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Porter (1979, 2008) described five forces that act a company within an industry. More
generally, this applies to any market. Any industry can contain multiple markets. Markets
can also reach across industries.
This model is commonly shown as in the diagram below:
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Porter's Five Forces http://changingminds.org/disciplines/marketing/understanding_...
Numbers of competitors.
Oversupply of products as compared with demand.
Sharp increase in capacity.
Slow market growth that means business growth comes from stealing market share.
Dynamic, creative marketing in many competitors.
Emotional commitment to growth and leadership within competitors.
A blind commitment to strong competition even when it costs more than it gains.
High fixed costs and lower product costs that lead to temptations to cut product price.
Products that quickly date or are perishable that may also lead to price-cutting.
High exit barriers such as sunk costs that would be lost.
Dumping of products at bargain prices and other self-destructive actions.
Mature markets often stabilize into a dynamic equilibrium where, although there is
competition, most competitors survive over the long term. To achieve this, tacit
oligopolistic tactics may be used, such as price alignment and an avoidance by all of price
wars.
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Suppliers also may not be completely beholden to the company as they have something
that the company needs. Their power is similar to employee power in that their ultimate
sanction is withholding or total withdrawal. While few would do this, a degenerated
relationship could lead to temptations to do so.
Suppliers are more powerful when:
If you can replace suppliers easily then this reduces their power. However, even if you can
find other suppliers, it can take time to get this organized.
When suppliers have limited ability to deliver, for example when raw materials or a key
part becomes scarce, then they have to choose which of their customers to supply. This
gives them further power is another reason to sustain your relationship with them.
Suppliers may also act as a group, collaborating to get the best for those in their industry.
This can be helpful but may also lead to actions that make things more difficult for you.
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When a market has been stable for some time, existing market 'competitors' can become
lazy and set in their ways. A new entrant may compete in new ways that could be
considered 'unfair' even though these are legal and effective.
5. Threat of substitutes
One of the biggest sources of surprise in a marketplace is when a 'competitor' appears with
a product so different they are not seen as real competitor until it is too late.
A classic example of this is where the typewriter was substituted by the wordprocessor. At
first, the wordprocessor was a very expensive system attached to a big computer and
available to only a few, but with the advent of personal computer, the now-established
method quickly killed the whole typewriter industry.
Incumbents may well try to fight substitutes with the same technology, but if they lack the
whole competence to produce and sell these new products, then they will still fail.
There are two different types of substitute. The full substitute completely replaces the
current product, making it redundant (as the wordprocessor did to the typewriter). The
partial substitute acts as a new competitor but does not fully replace the original product. A
classic example of this is margarine and butter. Butter has retained many customers as it
has qualities that margarine does not have. Butter marketing has emphasized this and
positioned margarine as a lower-quality substitute.
Substitutes can come from a wide range of products. The critical aspect of a substitute is
that it is paid for with the same money that would be used for the item being replaced.
Substitutes hence compete for 'share of wallet'. In this way, all beverages may be
considered substitutes for one another.
Shifts in the wider marketplace and customer needs can lead to substitutes appearing, for
example a 'health' concern leads to fruit juices and bottled water becoming substitutes for
colas.
Substitutes are more likely when:
As with butter and margarine, substitutes may be of lower quality as long as they are good
enough. In particular where price is important, a reduction in quality may be accepted
when the reduction in price makes this worthwhile. Other disadvantages may also be
acceptable, such as the delays in delivery associated with items source overseas.
Discussion
Porter's model was created of of his doctoral work. Since then it has become a standard
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framework that is taught at many business schools and on most marketing courses. The
main innovations it encompasses is in showing that (a) non-competitors within the current
marketplace have power, and (b) there are additional threats beyond the status quo.
Other forces have since been identified, in particular Nalebuff and Brandenburger's
complementor. This is a product which does not compete. Instead it supports the
company's offerings. Essential complementors are necessary additional products, for
example paper is an essential complementor for printers. Non-essential complementors are
helpful but not necessary, for example decorative 'skins' for personal devices.
See also
Market Players, Barriers to Entry
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