Porters Five Forces Of Competitive Position Commerce Essay


Michael Porter was born in America in 1947 and Graduated in aeronautical engineering in 1969 from Princeton University and then received MBA with High Distinctions in 1971 from Harvard Business School and achieved an economics doctorate at Harvard university in 1973 where he was awarded university professorship, a position he continues to fulfil at Harvard Business School. His research group is based at the Harvard Business School, and separately he co-founded with Mark Kramer the Foundation Strategy Group, 'a mission-driven social enterprise, dedicated to advancing the practice of philanthropy and corporate social investment, through consulting to foundations and corporations'. A prime example of someone operating at a self-actualization level if ever there was one.

After his earlier work on corporate strategy Porter took a step ahead and extended the application of his theories and ideas to international economies and the competitive positioning of nations, as featured by him in many of his books. In fact in 1985 Porter was appointed to President Ronald Reagan's Commission on Industrial Competitiveness, which marked the widening of his perspective to national economies. By the 1990's Porter had established a reputation as a strategy guru on the international speaking circuit second only to Tom Peters, and was among the world's highest earning academics.

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Porter's first book Competitive Strategy (1980), which he wrote in his thirties, became an international best seller, and is considered by many to be a seminal and definitive work on corporate strategy. The book, was published in nineteen languages and re-printed approaching sixty times, changed the way business leaders thought and remains a guide of choice for strategic managers the world over.

Aside from his innovative thinking, Porter has a special ability to represent complex concepts in relatively easily accessible formats, notably his Five Forces model, in which market factors can be analysed so as to make a strategic assessment of the competitive position of a given supplier in a given market.

Porter's Five Forces:

New Market Entrants, eg:

barriers/entry ease

geographical factors

incumbents resistance

new entrant strategy

routes to market

Buyer Power, eg:

buyer choice

buyers size/number

change cost/frequency

product/service importance

volumes, JIT scheduling

Supplier Power, eg:

brand reputation

geographical coverage

product/service level quality

relationships with customers

bidding processes/capabilities

Competitive Rivalry, eg:

number and size of firms

industry size and trends

fixed v variable cost bases

product/service ranges

differentiation, strategy

Product and Technology Development, eg:

alternatives price/quality

market distribution changes

fashion and trends

legislative effects

Competitive Rivalry among the Industry

Particularly this force defines the importance of competition among the same players of the same Industry. High cut throat strain results in pressure on cost and margins and hence, on Productivity and profitability for all business or company in the industry.

Competition among businesses which exists already is prone to be high when:

• There are many more businesses of about same or parallel industry Scheme

• Same Strategies are being used by many businesses.

• There isn't any discrimination between businesses and their commodities and services; therefore, there is a high possibility of similar prices leading to high competition.

• The growth rate in the market is very low (development of a specific company is achievable only at the competitor's expenses),

• There are high barriers for exit (e.g. high-priced and extremely specialised tools).

Bargaining Powers of the suppliers

The word 'suppliers' comprises many sources of inputs that are required in order to supply services or commodities.

The practice of high bargaining power of the suppliers is when:

• A very few players of market supply rather than many different equally distribute it.

• There are no other substitute services or products available for the particular input.

• When customers are fragmented the suppliers bargaining power is low.

• It is expensive to switch from one supplier to another.

• In order to achieve higher price and margins there is a probability of the supplier to integrate forwards.

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This risk goes higher particularly when:

The Supplying industry has less Productivity and profitability then buying industry

The buying industry has access to very low barriers or small entry.

In this kind of situations, the buying industry more often faces a high pressure on margins from their suppliers. The relations with the powerful suppliers can potentially very much reduce strategic options of their organisation.

Bargaining power of the customers

The volume and margins can be intruded by the bargaining power of the command of the customers

The Customers bargaining power will be probable far above the ground only when:

• There is concentration of buyers only when they buy in large volumes

• Supplying industry compromises a large number of small operators.

• The supplying industry probably works with only high fixed costs

• Switching cost from one to another is very high for the customers.

• Government and legislation action.

Threats of substitutes

Threats from the substitute will come into existence if there are some other options for alternative products or goods with cheaper prices and better performance of the same system. These substitute products or goods will be probably a focus for a major part of the market volume and it can destroy the potential sales quantity of the current businesses. This kind of products also relates to consolation and complementary products.

The threat of substitute and the new entrants will be determined by the factors like.

• Customers branding and loyalty

• Customers close and effective relationship.

• To allow the customers to switch costs.

• The substitute's performance and relative price

• Current trends in the market.

Threat of New Entrants

The higher the competition amongst the competitors in their business, the easier it would be for the other players to enter into the market or industry. The new players in such situation could change many important aspects of the market and its environment (e.g. stock rates in the market, prises and customer's reliability) at given anytime. There is always an source of light for reaction and modification from the hand of current players in the market. There will be barriers to entry, which will reduce the threat of the new entrants in the market or industry.

They are in general

• Scale of Economics' (Requirement of the smallest size to achieve operations)

• The Initial investment and the fixed cost are very high

• Cost benefits of present businesses because of their much higher experience effects of operation with all assets depreciated.

• Brand reliability and loyalty of the customers

• Confined intellectual possessions like registrations, patents, copywriters', licenses etc

• Less efficiency of valuable resources, e.g. appropriate working staff

Influence of information systems on Porters five forces

Influence of Information systems on rivalry among the industry:

In any company Information System plays an important role to compete on the basis of both on either difference of cost or the difference in quality. The information technology always affects the importance of its performance or to allow companies to achieve competitive benefit by exploring the changes in the competitor's hands.

