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.
