13.

PORTER'S FIVE FORCES MODEL-COMPETITIVE ANALYSIS

1. Introduction

To gain deep understanding of a company's industry and

a

competitive environment, managers do not need to gather all

the information they can find and waste a lot of time
digesting it.
Rather, the task is much more focused.

Thinking strategically about

company's competitive environment entails using
a

some well defined concepts and

analytical tools.
A powerful and widely used tool for systematically diagnosing the significant
competitive pressures in a market and assessing the strength and importance of each is
the five-forces model of competition.

2. The way one uses the five-forces model to determine what

competition is like in a

given industry is to build the picture of competition in three steps:

Step 1 Identify the specific competitive pressures associated with each of the five
forces
Step 2 Evaluate how strong the pressures comprising each of the five forces are
(fierce, strong, moderate to normal, or weak).

Step 3 Determine whether the collective strength of the five competitive forces

conducive to earning attractive profits

3. Five Forces are

i) Threat of new entrants:

New entrants are always a powerful source of competition.

The new capacity and product

Threat of
range they bring in throw up new New Entrants

competitive pressure.

And the bigger the new entrant, the

Bargaining9
power ot
Industry Bargalning
power of
more severe the competitive Suppllers Rivalry Consumers

effect.
Threat of
New entrants also place a limit on Substtutes

prices and affect the profitability of

existing players.

i) Bargaining power of customers:

Quite often, users of industrial products come together formally or informally and exert

pressure on the producer in matters such as price, quality and delivery.

Two top CDMA service providers Reliance and Tata Teleservices had put a

simultaneous pressure on Qualcomm to reduce the royalties on the CDMA based

handsets.

The bargaining power of the buyers influences not only the prices that the producer can

charge but also influences in many cases, costs and investments of the
produce
because powerful buyers usually bargain for better services which involve costs
and investment on the part of the
producer.
ii) Bargaining power of suppliers:
Quite often suppliers, too, exercise considerable
bargaining power over companies.
 The more specialised the offering from the supplier, greater is his clout.

And, if the suppliers are also limited in number they stand a still better chance to
exhibit their bargaining power.
The bargaining power of suppliers determines the cost of raw materials and other inputs of
the industry and, therefore, industry attractiveness and profitability
iv) Rivalry among current players:
This is what is normally understood as competition.
And it is obvious that for any
player, the competitors influence prices as well as the costs of
competing in the industry, in production facilities product development, advertising, sales
force, etc.

v) Threats from substitutes:

Substitute products offering a price advantage and/or performance improvement to the

consumer can drastically alter the
competitive character of an industry.
For example, coir suffered at the hands of
synthetic fibre.
Wherever substantial investment in R&D is
taking place, threats from substitute products
can be expected. Substitutes, too,
usually limit the prices and profits in an industry.
4. CONCLUSION

The five forces together determine

industry attractiveness/profitability.
The collective strength of these five competitive forces determines the scope to earn
attractive profits.

The strength of the forces may vary from

industry to industry