The Five Competitive Forces That Shape Strategy Essay

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Porters’ five forces that shape competition in a company’s external environment. He discussed techniques for identifying strategic opportunities and threat at the industry environment. In this article he updates, reaffirmed and extended his classic work of strategy formulation, the Porter’s Five Competitive Forces. The classic five forces are: a. Threat of Entry: the risk of new entry by potential competitors. b. The Power of Supplies: the bargaining power of suppliers. c. The Power of Buyers: the bargaining power of buyers. d. The Threat of Substitute: the competitive force of substitute products. e. Rivalry among existing competitors: the degree of rivalry among established companies. The updates include: how to put the five forces analysis into practice, addresses common misunderstandings, provides practical guidance for users of the framework, and a deeper view of its implications for strategy today. The five forces govern the profit structure of an industry by determining how the economic value it creates is apportioned. The stronger each of these forces is, the more established companies are limited in their ability to raise prices and earn greater profits. A strong competitive force is a threat because it depresses profits. A weak competi¬tive force is an opportunity because it allows the company to earn greater returns. Changes in the strength of the forces signal changes in the competitive landscape critical to ongoing strategy formulation. As the forces are discussed, the threat of entry, particular attention paid to the determinants of barriers to entry and expected retaliation. The risk of entry by potential competitors is a function of the height of barriers to entry. The height of barriers to entry is determined by: the extent to which incumbents have brand loyalty; the extent to which incumbents enjoy an absolute cost advantage over

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