In 

economics and finance, marginal cost is the change in total cost that arises when

the quantity produced changes by one unit. That is, it is the cost of producing one more
unit of a good

In economics, average cost or unit cost is equal to total cost divided by the number of

goods produced (the output quantity, Q

Supply chain management (SCM) is the management of a network of

interconnected businesses involved in the ultimate provision
of product and service packages required by end customers (Harland, 1996).[1] Supply
chain management spans all movement and storage of raw materials, work-in-process
inventory, and finished goods from point of origin to point of consumption (supply chain).

Marketing is a social and managerial process by which

individuals and groups obtain what they need and want
through creating, offering, and exchanging products of value
with others.
Porter's Five Forces is a framework for the industry analysis and business
strategy development formed by Michael E. Porter of Harvard Business
School in 1979. It draws upon Industrial Organization (IO) economics to derive
five forces that determine the competitive intensity and therefore attractiveness of
a market. Attractiveness in this context refers to the overall industry profitability.
An "unattractive" industry is one in which the combination of these five forces
acts to drive down overall profitability. A very unattractive industry would be one
approaching "pure competition", in which available profits for all firms are driven
down to zero.
Three of Porter's five forces refer to competition from external sources. The
remainder are internal threats.
Porter referred to these forces as the micro environment, to contrast it with the
more general term macro environment. They consist of those forces close to
a company that affect its ability to serve its customers and make a profit. A
change in any of the forces normally, requires a business unit to re-assess
the marketplace given the overall change in industry information. The overall
industry attractiveness does not imply that every firm in the industry will return
the same profitability. Firms are able to apply their core competencies, business
model or network to achieve a profit above the industry average. A clear example
of this is the airline industry. As an industry, profitability is low and yet individual
companies, by applying unique business models, have been able to make a
return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: threat of
substitute products, the threat of established rivals, and the threat of new
entrants; and two forces from 'vertical' competition: the bargaining power of
suppliers and the bargaining power of customers.
This five forces analysis, is just one part of the complete Porter strategic models.
The other elements are the value chain and the generic strategies.[citation needed]
Porter developed his Five Forces analysis in reaction to the then-popular SWOT
analysis, which he found unrigorous and ad hoc.[1]
Contents

 [hide]

1 The five forces

o 1.1 The threat of the entry of new

competitors

o 1.2 The intensity of competitive

rivalry

o 1.3 The threat of substitute

products or services

o 1.4 The bargaining power of

customers (buyers)

o 1.5 The bargaining power of

suppliers

2 Usage

3 Criticisms

4 See also

5 References
 6 Further reading

7 External links

[edit]The five forces

[edit]The threat of the entry of new competitors
Profitable markets that yield high returns will attract new firms. This results in
many new entrants, which eventually will decrease profitability for all firms in the
industry. Unless the entry of new firms can be blocked by incumbents, the
abnormal profit rate will fall towards zero (perfect competition).

 The existence of barriers to entry (patents, rights, etc.) The most attractive

segment is one in which entry barriers are high and exit barriers are low. Few
new firms can enter and non-performing firms can exit easily.
 Economies of product differences
 Brand equity
 Switching costs or sunk costs
 Capital requirements
 Access to distribution
 Customer loyalty to established brands
 Absolute cost
 Industry profitability; the more profitable the industry the more attractive it
will be to new competitors
[edit]The intensity of competitive rivalry
For most industries, the intensity of competitive rivalry is the major determinant of
the competitiveness of the industry.

 Sustainable competitive advantage through innovation
 Competition between online and offline companies; click-and-mortar -v-
slags on a bridge[citation needed]
 Level of advertising expense
 Powerful competitive strategy
 The visibility of proprietary items on the Web[2] used by a company which
can intensify competitive pressures on their rivals.
How will competition react to a certain behavior by another firm? Competitive
rivalry is likely to be based on dimensions such as price, quality, and innovation.
Technological advances protect companies from competition. This applies to
products and services. Companies that are successful with introducing new
technology, are able to charge higher prices and achieve higher profits, until
competitors imitate them. Examples of recent technology advantage in have
been mp3 players and mobile telephones. Vertical integration is a strategy to
reduce a business' own cost and thereby intensify pressure on its rival.
[edit]The threat of substitute products or services
The existence of products outside of the realm of the common product
boundaries increases the propensity of customers to switch to alternatives:

