Porter’s 5 Forces
Porter’s five forces model is designed to show the profitability potential of a company. This is very important when designing ones international strategy. While this is not an all encompassing model, it is essential that these five forces be considered because they drive the profit margins of a product and before going global, a company must know if it even has a chance to succeed in that specific market. These forces are: 1. Rivalry. Rivalry effects how much a company is able to charge for their product.
When the competition for a specific item is low, companies may be able to charge more, but when there is more competition companies need to have competitive prices and quality of their products. 2. Threat of substitutes. Threat of substitutes refers to other products that affect the price of another product. The example used in the article was the price of aluminum cans. The price is affected by the price of glass, steel, or plastic containers. They are not in direct competition but the price of one can drive the prices of another. 3. Buyer Power.
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Buyer power is how buyers influence the market by being able to impose their demands of cost and quality. 4. Supplier Power. Is similar to buyer power but in the reverse role. The supplier is able to demand its prices and quality of a product. When there is only one supplier to a high demand product, they control the prices, but when there are many suppliers, they compete to have the most attractive product by price and quality. 5. Threat of new entrants and entry barriers. It is in the company’s best interest to set barriers on its products so it can maintain the leading edge over its competition.
A simple example is a patent that a company holds on a product. These forces need to be considered by a company’s leadership in order for the company to understand the market they are in and how they can maximize their profit margin. When looking to take a company global, these considerations are essential. The product must be desired by the buyer pool. The materials to produce the product must be available, which could cause logistical problems and add cost to producing the product. This model does not take into effect the role that government may have on a company.
It mentions briefly that the government may create barriers, but the government impacts business in a variety of different ways and each government may be different. The policies set in place by governments differ depending on which country you are operating in. Some of the different areas may include employee rights, consumer rights, taxation, and environmental protection. A solid understanding of each of these governmental policies and the impact they may have on a company is essential before spreading internationally.
Also product quality and quality of materials used may also differ depending which part of the world you are in. Something I have seen in the tool and die industry is that the quality of steel used for injection molding differs from the United States and China. An injection mold made out of high grade mold steel in the U. S. has a very long life but its initial cost may be expensive. On the other hand having the same mold made in China does not have the same quality and requires more maintenance. The mold from China had a smaller initial investment, but may end up costing more in down time of the machine and repair costs.
Another limitation of Porter’s model is the fact that it does not take into account the rapidly changing market. A key factor in a company’s chance of success is its ability to adapt to the forces around them and the ever changing market of supply and demand of certain products. Overall Porter’s 5 forces are a good way to begin setting up a good business model because these drive the profitability of a company. These forces will help to build a solid strategic direction for a company but that company needs to continually evaluate and restate its direction as the market changes around them.