Porter’s Five Forces Framework

According to Porter (2008), Porter’s five forces theory is a theory of analysis and business strategic management used to analyze industries and markets so as to determine the competitiveness and attractiveness of the market. Therefore, these forces determine industry profitability (Grundy, 2006). The five forces of competition as suggested by Michael Porter can be illustrated in the figure below:

Fig 1: Porter’s five forces of competition (Johnson, Scholes and Whittington, 2005).

According to Grundy (2006), Porter’s five forces model summed up microeconomic theory into five major aspects as shown in figure 1 above. Grundy also implies that competitive rivalry influences all the other forces. This is illustrated by placing ‘competitive rivalry’ at the center of the box. In the case of retail industry in UK, opening up the industry to EURO market has allowed for entry of foreign firms into the industry. This has increased competitive rivalry.

  • Threats of Entry

First, Roy (2006) says that the threats of new entrance in the industry depend on the size of barriers erected by existing firms in the industry and the threats expected by the existing firms from potential entrants. Some of the barriers that can be used by existing firms include easy access to resources such as human capital, economies of scale, political influence, etc. The potential entrants on the other hand can react by using such possibilities as financial resources, bargaining power and understanding the curve effect of mass production (Roy, 2006).

  • Bargaining power of Suppliers

Roy also recognizes bargaining power of suppliers as another fundamental component of the five force model. Suppliers often protect companies pricing and lobbying. To suppliers, the industry as a whole is less important than the customer. However, the products delivered by suppliers are very essential to the buyer. In this case, substitutes are limited. The existing suppliers will therefore increase prices and reduce product quality. In the case of the UK retail industry, international business environment increases such a bargaining power for the local suppliers because substitutes will increase, thus increasing the costs of purchase by retail companies. Due to suppliers’ switching costs, entry of substitute suppliers will limit the power of the existing suppliers in the industry.

  • Bargaining Power of Buyers

Another competitive force that can be used to analyze an industry is the bargaining power of buyers. Roy (2009) suggests that buyers have the power to influence pricing and demand high quality and performance in the industry. This results in different strategies set by the industry participants regarding to costs and profits. Therefore, with increased competition posed by new retail firms entering the market may offer low prices due to buyer’s bargaining power. This will make the companies to follow the same trend or lose customers. Reduced prices and loss of customers will therefore reduce the profitability of the local companies and increase operation costs due to increased competition.

  • Threat of substitutes

Roy (2009) also recognizes threat of substitutes as an important component of Michael porter’s forces of competition. Roy explains that the existence of substitute products in the market enables consumers to find alternatives. Substitutes in this case do not refer to similar products but different ones which can be used in place of the existing products. The determining factors in the trade of substitutes include buyer switching costs, relative price of substitutes, level of product differentiation, the ease of substitution and the amount of substitute products available in the industry.

  • Intensity of competitive Rivalry

Finally, Roy holds that rivalry in the industry is also a determinant competitive force in industry analysis. According to him, the intensity of competitive rivalry in the market is the core element of competitiveness in any industry (Gitman & Daniel, 2009). The performance of rivals in the market will be determined by competitive advantage due to innovation, internet marketing competitions, marketing strategies and costs, strength of competitive strategies and flexibility and adaptation to change.

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