You are on page 1of 67

SEMINAR REPORT ON CONTEMPORARY MANAGEMENT ISSUES

TOPIC- PORTER FIVE FORCES Submitted to:

Rajasthan Technical University Kota in lieu of partial fulfillment of requirement of Master of Business Administration (MBA) By Rajesh Vaishnav MBA ll SEM (2010-12) From

BIYANI INSTITUTE OF SCIENCE & MANAGEMENT (BISMA) Jaipur, (Rajasthan)

ACKNOWLEDGEMENT

I express my sincere thanks to my project guide, Dr. ANUSHEEL K. SHARMA ,FACULTY

of BISMA for guiding me right from the inception till the successful competition of the
project. I sincerely acknowledge him for extending their valuable guidance support for literature critical reviews of project in all stages of this project. I am also thankful to BISMA staff for their cooperation in completing my project. I am also thankful to My Parents for their support in completion of my project. throughout my project & all the moral support he had provided to me

RAJESH VAISHNAV

MBA II Sem

DECLARATION BY CANDIDATE

I hereby declare that this report is my original work and I have not copied it from anywhere or earlier such report prepared by seniors. I further declare that I have not submitted this report anywhere else except to R.T.U. Kota in partial fulfillment of my MBA Course.

Date:

RAJESH VAISHNAV
(MBA-II SEM)

DECLARATION BY GUIDE

This is to certify that RAJESH VAISHNAV , the student of MBA of BIYANI INSTITUTE OF SCEIENCE & MANAGEMENT has completed the project study titled PORTER FIVE FORCES. Under my guidance .It is her own work to the best of my knowledge. I wish her all future ventures.

Dr. ANUSHEEL K. SHARMA Ass. Prof. BISMA

Certificate

This is to certify that the report entitled PORTER FIVE FORCES. This is being submitted here for the award of degree of MBA, of Rajasthan Technical University, Kota is the result of research work completed by Rajesh Vaishnav. Under the guidance & to the best of my knowledge and belief, the work embodied in this project report has not form earlier the basis for the award of any degree or similar title of this another examining body.

Dr. Anusheel K. Sharma Ass. Prof. BISMA

TABLE OF CONTENTS
S.NO. TITLE Introduction Porters Five Force Porter Five Forces Analysis Strategy Understanding the Tool Use of the Information Form Five Forces Analysis PAGE NO.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Application of Five Forces in International Markets Business Decision Framework SWOT Analysis of Five Forces Limitation BIBLIOGRAPHY

1. INTRODUCTION

Introduction
The model of the Five Competitive Forces was developed by Michael E. Porter in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes. Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.

Michael Porter

Born

May 23, 1947 (age 63)


7

Ann Arbor, Michigan

Michael Eugene Porter (born May 23, 1947) is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porters work is recognized in many governments, corporations and academic circles globally. He chairs Harvard Business School's program dedicated for newly appointed CEOs of very large corporations.

2. PORTERS 5 FORCES

Diagram of Porter's 5 Forces


SUPPLIER POWER
Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry

THREAT OF NEW ENTRANTS


Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products

THREAT OF SUBSTITUTES
-Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes

BUYER POWER
Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives

DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes

10

I. Rivalry
In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences. Firms strive to secure a competitive advantage over their rivals. The intensity of rivalry varies within each industry and these differences can be important in the development of strategy.

Industries that are concentrated, versus fragmented, often display the highest level of rivalry. Many, including The US Bureau of Census, recognize industry concentration and measure it by the concentration ratio (CR). The Census Bureau reports the CR by Standard Industrial Classification (SIC) Code and it indicates the percent of market share held by the four largest firms. A high concentration ratio indicates that a majority of market share is controlled by the largest firms. If a few firms hold a large market share, the competitive landscape is le competitive as it nears that of a monopoly. A low CR indicates that the industry has many rivals, none with significant market share. These fragmented markets are said to be competitive.

The intensity of rivalry is influenced by the following industry characteristics: A larger number of firms increase rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market

1. share, leading to a struggle for market leadership.

11

2. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market. 3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. 4. High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies. 5. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. 6. A low level of product differentiation is associated with higher levels of rivalry. rand identification, on the other hand, tends to constrain rivalry. 7. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry. 8. A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense 9. Industry Shakeout. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply

II. Threat of Substitutes


In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices.

12

III. Buyer Power


The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monophony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopolies exist, but frequently there is some asymmetry between a producing industry and buyers.

The following tables outline some factors that determine buyer power.

