Question

What are real-world examples to demonstrate a weak or strong force when considering Porter's threat of substitutions and Porter's rivalry?

(*One example for threat of substitution)

(*Second example to demonstrate rivalry)

Explain why your selection should be classified as a strong or weak force for that category?

Answer 1

Basically, Porter's have divided the topic into 5 forces.

• Porter’s Five Forces of Competition Definition is:

Porter’s 5 forces framework is used for strategic industry analysis. It was developed in 1979 by Michael Porter, Harvard Business School professor. Michael Porter’s five forces of competition can be used to examine and analyze the competitive structure of an industry by looking at 5 forces of competition that influence and shape profit potential. Furthermore, Porter’s five forces of competition have become a central concept in business theory.

Porter’s 5 forces industry analysis does more than look at a company’s direct competitors. It looks at multiple aspects of the industry’s competitive structure and economic environment, which includes the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products. The idea is to look at each of these factors and determine the degree to which they increase competition in the industry. If the forces are strong, then they increase competition. Whereas if the forces are weak, then they decrease competition. Porter’s five forces definition can be utilized by any business. In addition, it can be applied to any industry. For example, consider the Environment of Industry. The competitive environment of the industry has a strong influence on the performance of businesses within that industry. Porter’s five forces defined whether an industry is attractive or unattractive from the perspective of a company competing in that industry. Porter’s 5 forces of competition provide an excellent method to consider an industry before the entrance.

• The Poter's 5 Forces of Competition:

1. The Threat of new entrants
2. Bargaining power of suppliers
3. Bargaining power of buyers
4. The threat of substitute products
5. The intensity of rivalry among competitors

• Here we mainly discussed the last two forces that are the threat of substitution and demonstrate rivalry:

1. The Threat of substitution:

The threat of Substitutes (one of Porter’s Five Forces). Porter’s threat of substitutes definition is the availability of a product that the consumer can purchase instead of the industry’s product. A substitute product is a product from another industry that offers similar benefits to the consumer as the product produced by the firms within the industry. According to Porter’s 5 Forces, the threat of substitutes shapes the competitive structure of an industry.

• The threat of Substitutes – Determining Factors

Several factors determine whether or not there is a threat of substitute products in an industry. First, if the consumer’s switching costs are low, meaning there is little if anything stopping the consumer from purchasing the substitute instead of the industry’s product, then the threat of substitute products is high. Second, if the substitute product is cheaper than the industry’s product – thereby placing a ceiling on the price of the industry’s product – then a threat of substitutes high risk is the case. Third, if the substitute product is of equal or superior quality compared to the industry’s product, the threat of substitutes is high. And fourth, if the functions, attributes, or performance of the substitute product are equal or superior to the industry’s product. Any of these situations is a high threat of substitutes: porter’s 5 forces see less profit potential. On the other hand, if the substitute is more expensive, of lower quality, its functionality does not compare with the industry’s product, and the consumer’s switching costs are high, then a low threat of substitutes occurs. And of course, if there is no close substitute for the industry’s product, then the threat of substitutes is low.

• The threat of Substitutes – Analysis

When analyzing a given industry, all of the aforementioned factors regarding the threat of substitutes may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate a high threat of substitutes and some may indicate a low threat of substitute products. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

• The Threat of Substitutes Porter places High risk on:

• Substitute product is cheaper than industry product
• Consumer switching costs are low
• Substitute product quality is equal or superior to industry product quality
• Substitute performance is equal or superior to industry product performance

• The Porter Threat of Substitutes Low-Risk Situation:

• Consumer switching costs are high
• Substitute product is more expensive than industry product
• Consumer switching costs are high
• Substitute product quality is inferior to industry product quality
• Substitute performance is inferior to industry product performance
• No substitute product is available

• The threat of Substitutes Interpretation

A low threat of substitute products makes an industry more attractive. In addition, it increases profit potential for the firms in the industry. Conversely, a high threat of substitute products makes an industry less attractive. It also decreases the profit potential for firms in the industry. The threat of substitute products is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Start creating a list of potential substitutes that you evaluate as a threat in an external analysis. With this analysis, you’ll be better able to identify and react to any threat of substitutes.

