Porter's competitive forces

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What are the competitive forces that shape an organization's strategy?

Accordingly to Porter's industry analysis, there are five forces which shape an organization's overall corporate strategy. Let us discuss each of these forces one by one:

1) Rivalry among existing firms: The prevailing competitive scenario or competition in the business segment or industry of the firm is the primary competitive force shaping the firm's overall corporate strategy as the organization will have to devise strategies to encounter the competitive strategies of rival firms and survive in the industry.

2) Bargaining power of buyers: Buyers are the people / organizations who create demand in an industry

The bargaining power of buyers is greater when

- There are few dominant buyers and many sellers in the industry
- Products are standardized
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers
3) Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry.

The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:

- There are many buyers and few dominant suppliers
- There are undifferentiated, highly valued products
- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)
- Buyers do not threaten to integrate backwards into supply
- The industry is not a key customer group to the suppliers

source: http://www.tutor2u.net/business/strategy/porter_five_forces.htm

4) Threat of substitutes: Another important force affecting the formulation of corporate strategy is the threat from substitute products or services. The presence of close substitute products in the business segment or industry can prove to be risky for the business and make the opportunities less attractive. The threat of substitute is influenced by several factors, such as buyer's willingness to substitute, the relative price and performance of substitutes and costs of switching to the substitute products. Thus, a firm need to analyze all these factors in advance in order to devise a suitable plan to encounter the threats from this substitute.

5) Threat of New entrants: The ease or difficulty with which new firms can enter the industry of the firm is also a force which affects its choice of strategy. The threat of new entrants is dependent on the barriers to entry in the trade, such as those related to economic of scale, government regulations or approvals, investment requirements, etc.

We will also add one more force to the above mentioned five forces. This force will be the power of other stakeholders, such as the government. ...