Michel Porter's Five Forces In The Industry

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Getting to know about five forces helps company to understand the industry’s structure and point out the position which is more profitable. Competition is defined narrowly by the managers. There are huge returns in those companies where forces are strong and companies are profitable if forces are kind. The forces which are stronger are considered for strategy formation and these also determine the profitability. The five forces are categorized by Michel Porter as follows: First we will talk about threat of new entrants, new entrants bring something unique or diversified into the industry to gain market share, this thing puts pressure on the existing companies to lower down prices and cut down costs. Threat of entry puts a full stop on industry’s…show more content…
The influence of rivalry is high if competitors are equal in size and power, barriers to exit are far above the ground, and growth of the industry is near to the ground. The price competition transfer profits from industry to customers that is why rivalry is destructive to profitability. Price competition occurs when the switching cost for buyer is low and product or service are almost same, marginal cost is low and fixed cost is high, capacity must be efficient, and product is perishable. Profitability can be less affected by the brand image or timely delivery as compare to price competition. Zero-sum competition is when all the competitors are focusing on same attributes or needs. Rivalry is positive sum (increases profitability) and also expands the industry when each competitor serve the need of different customer segment, with different price, product, service, features, or brand…show more content…
Every company must be aware of its industry’s average profit and how it changes time to time so that the strategies can be formulated. Five forces are also used to know about company’s strengths and weaknesses. Understanding industry structure helps mangers to do positioning of company, and exploiting shifts in the forces, and shaping the balance of forces to create a new industry. Positioning the company; for that strategy can be finding the position where the forces are not strong. We have an example of Paccar a heavy truck maker focuses on one customer group for stable long term profitability where forces are weaker and buyers are less price sensitive. Paccar was giving extra features like luxurious sleeping cabin, leather seats, and personal signature on trucks as demanded by the customer. Paccar is in customization so trucks are built to order not to stock. For that Paccar charge 10% premium. Paccar is in profit for last 68 years and earned return on equity above

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