2. Demonstrate Rivalry:

The demonstrate rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each other’s profit potential. If rivalry is fierce, then competitors are trying to steal profit and market share from one another. As a result, this reduces profit potential for all firms within the industry. According to Porter’s 5 forces framework, the demonstrate rivalry among firms is one of the main forces that shape the competitive structure of an industry.

Porter’s demonstrate rivalry in an industry affects the competitive environment and influences the ability to existing firms to achieve profitability. For example, a high demonstrate rivalry means competitors are aggressively targeting each other’s markets and aggressively pricing products. This represents potential costs to all competitors within the industry.

High demonstrate competitive rivalry can make an industry more competitive and thus decrease profit potential for the existing firms. In comparison, the low intensity of competitive rivalry makes an industry less competitive. It also increases profit potential for the existing firms.

• Porter’s Demonstrate Rivalry Determining Factors

Several factors determine the intensity of competitive rivalry in an industry, whether it increases or decrease it.

• Porter’s Rivalry Demonstrate Increased

If the industry consists of numerous competitors, then Porter rivalry will be more intense. Whereas if the competitors are of equal size or market share, then the demonstrate rivalry will increase. The demonstrate rivalry will be high if industry growth is slow. If the industry’s fixed costs are high, then competitive rivalry will be intense. Additionally, rivalry will be intense if the industry’s products are undifferentiated or are commodities. If brand loyalty is insignificant and consumer switching costs are low, then this will intensify industry rivalry. Industry rivalry will be intense if competitors are strategically diverse – which means that they position themselves differently from other competitors. Then an industry with excess production capacity will have greater rivalry among competitors. And finally, high exit barriers – costs or losses incurred as a result of ceasing operations – will cause demonstrate rivalry among industry firms to increase.

• Porter’s Rivalry Demonstrate Decreased

And of course, if the opposite is true for any of these factors, the intensity of Porter rivalry among competitors will below. For example, the following indicates that Porter demonstrates rivalry among existing firms is low:

• A small number of firms in the industry
• A clear market leader
• Fast industry growth
• Low fixed costs
• Highly differentiated products
• Prevalent brand loyalties
• High consumer switching costs
• No excess production capacity
• Lack of strategic diversity among competitors
• Low exit barriers

• Porter’s Demonstrate Rivalry Analysis

When analyzing a given industry, all of the aforementioned factors regarding the demonstrate competitive rivalry Porter placed among existing competitors may not apply. But some, if not many, then certainly will. And of the factors that do apply, some may indicate the high demonstrate rivalry and some may indicate the low demonstrate rivalry; however, the results will not always be straight forward. As a result, consider the nuances of the analysis and the particular circumstances of the given firm and industry when using the data to evaluate the competitive structure and profit potential of a market.

• Demonstrate Rivalry is High if…

If any of the following occurs, the demonstrate rivalry is high.

• Competitors are numerous
• Industry growth is slow
• Fixed costs are high
• Competitors have equal size
• Products are undifferentiated
• Brand loyalty is insignificant
• Consumer switching costs are low
• Competitors have equal market share
• Competitors are strategically diverse
• There is excess production capacity
• Exit barriers are high

• Demonstrate Rivalry is Low if…

If any of the following occurs, then it may indicate that the demonstrate rivalry is low.

• Competitors are few
• Unequal size among competitors
• Competitors have an unequal market share
• Industry growth is fast
• Fixed costs are low
• Products are differentiated
• Brand loyalty is significant
• Consumer switching costs are high
• Competitors are not strategically diverse
• There is no excess production capacity
• Exit barriers are low

• Porter’s Demonstrate Rivalry Interpretation

When conducting Porter’s 5 forces industry analysis, low demonstrate rivalry makes an industry more attractive and increases profit potential for the firms already competing within that industry. In comparison, the high demonstrate rivalry makes an industry less attractive and decreases profit potential for the firms already competing within that industry. The demonstrate rivalry among existing firms is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework.