Porter’s 5 Force Model

Porter’s Five-Force model consists of rivalry, threat of substitutes, buyer power, supplier power and threat of new entrants and entry barriers. I believe Porter’s Five-Force model offers a corporation a solid backbone foundation in developing an international business strategy. The first part of Porter’s Five-Force model is rivalry. According to Porter, rivalry focuses on two main factors which are a high concentration ratio and a low concentration ratio. A high concentration ratio indicates that a high concentration of market share is held by the largest firms which the industry is concentrated.

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A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share (Porter, 2010). Porter offers competitive moves a corporation can choose to implement such as changing prices and improving product differentiation, to gain an edge on their rival. Porter also outlines in great depth how the intensity of rivalry is influenced by ten key industry characteristics, such as slow market growth and industry shakeout. The second component of Porter’s Five-Force model is the threat of substitutes.

Porter states that a threat of substitutes exits when a product’s demand is affected by the price change of a substitute product. An example Porter uses to clarify his position is the price of aluminum beverage cans which is constrained by the price of glass bottles, steel cans, and plastic containers (Porter, 2010). These products do not serve as rivals in the aluminum can industry but merely as alternative substitutes. The third element of Porter’s Five-Force model is buyer power. Porter demonstrates power buyers and weak buyers.

As a former Department of Defense employee, I thought Porter did an excellent job of outlining an industry where the buyers are concentrated. The Department of Defense chooses which purchases they will make from a group of bidding defense contractors. I felt the Intel Corporation relationship with PC manufacturers was another great example of Porter’s illustration on weak buyers. Intel supplies critical portions of buyers’ input-distributing of purchases (Porter, 2010). The fourth section of Porter’s Five-Force model is supplier power. Porter exhibits powerful suppliers and weak suppliers.

Porter states suppliers are powerful if suppliers are concentrated. The example Porter uses is the drug industry’s relationship to a hospital. Suppliers are weak if customers are weak. Porter uses the illustration of travel agents relationship to airlines (Porter, 2010). The fifth and final module of Porter’s Five-Force model is the threat of new entrants and entry barriers. According to Porter, when industry profits increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry.

Porter goes on to list four sources for barriers to entry which are government, patents, asset specificity and organizational economies of scale. Government can restrict competition through the granting of monopolies and through regulation. Patents serve as private property, this creates a barrier because it prevents others from using the knowledge. Asset specificity serves as a barrier because when firms already hold specialized assets they resist efforts by others from taking their market share and potential entrants are reluctant to make investments in highly specialized assets.

In outlining organizational economies of scale, Porter states that the most cost efficient level of production is termed minimum efficient scale which is the most cost efficient level of production. Industries with high MES deter entry of small, start-up businesses. Operating at a less than MES permits the firm to sell at a premium price. The barrier to entry is greater because of the large disparity between industry MES and entry unit costs (Porter, 2010). I believe Porter’s Five-Force model is extremely helpful and provides a solid foundation when developing one’s international strategy.

When investigating rivalry, you are able to understand the competition which allows you to adjust accordingly in order to gain a competitive advantage. Understanding the threat of substitutes allows you to see the different variables that may have an impact on your product. Analyzing buyer power enables your corporation to utilize the leverage they possess and also allows for your corporation when in a weak buying position to make the necessary adjustments in order to succeed. In examining supplier power, you enable your corporation to have a direct influence on the producing industry.

In probing barriers, your corporation will know if it is feasible and cost efficient to enter a certain market. I feel that if you understand and incorporate Porter’s Five-Force model, you are giving your corporation a solid blueprint in developing an international strategy. The only limitation I saw in Porter’s modeling technique is that he did not touch on the subject of developing a strategy for the future and addressing new trends that may arise. “Porter’s economic speculations may be even a bit archaic as we move forward into the era of the stateless corporation.

Here, the global corporations dissolve and reform, and market opportunities come and go” (Allio, 1990. ). I agree with Allio that market opportunities come and go. I feel the successful corporations are the ones who capitalize on market opportunities. I feel Apple is a company that constantly looks to take advantage of market opportunities. In 2007, Apple introduced the IPhone which was the first touch screen phone, which is now the precedent among cell phones. Apple continues to stay ahead of the competition by understanding future trends and making the necessary upgrades in their product.

I feel developing a strategy for the future and understanding new trends and implementing the proper modifications is vital to the survival of a successful corporation. Porter, M. E. (1999-2010). Porter’s Five Forces. http://www. quickmba. com/strategy/porter. shtml. Retrieved July 10, 2011 Allio, Robert J. (1990), “Flaws in Porter’s Competitive Diamond? “, Planning Review, 18 (No. 5, September/October), 28-32. Retrieved July 10, 2011, from ABI/INFORM Global. (Document ID: 729356).

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