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Porter
Strive for competitive advantage and the forces that affect it.
Strategic Management
Dr. Cassell
By: Ashleigh Bender
Table of Contents:
I .) Executive Summary pg.
II.) Porters Five Forces Defined pg.
* Supplier Power pg.
* Buyer Power pg.
* Threats of New Entrants pg.
* Substitutes Products pg.
* Degree of Rivalry pg.
III.) Advantage and Disadvantage of Porters Five Forces Model pg.
IV.) Application of Porters Five Forces pg.
V .) Porters Generic Strategies pg.
* Cost Leadership pg.
* Differentiation pg.
* Focus Strategy pg.
VI .) Advantage and Disadvantage of Porters Generic Strategies pg.
VII .) Application of Porters Five Forces pg.
VIII.) Bibliography pg.
Executive Summary:
Michael Porter created two concepts used by industries to either achieve greater
competitive advantage or can be used as an over all strategy in the market. Both of these
concepts work in conjunction with each other to work towards the ultimate goal of
generating revenue and stockholders wealth. In this paper these concepts will be discussed
in-depth to explain what they are, how they are an advantage and disadvantage and how to
apply them.
Introduction:
When a company is formulating a strategy, the framework for such an analysis is the
environment. In order to fully assess what the company is capable of a manger needs to
look at both external and internal forces that affect the company in order to effectively
develop a strategy. A company can formulate a strategy based on the forces that affect the
industry as a whole.
The structure of the industry has a large influence on a company and their ability to
compete and the strategies that are available to them. Forces that are outside of the
industry affect all firms in the industry and the key to effectively compete is the differing
abilities of firms to deal with these forces.
Competition in an industry is inevitable and is created through the underlying economic
structure that goes beyond the behavior of the competitors. The state of competition in an
industry is based on five competitive forces. These forces combined determine the profit
potential in the industry.
On a broader sense of things, a company can choose to pick one of three generic strategies.
These strategies require a commitment to one strategy. Also, these are designed to
outperform competitors in the industry to earn higher revenues. When combined, a
company can choose what to do within the five forces to create an ultimate strategy within
the given environment.
Porters Five Forces:
The Five forces is a model created by Michael E. Porter of Harvard Business in 1979. The
five forces is a framework for an industry analysis and the business strategy development.
This framework uses concepts developed within the industrial organization economics.
The forces determine the competitive intensity and attractiveness of a market.
These forces affect the company and their ability to serve its customers and produce a
profit. This means that a change in such forces will require the company to reassess their
efforts to shift with the market. These forces also help a company in making a qualitative
evaluation of the firms strategic position. A strategic manager may use this model to better
understand the industry in which the firm operates, in order to create a greater competitive
advantage.
In an industry with two or more competitors, competitive intensity increases. As this
increases the average industry return falls. When the bargaining power of buyers and
suppliers is high, the threat from new entrants and substitute products is high thus creating
an intense rivalry among firms. Within this the five forces are created, as illustrated in
Figure 1.
In each of these forces there are circumstances that increase the power of each of the
forces. These can be used as tools by a strategist to create an edge over competition and
can be used to boost a companys profitability and take away from other competitors in the
industry. These circumstances will be further discussed further in the paper and can be
seen in figure 2.
Supplier Power:
Supplies in an industry are raw materials, labor, machinery, services and capital. These are
all necessary inputs to the firms production process. These materials are all supplied by
different interest groups within the industry.
The strength of suppliers affects the industrys profit potential. Suppliers have the power
over companies in an industry by threatening to raise prices or reduce the quality of
purchases goods and services. They can also exert an influence on the producing industry,
such as selling raw materials at a high price to capture some of the industries profits
(Porter, 27-28). Figure 3 and 4 show when a supplier is powerful and weak as well as
example of when and how they apply (Quick MBA).
Suppliers are not just other firms but also labor. There is evidence that when highly skilled
employees or tightly unionized labor is scarce, labor can take away a fraction of the
potential profits in an industry. Determining suppliers power is often of the firms control
and subject to change. Although a firm can improve their situation through effective
strategy; it can enhance its threat of backward integration, eliminate switching costs and
the like (Porter 28).
Figure 4
Suppliers are Weak if: Example
Many competitive suppliers- product is standardized Tire industry relationship to
automobile manufactures
Purchase commodity products Grocery store brand label products
Credible backward integration threat by purchasers Timber producers relationship to major
department stores
Customers Weak Travel agent relationship to airlines
Figure 3
Suppliers are Powerful if: Example
Credible forward integration threat by suppliers Baxter International, manufacture of
hospital supplies, acquired American Hospital Supply, a Distributor
Suppliers concentrated Drug industrys relationship to hospitals
Significant cost to Switch suppliers Microsofts relationship with PC manufactures
