The strategic and competitive analysis tools are the core instruments with which the businesses evaluate the competitive environment, discover the opportunity areas, and develop informed decisions. The most popular framework analysts use to achieve the goal is Porter’s Five Forces (Wellner & Lakotta, 2020)). Depicted initially by Michael Porter, this model ensures a structured approach when considering the dynamics within a competitive environment, assisting in the strategic planning and the allocation of resources. By analyzing the five main forces, businesses can better understand the underlying variables determining the degree of business rivalry.
The first strength in Porter’s Five Forces model is the threat of new entrants. This force measures the entry barriers into a market and the possible erosion of profits from the new entrants. The type of entry barrier is also a determinant of the threat level that new entrants pose; some barriers to entry include economy of scale, capital requirements, regulatory constraints, and brand loyalty. Low-barrier industries are much more vulnerable to new competition, whereas those with high barriers are less subject to that. They may face market saturation and gradual intensification of the competition (Mugo, 2020).
The second one concerns the unbalanced power between buyers, which is also one of the forces. Pricing, quality, or production conditions are crucial in profitability making and depend more or less on the suppliers’ bargaining power (Mugo, 2020). The players on the supplier’s side are the most concentrated in imports, differentiated of the inputs, seat to shift, and the existence of substitutes. In specific smaller categories, industries with small market shares face the power of supply, which can lead to higher costs among the industry participants or lower flexibility.
Porter’s analysis of the power of buyers constitutes the third element in the buyer’s bargaining power. The extent of influence of the customer on pricing and terms measures this force. Buyer power depends on the buyer concentration, price sensitivity, availability of substitutes, and switching costs among the buyers (Mugo, 2020). The seller power is usually seen through buyer concentration or equal alternatives that can be critical in determining such leverage; in this case, the competitor may have no choice but to compete on the price or quality to remain in the market.
Substitutes are the fourth force that one needs to evaluate. Customers’ needs can be satisfied through alternative products or services instead. Industries with many substitutes are prone to suffer a loss in market share due to a change to other choices. Customers’ decision on where to buy largely depends on the product’s price performance trade-off, the switching costs, and the perceptual differentiation. Understanding how the competitive environment is structured and the potential substitutes is paramount for the industry players to create a relevant differentiating strategy and limit the threat posed by the alternative solutions.
Complementing other factors, we have the intensity of competitive rivalry, which looks into the level of competition between the industry players. The type and number of competitors, industry growth rate, the relative value of a product, and exit barriers are some considerations that define the level of competition (Mugo, 2020). Industry with a higher rivalry may lead to price wars, reduced profitability, and increased innovation or competition where companies’ strategic positioning for market share is a very vicious competition.
Therefore, Porter’s Five Forces model brings about a systematic and comprehensive tool for strategic and industry analysis, which gives you an in-depth understanding of the industry competitiveness and saves you time in strategic decision-making. By analyzing these five forces, the companies can point out significant drivers affecting the dynamics of the industry arena, assess competitive threats and opportunities, and develop successful strategies ensuring their long-term viability and a stronger competitive position.
References
Mugo, P. (2020). Porter’s five forces influence on competitive advantage in telecommunication industry in Kenya. European Journal of Business and Strategic Management, 5(2), 30-49.https://doi.org/10.47604/ejbsm.1140
Wellner, S., & Lakotta, J. (2020). Porter’s Five Forces in the German railway industry. Journal of Rail Transport Planning & Management, 14, 100181. https://doi.org/10.1016/j.jrtpm.2020.100181
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