Porter Five Force Analysis

Porter Five Forces Analysis

Harvard Professor Michael E. Knight developed the model of the 'Five Competitive Forces' in 1980. Since then the 'five forces tool' has since been used by industries as a form of analyzing their structure and strategic process, and to further explore their environment and competitive advantage (Morrison 2011).

The five forces are:

1) Intensity of rivalry amongst existing competitors

2) Threat of entry by new competitors

3) Pressure from substitute products

4) Bargaining power of buyers (customers)

5) Bargaining power of suppliers

When used together the company is given a clear overview of their competitive position and their profitability. One such major company is Wal-Mart. We will take an over view of Wal-Mart using Porter's 'five forces'.

Rivals

Rivals are industries competing against each other, and can be either strong or weak depending on the amount of industries competing. The more the industries the more intense the competition and the situation then becomes cut-throat among industries. Porter's factor affecting rivalry is number of firms, fixed costs and product differentiation (Mallon n.d.). Wal-Mart is so strong and offers their customers more for their money with their low prices that their competitors stand no chance competing against them. Their unique logistic too allows them to track their sales data, inventory levels and employee turnovers (Mallon n.d.).

Threat of New Entrants

Barrier to entry is one major defining characteristics of competitive advantage in the industry. When an industry barrier to entry is high, it is usually too costly for new firms to enter that industry, while industries with low barriers to entry are usually more cost efficient for new firms to enter (Mallon n.d.). A rise in new entrants in a market place is a result of reduction in barrier to entry, as the threat of new entrants rises rivalry increases resulting in a decrease in profitability. The major barriers to entry are patents, high cost of entry and brand loyalty. A new industry trying to enter the market faces challenges that are very costly and hard to overcome, whereby posing minimal threat to Wal-Mart (Mallon n.d.). Pressure from Substitutes

This is probably the most harmful element of strategic decision making because it is mostly overlooked. It is always very important for managers to stay on top of what their competitors are doing but also be aware of what other products are on the market (Mallon n.d.). The threat of substitutes is high when switching cost is low. Although