Michael Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing strategies in many industries as the intensity of competition among firms varies widely across industries. According to Porter, the nature of competitiveness in an industry can be viewed as a composite of five forces: rivalry among competing firms, potential entry of new competitors, potential development of substitute products, bargaining power of suppliers and bargaining power of consumers. There are 3 steps to use Porter’s Five Forces Model can reveal whether competition in a given industry is such that the firm can make an acceptable profit. Firstly, identify key aspects or elements of each competitive force that impact the firm. Secondly, evaluate how strong and important each element is for the firm. Lastly, decide whether the collective strength of the elements is worth the firm entering or staying in the industry.
Rivalry among the competing firms is the most powerful among the five forces as the successful firm provide competitive advantage over the strategies pursued by rival firms. The changes in strategy can be met with retaliatory countermoves, such as lowering prices, enhancing quality, adding features, providing services, extending warranties, and increasing advertising. There are many factors may cause the rivalry increased such as the number of competitor increases as competitors become equal in size and capability, demand decreases and grow slowly, price decline and others. For example, Ford and General Motors’ both losing money in North American auto operations and their market share decline constantly when Toyota and Honda have stepped up their marketing and production effort in the United States. Toyota’s new plant starts production with capacity of 200,000 vehicles annually in 2009 become competitors for Ford and General Motors, which equal in size and capability and thus threaten the their status in American.
Second force is potential entry of new competitors. The intensity of competitiveness among firms increases if a new firm can easily enter a particular industry. The barriers to entry n industry may includes specialize gain of technology, lack of experience, strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate distribution channels, government laws and regulatory policies, tariffs, lack of access to raw materials and others. Thus, every firm should stay alert and identify the new firm entry, monitor the new rival firm’s strategies and be-ready to counterattack if needed, and capitalize on existing strengths and opportunities of own firm. Generally, when the threats of new firms entering the market is strong, incumbent firms will lower down their products’ price, adding free gifts and rewards such as extending warranties, adding features or offer financing specials.
Third of the competitive force is potential development of substitute products. Commonly, firms are in close competition with the producers of substitute products in other industries such as plastic container producers competing with glass, paperboard and aluminum can producers; and acetaminophen manufacturers competing with other manufacturer of pain and headache remedies. Competitive pressures arising from substitute products increases due to the decline of substitute products’ price and lower switching costs for consumers. For instance, producers of eyeglasses and contact lenses face the increasing competitive pressure from laser eye surgery; producers of sugar face competitive pressure from artificial sweeteners and producers of honey; newspapers and magazines face the competitive pressure of Internet and 24-hour cable; and malls and shops face the competitive pressure of Internet online shopping.
Fourth of the competitive force is bargaining power of suppliers. It affects the intensity of competition in an industry, especially there is a large number of suppliers, a few of raw material substitute or cost of switching raw materials is expensive. Thus, the suppliers and producers should cooperate and assist each other to enhance their long-term profitability with reasonable prices, standard quality, just-in-time deliveries to reduce inventory costs and development of new services. However, firms may pursue a backward integration strategy to gain control or ownership of suppliers when suppliers are unreliable and too costly or not capable. Conversely, many firms use outside suppliers for component parts rather than self-manufacture them as it is more economical. For example, in outdoor power equipment industry, Murray is a producer if lawn mowers, rotary tillers, leaf blowers, and edgers obtain their small engines from outside manufacturers, Briggs & Stratton who specialize in produce huge economies of scale of engines.
The last competitive force is bargaining power of consumers. The bargaining power of consumers is a major force affecting the intensity of competition in an industry if they are concentrated or large amount or buy in volume. The rival firms offer extended warranties, special services, or free gifts to gain customers loyalty. The bargaining power of consumers can increase if they can inexpensively switch to substitute, update with sellers’ products, prices, and costs, lower selling price with greater extent warranty coverage and accessory packages. For example, Tesco offers full range of groceries with thousand of products and ClubCard point to help consumers spending less. Tesco also has it advertisements in television program, Internet, roadside signboards and printed promotion papers for consumers. These ensure the status of Tesco always has higher bargaining power of consumers as compare others rivals.