Porter's Five-Forces Model in International Strategy

Introduction

There are several different techniques and models that decision makers use to enable their organizations to sustain a competitive advantage within their respective industries. One model that stands out and is still a major part of developing business strategies today is Michael Porter’s Five Forces Model. Since the emergence of Porter’s framework, it has proven to be a valuable tool in analyzing a firm’s industry structure in strategic processes. According to Porter, the competitive environment is created by the interaction of these forces acting on an organization.

Porter’s Five Forces

The first of Michael Porter’s Five Forces is the degree of rivalry. Rivalry exists in all industries. It is what keeps competition ongoing between organizations. This force is said to be the most powerful of the five competitive forces. In various industries, businesses are considered to be mutually dependent. If one organization makes a competitive move, it will affect all others in the same industry and they will react accordingly (Helms and Cengage,2006).

The second force in his model is the threat of substitutes. A substitute product is defined as a product that can satisfy consumer needs that are also targeted by another product. For instance, cigarettes can be substituted by electronic cigarettes. This force ties into the rivalry force in that substitute products tend to cause an increase in competitive pressures as the price of the substitute products decrease (Helms and Cengage,2006).

The next of the five forces is the bargaining power of buyers. This is the impact that consumers have on a producing industry. When buyer power is strong, the producing industry becomes one in which there are many suppliers and one buyer, so to say (QuickMBA.com, 2010). When a market experiences these conditions, the buyer has the power and sets the prices.

The fourth force is the opposite of the previous one mentioned, the bargaining power of suppliers. When suppliers are in power, they have the ability to sell their products at high prices in order to capture some of the profits in the industry. Suppliers takeover power when the industry has a large number of suppliers and limited amounts of substitute products (Helms and Cengage,2006). As suppliers increase prices, reduce services, or reduce the quality of goods and services, the intensity of competition increases.

The last of the five forces is the threat of new entrants and entry barriers. This deals with how easy or difficult it is for new firms to enter an industry. When a new company enters a market, competition for market share increase. Certain barriers can make it difficult for a firm to enter a market. These barriers may include economies of scale, product differentiation, or cost of promotion and advertising among other barriers (Helms and Cengage,2006).