“The Competitive Five Forces that Shape Strategy” Hand-in Article Summary In this theoretical piece Porter explains how there are five main forces that shape competition in a company’s external environment. There are various different techniques for identifying strategic opportunities and it differs by industry.
The classic five forces are: threat of entry: the risk of new entry by potential competitors, the power of supplies: the bargaining power of suppliers, the power of buyers: the bargaining power of buyers, the threat of substitute: the competitive force of substitute products and finally rivalry among existing competitors: the degree of rivalry among established companies. The article discusses how to put the five forces into practice while addressing common misunderstandings.
As Porter explains the forces he touches on the possibility of threat of entry with a particular consideration paid to the causes of barriers to entry and expected retaliation. The risk of entry by potential competitors is a function of the height of barriers to entry. This is determined by the extent of brand loyalty, absolute cost advantage over potential entrants and the possibility of scale economies. Porter also explains how retaliation will influence a new entrant’s decision to enter or stay out of an industry.
It is clear that changes in macro environment like industry growth rate, technology and the government can have a direct impact on any one of the five forces altering the attractiveness of an industry. It is important to recognize that a fast-growing industry is not always a profitable one and expanding not only benefits you but also expands opportunities for all competitors. Next, Porters emphasizes the role of complements or products or services used together with an industry’s product.
Without a sufficient supply of complementary products, demand in the industry will be weak, and revenues and profits will be low. By eliminating today’s competitors through mergers and acquisitions an industry’s profit potential will reduce because removing today’s competitors often attracts new ones. In order for a company to create a more favorable structure it should apply the 5 key forces in its industry.
In order to do this you must shift the threat of new entry and substitution, and change the supplier or buyer power and new bases of rivalry. In conclusion, the five forces uncover how industries can profit the way they do. A company must understand each force thoroughly before combining the industry conditions into strategy. All in all the forces provide a framework for a business to take competitive action and compete in the industry. After learning about Porter’s five forces in my marketing classes this just expands my knowledge.
It is obviously a very popular and successful method for identifying key characteristics and strategic opportunities for a company. I do not see any shortcomings as it is an updated and revamped version of his initial research in 1979. The model has proven success in many instances and I only see it expanding and improving in the next years to come. I would be interested to see how one company implements this into their strategy and what kind of improvements it may bring to that specific company.