Michael Porter of Havard Business School developed a comprehensive approach to analyse the industry structure to develop competitive strategies.
Porter states that every organization has certain advantages in terms of its technical resources, which enable it to compete in the market. The intensity of competition depends on five market forces.
(1) Threat of Entry:
A company wants to keep its existence intact. Threat of entry by new firm may increase competitive intensity. The threat of entry by new firms such as Coca Cola posed serious threat for the existence of Indian Companies.
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(2) Threat of substitute Product:
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Advancement of new technology has made many old products redundant and strengthened competition. The firm and industry which is already in existence was at stake. Steel tubes faced competition from PVC tubes, plastics bags offered big threat to jute bags which compelled to reduce price of jute bags.
(3) Bargaining power of buyers:
If supply is more than demand, buyers enjoy a distinct advantage and enjoy a bargaining power. That is why higher supply reduces price.
(4) Bargaining power of suppliers:
This is an example of sellers market, where suppliers can dominate and force buyers to pay higher prices and thus, increase profitability.
(5) Industry rivalry:
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Degree of business rivalry among firms is an indicator of competition. Industries with higher fixed costs may face more price wars. Moreover, differentiated strategies, technological growth and growth of industrial excellence at the individual firm’s level can be a source of competition.