Question

Define Porter's competitive forces model and explain how it works. Include a description of the five competitive forces in this discussion, giving examples.

Answer 1

Porters five force model is a powerful tool to assess the business environment in an industry and the competitive position of the company to choose the right strategic approach for growth and competitive advantage.

The five forces can be understood by applying them in a competitive environment of passenger car industry..

Competitive rivalry - High.The industry has a huge competitive rivalry in all segments of passenger cars. The companies are hard pressed to stay in fray by continuously upgrading the products under pressure from customers, regulators, environment agencies to make their vehicles safer, cleaner, cost effective and in line with the latest technological innovations to satisfy the customers.

Bargaining power of customers- High. The customer is king in passenger car industry. The choices are plenty for a budget range and the products are almost at par to such an extent that loyalties can changes over few hundred dollars or couple of new features.

Bargaining power of suppliers.- High Most of the players in industry depend on components made by a huge number of suppliers, predominantly in developing countries like China and other Asian nations. Any disruption caused in supply can affect the business drastically.

Threat of substitute products - Medium- The only substitute profit for a car buyer is another vehicle of a different type, i.e. an electric powered vehicle or a smart car. The companies need to develop competencies in these new items to sustain competitive position.

Threat to entry of new players- Low - Since it is an industry that involves a huge fixed cost in terms of machinery and equipment, land and other resources, as well as deep technical expertise to gain and retain competitive position, only those companies which have huge resources and experience / expertise in the industry can enter the competition.

The company can evaluate all these factors to find out its position in the industry and develop strategies to be competitive.