Porter's Five Competitive Forces model is a framework made by Michael Porter that is used by businesses when thinking about business strategy and the impact of Information technology. This model can help a business decide whether to, enter an industry or expand your business in the industry you are already working on. The five forces in the model are the following: 1. Buyer Power 2. Supplier Power 3. Threat of substitute products or services 4. Threat of new entrants 5. Rivalry among existing companies Buyer Power The more choices of suppliers that a consumer can choose from, the higher the buyer power is and vice versa.
Suppliers want to lower buyer power as much as possible while consumers want it to increase. One of the ways to keep buyer power low is to use loyalty programs, which reward loyal customers with special bonuses or offers. Supplier Power The supplier power is high when buyers have few choices to choose from, and it is low when there are many choices to choose from. As a producer, you want the supplier power to be high. Threat of Substitute Products or Services This is level is high when there are many different alternatives to choose from. As a producer, you want little or substitutes or services to block you from gaining profits.
A monopoly is not that common in a business so to keep customers from going to your competitors you create an advantage through switching costs. These are costs, not necessarily money that keeps customers wanting to stay with your company and reluctant to switch to another service. This differs from loyalty programs in that a company may have a whole profile unique to yourself, but if you switch to another company you would have to start the process over again. Threat of New Entrants This level is high when it is easy to enter a market, and low and when it is hard to enter one.
Rivalry This level is high when competition is tough and cutthroat and low when it competition is more relaxed. Porter's Generic Strategies The Cost Leadership Strategy Porter's generic strategies are ways of gaining competitive advantage – in other words, developing the "edge" that gets you the sale and takes it away from your competitors. There are two main ways of achieving this within a Cost Leadership strategy: * Increasing profits by reducing costs, while charging industry-average prices. * Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you've reduced costs.
The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low cost producers who may undercut your prices and therefore block your attempts to increase market share. You therefore need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have:
* Access to the capital needed to invest in technology that will bring costs down. Very efficient logistics. * A low cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors. The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies. This is why it's important to continuously find ways of reducing every cost. One successful way of doing this is by adopting the Japanese Kaizen philosophy of "continuous improvement".
The Differentiation Strategy Differentiation involves making your products or services different from and more attractive those of your competitors. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support and also brand image that your customers value. To make a success of a Differentiation strategy, organizations need:
* Good research, development and innovation. * The ability to deliver high-quality products or services. Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings. Large organizations pursuing a differentiation strategy need to stay agile with their new product development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments. The Focus Strategy Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low cost or well-specified products for the market.
Because they serve customers in their market uniquely well, they tend to build strong brand loyalty amongst their customers. This makes their particular market segment less attractive to competitors. As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its own. But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only that market niche.
It's simply not enough to focus on only one market segment because your organization is too small to serve a broader market (if you do, you risk competing against better-resourced broad market companies' offerings. ) The "something extra" that you add can contribute to reducing costs (perhaps through your knowledge of specialist suppliers) or to increasing differentiation (though your deep understanding of customers' needs).