Analysis of Porter's 5 Forces Model and Its Application in E-Commerce Based Economy

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A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Michael Porter has postulated that the intensity of competition in an industry is determined by its underlying economic structure. Porter (1985) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. According to Porter, industry structure is determined by five competitive forces and it is evident that all of these competitive forces will be affected by the development of the information economy.

The five forces model, as developed by Micheal E. Porter, illustrates the biggest factors that may enter into the strategic decision-making process. These are, on a vertical level, suppliers and customers, on a horizontal level, competition from products, new entrants (can also be vertical), and rivals. To explain the horizontal/vertical, it means companies and products that are on the same level as you, competing for the attention of the same customers (and suppliers). Vertical relationships are those which a company depends on, either their relationship with suppliers or their relationship with customers. Each of these also operates on their own horizontal axis. The more powerful players on that level become, the more they can affect players on the other levels. In other words, it is an analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry likely profitability is conducted in Porter’s five forces model.

➢ Force 1: The Degree of Rivalry: The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition.

➢ Force 2: The Threat of Entry: Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. The entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position. The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows: Economies of scale: for example, benefits associated with bulk purchasing; Cost of entry: for example, investment into technology, etc.

➢ Force 3: The Threat of Substitutes: The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or services.

➢ Force 4: Buyer Power: Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry. The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors.

➢ Force 5: Supplier Power: Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to...
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