Porter's 5 Forces Model MACR

TERM PAPER ON Porter’s five forces model Submitted to DR ANITHA Submitted by DARSHANKUMAR GARAG



Transcript of Porter's 5 Forces Model MACR

Page 1: Porter's 5 Forces Model MACR



Porter’s five forces model

Submitted to


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I am thankful to Dr Anitha for providing me the task of

preparing the Term Paper. We at Pesit believe in taking

challenges and the term paper provided me the

opportunity to tackle a practical challenge in the subject

of management. This term paper tested my patience at

every step of preparation but the courage provided by my

teachers helped me to swim against the tide and move

against the wind.

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1.1 Abstract

Strategic Analysis and Planning is a field in which expertise and

experience are key factors. In order to decide on strategic matters such as the

competitive position of a company experts heavily lean on their ability to

reason with uncertain or incomplete knowledge, or in other words on their

experience and expertise. An important aspect is to assess a company's profit

potential in the industry for which Porter's competitive Forces Model is by

far the most widely used framework.

Porter's five forces analysis is a framework for industry analysis and

business strategy development formed by Michael E. Porter of Harvard

Business School in 1979. It draws upon industrial organization (IO)

economics to derive five forces that determine the competitive intensity and

therefore attractiveness of a market. Attractiveness in this context refers to

the overall industry profitability. An "unattractive" industry is one in which

the combination of these five forces acts to drive down overall profitability.

A very unattractive industry would be one approaching "pure competition",

in which available profits for all firms are driven to normal profit.

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The model of the Five Competitive Forces was developed by

Michael E. Porter in his book “Competitive Strategy: Techniques for

Analyzing Industries and Competitors” in 1980. Since that time it has

become an important tool for analyzing an organizations industry

structure in strategic processes.

Porter’s model is based on the insight that a corporate strategy

should meet the opportunities and threats in the organizations external

environment. Especially, competitive strategy should base on and

understanding of industry structures and the way they change.

Porter has identified five competitive forces that shape every

industry and every market. 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 a way that guides the organization for making

decisions regarding the mergers and acquisitions. Porter’s model

supports analysis of the driving forces in an industry. Based on the

information derived from the Five Forces Analysis, management can

decide how to influence or to exploit particular characteristics of their

industry or make decisions regarding M&A.

An important part of the Strategic Analysis and Planning concerns

Porter's Competitive Forces Model and it is interesting to see how this

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well-defined part can be modeled so that the knowledge that it contains

can be used in an expert system for various technicalities in the field of

mergers and acquisitions for the companies to make reliable decisions.

Knowledge in the field of strategic analysis is either uncertain or

incomplete. An expert in the field generally will not have all data at his

disposal. In particular, many data concerning the environment (external

& internal) of the enterprise, such as data of competitors and suppliers,

will sometimes be missing or is difficult to uncover and thus cannot be

taken into account. But also data from within the own enterprise is not

always readily available. Whatever the reason for this lack of data may

be, the expert is expected to generate an analysis the best he can based

on data that is available. Naturally, the more relevant data he can use,

the better the quality of the analysis will be. In other words, if the input

data is not sufficiently available, conclusions drawn will be

correspondingly less certain. This is one of the most striking

characteristics of an expert. He is able to come to conclusions based on a

limited number of data that - in addition - may also be uncertain. For this

purpose he will use his experience.

Literature review

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Three of Porter's five forces refer to competition from external

sources. The remaining are internal threats.

Porter referred to these forces as the micro environment, to contrast it

with the more general term macro environment. They consist of those

forces close to a company that affect its ability to serve its customers and

make a profit. A change in any of the forces normally requires a

business unit to re-assess the marketplace given the overall change

in industry information. The overall industry attractiveness does not

imply that every firm in the industry will return the same profitability.

Firms are able to apply their core competencies, business model or

network to achieve a profit above the industry average as well as to

make ideal decisions regarding M&A. A clear example of this is the

airline industry. As an industry, profitability is low and yet individual

companies, by applying unique business models, have been able to make

a return in excess of the industry average by ways of merger among

various companies.

Components of Porter’s competitive forces

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Porter's five forces include - three forces from 'horizontal' competition:

threat of substitute products, the threat of established rivals, and the threat of

new entrants; and two forces from 'vertical' competition: the bargaining

power of suppliers and the bargaining power of customers.

This five forces analysis is just one part of the complete Porter strategic

models. The other elements are the value chain and the generic strategies

Porter developed his Five Forces analysis in reaction to the then-

popular SWOT analysis, which he found un-rigorous and ad hoc. Porter's five

forces is based on the Structure-Conduct-Performance paradigm in industrial

organizational economics. It has been applied to a diverse range of problems,

from helping businesses become more profitable to helping governments

stabilize industries.

The Porter model is also useful in examining the future configuration of

strategic strength and attractiveness of markets which the firm wishes to

enter. It is this configuration which will determine the strategic choice that

the firm makes.

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Each of these five forces is based on structural features

(dimensions) which collectively impact the profit potential. All

five forces jointly determine the intensity of the industry

competition and profitability. The strongest forces become crucial

from the point of view of decisions regarding M&A strategy


Unsystematic Risk

Unsystematic Risk

Systematic RiskSystematic Risk

Bargainig power of customer

Bargaining power of suppliers

Threat from Substiture Products

Threat of new Entrants

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Main aspects of porter’s five forces model

The original competitive forces model, as proposed by Porter,

identified five forces which would impact on an organization’s behavior in a

competitive market. These include the following:

The rivalry between existing sellers in the market.

The power exerted by the customers in the market.

The impact of the suppliers on the sellers.

The potential threat of new sellers entering the market.

The threat of substitute products becoming available in the market.

