PORTER’S correct to select the Five Competitive
PORTER’S FIVE COMPETITIVE FORCESMethodology 4Because the subject matter of strategic management is so inherently complex and because each one of us brings his own personal biases to the analysis, it was suggested early on that virtually all case material in the field be analyzed from the perspective of more than one methodology. Profit theory and industrial chains were selected as the first of a number of viable approaches to the analytical process. It would have been equally correct to select the Five Competitive Forces analysis refined by Michael Porter, one of the major figures in the field of strategic management. This methodology addresses the same issues but differs only in the language that they use to describe corporate behavior.
The five forces are:The threat of new entrants into an industry or a market served by a specific company. The bargaining power of suppliers. The bargaining power of customers. Threat of substitute products or services. The intensity of the rivalry among existing firms. Each of these topics is treated separately in the discussion that follows.
The threat of new entrantsThe ease with which firms can enter into a new market or industry is a critical variable in the strategic management process. In some industries the barriers to entry are minimal. In other industries, the barriers to entry are formidable. These barriers can take on many forms; among them: the amount of capital needed to enter into a specific industry may be great enough to deter entrants; the current participants in the industry may have product lines protected by patents; the switching costs for the company’s customers may be great enough to pose a barrier to entry to a new firm; and other factors discussed below.For example, there are a large number of small computer-oriented software firms in the United States. Entry into this industry does not require a vast amount of capital. Instead, one needs a rather small number of highly imaginative and qualified programmers able to develop niche-oriented products that find a home in an ever-expanding marketplace.
Because the major portion of the costs are incurred in the development phase with production costs absorbing relatively small amounts of money, a successful new productentry can prove to be highly profitable, thus providing the capital and marketing base needed to challenge a firm that may previously have been in a leadership position.The same cannot be said for the jet aircraft industry. The up-front costs for designing, developing and producing a jet-powered aircraft are estimated to be in the $4.0 to $5.
0billion category. This would be an immense amount of money for a firm to risk as the cost of entry into an otherwise stable business. Equally important as a barrier to entry would be the lack of availability of a highly skilled management, engineering, and production workforce. From a practical perspective, this group would have to be put together before any initial effort on the design of a new aircraft could go forward. And they would have to b