Question

Identify and discuss the five components of Michael Porter’s Five Forces Analysis. How might these five components impact the competitiveness of an organization?

Answer 1

Five forces analysis by Michael Porter help in strategizing and analyzing a company’s business and its growth for the future. They are useful in knowing the attractiveness of an industry and the competitiveness of an organization. These are:

1. Bargaining power of supplier: This consists of how much power is the company’s supplier while negotiating with the firm. If a firm has so many suppliers and the product supplied is readily available, the supplier’s power becomes low. However, in case of a niche product, there are few suppliers are hence the supplier power is high. For example, logistics suppliers for an eCommerce firm are many, hence bargaining power of suppliers is low.

2. Bargaining power of buyer: This consists of how much power is the buyer in front of the company. If the product offered by the company is also readily available in the market with comparative pricing and quality, the buyer’s power increases. For example, the bargaining power of buyers in telecom industry is high.

3. Threat of substitutes: If there are substitutes readily available in the market than the threat of substitutes increases as the consumer can always shift to the other substitutes. For example, the camera industries are facing a doom due to high substitution by the mobile phone industry.

4. Threat of rivals: If there are many rivals for the firm which offer competitive pricing and quality for similar product, the threat of rivals increases. However, for a firm which sells a niche product or service, the threat stays low. For example, the eCommerce industry comprises a lot of small start-ups that compete for a fixed customer pool and offer comparative services.

5. Threat of new entrants: The industry specificity defines the threat of new entrants. If the model used in the industry is asset-heavy, legal compliances and failure stakes are high, then the threat of new entrants becomes high for the industry and entering this industry becomes difficult. For example, an asset-light model of business might require just a laptop, some years of industry exposure and a legal certificate to start with. In this case, the threat of new entrants becomes high as anyone can start a business in this domain.