Buyers are Powerful if: Buyers are concentrated - there are a few buyers with significant market share Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival

Example DOD purchases from defense contractors

Circuit City and Sears' large retail market provides power over appliance manufacturers

Large auto manufacturers' purchases of tires

Buyers are Weak if: Producers threaten forward integration -

Example Movie-producing companies have integrated


13

producer can take over own distribution/retailing Significant buyer switching costs - products not standardized and buyer cannot easily switch to another product Buyers are fragmented (many, different) - no buyer has any particular influence on product or price Producers supply critical portions of buyers' input - distribution of purchases

forward to acquire theaters

IBM's 360 system strategy in the 1960's

Most consumer products

Intel's relationship with PC manufacturers

IV. Supplier Power


A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power.

Suppliers are Powerful if:

Example
Baxter International, manufacturer of hospital

Credible forward integration threat by suppliers

supplies, acquired American Hospital Supply, a distributor

Suppliers concentrated Significant cost to switch suppliers Customers Powerful

Drug industry's relationship to hospitals Microsoft's relationship with PC manufacturers Boycott of grocery stores selling non-union

14

picked grapes

Suppliers are Weak if: Many competitive suppliers - product is standardized Purchase commodity products Credible backward integration threat by purchasers Concentrated purchasers Customers Weak

Example Tire industry relationship to automobile manufacturers Grocery store brand label products Timber producers relationship to paper companies Garment industry relationship to major department stores Travel agents' relationship to airlines

V. Threat of New Entrants and Entry Barriers


It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry.

Barriers to entry arise from several sources: 1. Government creates barriers. Although the principal role of the government in a market
is to preserve competition through anti-trust actions, government also restricts competition through the granting of monopolies and through regulation. Industries such as utilities are

15

considered natural monopolies because it has been more efficient to have one electric company provide power to a locality than to permit many electric companies to compete in a local market.

2. Patents and proprietary knowledge serve to restrict entry into an industry. Ideas
and knowledge that provide competitive advantages are treated as private property when patented, preventing others from using the knowledge and thus creating a barrier to entry. Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in the instant photography industry. In 1975, Kodak attempted to enter the instant camera market and sold a comparable camera. Polaroid sued for patent infringement and won, keeping Kodak out of the instant camera industry.

3. Asset specificity inhibits entry into an industry. Asset specificity is the extent to
which the firm's assets can be utilized to produce a different product. When an industry requires highly specialized technology or plants and equipment, potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails. Asset specificity provides a barrier to entry for two reasons: First, when firms already hold specialized assets they fiercely resist efforts by others from taking their market share. New entrants can anticipate aggressive rivalry. For example, Kodak had much capital invested in its.

4. Organizational (Internal) Economies of Scale. The most cost efficient level of


production is termed Minimum Efficient Scale (MES). This is the point at which unit costs for production are at minimum - i.e., the most cost efficient level of production. If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry or cost parity with rivals. For example, in long distance communications roughly 10% of the market is necessary for MES. If sales for a long distance operator fail to reach 10% of the market, the firm is not competitive.

Some of an industry's entry and exit barriers can be summarized as follows:

Easy to Enter if there is:

Difficult to Enter if there is:

Common technology

Patented or proprietary know-how

16

Little brand franchise Access to distribution channels Low scale threshold

Difficulty in brand switching Restricted distribution channels High scale threshold

Easy to Exit if there are:


Difficult to Exit if there are:


Salable assets Low exit costs Independent businesses

Specialized assets High exit costs Interrelated businesses

DYNAMIC NATURE OF INDUSTRY RIVALRY


Our descriptive and analytic models of industry tend to examine the industry at a given state. The nature and fascination of business is that it is not static. While we are prone to generalize, for example, list GM, Ford, and Chrysler as the "Big 3" and assume their dominance, we also have seen the automobile industry change. Currently, the entertainment and communications industries are in flux. Phone companies, computer firms, and entertainment are merging and forming strategic alliances that re-map the information terrain. Schumpeter and, more recently, Porter have attempted to move the understanding of industry competition from a static economic or industry organization model to an emphasis on the interdependence of forces as dynamic, or punctuated equilibrium, as Porter terms it. In Schumpeter's and Porter's view the dynamism of markets is driven by innovation. We can envision these forces at work as we examine the following chart.

Top 10 US Industrial Firms by Sales 1917 - 1988


17

1917 1 US Steel 2 Swift 3 Amour American Smelting

1945 General Motors US Steel

1966 General Motors Ford Exxon

1983

1988 General Motors Ford Exxon

General Motors Mobil

Standard Oil - Standard Oil -NJ NJ US Steel Bethlehem Steel (Exxon) General Electric

