assignment

BIS

Introduce:

The model of the Five Competitive Forces was developed by Michael E. Porter in his book …Competitive Strategy: Techniques for Analyzing Industries and Competitors in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes. Porters’ model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change.

Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porter’s model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management

can decide how to influence or to exploit particular characteristics of their industry.

In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as it occurred only among today’s direct competitors, yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential etchants, and substitute products, the rivalry that result from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.

2 The Five Competitive Forces

The Five Competitive Forces are typically described as follows:

2.1 Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or service, or shifting costs to industry participants. Powerful suppliers, including suppliers of labor, can squeeze profitability out of an industry that is unable to pass on cost increasing in its own prices. Microsoft, for instance, has contributed to the erosion of profitability among personal computer makers by raisin

prices on operating systems. PC makers, competing fiercely for

customers who can easily switch among them, have limited

freedom to raise their prices accordingly. And the supplier

group does not depend heavily on the industry for its revenues. Suppliers serving many industries will not hesitate. Supplier

bargaining power is likely to be high when:

1 The market is dominated by a few large suppliers rather than

a fragmented source of supply, there can reduce the unnecessary

cost which is often change the supplier. For large supplier,

most part product of raw material in company need large supplier

offer. There will cause lack of sources and Influence

Company’s running and cause huge loss as supplier stops supply

raw material to company suddenly,. Opposite, for fragmented

source of supply, company can choose the other one and do not

influence market share.The supplier’s customers are

fragmented, so their bargaining power is low, so that they can

accept a lot of customers from different place.

2 There are no substitutes for the particular input; the

company takes one product from specific supplier. However it

is also good to company. Because of the suppliers usually do

not change always, thus it provide stead environment for

industry. Once the company choose supplier, company usually make long time cooperation.

3 The switching costs from one supplier to another are high, Sustainable companies usually try to employ strategies that incur some sort of high cost in order to dissuade customers from switching to a competitor's product, brand or services. For example, many cellular phone carriers charge very high cancellation fees for canceling a contract. Cell phone carriers do this in hopes that the costs involved with switching to another carrier will be high enough to prevent their customers from doing so. So if company often changes suppliers easier to increasing the cost. And once the customers reliable one brand. Customers will used to use that brand. Therefore, company maybe loss the customers if company often changes suppliers.

4 There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high Such as Food Street, Student Street and shopping center. There can bring quit profit and attract a lot of customers to buy. One threat is existed too. Because

of supplier integrating also bring competition of business. It

is very possible be loser and cause shop closed down or the product of company attract many customers and make big profit.

5 The buying industry has a higher profitability than the supplying industry, the buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products), and the buying industry has low barriers

to entry.

In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options

for the organization.

2.2 Bargaining Power of Customers

《Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monophony - a market in which there are many suppliers and one buyer. Under such market conditions, the

buyer sets the price. In reality few pure monopolies exist, but frequently there is some asymmetry between a producing industry and buyers. The following tables outline some factors that determine buyer power. Powerful customers can capture more value by forcing down prices. As with suppliers, there may be distinct groups of customers who differ in bargaining power.

A customer group has negotiating leverage if: there are few buyers, or each one purchases in volumes that are large relative to the size of a single vendor. Large-volume buyers are particularly powerful in industries with high fixed costs, such as telecommunications equipment, offshore drilling, and bulk chemicals. High fixed costs and low marginal costs amplify the pressure on rivals to keep capacity filled through discounting》Customers bargaining power is likely to be high when

1They buy large volumes; there is a concentration of buyers, as it has large volumes or manufacturing can

reduce the cost and make profit. The supplying industry

comprises a large number of small operators. Every part

does its specific work in order to make bigger

efficiency.

2 The product is undifferentiated and can be replaces by substitutes, for example. Customers can choose the same goods however different price on the internet so as to buy the value goods.

3 Switching to an alternative product is relatively simple and is not related to high costs, Customers can accord income, life-cycle style etc. to changing product easily. Consumer can choose product which is whatever consumers want. One major reason is there is not related to high cost and convenience and easy to satisfaction people’s value. People’s propensity direct influence people choose. Consumer will choose the alternative all the time when consumer don not like this kind of product any more, and choose the product which is different from before maybe influenced by peer group as well

4 The product is not of strategically importance for the customer.For example, when people buy shampoo and soap, they will buy directly and quickly or choose closed place to purchasing rather than to know the detail information.

5 The customer knows about the production costs of the product. People can easy know the how much the price about

between luxury and inferior. Customers have low margins and are price-sensitive.

6 There is the possibility for the customer integrating backwards.

.

《The industry’s products’ are standardized or undifferentiated. If buyers believe they can always find an equivalent product, they trend to play one vendor against another.

Buyers face few switching costs in changing vendors

Buyers can credibly threaten to integrate backward and the industry’s them elves if vendors are too profitable. Producers of soft drinks and beer have long controlled the power of packaging manufactures by threatening to make, and times actually making, packaging materials themselves.

A buyer group is price sensitive if: the product if purchases from the industry represent a significant fraction of its cost structure or procurement budget, here buyers are likely to shop

around and bargain hard, as consumers do for home mortgages. Where product sold by an industry is a small fraction of buy’s costs or expenditures, buyers are usually less price sensitive The buyers group earns low profits, is strapped for cash, or is otherwise under pressure to trim its purchasing costs. Highly profitable or cash-rich customers, in contrast, are generally less price sensitive.

