What is Michael Porter's five force model?
- Michael Porter gave his model in 1980 in his book “Competitive Strategy: Techniques for analyzing industries and competitors”. As the name of his book suggests, it contains techniques for attaining a competitive position in the industry and helps in strategy formulation.
- Strategy formulation is one of the most important and recurring tasks in an organization for having a competitive advantage in the industry.
- Strategy formulation starts with scanning of the environment, e. both internal and external, to find out the forces that shape competitions in the industry in which a firm is working.
- Porter tried to explain it with the help of his five forces model that is related to industry analysis, i.e. external environment for finding out opportunities and threats in the industry an organization is working.
What is an industry, and what is this model?
- The industry refers to a group of firms producing similar kinds of products, e.g. Nike, Reebok, Adidas, Converse all belong to the shoe industry.
- Michael porter contends that an organization is most concerned with the intensity of competition in the industry it is operating. Porter measured this intensity with the help of these five forces:
- Threats of new entrants
- Threats of substitute products and services
- Bargaining power of suppliers
- Bargaining power of consumers
- Rivalry among existing industry
Elements of Michael Porter's five force model
Let’s see each factor one by one in detail.
New Entrants came up with new capacity and desire to gain market share; therefore, they are a threat to an existing corporation. To discourage them, existing organizations create barriers like using economies of scale for having absolute cost advantage; they ensure minimal customer switching from the existing brand so that acquiring customers becomes a costly affair for new entrants to enter the industry.
Threats of substitute products and services
It refers to those products which happen to be two different products but can satisfy the similar needs of the consumer. Like sugarfree is a substitute for sugar, cola is a substitute for water. Substitutes limit the return from the industry. And to face this situation, firms identify buyer propensity to substitute, the relative price performance of substitute, buyer's switching costs, number of substitute products available in the market, ease of substitution, availability of close substitute, perceived level of product differentiation, etc. so that they can plan a strategic and competitive advantage.
Bargaining power of suppliers
Suppliers play an important role in the normal course of business. They can affect business by increasing factor prices and reducing the quality of the raw material. So, to cope up with these challenges marketers try to find out- Supplier switching costs relative to firm switching costs, Degree of differentiation of inputs, Impact of inputs on cost and differentiation, Presence of substitute inputs, Strength of distribution channel, Supplier concentration to the firm concentration ratio and try to build a good relationship with their suppliers to ensure uninterrupted supply in the future.
Bargaining power of consumers
The consumer is the king of the market. Companies are producing to earn a profit, not for self-consumption. So, keeping the buyer happy is one of the most important tasks. But buyers nowadays are very updated and informative so with the availability of their information of substitute products and competitors in the industry they try to force down the prices of the product, bargain for higher quality and more services at the same price. To cope up with these challenges companies in the industry try to build a competitive advantage.
Rivalry among existing industry
Corporations in an industry are interdependent. The decision of one will affect other’s profit share like in the aeroplane industry, during high demand Vistara increase prices, Air India will also increase the prices for their flights to earn high profits. Firms can face this situation by having a Sustainable competitive advantage through innovation, Competition between online and offline companies, Level of advertising expense, Powerful competitive strategy, Firm concentration ratio, Degree of transparency.
Let’s Understand the model with the help of an example:
The model mentioned that the collective strength of these forces would determine the profit potential in the industry. If these forces are high, then there is a threat to the firm. If these forces are low, then there is a high opportunity for profit.
like in our example of the sports shoe industry:-
- The threat of new entrants is low because the industry has reached the maturity stage.
- The threat of substitutes is low because other shoe companies do not provide support for sports activities.
- The bargaining power of suppliers is medium but increasing as the number of suppliers is rising in Asian countries
- The bargaining power of the consumer is medium but rising because prices are falling due to a rise in the low priced shoe market.
- Rivalry among the industry is high organizations are spending a lot on advertisements.
So, these were the five forces which Porter explained in his model it helps a marketer to analyze the opportunities present in the market and grab them before anyone else also it helps them to cope with the existing threats.
How to Prepare for UGC NET Commerce?
Candidates preparing for UGC NET Exam as commerce for paper 2 have to prepare for Michael Porter's five force model topic which is an important topic in UGC NET Paper 2 Commerce.
- All the applicants are also advised to solve as many UGC NET Previous Year Papers as possible. Previous Year Papers give you an idea of what to expect in the examination, it prepares you for the types of questions asked in the examination.
- UGC NET Mock Tests are also proven to be a great tool for preparation.
Best Books for UGC NET 2022 Commerce
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|Graduation Textbook Micro Economics by Dr Deepshree|
Graduation level Textbook and Internet/ Wikipedia
Graduation level Textbook by I.M. Pandey
Post-Graduation level Textbook “Business Statistics” by Dr J.K. Thakur
Graduation level Textbook by C.R. Kothari
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Team, BYJU'S Exam Prep.