The Porter Industry Competition Model
Introduction
The Porter Industry competition model is a tool used by businesses to analyze the competitive structure of an industry and the relative power of each firm or group within it. It was developed by Harvard Business School professor Michael E. Porter in his article, “The Five Competitive Forces thatShape Strategy, which appeared in the Harvard Business Review in 1979. The model outlines five major forces that can affect a business within an industry: competition between existing firms, the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products or services. The model uses these forces to evaluate the strength or weakness of a given industry and to determine what strategy a company can use to gain a competitive advantage in the industry.
Competition Between Existing Firms
The first force of Porter’s Industry Competition Model is the competition between existing firms. This is the most important force and is affected by the number and size of firms in the industry and the degree of product differentiation. When there are many firms and products are highly differentiated, competition is greater. This can lead to numerous strategies, such as price wars and product improvements, in order to gain a competitive advantage. It can also put pressure on firms to maintain or improve their efficiency in order to remain competitive.
Bargaining Power of Buyers
The second force is the bargaining power of buyers. This refers to the ability of buyers to choose between different firms offering the same product. If buyers have a wide variety of options, they have greater bargaining power, which can be used to negotiate lower prices or better terms. On the other hand, if there are fewer options available, buyers may have less bargaining power, allowing firms to charge higher prices or have more favorable terms.
Bargaining Power of Suppliers
The third force of the Industry Competition Model is the bargaining power of suppliers. This refers to how much power suppliers have when negotiating prices and terms with their customers. If suppliers have few alternatives, their bargaining power is high, allowing them to raise prices or offer less favorable terms. Likewise, if there are numerous suppliers, buyers will have greater bargaining power, allowing them to negotiate lower prices or more favorable terms.
Threat of New Entrants
The fourth force is the threat of new entrants. This refers to how difficult it is for a new firm to enter an industry and compete with established firms. Industries with high barriers to entry, such as high capital costs or complex regulations, are less likely to be threatened by new entrants. On the other hand, industries without such restrictions may be more likely to attract new firms, increasing competition.
Threat of Substitute Products or Services
The fifth and final force of the Industry Competition Model is the threat of substitute products or services. This refers to the possibility of customers switching to a different product or service offered by another firm. If customers have a wide variety of alternatives, they are more likely to purchase one of them in lieu of the product offered by the firm in question. This can lead to decreases in demand and lower profits for the firm.
Conclusion
The Porter Industry Competition Model is an important tool for businesses to analyze the competitive structure of an industry and the various forces that can affect it. By understanding these forces and their effects on the industry, businesses can better position themselves to gain a competitive advantage and protect their profits. The model can also be used to evaluate the potential for changes in the industry and identify possible opportunities for firms to capitalize on. Overall, the Porter Industry Competition Model provides a comprehensive look at the forces affecting an industry and how they can be used to formulate strategic plans that will give a firm a competitive edge.
