The impact of Porter’s five forces model


Introduction

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths. Five Forces analysis is frequently used to identify an industry's structure to determine corporate strategy. Porter's model can be applied to any segment of the economy to understand the level of competition within the industry and enhance a company's long-term profitability. The Five Forces model is named after Harvard Business School professor, Michael E. Porter.

Source: You tube

 How to use the model
The Porter’s five forces model is often used as a starting point to evaluate a company’s position in its industry and to assess its level of competitiveness. Though this framework is generic and applicable to any industry, it is only effective if it is used in a specific context that applies directly to the company undertaking the evaluation.
Porter also emphasized the importance of using this model at more basic industry level. If an organization operates in different industries, then it must develop a separate five forces model for each of its industries. 

Porter’s five forces analysis for IKEA
IKEA is a Swedish company that sells furniture and home accessories. The furniture is modern and ready to assemble. As of 2008, it was the biggest retailer of furniture in the world. It was created in 1943 by 17 year old Ingvar Kamprad. In addition to simplistic furniture design and eco- friendly solutions, the company is known to control costs, focus on operational details and efficiency and a continuous focus on new product development. This strategy has allowed the company to maintain its low costs over the years. At present, there are 349 IKEA stores in 43 countries.

·         Competitive Rivalry
There is significant competition in the discount furniture market with companies like Ashley Furniture Home Stores, Home Depot or other local players. But IKEA has managed to create a clear differentiated position in the market and remains the global market leader in its industry.
·         Threat of new Entrants
There is little threat from new entrants. The requisite expertise is difficult to replicate and financial investments are significantly high. In addition the market is saturated enough with the existing players that there is little attraction for a competitor large enough to threaten IKEA’s position.
·         Threat of Substitutes
There is little threat of substitutes as the target market for IKEA is unlikely to switch to higher end more classic styles of furniture. There are not many alternates that offer the breadth of options that are available at IKEA.
·         Bargaining Power of Buyers
There is enough competition in the market to afford some power to the buyers in the industry. Since IKEA has built up its USP with its competitive prices, customers can choose to switch if there is any increase in the prices. There is little switching cost, though loyalty may be a factor that prevents a switch.
·         Bargaining Power of Suppliers
Suppliers do not have substantial bargaining power as there many options available to IKEA around the world. There are numerous factories that have the requisite expertise to partner with IKEA. Despite this IKEA attempts to firm long term strategic partnerships with suppliers which benefits both supplier and the firm.
 Porters Five Forces for Softlogic Company
Softlogic is a well-diversified organization in Sri Lanka operates in so many business industries such as retail, health care, restaurants, automobile and etc. Therefore, it’s vital for Softlogic to understand whether staying or leaving from any industry after analysis the industry profitability. 
Source: visual-paradigm.com
Bargaining power of suppliers
Softlogic consumer electronic has signed many distributor agreements with world leading brands like Panasonic, Samsung, Dell, Candy, Whirlpool and others. Those brands have given great growth opportunities in the business. There is a limit of bargaining with these principals as certain agreements are exclusive for Softlogic. Any business violation can result in cancellation of the distributor agreement. Therefore, bargaining power of suppliers are extremely high in this business. 

The Threat of Entry-Barriers to entry
Consumer electronics business is a highly competitive industry in Sri Lanka as all the major players like Singer, Abans, Singhagiri, and Damro build their business with their competencies. Acquiring best brands, business scale and experience, access to supply and distribute products are extremely difficult for new comer. Therefore, barriers to entry is very high for any organization who has never tapped this industry.

The Power of Buyers
Consumer durable industry has been structured under oligopoly as there few dominant players in the business. Except LG brand all other leading brands have signed distributor agreement ship with any of those competitors. When we compared with Softlogic our major brand contributors Panasonic, Samsung, Dell and whirlpool any customer can purchase through Damro, Singer or Abans. So buyers are expecting superior offers or perceived value from each organization when they purchasing those brands.
Based on purchasing benefits and other perceived values power of buyers are high because of options are available for them switch under low cost. Therefore, buyers will be very clinical part of this consumer durable business as many distributors eying to get multiple brand distribution.

Competitive Rivalry
Competitive rivalry among existing firms is really high as consumer durable business is growing by 10% compared to the prior year. Not only dominate players medium size players like Seetha Holdings, Dinapala trade centre, Dilshan trade centre has identified the potential opportunity in this consumer durable business. This is one of the industries where easily every organization can increase the prices of products due to currency fluctuation.
Threat of substitute
Consumer durables products are not easy to substitute with another product as there are very limited options available for the customers to fill their needs.
Being in the right industry always important to profitability as porters five forces has mentioned it clear as organizations must evaluate the importance of five force factors before investing in any industry as well as it is worth to stay in current industry. 

Conclusion
According to Porter, the five forces framework should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers (see industry information). A firm which competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the primary issue in corporate strategy is the selection of industries (lines of business) in which the company will compete.


References

http://softlogic.lk/posters/170724160750Softlogic%20Holdings%20AR%20201617.pdf, [Online]
[Assessed 9th July 2020].  

Investopedia, 2020.  Porter’s 5 forces. [Online] https://www.investopedia.com/terms/p/porter.asp[Assessed 9th July 2020].  

Cleverism.com, 2019. Porter’s five forces model strategy framework. [Online] https://www.cleverism.com/porters-five-forces-model-strategy-framework/ (Assessed 9th July 2020].  
Porter’s five forces analysis of IKEA, 2019. Porteranalysis.com. [Online] https://www.porteranalysis.com/porters-five-forces-analysis-of-ikea/ (Assessed 9th July 2020].  

https://www.visual-paradigm.com/tutorials/five-forces-analysis-tutorial/
https://www.youtube.com/watch?v=OCnlArFuU-E

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