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five forces model


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Developed by Michael Porter, this model provided a framework for an overall set of competitive rivalries within an industry structure. Marketers seeking to develop a competitive advantage can use this model to better understand the industry context in which the firm operates.

The model is illustrated, then expanded upon:

If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct. When an important rival takes an action that precipitates counter-moves by other firms, rivalry intensifies. The intensity of rivalry is classified into various ranges, based on the firm's aggressiveness in attempting to gain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive strategies: Pricing: raising or lowering prices to gain a temporary advantage. Improving product differentiation. Creatively using channels of distribution: using vertical integration or using a distribution channel that is novel to the industry. Exploiting its relationships with its suppliers.

Pricing: raising or lowering prices to gain a temporary advantage.

Improving product differentiation.

Creatively using channels of distribution: using vertical integration or using a distribution channel that is novel to the industry.

Exploiting its relationships with its suppliers.

Various industry characteristics that affect the intensity of rivalry:A larger number of firms increases rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership.Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market.High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share, resulting in increased rivalry.High storage costsorhighly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload products on the market at the same time, competition for customers intensifies.Low switching costs increase rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers.Low levels of product differentiation are associated with higher levels of rivalry. Brand identification and loyalty, on the other hand, tends to constrain rivalry.Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry.High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable.A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging a rival's moves. Rivalry is volatile and can be intense.Industry shakeout A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures. It is clear that market stability and changes in supply and demand affect rivalry. Cyclical demand tends to create intensive competition.

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Subjects: Marketing.


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