater these entry
barriers, the less the danger to emerging players. The need for economies of scale, high
customer loyalty for current brands, substantial capital requirements (e.g. large marketing or
R&D investments), the need for combined expertise, regulatory regulations, and restricted
access to distribution networks are examples of barriers to entry.
Threat of new entrants is high when:
 Low amount of capital is required to enter a market.
 Existing companies can do little to retaliate.
 Existing firms do not possess patents, trademarks or do not have established brand
reputation.
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch
to other industries).
 There is low customer loyalty.
 Products are nearly identical.
 Economies of scale can be easily achieved.
2. Bargaining power of suppliers

This force analyzes how much power and leverage the supplier of a business (also known as
the input market) has over the ability to increase its prices or decrease the quality of products
or services purchased, which will in turn reduce the profitability capacity of an industry. In
deciding supplier strength, the concentration of suppliers and the availability of substitute
suppliers are important factors. The less they live, the more influence they have. When there
is a multitude of vendors, companies are in a great spot. Supplier power sources also include
the switching costs of industry firms, the presence of viable alternatives, the efficiency of
their distribution networks, and the uniqueness or degree of distinction in the product or
service provided by the supplier.
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Suppliers have strong bargaining power when:
 There are few suppliers but many buyers.
 Suppliers are large and threaten to forward integrate.
 Few substitute raw materials exist.
 Suppliers hold scarce resources.
 Cost of switching raw materials is especially high.
3. Bargaining power of buyers

The bargaining power of buyers is also known as the export market. This force analyzes the
degree to which consumers are willing to bring the business under pressure, which also
influences the response of the consumer to price changes. Because there are not many of
them and when the customers have many options to purchase from the customers have a lot
of control. In addition, transitioning from one business to another should be simple for them.
However, purchasing power is poor when buyers buy goods in limited quantities, behave
individually, and when the product of the seller is very different from any of its rivals.
Buyers exert strong bargaining power when:
 Buying in large quantities or control many access points to the final customer.
 Only few buyers exist.
 Switching costs to other supplier are low.
 They threaten to backward integrate.
 There are many substitutes.
 Buyers are price sensitive.
4. Threat of substitute products
The existence of products outside of the realm of the common product boundaries increases
the propensity of customers to switch to alternatives. In order to discover these alternatives
one should look beyond similar products that are branded differently by competitors. Instead,
every product that serves a similar need for customers should be taken into account. Energy
drink like Redbull for instance is usually not considered a competitor of coffee brands such as
Nespresso or Starbucks.
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However, since both coffee and energy drink fulfill a similar need (i.e. staying awake/getting
energy), customers might be willing to switch from one to another if they feel that prices
increase too much in either coffee or energy drinks. This will ultimately affect an industry’s
profitability and should therefore also be taken into account when evaluating the industry’s
attractiveness.
Example:
In terms of the airline industry, it can be seen that its customers have a general desire to fly. It
might be clear that besides going by airplane, there are several alternatives for flying.
Customers might take the train or go by car, depending on the urgency and distance. More
and more people make use of high-speed trains, such as Bullet Trains and Maglev Trains,
particularly in Asia. In addition, Elon Musk's Hyperloop concept, in which passengers fly in
capsules via a vacuum tube exceeding speed limits of 1200 km/h, may give the airline
industry some significant future competition. In this context, the danger of alternatives in the
airline industry can be regarded as at least medium to large.
5. Rivalry among existing competitors

This last Porter Five Forces force explores how intense the marketplace is in the current
competition, which is measured by the number of established competitors and what each
competitor can do. Rivalry is high when there are many rivals that are nearly similar in size
and strength, when the market is rising slowly and when customers can easily turn to low-
cost rivals. The concentration ratio of an industry is a strong measure of competitive rivalry.
The lower this ration, the more severe competition is likely to be. Competitors are likely to
aggressively participate in advertisement and price wars when competition is strong, which
can harm the bottom line of a company.
Rivalry among competitors is intense when:
 There are many competitors.
 Exit barriers are high.
 Industry of growth is slow or negative.
 Products are not differentiated and can be easily substituted.
 Competitors are of equal size.
 Low customer loyalty.

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What are the benefits of Porter’s Five Forces Model?

We all know the importance of conducting thorough competitor research. In fact, this
is a vital part of any successful marketing strategy. Keeping up to date with what
your competitors are doing will help you determine what their strengths and
weaknesses are, giving you a better idea of what you should avoid, and what you
should be using as inspiration.
Michael Porter’s Five Forces Analysis goes one step further, requiring you to look at
specific aspects of the market in great detail, so you can make more strategic
business decisions.
As an example, making the decision to move into a market that’s already saturated
due to high demand means there’s more competition to compete with. Therefore,
you’ll have to invest more money into marketing, sales and product development to
stand out and may have to reduce your prices. Similarly, you may think moving into a
market with less competition could be the answer. Using Porter’s Five Forces Model,
however, you can assess whether the demand is there.

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Question: Explain Porter’s Five Forces of Competitive Position through a

1.Threat of new entrants

Threat of new entrants is high when:

 Low amount of capital is required to enter a market.

 Existing companies can do little to retaliate.

 There is no government regulation;

 There is low customer loyalty.

 Products are nearly identical.

 Economies of scale can be easily achieved.

2. Bargaining power of suppliers

Suppliers have strong bargaining power when:

 There are few suppliers but many buyers.

 Suppliers are large and threaten to forward integrate.

 Few substitute raw materials exist.

 Suppliers hold scarce resources.

 Cost of switching raw materials is especially high.

3. Bargaining power of buyers

Buyers exert strong bargaining power when:

 Only few buyers exist.

 Switching costs to other supplier are low.

 They threaten to backward integrate.

 There are many substitutes.

 Buyers are price sensitive.

4. Threat of substitute products

5. Rivalry among existing competitors

Rivalry among competitors is intense when:

 There are many competitors.

 Exit barriers are high.

 Industry of growth is slow or negative.

 Products are not differentiated and can be easily substituted.

 Competitors are of equal size.

 Low customer loyalty.

What are the benefits of Porter’s Five Forces Model?

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