Page 15 - DMGT401Business Environment

Business Environment

Notes According to Michael Porter the five forces of competition are:
1. Threat of Competitors: The rivalry among sellers in the industry.
2. Threat of New Entrants: The potential entry of new competitors.
3. Threat of Substitutes: Market attempts of companies in other industries to win customers
over to their own substitute products.
4. Bargaining Power of Suppliers: The competitive pressure stemming from the supplier-
seller collaboration and resultant bargaining.
5. Bargaining Power of Buyers: The competitive pressure stemming from seller-buyer
collaboration and bargaining.

Figure 1.2: Michael Porter's Five Forces Model

Threat of
Substitutes

Bargain Power Bargain Power of
of Supplier Threat of Competitor Buyer

Threat of
New Entrants

To help make this tool more relevant and useful we've used two different examples after each

force: An example based on a mythical childcare charity interested in bidding for a local authority
contact to provide respite care for parents of disruptive children.

Children Charity Co. (CCC): CCC is currently a small provider of 'relief' services for parents of
children with behavioural difficulties. They have heard that the local authority in the area
where they work will be considering whether to continue using the NSC (National Society for
Children) to provide residential childcare for children who are in care/looked after. This contact
could be worth £5M and could lead to a national series of contracts for CCC. The CEO and senior
team are trying to decide what to do.

1. Threat of Competitors: When rivals compete to win over customers to improve market
share or profitability - that is rivalry among competing sellers. The intensity of rivalry
among competing sellers is a function of how vigorously they employ tactics such as
lower prices, snazzier features, expanded customer service, longer warranties, special
promotional offers, and introduction of new product. All these lead to adverse impact on
the profits of the firm. Rivalry intensifies as the number of competitors increases and as
competitors become equal in size and capability.

Rivalry becomes stronger when the demand for a product grows, and industry conditions
tempt competitors to cut prices or use other competitive weapons to boost unit volume.
Rivalry is also intensified when one or more competitors are dissatisfied with their market
position and launch moves to bolster their standing at the expense of rivals, or when exit
barriers are very high and it costs more to get out of business than to stay on. Sometimes,

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