In 1979, a new model was developed for the industry analysis and for the business strategy development: Porter's 5 Forces model. This framework is named after its creator Michael Porter who is a university professor specialized in strategy at Harvard Business School. The model was published for the first time in a book called "Competitive Strategy: Techniques for analyzing industries and competitors" written by Michael Porter himself. He is famous for his main studies focused on how a firm could develop a competitive strategy to obtain a competitive advantage by mastering better than its rivals and understanding the forces which structure its competitive environment. Therefore, he built several strategic tools which are the value chain, the generic tree strategies, the market positioning strategies, strategic groups, Porter's clusters of competence for regional economic development and of course Porter's Five Forces Analysis.
Since the beginning, Porter's Five Forces which has become a reference in analyzing the power of the forces is governing the market. He has identified five competitive forces which recover all kind of markets. Three of Porter's five forces refer to competition from external sources. The remainder is internal threats. Porter referred to these forces as the micro environment. These forces are the intensity of competitive rivalry within an industry, the threat of new entrants and of substitute products, the bargaining power of the customers and suppliers. They consist of those forces close to a company that affect its ability to serve its customers and make profit.... Each of these forces helps to understand the nature of the intensity of the competition present on a market and how this market is or not attractive and profitable. Attractiveness in this context refers to overall industry profitability. "An "unattractive" industry is one in which the combination of these five forces act to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all time are driven down to zero." The overall industry attractiveness does not imply that every firm in the industry will return the same profitability.
[...] The model is also reduced to competitive forces acting in a perfect classic and static market, which is not anymore the case of today's modern business. Indeed, nowadays business is constantly deeply moving in because of technological breakthroughs or new entrants of startups, for example, which can completely change the structure of an industry. External events like 9/11/2001, wars like the Gulf War or the Iraq War as well as internet's boom are all events which will have direct effect on companies. [...]
[...] The threat of substitute products or services Knowing about the threat of substitute products or services helps to understand how easy it is for a new product to replace an existing product. The presence of the substitutes has an influence on the industry's attractiveness and its profitability. This is because they have generally lower prices. Indeed, the increase of the price of a product or service of a company will conduct to a rise of the quantity sold by its competitor who didn't changes its prices, or new competitors which offer lower prices for a product answering to the same need. [...]
[...] The model is easy to use, adaptable to each kind of industry and gives a structured analysis of the market and its competitive forces. It is also a very flexible model and in accordance with the organizations needs, some forces can be analyzed more than others. According to the site TheManager.org, there are many reasons why a company should needs Porter's Five Forces analyzes. They are classifiable in three kinds of categories according to the type of information the model could provides. [...]
[...] The bargaining power of customers The bargaining power of customers is also described as the market of outputs: the ability of customers to put pressure on the firm, which also affects the customer's sensitivity to the price changes. The main influence of the customers is evaluated by their capacity of negotiation. Customers are the buyers who create the demand on a market. Analyzing this force helps to know the level of bargaining power of customers. Their influence on the price in terms of payment, and as deadlines determines the profitability of the market. [...]
[...] The second category of information given by analyzing Porter's 5 Forces will help making “Dynamical Analysis”. It concerns all the data which will give information on all the potential evolutions concerning the global market and its players. Being aware of the future evolutions helps the company to anticipate and so avoid putting it-self in a critical situation. For example, by analyzing its competitors through business intelligence it will be easier to know what its competitors are planning to do or what their strategies are. [...]
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