Porters Five Competitive Forces Summary and Review

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MBA Program

Course: Strategic Management

Assignment: Summary and Review
The Five Competitive Forces that Shape Strategy
28-March-2013

The Five Competitive Forces that Shape Strategy
The Five Competitive Forces (by Michael E. Porter, in 1979) in a discussion on “How Competitive Forces Shape Strategy”.
Porter’s five competitive forces model (Hereinafter the model) is a strategic tool used to make an analysis of the value of an industry structure. While some business strategists may focus solely on existing competitors Porter’s model explains that there are several other forces in the competition that the strategist should be aware of. The model is constructed of the following: Threat of new entrants, threat of substitute product or services, bargaining powers of the buyers, bargaining power of the suppliers and competitive rivalry within the industry.
Threat of new entrants – the entry of competitors into an industry drives a competitive advantage into making for better products as well as a wider choice of products. The intensity of threat of new entrants is influenced by a number of factors, some of which include switching cost economies of scale and brand loyalty. Switching costs refer to the one-time cost that buyers incurred if they switch from one company product to another's. To overcome the switching cost barrier new entrants must offer buyers bigger price cuts, better quality or service which in return can lower profit margins for new entrants. New entrants must also face the barrier of economies of scale which requires that new entrants to come on large scale, risking a strong reaction from existing competitors or coming to a small industry scale accepting cost disadvantages. Economies of scale refer to the decline in unit cost of product or service. Take for example the car making industry, not only that new makers must overcome the economies of scale in terms of unit cost and switching costs in order for car makers to be successful they...

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