Businesses And Potential

He identified five competitive forces of an industry which influenced what strategies were available to firms within the industry and which determined the potential for return on capital.
Porters five forces are:
Threat of New Entrants. If a new player enters the industry then there is the potential for this new player to take custom from the existing firms. Porter identifies six key obstacles for new entrants:
Economies of scale – A new entrant must either heavily invest in order to produce goods or services in such quantise as to take advantage of economies of scale, or they must start small and so make lower margins because they lack the economies of scale.
Differentiation of Product – A new entrant must make their product different to the existing products – and so entice someone to buy it.
Need for capital – when starting a new business some capital will be needed for such things as stock and premises.
Conversion Costs – A new entrant will need to overcome the reluctance of a potential buyer to switch from their existing supplier, based on costs they will incur in making the switch.
Lack of Distribution Channels – Existing firms will already know where to find their customers and how to entice them. New entrants will have to break in to the markets.
Other Costs – for example, technology raw materials, location and others.
The strength of this force is dependent on how high these obstacles are. For example in the “selling junk on e-bay” market, this is a very strong force as the Threat is high, in that the obstacles identified above are relatively low, so a new entrant will not find them onerous. However in the “drilling for oil” market this force is weak, as drilling for oil has very high costs in all of the above areas.
Rivalry among existing competitors. This is especially strong when one or more competitors are struggling or see a way to gain competitive advantage. Some of the factors which may mean that this is a strong force are: High exit barriers, little product differentiation and high fixed costs.
Pressure from substitute products. Substitute are other products that can perform the same function. This pressure will be highest where there is little product differentiation, as consumers will not be put off switching from one supplier to another.
Bargaining power of buyers. This force will be strong if the buyers have high power over the industry. Examples of situations in which buyers might have this power are: When buyers buy large volumes, when the products are undifferentiated or when buyers profit margins are small.
Bargaining power of suppliers. This is the complement of the force above and examples of this situation are: When t he supplying industry is more concentrated than the buying industry, the products supplied are crucial to the buying industry and when the suppliers are easily able to become their own consumers through forward integration.
Taken together these five forces allow a company to identify its own vulnerabilities, strengths and weaknesses and their causes in relation to others in the industry.
This model is one of the tools that marketing and strategy professionals regularly use. Indeed when performing a marketing or strategy analysis one of the analyses usually required is “Porter’s five forces”. However we must be careful, this model is but one tool in the box. We must also consider that the worth of this model depends on how we use it. For example when considering the “fruit and vegetable” industry, would organic produce be a separate industry? Or how about fresh vs frozen foods? Our choices here could determine the worth of our analyses. We should also consider the constant evolution of products, industries and markets. Markets and industries are experiencing increasing globalisation and methods of business are changing right now due to increasing e-commerce. These changes have already affected this model, and the future promises even more changes.
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Kate Gardens is a custom essay writing expert writer and UK customers support consultant at Customessays.co.uk. Get more details for dissertation and find more tips for dissertation.

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