Every person in business usually does a lot of research and makes a lot of plans before starting a business. One of the most important among such aspects is to conduct an industry analysis. It can provide the entrepreneur with an idea regarding the growth of his products or services and the amount of competition he has to face from others.
Michael Porter’s Five Forces is one such tool which can be used to evaluate the five important factors regarding the growth of the industry. It helps the entrepreneur to get to know about the environment surrounding the industry and the necessary steps to be taken to get success in this market.
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It is important to have firm knowledge regarding the industry before making the investments and Porter’s 5 Forces is the most effective tool for this purpose. The five forces model plays an important role to identify and analyse the primary five competitions in any industry and also provides a clear picture regarding the strengths and the weaknesses of the industry.
This can prove to be a huge difference for someone new in this sector and can help him find his feet. He can use these factors to his advantage so that he can maximise his profit.
Porter’s Five Forces Model Consists of the Following Sections:
It is the power which lay in the hands of suppliers to increase or decrease the prices of certain commodities. It depends on a large number of factors like the number of suppliers present in the market, the quality of the products and if they stand out from the quality of other suppliers, etc. If the number of suppliers in that particular sector is less, then the power of the suppliers tend to increase. Then the entrepreneur has to take into account the idea of alternative suppliers, but that may be difficult due to budget constraints.
Buyers love to bargain and are more often successful in reducing the prices of products in the market. It also depends on a large number of factors like the number of buyers, size order, the demand of new products among buyers, prices of other alternative products and quality of the products. If the number of buyers is less, they have more control over the prices.
It is one of the most important factors in the Porter analysis. In the industry market, the number of competitors, as well as their potential, has a major impact. If a newly launched product has a lot of competition, then it might be a problem as the buyers will have a lot of options for purchasing. But this is not the case if there are fewer options in the market.
To get the upper hand in a competitive market, a firm opts for several methods to increase their profit-
Changing the prices according to the competition
Improving the quality of the products to attract more buyers
Innovatively using channels of distribution to grab a new area
Using the relationship with customers to good effect by satisfying their demands
Often customers may find an alternative way to fulfil their demands and they no longer have the necessity to buy these products or services. This can prove to be a major threat to the company. More the number of substitute products available in the market, lesser is the demand for the products. The threat of getting substituted can not only cause an impact on the prices of the products but can also raise the question of sustainability in some cases.
Not only there is the threat of the direct rivals, but there is also the threat of new firms entering into the picture and causing a major craze in the market. This can harm the sales of products and weaken your position in the market. Free entry markets tend to suffer more in such situations and thus the need for a few entry barriers are a necessity to reduce competition with new firms.
A strategy can be made to counter Porter’s 5 forces model on three levels-
Business unit level
The business unit level acts as an immediate context to industry rivalry. Porter came up with three generic strategies - cost leadership, differentiation and focused on gaining an advantage over the rivals. With the help of a proper generic strategy, firms can enjoy a position where they can use their strengths to good effect and combat against the effects of five competitive forces on them.
1. What are the Factors Leading to Intense Rivalry Among Firms in Five Forces Analysis?
Ans: The rivalry intensity in Porter's five forces is impacted heavily due to the following causes:
Increase in the number of firms as they all fight for the same number of buyers and resources
Firms tend to fight among themselves for higher market share when the growth is low
High product costs
High storage costs
Low switching costs if customers can easily start using another product
High exit barriers which provoke firms to stay in the industry and fight for their place
More diversity of rivals in culture, taste and philosophy increases rivalry as well
A prosperous market provokes new firms to introduce themselves, which only increase the competition even more.
2. What are the Entry Barriers for New Firms in Porter’s 5 Forces Analysis?
Ans: Barriers are created to prevent the increase of competition in the industry and it arises from several sources:
The Government restricts competition with the grant of monopolies and regulations although their primary objective was to maintain competition.
Those firms who wish to enter the market after studying the ideas and gaining knowledge about the advantages of the sector are often blocked or sued to remove competition.
New firms often take the use of modern technology and have prized assets to create better products. This proves to be another barrier in the market.
Industries with high MES do not allow small businesses to enter into the fray.