Back in 1979, Michael Porter created Porter’s Five Forces Model. He suggested portrayed the five forces that shape industry competition as well as strategy. Those five forces consisted of the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitute products or services and the rivalry between existing competitors. It serves as a useful tool for procurement managers to better understand competition in their sector and the potential impact on procurement strategies.
Porter’s Five Forces: An Overview
In the original model, Porter identified threat of entry as new entrants to an industry bringing new capacity and a desire to gain market share. He suggested that the threat of entry puts pressure on the profit potential of an industry.
Porter identified that powerful suppliers could capture more value for themselves where they were able to charge higher prices, limiting quality or services, or shifting costs to industry participants. He suggested that if there are no substitutes in the market the supplier has control over the market and profits.
His model also suggested that there was a flip side to this situation. Powerful buyers or customers could capture more value by forcing down prices, demanding better quality or more service, and generally playing industry participants off against each other.
Porter defined substitutes as something that performs the same or similar function as an industry’s product by different means. Where the threat of substitutes is high, industry profitability suffers. He noted that strategists should be alert to changes in other industries that may impact on their own.
He then went on to discuss rivalry. He suggested that rivalry takes on many forms including price discounting, new product introductions, advertising campaigns and service improvements. He suggested that rivalry is especially destructive to profitability if it gravitates solely to price. He believed that rivalry becomes more intense based on the number of competitors, industry growth, and exit/entry barriers are high.
The Five Forces: Revisited
Times have moved on and so has the interpretation of Porter’s Five Forces model. Universally used by all branches of study including business management, marketing, sales and procurement. The model provides insights into different strategies viewed from different angles.
So now perhaps is a good time to revisit the model and consider the forces within it.
Let’s first distinguish what a force is. Force may be defined as an influence that changes movement. This would be true regarding the number of suppliers and buyers in an industry or in a market. Based on whether the supply market is a monopoly, oligopoly or contains competition it should be possible to decipher in which way the power of the supplier base is moving.
The same can be said of the buyer market. Based on whether the buyer market is a monopsony, oligopoly or contains competition it should again be possible to identify in which way the power of the buyer base is moving.
With regard to entry and exit into the marketplace, the number of new suppliers or buyers entering the market or the number of buyers and suppliers exiting the market will also influence movement. In terms of substitutes, this could be expanded so that it not only includes the number of suppliers who bring in alternative products, but it could also include new materials and processes as well as other innovations. These would also influence the market or industry and create changes in movement. Finally, there is ‘rivalry’. But is rivalry a force?
Is ‘Rivalry’ Really A Force?
Rivalry is defined as markets or industries competing for the same thing. Porter cited price discounting, new product introductions, advertising campaigns and service improvements as a separate force within his model. Yet the points he makes are all activities that take place within the other four forces. Price discounting is conducted by suppliers along with advertising campaigns and service improvements. New product introductions are already covered as a force of substitution. He believed that rivalry becomes more intense based on the number of competitors, industry growth, and exit/entry barriers. All of which relate to the four forces already discussed. These are all causes that have consequences.
This suggests that rivalry is not a force or cause and at best is simply a consequence of what has happened in the other four forces. If rivalry is defined as markets and industries competing for the same thing then this suggested competition, the activity or condition of striving to gain or win something by defeating or establishing superiority over others, is what he is referring to. If winning is achieved by the actions of buyers and suppliers including their entry or exit into a marketplace and the establishment of substitutes once again rivalry cannot be seen as a force.
If it was Porters four forces model it would suggest that the consequence of changes in the market or industry can create a dangerous or bad situation in which the participants become more and more involved and from which you cannot escape. There would be no fifth force in the centre of the model. This would simply denote a competition vortex which differs in intensity as the four forces around its influence movement.
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