Essay On Porter Five Forces Analysis

Porter five forces analysis is a framework for industry analysis and business strategy development. It inducements upon industrial organization economics to develop five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An unattractive industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching pure competition, in which available profits for all firms are driven to normal profit. This analysis is associated with its principal innovator Michael E. Porter presently at Harvard University as of 2014.

Porter's five forces considered together can help you to determine whether a firm has an economic moat. The framework is particularly useful for examining a firm's external competitive environment. After all, if a company's competitors are weak, it may not take much of a moat to keep them at bay. Likewise, if a company is in a cutthroat industry, it may require a much wider moat to defend its profits. The five forces concept is perhaps best explained through an example.

Buyer Power.

Consumer-products companies face weak buyer power because customers are fragmented and have little influence on price or product. But if we consider the buyers of consumer products to be retailers rather than individuals, then these firms face very strong buyer power. Retailers like CoolBlog are able to negotiate for pricing with companies like Chatime because they purchase and sell their product in cheap price.

Supplier Power.

More than likely, consumer-products companies face some amount of supplier power simply because of the costs they incu...

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... part from that, the threat of substitutes. With so many firms in the quick service drink industry, low switching costs, similar products, and healthier options, the threat of substitutes is very high. When there is one product successful, it also leads to the creation of other products that can perform the same functions as the product of the same industry.

Porter also mentions that if one industry wishes to follow suit, producing products with similar function, attention should be given to product that enjoy steady-price performance treads off with the industry product. Secondly is would entail minimum switching costs for a buyer. Lastly are produced by industry earning high profits. Porter recommends that by doing advertising, product quality improvement, and marketing, R&D and product distribution, an industry can improve its collective against the substitute.