Porter’s Five Forces Model Notes and Exam Questions Business Studies Grade 12

Developed by renowned Harvard Business School professor Michael E. Porter, the Five Forces Model serves as a powerful tool for analyzing the competitive forces at play within an industry. By comprehensively evaluating these forces, businesses can formulate effective strategies to enhance their competitive advantage and navigate the ever-evolving marketplace.

Porter’s Five Forces Model Business Studies Grade 12

What is Poter’s Five Forces Model

Definition: Porter’s Five Forces Model is a strategic management tool that is used to analyze the competitive forces in an industry. It was developed by Michael Porter, a Harvard Business School professor, and is widely used in business strategy and management.

The model analyzes five key forces that shape the competitive environment of an industry, and helps businesses understand the dynamics of competition within that industry. These five forces are:

1. Threat of New Entrants: This refers to the ease with which new competitors can enter an industry. Factors that can impact this include barriers to entry, economies of scale, and access to distribution channels.
2. Bargaining Power of Suppliers: This refers to the bargaining power that suppliers have over firms in the industry. Factors that can impact this include the number and size of suppliers, the availability of substitute products, and the cost of switching suppliers.
3. Bargaining Power of Buyers: This refers to the bargaining power that buyers have over firms in the industry. Factors that can impact this include the number and size of buyers, the availability of substitute products, and the cost of switching products.
4. Threat of Substitutes: This refers to the extent to which substitute products or services can meet the needs of customers. Factors that can impact this include the availability and cost of substitute products, and the level of product differentiation.
5. Rivalry Among Existing Competitors: This refers to the intensity of competition between firms in the industry. Factors that can impact this include the number and size of competitors, the level of product differentiation, and the level of advertising and marketing.

The model helps businesses identify the key competitive forces in their industry, and develop strategies to position themselves to succeed in that environment.

Explanation of Porter’s Five Forces Model with South African-Specific examples

Here are some examples of how Porter’s Five Forces Model applies in the South African context:

1. Threat of New Entrants: In South Africa, the banking industry is dominated by a few large players who have significant economies of scale and control much of the market. As a result, it is difficult for new entrants to enter the industry and compete effectively.
2. Bargaining Power of Suppliers: In the mining industry, suppliers of key resources such as coal, iron ore and platinum have significant bargaining power over mining companies, as they are few in number and the resources they provide are critical to the operations of mining firms.
3. Bargaining Power of Buyers: In the telecommunications industry, large corporate customers have significant bargaining power over telecoms firms, as they can demand discounts and other concessions due to the volume of business they bring to the table.
4. Threat of Substitutes: In the retail industry, online shopping is becoming an increasingly popular substitute for traditional brick-and-mortar stores. This poses a threat to retailers who do not have a strong online presence or a clear strategy for dealing with the shift towards e-commerce.
5. Rivalry Among Existing Competitors: In the fast food industry, there is intense rivalry between established players such as McDonald’s, KFC and Burger King. This is driven by factors such as aggressive advertising and marketing campaigns, pricing strategies, and efforts to introduce new products and services.

How businesses can follow Porter;s Five Forces Model in South Africa

Here are some examples of what businesses could do in response to each of Porter’s Five Forces in the South African context:

Threat of New Entrants:

• Increase barriers to entry by securing patents or licenses (e.g. Sasol in the energy industry)
• Develop economies of scale to lower costs (e.g. SABMiller in the brewing industry)
• Create strong brand recognition to deter new entrants (e.g. Woolworths in the retail industry)
• Collaborate with existing players to reduce competition (e.g. Cell C partnering with Telkom in the telecommunications industry)

Bargaining Power of Suppliers:

• Cultivate strong relationships with suppliers to negotiate better prices (e.g. Pick n Pay in the retail industry)
• Diversify suppliers to reduce dependency on any one supplier (e.g. car manufacturers in the automotive industry)
• Invest in vertical integration to reduce reliance on suppliers (e.g. Sasol in the energy industry)
• Develop substitute products to reduce reliance on specific raw materials (e.g. developing electric cars to reduce reliance on oil in the automotive industry)

Bargaining Power of Buyers:

• Build brand loyalty to reduce switching by customers (e.g. Coca-Cola in the beverage industry)
• Reduce prices to stay competitive with other products (e.g. Vodacom and MTN in the telecommunications industry)
• Offer value-added services to differentiate from competitors (e.g. banking products offered by retailers like Woolworths and Pick n Pay)
• Develop exclusive partnerships to offer unique products (e.g. KFC partnering with Pick n Pay to offer exclusive meal deals in the fast food industry)

The threat of Substitutes:

• Invest in research and development to create differentiated products (e.g. Apple in the technology industry)
• Offer incentives to customers to choose their products over substitutes (e.g. loyalty programs offered by airlines to frequent flyers)
• Increase the quality of products to reduce the appeal of substitutes (e.g. Nando’s in the fast food industry)
• Develop marketing campaigns to promote unique features of products (e.g. promoting the nutritional value of milk to reduce the appeal of soft drinks in the beverage industry)

Rivalry Among Existing Competitors:

• Increase product differentiation to reduce competition (e.g. MTN offering mobile money services in the telecommunications industry)
• Invest in research and development to offer unique products (e.g. Mercedes-Benz in the automotive industry)
• Offer lower prices to increase market share (e.g. Shoprite in the retail industry)
• Collaborate with competitors to increase market share (e.g. FNB partnering with Clicks to offer banking services in the retail industry).