Porters Five Forces of AARP and AARP Services A Multi-Sector Approach to Social Change

Posted by Zander Henry on Aug-16-2018

1. Porter’s five forces

The porter’s five forces is an important strategic tool that is used by companies and businesses to understand industry dynamics as well as identify important aspects of the external environment. As a result, the porter’s five forces model is used for decision making purposes, and facilitates companies in its planning and goal setting processes. The strategic model assesses the external environment through five important aspects related to the industry – namely: rivalry, buyer bargaining power, supplier bargaining power, threat of new entrants, and threat of suppliers. These factors help decision makers in understanding the industry position, and as well as growth potential and trends in the industry to better steer the business. The following section will briefly detail porter’s five forces for AARP and AARP Services A Multi-Sector Approach to Social Change.

2. Industry rivalry

2.1. What is industry rivalry?

Industry rivalry or competitiveness refers to the number of players, and their strength in an industry. It also observes and identifies the various competitive advantages and benefits that players have, along with their offerings and business strategies. As a result, the competitiveness and rivalry of an industry allows the identification of the main drivers, as well as identifies what fuels growth in the industry.

The industry rivalry is considered to be high when there are many players in a fragmented market, and these players offer similar products and services. As a result, players compete via pricing strategy largely. Consumers face negligible switching costs between players.

In a low competitive industry, there are few dominant players who offer distinctive products and services. Businesses operating in low completion industries are marked with healthier profits, and a more sustainable competitive advantage in business offerings and strategies. Lower competition in the industry, however, may also lead to the development of monopoly, and monopolistic markets, where consumers are often at a disadvantage because of higher pricing strategies, and price collusions.

For AARP and AARP Services A Multi-Sector Approach to Social Change, the industry rivalry is observed as:

2.2. Level of competition
  • AARP and AARP Services A Multi-Sector Approach to Social Change faces moderate to high industry competition
  • There are a large number pf players and market is generally fragmented
  • The players vary in their size of operations but compete for the same share of the pie with respect to consumer segments
  • There are a number of different local as well as international players in the industry, which has also led to the transfer of new skills and knowledge for local players
  • Industry players continually work towards improving their business processes and offerings to maintain profits and manage costs effectively
  • Industry players offer similar products and services
2.3. Building Competitive advantage
  • AARP and AARP Services A Multi-Sector Approach to Social Change has tried to build a distinctive competitive advantage through investment in research and development, and thereby works towards creating unique and strategic marketing communications.
  • High industry rivalry has also led to higher rate of innovation for players
  • AARP and AARP Services A Multi-Sector Approach to Social Change has also introduced a number of different innovations to make its business processes more effective and efficient
  • Players strive to operate with economies of scale, and have also started to use modern brand management techniques to appeal to consumers
  • AARP and AARP Services A Multi-Sector Approach to Social Change has made distinctive and marked changes to its product by inducing aspects of label designs and marketing campaigns to enhance its product development
  • Industry players have also led to overall industry growth through investment in distribution channels and development if e-commerce for respective industry
2.4. Implications of industry rivalry
  • The higher competitive rivalry has therefore led to an overall growth of the industry, and fuelled development as well internally
  • AARP and AARP Services A Multi-Sector Approach to Social Change focuses on technological advancements and brand management and brand development as key aspects for building sustainable competitive advantage and experiencing growth.

3. Buyer bargaining power

3.1. What does the bargaining power of buyers mean?

The bargaining power of buyers refers to the pressure that consumers of the good or service can exert on the company and the business. This pressure relates not only to offering competitive pricing to the consumers, but also entails focus on ensuring high quality of business offerings, improved customer service, and ethical production means, the bargaining power of the buyers is important in defining the competitiveness of the industry.

This is because the pressure from the consumers can affect the seller directly, and influence his ability to produce and maintain profits. Higher bargaining power on part of the consumers can exert high pressure on the buyers to not only lower prices, but also consider and work towards fulfilling other consumer demands. Lower bargaining power on part of the consumers, in turn, where consumers are in weaker positions, or high number, leads to low competition in the industry where the buyer is not pressurized by the consumers’ demands, and enjoys higher profit potential.

