Porters Five Forces of Johannes Van Den Bosch Sends an Email
Posted by Zander Henry on Aug-16-2018
The Porter 5 forces framework is basically built on this perception that a firm’s strategy must have the capability to not only embrace opportunities but also encounter threats in external settings. Hence, a competitive strategy must have developed to not only understand industry structures but also adapt to the timely changes (Porter, 2008).
The five forces framework was originally coined by one of the Harvard professor named Michael Porter, and was firstly published in the year 1979 (Ural, 2014; Johnson, Scholes, & Whittington, 2008).
It is also argued that the framework is built on an industrial-organizational approach which showcases that attraction of the industry in which firms operate is viewed by market structure as it affects the behavior of contributors (Raible, 2013; Slater & Olson, 2002).
Therefore, with the help of this framework, ABC COMPANY not only gains a glimpse of the industry at a particular point but also would be able to picture the industry dynamics and potential changes that could be possible in the future.
Aside from competitive factors, ABC COMPANY, with the help of Porter's Five forces framework, also would be able to recognize the other four potential factors. This would help the company to sustain its competitive edge in the longer run. As these integrating factors shape industry competition and could be an ongoing threat for ABC COMPANY’s success if neglected by strategists (Porter, 1979; Mohapatra, 2012).
Also, ABC COMPANY when, applies the method to analyze an industry, the company would be able to design a proactive strategy which will further help the management in terms of profitability. As it is notably argued in prior studies that the weaker the forces are, the high the ratio of opportunity ABC COMPANY could have to attain higher returns (Grundy, 2006).
2. Significance of Porter Model
In one of his articles, Michael Porter articulates that the suggested five forces' effects are intense. The reason is that in some industry cases, the market is not much attractive and due to this, firms of that particular industry are unable to maintain sustainable profits (Boyce, 2021; Wright, 2021).
Therefore, it is necessary for ABC COMPANY to evaluate these forces critically and address the gaps where it is needed (Malhotra & Gupta, 2001). The reason is that Porter Five Forces analysis could help ABC COMPANY to anticipate industry structural changes and exploit them in the favor when it is necessary and crucial.
The model is important to be evaluated for ABC COMPANY as it helps to determine whether the said industry is attractive or unattractive in their case. This is because the five forces of the model are potentially capable of affecting the profitability of the company negatively (Burton, 1995).
Having said argument, the discussion can take further steps to have a clearer and more precise picture that why the model is significant for ABC COMPANY and how it shapes the industry context. It is quite apprehensible that industry competition is rooted with the underlying economic structure. Hence, revealing the fact that it goes beyond the attitude of existing competitors (Zhukova, 2021; Gordon, 2022).
With the help of industry analysis, ABC COMPANY enables to build a competitive strategy which would help them to act defensively against these forces or push them to work in the favor.
3. Porter Five Force Factors
3.1 Threats of New Entrants
The very first force amongst the five forces is threats of new entrants, which explains the entry of new players in a competitive market. It defines how easy for new players to enter or leave the market. It is also called barriers to entry and exit (Jurevicius, 2021).
To maintain the sustainability of ABC COMPANY, it is crucial to know that the barrier of entry is high and low in said industry. The reason is that if new players have easy access to enter the industry, then they will have a more chance to exploit the underlying part of market. Eventually, it will become an unfavorable situation for ABC COMPANY to be in.
In the case of ABC COMPANY, the barrier to market entry appears to be high, which indicates that it is not easy for new players to enter the market, hence leading to lower competition. This show the industry is attractive and seems to be in good shape. To explain it further, six areas are going to be discussed here under the realm of threats of new entrants, which proves to be a significant barrier to entry (Jurevicius, 2021).
3.1.1 Economies of Scale
Economies of scale permit businesses to decrease their per unit prices because it flourishes and attains efficiency gains. However, when big players such as ABC COMPANY exists in the market along with the huge cost advantages, it becomes difficult for new players to bear the competition and maintain the sustainability (Chi, 2022) . Additionally, new players, most of the time, have scarce resources of efficiencies to compete on prices, hence, displaying a huge barrier for new entrants
3.1.2 Brand image
Brand image is also another greater hindrance for newcomers. The reason is that existing players such as ABC COMPANY have a strong brand image, hence, it takes ample of effort to take business away from these trusted brands. Thereby, discouraging new entrants from entering the market (Chi, 2022).
