In Insolvency and Bankruptcy Board of India’s valuer exam, Porter’s Five Forces comes under Valuation Applications chapter that carry 35% weightage. Along with this, various set of business strategy analysis tools are covered in this chapter, which are very important to understand for the purpose of clearing IBBI Registered valuer examination. You can expect 1 to 2 marks from Porter’s Five Forces in the IBBI registered valuer exam. In Today’s blog we will discuss only regarding Michael Porter’s Five Forces Strategy of identifying competition in Business.

Porter’s Five Forces is a simple but powerful tool that you can use to identify the main sources of competition in your industry or sector. When you understand the forces affecting your industry, you’ll be able to adjust your strategy, boost your profitability, and stay ahead of the competition. For example, you could take fair advantage of a strong position or improve a weak one, and avoid taking wrong steps in the future.

The tool was created by Harvard Business School professor Michael Porter, to analyze an industry’s attractiveness and its potential profitability. Since its publication in 1979, it has become one of the most popular and highly regarded business strategy tools.

Porter recognized that organizations like to keep a close watch on their rivals, but he encouraged them to look beyond the actions of their competitors and examine the forces at work in their wider business environment.

According to Porter, there are five forces that represent the key sources of competitive pressure within an industry. [2]

He stressed that it’s important not to confuse these with more fleeting factors, such as industry growth rates, government interventions, and technological innovations. According to Porter, these are temporary factors, while the Five Forces are permanent parts of an industry’s structure.

Let’s take a look at Porter’s Five Forces in more detail:

 1.Competitive Rivalry  –  The first of Porter’s Five Forces looks at the number and strength of your competitors. How many rivals do you have? Who are they, and how does the quality of their products and services compare with yours?

In an industry where rivalry is intense, companies attract customers by aggressively cutting prices and launching high-impact marketing campaigns. However, this can make it easy for suppliers and buyers to go elsewhere if they feel that they’re not getting a good deal from you.

On the other hand, where competitive rivalry is minimal, and no one else is doing what you do, then you’ll likely have tremendous competitor power, as well as healthy profits.

2. Supplier Power – Supplier power is determined by how easy it is for your suppliers to increase their prices. How many potential suppliers do you have? How unique is the product or service that they provide? And how expensive would it be to switch from one supplier to another?

The more suppliers you have to choose from, the easier it will be to switch to a cheaper alternative. Conversely, the fewer suppliers there are and the more you rely on them for help, the stronger their position and their ability to charge you more is. This can impact your profitability, for example, if you’re forced into expensive contracts.

3. Buyer Power – If the number of buyers is low compared to the number of suppliers in an industry, then they have what’s known as “buyer power.” This means they likely find it easy to switch to new, cheaper competitors, which can ultimately drive down prices.

Think about how many buyers you have. How big are their orders? How much would it cost them to switch from your products and services to those of a rival? Are your buyers strong enough to dictate terms to you?

When you deal with only a few savvy customers, they have more power. However, your power increases if you have many customers and little competition.

4. Threat of Substitution – This refers to the likelihood of your customers finding a different way of doing what you do. For example, if you supply a unique software product that automates an important process, people may substitute it by doing the process manually or by outsourcing it.

A substitution that’s easy and cheap to make can weaken your position and threaten your profitability.

5. Threat of New Entry – Your position can be affected by people’s ability to enter your market. If it takes little money and effort to enter your market and compete effectively, or if you have little protection for your key technologies, then rivals can quickly enter your market and weaken your position.

However, if you have strong and durable barriers to entry, then you can preserve a favourable position and take fair advantage of it. Is it relatively easy for a new competitor to gain a foothold in your industry or market? How much would it cost, and how tightly is your sector regulated? Do new entrants come and go regularly? Or is the industry dominated by a few, big players?

Criticism of Michael Porter’s Five Point Theory

Despite its enduring popularity, Porter’s Five Forces Model has come in for considerable criticism in recent years. The model was devised during the 1980s which was largely a period of:

• Strong competition.
• Relative market stability.
• Steady technological change.

Today, however, technological advances have revolutionized the way in which we do business – and the speed at which we do it. Indeed many organizations now operate in a “hypercompetitive” environment, where they need consistently need to be dynamic, relentless and aggressive in order to stay on top. This can lead to a constant state of flux and market instability. In an ever-shifting business environment such as this, many believe that the rather inflexible Five Forces Model is of little help in anticipating what lies ahead or where competitive advantage can be gained.

There are also economists and strategists who believe that the attractiveness of an industry cannot be assessed without considering the resources that the organization brings to that industry as well. This would suggest that it’s best assessed by using the Five Forces approach alongside an “inside out” or “resource-based” view of the organization, where competitive advantage is derived from leveraging resources and competences within the organization.

Porter’s Five Forces is quite effective in helping the management of a company take an objective look of it. From there, the company, with a great deal of confidence, may strategies and make the next move to achieve its goals. From this piece of information you must have realised how intuitive appealing and easy to learn the Porter’s five forces is. Student’s unfamiliar with business strategies like ADL, Porter etc assume that these areas are complex and they avoid studying them. But how wrong could they be! Especially students from the three professional streams (Chartered Accountant, Company Secretary and Cost Accountant) find these topics novel. But remove these misconceptions and embrace these theory areas. You can easily score those 1 or 2 marks in valuer examination that will make the difference between passing and failing.

What is eventually important for you is to study strategically and work on your weak areas with complete dedication so that you could pass the IBBI registered valuer examination. And for passing that examination with a minimum of 60% marks, these small and easy areas make a lot of difference. RVMOCKTEST.ONLINE is there to help you in this path of becoming a Registered Valuer by making you exam ready. You can check your preparedness and identify your mistakes, by appearing in online mock tests of RVMOCKTEST.ONLINE that will boost your confidence and increase your chances of clearing in one single shot!!

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