Porters Five Forces of Competition Essay Example for Free

Porters Five Forces of Competition Essay Porter’s Lesson: Michael E. Porter’s article, the five competitive forces that shape strategy, is an article that dissects the true underlying factors of competition and industrial structure. Throughout the context of the article, Porter thoroughly explains how competition and profitability does not only derive from production of goods and services or the level of sophistication of a firm. Instead, he claims that in order for an industry to be truly competitive and profitable, the industry as a whole must hold a solid structure. Porter educates the audience by introducing the five key forces of strategy that will essentially lead to a firm’s prevalence of competitiveness. He labels these forces as direct competition, customers, suppliers, potential entrants, and substitute products. Porter claims that each of these forces of competition plays their roles within any competitive and even temporarily non-competitive industry. Porter’s main lesson for his audience is that in order for an individual firm or an industry to succeed, it must strategically know how to react to any shift within the industry, whether its competitiveness, supply and demand, economical issues, potential entrants, or even natural issues. Porter also strives to explain how a company could or could not earn a return on investment based on the intensity of the competition within the industry. All in all, Porter explicitly explains each of the five forces that shape an industries competition with a breakdown of different factors for each force, as well as real life examples that make the topic very clear for the audience to understand his lesson. Analysis of the Lesson: Of the five forces, Porter clearly educated the reader about the importance of potential entrants and their threat to an industry. I felt that one of Porter’s greater lessons in this matter was when he described the seven major sources of entry barriers, and how an incumbent can strategize to react to the competitiveness of the industry if a desired entrant were to exist. One aspect that really sparked my interest was when Porter went about explaining the entrant’s hesitancy of entering into an industry based on the level of retaliation from the existing firms within the market. On the other hand, it was also interesting to know that the entrant could also alarm the incumbents, when the entrant has a large amount of capital to invest as they enter from another market which they succeeded in. Another force that Porter dissected is what most people would think of in reaction to the term competition, and that is direct competition of one firm and another, or for the lack of a better word, rivalry. Porter made a statement, and that was, â€Å"The degree to which rivalry drives down an industry’s profit potential depends, first, on the intensity with which companies compete and, second, on the basis on which they compete.† As Porter discussed the different factors that affect the intensity of a rivalry, he noted that intense rivalry tends to destruct profitability if the battle between two firms is focusing solely on price because at that point, price competition is simply transferring profits directly from an industry to its customers, which will ultimately result in the degradation of an industry. I couldn’t agree more with Porter about the fact that when it comes to rivalry between multiple firms, the industry can find an advantage when each competitor aims to serve the needs of different customer segments, by focusing on a variety of price, products, services, features, or brand identities. Most people would think of a rivalry in terms of competition, and not necessarily take the time to think of other factors that are just as important when it comes to an industry’s competitiveness. Many are so focused on what goes on within their own market that they forget to acknowledge the outside forces until it slaps a firm across the face. Porter used an example of the photographic industry as he explained the importance of substitute products. Here he argued that long time competitors such as Kodak Fuji, two large photographic film companies, were in a position to lose profitability if they didn’t focus on outside forces, such as the entry of digital cameras. Although they are not as profitable as before, both companies made large investments, along with large amounts of research and development, and both prevailed in continuing to be somewhat profitable and slightly competitive in their industry rather than falling off all together. After reading that example, I instantly thought of different firms that didn’t focus on innovating at times where substitute products came into play, and those companies are no longer around. A few examples of companies that fell or are bound to fall are Blockbuster, Circuit City, Best Buy, K-Mart, and Sears. Once Porter ended his presentation of the five forces of competition and profitability, he continued to approach his final lesson, and that is the value created if a strategist accurately analyzes the five forces of competition within an industry. He enlightened the audience that if a strategist understands the competition within the industry, he will not only prevail beyond existing rivals, but could also uncover new opportunities such as differences in customers, suppliers, substitutes, potential entrants, and rivals that can become the basis for distinct strategies leading to superior performance. The only minor detail I felt that should have been added to this section on value is the possibility of losing value based on time devoted towards each force. Porter most definitely stated the facts when explaining the potential for new opportunities if understanding the industry as a whole. One thing he didn’t explain is what could also happen if a strategist possibly focuses on one aspect for too long, or fails to devote enough time to one competitive force versus another. I would imagine that this could possibly cause problems to arise rather than opportunity if a firm were to not manage its strategic time wisely. My Takeaways: I am fortunate that I am currently involved in a family business that allows me to relate to so many aspects of this article. My family currently owns and operates a five-store, soon to be six, supermarket chain in several parts of southern California. Like many other businesses, the everyday operation of a supermarket is exposed to countless aspects of business and its overall environment. I myself am within the world of supermarkets six out of the seven days in the week, and I can most definitely admit that this article completely enhanced my understanding of the terms competition and profitability. The amount of connections I could make with topics in this article to my everyday work is countless. For this paper, I’ll simply discuss what stood out most. First, I’ll have to give my takeaway on price competition and bargaining power. Item prices throughout the stores are what I’d consider to be the bullets in a gunfight between two competing supermarkets. There was a topic I discussed in my analysis that stated, â€Å"Firms that solely focus on price competition ultimately gives industry profitability to the customer.† In the supermarket industry, buyers constantly negotiate with suppliers for the lowest costs to provide customers with the most aggressive prices. This also relates to the section on buying power that Porter touches on. Here I learned, any store can simply raise prices or drop prices at store level, but the company that will prevail is that who is dominant in getting the lowest cost from the supplier, resulting in more aggressive margins verse the competitor. If both you and your competitor have the same price on one item, allow the competitor to give its profit to the customers by you being the one to pay less for the supply. The second factor that I can relate to which I will discuss is threat of new entrants and retaliation. If someone pulls up a map of supermarkets in a specific area, they will find seven to ten different supermarkets in a five mile radius. Competition from one company to another usually occurs within each region. At times, successful independent supermarket chains will raise awareness of other supermarket chains in a specific region by preparing to open a new store or buying out a current store that is not profitable. This is when the incumbents will do everything in their power to keep their customers from going to the new store that is most likely going to enter with highly aggressive pricing. At this time, you will see incumbent’s prices dropping, promotions increasing, advertisements become incredibly aggressive, prizes being given out, and any other form of retaliation a company can perform to keep its market share. As stated before, the connections are countless, and I could truthfully admit that I could write a twenty page paper on all the topics I can relate to in this article. I discussed a few relations above, but I must also state that this does not limit what I took away from Porter’s article that I can apply to my family’s business today. All in all, it was a highly educational read and a great tool for any business who seeks to increase competitiveness and profitability, let alone a great tool for any individual who plans to one day be a successful businessman.