Michael Porters Five Forces - Essay Example

Porter's 5-Force Analysis of the school] of the INTRODUCTION Michael Porter's 5-forces can be used to analyze an industry and help shape and create a "competitive strategy" (Porter, 6). Understanding each of the five forces and how they interact with one another provides a clear picture of the degree of competition being faced within an industry, and therefore its relative attractiveness. The understanding cannot provide an advantage; it is what you do with the understanding. Without the understanding, a strategy can be at risk of being unrealistic. Michael Porter's 5-force Analysis is a tool for the structural analysis of industries. There are 5 forces that always shape the competitive structure of an industry: Supplier Power, Barriers to Entry, The Threat of Substitutes, Buyer Power, and Industry Rivalry. In the following paper the example of online university as a part of a strategic group within the larger context of "universities" will be considered to research the Porter's Five Forces model. The theory of five forces model along with practical analysis is combined in each of Porter's discussion within the chosen industry. I. SUPPLIER POWER Supplier power is the ability of a supplier to control the cost and supply of the inputs in the market. The supplier power of an industry can be altered in many ways: 1) Differentiation of Inputs - If a company needs various inputs from different suppliers, then those suppliers have a high power. 2) Switching Costs for Transferring to Other Suppliers - Supplier power is high if the cost to switch over to a new system is high. 3) Impact of Suppliers' Inputs on the Quality - Supplier power is high if the inputs from a supplier reflect the quality of the company. 4) Threat of forward integration by suppliers - The supplier power is low, if the company can easily switch to a different supplier. In the analysis of online university it is important to carefully enumerate the supplier group. Suppliers to the online education industry would be faculty (content suppliers), mentors, software providers and perhaps in the case of state-supported institutions, the legislators and regents. Given that legislators and regents have considerable power in some instances, one has to acknowledge that the principal supplier group exerts relatively little power in relationship to the industry. Thus the bargaining power of suppliers is low. II. Barriers to Entry Barriers to entry deter new competitors from entering the market and creating more competition for established firms. There are several major barriers to entry and they include economies of scale, capital requirements, product differentiation, switching costs, cost disadvantages independent of scale, access to distribution channels, and government policy. One example of an industry with high barriers to entry is computer chip manufacturing. The extremely high cost of building a fabrication plant makes entry into this industry very risky. The resturaunt industry on the other hand has considerably fewer barriers to entry since almost everything can be leased and employees need not be highly experienced and trained. (Porter, 7). One has only to watch the Internet to see almost daily announcements of new email courses, programs and degrees rapidly proliferating. The reasons for this are fairly obvious. Barriers to entry are low. Capital requirements are minimal. Switching costs are not important to the buyers and brand identity is probably not nearly as important as access and convenience. Demand for this "product" is growing rapidly as industry demands larger numbers of advanced degrees and education to meet market demands. The threat of new entrants is high. III. THREAT OF SUBSTITUTES Threat of Substitutes exist when the demand for a product declines due to either lower prices of a better performing substitute product, low brand loyalty, new current trends, or low switching cost. When threat of substitutes is low the outcome is favorable to the industry, because fewer alternatives exist. In the example with online university, ignoring on the job training, experience and the "school of hard knocks", there are few real substitutes for this product. This particular force would be described as weak. VI. BUYER POWER A few things determine the force of a buyer's power in Porter's 5-Force analysis. The first and foremost factor is the ratio of suppliers to buyers in the market. If there are many suppliers, and only a few buyers, the buyer's have the power to negotiate the price of the goods or services. The idea is that the buyers in this case would have many choices of where to buy the materials they need. If the price of the goods or service is too high with one supplier, then they could easily go to another company that would offer the same product for less. If the ratio was switched around, and many buyers needed to purchase goods or services from only a few suppliers, the suppliers would now have the bargaining power, and would be able to set prices. A low buyer power rating in the analysis of an industry would mean that the market conditions present would allow entrepreneurs to easily break in to the market because of the wide dispersion of power throughout the industry. A good example of this would be in the industry of household video game consoles. Nationally, there are only a few suppliers in this industry, such as Microsoft, Nintendo, and Sony, yet there are many video game stores locally such as Toys n Joys, Software Etc., K*B Toys, Wal Mart, K Mart, Sam Goody, Costco, Sam's Club, Blockbuster, and many other smaller businesses. If one were to look around nationally, it would be apparent that the local market here in Hawaii is a mere fraction of the market as a whole. A high buyer rating in an industry would mean that entry into the industry would be very difficult. The buyers in this type of industry would generally have the last word when it came down to the pricing of products. A prime example of this would be military hardware industry. Keep in mind that there are other ways in which to be classified as an industry with a high or low buyer power. One other way to claim the status of a low buyer power industry would be if the switching costs, the