Porter's Five Forces

Porter's Five Forces

Introduction

A business is said to have competitive advantage over its rivals when its sustained profit exceeds that of the average for industry it belongs to. It is one of major and most fundamental objectives of a business organization to achieve and maintain a competitive advantage. As Michael Porter suggested, there are two basic types of competitive advantage:

Cost advantage

Differentiation advantage

Cost advantage implies that a competitive advantage exists when a business organization offers the same benefits to its consumers as its competitors but at a much lower cost whereas the differentiation advantage means delivering the products with the benefits that far exceed those of offered by the competitors. Cost and differentiation advantages are also sometimes referred to as positional advantage as the two characteristics play an important role in determining the company's position in the industry as being a leader either in differentiation or cost (Thompson, & Thompson, 2012). To examine a company's competitive environment, Porter provided a framework called Porter's five forces. The framework is also known as the Industry and Competitive Analysis. The paper aims to explore the Porter's five forces in detail to determine their meaning with respect to business.

Discussion

Michael Porter's framework represents an industry as being affected and manipulated by five forces. These five forces have the potential to guide a strategic business manager seeking to attain and maintain an edge over competitors. The five forces are described below:

Rivalry

The rivalry between different firms is measured by economists by means of indicators of industry concentration. One such measurement tool is Concentration Ratio (CR). The CR indicates that how much percentage of market share is held by largest organizations in the industry. A high value of CR implies that largest firms hold high concentration of market share rendering the competitive landscape less competitive and indicative of monopoly. ...