Porter Five (5) Forces-Modell
The Porter Five (5) Forces Model was proposed by Michael E. Porter in 1979. The purpose was to assess and assess the competitive position and strengths of business organizations. The model has three horizontal competitive forces (threat of substitute products or services, threat of new entrants and rivalry between existing firms) and two vertical forces (bargaining power of buyers and bargaining power of suppliers).
These forces shape competition in every industry. The competitiveness of the entire industry decreases when these forces reduce profitability. Porter felt that the SWOT analysis lacked rigor. Many new businesses use the Porter Five (5) Forces Model to decide whether it is profitable to enter a particular industry.
Here is the pictorial representation of the Porter Five (5) Forces Model:
Uber and the Taxi Industry An Analysis of Porter's Five (5) Forces
Application of this model can help Uber and Taxi Industry A to determine industry attractiveness and understand its competitive position in the market. The analysis can also be used to make some strategically smart decisions that could improve Uber's and Taxi Industry A's performance and ensure long-term survival.
Threats from new entrants
The threat of new entrants reflects how new entrants impose threats on existing market entrants. If the industry is profitable and the barriers to entry into the industry are low, it will attract more players and thus the threat of new entrants. will be high.
Here are some factors that reduce the threat of new entrants to Uber and Taxi Industry A:
- Entering the industry requires significant capital and resource investments. This power also loses power when product differentiation is high and customers value the unique experience.
- Uber and Taxi Industry A will face the low threat of new entrants if the existing regulatory framework imposes certain challenges on the new companies interested in entering the market. When this happens, new players have to meet strict, time-consuming regulatory requirements, which can discourage some players from entering the market.
- The threat will be low when psychological switching costs for consumers are high and existing brands have built a loyal customer base.
- New entrants are put off when access to distribution channels is restricted.
Uber and the taxi industry A will face a high threat from new entrants if
- Existing regulations support the entry of new players.
- Consumers can easily switch brands due to weak/no brand loyalty.
- The initial investment is high.
- Building a distribution network is easy for new players.
- Retaliation from existing market participants is not a discouraging factor.
How can Uber and the taxi industry A counter the threat of new entrants?
- Uber and the taxi industry A can develop brand loyalty by working on customer relationship management. It will increase the psychological cost of switching.
- It can establish long-term contractual relationships with distributors to expand access to the target market.
- Uber and Taxi Industry A can also invest in R&D activities, obtain valuable customer data and introduce innovative products/services to create a strong base of differentiation.
Threat of Substitute Products or Services
The availability of substitute products or services makes the competitive landscape challenging for Uber and the Taxi Industry A and other existing players. High threat of substitution shows that customers can use alternative products/services from other industries to meet their needs. Various factors determine the intensity of this threat to Uber and the taxi industry A
The threat of substitute products or services increases when;
- A cheaper replacement product/service from another industry is available
- The psychological costs of switching from industry to substitute products are low.
- The replacement product offers the same or even better quality and performance as offered by Uber and the Taxi Industry A product.
However, this threat to Uber and the taxi industry A is essentially low if;
- The switching cost of using the replacement product is high (due to high psychological costs or higher economic costs).
- Customers may not get the same benefit (in terms of quality and performance) from the replacement product as they did from the Uber and Taxi Industry A product.
How can Uber and Taxi Industry A address the threat of substitute products or services?
- Uber and Taxi Industry A can reduce the threat of substitute products or services by clearly emphasizing that their offered product/service is better than the available substitutes.
- It should provide customers with compelling reasons by offering a better experience and great value for money.
- It can increase switching costs by working on loyalty.
- Finally, it can improve quality, maximize value for money, and create a strong base of differentiation to discourage customers from using the substitute product.
rivalry between existing firms
The rivalry between existing companies shows the number of competitors that give Uber and the taxi industry A a tough competition. A high level of rivalry shows that Uber and the taxi industry A may face strong pressure from competing companies, which may limit each other's growth potential. Profitability in such industries is low as companies use aggressive targeting and pricing strategies against each other.