Texaco

IBM General Electric Mobil Chrysler Texaco DuPont Philip Morris

5 Standard Oil NJ

Chrysler Mobil Texaco

Ford IBM Social (Oil) DuPont Gulf Oil Standard Oil of Indiana

6 Bethlehem Steel Swift 7 Ford 8 DuPont Amour

Curtiss-Wright US Steel IBM Gulf Oil

9 American Sugar Chrysler 10 General Electric Ford

10 Largest US Firms by Assets, 1909 and 1987


1909 1 US STEEL 2 STANDARD OIL, NJ (Now, EXXON #3) 3 AMERICAN TOBACCO (Now, American Brands #52) 1987 GM (Not listed in 1909) SEARS (1909 = 45) EXXON (Standard Oil

18

trust broken up in 1911) AMERICAN MERCANTILE MARINE (Renamed US Lines; 4 acquired by Kidde, Inc., 1969; sold to McLean Industries, 1978; bankruptcy, 1986 5 INTERNATIONAL HARVESTER (Renamed Navistar #182); divested farm equipment FORD (Listed in 1919) MOBIL OIL GENERAL ELECTRIC (1909= 16) CHEVRON (Not listed in 1909) IBM (Ranked 68, 1948)

6 ANACONDA COPPER (acquired by ARCO in 1977) 7 US LEATHER (Liquidated in 1935) ARMOUR (Merged in 1968 with General Host; in 1969 by 8 Greyhound; 1983 sold to Co nAgra) AMERICAN SUGAR REFINING (Renamed AMSTAR. In 1967 9 =320) Leveraged buyout and sold in pieces) 10 PULLMAN, INC (Acquired by Wheelabrator Frye, 1980; spunoff as Pullman-Peabody, 1981; 1984 sold to Trinity Industries)

TEXACO (1909= 91)

DU PONT (1909= 29)

19

3. PORTER FIVE FORCES ANALYSIS

20

Porter five forces analysis

A graphical representation of Porter's Five Forces

21

Porter's Five Forces is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven down to zero. Three of Porter's five forces refer to competition from external sources. The remainders are internal threats. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average. Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers. This five forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies. Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc.

22

Purposes

To identify relationships and dynamics of an industry. To help making strategic decisions on an advantage position in a market. To make a better understanding on how business operates under an industry.

When
The model can be used when a company want to identify the attractiveness of a new industry to determine the profitability of new product/service. It can also be used in an existing industry to determine the organisations strategic position as it takes account of competition analysis.

Tips
Five forces model only focus on external business environment but limit on organizations intrinsic strengths.

The model can be classified as reactive rather than proactive. The model should be used in combination with inside-out approach. It should be used with Resource-Based View which focuses more on company intrinsic strengths and competent ices.

How
The model is a dimensional theory that highlights key fundamental forces within industrial environment.

23

4. STRATEGY

24

Strategy - analyzing competitive industry structure Defining an industry


An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry). Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry. The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described below:

25

Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are - The threat of entry of new competitors (new entrants) - The threat of substitutes - The bargaining power of buyers - The bargaining power of suppliers - The degree of rivalry between existing competitors Threat of New Entrants New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include - Economies of scale - Capital / investment requirements - Customer switching costs - Access to industry distribution channels - The likelihood of retaliation from existing industry players. Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: - Buyers' willingness to substitute - The relative price and performance of substitutes - The costs of switching to substitutes

26

Bargaining Power of Suppliers Suppliers are the businesses that supply materials & other products into the industry. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when: -There are many buyers and few dominant suppliers -There are undifferentiated, highly valued products - Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) - Buyers do not threaten to integrate backwards into supply - The industry is not a key customer group to the suppliers Bargaining Power of Buyers Buyers are the people / organizations who create demand in an industry The bargaining power of buyers is greater when - There are few dominant buyers and many sellers in the industry -Products are standardized -Buyers threaten to integrate backward into the industry - Suppliers do not threaten to integrate forward into the buyer's industry - The industry is not a key supplying group for buyers Intensity of Rivalry The intensity of rivalry between competitors in an industry will depend on: - The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader
27

- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting - Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry - Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier - Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less - Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry

28

Assessing the Balance of Power in a Business Situation

Who has the upper hand, and why?


The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations.

29

5. Understanding the Tool

30

Understanding the Tool:


Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are: 1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. 2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. 3. Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if noone else can do what you do, then you can often have tremendous strength. 4. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. 5. Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.
31

Using the Tool:


To use the tool to understand your situation, look at each of these forces one-by-one and write your observations on our free worksheet which you can download here. Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in the diagram above. Then, mark the key factors on the diagram, and summarize the size and scale of the force on the diagram. An easy way of doing this is to use, for example, a single "+" sign for a force moderately in your favor, or "--" for a force strongly against you (you can see this in the example below). Then look at the situation you find using this analysis and think through how it affects you. Bear in mind that few situations are perfect; however looking at things in this way helps you think through what you could change to increase your power with respect to each force. Whats more, if you find yourself in a structurally weak position, this tool helps you think about what you can do to move into a stronger one. This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness and likely-profitability of an industry. Since publication, it has become one of the most important business strategy tools.

