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Porter’s Five Forces Analysis
Porter’s Five Forces is a framework formed to help businesses achieve their full potential and effectiveness. According to the author, all businesses that enter a specific industry come with their potential, and they usually possess considerable resources and the desire to dominate a particular market share. Businesses pose different competition forms that range from service improvement, price reduction, advertisements, and introduction of new goods. Many challenges face business and affect its profitability. A business’s competition is embedded in its operating intensity and its basis for competition. The tool aims to evaluate an organization’s attractiveness and the reason for its profitability by understanding the fundamental competition. Thesis: the purpose and main lesson of Porter’s framework is to understand the forces that pose competition in an industry and help businesses adopt strategies suitable for the competitive environment and maximize profits.
A business’s power is determined by the number of similar companies offering the same services or products. The more the competition from other companies with undifferentiated products, the lesser the business or organization’s power. Businesses should not compete to satisfy the same needs or compete on exact dimensions as these results in a tenacious competition. An industry with many businesses that are equal in power leads to poaching of business ideas. There needs to be a leader in an industry to oversee the enforcement of desirable industry practices.
Consequently, an industry that has slow growth is bound to exhibit high levels of competition. Entrepreneurs must consider an industry’s growth rate and the availability of similar products and services before venturing into it. For instance, it is paramount and prudent to look at what motivates your rivals to stay in the industry. Suppose their aspirations go beyond economic gain, especially parastatals that significantly influence an industry’s profitability. In that case, they may compete based on price competition that drains the industry of profits and transfers them to customers. It would be unwise to go into an industry with such competitors. The perishability of a product influences price competition as some businesses choose to sell highly perishable goods at significantly lower prices before they depreciate. High fixed costs and low marginal cost for enterprises dealing with essential goods with a low demand forces them to lower their prices to increase sales per unit to raise enough money to cover the fixed costs. Competition based on brand image, customer relation and quality of products is bound to increase an industry’s profitability as it improves value and raises barriers to new entrants. When business rivals compete based on different dimensions outside price and based on meeting different segments of customers’ needs and services, the industry’s profitability increases.
The force of new entrants influences the power of an established business into the industry.
The absence of barriers and availability of resources for new entrants to venture into an industry weakens the established businesses as they lose market share over time. The existence of obstacles in an industry gives companies the power to charge higher prices and negotiate favorable terms. The entry of new businesses in an industry poses a threat to the incumbents as new entrants negatively affect an enterprise’s profitability. Entry into the industry is only a threat if it negatively affects profitability. Industries may use some tactics like supply-side economies of scale, which means that the incumbent businesses produce large scale at lower costs with more efficient technologies, making it hard for a new entrant to come in a large scale. Industries that have high capital requirements have few entrants. If an industry has stable, attractive returns, an entrepreneur should not be deterred by the increased capital requirements as they can quickly get financial assistance from investors. An industry with businesses who have established their brands with proprietary rights in production technology and access to raw material is hard for new small-scale entrepreneurs to venture in. They may be required to invest large amounts of capital to be competitive with the incumbents. Government policies significantly affect the business environment through various policies that may be advantageous or limiting to others. Licencing requirements may work as a barrier to prospective businesses, hence indirectly controlling the regulated industry’s competition. The provision of business subsidies works to promote entry into an industry and may negatively or positively impact the sector.
Customers have the power to push prices down as they put businesses under pressure. Buyers gain their power from a market with many alternatives, and it is low when an industry is dominated by monopolies (Porter, 83). The consumer’s bargaining power directly influences the competitive strategies of businesses in an industry. When the sellers are many compared to the number of customers, they give customers the ability to demand lower prices due to alternatives. Informed buyers have more power and are likely to influence the pricing of goods and services in an industry. Government policies that support monopolies work to disadvantage customers as businesses use that advantage to put hefty prices on their goods and services. In such situations, customers are stripped of their power of choice and are therefore dependent on one business. Essential goods and services should not be left in monopolies’ hands as they work to oppress the buyer who has other options.
Business competition should be about making profits and not putting rivals out of business. Competition should be based on ethical principles, and businesses should not compete through unfair and unethical methods. Porter’s five forces should help enterprises have a picture of what is affecting their profitability and capitalize on such. The forces and industry structure are dynamic, and so does the business environment. Managers can identify the transformative business trend; they can formulate strategies to work around profitability limitations or even readjust the forces in their favor. Managers should be able to use the framework to identify where power lies in their business environment. Through the tools, managers can identify their strengths current business position and plan on the place the business may move into. Even though the business has evolved significantly as the theory’s model is still valid (Adelakun, n.p). The framework is useful to managers seeking to keep operating in a competitive business environment.
Work Cited
Porter, Michael E. “The five competitive forces that shape strategy.” Harvard business review 86.1 (2008): 79-94.
Adelakun, Andrew. “Should Porters Five Forces have value in Businesses today?.”