Porters 5 forces essay assignment

S.L. Bus 444 Meilich

Porter’s 5 Forces

Item 1: Availability of Substitute Supplies (power of a Suppliers group)

When there is a low availability of substitute supplies the suppliers for an industry the

supplier has more power than if there was a high availability of substitute supplies. For

example, there are not many substitutes (i.e. different makers of) for anesthesia, a supply used in

operating rooms. Doctors, hospitals and insurance companies must pay whatever those few

companies charge because you cannot operate on a person without it. However if there is a high

availability of substitute supplies—like lumber the supplier has less or no power and must

accept either what the purchaser is willing to pay or at the very least, be willing to negotiate the

price of the supply needed.

Item 2: Incumbents’ control of access to raw materials/inputs (Threat of potential entry)

The threat of new entry is very low if the firms already in the industry already have

control of the raw materials needed to produce the outputs of that industry. For example if

you need iron to make cast iron pans, you have to get the iron from a mine, quarry or refinery

that deals in the production of iron. However, if your competitor(s) own(s) or has/have contracts

with most of these sources of iron, there is a very low chance that you will be able to break in to

the cast iron market, unless you have the capital required to find, open and operate the sources

yourself. On the other hand the threat of new entry is very high if there is an abundance of the

materials needed and there is no incumbent control of those resources. For example plastic

pellets for creating different plastic products are very generic. Wet ‘n’ wild uses plastic pellets in

its lipstick cases but it doesn’t have complete control over those plastic pellets and if I decided I

wanted to make a line of lipsticks I could go to the same plastic pellet producer to get raw

material for my lipstick cases.

Item 3: Concentration of suppliers relative to industry (power of a Suppliers group)

This is common sense, if there are many firms within an industry asking for supplies

from a small number of suppliers the power of the suppliers is very high. I’ll use the same

example from before, with the anesthesia. There are very few companies that actually produce

anesthesia and many hospitals, surgeons and patients that require it for their use. Those suppliers

S.L. Bus 444 Meilich

of anesthesia can effectively charge whatever they want and they’ll get it. The opposite is true

for an industry that is run by an oligopoly or monopoly. The fewer firms there are in

comparison to suppliers the less power the suppliers will have.

Item 4: Product/Service differentiation (Threat of potential entry)

If an industry is offering a unique product it is very difficult to break in to it making

the threat of potential entry very low. A good example of this is screws for space craft in

NASA, there is probably very few people who could make a screw that is that specialized—and

who NASA would trust to make those screws—entry in to this market would be very difficult. In

contrast, Home Depot carries a wonderful variety of screws that no one cares anything about;

virtually anyone can use these screws interchangeably—there’s low differentiation between them

and therefore a higher threat of entry. If you have a factory and startup capital you can make

your own brand of generic screw just as easily.

Item 5: Available Substitutes (power of substitutes)

The number of available substitutes that are good/superior greatly increases the power of

the substitutes. For example if you have a small wood working shop that has power tools that

require electricity to work and the power goes out but you have a backup generator that kicks in

almost immediately and allows you to continue your work uninterrupted, that backup generator

is a powerful substitute. In addition to this you could also have back up solar power, tesla

batteries etc. to get the electricity you need to run your business. But if all you have are few, poor

substitutes like using hand tools (the non-electric kind) when the electricity goes out that counts

as a poor substitute.