Advantages Of Michael Porter's Five Forces Model

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As stated by Michael Porter, the elements of organisational structure such as industry structure, competitive strategy, value chains, business processes and information system can be comprehended by analyzing his five forces model. The five forces model is able to control and influence the profitability of the industry.

→ Bargaining power of customers
→ Threat of substitutions
→ Bargaining power of suppliers
→ Threat of new entrants
→ Rivalry among existing firms

(Kroenke and Hooper, 2013, p.61).

The four competitive strategies that have been initiated by Porter are:

→ Cost leadership
→ Differentiation
→ Low - cost
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Normally, only big companies feel confident enough to implement this strategy since they are able to acquire the desired products with cheap prices easily through economies of scale (bargaining power of suppliers). The products that have been cheaply bought are then will be sell again to buyers while adding minimal markup in order to maintain the lower prices (bargaining power of customers). These actions were undertaken to make sure that they offer the cheapest price of goods or services among the other companies (rivalry among the existing firms). This makes it more difficult and inconvenient for the competitors to compete with the company. This strategy also insists on a company to always reduce their costs consistently. Additionally, this strategy is not recommended for small businesses as it depends a lot on the economies of…show more content…
Threat of new entrants
The entrants to this industry are significant as there are no minimum legal barriers or knowledge barriers that could prohibit new market from entering the industry. However, since IKEA is a big company that uses the economies of scale by implementing the cost leadership strategy, it provides products at lower prices that may cause some small companies to not be able to compete due to their lack of power.

3. Threat of substitution
For IKEA, the target market is typically not changing their taste or preferences from the high-end classic furniture that has been provided by IKEA. IKEA has also been always offer unique and differentiated products for that suits the customers’ preferences. This causes the threat of substitution for IKEA to be very low. There is also not much other alternative furniture company that provides the quality that IKEA has.

4. Bargaining power of customers
There is moderate customers’ bargaining power in IKEA as the competition is averagely enough for the customers to switch from this company if they are not satisfied with the price that has been offered by IKEA. Therefore, IKEA focuses on low-cost focus to provide customers with same quality but lower price

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