Rivalry between existing firms will be low for Uber and the taxi industry if;
- There are only a limited number of players in the market
- The industry is growing rapidly
- There is a clear leader
- The products are highly differentiated and each market participant addresses different sub-segments
- The economic/psychological switching costs for consumers are high.
- Exit barriers are low, meaning companies can easily exit the industry without incurring major losses.
Similarly, there are some factors that are increasing the rivalry between existing Uber companies and the taxi industry. A For example, the firm will face intense rivalry between existing firms if market participants are strategically different and target the same market. The rivalry will also be intense when customers are not loyal to existing brands and lower switching costs make it easier to attract customers from others. Competitors with the same size and undifferentiated products with slow industry growth tend to pursue aggressive strategies against each other. All of these factors make rivalry between existing companies a major strategic concern for Uber and Taxi Industry A
How can Uber and the taxi industry A manage the rivalry between existing companies?
Uber and Taxi Industry A should focus on the implicit needs and expectations of their customers to strengthen the differentiation base. It should increase switching costs by building long-term customer relationships. The organization should also invest in research and development activities to identify new customer segments. In some cases, working with competitors can be mutually beneficial. The organization can also look for this option.
bargaining power of suppliers
The bargaining power of suppliers in Porter 5's Force model reflects the pressure that suppliers exert on business organizations using various tactics such as: B. reducing product availability, reducing quality or increasing prices. When suppliers have strong bargaining power, it costs buyers (business organizations). In addition, high bargaining power of suppliers can increase competition in the industry and reduce profit and growth potential for Uber and the taxi industry. A Likewise, weak supplier power can make the industry more attractive due to high profitability and growth potential.
Supplier bargaining power will be high for Uber and Taxi Industry A if:
- Vendors have concentrated on a specific region and their concentration is higher than that of their buyers.
- This force is particularly strong when the cost to buyers of switching from one supplier to another is high (e.g. due to contractual relationships).
- When providers are few and demand for the product they offer is high, this strengthens the position of providers vis-à-vis Uber and the taxi industry A
- The forward integration of suppliers weakens the position of Uber and Taxi Industry A as they become competitors in this area as well.
- If Uber and the taxi industry A are not well educated, have insufficient market knowledge and lack price sensitivity, this automatically strengthens the position of the providers vis-à-vis the organization.
- Other factors that increase the bargaining power of the providers are a high product differentiation of the providers, Uber and the taxi industry A, which only have a small share of the total turnover of the providers, and the unavailability of the substitute products.
In contrast, the bargaining power of suppliers for Uber and Taxi Industry A will be low if:
- Suppliers are not concentrated
- Switching costs are low
- The product lacks differentiation
- Replacement products are available
- Uber and the taxi industry A is very price sensitive and has sufficient knowledge of the market
- Forward integration by suppliers is not to be feared.
How can Uber and Taxi Industry A tackle supplier bargaining power?
Uber and Taxi Industry A can strengthen their position vis-à-vis suppliers by reducing their dependency on one or a few suppliers. It will increase its price sensitivity. Developing long-term contractual relationships with suppliers from different regions not only reduces their bargaining power, but also allows Uber and Taxi Industry A to improve their supply chain efficiency. Finally, Uber and the taxi industry A can find alternative ways to manufacture the product if the product demand is high enough and the company has the necessary skills and expertise. However, a detailed cost-benefit analysis is required to determine feasibility. Product redesign and product line diversification can also help the organization reduce the power of suppliers in the marketplace.
bargaining power of buyers
The bargaining power of buyers demonstrates the pressure that customers put on business organizations to obtain quality products at affordable prices with excellent customer service. This force directly affects the ability of Uber and Taxi Industry A to achieve business goals. Strong bargaining power lowers profitability and makes the industry more competitive. Weak buyer power, on the other hand, makes the industry less competitive, increasing profitability and growth opportunities for Uber and Taxi Industry A
There are a few factors that increase buyers' bargaining power:
- A more concentrated customer base increases their bargaining power with Uber and the taxi industry A
- Buyer power is also high when there are few but a number of sellers (business organizations) are too many.