32

6.

Use of the Information form Five

Forces Analysis

33

Use of the Information from Five Forces Analysis


Five Forces Analysis can provide valuable information for three aspects of corporate planning:

Stoical Analysis:
The Five Forces Analysis allows determining the attractiveness of an industry. It provides insights on profitability. Thus, it supports decisions about entry to or exit from and industry or a market segment. Moreover, the model can be used to compare the impact of competitive forces on the own organization with their impact on competitors. Competitors may have different options to react to changes in competitive forces from their different resources and competences. This may influence the structure of the whole industry.

Dynamical Analysis:
In combination with a PEST-Analysis, which reveals drivers for change in an industry, Five Forces Analysis can reveal insights about the potential future attractiveness of the industry. Expected political, economical, socio-demographical and technological changes can influence the five competitive forces and thus have impact on industry structures.

Analysis of Options:
With the knowledge about intensity and power of competitive forces, organizations can develop options to influence them in a way that improves their own competitive position. The result could be a new strategic direction, e.g. a new positioning, differentiation for competitive products of strategic partnerships.

34

Thus, Porters model of Five Competitive Forces allows a systematic and structured analysis of market structure and competitive situation. The model can be applied to particular companies, market segments, industries or regions. Therefore, it is necessary to determine the scope of the market to be analyzed in a first step. Following, all relevant forces for this market are identified and analyzed. Hence, it is not necessary to analyze all elements of all competitive forces with the same depth. The Five Forces Model is based on microeconomics. It takes into account supply and demand, complementary products and substitutes, the relationship between volume of production and cost of production, and market structures like monopoly, oligopoly or perfect competition.

Influencing the Power of Five Forces


After the analysis of current and potential future state of the five competitive forces, managers can search for options to influence these forces in their organizations interest. The objective is to reduce the power of competitive forces. They are of general nature. Hence, they have to be adjusted to each organizations specific situation. The options of an organization are determined not only by the external market environment, but also by its own internal resources, competences and objectives.

4.1

Reducing the

4.2

Reducing the

Bargaining Power of Suppliers


Partnering Supply chain management Supply chain training Increase dependency Build knowledge of supplier costs and

Bargaining Power of Customers Partnering


Supply chain management Increase loyalty Increase incentives and value added

35

methods Take over a supplier

Move purchase decision away from price Cut put powerful intermediaries (go directly to customer)

4.3

Reducing the Treat 4.4

Reducing the

of New Entrants
Increase minimum efficient scales of operations

Threat of Substitutes
Legal actions Increase switching costs Alliances Customer surveys to learn about their preferences Enter substitute market and influence from within

. Patents, protection of intellectual property

Alliances with linked products / services Tie up with suppliers Tie up with distributors

Accentuate differences (real or perceived)

Retaliation tactics

4.5 Reducing the Competitive Rivalry between Existing Players


Avoid price competition Differentiate your product Buy out competition Reduce industry over-capacity Focus on different segments Communicate with competitors
36

7. Application of Five Forces in International Markets

37

Application of Five Forces in International Markets


Around the world, companies that have achieved international leadership employ strategies that differ from each other in every respect. But while every successful company will employ its own particular strategy, the underlying mode of operation the character and trajectory of all successful companies is fundamentally the same. Companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies and new ways of doing things. They perceive a new basis for competing or find better means for competing in old ways. Innovation can be manifested in a new product design, a new production process, a new marketing approach, or a new way of conducting training. Much innovation is mundane and incremental, depending more on accumulation of small insights and advances than on a single, major technological breakthrough. It often involves ideas that are not even new ideas that have been around, but never vigorously pursued. It always involves investments in skill and knowledge, as well as in physical assets and brand reputations.

38

Using Porters Five Forces when creating your marketing plan


Understanding the dynamics of competitors within an industry is critical for several reasons. First, it can help to assess the potential opportunities for your venture, particularly important if you are entering this industry as a new player. It can also be a critical step to better differentiate your self from others that offer similar products and services. One of the most respected models to assist with this analysis is Porters Five Forces Model. This model, created by Michael E. Porter and described in the book Competitive Strategy: Techniques for Analyzing Industries and Competitors, has proven to be a useful tool for both business and marketing-based planning. Background The pure competition model does not present a viable tool to assess an industry. Porters Five Forces attempts to realistically assess potential levels of profitability, opportunity and risk based on five key factors within an industry. This model may be used as a tool to better develop a strategic advantage over competing firms within an industry in a competitive and healthy environment. It identifies five forces that determine the long-run profitability of a market or market segment.