1.1.1 Primary Dimensions of Porter's Five Forces Model

The primary dimensions of the competitive forces model consists of five

forces that significantly impacts on an organization's behavior in a competitive

market and should be consistent for a particular industry.

These include the rivalry between current vendors in the market, the muscle

wielded by the customers in the market, the impact of suppliers on the trader, the

impending threat of additional merchants entering the market and the threat of

substitute products developing into a viable alternative in the market. According to

Porter the intensity of competition is determined by the comparative strengths of

these forces.

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Barriers to entry

These are the important structural components with an industry to limit or

prohibit the entrance of new competitors. The major components are scale

economies (advantage of experience, learning and volume), differentiation (brand

image and loyalty), capital requirements (new entrants will face a risk premium),

switching cost involved by the customer, access to distribution channels and cost

disadvantages (patents, location, subsidies).

Rivalry among existing competitors

In most industries, especially when there are only a few major competitors,

competition will very closely match the offering of others. Aggressiveness will

depend mainly on factors like number of competitors, industry growth, high fixed

costs, lack of differentiation, capacity augmented in large increments, diversity in

type of competitors and strategic importance of the business unit.


These are products or solutions that basically perform the same function but

are often based on a different technology. Depending on the level of abstraction

nearly everything can be a substitution. In general the only factor that really

matters is a shift in technology.

Power of Buyers

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Through their bargaining power buyers can force the competitors to lower

their prices or force higher quality or better service. The major factors which

determine the bargaining power are volume (relative to seller sales), does the

product represent a major fraction of the buyer’s costs or purchases, differentiation

or standard product, switching costs, buyer profitability (hence their price

sensitivity), threat of backward integration, importance to the quality of the final

product, and level of knowledge and information of the buyer of industry demand,

actual market prices and supplier cost.

Power of Suppliers

Suppliers can exert their bargaining power over participants by threatening

to raise prices or reduce the quality. A supplier group is powerful if they are more

concentrated than the industry they sell to, or if the customer group is not

important for the suppliers, if the product is an important input to the buyer’s

business, or they have built up switching costs, or the supplier group poses a threat

of forward integration. Through addressing these dimensions which make up the

Five Forces we have outlined factors which will be taken into account in our expert

system. It will still be the expert’s insight who will assert the value of impact of

each individual variable.

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Advantages of Utilizing the Porter Five Forces Model

Porter's five forces model (1980) is based on the premise that a competitive

advantage can only be achieved once a capacity to generate a better than industry

average return on investment can be maintained.

When the model is correctly implemented it can provide companies with a

simple picture that can be used to assess and analyze the business or organization's

competitive position and practical strengths that can be capitalized on to achieve

the allusive sustainable competitive advantage.

In order to use the model, according to its designer, involves establishing the

relationship between the five competitive forces that shape the industry and the

market segment selected for the product. Analyzing the relationship between all

potential competitors, suppliers and buyers provides a platform for generating

alternative solutions to problems that need resolving for success.

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Limitations of porter’s five forces model

Porter’s model is a strategic tool used to identify whether new products,

services or businesses have the potential to be profitable. However it can also be

very illuminating when used to understand the balance of power in other situations.

Porter argues that five forces determine the profitability of an industry. At

the heart of industry are rivals and their competitive strategies linked to, for

example, pricing or advertising; but, he contends, it is important to look beyond

one’s immediate competitors as there are other determinates of profitability.

Specifically, there might be competition from substitute products or services.

These alternatives may be perceived as substitutes by buyers even though

they are part of a different industry. It is important to appreciate that company’s

purchase from suppliers and sell to buyers. If they are powerful they are in a

position to bargain profits away through reduced margins, by forcing either cost

increases or price decreases. This relates to the strategic option of vertical

integration, when the company acquires, or merges with, a supplier or customer

and thereby gains greater control over the chain of activities which leads from

basic materials through to final consumption. It is important to be aware that this

model has further limitations in today's market environment; as it assumes

relatively static market structures. Based originally on the economic situation in

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the eighties with its strong competition and relatively stable market structures, it

is not able to take into account new business models and the dynamism of the

industries, such as technological innovations and dynamic market entrants from

start-ups that will completely change business models within short times. For

instance, the computer and software industry is often considered as being highly

competitive. The industry structure is constantly being revolutionized by

innovation that indicates Five Forces model being of limited value since it

represents no more than snapshots of a moving picture. Therefore, it is not

advisable to develop a strategy solely on the basis of Porter’s models

(Kippenberger, 1998; Haberberg and Rieple, 2001), but to examine it in addition

to other strategic frameworks of SWOT and PEST analysis.

Some issues during the implementation of these Five Forces are crucially

important for organizations to build long-term business strategy and

sustaining competitive advantages rather than simply list the forces. Successful use

of the Porter Model Analysis includes identifying the sources of competition, the

strength and likelihood of that competition existing, and strategic

recommendations for the action a company should take in order to develop barriers

to competition.

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In order to understand the five forces model that Porter's

recommends one need to establish and understand the relationship

between the five forces first.

The primary objective of a successful corporate strategy that is based on

the porter five forces model should be to identify and take advantage of

the existing competitive forces in a manner that will enhance the

competitive position of the company by deciding on the merger or


One of the main advantages of using the Porter five forces model

as a basis of industry analysis is that the model provides an objective

framework for conducting an analysis of the primary constrains and

driving forces that may be present in the industry within which the

company operates. The information that can be obtained by using the

Five Forces Analysis model is normally utilized by the management

team to determine how to manipulate or take advantage of identifiable

characteristics of the industry being analyzed.

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Valuation for mergers buyouts & restructuring- Azak Wiley

India (P) Ltd