Michael Porter’s 5 Help Online
Michael Porter’s 5 is a tool used for analyzing the level of competition and strategy of business development. It was developed in 1979 by Michael Porter from Harvard School of Business. The five forces mostly relate to the microenvironment of a company. Porter states that these forces influence the ability of a company to serve its customers. A change in any of the five forces requires a business enterprise to reassess the marketplace and come up with strategy to survive. Are you looking for Michael Porter’s 5 Online Help? Worry no more! We got you covered!
Michael porter’s 5 consists of five forces; three forces from horizontal competition and two forces from vertical competition. Horizontal competition refers to the rivalry of gaining customer’s preference among enterprises which are at the same level. These horizontal forces include threat of alternative products or services, threat of new entrants and threat of established rivals. Vertical competition occurs along a channel whereby each member in the channel obtains benefit from the final product. The vertical forces include bargaining power of the customers and bargaining power of the suppliers.
Michael Porters 5 Help Online: Threat of New Entrants
Profitable markets attract new firms. It translates to entry of new entrants, who reduce the profitability in the industry. There are some barriers that inhibit new entrants from entry into the market. For example, in the construction industry, more capital will be required to purchase equipment and raw materials. Also, trained and skilled laborers will be required to set up the industry. These workers are expensive to hire and maintain. It is difficult for many entrants to enter the construction industry due to these barriers.
The industry attractiveness increases when there are barriers of entry. For example, in an import and export company, the main barrier is government policy and licensing. An already existing company will view new entrants as less challenging in comparison with existing competitor. Barriers prevents new entry to the market thereby there is an increase in profitability in the industry.
Another obstacle is lack of availability of raw materials. For example, in steel company, raw materials required include iron core, coal, limestone and recycled steel which are hard to obtain. It is difficult for new entrants to enter the market due to unavailability of the raw materials. Therefore, there is low threat into the entry of the market.
Other obstacles include economies of scale, brand identity, cost of switching, distribution channels, expected retaliation, taxations and trade policies, product differentiation, absolute cost, customer loyalty, and industry profitability.
The company should adapt to changes such as technological changes, customer needs among others. This helps in survival in the market as the new entrants get into the market especially in industries where entry is easy. For example, cosmetics company whereby its easy for new entrants to enter, these companies should adapt to the changes in the market so as to survive.
Michael Porters 5 Help Online: Threat of substitute products or services
There exist products which are outside the realm of the common product. This increases the tendency of customers to purchase alternative products. For example, tap water and freshly made juice can be considered as a substitute for Coke while Pepsi is a competitor similar product. Increasing marketing on tap water and freshly made juice will reduce the market share for Coke and Pepsi. Pepsi increasing its marketing would increase the market share on consumption of soft drinks. Pepsi would have a higher market share as compared to Coke company.
What should a company do when the threat of substitute is too high? For example, when spare parts of automobile are considered. Customers will prefer the use of the substitutes over the original due to low prices and equivalency with value on the original. The automobile should adapt to the changes in customers preference by doing product diversification. The substitutes affect the prices of the company, its demand pattern and profitability.
Potential factors which can lead to threat of substitution include buyer’s propensity to substitute, relative price performance of substitute, buyer switching costs, ease of substitution, substandard product, perceived level of product differentiation, quality depreciation and number of substitute products available in the market.
Michael Porters 5 Help Online: Bargaining power of the customers
The bargaining power of the customer is also referred to as the market of outputs. It is the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. For example, there are numerous grocery stores and the customer has the ability to choose which grocery store to purchase goods. In this case, the buyer has high bargaining power due to the presence of numerous sellers of the same products. Even when one seller does not sell to the buyer, the buyer has other options. Some of the sellers tend to reduce prices so as to attract customers to their enterprise.
Other means of reducing the bargaining power of the buyer include establishment of loyalty program. The program binds the customer to be loyal to one brand or company. Therefore, they cannot switch to other companies for the same products or they lose the benefits of the loyalty program such as reward points. These reward points after accumulation can purchase some products or win some products from that company.
Potential factors of bargaining power of the customer include buyer concentration to firm concentrate ratio, degree of dependency upon existing channels of distributions, bargaining leverage especially in industries with high fixed costs, buyer switching costs relative to firm switching cost, buyer information availability, force down prices, availability of existing substitute products, buyer price sensitivity, differential advantage of industry products, and total amount of trading.
Michael Porters 5 Help Online: Bargaining power of the suppliers
The bargaining power of the suppliers is also referred to as the market of inputs. Suppliers can supply raw materials, components, labor, and expertise to an enterprise as source of power. The bargaining power of the supplier can be determined by the available number of suppliers in the market. Few suppliers result to high bargaining power of the suppliers. This is because the enterprises will have very few suppliers to purchase raw materials. Suppliers may refuse to work with an enterprise or even chare excessively high prices for the survives or raw materials issued. Multiple suppliers result to low bargaining power of the suppliers. This is because the firm has numerous options from where they can choose.
Industries with low bargaining power are highly profitable. For example, restaurants, there is little bargaining power of the supplier. There are more than 100 vegetable vendors who can distribute vegetables in restaurants if one vendor des not supply to the restaurant.
Firms can strategize on ways of reducing the bargaining power of the suppliers. They can set up depots where vendors with the required raw materials drop off their commodities. Eventually, the firm collects the raw materials form all depots. This will increase the number of suppliers of the raw materials since depots are set at different locations. Therefore, reducing the bargaining power of the suppliers.
Determinants of the bargaining power of the supplier include: supplier switching costs relative to the firm switching costs, degree of differentiation of inputs, presence of substitute inputs, impact of inputs on costs or differentiation, strength of distribution channel, supplier concentration to firm concentration ratio, and supplier competition
Michael Porters 5 Help Online: Intensity of competition rivalry
It refers to intensity of rivalry between existing competitors in the market. High competition results to low profitability. This is due to competition in the market share and winning over customers. High competition creates a barrier for entry of new entrants in the market. Thereby, maintain competition between the existing firms.
High competition is also healthy since it results to product differentiation and uniqueness. The company comes up with methods of retaining the customers and attracting new ones. This is done through product differentiation, diversification, uniqueness and offering quality products or services.
Low competition attracts entry of new entrants in the market. This increases the number of firms within that industry leading to reduction in profitability. Also, since there will exist numerous firms within the industry, the competition will be high on market share.
Low competition, also leads to poor quality of products and services provided by existing firms. When there is no firm to compete with the existing, the firms became reluctant in doing research and development of the products to improve them. This is because they are the only firms where the customers can purchase the products or services and they have little competition in the market share.
There has been a continuation of the Michal 5 Porters. Adam Gardenburger and Barry Nalebuff of Yale School of Management in the mid-1990s. They use game theory to add the 6th force which is the concept of complements. The concepts include the effect of the government and public in general as a force of the market. This concept by rebutted by Porters who stated that the government, public and innovation where factors that affect the five forces.
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