Substitute products
Porters Five Forces model refers to substitute products as those products that are available in other industries that meet an identical or similar need for the end user. As more substitutes become available and affordable, the demand becomes more elastic since customers have more alternatives. Substitute products may limit the ability of firms within an industry to raise prices and improve margins. For example, the price of aluminum cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the same
39

industries. A substitute product to the services offered by a CPA firm is accounting or tax-based software two very different industries that offer some of the same consumer benefits. The treat of substitutes often impacts price-based competition. There are other concerns in assessing the threat of substitutes relating to technology. New technologies contribute to competition though substitute products and services. Think of the impact wireless technologies have had on traditional telephone service. Except in remote areas it is unlikely that cable TV could compete with free broadcast TV from an antenna without the greater diversity of entertainment that it affords the customer.

The competitive strategy


Understanding the dynamics of competitors within an industry is critical for several reasons. First, it can help to assess the potential opportunities for your venture, particularly important if you are entering this industry as a new player. It can also be a critical step to better differentiate your self from others that offer similar products and services. One of the most respected models to assist with this analysis is Porters Five Forces Model. This model, created by Michael E. Porter and described in the book Competitive Strategy: Techniques for Analyzing Industries and Competitors, has proven to be a useful tool for both business and marketing-based planning.

40

Service
Service can also play a part in the industrys dynamics. Those competitors that provide superior service may bring an advantage to their competitive position if the industry/customer places value on this attribute. This is another point of differentiation and can be a key strategic element to consider. If a competitor has a service component that is difficult to replicate, it will prove to offer a strategic advantage.

The result
We can look at several industries and see how Porters Five Forces would depict them; the entertainment industry is in flux, telecommunications companies are volatile, computer firms are merging, utility industries are down, the housing market is up. Porters Five Forces can assist us to better understand these dynamics in a more objective manner and hopefully make better strategic decisions as a result.

Porter's Five Forces Examples; Reports on Different Companies

There is continuing interest in the study of the forces that impact on an organization, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector. As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industrys likely profitability is conducted in Porters five forces model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces
41

acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.

Main Aspects of Porters Five Forces Analysis


The original competitive forces model, as proposed by Porter, identified five forces which would impact on an organizations behavior in a competitive market. These include the following:

The rivalry between existing sellers in the market. The power exerted by the customers in the market. The impact of the suppliers on the sellers. The potential threat of new sellers entering the market. The threat of substitute products becoming available in the market.

Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market.

Force 1: The Degree of Rivalry


The intensity of rivalry, which is the most obvious of the five forces in an industry; helps determine the extent to which the value created by an industry will be dissipated through headto-head competition. The most valuable contribution of Porter's five forces framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.

This force is located at the centre of the diagram; Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market. 42

Force 2: The Threat of Entry


Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents position. The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:

Economies of scale: for example, benefits associated with bulk purchasing; Cost of entry: for example, investment into technology; Distribution channels: for example, ease of access for competitors; Cost advantages not related to the size of the company: for example, contacts and expertise; Government legislations: for example, introduction of new laws might weaken companys competitive position;

Differentiation: for example, a certain brand that cannot be copied (The Champagne)

Force 3: The Threat of Substitutes


The threat that substitute products pose to an industry's profitability depends on the relative price-toperformance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:

Product-for-product substitution; is based on the substitution of need; Generic substitution (Video suppliers compete with travel companies); Substitution that relates to something that people can do without (cigarettes, alcohol).

Force 4: Buyer Power


Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry. The most important determinants of buyer power are the size and the
43

concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the risk of failure associated with a product's use.

This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;

Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies;

Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.

Force 5: Supplier Power


Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power. Bargaining power of suppliers exists in the following situations:

Where the switching costs are high (switching from one Internet provider to another); High power of brands (McDonalds, British Airways, Tesco); Possibility of forward integration of suppliers (Brewers buying bars); Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).

The nature of competition in an industry is strongly affected by the suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete the structure of the industry itself may play an important role. Indeed, the whole five-forces framework is based on an economic theory know as the Structure-Conduct-Performance (SCP) model: the structure of an industry determines organizations competitive behavior (conduct), which in turn determines
44

their profitability (performance). In concentrated industries, according to this model, organizations would be expected to compete less fiercely, and make higher profits, than in fragmented ones. However, as Haber berg and Ripple (2001) state, the histories and cultures of the firms in the industry also play a very important role in shaping competitive behavior, and the predictions of the SCP model need to be modified accordingly.

