The Porter’s five forces are the most important to understand where the power lies in business situation. It is useful to understand both the strength of your current competitive position and the position you want to move in future.
Porter’s five forces model is now become useful tool for any companies and any industries. These five forces not only stimulate the competition in the industry but also shape up the industry. These five forces help a company to understand the structure of industry as well as how to generate profit even in intensive competition.
The main strength of these competitive forces is how this affects on the prices, costs, and the investment requires to competing in the industry. This also reflects in the balance sheets and income statements of single firm in the industry.
It is also important to understand the main causes of profitability in industry rather than to understand the attractiveness of industry. The main elements that are quantified by five forces are the percentage of buyer’s total cost accounted for by the industry products, to help access barriers to entry, as well as the buyer’s switching costs.
Eliminating rivals is risky strategy for most companies and it reduces the long term profitability in industry if they ignore the competitors as strong rivals. The major companies like IBM, Pfizer and Wall mart are now taking granted the barriers of new small companies in industry and trying to retain the profitability in intense competition.
These five forces reveal whether an industry is truly attractive or not and it helps investor to know about the positive or negative change in industry structure. It reveals the main causes of competition in industry.
It also helps company manager to know about the opportunities arrives in terms of customers, suppliers, substitutes, potential entrants, and rivals that can become important for superior performance. The one who knows more about five forces can retain the attractiveness in industry but the most important thing is to understand the five force of competition.
New entry in the industry brings new capacity with intention to gain market share from existing company, it puts pressure on prices, costs and the rate of investment necessary to compete. Pepsi did the same when they entered in bottled water market, Microsoft did when it began to offer internet browser and Apple did when it entered in the music distribution business. Tata also did the same when they entered in the household furniture business in India. The threat of entry puts a limit on profitability in industry.
The strategic managers of the company who intend to develop edge over competitors can use this model to understand the industry context in which the firm operates.
Any company should seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and establishing appropriate strategies for competition. If company fully able to understand these five forces of competition and understand which one is most important, it will be in stronger position than their rivals.
The successful use of Porter’s five forces model includes identifying the sources of competition, the strength of the existing competition, and strategic recommendation for company to take action against competitors.
These five forces reveal the most significant aspects of the competitive environment. Company should understand where they stand against their buyers, suppliers, entrants, rivals and new entrants. Company managers should know the possible actions against competition and know how to utilize these five forces effectively.
Company should use Porter’s model at basic line business level to making a quantitative evaluation of firm’s strategic position in the industry. A firm should develop five forces model that competes in a single industry. For diversified companies each line of business should develop its own industry specific five forces analysis to compete in the industry.
Manager should understand that the three out of five forces is refer to competition from external sources and better to develop strategy against them. Company should know the factor for barriers of new entrants like high switching costs, scarcity of resources, existing loyalty to brand, and government restrictions or legislation. Manager should know about the power of suppliers if they have few substitutes as supplying industry has higher profitability than buying industry for such products.
http://www.investopedia.com/features/industryhandbook/porter.asp#axzz1Qd2rgA87
For pharmaceuticals industry the barrier for new entries are very less because of high R & D costs, suppliers, buyers and substitutes powers are also less for patent drugs. So manager should understand the profitability of company and attractiveness of the industry. Overall the pharmaceutical industry remained high value, favorable market position with good earnings growth.
In short, Porter’s five forces model can be used as diagnosis tools and aid for strategy development.
LEAD 