The Five Competitive Forces That Shape Strategy.
In the article Michael E. Porter tells us that there are several forces in the competition for profits that a marketer or strategist should be aware of. The forces of which there are five are explained in an “industry structure” model. The model talks about how the most successful organizations are the ones that find the niche within the current market, this is where the competitors are the weakest. He goes onto further explain that the industry structure comprises of New Entrants, Suppliers, Buyers, Substitutes, and finally Existing Competitors.
We are also told within the article that industries have a gross difference in profitability regarding ROI (Return on Invested Capital). He cites various examples from different industries such as Airlines (6%) vs. soft drinks (38%). Both these industries in this example have the five forces to thank. Porter goes on to say that several combinations of forces help create a low or high return industry. For example if we take the low return industry, it is not necessary that all five forces be of equal weightage. Instead that one force can change or alter the profits in an entire industry.
The five factors that make up the five forces porter mentions are the following. There is the threat of entry, which talks about barriers to entry that include economies of scale i.e. supply and demand, alternative costs, capital requirements, and access of distribution. Then there are the threat of suppliers, if there happen to be a small number of suppliers and a large number of buyers, suppliers can decide to take it in their own hands how to control the market. At the same time supplier maybe diversified into other industries because switching costs are high and there are no substitutes available. Threat of buyers is another issue that needs to be tackled, when there are few buyers, an example of this would be offshore drilling. There are plenty of alternatives available, at the...