45

Good Porter's 5 Forces analysis


The Porters Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. It also helps to understand both the strength of a firms current competitive position, and the strength of a position a company is looking to move into. Despite the fact that the Five Force framework focuses on business concerns rather than public policy, it also emphasizes extended competition for value rather than just competition among existing rivals, and the simplicity of its application inspired numerous companies as well as business schools to adopt its use. With a clear understanding of where power lies, it will enable a company to take fair advantage of its strengths, improve weaknesses, and avoid taking wrong steps. Therefore, to apply this planning tool effectively, it is important to understand the situation and to look at each of the forces individually. In conducting an analysis of Porters Five Forces, it is required to brainstorm all relevant factors for the companys market situation, and then check against the factors presented for each force in the diagram above. The next step is to highlight the key factors on a diagram, and summarize the size and the scale of the force on the diagram. It is suggested to use relevant signs, for instance, + and -" to represent the forces moderately in companys favor, or for a force strongly against. After identifying favorable and unfavorable forces for the companys performance and industrys attractiveness, it is important to analyze the situation and examine the impacts of the forces. One of the critical comments made of the Five Forces framework is its static nature, whereas the competitive environment is changing turbulently. Are the five forces able to foresee industry expansion? Is it the corporate strategist's goal to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor, or is the goal to become part of the ongoing commerce with the intention to produce innovative ideas that will expand the size of the industry? Is it true that the environment poses a threat to the organization, leading to the consideration of suppliers and buyers as threats that need to be tackled, or does it offer the ground for a constitutive industry player co-operation?
46

Theory
The JNCT employs various tools for evaluating competitiveness. Those developed by Professor. Michael Porter of Harvard Business School are the most central to our work. There are four basic tools developed by Porter as follows:

The 'Diamond'
The 'Diamond' below is used to analyze the business environment of the selected cluster. The determinants, taken individually and as a system, create a context in which a nation's firm is born and competes. Weakness in any one of those determinants constrains the industry's potential for upgrading and gaining competitive advantages.

47

Five Competitive Forces


The five competitive forces determine industry profitability and attractiveness. These forces are important in shaping the prices that firms can charge, the costs they have to bear, and the required investments to compete in the industry.

48

Cluster Map

Clusters are geographic concentrations of interconnected firms and institutions in a particular field. Clusters encompass an array of linked industries and other entities that are important to competition. They include, for example, suppliers of specialized inputs such as components, machinery, services, and providers of specialized infrastructure. Quite often, clusters also extend downstream to channels and customers and laterally to manufacturers of complementary products and to firms in industries related by skills, technologies, or common inputs. Finally, many clusters include governmental and other institutions such as; universities, standards-setting agencies, think tanks, vocational training providers, and trades associations, which provide specialized training, education, information, research, and technical support. The cluster map specifies all related and supporting elements of major industries. In addition, it illustrates the linkages between such elements, whether strong or weak, and indicates absent industries. The cluster analysis provides a pattern for understanding how major industries 49

conduct their business and the way they compete, whilst simultaneously complementing and supporting one another. Clusters encompass one facet of the diamond, but are best seen as a manifestation of the interactions between all four facets. Clusters affect competition in three broad ways: (1) by increasing the productivity of constituent firms or industries; (2) by increasing their capacity for innovation and thus the growth of productivity; and (3) by stimulating new business formation that supports innovation and expands the cluster. Many cluster advantages rest on external economies or spillovers across firms and industries of various sorts. A cluster is thus a system of interconnected firms and institutions whose entirety is more than the sum of its parts.

Value Chain Analysis

The value chain, also known as value chain analysis. The value chain provides a tool for understanding the sources of cost advantage. A firms cost position represents the sum of all costs incurred for performing all the required activities relative to competitors. Cost advantage can occur in any activity. Nevertheless, many managers reveal shortsightedness in viewing costs, and concentrate mostly on manufacturing. Successful cost leaders, however, are often low-cost product developers, low-cost marketers, and low-cost service providers. They draw 50

cost advantage from the entire value chain. Gaining cost advantage usually requires optimizing the linkages among activities, as well as close coordination with suppliers and distribution channels. The value chain also exposes sources of differentiation.

Firm Level
A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of the independent activity's value. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter, as a profession, can be used to illustrate the difference of cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.

Activities The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity.

Industry Level

51

An industry value chain is a physical representation of the various processes that are involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain). It is based on the notion of value-added at the link (read: stage of production) level. The sum total of link-level value-added yields total value. The French Physiocrat's Tableau conomique is one of the earliest examples of a value chain. Warily Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative importance of each individual link in industry-level value-chains for the U.S. economy.

Significance
The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. The simpler concept of value streams, a crossfunctional process which was developed over the next decade, had some success in the early 1990s. The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on). Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to minimize the cost of transportation. Value chain analysis has also been successfully used in large Petrochemical Plant Maintenance Organizations to show how Work Selection, Work Planning, Work Scheduling and finally Work Execution can (when considered as elements of chains) help drive Lean approaches to Maintenance. Value chain analysis has also been employed in the development sector as a means of identifying poverty reduction strategies by upgrading along the value chain.
52

Value Reference Model


A Value Reference Model (VRM) developed by the trade consortia Value Chain Group offers an open source semantic dictionary for value chain management encompassing one unified reference framework representing the process domains of product development, customer relations and supply networks. The integrated process framework guides the modeling, design, and measurement of business performance by uniquely encompassing the plan, govern and execute requirements for the design, product, and customer aspects of business. The Value Chain Group claims VRM to be next generation Business Process Management that enables value reference modeling of all business processes and provides product excellence, operations excellence, and customer excellence. Six business functions of the Value Chain:

Research and Development Design of Products, Services, or Processes Production Marketing & Sales Distribution Customer Service

53

8.

