Act- A01254861-Porter’s Five Forces

Porter’s Five Forces

Alejandra Hernández| A01254861

Forces That Shape Competition

The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force.

THREAT OF ENTRY

THE POWER OF SUPPLIERS

THE POWER OF BUYERS

RIVALRY AMONG EXISTING COMPETITORS

THE THREAT OF SUBSTITUTES

Bibliography

Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. Powerful suppliers, including suppliers of labor,can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices.

A substitute perform the same or a similar function as an industry’s product by a different means. Videoconferencing is a substitute for travel.Plastic is a substitute for aluminum. E-mail is a substitute for express mail. Sometimes, the threat of substitution is downstream or indirect, when a substitute replaces a buyer industry’s product. When the threat of substitutes is high, industry profi tability suffers. Substitute products or services limit an industry’s profi t potential by placing a ceiling on prices. If an industry does not distance itself from substitutes through product performance, marketing, or other means, it will suffer in terms of profi tability – and often growth potential.

Powerful customers – the flip side of powerful suppliers – can capture more value by forcing down prices, demanding better quality or more service(thereby driving up costs), and generally playing industry participants off against one another, all at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions.

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Rivalry among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements. High rivalrylimits the profi tability of an industry. The degree to which rivalry drives down an industry’s profi t potential depends, fi rst, on the intensity with which companies compete and, second, on the basis on which they compete. The intensity of rivalry is greatest if: Competitors are numerous or are roughly equal in size and power. In such situations, rivals fi nd it hard to avoid poaching business. Without an industry leader, practices desirable for the industry as a whole go unenforced. Industry growth is slow. Slow growth precipitates fi ghts for market share

Puts a cap on the profit potential of an industry. When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors. The threat of entry in an industry depends on the height of entry barriers and the reaction entrants can expect from incumbents. If entry barriers are low and newcomers expect little retaliation from the entrenched competitors, the threat of entry is high and industry profitability is moderated. Barriers to entry. Entry barriers are advantages that incumbents have relative to new entrants.