Five Forces Model

Powerful Essays
Professor Michael Porter of the Harvard Business School developed a framework that aids in the development of an organizations competitive advantage. Porter identified five basic forces that act on the organization; I. The bargaining power of suppliers; II. The bargaining power of buyers; III. The threat of potential new entrants; IV. The threat of substitutes; V. The extent of competitive rivalry. The bargaining power of suppliers. Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods or services. In every industry there are suppliers; Porter put forward the idea that suppliers are more powerful under the following conditions; „« If it is dominated by a few companies and is more concentrated than the industry it sells to. This means it is difficult to switch suppliers if they start exerting power. „« It is not obliged to contend with other substitute products for sale to the industry. This is the case if the suppliers role is technical and no other suppliers can offer this product/service. „« The industry is not an important customer of the supplier group. If the industry that the supplier is selling to, does not represent a large proportion of its sales then it can exert power. „« The supplier¡¦s product is an important input to the buyers business. Supplier¡¦s product is essential to the buyer then they can charge whatever price they wish, and the buyer will pay because the product is essential. The bargaining power of buyers. Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other. Porter put forw... ... middle of paper ... ... 1. It assumes that the organisation`s own interests come first; it doesn¡¦t take into account charities or government bodies, where the needs of other people come first. (Lynch 2006) 2. The model assumes relatively static market structures. The competitive environment of an industry is ever-changing. (Lynch 2006) 3. In economic terms, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver. 4. It only looks at the macro-environment of an organisation and makes no attempt to investigate the micro-environment. 5. It is said to be dated; when the model was created in the 1980`s, the US economy was under-going cyclical growth primary objectives consisted of profitability and survival. Development in most industries had been fairly stable and predictable, compared with today¡¦s dynamics.