Porters Five Forces

  This week our lecture topic is “placing organization in context”, what impressed me a lot is Porters Five Forces which is a useful tool to help us analyse the micro environment .

   
  Firstly, this diagram illustrates Porters Five Forces

1:Supplier Power: the power of supplier to drive up the prices of your inputs

2:Buyer Power: the power of your customer to drive down your prices

3:Competitive Rivalry: the strength of competition in the industry

4:The threat of substitution: the extent to which different products and services can be used in place of your own

5: The threat of New Entry: The ease with new competitors can enter the market if they see that you are making good profits (and then drive your prices down)

    “How competitive forces shape strategy”, Michael Porter outlines the five forces that affects competitive positioning. As far as I am concerned, it is quite practicable and helpful tool to identify and analyze our advantages and disadvantages in micro environment. Let me take Ryanair for example.

         Ryanair Porter’s Five Forces Analysis

1: Bargaining power of supplier(-)

A：increasingly number of its suppliers, but Boeing is still main supplier

B :  high switching costs

2:bargaining power of customers(-)

A: there are many buyers

B: It doesn’t cost much for customers to switch to another airline

C: Buyers are price sensitive and their decision is often based on how much does a ticket costs

D: Buyers can easily choose alternative airline

3:threat of substitute products and services(+)

A: There are a few alternative types of transportation ,such as railway networks ,sea transports, coach transport as well as car rental firms

B: alternative types of transportation almost always cost more

4:Threat of new entrants(+)

A: large amount of capital required

B: high retaliation possible from existing companies if new entrants would bring innovative ideas to the industry

C: all airline companies have established brand image and reputation

D: difficulties association with gaining access to distribution channels

5:Competitive rivalry(-)

A: moderate number of competitors

B: size of competing firm’s vary but they usually complete for different consumer segment

C: there is moderate threat of being acquired by a competitor

  From this example, we can see that Porters Five Forces tool is simple but powerful tool for understanding where power lies in a business situation . This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you’re considering moving into.