Question

Please write (type) about: why is Porter's 5 Forces Model useful for firms? with example

Answer 1

Michael Porter’s five forces of the model are extremely useful for firms and we need to understand the forces in a better manner.

5 forces of the model are;

1. Bargaining Power of Buyer
2. Bargaining Power of Supplier
3. Threat of Substitutes
4. The threat of New Entry
5. Industry Rivalry

1) Bargaining Power of Buyer is necessary for the firm because it puts the firm under immense pressure from changes in the quality as well as in the price of the commodities. If the client base is small and the quality of the product changes the clientele can shift its mind towards the competitors. The best example in this could be Nike & Adidas, any changes in the quality or the price allow a shift in buying of goods from the consumers.

2) Bargaining power of the supplier is equally important because if the product is unique, qualitative and cost effective then every supplier might provide it. Depending on all aspect if the supplier strength is relatively smaller it holds a higher degree of power. An example could be parts produced by manufacturing company suppliers, now in this case if the suppliers are lower it could allow the bargaining chip in the hands of the suppliers.

3) Rivalry: In this case, if the areas of operations are stringent then new entrants would have problems in exploring the market. An example could be Under Armour who is facing immense competition from the stalwarts like ‘Nike’ & ‘Adidas’.

4) Threat of new players is a big cause of concern as big companies in global arena requires big initial investment for advertisements, branding to promote their products. Landing cost becomes an issue as most new players cannot afford that much money. Area of soft drinks is one where we can see products of Coke and Pepsi run the shots but any new player making the entry will require matching up the advertisement cost in the range of Coke and Pepsi to survive in the market.

5) Threat of Substitutes is a pressure on existing companies as new players are rising up the ladder, maintenance of costs with quality is essential otherwise new players will enter the field with newer concepts and with a limited budget for consumers.