Porter's 5 forces model (Competitive Model)

According to the mba-tutorials.com website, the porter five forces model was developed  in 1979 by Michael E.Porter from Harvard University. The purpose of this model is to analyze the industry in order to determine the level of intensity regarding the competition and attractiveness of the industry. The attractiveness of an industry is measured in terms of profit; more profitability means a more attractive industry and low profitability means a low attractive industry.

This five forces model comprises of a treat posed by new entrants, bargaining power of suppliers and buyers, substitutes products and intensity of rivalry among competitors.

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Threat of New Entrants

It is normal to say that the profitable industry will attract other firms into the industry. A new entrant to the industry can increase the competition and substantially erode the existing market share position which then reduce the attractiveness of the industry. 

The factor why the industry can attract to the new entrant because the profit earn by new firms are relatively high and encourage many other new entrants operating elsewhere to enter the industry. Besides, the market for the industry is relatively untapped and there are considerable marketing opportunities. On top of that, it also easy for new firms to enter the industry because it has low entry barrier.

Bargaining Power of Suppliers

The suppliers are important to the organization to obtain the inputs such as raw material, labor and any parts that needed to produce the goods and services. 

Supplier can be powerful when the suppliers outputs are really needed to the buyers marketplace success. Besides, when the inputs required by buyers are unique, it will make it costly to switch from one suppliers to another suppliers and the inputs also only available from a small group of suppliers.

 Beside that, the suppliers can be powerful when the buyer's inputs do not present a significant portion of the supplier's business and the suppliers can sell directly to the firm's customers, bypassing the need from the firm.

Bargaining Power of Buyers

Customers or potential buyers are really important for a firm in the industry. The power of buyers can effect the profitability of the business. Buyers have the most power when they are large and purchasable most of the industry's output. It also increase the power of buyers when the industry has many small suppliers supplying the product and the quantity of buyers are large. 

Next, the products represent a relatively large expenses for customers and sales of the product being purchased account for a significant portion of the seller's annual revenues. Apart of that, they have access sufficient information and are able to evaluate the competitive offerings.

Beside that, the buyers could switch to another product without incurring significant switching cost because the supplier's products are not unique and undifferentiated. Lastly, the buyers could make the product themselves.

Substitutes Products

This is the common problems that occur in the existing business. The one product from one business can be replaced by products from another. Generally, product substitutes present a high treat to  a firm when the customers can obtain a product which is almost of the same quality or almost similar functions as the product of the industry produces but with the lower price. 

Substitutes products can really be a treat when the products is undifferentiated and the customers can easily switch away from one supplier to another suppliers with little switching costs. It also more treaty when the customers are price sensitive and have a little brand loyalty.

In addition, the unreal benefit offered by the products in the industry and at the same time the customers can do without the product offered by the industry also increase the power of the substitutes products.

Rivalry Among Competitors

There will be many competitors producing the similar almost similar goods in the industry. So, it is important to understand the nature of the competition in a particular industry as this will determine the strategies undertaken by the firm.

Rivalry among competitors is often the strongest of the five competitive forces and can vary widely among the industries. However, it can be more intense when the industry has two or three dominant firms which battling to be the dominant firms in the industry.

Besides, there are numerous competitors in the industry and the competitors are relatively equal in size and power. In can be more worse when the firms are competing in a slow and shrinking industry. 

Beside that, the product are undifferentiated and are viewed by customers as commodities. Since customers view the products as commodities, the buyers purchasing decision is based on primarily on the price and less on product characteristics. Moreover, the high fixed cost of production and for exiting the business such as social or government restriction also cause companies to remain in an industry.

References: 

1) http://www.mba-tutorials.com/strategy/65-porters-five-forces-model.html

2) Strategic Management. Z.Abidin.M & H. J. Ann & W. F.Yee. 2014. Second Edition. P. 43-48