Understanding Competition through ‘Porter’s Five Forces Analysis’ Model

Porters_five_forces

(Michael Porter’s five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979.)

Every small businessman or New as well as an existing entrepreneur or a Progressive company/ enterprise indulges in business activity with the prime motive of earning profits. I am sure we all agree to this thought. Michael Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found not rigorous but only ad-hoc. Michael Porter’s five forces Analysis Model is based on the Structure-Conduct-Performance paradigm to compete market forces effectively. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries to propel economic growth.

What are these five forces ?

1. Threat of New competition – New Products or Services are discovered or developed (through ‘in-house’ repetitive R & D efforts ), so as to gain from the market opportunities which may be unknown, un-tapped or latent ones. There is a gestation period in any product life cycle leading to its stabilization in the market and earning definite profits. Profitable markets that yield high returns will attract new players. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents (such as patents or rights), the abnormal profit rate will tend towards zero (hypothetically in theory, when there is perfect competition). Needless to say, when the profits tend towards lower returns on the efforts/ investment capital used, the existing players will exit the market as early as possible.

2. Threat of substitute products or services– Let us not be confused with competitors’ similar products with that of real competition. At Epson, the Ink cartridge business I developed, compatibles posed a major threat to the growth of genuine Ink Cartridges which are priced ten times that of a compatible Ink cartridge. It is like comparing mineral water to the ‘Coke’ soft drinks. Both of them serve to quench the thirst of the customer but mineral water cannot replace the Coke or vice versa. In developing ‘price-sensitive’ markets like that of India, compatibles mushroom very soon to compete with the originals. Product quality should be the USP to sell originals and efforts should be directed towards educating the buyers rightly.

3. Bargaining power of the customers – The ability of the customers to put the Seller under pressure is remarkable in developed as well as developing markets. Globalization of Indian markets, Increasing awareness of the buyers through or as a result of media campaigns, Increase in number of competitors in every market – have added lot more to existing efforts of the sellers. Advertising expenses have risen to much higher levels. Sales Managers have become specialized in their selling skill sets, industry knowledge, and product knowledge. Newer markets are tapped to break-free from competition in urban markets. The same is with the ‘saturated’ developed countries ; foreign companies are knocking doors of the developing and emerging markets to sell their products or services.

4. Bargaining power of suppliers – With rising costs and scarcity of the right resources, the suppliers of raw materials, components, labor, and services (such as ‘expertise’) – can be a source of pressure over the Sellers while pricing their products or services. Suppliers may refuse to work or will charge excessively high prices for unique resources. I would acknowledge this situation as ‘internal force’ leading to noncompetitive pricing among sellers, giving room to substandard product variants or sometimes to exaggerated unreal demand-supply instances.

5. Intensity of Competition Rivalry in the markets– Particularly in urban markets, the competition is very intense. Competition Rivalry is leading to – trade mal-practices in order to survive in the market ; adopting innovation while exercising strategy to market the products or services ; employing specialists in sales to gain advantage in much shorter times and spending on executive training to build individual capabilities required to march ahead despite the growing competition.

Strategic Marketing is an ongoing process that evaluates and controls the business and the industry in which the Seller is involved; it assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly]. If required, please do visit My profile on the LinkedIn.com and contact me for my services in business consulting. Good Day !

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