Since then we know that information systems can change an organisations cost in any impact on cost which was limited to the activities in which repetitive information processing played an important role. These boundaries' no longer exist. For example Nikon a camera company manufactured a material management system and assembly around an automated parts selection at a very cheap cost. Nikon's achievement comes from software that manages the selection and parts catalogue. In another scenario let's take a garment production, equipments like electronic cloth cutters, designing patterns and technology for delivering cloth to the final sewing machine have reduced the time by 40% and reduced the labour cost.

Using the information systems to many different business strategies is unbelievable. The information system makes it modification and customisation of products valuable, unique and possible to manufacture. Using information System for instant Digital Equipment's artificial intelligence system, Robots, which make use of the decision policy to increase the computer configurations, which is modified. This drastically reduces the time consumed to process the order and makes it more perfect, which made the Digital's image a better quality and superior.

Influence of Information systems on the bargaining powers of the suppliers:

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Companies can achieve benefit if they dominate enough to lock in suppliers to their system of processes or a buyer to their products. Having this bargaining power i.e. the power to dominate the suppliers and buyers is the important mean to this scenario. A company contains bargaining power over a supplier when the organisation has few competitors or the organisation is the main competitor himself in the market. Not just the company use its power to pressurise the suppliers to the cheaper rates, but then it also expects to use information systems which will be compatible on its own automated system. The suppliers should also use an information system which tells them when to deliver products to Wholesalers' so that all the retailers will never be overstocked or out of stocks.

Let's take another example in which organisations are very much dependent on a very powerful supplier is the computer industry. Computer companies are very much dependent on Intel, the world's largest producers of processors for computers. Intel's main competitor which is Advanced Micro Devices (AMD), must produce and distribute processors that are parallel and perform against Intel's standards. Even thou AMD has produced processors which can give hard time to Pentium although about 80% of the chips used in Computers use Intel probably only because Intel has the large capacity of manufacturing such a large number of processes to serve the market. Which shows that Computer manufacturers can buy processors only up to a particular limit from Intel's competitor, who is probably AMD even thou they will then go back to Intel to meet their large number of requirement? That's the particular reason why Intel is in a strong position, which is more active and trusted than any other processor company and they also have more power to bargain.

Influence of Information systems on the bargaining power of the customers:

More number of powerful customers will particularly ask for improved and quality service or a better quality of product at the same price or may be at a improved cost as well. Although the more the powerful the customers are the less amount of profit the company will make.

Though you cannot come to the conclusion or expect the annual profit of the company by considering on this particular aspect on its own, you will also have to think about the other forces in the Porter's Model. If your customer knows the difference of products and services with your other players in the market and the customer values shows that difference you will have and some defence through the process of negotiations , but if your customer compares and knows that you and your competitors have more or less similar products or services then the bargaining power is more.

The automobile parts or component or machinery suppliers whose buyers are big automobile companies like Vauxhall, Hyundai and Walks Wagon is a appropriate example of an competitive industry in which the bargaining power is high for the buyers and thus produces a powerful and a competitive threat. It is due to because the supplier of the automation parts and machineries' are less and the market is higher

For example Ford does its business with more than 1500 different auto mobile machinery suppliers in United Kingdom and they usually have fixed contracts with a number of diverse companies to supply the same part. Moreover to push the component prices down both Vauxhall and Hyundai have used the threat and they will start manufacturing the required automobile machinery themselves other than buying it from automobile component suppliers.

Also another problem is that the relative power of suppliers and buyers tends to change with response to changing market conditions. For example, because of changes now taking place in the pharmaceutical and medicine companies, major buyers of pharmaceuticals are gaining power over the pharmaceuticals suppliers and have been able to demand fewer prices. The running case discusses how Boots buying power has changed over the years as the company is growing larger.

Influence of Information systems on the threats of the substitutes:

An analysis of the threat of alternative products will recognise the probability that customers to your industry will change to purchasing a substitute product from outside your industry. The methodical analysis of porter's competitive forces in the industry surroundings using the Porter's framework is a powerful tool that aids the managers and leaders to think strategically and act upon it. It is very essential to know that even one single competitive force often affects the others hence all the forces has to be considered while performing the analysis of any industry. Without a doubt, Analysis in the industry leads the managers to think analytically concerning the way their strategic choices will both affect and be affected by the five forces of industry competition and change the conditions in industry.

Influence of Information systems on threats of new entrants in the market:

The basic idea of analysing competitive strategies, Opportunities and threats has been used by many people as a basis for considering potential impact of Information Systems. In the 1980's, McFarlan, Parsons, Cash and others used Porter's Competitive Five Forces model to supervise how information system had and could impact certain industries and affect any other industries in that particular area. For example in recent times Porter had applied this model to know the impact of the Internet technology on firms and industries. This clearly shows that the opportunities and threats that Information Systems can offer and pose will vary over time in an industry, considerably due to the role Information Systems play and partially due to the economic and competitive situation of the industry. Also product innovation can encourage new industry growth or in some case accelerate the decline of certain industries. The entry of Amazon Online Books has had a major impact in the market and the books industry. The overall books sale had gone up drastically. Due to Amazons online revolution the traditional books retailers had suffered a heavy loss into their business.