Porter's Five Forces Of A Focal Firm

The focal firm performance is affected by external environment (industry environment and general external environment) in the competitive advantages. The industry environment has the direct effect on the focal firm in the five competitive forces to assess industry attractiveness and to earn above-average profits. The Porter’s Five Forces model focus on the screening and interpreting of threats in the industry environment for corporate level strategic choice, they have direct affect to the average profitability of firms because of the products price, the costs of production and the costs of entry in the industry. If there are high barriers of all threats in the industry, the focal firm will earn expect normal profits that earn its cost of capital.

It is depends on the existing firms and the “height” of barriers to entry that attributes of an industry’s structure. The threat of new entrants will affect by: Firstly, the economics of scale as “high” barriers to entry into the industry that can make the industry more attractive because of the existing firms can earn expect above normal profits. Secondly, the product differentiations that the existing firms have their own brand identification and customer loyalty that will lead to new entrants use more costs to start other industry and then reduce their potential return. Thirdly, cost advantages independent of scale mean that the existing firms have a whole range of cost advantages. There are proprietary technology, managerial know-how, favorable access to raw materials, and learning-curve cost advantages. They can take the cost advantages of the existing firms, but the increases cost will reduce the potential profit. Lastly, the government policy will enhance the cost of entry into the industry that means the government regulated monopoly to ensure the affordable product

Suppliers can reduce supplies quality and increase supplies price. There are the bargaining powers of suppliers lead to high levels of threat when: the supplier’s industry dominated by small number of firms (the firms are small choice for purchase, suppliers can more flexibility to charge high price and reduce quality for increase the supplier’s profit), the suppliers sell unique or highly differentiated products (suppliers can operate in almost whole industry by their unique characteristics of products), the suppliers are not threatened by substitutes, the suppliers threaten forward vertical integration, and the firms are not important customers for