Competitive BusinessEnvironment

According to Michael Porter thenature and degree of competition

inan industry depends on Five

Forces.

Goals

IndustryCompetitors(Intensity ofcompetition)

Threat of New Entities

Bargainingpower of customer

Threat of Substitutes

Bargaining power

ofcustomers

Five Forces EnvironmentalAnalysis

Porter has identified five competitive forces that shape every industry and every market.

An industry’s profit potential depends on 5 basic competitive forces within that industry.

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 such a way to improve the position of the organisation.

The 5 competitive forces

Threat of new entry

The threat of new entrants depend on the extent to

which there are barriers to entry.

• Economies of scale

• Expected retaliation

• Product differentiation

• Capital requirement

• Cost advantages of existing players due to experience curve effects of operation

The objective of corporate strategy should be to modify these competitive forces in such a way to improve the position of the organisation.

Access to distribution channels

Protected intellectual property rights like patents, licences

Scarcity of major resources

Access to raw materials is controlled by existing players

Brand loyalty of customers

Switching costs for customers

Powerful suppliers

Supplier bargaining power is likely to be highwhen-• High supplier concentration rather than afragmented source of supply• No substitutes• The suppliers’ customers are fragmented, so theirbargaining power is low• The switching costs from one supplier to anotherare high• Possibility of supplier integrating forward.

Powerful buyers

Customers’ bargaining power are high underthe following circumstances-• Concentration of buyers• Undifferentiated products• Switching is relatively simple• Customers are price sensitive• Backward integration of customer• Customer is aware of the production costsof the product.

Threat of substitutes

Determined by factors like-• Brand loyalty of customers• Close customer relationships• Switching costs for customers• The relative price or performance ofsubstitutes• Current trends

Competitive rivalry

Describes the intensity of competitionbetween existing players in an industry.This is likely to be high when-• There are many players of about the samesize.• Players have similar strategies• Product not much differentiated• Low market growth rates• Exit barriers are high

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