The Competitive Environment: Michael E. Porter's Five Forces Model

THE COMPETITIVE ENVIRONMENT -

In addition to the general environment, managers must consider the competitive environment (also sometimes referred to as the task or industry environment). The nature of competition in an industry as well as the profitability of a particular firm are more directly influenced by developments in the competitive environment. The competitive environment consists of many factors that are predominantly relevant to a firm 's strategy. These include existing or potential competitors, customers, and suppliers.

Potential competitors may include a supplier considering forward integration, such as an automobile manufacturer acquiring a rental car company, or a firm in an entirely new industry introducing a similar product

Then, we address the concept of strategic groups, which demonstrates that even within an industry, it is often useful to group firms on the basis of similarities in their strategies. Firms within a strategic group tend to react similarly to external events, and competition tends to be more intense among firms within a strategic group than between strategic groups.

Porter 's Five-Forces Model of Industry Competition The "five forces" model developed by Michael E. Porter has been the most commonly used analytical tool for examining the competitive environment. It describes the competitive environment in terms of five basic competitive forces:

1. The threat of new

The of a product typically decreases as the absolute volume produced within a period increases. Larger facilities, automation, fixed overhead costs, and advertising expenses can be some of the typical sources of economies of scale for a traditional manufacturer. For example, research and development costs, commercialization expenses, and legal and regulatory compliance give significant rise to economies of scale in the pharmaceutical industry. The presence of such economies of scale in an industry deters entry by forcing the firm contemplating entry to come in on a large scale and risk strong reaction from existing firms or come in on a small scale and accept a cost disadvantage.

Product Differentiation : When existing competitors have strong brand identification and customer loyalty , differentiation creates a barrier to entry by forcing a brand requires spend heavily to overcome existing customer loyalties. Building enormous investment, takes time, and is of course fraught with