Thousands of startups are started and shut down every year. Though every industry in which they operate is different, the basics of drivers to making profits remain the same. Porter’s five forces is a model that analyses competition and helps determine an industry’s weaknesses and strengths. This model recognizes looking beyond the direct competition that is up in the market and thinking of other indirect possibilities of competition.
The purpose of this for a company can not be to check and make strategic decisions once at all but to continuously keep a look at the five forces and analyze how they stand in the market.
Existing competition
With the intense rivalry there is always great spending on customer acquisition, customer retention, and the threat of price downs. It can be more competitive when industry growth is slow.
If you do not have much of competitors in the market, the market is very much controlled by you. There would be huge competitive power and good profits.
Eg; The airline industry. Since there is a large competition, no single company has the power to control the prices on their own.
Bargaining power of buyers (or customers)
It is the potential customers have to bring the prices down.
A smaller and more powerful customer base translates to a huge bargaining power for the buyer. On the other hand, smaller and independent customers give the company an upper hand in pricing and hence profitability.
Similarly, if the number of customers is lesser than the number of suppliers, the bargaining power of buyers increases. This is because they have a pool of options available for buying the product.
Eg; the airline industry where customer loyalty is too low and customers tend to go to the one offering the lowest price.
Bargaining power of suppliers
Every company has to purchase inputs from different suppliers for making their products or services. Again like buyers, powerful suppliers negotiate a higher price. Especially if the input is a niche and suppliers are less.
If you have a wide range of suppliers, you always have the option to purchase the goods from the best or the cheapest ones. If the number of suppliers is less, they have a huge bargaining power where they can reduce the supply or increase the price as they want.
Eg; the semiconductor chip designers whose suppliers (the chip makers) are limited and powerful.
The threat of new entrants
How likely and frequently can a new competitor enter the market? This is an important factor as every new competitor can force existing players to bring pricing down and spend more on acquiring customers.
This boils down to how strongly your product is based. How easily can one replicate your product? What are your unique propositions that are hard to copy?
Eg; the Indian telecom industry Jio changed the way it worked with Jio bringing down the prices.
Threat of substitute products or services
When a new product meets the customer’s demand in a different way, the industry’s profitability decreases.
The new products might not be exactly your competition as we saw for the existing competition, but it solves the purpose of the customer’s problem.
Eg; video conferencing products are substitutes for the travel industry.
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