For AARP and AARP Services A Multi-Sector Approach to Social Change, the bargaining power of buyer has different aspects:

3.2. Market fragmentation
  • AARP and AARP Services A Multi-Sector Approach to Social Change has a wide array of consumers as it produces and sells its products locally as well as across borders
  • As a result, the higher number of consumers lowers the overall bargaining power of the buyers, and strengthens the position of AARP and AARP Services A Multi-Sector Approach to Social Change with respect to sales and profit maintenance
3.3. Industry competitiveness with respect to buyer bargaining power
  • Activities within the sector are largely manufacturing activities, and as a result these activities are important for the buyers
  • With respect to each individual industry player, this increases buyer power considerably
  • Consequently, the competition and rivalry in the industry increases as each player tries to increase his share of the pie by targeting similar segments of consumers
3.4. Distribution channels and buyer bargaining power
  • The higher channels for distribution of goods produced and marketed in the industry makes them more accessible for consumers
  • As a result, it increases the consumer base for the players, and also leads to higher market fragmentation
  • This is true for local as well as international markets
  • Consequently, this decreases the buyer bargaining power for the industry
3.5. Switching costs
  • The issue is however complicated by the high number of players in the industry offering similar products or services, which reduces switching costs for consumers
  • Switching costs however may also vary according to the needs and wants of the consumers, and the types and variants of the products that they prefer
  • The price competitiveness is especially an important factor for determining the switching costs for the consumers, in addition to product quality
  • Industry players focus on brand development and marketing communications to appeal to consumers, and generate trials.
  • As a result, the overall bargaining power in the industry is considered to be moderate

4. Supplier bargaining power

4.1. Understanding what supplier bargaining power is?

Supplier bargaining power refers to the pressure and influence that suppliers have on a company or a business through price fluctuations, quality inconsistencies, and through creating a supply shortage of the raw materials and inputs needed by businesses for operating the business. The supplier bargaining power has a direct impact on the competitiveness of an industry as well as on the profitability of the businesses for industry players – and thereby the growth potential for the overall industry.

The bargaining power of suppliers is said to be high when companies and businesses face a high cost of switching suppliers with respect to the business. In addition, a small number of suppliers also increases the bargaining power of the suppliers as it restricts the choice that a company or a business may have for procuring its raw inputs. In addition, low availability of materials and products from suppliers also strengthens the bargaining power of suppliers.

In contrast, the bargaining power is low when businesses shave the option of procuring materials from a number of suppliers present. As a result, the higher number of suppliers who offer similar products to the business lowers the overall bargaining power of the suppliers. In addition, businesses may also face a low switching cost and will have substitutes available. This will work towards weakening the supplier bargaining power.

The bargaining power of suppliers for AARP and AARP Services A Multi-Sector Approach to Social Change is assessed below:

4.2. Supplier strength
  • AARP and AARP Services A Multi-Sector Approach to Social Change has a limited number of suppliers from local and international markets
  • The lower number of supplier makes switching costs high for the business, and as a result, gives more power to the suppliers because of the higher demand they face
  • AARP and AARP Services A Multi-Sector Approach to Social Change has a restricted number of suppliers also because of the quality checks and contractual agreements they carry out
4.3. Industry competitiveness and supplier bargaining power
  • The higher bargaining power of the supplier increases competitiveness in the industry
  • Players, including AARP and AARP Services A Multi-Sector Approach to Social Change, compete using pricing strategies
  • Players also control other processes and business operations to ensure that the cost of doing business is controlled, and not passed to the consumer
  • Low ability to change supplier to maintain quality pressures the business to achieve economies of scale
  • Players in the industry compete for supplier contracts as well, and this may lead to a higher cost of doing business altogether.
  • However, players must ensure that this higher cost does not lead to higher prices for the consumer, as the high rivalry in the industry maintains competitive pricing for all players
4.4. Substitutes
  • Players like AARP and AARP Services A Multi-Sector Approach to Social Change in the industry are dependent on manufacturing for producing and marketing their offerings and products
  • With a manufacturing focused company, the suppliers maintain a higher power
  • Businesses do not have substitutes and must contract with suppliers for ensuring quality production and sale of their products
  • Lower number of substitutes makes switching costs higher, and also increases the supplier bargaining power

5. Threat of new entrants

5.1. Understanding what threat of new entrants is?

The threat of new entrants refers to the threat that new competition and new players may pose to existing players in the industry. The threat of new entrants also defines the competitive nature of an industry, and helps strategizing along with determining the attractiveness and growth potential of an industry. The threat of new entrants is also an important factor for determining and predicting the profitability of the industry as a whole, as well as of individual members and players.

When new players and businesses enter an industry, it increases competition and rivalry within the business. If the new competing offers same or similar products and services, it will threaten the competitive position of the business.