monetary cost or simply the ease of converting to another system, for the buyer to change from one supplier to another is high. One such example of this would be computer operating systems. Another way an industry could be considered to have a high buyer rating is if the industry deals with a luxury good, such as a high end automobile or multi-million dollar homes. When an item is not an essential one, people have the option of going without that good, and therefore reduce the bargaining power of the supplier. Bargaining Power of Buyers: Individual buyers of educational offerings have relatively little aggregate power; however, firms, government agencies and even the military can exert considerable power as a result of the inherent "buying" volume. If an online educational institution wishes only to serve the individual learner (most likely not a particularly attractive market segment), then buyer power is low. On the other hand if the institution wishes to serve firms and agencies, buyer power is high. Determining which segment of the market is to be served, is a predecessor to the evaluation of the bargaining power of buyers. V. DEGREE OF RIVALRY Degree of rivalry or the intensity of competition is the final force of Michael Porter's Five-force theory. This point is crucial in evaluating possible entry into various industries. Favorable competition levels of an independent entrepreneur depend greatly on personal strategy and desired outcome. Examples of industries with low-level competition include monopolies or near monopolies such as public utilities. Companies such as Hawaiian Electric and Board of Water Supply are the industry when it comes to public utilities. Although federal restrictions somewhat regulate these "monopolies", their low degree market sharing provides them very healthy profit margins. On the other hand a high level of competition creates price wars and market sharing. These conditions cause profit sharing among the rivals in a particular industry and higher savings for consumers. A prime example of this high degree of competition is the current computer industry. Although the computer market, at its pioneering stages, was categorized as an industry with fairly low competition, the advancement of modern technology has pushed the industry to new frontiers. In these recent years many companies have dove headfirst into the computer industry, creating an unbelievably high level of rivalry. In the case of Porter's 5-Force Analysis, there are other types of tools, which can help aid in analysis of competitive structures. However, there are other things Porter has developed that complement the use of his five-force analysis. One of these tools would be Porter's Diamond Of national Advantage. In short, this tool is used to analyze a country's ability to develop an advantage in the international trade market through means other than their global position, and resources found there. Another strategy that Porter had developed is his 'Generic Strategies'. These strategies are used to determine what type of approach a company should take to optimize its position in their industry, and to ultimately maximize the profits they are able to generate. In the example with online university, in addition to thousands of "product" offerings from traditional and nontraditional colleges and universities, textbook publishers, venture capitalists and consortia are active competitors. Even in its early stage, the online educational environment gets very close to the economist's notion of perfect competition. This is a fragmented, highly competitive industry. Universities compete actively for incremental enrollment. In some cases they engage in "price cutting" through scholarships. Recently, we have seen a dramatic increase in the frequency and substance of advertising campaigns for online education. Thus the force exerted by existing competitors is high. CONCLUSION Michael Porter's 5-force Analysis processes market data into useful information for decision-makers when determining possible entry into various industries. By analyzing industries, entrepreneurs can determine the optimal industry in which to enter. Although this theory has withstood the test of time, there are a few objective aspects that the five forces do not and cannot analyze. Overall Porter's Five Force Analysis provides basic understanding of the competitive structure of industries, though particular organizations may be uniquely poised to compete within any given industry. Though this tool is over 20 years old, it is still popular with management consultants, and is a staple of the MBA curriculum. Bibliography 1. http://www.essaynow.com (28 January 2003) This website is a compilation of different essays written by different authors on Porter's Five Force Analysis. These essays offer evaluations of specific industries using Porter's Five Force Analysis. Examples of such industries include banking, telecommunication, supermarkets and much more. 2. http://www.fedex.com (31 January 2003) This website is FedEx's main website including general information about the FedEx Corporation. 3. http://www.geocities.com (30 January 2003) This website also offers general information about Porter's Five Force Analysis. 4. http://www.Kelloggs.com (31 January 2003) This website is Kellogg's main website including general information about the Kellogg Corporation. 5. http://www.legamedia.net (30 January 2003) Legamedia.net is mainly a foreign website written in Dutch about Porter's Analysis. 6. http://panko.com (30 January 2003) This website is a Ray R. Panko's personal business website. Ray Panko is a Professor at the University of Hawaii and has written a number useful sources about information systems and communications. 7. http://www.quickmba.com (29 January 2003) This website includes a detailed summary of Porter's Analysis. Information used from this site includes a diagram of Porter's Five Forces. 8. http://www.themanager.org (31 January 2003) This website offers a description of various management tools including Porter's Five Force Analysis. 9. Porter, Michael E. Competitive Strategy. New York, New York: The Free Press, 1980. This book written by Michael Porter is unaltered information about his theory. Read More