Saturday, March 14, 2015

Porter's Five Forces

If you look to understand the Porter’s model, well, good luck. It took me ages to get around the concept. Primarily, the person who taught me the concept made the same mistake while teaching it that most people make while learning it, trying to understand the concept in isolation. Each area one-by-one. 


It doesn’t make sense unless you look at the big picture. The thing is, the Porter’s model is a tool, a practical tool and not merely a management concept. For anything that is practical and is a tool, cannot be taken out of its environment to be understood. This is a business world tool, not a science lab experiment.


I am going to make it as realistic as possible. 





The idea of the Porter’s model is the same what the same as the SWOT analysis; understanding your organization viz-a-viz the business environment. The Competitive Business Environment and then, based on that analysis, how to devise a business strategy that ensures entry, survival and finally profits to holding substantial market share.

The Porter’s model is based on the idea of understanding own position, understanding competition and using the tools built on these five forces to determine the competitive market of a particular product in specific and an organization in general.





Threat of Substitutes
Well, there are two sides to it, affordability and availability. When users cannot afford commodities being offered by vendor A, the natural and perhaps the rational decision is to look for the same or at least almost the same. We all know, not everyone has the purchasing power to a German car, this is why we have so many Japanese and Korean cars on our roads.

Secondly, it’s the availability of a substitute. If there is a choice to buy something that is the same if not better, that too, owing to our desires, seems attractive. The world saw an iPhone 4. Nothing like it ever before. Sometime later, the Android came into existence. Today phones that may or may not be better than the iPhone, yet offer a good deal, good competition and at the same time are equally well priced for those that cannot buy the iPhone in markets where it is still sold is a luxury item than a utility.



The Rivalry between Existing Businesses

Rivalry between existing businesses creates downward pressure on prices, just like the Kinky Demand Curve concept in laid down in Economics. There is an increased competition for the same customers and product resources. There is greater competition for market dominance.


Threats of New Entrants

Now where we do not experience any sort of market concentration and the substitutes can be brought into the market with a lesser degree/chance of failure, new entrants are inevitable. These new entrants not only create a downward pressure on the existing prices and profit margins but they, now, themselves become a part of that rivalry between businesses.


Bargaining Power of Suppliers

The same concept of a perfect and imperfect market but with a twist. The twist in here is the supplier, if alone or maybe a couple, can and will control the supply of the raw materials, both, in terms of quantity as well as prices.


Bargaining Power of Customers

If you recall the Law of Demand; you will remember that the demand is affected by change in income as well as a change tastes of consumers. Likewise, in here, if the consumers choose to change their choices, tastes it creates pressure on the businesses to match the changes of their sources of income. Further, if the business is not delivering to the consumer’s satisfaction, these consumers will eventually be customers to another.

Aggregate Demand

* Aggregate Demand – Concept We’ve studied the Law of Demand, we know it is a negative relationship between the price of a commodity and it...