 Buyer propensity to substitute

 Relative price performance of substitute
 Buyer switching costs
 Perceived level of product differentiation
 Number of substitute products available in the market
 Ease of substitution. Information-based products are more prone to
substitution, as online product can easily replace material product.
 Substandard product
 Quality depreciation
[edit]The bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs:
the ability of customers to put the firm under pressure, which also affects the
customer's sensitivity to price changes.

 Buyer concentration to firm concentration ratio

 Degree of dependency upon existing channels of distribution
 Bargaining leverage, particularly in industries with high fixed costs
 Buyer volume
 Buyer switching costs relative to firm switching costs
 Buyer information availability
 Ability to backward integrate
 Availability of existing substitute products
 Buyer price sensitivity
 Differential advantage (uniqueness) of industry products
 RFM Analysis
[edit]The bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs.
Suppliers of raw materials, components, labor, and services (such as expertise)
to the firm can be a source of power over the firm, when there are few
substitutes. Suppliers may refuse to work with the firm, or, e.g., charge
excessively high prices for unique resources.

 Supplier switching costs relative to firm switching costs

 Degree of differentiation of inputs
 Impact of inputs on cost or differentiation
 Presence of substitute inputs
 Strength of distribution channel
 Supplier concentration to firm concentration ratio
 Employee solidarity (e.g. labor unions)
 Supplier competition - ability to forward vertically integrate and cut out the
buyer
Ex. If you are making biscuits and there is only one person who sells flour, you
have no alternative but to buy it from him.
[edit]Usage

Strategy consultants occasionally use Porter's five forces framework when

making a qualitative evaluation of a firm's strategic position. However, for most
consultants, the framework is only a starting point or "checklist" they might use "
Value Chain " afterward. Like all general frameworks, an analysis that uses it to
the exclusion of specifics about a particular situation is considered naїve.
According to Porter, the five forces model should be used at the line-of-business
industry level; it is not designed to be used at the industry group or industry
sector level. An industry is defined at a lower, more basic level: a market in which
similar or closely related products and/or services are sold to buyers.
(See industry information.) A firm that competes in a single industry should
develop, at a minimum, one five forces analysis for its industry. Porter makes
clear that for diversified companies, the first fundamental issue in corporate
strategy is the selection of industries (lines of business) in which the company
should compete; and each line of business should develop its own, industry-
specific, five forces analysis. The average Global 1,000 company competes in
approximately 52 industries (lines of business).
[edit]Criticisms

Porter's framework has been challenged by other academics and strategists such
as Stewart Neill. Similarly, the likes of Kevin P. Coyne [1] and Somu
Subramaniam have stated that three dubious assumptions underlie the five
forces:

 That the source of value is structural advantage (creating barriers to entry).

 That uncertainty is low, allowing participants in a market to plan for and
respond to competitive behavior.
An important extension to Porter was found in the work of Adam Brandenburger
and Barry Nalebuff in the mid-1990s. Using game theory, they added the concept
of complementors (also called "the 6th force"), helping to explain the reasoning
behind strategic alliances. The idea that complementors are the sixth force has
often been credited to Andrew Grove, former CEO of Intel Corporation.
According to most references, the sixth force is government or the public. Martyn
Richard Jones, whilst consulting at Groupe Bull, developed an augmented 5
forces model in Scotland in 1993. It is based on Porter's model and includes
Government (national and regional) as well as Pressure Groups as the notional
6th force. This model was the result of work carried out as part of Groupe Bull's
Knowledge Asset Management Organisation initiative.
Porter indirectly rebutted the assertions of other forces, by referring to innovation,
government, and complementary products and services as "factors" that affect
the five forces.[3]
It is also perhaps not feasible to evaluate the attractiveness of an industry
independent of the resources a firm brings to that industry. It is thus argued that
this theory be coupled with the Resource-Based View (RBV) in order for
the firm to develop a much more sound strategy.
[edit]