The Porter’s Five Forces Part I

Author : Ami Fitri Utami, SE., MSM

The first aspect is the threat on new entrants. New player can bring new models, new capacity and new cash flows that can shake up the existing competition. The threat of entry depends on the height of entry barriers and on how strong the existing competition on the industry. Barriers to entry became an advantages that incumbents or old player have over the new entrants. There are seven major source of entry barriers: Supply-side economies of scale, it means that when company produce a larger volumes of products or services it will enjoy a lower costs per unit. Demand side benefits of scale these benefit arise in industries which a buyer’s willingness to pay will increase with other recommendation regarding the products. Customer switching costs it is a cost that buyers face when changing products or suppliers. Capital Requirements. It is the sum amount of capital that have to be invested in order to compete in the industry. Incumbency advantages independent of size, it means that the incumbents will always have cost or quality advantages over new entrants regarding the size of the incumbents. Unequal access to distribution channels, new entrants have to secure distribution of its product, meanwhile when distribution channel is limited they have to replace the existing player first. Restrictive government policy, government policy can play a significant role to entry barriers through regulation and policy.
The second force is power of suppliers, when suppliers have the capability to direct the price quantity and so on it means that they can squeeze the profitability out of an industry. A supplier group is superior if : it is more concentrated than the industry it sell the product to, the supplier doesn’t depend on one industry to create revenue, the industry face a heavy switching cost if they change the suppliers, suppliers produce unique and differentiated products, there is only one supplier that supply certain products, supplier have the ability to integrate forward into the industry.
Other than suppliers, buyers that are powerful have the ability to forcing down prices, demanding better quality thus driving up costs, as in supplier’s power there are some criteria for buyer that can make them superior than the industry, customer group has negotiating leverage if : there are only few buyers in the market, the product are similar and standardize, the switching cost is low, the buyers have the capability to integrate backward and produce the product themselves. A buyer group is price sensitive.

Reference :

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.