3.1.3 Capital Requirements
This proves to be another huge barrier as an industry where ABC COMPANY caters, requires millions of capital to start a business. Therefore, it makes it difficult for potential entrants to have this sort of financial backing where success is not guaranteed. For this reason, new players are scarce in such an industry where the huge capital requirement is needed (Hart, 2022).
3.1.4 Technological Economies
Although technology and expertise in a specific industry could go in favor of new players, however, it might also create a huge barrier for them. The reason is that it demands an ample amount of knowledge and advancement to create a new business (Hart, 2022).
3.1.5 Government Legislation
Policies of Government have the potential to restrict the competition in industry through new legislations, tariffs and quotas. Hence, it goes in favor of ABC COMPANY as by restricting competition; it becomes expensive for newcomers to enter the market (Hart, 2022).
3.2 Bargaining Power of Suppliers
Suppliers' bargaining power is referred to as the market inputs. As the suppliers provide the raw material to the firms, so that firms may further carry their businesses. Thereby, it is crucial to know how much power suppliers have in the industry. The reason is that it may create a detrimental effect on revenue. As suppliers could generate threat to firms by increasing their product/service prices which ultimately firms would not be able to recover. Hence, they only have the option to increase their costs price (Porter, 2008).
There exist several reasons that could be treated as an indicator of high supplier bargaining power. For suppose, when suppliers dominate the industry due to fewer in quantity. Thereby, becomes more concentrated in contrast with industry, or the industry is not much crucial customer for them (Porter, 1979).
However, the bargaining power could be manipulated through a number of suppliers, low product differentiation and the presence of product substitutes (Slater & Olson, 2002).
Specifically talking about the situation for ABC COMPANY, supplier power is medium. Hence the company somewhat faces low pressure in terms of margins from suppliers. Following are the factors which are crucial to know in order to be aware of supplier power (Eskandari, Miri, Sedigheh, & Nia, 2015).
3.2.1 Supplier Size
The supplier industry is not concentrated; hence ABC COMPANY have numerous options on the table to have their raw material at a reasonable cost (Team, 2020).
3.2.2 Supplier Product’s Substitute
Since the multiple suppliers are able to produce the same product, ABC COMPANY doesn’t have to be tied to particular product specifications, hence can have multiple options (Team, 2020).
3.2.3 Switching Cost
In the case of ABC COMPANY, the presence of a significant number of suppliers makes the switching cost low for the company (Team, 2020).
3.2.4 Contribution of Supplier in Industry Cost
In the current case, suppliers here are not much dependent on the said industry for their return, hence, it indicates that they have multiple customers from multiple industries, hence in terms of cost, they have the power to charge a higher rate (Slater & Olson, 2002).
3.2.5 Threat of Forward Integration (Supplier)
In ABC COMPANY's case, forward integration is not possible, hence it gives leverage to the company to maintain their profitability and save their cost. The less threat of forwarding integration makes the company in a safe position. Hence, there is no need to lower the profit margins and price of the product (Slater & Olson, 2002).
3.2.6 Product Differentiation
Luckily, suppliers do not offer a unique product, hence, ample of option are available for ABC COMPANY to get the same product which eventually saves the time and cost of the company (Slater & Olson, 2002).
3.3 Bargaining Power of Buyers
Bargaining power of suppliers is known to be a vertical force in the porter framework. We can say that this force happens to have occurred in various stages of the supply chain. Bargaining power of buyers is considered to be high when plenty of sellers exist and buyers have limited quantity (Isabelle, Horak, McKinnon, & Palumbo, 2020).
This is the reason that it is a must for organizations like ABC COMPANY to know how many sellers exist in markets and how many options they have in terms of buyers. The reason is buyers have the option to refuse to purchase the product; however, sellers like ABC COMPANY do not have the affordability to refuse to sell the product. Hence, it shifts power towards buyers to decide the price which they are willing to pay, especially when they have plenty of options available in the market (Planium Pro, 2021).
The collective power gives them leverage to push sellers like ABC COMPANY to decrease their prices and demand better product quality, hence unleashing the competition among competitors.
With this edge, the buyers have the advantage of capturing more value than expected while paying the minimum and getting maximum. This situation makes the suppliers dependable on them, hence buyers have the edge to take advantage (Porter, 2008).
