The five forces framework developed by Michael Porter is the most widely known tool for analyzing the competitive environment, which helps in explaining how forces in the competitive environment shape strategies and affect performance. These competitive forces are as follows (Porter, 1985):
The rivalry among competitors in the industry
The potential entrants
The substitute products
The bargaining power of suppliers
The bargaining power of buyers
However, these five forces are not independent of each other. Pressures from one direction can trigger off changes in another which are capable of shifting sources of competition.
Threat of New Entrants
Entry of a firm in and operating in a market is seen as a threat to the established firms in that market. The competitive position of the established firms is affected because the entrants may add new production capacity or it may affect their market shares (Hough, 2006). They may also bring additional resources with them which may force the existing firms to invest more than what was not required before. Altogether the situation becomes difficult for the existing firms if not threatening always and therefore they resort to raising barriers to entry. These barriers are intended to discourage new entrants and this may be done by organization.
Bargaining Power of Suppliers
Business organizations have a large dependency on suppliers and the latter influence their profit potential significantly. Suppliers’ decisions on prices, quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. However, suppliers’ ability to do all these depends on the bargaining power over buyers.
Bargaining Power of Customers
Customers with a stronger bargaining power relative to their suppliers may force supply prices down or demand better quality for the same price and may demand more favorable terms of business. For instance, there will always be a difference in the bargaining power between an individual’s buying different construction material like cement, steel or bricks and a real estate builder buying them for the number of properties he may have been building over so many years (Johnson & Scholes, 2004).
Threat of Substitutes
Often firms in an industry face competition from outside industry products, which may be close substitutes of each other. For example, with the new technologies in place now the electronic publishing is the direct substitutes of the texts published in print (Hitt, Ireland, & Hoskisson, 2011). Similarly, newspaper finds their closest substitutes in their online version, though it may be a smart strategic move to position them as complementary products.
Competitive Rivalry
The level of rivalry is minimum in a perfectly competitive market where there are large number of buyers and sellers and the product is uniform with everyone. Same is true for a monopoly market where there is only one player and the type of product is also one. However in case of oligopoly or monopolistic competition, where you will find few players and the market conditions allow them to differentiate their products and services, competition is found to be fierce.
Second Part: The Porter’s Competitors Strategies
Competitive strategy creates the base in which a business competes in the marketplace. Michel E. Porter has suggested the following market based competitive strategies.
Cost Leadership Strategy
Differentiation Strategy
Focused Cost leadership
Focused Differentiation
The Cost leadership strategy
The cost leadership strategy is an integrated set of actions taken to produce goods or service with features that are acceptable to customers at the lowest cost, relative to customers (Hough, 2006). Under this attempts are made to offer standardization products to the customers at price lower than the competitor. Its main aim is to reduce cost and increase the market share by providing acceptable products. The overall profits increases due to higher sales irrespective of the lower price. Costs are minimized with proper coordination among the functional units of the business. The strategy is successful when the customer is price sensitive.
Differentiation Strategy
The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) the customer perceive as being different in ways that are important to them. Under this strategy, an organization tries to offer the products which are distinct in the perception of customers. The Differentiation may be based on product parameters, service back up, promotion and image. The product is differentiated through the unique product performance features, and services, adopting new technologies providing detail information about the product.
Focus Strategy
The focused strategy is an integrated set of actions taken to produce goods or service that serve the need of a particular competitor segment. The company focuses on a narrow segment of customer. A firm attempts to achieve either cost advantage or differentiation. The assumption is that the need of the group can be better served by focusing entirely on it. Under this, a firm can be customer loyalty. The firm focuses on market segment with high profitability and growth. The risk associated with focused strategy is imitation and change in the target segment. There are two types of focus strategy. They are focus low cost, and focus differentiation.
1. Focus - Low cost
This strategy focuses on a particular niche of the market segment through cost. The cost of the product is lowered in compare to the competitors.
2. Focus Differentiation
This strategy also focuses on a particular niche of the market. The firm tries to overcome the competition by the product differentiation. The product is attributed to the unique features or tastes or preferences in comparison on its strategies.
References
Hitt, M., Ireland, R., & Hoskisson, R. (2011). Strategic Management. USA: South-Western Cengage Learning , 116.
Hough, J. (2006). Business Segment Performance Redux: A multilevel approach . Strategic Management Journal , 45 - 61.
Johnson, G., & Scholes, K. (2004). Exploring Corporate Strategy. New Delhi: Prentice-Hall of India.
Porter, M. (1985). Competitive Advantage. New York: The Free Press.
