poters 5 forces

1. SUBJECT : PRINCIPLES OF MANAGEMENT
TOPIC : PORTERS 5 FORCES
DATE OF SUBMISSION : 17TH MARCH 2015
SUBMITED TO
NISHAT MOUMITA
FACULTY OF PRINCIPLES OF MANAGEMENT
SUBMITED BY
NAME : RAZU ANIKUZZAMAN
ID : 14-27877-3
SECTION : L
FACULTY COMMENTS MARKS

2. Porter’sFiveForces
AssessingtheBalanceofPowerina BusinessSituation
Assess the balance of power in a business situation, with
James Manktelow & Amy Carlson.
The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in
a business situation. This is useful, because it helps us understand both the strength of our current
competitive position, and the strength of a position we are considering moving into.
With a clear understanding of where power lies, we can take fair advantage of a situation of
strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an
important part of our planning toolkit.
Conventionally, the tool is used to identify whether new products, services or businesses have
the potential to be profitable. However it can be very illuminating when used to understand the
balance of power in other situations.
Understanding theTool
Five Forces Analysis assumes that there are five important forces that determine competitive
power in a business situation. These are:
1. SupplierPower:Here we assesshow easyitisfor supplierstodrive upprices.Thisisdrivenby
the numberof suppliersof eachkeyinput,the uniquenessof theirproductorservice,their
strengthandcontrol overus,the cost of switchingfromone toanother,andso on.The fewer
the supplierchoiceswe have,andthe more we needsuppliers'help,the more powerful we
suppliersare.
2. Buyer Power: Here we ask ourself how easyit isfor buyerstodrive pricesdown.Again,thisis
drivenbythe numberof buyers,the importance of eachindividual buyertoour business,the
cost to themof switchingfrom ourproducts andservicestothose of someone else,andsoon. If
we deal withfew,powerful buyers,thentheyare oftenable todictate termsto us.
3. Competitive Rivalry:What is importanthere isthe numberandcapabilityof ourcompetitors.If
we have many competitors,andtheyofferequallyattractive productsandservices,then we'll
mostlikelyhave little powerinthe situation,because suppliersandbuyerswillgoelsewhereif
theydon't geta good deal from us.On the otherhand,if no-one else candowhat we do, then
we can oftenhave tremendousstrength.
4. Threat of Substitution:This isaffectedbythe abilityof ourcustomerstofinda differentwayof
doingwhatwe do – forexample,if we supplyaunique software productthatautomatesan
importantprocess,people maysubstitute bydoingthe processmanuallyorbyoutsourcingit.If
substitutioniseasyandsubstitutionisviable,thenthisweakens ourpower.
5. Threat of New Entry: Poweris alsoaffectedbythe abilityof people toenter ourmarket.If it
costs little intime ormoneytoenter ourmarketand compete effectively,if there are few
economiesof scale inplace,orif we have little protectionforourkeytechnologies,thennew

3. competitorscanquicklyenterourmarketandweaken ourposition.If we have strongand
durable barrierstoentry,then we can preserve afavorable positionandtake fairadvantage of
it.
From "How Competitive Forces Shape Strategy" by Michael E. Porter. Published by Harvard
Business Review, 1979.
These forces can be neatly brought together in a diagram like the one in figure 1 below:
Figure 1 – Porter's FiveForces

4. Figure 2 – Porter's FiveForces Example: Buying a
Farm
This worries him:
 The threat of newentry isquite high:if anyone looksasif they're makinga sustainedprofit,
newcompetitorscancome intothe industryeasily,reducingprofits.
 Competitive rivalryisextremelyhigh:if someoneraisesprices,they'llbe quicklyundercut.
Intense competitionputsstrongdownwardpressure onprices.
 Buyer Power isstrong,againimplyingstrongdownwardpressureonprices.
 There issome threat of substitution.

5. Unless he is able to find some way of changing this situation, this looks like a very tough
industry to survive in. Maybe he'll need to specialize in a sector of the market that's protected
from some of these forces, or find a related business that's in a stronger position.
Key Points
Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in
an industry. With a little adaptation, it is also useful as a way of assessing the balance of power
in more general situations.
It works by looking at the strength of five important forces that affect competition:
 SupplierPower:The powerof supplierstodrive upthe pricesof our inputs.
 Buyer Power: The powerof our customersto drive down ourprices.
 Competitive Rivalry:The strengthof competitioninthe industry.
 The Threat of Substitution:The extenttowhichdifferentproductsandservicescanbe usedin
place of our own.
 The Threat of NewEntry: The ease withwhichnew competitorscanenterthe marketif theysee
that we are makinggoodprofits(andthendrive ourpricesdown).
By thinking about how each force affects us, and by identifying the strength and direction of
each force, we can quickly assess the strength of our position and our ability to make a sustained
profit in the industry.
We can then look at how we can affect each of the forces to move the balance of power more in
our favor.