With this piece, we take a look at the Porter’s 5 forces model, we’ve taken the example of Wipro in order to drive home the point. Let’s dive straight in the concept.
Imagine that you are the Defense Minister of a country. You are charged with the task of analyzing all possible threats to the country’s safety in all aspects from military attacks to chances of trade conflicts, in order to decide how to fortify the country at all fronts. And so, you enlist the help of the concerned ministers and sit to analyze. You will consider an all-round perspective to list all of these threats, right?
Similarly, a company in any industry will also do such analysis to keep track of the competitive environment and the threats it can face. At such a time, an analysis model called the Five Forces model developed by Michael Porter comes handy. This model helps to not only determine the competitive scenario of the current industry you’re in, but also that of the industry you are wanting to enter- in which case it serves to help you decide whether to enter that industry or not.
Porter’s 5 Forces model: The concept
As rightly established, the five ‘forces’ are the five competitive forces that are used as guidelines to design corporate strategies. These are explained below: Let’s take a look at all the elements of Porter’s 5 forces model. It roughly consists of Industry Rivalry, Threat of Substitutes, Bargaining Power of Buyers, Bargaining Power of Suppliers, and finally, Threat of New Entrants.
It is important to know the current competition in the industry, and just how intense it is. If you are already in the industry, competition analysis will help you find where you can improve. But, if you are looking to make an entry in a highly competitive industry, with established market leaders and a band of rising market followers, it rarely serves well. The higher the number of competitor products/services, the lower is your company’s power to dictate the price, availability, ultimately your profits.
Conversely, if the competition is lesser, your company will have greater power to dictate these factors, and also the profits. Unless, your entry will completely disrupt the market by servicing a need that wasn’t previously known. As an example we can consider the soft drinks industry in India- dominated by Coca Cola and PepsiCo. Everything from their pricing to advertisement is controlled by the competition, thus leaving them little space for control.
Threat of Substitutes
Substitute products are those which can be used in place of your company’s products. They usually pose a threat because they make your products replaceable. If your products aren’t replaceable, and offer unique value, there won’t be a substitute product threat. In such a case, your company will have more power over pricing and profits. Considering a unique industry like organic skincare, which has been consistently growing… newer and unique players are entering the market with unique products that can’t be easily substituted.
Indian brands like Kama Ayurveda, Forest Essentials are gaining popularity, and have created a niche industry of their own.
Bargaining Power of Buyers
The buyers can easily bargain when they feel they have the power in any given industry. Regardless of the number of consumers in the industry, the significance each one has plays a major role in driving the price points. This is majorly seen in the airlines industry, where people will switch to a different flight just for the lower prices. Thus the airlines are forced to give out discount deals, or other attractive offers constantly to drive the business.
Bargaining Power of Suppliers
The suppliers of the raw materials that go into the assembly of the product also have enough power to drive the price point. If the suppliers charge higher all of a sudden, knowing that your company will have no other supplier to turn to, then your customers will bear the brunt of higher prices. Here we can consider the example of the fast food industry that is so dependent on its suppliers for its larger quantities and no downtime. If in case, a tomato supplier decides to jack up the prices, McDonald’s will have to comply till it can find a new supplier with reasonable prices.
Threat of New Entrants
New entrants always pose a threat in most industries due to the fact that any newcomer could be the one that disrupts the market. With ever-growing demands, and technological developments, new products are being constantly being developed. The lesser resources (time and money) it costs a company to enter an industry, the higher is the chance for new entries. This means that the industry in question has low barriers. As opposed to this, an industry with high barriers doesn’t interest many new entrants.
An example of a high barrier industry is the electricity industry- new entrants will very rarely try to get in. Conversely, a low barrier industry is the digital marketing industry. Considering how rapidly it has grown (not including the growth during the COVID-19 pandemic).
Porter’s five forces on Wipro:
Let’s also analyze one of the technology giants of India using Porter’s Five Forces model- Wipro Limited. The company operates in a highly competitive industry i.e. the Information Technology Services industry. It has tough competitors like Infosys It has tough competitors like Tata Consultancy Services, IBM, HCL Technologies, and the likes. This rivalry can be managed by continuous efforts to create differentiation. It is threatened by new entrants that will counter the company in aspects like newer technologies; lower prices; a new value proposition to customers.
This can ultimately lead to the bargaining power of buyers increasing due to the availability of more options. Wipro Limited can tackle it by constant innovation; flexible pricing; building economies of scale; by providing even attractive rewards to returning customers. These will create barriers for new entrants to reconsider entering the industry. When considering the threat of substitute products; Wipro Limited can challenge it by increasing switching costs, and/or creating more customer-centric services rather than product-oriented ones.
This will help them create a firmer connect with their customers, and understand their needs better. The threat of the bargaining power of suppliers can be absolved by creating a dependable chain of multiple suppliers as well as researching new materials that can be used to create the products.
Here, we end the instructional technicalities of the Five Forces model. Imagine your country surrounded by the forces, and take a call as to proceeding further. Each of these forces can be broken down individually to get the most profitable strategy ever. So go on dear Defense Minister, you can now save the day!
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