Porter's Five Forces

Michael Porter, the father of competitive strategy, came up with Porter's Five Forces. The Five Forces are the 5 different factors that affect the competitiveness of the company. 

The Five Forces are 

Threat of New Entrants

-Cuts into market share and intensifies internal rivalry

-Factors that affect: Brand loyalty, access to natural resources, knowhow, government, steepness of learning curve

Supplier Power and Buyer Power

-Competitive nature of input market, concentration of upstream and downstream firms. 

Substitutes and Complements

-Availability of substitutes erode demand

-When price elasticity is large, then substitute pressure is large

Internal Competition

-Price competition erodes price cost margin and profitability

-Non-price competition can drive up costs - such as improvements in product. However profitability is less affected since costs are more likely to be passed onto consumers

-Reasons for internal rivalry; non-differentiated product, cost reductions, increased # of competitors, transparency of price and sale terms. 

What Should Firms Do to Cope with the Five Forces

1. Increase Switching costs to reduce internal rivalry - Google does a good job with gmail and calendar
2. Adopting Entry-deterring strategies
3. Doing vertical integration

Value Net - of Brandenberger states that competitive forces can be both beneficial and bad.