Porter's Model

Porters model of Five Competitive Forces allows a systematic and structured analysis of market structure and competitive situation. The model can be applied to particular companies, market segments, industries or regions. Therefore, it is necessary to determine the scope of the market to be analyzed in a first step. Following, all relevant forces for this market are identified and analyzed. Hence, it is not necessary to analyze all elements of all competitive forces with the same depth.

The Five Forces Model is based on microeconomics. It takes into account supply and demand, complementary products and substitutes, the relationship between volume of production and cost of production, and market structures like monopoly, oligopoly or perfect competition.

After the analysis of current and potential future state of the five competitive forces, managers can search for options to influence these forces in their organization's interest. Although industry-specific business models will limit options, the own strategy can change the impact of competitive forces on the organization. The objective is to reduce the power of competitive forces.

The following figure provides some examples. They are of general nature. Hence, they have to be adjusted to each organization's specific situation. The options of an organization are determined not only by the external market environment, but also by its own internal resources, competences and objectives.

Reducing the Bargaining Power of Suppliers

Ð'* Partnering

Ð'* Supply chain management

Ð'* Supply chain training

Ð'* Increase dependency

Ð'* Build knowledge of supplier costs and methods

Ð'* Take over a supplier

Reducing the Treat of New Entrants

Ð'* Increase minimum efficient scales of operations

Ð'* Create a marketing / brand image (loyalty as a barrier)

Ð'* Patents, protection of intellectual property

Ð'* Alliances with linked products / services

Ð'* Tie up with suppliers

Ð'* Tie up with distributors

Ð'* Retaliation tactics

Reducing the Competitive Rivalry between Existing Players

Ð'* Avoid price competition

Ð'* Differentiate your product

Ð'* Buy out competition

Ð'* Reduce industry over-capacity

Ð'* Focus on different segments

Ð'* Communicate with competitors

Reducing the Bargaining Power of Customers

Ð'* Partnering

Ð'* Supply chain management

Ð'* Increase loyalty

Ð'* Increase incentives and value added

Ð'* Move purchase decision away from price

Ð'* Cut put powerful intermediaries (go directly to customer)

Reducing the Threat of Substitutes

Ð'* Legal actions

Ð'* Increase switching costs

Ð'* Alliances

Ð'* Customer surveys to learn about their preferences

Ð'* Enter substitute market and influence from within

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