Porter’s Five Forces Model of Competition
Michael Porter (Harvard Business School Management Researcher) designed various vitalframeworks for developing an organization’sstrategy. One of the most renowned amongmanagers making strategic decisions is the fivecompetitive forces model that determines industrystructure. According to Porter, the nature of competition in any industry is personified in the following five forces:
i. Threat of new potential entrants
ii. Threat of substitute product/services
iii. Bargaining power of suppliers
iiii. Bargaining power of buyers
v. Rivalry among current competitors
The five forces mentioned above are verysignificant from point of view of strategyformulation. The potential of these forces differsfrom industry to industry. These forces jointlydetermine the profitability of industry because theyshape the prices which can be charged, the costswhich can be borne, and the investment requiredto compete in the industry. Before making strategicdecisions, the managers should use the five forcesframework to determine the competitive structureof industry.
Let’s discuss the five factors of Porter’s model in detail:
1. Risk of entry by potentialcompetitors:Potential competitors refer to the firms which are not currently competing in the industry but have the potential to do so if givena choice. Entry of new players increases the industry capacity, begins a competition for market share and lowers the current costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry. The various barriers to entry are-
• Economies of scale
• Brand loyalty
• Government Regulation
• Customer Switching Costs
• Absolute Cost Advantage
• Ease in distribution
• Strong Capital base
2. Rivalry among current competitors: Rivalryrefers to the competitive struggle for market share between firms in an industry. Extreme
