Industry Analysis - Porter's Five Forces
Business Management and Enterprise (Year 12) - Management (U4)
Porter’s Five Forces framework can be used to analyse the nature and level of competition within an industry.
It can be used for many different reasons:
To see whether a new initiative will be viable
Assess industry profitability to determine future actions
Understanding competitive forces of an industry
Weak forces mean that there is an opportunity to raise prices and enhance profitability. On the other hand, stronger forces imply that the market is very competitive.
There are five main forces:
Threat of new entrants (or threat of entry)
It refers to the extent of a firm being able to enter a particular market, and largely depends on barriers to entry.
This involves capital requirements to enter, IP legislation, economies of scale and access to suppliers and distribution channels.
Businesses can influence this by developing supply chains and striving for economies of scale.
2. Threat of substitutes (or substitute products)
This refers to the extent to which products can be substituted for similar products, provided by rival firms within the industry.
This involves how easy it is to develop a new product and its corresponding quality and volume. It is also impacted by the willingness of buyers to change brands.
3. Bargaining power of consumers (or buyer power)
It refers to the extent to which consumers can influence the price of a particular product.
It is influenced by the concentation of buyers, availability of substitutes, and cost of switching brands.
It is likely to be high when the buyers are influential and purchase a lot of a particular product. This effect is further compounded if the suppliers are small and unable to negotiate better terms.
Business can deal with this by creating unique products, which somewhat compels customers to purchase from them. They can also work on their marketing to build brand loyalty.
4. Bargaining power of suppliers (or supplier power)
It refers to the extent to which suppliers are able to influence the market and impact a business’ operations.
It is likely to be high when there is a low number of suppliers, implying they have a large amount of power. If particular suppliers have higher quality materials compared to others, they are likely to possess higher bargaining power.
To influence this, a business can develop products using components that can be sourced from multiple suppliers. This reduces the monopoly-like power that suppliers have.
5. Competitive rivalry
All of the previously mentioned forces impact competitive rivalry.
Competitors fight for position in a market through price, quality, advertising and more.
It is mainly influenced by the size and number of competitors.
Rivalry increases when competitors increase or if there is a slow level of growth in demand.