Michael Porter's five forces Model for Competitive Position of Business

 

 

Michael Porter's five forces model is used in assessment of competitive position of the business in  macro environment. Porter has identified five positions which give competitive benefit and limitations to businesses. There are five  interrelated factors.

 

• Bargaining Position of Suppliers.

  Bargaining position of suppliers can be assessed in terms of their size relative to the business. Availability of raw materials and services used by the businesses, shortage of raw material and services to the business gives suppliers strong bargaining position. Competition among suppliers also influence their bargaining positions. If competition is fierce among suppliers than business can negotiate discount with suppliers more easily.

   

• Bargaining Position of Customers.

  Bargaining position of customers can be assessed in terms of their size. Large customers can invite tenders so that they can purchase from the business offering lowest prices and favorable terms like credit period and after sale services. Competition among businesses gives considerable benefits to customers. If business is providing some unique product like blue diamonds which are few in the world, found in south Africa, than customers bargaining position is relatively weak.

   

• Competition and Rivalry.

  Competition and rivalry leads to increase in costs for the business as more marketing expenditure will be required to create brand loyalty and business reputation. Prices may have to be decreased to maintain and  increase market share. Research and development expenditure have to be increased to devised new products to cope with actions taken by competitors. Competition and rivalry also forces business to work efficiently and provide better quality product to obtain an edge over competitors. Managers will be forced to unnecessary costs like wastage and idle time to increase their PRP (profit related pay) because profit making through increase prices may not be possible.

   

• Barriers to Entry.

  Barriers to entry can be assessed in terms of licensing requirement by the law and initial capital expenditure required to initiate the business. Some businesses like telecommunication requires both licensing and capital expenditure to install communication networks. These thing provides deterrent to businesses specially small business which do not have know how of legal requirement and money to invest in such resources. Fierce competition may also act as barrier to entry because the potential business find it difficult to create market share to achieve sales growth.

   

• Threats from Substitute Products.

  Threats from substitute products can be judged in terms of number of alternative products that customer can use instead of using existing product. Like glass mugs and steel mugs if glass mugs are getting higher in prices than customers can used steel mugs. Another thing to consider is switching cost of the product to the customer. Some products are like above can be easily switched but some products which require training and have lack of resale value are difficult to switch. Ex, if buses fare increases it will be difficult for travelers to switch to different mode of transport like purchasing their own vehicle because it involves substantial invest which everyone cannot afford. if electricity gets expensive, customer normally have no alternative but to reduce electricity consumption.

   

  Related posts:

• What is Michael Porter’s Generic Strategies for Business Success?
• What is Michael Porter’s Diamond Model for Competitive Advantage of Business?

 

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