The threat of new entrants for AARP and AARP Services A Multi-Sector Approach to Social Change stands as:

5.2. Barriers to entry
  • The industry has moderate to high barriers to entry
  • This lowers the threat of new entrants as new businesses and companies will not easily be able to enter the industry and compete amongst and with existing players for the same share of consumers
  • The industry is regulated by government policies and institutions which offer tough entrance based on their criteria
  • There is no easy access to suppliers as well s distribution channels, which decreases the chances of new entrants becoming part of the industry
  • The higher growth potential and profit promise also appeals to new players, who however, find it difficult to enter the growing industry
5.3. Financial cushioning
  • AARP and AARP Services A Multi-Sector Approach to Social Change competes in an industry that requires high financial investment
  • The capital requirements of the industry cannot easily be met with by new players
  • Bank loans may also not be easily acquired for meeting the financial requirements and capital needs of entering the industry
  • The higher financial risk and investment associated with the industry discourages new entrants and players from trying to compete in the industry
  • The added advantage of cost that existing players enjoy further decreases the chance of new players trying to enter the market.
5.4. Technological investment
  • The industry in which AARP and AARP Services A Multi-Sector Approach to Social Change competes is highly dependent on the technological infrastructure
  • Technological advancements and innovations are introduced and adapted frequently for easing the business operations and processes, as well as for smoothing processes for consumers
  • The technological advancements require high expertise and capital investments
  • This may not be afforded by new entrants which lowers their threat of entry into the industry
5.5. Investment in R&D
  • Existing players have strategized their business decisions and goals with respect to high investment in research relating to consumer behaviour and market trends
  • This information and research may not easily be available to the new entrants
  • Gaining this information and data, and correlating it with the past data and information to predict future trends will further be time taking as well as cost intensive
  • This further dissuades new entrants and lowers their threat of entry into the industry
5.6. Size of operations
  • Exiting players have a larger size of operations
  • This players also have sustainable economies of scale into their business processes – especially manufacturing
  • As a result, existing players manufacture using cost effective means and methods
  • Existing players also have controlled expenses, and deliver high quality products owing to their operations management
  • New players in the industry will not be able to compete immediately and directly with existing players given the large size of operations and economies of scale – without a high financial investment
  • The high financial investment will run a risk as well, since the existing players have also invested in brand building activities, and have developed a string relationship with the consumers.
  • As a result, the threat of new entrants to the industry is considerably lowered

6. Threat of substitutes

6.1. What is the threat of substitutes?

Threat of substitutes refer to the products from other industries that can easily replace the product offerings from the industry in which a company or a business operates. These substitute products offer similar benefits to the consumers. The threat of substitutes also affects the competitiveness of the industry, and influences the profitability potential of the players in the industry.

A higher threat of substitutes i.e. a higher availability accessibility of substitute products increases competitiveness for the industry players, and lowers the profitability for the players as well. This is because consumers could easily switch to other products form other industries.

Lack of close substitutes as well as inaccessibility of substitute products will work towards lowering the competitiveness in the industry and increasing profit potential for industry players. This is because consumers will have high switching costs associated with using substitute products, and may also not have alternatives available. As a result, the businesses I the industry will face a higher demand, and enjoy higher profitability

For AARP and AARP Services A Multi-Sector Approach to Social Change, the threat of substitutes is observed to be low. This is largely because substitutes are not present in the home country, and are offered to a niche consumer segment in international markets as well. As such, these substitutes are costly.

6.2. Switching costs
  • There are high switching costs associated with using substitute products
  • Substitute products may be imported, with additional custom duties and costs attached – which will increase the price of the product
6.3. Availability
  • Substitute products for AARP and AARP Services A Multi-Sector Approach to Social Change are not easily available in the market
  • The substitute products are made available only at select outlets, through select channels – given their low demand, and exclusivity
  • The substitute products are made available only at select outlets, through select channels – given their low demand, and exclusivity
6.4. Accessibility
  • Substitute product are not easily accessible
  • They are produced offshore, and internally distributed and managed by the company
  • As such, no mass marketing tools are used
  • Consumers cannot easily locate their stocking
  • As a result, they are not widely accessible
  • This lowers the threat of substitutes for AARP and AARP Services A Multi-Sector Approach to Social Change

7 References

Bierly, P. & Hämäläinen, T., 1995. Organizational learning and strategy. Scandinavian Journal of Management, 11(3), p. 209–224.

Cole, G., 2003. Strategic Management. Boston: Cengage Learning EMEA.

French, R., 2011. Organizational Behaviour. Hoboken:NJ: John Wiley & Sons.

Hiriyappa, B., 2009. Organizational Behavior. New Delhi: New Age International.

King, D. & Lawley, S., 2016. Organizational Behaviour. Oxford: OxordUniversity Press.

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