Discuss Porters 5 forces model on competition.

This was developed by Harvard Business School’s Michael E. Porter in 1979. It is a method which answers questions about the competition.

The five forces model looks at five factors –

a) Threat of Substitute –
It is another form of product that will serve the same purpose. For example, a scooter with high fuel efficiency will be a substitute for a motorbike. A landline phone connection and a mobile phone are substitutes to each other. The entry or presence of substitutes will force the organisation to make changes in the marketing program (4P’s) like reducing prices, etc.

Substitutes pose threat because of –
• Price of the substitute
• Performance (for example, cassette and a CD, train and an aeroplane)
• Cost to the organisation for modifying the product or switching to the substitute with better performance, etc.

b) Threat of potential entrants –
The potential entrant, offering the same kind of products will eat into the organisations market share. It will force the organisation to take necessary steps –

• Changes in price to make it difficult for the entrant to maintain profits
• Access to suppliers, intermediaries like signing exclusive contracts
• Well recognised brand image
• Communication networks highlighting the value to the customers
• Constantly adding features to the product (e.g. automobile manufacturers keep introducing vehicles with upgraded features)

c) Buyer power –
When there are lot of sellers, it is easy for a buyer to switch to a different brand or a substitute. Buyer power in the hands of buyers is used to push down prices and demand special conditions. For example, automobile manufacturers offer special services like home delivery of vehicle, book a demo at home, free service of vehicle for a period, etc.

• Bargaining power of buyers is low when there are less number of producers than buyers.
• it is high when there are large number of producers than buyers

d) Bargaining power of suppliers –
It is inversely proportional to the number of suppliers. Fewer the suppliers more the bargaining power with them. The suppliers may raise the price of its materials adding cost to the company. To counter this organisations get into a contract with the suppliers, like agreement on supply of items for a particular period at the same price and quality. There is always a threat in case the suppliers are few. Suppliers have direct impact on profits and quality of products.

e) Competitor rivalry –
This force analyses the competition in the market place which is determined by the number of competitors, and to which extent they will fight to remain in the market. Due to intense competition there is a possibility of price war. Competition is high when the demand in the market is high and the number of producers are few. The buyers in this situation can easily switch to a competitor’s product.
Some thinkers have criticised the Porters five forces model –

1) It is production oriented. It focuses on the industry and not on customer benefits.
2) Technology makes the study of this model irrelevant as advance in technology keeps making products obsolete. We hardly see anyone using a Walkman, or a pager.