Question

1. Describe the competitive forces that pressure a company's industry using the five force framework. Explain at least three of the conditions that increase rivalry.

Answer 1

Porter classifies five main competitive forces that affect any market and all industries. these forces determine how much competition will exist in a market and consequently the profitability and attractiveness of this market for a company. Through corporate strategies, a company will aim to shape these forces to its advantage to strengthen the organization's position in the field.

industry attractiveness is the overall profitability potential of the industry. An attractive industry will be one where the combined power of the competitive forces will increase profitability potential.

These forces, termed as the micro environment by Porter, influence how a company serves its target market and whether it is able to turn a profit. Any change in one of the forces might mean that a company has to re-evaluate its environment and realign its business practices and strategies.

PORTER’S FIVE FORCES

The five forces identified by Porter are divided into:

• Horizontal forces: Threat of substitutes, threat of new entrants, competitive rivalry
• Vertical forces: Bargaining power of buyers and bargaining power of customers

1. Competitive Rivalry

One important force that Porter describes is the degree of rivalry between existing companies in the market. If there are more companies competing with each other, the resulting competitive pressure will mean that prices, profits and strategy will be driven by it.

One company may end up having little or no power in its own industry if there is a variety of quality products are offered in the market in direct competition with it. Customers have the option of simply moving on to a different company easily. Conversely, in the absence of this rivalry, the company may be able to freely set prices and profit margins without being dictated by what the customer finds attractive.

When is competitive rivalry high?

Competitive rivalry may be higher when:

• Similar sized companies operate in one market
• These companies have similar strategies
• Products on offer have similar features and offer the same benefits
• Growth in the industry is slow
• There are high barriers to exit or low barriers to entry

2. Threat of new Entrants

The competitive threat to a company’s business may not only be from existing players in the market but also from potential new entrants into the market place. If an industry is profitable, or attractive in a long term strategic manner, then it will be attractive to new companies. Unless there are barriers to entry in place, new firms may easily enter the market and change the dynamics of the industry.

The particular dynamics of an industry that restrict entry into it are called barriers to entry The most attractive scenario for a new company is when a potential market has low barriers to exit but high barriers to entry. The economics of any industry will determine the level of difficulty faced when trying to enter this market.

When are barriers for new entrants high?

Barriers to entry may stem from things like:

• patents and proprietary knowledge
• access to specialized technology or infrastructure
• economies of scale or government driven obstacles
• high initial investment needed
• high switching costs for consumers, loyal consumers
• difficulty in accessing raw material and difficulty in accessing distribution channels

3. Threat of Substitutes

Within the framework defined by Porter, substitute products are those that exist in another industry but may be used to fulfill the same need. The more substitutes that exist for a product, the larger the company’s competitive environment and the lower the potential for profit. An example of this is that for a boxed juice producer, fresh juice, water and soft drinks are all substitutes though they exist in separate categories.

A high threat of substitutes will impact a company’s ability to set prices that it wants. If a substitute is priced lower or fulfills a need better than it may end up attracting consumers towards it and reduce sales for existing companies.

When is there a threat from substitutes?

The threat of substitutes is affected by factors such as brand loyalty, switching costs, relative prices, as well as trends and fads.

4. Bargaining Power of Buyers

When buyers have the power to affect prices in an industry, it becomes an important factor to consider for a company.

When is buyer power high?

Buyers tend to have power over an industry if they are important to the company, this may be if the industry is such that buyers either buy in bulk, or can easily switch to another supplier. A limited number of strong buyers may be able to exert significant control over a seller. In addition, if a product is similar to its competitor with little or no differentiation, then there are chances that the company may need to let the supplier dictate terms in order to avoid losing the customer.

5. Bargaining Power of Suppliers

Suppliers provide the raw material needed to provide a good or service. This means that there is usually a need to maintain strong steady relationships with suppliers. Depending on the industry dynamics, suppliers may be in the position to dictate terms, set prices and determine availability timelines. Powerful suppliers may be able to increase costs without affecting their own sales volume or reduce quantities that they sell.

When do suppliers have power?

Supplier may enjoy more power if there are less of them. Costs of switching to an alternate are high, or there are no alternates. A supplier may also be the only provider of a certain raw material. This may be the case in instances where a supplier holds a patent or have proprietary knowledge. Because of a lack of alternates, they may be able to withhold quantities or increase prices without losing sales.

three of the conditions that increase rivalry.

• ​​​​​​​​​​Large Number of Firms: If there are more firms within an industry, there is an increased competition for the same customers and product resources. There is even greater competition if industry players are equal in size and power, as rivals compete for market dominance.
• Slowed Industry Growth: When an industry is growing rapidly, firms are able to increase profits because of the expanding industry. When growth slows and industries reach the maturity stage of the industry lifecycle, competition increases to gain market share (and continue the profit growth that investors require).
• High Fixed Costs or High Storage Costs: In industries where the fixed costs are high, firms will compete to gain the largest amount of market share possible to cover the fixed costs.