Michael Porter, who was a Harvard Business School Professor, as a result of his decades of research and teaching, developed a number of theoretical models on competitiveness. Porter Five Forces Models lays out the five forces that directly influence the competitiveness of a business in an industry with regard to industrial structure and profit margins. While Porter’s Diamond Model details the four factors that influence the competitive environment of a nation and its industries.
The Porter Five Forces Model talks about the competitive environment the company exists in. What factors in its surrounding are directly impacting the industry that it is in and how those factors are able to impact the industry structure, the profit margins for the companies in the industry and so on. There are five forces of Porter Five Forces Model. These are bargaining authority of the suppliers and buyers, the threat of new entrants, the threat from substitute product and services and industry competition amongst competitors. Diamond Model only has four forces or four factors of competitive edge. They are factor conditions, demand conditions, company strategies and the presence of supporting industries. In Porter’s Diamond Model, the demand conditions means local demand for services or products offered by a company while the factor conditions are the resources of a country e.g. natural resources, human resources etc.
In Porter Five Forces Model, the buyers bargaining power means the capability of the buyers to force prices of the company’s products or services offered to go down due to their large number, lack of product differentiation, readily available substitute and negligible cost of switching for the buyer. Similarly, suppliers bargaining power can force the company to decrease their profit margins or offer less of the service at the same existing prices because of the ability of the supplier to strongly impact the company’s business. E.g. if a product is available easily from a number of suppliers, then the buyers of the products have a bargaining power over each of the suppliers. In the other case, if there are only one or two suppliers of a particular product or a service, then those or that supplier has a bargaining power over its buyers. The threat of new entrants means how easy it for new companies to enter into the industry and start making the same product or offering the same service. These factors are called entry barriers. High entry barriers discourage entry of new companies while low barriers make it easy for others to enter into the industry and increase competition. E.g. in airplane manufacturing there is almost no threat of new entry for Boeing and Airbus as the capital requirements for this industry is extremely high making entry very difficult. Industry rivalry is when a number of companies are offering the same product or service to the same customers. This leads to decreased prices and profit margins (Basu, n.d.). The last force of Porter Five Forces Model is the threat of substitute products or services. The readily availability of a substitute makes the demand very elastic rendering the industry unable to increase prices due to ease of buyers moving onto substitutes.
Porter’s Diamond Model is considerably different. These factors are easily influenced by government policies and regulations. For example, lower income taxes in a nation or an area lead to an increase in consumer demand, leading to increased sales and profits for the industry. Similarly, nations that invest a large part of their GDP in education have a workforce that is skilled and can help companies in carrying out R&D. The existence of supporting industries in nearby areas of manufacturing plants of companies can decrease overall production costs and lead to higher profits. These supporting industries can include vendors of raw materials, component manufacturers, service providers etc. It is very important that there be a competitive industry structure because then companies that are able to endure strong competition at their home nation are normally able to take on an yet higher level of competition in other nations.
Thus, Porter Five Forces Model can help a company in evaluating the industry it operates in order to determine the industry structure and the profit margins while Porter’s Diamond Model can help it analyze the competitive advantage it has over its rivals.
References
Basu, C., n.d. The Importance of Porter’s Diamond & Porter’s Five Forces in Business. [Online] Available at: http://smallbusiness.chron.com/importance-porters-diamond-porters-five-forces-business-33891.html [Accessed 5 June 2017].
Lindblad, M., n.d. The Importance of Porter’s Diamond & Porter’s Five Forces in Business. [Online] Available at: http://yourbusiness.azcentral.com/importance-porters-diamond-porters-five-forces-business-13559.html [Accessed 5 June 2017].