Porter’s Five Forces Model (Competitive Analysis)

Examples:

– Dell.com offers computers and laptops of high quality at low prices as compared to its competitors.

– EBay.com is a site where people like to go to purchase products online at low price.

The rivalry among competing firms increases as the number of competitors increases, as competitors grow more equal in size and capability, as demand for the company products decline, products are undifferentiated, product prices decline, consumer brand switching cost is less, number of supplier available for raw material, low price substitute products are available and entry into market is easy due to less constraints. As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive.

Potential Entry of New Competitors

Potential entry for new competitors is also the factor to intense the competition in the industry. A larger pool of new entrants results in more changes of intense competition. Barriers to entry, however can restrict the firms from entering the market, more number of entry barriers will make it difficult for the new entrants to exploit the opportunity of new market.

Barrier to entry, however, can include the need to gain economies of scale quickly, strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate distribution channels, government regulatory policies, tariffs, lack of access to raw material, possession of patents, undesirable locations, counterattack by entrenched firms and potential saturation of the market.

If existing firms are producing at economies of scale then the new entrants must ensure to make its entry into the market with a large production scale capability to lower its fixed and variable cost per unit in order to compete with the competitors product, otherwise new entrants will face exceeding cost problems. Government policy creates hurdles for new entrants by heavy taxes and interest rates. New firms must get to know the Government regulations and policies before making a entry decision into the country.

Despite the numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices and substantial marketing resources. The strategist’s job, therefore, is to identify potential new firms entering the market, to monitor the new rival firms’ strategies to counterattack as per need and to capitalize on existing strengths and opportunities.

Potential Development of Substitute Products

Firms mostly monitoring the trends within the industry to track the strategies but competition not only arise within the similar industry but also in different industry. Companies in other industry offer products with similar features and functionality or even better act as substitute for the products. For Instance, the producers of spectacles and contact lenses are facing mounting competitive pressures from growing consumer interest in laser surgery. Newspaper firms are feeling competitive force of the general public turning to cable news channels for late-breaking news and using Internet sources to get information about sports results, stock quotes, and job opportunities.

A firm faces intense competition from substitute product producing firms, when the customer cost of switching is lower, substitute products are better in quality and functionality , end users grow more comfortable when using the substitutes. The competitive strength can be determined by market share, sales pattern, producers adding capacity for more production, and rise in profits.

Bargaining Power of Suppliers

Supplier and producer relation always matters specially in manufacturing industries. Suppliers play an important role in the production of goods and services, making the raw material better and till the final product is made. Bargaining power of suppliers affect the intensity of competition especially if there are huge number of suppliers, less availability of raw material and the cost of switching between suppliers or raw material is high. These attributes in the industry give power to the supplier to enforce terms and conditions on manufacturers and charge high cost on raw materials.

For Examples,

The bargaining power of Microsoft and Intel in more because they are the huge suppliers of software and hardware. Microsoft enforce computer manufacturers to load Windows in their computers and place their logo on laptops, desktops and server machines. Intel on the other hand also demands computer manufacturers to place their logo on machines using Intel processor. Intel and Microsoft enforcing their terms and conditions also charging high cost from the computer manufacturing companies.

Manufacturer needs to build relationship with the supplier in order to improve the quality and reduce the prices of the product by working together for improvement in processes and reduce time to market by implementing just-in-time inventory.

For Example,

Dell computer known for low cost and best quality computer, laptop and server manufacturer in the industry. The key behind dell’s success is maintaining good relationship and collaboration with the supplier of computer hardware and software.

 

To gain control or ownership over its suppler, backward integration strategy is adopted by most of the companies. This strategy will help both suppliers and companies to work together for improvement in product quality, reduce cost, reduce time to market and earn good reputation in the industry.

Bargaining Power of Consumers

Consumers are the final users of the product; performance of the companies totally depend upon the consumers. Bargaining power of consumers is more especially when they are huge in number and consumers purchase in large quantity. Rival firms offer discounts, warranty and services to switch the consumer from one brand to another in the same industry.

The bargaining power of consumers is also more when products are undifferentiated and widely available. In this case consumer can ask for more discounts, extended warranty and services. As the satisfaction level of consumer goes up more the intensity level of competition increases. Firms should monitor the competitors strategies and also take care of the consumer’s likes and dislikes by maintaining good relationship with the consumer by implementing CRM processes in the company.

For Example,

P & G has an online portal to ask the customer about their views, opinions and new ideas about the products of their desire.

Criticism on Porter Five Forces Model

In the previous few years, other forces like globalization, technology and deregulation are introduced; these factors have a deep impact on the organization as well. The strategists should consider all the internal and external environmental variables into consideration in order to formulate fine-tuned strategies.