Question

Briefly describe Michael Porter's Five-Forces Model of industry competition. Why is it important to pay attention to these five forces of competition?

Answer 1

Micharl Porter's Five forces model is explained below :

1.) Competitive Rivalry - This force helps in identfing the number of competitors in the market as well as the quality of the product as compared to the product produced in your own manufacturing unit.where there are large number of rivals the company may decrease their products price and if there very few rivals in the market then your company's product can attract more revenues and have better profits.

2.) Supplier power - This force is a kind of charging force towards your business because this force helps you to determine the suppliers strength of increase the price of materials supplied by the suppliers and if you have more suppliers then it will be easy to change the supplier, who offer materials at less prices and if you have few suppliers then you have no other options and have to pay the demanded price by the supplier.

3.) Buyer power - This is the force which helps in identifying the business capability through the numbers of buyers you have and if there are less buyer then they have more power and if you possess more costomers strength then you have the more power to negotiate.

4.) Threat of new entry - This force is very much common to see in the market and have the strength to down the business profits due to the entrance of new players in the market this is the external threat on your company and you have see your position and check whether the other entrant can grow easily in your business sector. If you are working in the sector where the investment is less and then the competitor can quickly enter and if heavy investment is required then it is difficult for any entrant to enter and establish business.

5.) Threat of substitution - This threat refers to the similar way of doing business by the other entrant in the market. For instance if a company is developing programme which enables to function a particular process easily and other company in the market is doing it not with software but manually or they have outsourced the process to other business. If the substitution is less expensive and more easier then it may affect your product selling.

The above mentioned forces are important because it help determining the internal and external threat to the organization and helps in understanding the competition which can affect the business profits and also helpful in making adjustments to the policies and strategies which matches with the competitive environment and helps to improve financial position of the company.