A Summary Of Porter's Five Forces

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

These barriers can be categorized as supply-side economies of scale, demand-side benefits of scale, capital requirements, incumbency advantages independent of size, unequal access to distribution channels, restrictive govt. policies. New entrants are fearful of expected retaliation from the existing companies that how these will react to its entry, in this way new entrants got to know either enter or stay out of industry.
The second force that shape the strategy is the bargaining power with supplier, the supplier who is powerful charge high price by giving low quality product or service and in this way creates value for himself. Bargaining power is high, if the industry is weak to which it gives supplies, if the supplier is not depending on revenue from industry, switching cost of supplier is high, supplier having differentiated, customized and diversified products, no other substitute for the product the supplier is

If buyers are authoritative and substitutes are striking there is no security of profits with high growth. Focusing the growth barely is one of the major causes of bad strategy decision.
Innovation and technology; industry can’t become appealing or unappealing with only this factor. Industries with little technology but having some other factors like high entry of buyers are much profitable than high growth industries.
Government; we cannot say the control of government is good or bad for profitability. Analysis of government polices is the best way to see the government’s control on competition.
Complementary product and services; complementary arouses when two joint products gives a huge benefit as compare to separation. Complementary products and services are great in high tech industry. Strategists must find out the pros and cons of complements on the five forces. Barriers to entry can be lowered down or raised up in existence of complements; it affects the threat of substitute, it can results in positive rivalry that is increased switching cost and negative rivalry that is neutralizing differentiation.

Changes in Industry