Porter - 5 Forces

Bargaining power of suppliers - more powerful if

• there are only a few suppliers - difficult to switch to alternative supplier
• there are no substitutes
• suppliers prices form a large part of total costs of org. - price increase hits added value
• supplier can undertake value added process of org. e.g. forward integration such as direct holiday selling, direct insurance

Bargaining power of buyers, more powerful if

• Buyer are concentrated and there are few of them - org has little option but to negotiate with buyers e.g. national Govt contracts in health, defence & education.
• Undifferentiated product - i.e. much the same as everybody else's, buyer can easily switch to another supplier.
• Backward integration possible - as with supplier, buyer bargaining power increased if buyer can take over role of supplier
• Supplier selling price unimportant to total costs of buyer.

Threat of potential new entrants
New entrants come into market when profit margins are attractive and barriers to entry are low. Porter identifies 7 barriers to entry:

• Economies of scale - large production capacity needed to achieve low cost levels
• Product differentiation - branding, customer knowledge, service levels force new entrants to spend extra funds or simply take longer to become established in market e.g Ikea
• Capital requirements - major investments needed in technology, plant, distribution, service outlets
• Switching costs - satisfied buyer is difficult to switch to new supplier e.g. Msoft windows to Apple.
• Access to distribution channels - can be limited e.g. petrol companies own their retail petrol sites.
• Cost disadvantages independent of scale - established company, with loyal customers, confidence of major buyers, specialist expertise e.g. Malaysian & Korean car companies competing in Europe against Ford & VW.
• Govt Policy - to protect certain companies or sectors e.g. telecoms, health authorities & utilities.

Threat of Substitutes
From a strategy viewpoint key issues are:

• possible threat of obsolescence
• ability of customers to switch to substitute
• building in switching costs
• likely reduction in profits if prices reduce or remain the same

Extent of competitive rivalry
In highly competitive markets companies will:

• monitor price changes and match rivals immediately
• examine rival products in great detail and attempt to better them
• watch competitor investments in competing plant and regularly have drives to reduce their own cost levels
• attempt to poach employees
  

Criticisms of 5 forces model:

• Assumes orgn. own interests come first. Not so in charities and govt bodies.
• Assumes buyers have equal importance to other environmental factors. Many writers believe customers are the most important element of strategy.
• Presumes the environment poses a threat to an orgn. whereas many companies engage in close co-operation with suppliers.
• Ignores human resources aspects of strategy e.g. country cultures, management skills.

Example:

Airline Market

Smallpox vaccine market

The Internet and its effect on Industry Structure