The quality of buyers’products or services is little affected by the industry’s product. Where quality is very much affected by the industry’s product, buyers are generally less price sensitive. When purchasing or renting production quality cameras, for instance, makers of major motion pictures opt for highly reliable equipment with the latest features, they pay limited attention to price.

The industry’s product has little effect on the buyer’s other costs. Here buyer’s focus on price. They though improving or reducing labor, material, or other costs, buyers are usually more interested in quality than in price. Examples include services like tax accounting or well logging that can save or even make the buyer money. Similarly, buyers tend to not to be

price sensitive in services such as investment banking, where poor performance can be costly and embarrassing.》

2.3 Threat of New Entrants

《The competition in an industry will be the higher; the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry. The threat of new entries will depend on the extent to which there are barriers to entry. These are typically》

1 Economies of scale (minimum size requirements for profitable operations), for example: different country has different laws. As an industry, company must know at local is weather allowed to do. At the same time, company should pay more attention how much the government attention to industry. How much government support to this industry. So that chooses good industry to development.

2 High initial investments and fixed costs, as set

up a new company need a lot of capital to running the

company and quite part of cash to buy equipment and

facilities.

3Brand loyalty of customers

Some customer will quick believe the product they used before or depend on mass customer like. Features, quality, performances of product are also influences loyalty of customers. For example, people will pay more money buy touch screen of Iphone4 rather than to buy touch screen of Nokia.

5 Protected intellectual property like patents,

licenses etc, similarly, people will buy famous brand such as Nokia, iphone and so on but not buying Novae or high copy iphone.

6 Scarcity of important resources, e.g. qualified expert staff. The company cannot predict future accurately so that Causes Company does wrongly. Therefore, Access to raw materials and distribution channels are controlled by existing players,

7 High switching costs for customers. Because company needs training new employer skill or new customers cannot do job very fast that because no efficiency and influence normal produce. In the other word, use more money, do the worse job. It is bed for company.

8 Legislation and government action. For new industry, law in local is a major reason to how to raining company. The company must know what the company can do or not.For example: the most important legislative acts on taxation to be enacted 《in 2011 were publicized. They will not introduce any significant changes for business but some positive effect will be achieved for sure: many provisions will reduce the tax burden on businesses.With the growth and expansion of towns and cities the local government and state governments have generated a proliferation of new rules, laws, and regulations of their own. All of this must be taken into consideration when choosing a plant or business location. Tariff and government are deep influence the business can be a threat of entrant. For example, t he United Steelworkers union [in Canada] wants provincial governments to lobby Ottawa to protect the country's steel industry now that federal officials have decided against penalizing low-cost imports A spokesperson for Finance

Minister John Manley confirmed yesterday that the government had decided against imposing tariffs on steel imports" 》

2.4 Threat of Substitutes

《In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices. Threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products.The competition engendered by a Threat of Substitute comes from products outside the industry. The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are

substitutes, yet they are not rivals in the aluminum can industry. To the manufacturer of automobile tires, tire retreads are a substitute》

Similarly to the threat of new entrants, the threat of substitutes is determined by factors like

1 Brand loyalty of customers,Brand Loyalty refers to the consumer's conscious，consumer will used to use a kink of brand. However, in today's highly competitive environments, improving consumers' loyalty to brands permits marketers to maintain a comfortable and lasting position in the multimarket. Consumers will influenced by peer group to change the product which is used to use. Thus, there will be threat of substitutes.

2 Switching costs for customers, customer may pay a lot of money more to change normal used product as people use a new product, for example：a people used to use DIOR, when people want change to use CHANEL. Consumers need buy liquid makeup and sun screen one times.

3 The relative price for performance of substitutes, substitute is goods which are can be used with the same functions compare to goods of substitute. When consumer thinks

the product with the same function, consumer will compare price of substitute and choose the chapter one. So once the company does not do enough research, company will lose of consumers when substitute goods existing.

4 Current trends. Nowadays, people trend to buy the product which is convenience or nearly of home. So, some consumer would buy more expensive goods rather than buy cheaper goods because of distance. However, some customers may used to buy specific product consistency, even if the products have substitute. But part of people will choose others products when people find out the product consumers choose is not good. This is also trend. People like choose better goods as the goods have similarly price and performance.

Conclusion:

Porter five forces are defined as bargaining power of customers, bargaining power of suppliers, threat of substitute products, threat of new entrants and competitive rivalry within an industry. Porter five forces refer to micro-environment and macro-environment in business. Analysis relationship between suppliers and customers and how to deal with the threat of substitute product and threat of new entrants so as to let

company running usefully.

Recommendation:

Firstly, in order to better analysis industries and Competitors. As the company cooperates with suppliers, the company must provide good service and product to set up a good brand. Secondly, do some researches in the market in order to know how much government pay attention to industry and law in local to make sure require supporting of government so that reduce potential threat. Company had better to know the environment of scale and substitute. Then the company can local a good position to attract customers and avoid threat that substitute may bring.

Summary: