Definition of Porter’s Five Forces Porter’s Five Forces is a structure for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An “unattractive” industry is one in which the combination of these five forces acts to drive down overall profitability.
A very unattractive industry would be one approaching “pure competition”, in which available profits for all firms are driven to normal profit.
Porter’s five forces include three forces from horizontal axis competition which are threat of substitute products, the threat of established rivals, and the threat of new entrants. While the two forces from vertical competition are the bargaining power of suppliers and the bargaining power of customers. ?Competitive Rivalry: This refers to the intensity of the competition within the industry itself.
Concentrated industries with only a handful of players tend to be less competitive and more profitable than fragmented industries (like fast-food) where hundreds of company tries to challenge each other. In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences.
Rivalries naturally develop between companies competing in the same market.
Competitors use means such as advertising, introducing new products, more attractive customer service and warranties, and price competition to enhance their standing and market share in a specific industry. To Porter, the intensity of this rivalry is the result of factors like equally balanced companies, slow growth within an industry, high fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse competitors, igh-stakes investment, and the high risk of industry exit. There are also market entry barriers. ? Threat of Substitutes Substitute products are the natural result of industry competition, but they place a limit on profitability within the industry. A substitute product involves the search for a product that can do the same function as the product the industry already produces. Porter uses the example of security brokers, who increasingly face substitutes in the form of real estate, money-market funds, and insurance.
Substitute products take on added importance as their availability increases. ?Bargaining Power of Suppliers: Suppliers have a great deal of influence over an industry as they affect price increases and product quality. A supplier group exerts even more power over an industry if it is dominated by a few companies, there are no substitute products, the industry is not an important consumer for the suppliers, their product is essential to the industry, the supplier differs costs, and forward integration potential of the supplier group exists.
Labor supply can also influence the position of the suppliers. These factors are generally out of the control of the industry or company but strategy can alter the power of suppliers. ?Bargaining Power of Customers: The buyer’s power is significant in that buyers can force prices down, demand higher quality products or services, and, in essence, play competitors against one another, all resulting in potential loss of industry profits.
Buyers exercise more power when they are large-volume buyers, the product is a significant aspect of the buyer’s costs or purchases, the products are standard within an industry, there are few changing or switching costs, the buyers earn low profits, potential for backward integration of the buyer group exists, the product is not essential to the buyer’s product, and the buyer has full disclosure about supply, demand, prices, and costs. The bargaining position of buyers changes with time and a company’s competitive strategy.
Introduction Proton Holdings Berhad is short form for Perusahaan Otomobil Nasional (Malay for National Automobile Enterprise), is Malaysia’s first car manufacturer initiated in 1983 by then-Malaysia’s Prime Minister Mahathir bin Mohamad. Proton is listed on the Bursa Malaysia. Based on technology and parts from Mitsubishi Motors, production of the first model, the Proton Saga began in September 1985 at its first manufacturing plant in Shah Alam, Selangor.
Initially the components of the car were entirely manufactured by Mitsubishi but slowly local parts were being used as technologies were transferred and skills were gained. Competitive Rivalry In Malaysia nowadays, there are a few choice of cooking oil brands. It is mean that there are few company that process and produces cooking oil as their product such as Saji, a product of Felda Holding, Alif, product of Sime Darby. There are
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