- Low switching costs (economic and psychological) also increase the bargaining power of buyers.
- In the case of corporate customers, their ability to integrate backwards strengthens their position in the market. Backwards integration shows the buyers' ability to manufacture the products themselves, rather than buying them from Uber and Taxi Industry A
- Consumers' price sensitivity, high level of market knowledge and buying standardized products in large quantities also increase buyers' bargaining power.
Some factors that reduce buyers' bargaining power are lower customer concentration (i.e. customer base is geographically dispersed), customers' inability to integrate backwards, low price sensitivity, lower market knowledge, high switching costs, and buying customized products in small quantities .
How can Uber and the taxi industry address buyer bargaining power?
Uber and Taxi Industry A can manage the bargaining power of buyers by expanding and diversifying their customer base. This can be done by introducing new products, targeting new market segments and adopting product diversification strategies. Marketing and advertising strategies can also be helpful in this regard. Building loyalty by embedding innovation and offering a great customer experience can increase switching costs, ultimately reducing their bargaining power. Uber and Taxi Industry A can use these strategies to strengthen their competitive position in the market.
Effects of Porter's force model 5
Applying Porter's Five (5) Forces model to a real-world context enables organizations to make smart strategic decisions. The influence and importance of each of the five forces is contextual. Using Five Force Analysis, Uber and Taxi Industry A can determine industry attractiveness, make effective entry/exit decisions, and assess the impact of these forces on their own business and competitors. In addition, the dynamic analysis of this model can provide important information. For example, Uber and Taxi Industry A can combine Porter 5's force model with the PESTEL framework to determine the potential future attractiveness of the industry. In some cases, companies do not have the information needed to analyze the five forces. In such a scenario, the analysis can be performed using assumptions. Most often consultants consider this model as a starting point and other frameworks (such as PESTEL and Value Chain) are used in conjunction with a better understanding of the external environment.
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What is Porter's 5 forces analysis example? ›
Examples: High barrier to entry and high exit barrier (for example, telecommunications, energy) High barrier to entry and low exit barrier (for example, consulting, education) Low barrier to entry and high exit barrier (for example, hotels, ironworks)How do you apply Porter's 5 forces to an industry? ›
- Step 1 – Preparation is Key. ...
- Step 2 – Threat of New Entry. ...
- Step 3 – Threat of Substitution. ...
- Step 4 – Supplier Power. ...
- Step 5 – Buyer Power.
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Regarded as the most expressive in Porter's 5 forces model, the rivalry between competitors is the major determining factor for market competitiveness.What is the strongest of the 5 forces on the toy industry and why? ›
Power of Buyers (HIGH)
Consumers are the main Toy Industry engine. They decide wich trends are entering (by the popularity of tv shows, films, musical bands, etc.) so that Toy Companies must introduce new products in order to satisfy the arising population needs.
According to Porter, Rivalry among competing firms is usually the most powerful of the five competitive forces.
What is threats of substitute products? ›
What is the Threat of Substitution? Companies are concerned that substitute products or services may displace their own. The threat of substitution is high when rivals, or companies outside the industry, offer more attractive and/or lower cost products.What is main goal of Porter's 5 forces analysis? ›
The objective of Porter's Five Forces model is to assess the overall competitive landscape of a particular business sector. Each of these five forces corresponds to a key component of market intensity.Do you think the 5 forces model can be used in today's competitive world if yes how would it be applied? ›
Porter's Five Forces cannot be considered as outdated. The basic idea that each company is operating in a network of Buyers, Suppliers, Substitutes, New Entrants and Competitors is still valid. The three new forces just influence each of the Five Forces.What are some examples of industry analysis? ›
- Porter's 5 competitive forces model.
- PEST model.
- SWOT analysis.
