Porter’s five forces analysis-draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market.
True to Darwin’s theory “Survival of the fittest”, only competitive firms survive in the business market, provided, they have made the right strategic choice by comprehensively analyzing their position in the industry.
Every organization is part of the industry and almost all of them face competition. Thus, industry and competition are the vital considerations for making a strategic choice.
All the firms in a particular industry vie for the same set of customers by offering identical or similar products with minor variations. The analysis of the external environment in relation to the context of industry attractiveness thus becomes essential.
Industry analysis helps a firm to also fix long range plans, by gauging long term growth opportunities present if any. Strategic choice is nothing but, to screen all possible strategic alternatives followed by narrowing down the choice to the best suited and feasible alternatives and ultimately choosing an optimum strategy.
To explain it in more clear terms, let us look at this example. Say, if there are three big players of car manufacturers in an automobile industry. Each follows their own strategic style to capture the market. What are the threat factors?
A thorough analysis of the automobile industry thus made can make things clear to the firm, as to where they stand in terms of market share, what are their strengths and weaknesses, who pose a threat, what are the potential opportunities for growth and to tap market segments whose needs are unidentified. Still, it will be a seller’s market where the buyers have no bargaining power.
On the other hand, if the weather does not favor its growth, the firm has to immediately decide on its next course of action, calling for diversification. The possible threats for a firm can come from five directions as mentioned below:
The structure and dynamics of an industry has to be analyzed in order to determine the intensity of competition and profitability.
As the market is very dynamic, it becomes mandatory for firms to evolve strategies embracing a modern approach, with emphasis on reappraisal of existing strategy in the light of changing external conditions and formulation of alternative strategies.