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The five forces framework developed by Michael Porter is the most widely known tool for analyzing the competitive environment, which helps in explaining how forces in the competitive environment shape strategies and affect performance. These competitive forces are as follows (Porter, 1985):
The rivalry among competitors in the industry
The potential entrants
The substitute products
The bargaining power of suppliers
The bargaining power of buyers
However, these five forces are not independent of each other. Pressures from one direction can trigger off changes in another which are capable of shifting sources of competition.
Threat of New Entrants
Entry of a firm in and operating in a market is seen as a threat to the established firms in that market. The competitive position of the established firms is affected because the entrants may add new production capacity or it may affect their market shares (Hough, 2006). They may also bring additional resources with them which may force the existing firms to invest more than what was not required before. Altogether the situation becomes difficult for the existing firms if not threatening always and therefore they resort to raising barriers to entry. These barriers are intended to discourage new entrants and this may be done by organization.
Bargaining Power of Suppliers
Business organizations have a large dependency on suppliers and the latter influence their profit potential significantly. Suppliers’ decisions on prices, quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. However, suppliers’ ability to do all these depends on the bargaining power over buyers.
Bargaining Power of Customers
Customers with a stronger bargaining power relative to their suppliers may force supply prices down or demand better quality for the same price and may demand more favorable terms of business. For instance, there will always be a difference in the bargaining power between an individual’s buying different construction material like cement, steel or bricks and a real estate builder buying them for the number of properties he may have been building over so many years (Johnson & Scholes, 2004).
Threat of Substitutes
Often firms in an industry face competition from outside industry products, which may be close substitutes of each other. For example, with the new technologies in place now the electronic publishing is the direct substitutes of the texts published in print (Hitt, Ireland, & Hoskisson, 2011). Similarly, newspaper finds their closest substitutes in their online version, though it may be a smart strategic move to position them as complementary products.
Competitive Rivalry
The level of rivalry is minimum in a perfectly competitive market where there are large number of buyers and sellers and the product is uniform with everyone. Same is true for a monopoly market where there is only one player and the type of product is also one. However in case of oligopoly or monopolistic competition, where you will find few players and the market conditions allow them to differentiate their products and services, competition is found to be fierce.
Second Part:
The Porter’s Competitors Strategies
Competitive strategy creates the base in which a business competes in the marketplace. Michel E. Porter has suggested the following market based competitive strategies.
Cost Leadership Strategy
Differentiation Strategy
Focused Cost leadership
Focused Differentiation
The Cost leadership strategy
The cost leadership strategy is an integrated set of actions taken to produce goods or service with features that are acceptable to customers at the lowest cost, relative to customers (Hough, 2006). Under this attempts are made to offer standardization products to the customers at price lower than the competitor. Its main aim is to reduce cost and increase the market share by providing acceptable products. The overall profits increases due to higher sales irrespective of the lower price. Costs are minimized with proper coordination among the functional units of the business. The strategy is successful when the customer is price sensitive.
Differentiation Strategy
The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) the customer perceive as being different in ways that are important to them. Under this strategy, an organization tries to offer the products which are distinct in the perception of customers. The Differentiation may be based on product parameters, service back up, promotion and image. The product is differentiated through the unique product performance features, and services, adopting new technologies providing detail information about the product.
Focus Strategy
The focused strategy is an integrated set of actions taken to produce goods or service that serve the need of a particular competitor segment. The company focuses on a narrow segment of customer. A firm attempts to achieve either cost advantage or differentiation. The assumption is that the need of the group can be better served by focusing entirely on it. Under this, a firm can be customer loyalty. The firm focuses on market segment with high profitability and growth. The risk associated with focused strategy is imitation and change in the target segment. There are two types of focus strategy. They are focus low cost, and focus differentiation.
1. Focus - Low cost
This strategy focuses on a particular niche of the market segment through cost. The cost of the product is lowered in compare to the competitors.
2. Focus Differentiation
This strategy also focuses on a particular niche of the market. The firm tries to overcome the competition by the product differentiation. The product is attributed to the unique features or tastes or preferences in comparison on its strategies.
References
Hitt, M., Ireland, R., & Hoskisson, R. (2011). Strategic Management. USA: South-Western Cengage Learning , 116.
Hough, J. (2006). Business Segment Performance Redux: A multilevel approach . Strategic Management Journal , 45 - 61.
Johnson, G., & Scholes, K. (2004). Exploring Corporate Strategy. New Delhi: Prentice-Hall of India.
Porter, M. (1985). Competitive Advantage. New York: The Free Press.