The five forces framework developed by Michael Porter is the most widely known tool for analyzing the competitive environment, which helps in explaining how forces in the competitive environment shape strategies and affect performance. The framework suggests that there are competitive forces other than direct rivals which shape up the competitive environment. These competitive forces are as follows: 1) The rivalry among competitors in the industry 2) The potential entrants 3) The substitute products 4) The bargaining power of suppliers 5) The bargaining power of buyers.
However, these five forces are not independent of each other. Pressures from one direction can trigger off changes in another which is capable of shifting sources of competition. These five forces are placed to understand how each of these forces affect an Industry’s environment so that one can identify the most appropriate strategic position within the industry. Financial Opportunities Comparison for Google 1) Threat of New Entrants Entry of a firm in and operating in a market is seen as a threat to the established firms in that market.
The competitive position of the established firms is affected because the entrants may add new production capacity or it may affect their market shares. They may also bring additional resources with them which may force the existing firms to invest more than what was not required before. The situation becomes difficult for the existing firms if not threatening always and they resort to raising barriers to entry. a) Cost Disadvantage: New entrants may face disadvantages which are independent of the operations. (Thomas, K. W. , 1987. Organizational Psychology Prentice-Hall:Englewood-Cliffs)
b) Brand benefits: Buyers are often attached to established brands. Differences in physical or mere perceived value make existing products unique and the new entrants have to tire out to beat such brands and change the mindset of the customers. c) Capital Requirements: High investments required for a start up in any business is another deterrent for new entrants bringing down the possibility of increased competition. (Rao, T. V. , New Economic Environment, Tata McGraw-Hill Book Company, New Delhi,1994 ) d) Switching Costs: Switching costs, which is nothing but the expenses which a customer incurs in switching from one seller to another.
Threat of Substitutes Often firms in an industry face competition from outside industry products, which are close substitutes of each other. The availability and acceptability of substitutes determine an upper price limit to a product. When relative prices of the product in question raise above that of the substitute products, customers tend to switch away from them.
References 1. Thompson, A. Arthur, Jr. and Strickland, A. J. III. (2003). Strategic Management, Concepts and Cases, McGraw Hill Publishing, New York. 2.Strategic Management Concepts and Cases, 7thEdition,Hitt,Ireland/Hoskisson (THOMSON) South Western 3. Srivastava, R. M. (1999). Strategic Planning: Formulation Of Corporate Strategy (Texts and Cases) 1st ed. , Macmillan Limited. 4. Srivastava, R. M. (1999). Strategic Planning: Formulation Of Corporate Strategy (Texts and Cases) 1st ed. , Macmillan Limited. 5. Jr Thompson A. , Arthus, A. J. , (2001), Strategic Management: Competitiveness and globalization, Thomson Learning. 6. Johnson, Gerrry & Scholes, Kevan. (2004). Exploring Corporate Strategy. , Prentice-Hall, New York.
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