Question

Identify the five competitive forces that determine industry profitably. Explain the purpose of analyzing these forces.

Answer 1

Porter's five forces is the framework that helps in analyzing company's competitive environment. It is one of the important part of marketing strategy and gives clear picture as to how to run a business.

The five forces includes:-

• Threat of new companies- Market that has the potential of giving high return will attract new companies to start its business. As the number of companies will increase in the market, the profitability will decrease for all the companies. New companies will come up with new ideas to become more competitive in the market. However there are factors that can affect the performance of the new companies like capital requirement, Customer loyalty to established brands, government policy etc.
• Threat of substitute products or services- There are alternative products that can be more beneficial or satisfying for the customer. Substitute product and competitor product are different. Substitute products are those which can substitute the existing product to give more benefits or satisfy the needs of the customer. Example LED television is the substitute of traditional television. There are factors that can affect the entry of substitute to the market like performance of the substitute, quality, cost, number of substitute products available in the market etc.
• Bargaining done by the customers- Bargaining power of customer is the ability to put pressure to the company to minimize the cost of the product as per customer perceived value. It also depends on the number of alternative product present in the market. Companies can reduced the bargaining power of the customer by coming up with promotions, discounts or offering the products at fixed price.
• Bargaining power of the supplier- Bargaining power of supplier is the ability to put pressure to the company to increase the cost of the raw material, components or services supplied by them as per their requirement. The supplier is an important part of product development because supplier can provide raw materials, resources, services etc. It also depends on the number of suppliers present in the market.
• Intensity of competitive rivalry- Intensity of competitive rivalry depends on various factors which includes innovation, advertising expense, powerful business strategy, supply chain, value chain, online and offline marketing strategies etc. Hence to be on top companies needs to come up with strong strategies to exceed in all of these factors.

The purpose of analyzing these forces include the following: -

• It will help in understanding how the target market rate the competition.
• It helps in understanding the competitiveness of the business environment.
• It helps in identifying the strategy's potential profitability.