Business Decision Framework

54

Business Decision Frameworks

55

Good Business Decisions - What it takes?


Good business decisions, for sure require require a great deal of insight into the gathered data, extensive experience with the context and the skill to see through an exhaustive set of alternatives and outcomes. But, as Peter Drucker said business management is a practice. It is more of a science than an art; there are always specific issues and scenarios that you will need to consider while making any particular type of business decision. Making good business decisions is not a skill that is magically at birth, but is a skill that you can acquire and be good at through concentrating on issues that matter most for making a particular decision and practicing to hone that skill

Why, When, How


I started making these frameworks during business school. There is a lot of data given to you in cases and you will be challenged with a particular problem. Students usually analyze each data point given and then relate it back to the problem given. That worked for me until I was taking five forces with a full time job. I followed a reverse approach - after skimming through the case, I just took out and analyzed data which is relevant to the given problem. I started developing these frameworks for exactly the same purpose - what are the issues that you need to look at, given a particular business problem? I started adding on to the frameworks as I discovered new/missed issues; they mostly came from 'aha' moments during case discussions and books. Surprisingly, students found these frameworks useful in consulting interviews. Consulting interviews work the same way, you would be told a 2 minute story, you would be given a business problem and then you have to ask the interviewer the issues that you would be interested in learning about. You would be given relevant data as you requests for it.

56

The Competitive Advantage of Nations

National prosperity is created, not inherited. It does not grow out of a countrys natural endowments, its labor pool, its interest rates, or its currencys value, as classical economics insists. A nations competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the worlds best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers. In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. There are striking differences in the patterns of competitiveness in every country; no nation can or will be competitive in every or even most industries. Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic, and challenging. These conclusions, the product of a four-year study of the patterns of competitive success in ten leading trading nations, contradict the conventional wisdom that guides the thinking of many companies and national governmentsand that is pervasive today in the United States. According to prevailing thinking, labor costs, interest rates, exchange rates, and economies of scale are the most potent determinants of competitiveness. In companies, the words of the day are merger, alliance, strategic partnerships, collaboration, and supranational globalization. Managers are pressing for more government support for particular industries. Among governments, there is a growing tendency to experiment with various policies intended to

57

promote national competitivenessfrom efforts to manage exchange rates to new measures to manage trade to policies to relax antitrustwhich usually end up only under mining it.

What Is National Competitiveness?


These approaches, now much in favor in both companies and governments, are flawed. They fundamentally misperceive the true sources of competitive advantage. Pursuing them, with all their short-term appeal, will virtually guarantee that the United States or any other advanced nation never achieves real and sustainable competitive advantage. We need a new perspective and new tools an approach to competitiveness that grows directly out of an analysis of internationally successful industries, without regard for traditional ideology or current intellectual fashion. We need to know, very simply, what works and why. Then we need to apply it.

58

9.

SWOT Analysis of Five Forces

59

SWOT Analysis
In a SWOT analysis you identify strengths, weaknesses, market opportunities for your company, and threats to your business. One way to use the analysis it to then develop marketing strategies that will minimize the affect of weaknesses on your business while maximizing your strengths. Ideally, you will match your strengths against market opportunities that result from your competitors weaknesses or voids. When completing a SWOT analysis, you may find it helpful to create a table identifying observations relative to each SWOT component for both your companys site and your competitors sites. In the table, note Internet related activities such as trade organization participation, search engine inclusion, and outside links to the sites. This way, you are better able to spot your companys strengths and weaknesses as well as opportunities and threats to your business. Often, marketing strategy opportunities arise as a result of a changing business environment. As you study your competitors, be on the lookout for these opportunities. Some situations that could represent opportunities for a company include, but are certainly not limited to:

New technology is created, but the competition has been unable to deliver acceptable customer service.

A customer segment is becoming more predominant, but their specific needs are not being fully met by your competitors.

A customer, competitor, or supplier goes out of business or merges with another company.

Once you develop your marketing strategies, you are more able to complete a strategy based marketing plan that takes into account the overall business environment.