ABC COMPANY also seems to bear the pressure from buyers; however, even with the high bargaining power of buyers, the company is able to ease the pressure through the creation of brand loyalty programs which gives more value in contrast with their competitors. Following are the factors which makes the bargaining power high in the case of ABC COMPANY (Klemperer, 1995).
3.3.1 Volume of Buyers
The volume of buyers is high in the case of ABC COMPANY, hence giving them power to regulate suppliers as per their demands (Planium Pro, 2021).
3.3.2 Switching Cost
Since there is no switching cost in the case of buyers, hence buyers have multiple options in the market if they find an issue with any brand. However, with the help of brand loyalty, ABC COMPANY could gain the power to retain its customers (Planium Pro, 2021).
3.3.3 Threat of backward integration from Buyer’s end
Buyers could also have the ability to threaten organizations by developing products on their especially in a case when they realize that suppliers earn maximum profit. However, in the case of ABC COMPANY, there exist no such threat of backward integration (Planium Pro, 2021).
3.3.4 Price Sensitivity
As discussed, buyers are price sensitive, thereby, it is crucial for ABC COMPANY to take care of their pricing strategy if they really want to retain their customers and attract new customers (Dobbs, 2014).
3.4 Threat of Substitute Products
It is argued that there is always an availability of substitutes but due to their different characteristics, they are being ignored or easy to be overlooked. High threat of substitutes exhibits that the profitability of the industry is low because substitutes put a limit on prices (Dobbs, 2014).
Along with the profitability, the growth of the industry is also being compromised and damaged if the said industry is unable to distance itself from its substitutes. It is also to be understood in the lens of porter that substitutes not only affect the industry’s profitability but also minimizes the chances when the industry could produce in good times. Thereby, the factor cannot be underestimated.
For companies such as ABC COMPANY, substitutes are one of the important problems due to the strong position in the market. As there exists a threat of substitutes, thereby ABC COMPANY strategists carefully give attention to substitutes, especially to those who have the tendency to replace the actual product and become profitable. Following are the factors that are to be considered for ABC COMPANY (Pringle & Huisman, 2011; Lee, Kim, & Park, 2012).
3.4.1 Substitute Product Availability
As discussed, the presence of substitutes in the market raises the threat; thereby, ABC COMPANY makes sure to monitor it regularly (Lee, Kim, & Park, 2012).
3.4.2 Relative Price Performance of Substitutes
This is another factor which should be taken care of as it increases the threat if the prices are lower as compared to the original product (Lee, Kim, & Park, 2012).
3.4.3 Switching Costs
Since, the switching cost is lower as buyers can easily switch whenever they want, hence making the situation critical (Klemperer, 1995).
3.5 Competitive Rivalry
It is argued that the profitability could be limited due to high rivalry and constant competition. Rivalry among competitors becomes high when there exist numerous competitors who share similar power as well as size.
Even in the case of the slow growth of industry, the argument and challenges are constant when it comes to capturing market share. Additionally, in case of higher exit barriers, the rivalry among competitors also gets high (CGMA, 2013).
When competitors are very sincere in their businesses and sustain their competitive edge via good leadership skills, this makes their position stronger in the industry
ABC COMPANY needs to be aware of all its competitors because not being familiar with them may increase the competition intensity. In ABC COMPANY case, competition is high. However, ABC COMPANY is aware that they should not just compete in terms of price; otherwise, their position can be compromised and minimize profits. Thereby, they also analyze other factors as well in order to increase returns and retain consumers (Charles, Jones, & Schilling, 2009; Hagel III, Brown, & Davison, 2008).
Following are the factors which must be known to the company to be aware of rival intensity.
3.5.1 Industry life Cycle and Growth
Due to the slower growth of the industry, firms, including ABC COMPANY, put more effort into competing for what already exists (Charles, Jones, & Schilling, 2009).
3.5.2 Switching Cost
As discussed earlier, switching cost is low among firms, hence makes easier for the firm, including ABC COMPANY, to generate tough competition and take away each other’s customers (Hagel III, Brown, & Davison, 2008).
3.5.3 Barriers to Exist
As the industry barrier to exist is higher, hence firms have low options to leave and to maintain sustainability, they are forced to compete even earning less. Hence, this establishes additional pressure to compete well (Burton, 1995).
The overall discussions can be concluded that ABC company has the competitive edge to sustain its position in the market as growth can be seen in the industry. However, in some areas, the company needs to monitor the environment closely as the slightest negligence may damage the brand and ABC may bear a loss in terms of profitability.
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