4th NOVEMBER 2008 Porter’s five forces analysis is an industry’s framework analysis used in the development of business strategies. Michael Porter developed it in 1979. The analysis makes use of industrial organization concepts to derive the five forces that determines the intensity of competition and the market attractiveness. (Porter, 1979). Attractiveness in this context refers to the profitability of the industry. This means that an unattractive industry is the one where the forces combination works negatively to bring down the profitability of the industry. An attractive industrial environment would therefore be the one that tends to approach pure competition.
In order to contrast the above forces from the more general term macro environment, Porter decided to call the above forces as microenvironment, which means forces close to the company that affects the business ability to make profit and serve its customers. (Porter, 1980)Organizations are always busy competing for customers, for access to new markets, for access to raw materials as well as the right to come up with new products. Non-profit making organizations compete for grants and donations, government agencies compete for general funding from general fund budgets while the political parties compete for votes.
In everyday existence of profit making and non profit making organizations competition is part and parcel of the organizational activities and it is a fact of life if viewed from the long-term perspective. (Thomson, 1997). Many organizations in this competitive environment therefore come up with various ways through which they ensure that they remain competitive in the market such as the use of information technology to fast track each and every activity in the organization as well as the activities of the close and distant competitors.
(Jerry, 2006), The purpose of this report is to establish the implication of Porter’s Five Forces Model in understating the competitive strategic analysis of an organization. To amicably establish the implications of the above model and foster understanding of the concepts used a randomly Literature review The fives forces used by Porter in understanding the competitive strategic analysis of an organization include, the buyers bargaining power, the suppliers bargaining power, the threat of substitutes and the thereat of new entrants. Threat of new Entrants Bargaining Power of Existing rivalry of competitors bargaining Suppliers’ power of buyers Threat of substitute products The threat of entry reduces an industry’s potential profitability because firms compete for customers which reduce the revenue of the firms.
When the threat of entry is high the, incumbents do not have any other option but to hold their prices down or carry out investment boost in order to bar new competitors. For example, in coffee retailing comparatively low barriers to entry means that a company like Starbucks must aggressively invest in modernizing menus and stores.
(Visil, 2005)Powerful suppliers who include suppliers of labour can squeeze out an industry’s profitability. For example according to Porter, Microsoft has really contributed to profitability erosion among makers of personal computers by raising operating systems prices. PC makers have limited freedom to raise their prices when competing fiercely for customers who can easily move between them.