Porter’s five forces
Michael Porter’s forces
Michael porter explained five forces that illustrate the level of competitiveness in the industry. The five factors determine the level of attractiveness of an enterprise. He described the five points as the factors that influence quality customer service that, in turn, reflects in the success of the business. They make the industries attractive; thus, it increases their chances to thrive ( Dobbs, 2014). The factors are the entry of new firms in the industry, the bargaining capability of customers, the ability of the suppliers to bargain, availability of substitute products, and the rate of competitive rivalry.
First, porter’s framework outlined the intensity of competitive rivalry to be an essential factor in any industry. It determined how well the firms would be able to compete with each other. For significant competition, the firms should have well-planned strategies. For instance, the firm should be able to put measures to be up to date with the means of production it uses. Outdated technology would make a firm to lag compared with firms that use advanced technologies in its operations. The industry should also be able to identify how it should concentrate its firms in different areas to compete effectively with its counterparts.
Secondly, the bargaining power of the suppliers also determined how competitive a firm would be. The supplier’s bargaining power refers to the availability of a firm’s input. The firm may derive some competitive power from its suppliers. For instance, if a firm can acquire raw materials cheaply, then it turns a better chance to compete with other firms in the industry. The rate at which the inputs differentiate also determines how effective a firm would be to compete with other firms. If the firm can use the inputs longer at a favourable cost, it would experience high profitability. It would increase the ability of the individual firm to compete with other firms.
Additionally, the ability of customers to bargain is another competitive factor in the business industry. The bargaining power is the ability of the buyers to compel the business to price their products favourably. Customer’s sensitivity to the pricing of goods and services determines the profitability of the company. Firms should come up with ways to reduce the power that buyers may have over the business. For instance, introducing a loyalty program would be fit to influence the buyers to purchase goods with the initial prices. It would, in turn, reduce the pressure the customer would have in the business.
Also, threats of new entrants are one of the factors that influence competition in the business development sector. Usually, businesses that garner high profits encourage new firms in the market. When there are new firms constantly entering the industry, the level of profitability decreases. Therefore, the firm that can compete for favourably can yield substantial returns. Barriers can be used to reduce the entry of new firms in the industry. For instance, colossal capital requirements can be reinforced so that the number of firms entering the industry can be minimal. Few firms in the sector reduce competition, thus making the businesses to thrive.
The threat of substitute products is also another force explained in potter’s framework. The availability of products with similar customer satisfaction determines the profit yields of a business. Therefore the firm should be able to meet the customer requirements to compete with firms that produce substitute products. For instance, firms that make soft drinks should have quality products. The customers may choose to consume beverages from the firms that produce quality drinks, thus increasing their levels of competition. A firm that can compete favourably with firms that make substitute products is likely to thrive.
When the five factors pull together, the business is more likely to become more successful. It is because the bargaining power of the suppliers enables the firm to produce goods cheaply, thus leading to fair pricing (Bichanga et al., 2014). Proper pricing reduces the customer’s bargaining power, thus leading to high profits. Similarly, a firm that can compete with others that produce substitutes thrives easily. Also, the high intensity of competition increases the chance for the success of the business. When all the factors are combined, the yields of the company are high since the firm can compete favourably. When one element is more vital than the rest, the firm can compete favourably with other firms. It may outdo other firms in customer service. For instance, if the firm has a favourable supplier bargain, it may offer goods at lower prices. It would increase sales, thus yielding high profits.
References
Dobbs, M. E. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review.
Indiatsy, C. M., Mucheru, S. M., Mandere, E. N., Bichanga, J. M., & Gongera, E. G. (2014). The application of Porter’s five forces model on organization performance: A case of cooperative bank of Kenya Ltd.