Michael Porter’s Five Forces Model

Competition analysis is an important area while understanding the insights of industry analysis. The firm should study the nature of competition by way of strategic formulation. There are certain barriers which firms face or encounter while operating in the industry and to ascertain a greater amount of performance and survival Michael Porter has provided management with the five forces that help to fight and counter attack competition.

In the initial stages, firms used to rely on a single force of competition which was a clear indication that the firms suffered from Myopia.

Earlier competitive force was indicated to be only with the existing players in the market where in the idea of customers, suppliers, new entrants and substitute products are also the key components that influence competition in the industry. This view limited many firms into generating competitive strategies as no focus on competition had been considered.

Analyzing competition thus has been a key component in the industry structure and industry attractiveness and business strength.

Get quality help now

writer-marian

Verified writer

Proficient in: Business

4.8 (309)

“ Writer-marian did a very good job with my paper, she got straight to the point, she made it clear and organized ”

+84 relevant experts are online

Hire writer

Considering Retail as an industry, with the number of players fighting against each other there is an utmost necessity to understand the various forces that give shape to competitive strategies which is an ideal situation in the formation of a successful organization. There has been a number of malls that have come into function on the floor in the market place.

With the changes that have happened in the culture of retail the need to understand the influencing factors that give direction to the organizational development has been surpassed its need and hence it is a direct implication for the firm in being a part of the competitive analysis study.

The five competitive forces which judge the attack on competition are : • Threat of new entrants • Threat of substitute products • Threat of suppliers growing bargaining power • Threat of buyers growing bargaining power • Threat of intense segment rivalry A. Threat of new entrants: The new firms entering the industry create a huge advantage for the already existing firms as a feel of competitive spirit with themselves. This threat exists because the new firms may get into the market and acquire a huge chunk of the market share and may also have the advantage of new resources which could be a positive strategy for the new entrants. For those companies which are already present, it could be a threat with respect to their performance in terms of sales revenue and also returns which are been distributed amongst the entire potential competitors in the industry.

There are several factors which affect the firm’s entry as a fact of barrier, which are: ?Economies of scale: Entry of a new retail outlet is difficult to make a huge impact in the market because of the number of players who have already achieved economies of scale. Those companies which manufacture multiple products have a advantage of overcoming the economies of scale ?Product Differentiation: Normally customers feel that the old companies are have a strong brand and have established a loyalty in the minds of the consumers with respect to the services offered, products available, showing uniqueness and differentiation etc.

New entrants should try to make it a point to showcase their focus strategy to create an impact in the market. For example: Reliance Fresh has been the late entry into the retail industry and has shown difference in the promotion of mango mela that has been happening presently at the various stores and also has been able to create a niche in their pricing strategy. The costs have been high as they are the new entrants and have to generate funds for the advertising and promotional campaign that needs to be catered to. Capital Requirements: Huge amount of salaries, capital requirements, allocation of resources, provision of facilities and benefits to be availed to employees along with customers and other stakeholders asks for a higher amount of risks for the new entrants. Retail outlets have to incur costs on the investment of the visual merchandising, capital investment, infrastructure requirements, the promotional campaign etc. ?Switching cost: They are the costs which are borne at one time when the customer shifts from an old supplier to a new one.

These costs usually in retail industry include the psychological costs involved in building relationships with their loyal retail outlet or retraining of employees that will be involved etc. ?Access to Distribution channels: During the entry of new entrants, the difficulties which they may face are with reference to the already existing channel members and channel alternatives which have been used by the retailers. The already developed effective channels may not be available to the new firms who enter into the industry.

Thus reach and access to a particular retail outlet could be a problem for the customers which may affect the sale terribly. This is a sure loss for the retail outlets which have to display their products in the shelf space provided as they may not be able to do justice to their displays. ?Government Policy: Licensing and the requirements in availing permit are the main issues which the new entrants have to experience. These are the difficult cases where in the new entrants may have to face with reference to the governmental policies that have been instilled.

If the government gives clearance without difficulties it becomes easier for the new firms to enter into the market. Even if the new firm considers that they will be able to overcome the difficulties and the challenges that will be faced by them, still these entry barriers are of great concern to the new firm as well as the existing players in the industry with reference to the competitive forces that exist. B. Bargaining power of suppliers:

In this case, the suppliers have to be very much concerned about the way the market trends have been changing as a result of which the suppliers are considered to be at an advantage for the simple reason that they have the charge to bargain. The bargaining power of suppliers gives an implication that the market is a sellers market and hence there are few sellers on whom the customers have to rely on. The suppliers can showcase their prestige by increasing the prices, or by reducing the quantity or the quality of the goods and the services so that they have a better advantage due to the less number of sellers which exist.

