Study of Software Industry Using Porter's Five Forces Model Essay

4356 Words Oct 15th, 2008 18 Pages

Corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should be based on an understanding of industry structures, and the way they change.

Michael Porter provided a frame work that models an industry as being influenced by five forces. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porter’s model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how
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The bigger the market share they need to capture, the higher this barrier to entry is. One example of where it is extremely high is the automobile industry.
b) Access to distribution channels
In some industries, the distribution channels are controlled by existing companies through distributor contracts and preferred relationships. This can be seen in the light bulb industry, where the biggest manufacturers have exclusive contracts with the biggest retailers. New entrants will have to break into the current distribution system or find other alternatives. Both choices may be expensive, creating a high barrier to entry.
c) Capital requirements
Entering a new market can involve creating new capacity, aggressive advertising, acquisition of licenses, and so on. All of these activities require investment capital. The higher the capital needs, the greater the barrier to entry. An extreme case here is the building of jet aircraft, where even an established company can spend over a billion dollars (U.S.) to bring one new model into production.
d) Switching costs
In some cases, entry into a new market can be achieved by retooling existing production machinery at relatively low costs. It is also possible, however, that the retooling costs are substantial, hence, a greater barrier to entry. Oftentimes, highly specialized capacity for which there is no alternative use must be created. This is a potential switching cost and constitutes another barrier to entry.

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