Porter's five forces is a widely used framework for analyzing industries. It refers to the competitive influences shaping the corporate strategies that are likely to be successful. The framework has held up well over time and continues to be a staple of the coursework for business classes.What does Porter's 5 Forces stand for? ›
Porters 5 forces is a method used to breakdown and understand the competitive nature of an industry or business. It does so by looking at five main factors – threat of substitutes, threat of new entrants, bargaining power of buyers, bargaining power of suppliers, and competitive rivalry.When did Porter create 5 forces? ›
The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.How Porter's five forces can help small businesses analyze the competition? ›
- Learn what industry they need to target.
- Determine which industries give the best or least chances of success.
- Understand the demand for their product .
- Recognize their risks.
- Recognize their opportunities.
- Learn how profits get distributed within an industry.
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Porter theorized that understanding both the competitive forces at play and the overall industry structure are crucial for effective, strategic decision-making, and developing a compelling competitive strategy for the future.
What is the strongest of the five forces in most industries? ›
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Porter argues that factors affecting competition are largely similar regardless of the industry. His five forces that shape competition include competition among existing competitors, bargaining power of customers, bargaining power of suppliers, threat of substitute products and threat of new entrants.Which of the following represents buyer power in Porter's five forces model? ›
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Complementary products is not a force in the Porter Five Forces model.Why the power of customers is important? ›
Regardless of what industry you're in or what kinds of products and services you sell, your customer is the most important part of your business. Without the customer, you don't see any sales. As a result, they are a critical factor when developing your marketing messaging and strategy.How can we reduce threat of substitutes in industry? ›
The threat of substitutes can be reduced through product differentiation or customer value promotion.What is the importance of substitute products to consumers? ›
The benefit of substitute products is that they provide consumers with variety when choosing goods to satisfy their needs. On the other hand, companies will incur more costs to develop competitive offerings and promote them as the best in the market.
What question is Porter's five forces analysis trying to answer? ›
This section of the Five Forces asks you to determine the likelihood that your customers will replace your product or service with an alternative that solves the same need. Answer these questions: What are the differentiators between your product/service and the substitute?How can the Porter five forces model help one to understand and assess industry competition and attractiveness? ›
Porter's five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organisation's current competitive position, and the strength of a position that an organisation may look to move into.What does the 5 forces model contribute to our understanding of industry and firm performance? ›
Porter's Five Forces Model is an important tool for understanding the main competitive forces at work in an industry. This can help you to assess the attractiveness of an industry, and pinpoint areas where you can adjust your strategy to improve profitability.What is the use of Porter's five force model explain five forces with relevant examples? ›
According to this framework, competitiveness does not only come from competitors. Rather, the state of competition in an industry depends on five basic forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and existing industry rivalry.What is Porter's 5 Forces Analysis example quizlet? ›
the Five Forces model helps business people understand the relative attractiveness of an industry and the industry's competitive pressure in terms of buyer power, supplier power, threat of substitute products and services, threat of new entrants, rivalry among existing competitors.What are examples of competitive forces? ›
- The threat of indirect competition—the availability of products that offer similar performance.
- The possibility of new entrants into the marketplace.
- Supplier pressure—where demand for inputs is high, suppliers can raise their prices.
A Five Forces analysis can help companies assess industry attractiveness, how trends will affect industry competition, which industries a company should compete in—and how companies can position themselves for success.Which of the following are part of Porter's five forces model choose all correct answers? ›
5 Forces of Competition
Bargaining power of suppliers. Bargaining power of buyers. Threat of substitute products. Intensity of rivalry among competitors.
According to Porter, Rivalry among competing firms is usually the most powerful of the five competitive forces.What is the most important force among the 5 forces? ›
Porter Force 1: Rivalry between competitors
Regarded as the most expressive in Porter's 5 forces model, the rivalry between competitors is the major determining factor for market competitiveness.
Which of the five competitive forces is strongest? ›
The rivalry among competitors is the strongest of the five forces. This rivalry may cause price wars between competing firms if the industry is centered on price competition. Other sectors compete on product offerings.