CHAPTER 2: PORTERS 5 FORCES MODEL

Below is the diagram of 5 forces model

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability,part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by 5 forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

BUYER POWER

Buyers or customers can exert influence and control over an industry in certain circumstances. This happens when:

• There is little differentiation over the product and substitutes can be found easily by customers/buyers.
• Buyers/customers are sensitive to price fluctuations.

• Switching to another product is not costly for customers/buyers.   

            

SUPPLIER POWER
Suppliers are also essential for the success of an organization as they provide businesses with the resources they need to produce their products and services. Supplier power can come from:
• If there is one or just a few suppliers that can provide the resources a business needs.

• If it is expensive to move from one supplier to another (known also as switching cost)

• If there is no other substitute for the product provided by the supplier. 

THREAT OF SUBSTITUTE PRODUCTS & SERVICES
 Are there alternative products that customers can purchase instead of yours? alternative products that offer the same benefit as your products? The threat from substitute (competitor) products is high when:

• The price of the substitute (competitor) product falls.
• It is easy for consumers to switch from one substitute product to another.

• Buyers are willing to substitute products from different competitors.

THREAT OF NEW ENTRANTS

 The threat of new organizations entering the industry is high when it is easy for an organization to enter the industry i.e. entry barriers are low.When a new business is deciding whether to enter an industry it will look at:Would government legislation prevent them or encourage them to enter the industry.

1. How loyal customers are to existing products,
2. How quickly it can achieve economy of scales
3. Would it have access to suppliers and

RIVALRY AMONG EXISTENCE COMPETITORS

Competitive rivalry is a good starting point to when analyzing a particular industry. If entry to an industry is easy then competitive rivalry is likely to be high. If it is easy for customers to move to substitute products for example from coke to water then again rivalry will be high. Generally competitive rivalry will be high if:

• There is little differentiation between the products sold by competitors.
• Competitors are approximately the same size of each other.
• If competitors have similar strategies.
• It is costly to leave the industry (exit barriers)

What I study from this chapter I find the example product or company that use the 5 force model the one is L'OREAL company. Below is the their products:

 

                                                            

                                                                          TQ