60

10. Limitations of Porters Five Force Model

61

Limitations of Porters Five Force Model

Porters model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations. Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he contends, it is important to look beyond ones immediate competitors as there are other determinates of profitability. Specifically, there might be competition from substitute products or services. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. An example would be plastic bottles, glass bottles, and cans for packaging soft drinks. There may also be the potential threat of new entrants, although some competitors will see this as an opportunity to strengthen their position in the market by ensuring, as far as they can, customer loyalty. Finally, it is important to appreciate that companies purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either cost increases or price decreases. This relates to the strategic option of vertical integration, when the company acquires, or merges with, a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption. It is important to be aware that this model has further limitations in today's market environment; as it assumes relatively static market structures. Porter's Six Forces model and its relationship to the standard Five Forces model Porters Five Forces model actually has an extension referred to as Porters Six Forces model. It is considerably less popular than the Five Forces model as its acceptance has been less positive than the Five Forces model. The Six Forces model though is very similar to the Five Forces

62

model with the only difference being the addition of the sixth force in the framework. This sixth force in the model is termed as the relative power of other stakeholders, and can refer to a number of other groups or entities, depending on the factor which has the greatest influence including: Complementary One school of thought looks at the sixth force to be complementary, which are businesses offering complementary products to the sector in focus and being analyzed. The author states that these complementary businesses, as a sixth factor, affect the industry as changes in these businesses (such as new techniques, approaches or technologies) can impact on the dynamics between the industry and the complementary.

The government The sixth force in the framework can also be considered to be the government, and is included in the framework if it has potential to impact on all the other five forces. Thus, the government can have direct impact on the industry as the sixth force, but can also have indirect impact or influence by affecting the other five forces, whether favorably or unfavorably. The public Yet other viewpoints look at the public as the sixth force in the model, particularly if the public has a strong influence in the dynamics of the sector resulting in changes to the other forces or in the sector as a whole. Shareholders This group can also be considered potentially as the sixth force. This is more important in recent years where shareholder activity has increased significantly in the boardroom, and management of firms has been scrutinized much more and even given threats if certain actions favored by the shareholders were not pursued. Employees Employees could also be considered as the sixth force if they wielded extraordinarily strong influence on the firm in a particular sector. The status of employees seems to follow similar rules in certain sectors, and thus could be considered a strong influence in these sectors. For example, in the automobile sector in the US, a large part of the work force are

63

unionized, and thus could be considered the sixth force instead of the government or complementary. While a sixth force has been added to Porters original Five Forces model, the acceptance of this framework has been somewhat limited. This could be for two reasons. First, is that there is no definite and specific sixth force in all sectors, as it is different for each sector. Second, while a sixth force could be defined for all sectors, the influence of this factor can also be captured in the other five forces and thus the necessity of having it in the framework is less compelling. Where to find information for Porter's 5 Forces analysis in conducting the analysis it is crucial to examine the existing literature:

Periodicals, business articles on the industry performance, etc; Analyst reports and trade organizations; Company annual reports and its publications on the main suppliers and distribution network; Anything that will give the exposure to the market situation, competitors present in the market, new emerging companies in the industry.

It is important to make sure that the sources are reliable and relevant to the current condition of the industry. It has to be viable, reliable and valid, in order to conduct a good analysis of the model. For this purpose, the gathered data and information has to be checked and be applied to the current business conditions. Further limitations could be present in the nature of market forces that reduce the applicability of the information sources to present situations; and the amount of detailed information required. This can be prohibitive to its practical use.

64

Conclusion - Porter's five forces


According to the model of Porters five forces it is worthwhile entering web design industry. Most of the forces are weak and even the strong ones are not impossible hurdles see an overview of Porters five forces in the web design industry and the changes that occur if the complexity of the web site increases. Porters five forces in relation to the web design industry

Max Adler Salzhemmendorf Webdesign

65

There is a great competition between the web designers, but there is also a growth which is enough to enter the industry. But within the last five years the rivalry situation has been stronger and the market growth lower. With technological advancements the entry barriers and the knowledge have grown. For a professional web site today you need more than informatics knowledge, but also a good marketing knowledge and the ability to negotiate with your customers. With the right strategy it is still possible to make a lot of money online.

Any company must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. If a company fully understands the nature of the Porters five forces, and particularly appreciates which one is the most important, it will be in a stronger position to defend itself against any threats and to influence the forces with its strategy. The situation is fluid, and the nature and relative power of the forces will change. Consequently, the need to monitor and stay aware is continuous.

Issues during the implementation of these Five Forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic recommendations for the action a company should take to in order to develop barriers to competition.

66

BIBLIOGRAPHY www.businessballs.com www.ask.com www.wikipedia.com Books Strategic Management & Competitive Advantage BERNEY JAY B. (Edition 2008) Strategic Management & Business Policy Wheelen Thomas L. (Ninth Edition), 2007 Business Policy Strategic Management-Prasad L.M.

67