HL2 MARKETING THEORY:PORTER’S FIVE FORCES

IB BUSINESS AND MANAGEMENTA COURSE COMPANION

P189-191

PORTER’S FIVE FORCES

• Porter came up with a method for examining the competitive environment of a market.

• His model analyses the five key factors that will enable an organization to understand how strong the competition is, and therefore how to devise a suitable marketing strategy.

PORTERS FIVE FORCESThreat of New Entrants

• New businesses coming into a market increase competition, resulting in lower prices and profits.

• Barriers that prevent entry into the market can limit the competitive pressure and allow existing businesses to make larger profits.

• Porter established a number of strategies for businesses to help them increase the barriers in their markets.

Strategies to Prevent New Entrants from Entering the Markets

Big Spending on Promotion• Create strong brands by investing heavily in

promotion. • Potential new entrants will face such high

costs of entry that they will be deterred from entering the market.

Big Spending on Plant & Machinery• New entrants will find it hard to compete

without the same levels of equipment, but the expense of setting up will defer entry.

Strategies to Prevent New Entrants from Entering the Markets

Legal Protection: Patents & Copyrights• Obtain legal protection for products and

processes through patents and copyrights to prevent businesses simply copying your successful operations.

Control of Distribution Channels• Companies can control distribution channels by

entering into exclusivity agreements.• This will make it hard for new rivals to get their

products to end users.

PORTERS FIVE FORCESBargaining Power of Buyers

Problem

• Buyers will try to force prices down as far as possible. • If buyers are powerful, businesses will not be able to

earn high profits. • An example of this is livestock farming, where farmers in

many countries struggle to earn a living due to low livestock prices.

• The bargaining power of supermarkets means that farmers have little choice but to accept the prices being offered to them as they have few other outlets for their meat.

Strategies to Reduce the Bargaining Power of Buyers.

Mergers & Acquisitions • Merge or take over buyers to ensure that you have

an outlet for your product. This is known as vertical forward integration. This is common in the UK pub industry, where the majority of pubs are owned by breweries.

Service Agreements• Tie consumers in, for example, by having service

agreements. Buyers who find it very expensive to switch suppliers or products are far less likely to do so.

PORTERS FIVE FORCESThreat of Substitutes

• If substitutes to an organization’s products exist, consumers have a choice.

• The closer the substitute product, the more difficult the business will find it to raise prices, as consumers will simply switch to the alternatives.

Strategies to Reduce the Threat of Substitutes

• Firms need to create barriers to entry through marketing so consumers feel the product is better than another (not a close substitute). Ways of doing this include:

taking out patents and copyrights focusing on ensuring anti-competitive

behaviour.

PORTERS FIVE FORCESBargaining Power of Suppliers

• Just as buyers will use their bargaining power, suppliers will try to get the best deal they can.

• Suppliers with lots of power will be able to push prices up, increasing an organization’s costs and reducing its profitability.

Strategies to Reduce the bargaining power of Suppliers

Vertical Backward Integration This involves buying suppliers to ensure

continuity of supply.Reduce Dependence on any ONE Suppliers Businesses can reduce the power of suppliers

by not relying too heavily on one of them. By having a range of suppliers, a business can

switch to an alternative more easily if one supplier tries to raise the price.

PORTERS FIVE FORCESCompetitive Rivalry

• The more rivalry there is between businesses in a market, the more likely they will engage in price wars and push prices and profits for the whole industry down.

• Ensuring that price wars do not occur, (by perhaps colluding with rival businesses) will allow all the businesses in a market to increase their profitability.

• However, forming cartels is illegal in most markets and there are substantial penalties for businesses caught price fixing.

Strategies to Reduce the Impact on Competitive Rivalry

• In the same way that marketing activity can help to reduce the threat of substitutes, it can also reduce rivalry with other businesses by ensuring that products are perceived as better than their competitors.