Porter's Five Models

Porter 5 Forces

1. Introduction

When examine the marketing environment should analysis the macroenviorment, microenvironment, internal and external audits. Marketing environment not only influence by macroenviorment also of the company its own marketplace and its clients (Vignali et al., 2008, p. 361). Penrose (1959) and Hatch (1997) also suggested that competitive strategy requires both the exploitation of existing internal and external firm-specific capabilities in order to develop new ones. To analysis the microenvironment of a company, the competitive environment must be given the great importance, by trying to construct the competitive strategy, an assessment of the external environment will help to answer one basic question that is what will happen in the markets in which company choose to compete(Asch & Bowman, 1996)? By answering this, the company can therefore to find a well position for its company and make their own strategies but in the meantime, the other issues will be raised, that is what markets are the company are competing in? In order to define the market the firm is, company need to know well about what customers needs, and who it is the customers see the firm will competing with.

Porter (1980) said that "the first step in structural analysis is an assessment of the competitive environment - the basic competitive forces and the strength of each in shaping industry structure. The second is an assessment of the company's own strategy-of how well it has positioned itself to prosper in this environment." When these two are taken together, these two will be the key factors to forecasting a company earning power.

2. Literature Review

2.1 The theory of Porter's five forces

The successful of a company's competitive strategy depends on how it relates to its external environment and how well they prepare for it. In the contrast, a company who does not prepare well is ill equipped to deal with a competitive marketplace (Bennett & Blythe, 2002), therefore, company should know well about the advantage of competitive on the market, and what problems they will face in the future. The environment must be viewed each forces which have influence the company, including the products and services (Vignali&Vignali, 2009) when the company face these problems what strategy will they use to flight back; from external environment to understand the advantage of the competitive market in order to plan and build itself strategy, this thinking are from outside-in (Porter, 1980 and Mintzberg et al, 1998).

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Vignali & Vignali(2009) indicate that the company have to build the correctly knowledge of market and examine the environment very often in order to choose the correct strategy and make the company in the right position. In addition, it is important to know, no matter how to make the inside company stronger if the company can not defeat the competitive, keep the customers, or make the products different from other competitive company, it's all useless. While the core strategy required an analysis of customers and competitors to be identify the potential threats and opportunities, competitive positioning choose those targets most suited to utilising the firm's strengths and minimising vulnerability due to weakness( Nicoulaud et al., 2008). Therefore, the success of a company must analyse the competitive environment well and chooses the right competitive strategy.

The American writer Michael Porter (1980) defined the important of external competitive threats to be summarised by his model- the well know "Porter five forces", this model have been greatly important for the industry, by understanding the importance of each forces will give the company the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998).

The evidence that by working thought this analysis in a systematic way, some useful insights can be gained into the nature of the industry (Asch and Wolfe, 1992). It determines the level of competition an organisation is facing by assessing the extent to which the five forces are (see exhibit 1): risk of entry by potential competitors, bargaining power of suppliers, bargaining power of buyers, threats of substitute products, and rivalry amongst competitive firms.

The first factors is risk of entry by potential competitors, this is an issue due to if competitors can easily enter the business sector they will be able to put a height on the profits. Therefore, the higher of competition will have more threat from new entrants entering the sector. New entrants can enter the business segment is largely determined by the extent of the barriers to entry. No matter the potential competitors identified or not, actually do enter depends in large part on the size and nature of barriers to entry (Aaker, 2007). These are the main barriers to entry: capital cost of entry, economies of scale, product differentiation, switching costs, government policy, and the distribution channels. The second force is bargaining power of suppliers, Porter (1980) supply can exert a competitive force in industry by raising prices or reducing the quality of the goods they sell. The extent of supplier bargaining power is closely with the issues of buyer power. The power of the

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suppliers will be influenced by these factors: the concentration of suppliers due to only few suppliers, the buyers will have less opportunity to shop; the degree to products can be substituted by the diverse of suppliers; the importance of attaching to the buyer by the supple, and also the switching costs of moving to another supplier. The ability to charge customers different prices with differences of value made for each of buyers usually indicates that the market is characterized by high supplier power and meanwhile by low buyer power (Porter, 1998).

The other force is bargaining power of buyers, if the customers have more power than the suppliers, they can force prices down or ask for more services, therefore can influencing the profitability. The most important of buyer power are the size and the concentration of customers. Buyer tends to be more powerful in supply chain (Nichoulaud et al., 2008). For instance, soda companies sell to fast food restaurant that have strong bargaining power. The forth force is threats of substitute products, its profitability depends on the relative price to performance ratios of the vary types of products or services to which customers can turn to satisfy the same need, they can influence the profitability of the market and can be the major threat. It is also influence by switching costs which