In the retail industry, the retail outlets are in more number with the boom of the retail industry hence the suppliers also will be in higher numbers to meet up to the growing demand and the supply. This problem of increasing the prices or changing the quality or quantity may not arise in this case to a major extent. Suppliers are powerful in certain cases which have been indicated below: ?The suppliers have been dominated on the grounds when certain large companies have been contributed in a huge chunk to these suppliers. ?The products which the suppliers sell for are not available as substitute products for the customers. The supplier group does not rely and demand on the buyer groups as they are not the very important group that the suppliers focus on. ?Higher switching costs have been incurred due to the fact that customers will switch to the suppliers who have shown more effectiveness and efficiency with regards to their performance and strategic achievement. C. Bargaining power of buyers: Bargaining power of buyers is normally termed as the buyers market where in the suppliers are in huge numbers and buyers can switch from one supplier to another to avail the benefit of quality, quantity, variety, and quotation analysis or delivery schedule.

The buyers in this case have higher tendency to bargain as they have the advantage of choosing from a wide range of available suppliers. They will choose the products or services based on the rate or the prices the suppliers offer them at. They will select those sellers who will choose those suppliers who will sell at lower price. Customers have to select on the basis of who will give them the best services and also bargain based on higher quality at competitive prices to encourage fair competition between the players in the industry.

Buyers have shown their competency on the following grounds in relation to competition: ?Suppliers depend on buyers in a big way as the buyer group is the source of income for them and hence buyer groups are important entities to the seller groups. ?Buyers will shift to the suppliers even if they get a little benefit from a different supplier as in today’s scenario the concept of value for money has been adopted and been strategizing in major instances at the various levels of management. The products of the suppliers are undifferentiated and standardized as a result of which the buyers could bargain and demand for their advantages of price, quality or demand or services offered. D. Threat of substitute products: This is a very challenging component in which case the suppliers have to provide substitute products to satisfy the different needs of the consumers so that they have less chances of shifting from one place to another supplier. Substitutes available in the products which serve similar needs and wants are posing more challenges for the firms which do not keep and stock substitute products or services.

During such cases, the prices that are charged by the suppliers are maintained at a higher level depending on the number of suppliers having this advantage and the benefit. In the retail sector this is very common as there are huge number of products which have substitutes in themselves all which have been at competitive prices. Hence in majority of the instances such firms can be different in the services that are allocated to the retail outlets. The threat of substitute products is highest in the following states: The costs involved in switching from one seller to another are insignificant ?The prices have been minimized in respect to the substitute products that are available. ?The quality and performance is better off as compared to the products available at industries. The firms can show that the substitute products are at a higher leverage based on the prices, product quality, services, and product location advantage along with the benefit of features which can be highlighted on.

Differentiating the products by using the above strategies could be of advantageous and relevant to the customers who depend on the substitutes in most cases. E. Intensity of rivalry among competitors: The intensity of rivalry among the competitors will depend on the extent to which the competitors fight against each other. This rivalry also brings in the sense of competitive spirit among the firms in the market amongst the players in the same industry.

The competition can be based on the factors of quality, service, price, innovation and creativity which can instill the implication of achieving strategic competitiveness and attain higher returns and benefits for the firms. If these factors change of one company then correspondingly it could affect the functioning of the other competitors in the industry. Hence one firm’s change in strategies and tactics will result in changes happening to the whole economic buying and selling structure which will also affect the demand and supply pattern.

Competitive actions and reactions are a major constraint that will affect the functioning of the firms in the industry. Based on the number of retail formats which are existing in the present scenario and with the kind of mall culture that has been flowing today, there are major rivalries and challenges and difficulties faced by the retailers. If the industry already contains numerous competitors which are very forceful and powerful then the industry is not considered to be attractive.

In such cases the segment turns to be unattractive and hence decline in the stability, if exit barriers are high on , if the fixed costs increase or if the competitors have chances of being for a long time in the market etc are all termed to be an present in an unattractive industry. Conclusion: The five forces model as given by Michael Porter in respect to the competitive implications has guided the retail sector in a tremendous manner. With the fact that the industry may be growing or slowing off, or if there are numerous or many balanced competitors which exist.

With the boom in the retail sector and the advent of the number of players that have been mushrooming in the industry, it has been a real challenge for the players to change their strategic decisions accordingly. There has been cases where in the firms have entered the retail sector market but have not been able to create an impact or survive and hence they had to diminish and show a downward trend in the process. They have tried a number of methods and strategies to counter attack competition but because of the tough cut throat competition shown by the various players it has been a difficult task for the players there on.

But because of the innovativeness and creativeness and because of their strategic implementation of processes they have been able to display their impact by surviving and being successful in the industry. Thus the five forces model provided by Michael Porter determine the strengths of the firm and help in the management of the businesses profits there by helping the organization to analyze the marketing environment which has been a necessary requirement while carrying out environmental scanning and industry analysis.

Threat of new entrants, threat of substitute products, bargaining power of suppliers, bargaining power of buyers and rivalry among the existing players are the key factors which have to be formalized by every firm in the industry in order to scrutinize and analyze the developments and accomplishment of the assigned tasks. Thus the key result areas for the players in the industry are the forces which determine the percentage of success and the percentage of failure for individual organizations.