In 1979, “The Five competitive forces that shape strategy” article was published was written by Professor and economist Michael E.Porter and has been considered one of the most popular and well-liked strategy tools. The article was about Porter’s five forces which are used as a powerful tool to help businesses understand their competitive environment and determine business strategy‘s profitability in the future. Understanding these five forces and realizing where you are standing in marketing can have great help businesses adjust their strategy accordingly and increase their profitability. According to Porter’s model, five forces that shape industry competition are the Threat of Entry, The Power of Suppliers, The Power of Buyers, and The Threat of Substitutes, and these four forces are centered on Rivalry among existing competitors. Let me examine each of Porter’s Five Forces and analyze why understanding these forces play an important role in business strategy.
The threat of entry means threats of new entrants that are joining the marketplace and this force considers how it is hard for new entrants to enter the market and has effects on the competition. For example, new entrants branching out from other markets can make incumbents in the market think seriously and prevent prices from rising or focus on increasing investment. But there are some barriers that make new entrants think one more before entering a new marketplace and factors that protect incumbents. Supply-side economics of scale, for instance, means that incumbents focus on producing as much output as possible by putting lower costs per unit. And it causes lower fixed costs per unit and it requires new entrants’ huge capital. Another one is the demand-side benefits of scale means that customers put trust in big companies and buy products most people use. As a result, this factor causes customers may not have willing to use newcomers’ offerings. Other remaining factors which can be barriers for newcomers such as capital requirements, restrictive government policy, unequal access to the supply chain, and so on.
The Bargaining Power of Supply, another one of the five forces, is an analysis of how a business’s supplier is powerful and how easily businesses can change their suppliers if changes in prices occurred. Powerful suppliers usually can make themselves have more value by putting higher prices and may decrease their service quality. In the article, some cases are considered when suppliers have power over companies. For example, if suppliers offer different products and no substitute for what the suppliers offer. Or there are few suppliers which provide for all industries and there are independent suppliers which do not rely on one industry, they supply to two or more industries.
The Bargaining power of buyers, the third force, considers the power of buyers and how their power can influence offerings’ prices and quality. When the customers have power over the company and can keep prices down? There are some situations that help customers keep their advantage such as few buyers in the market and they make purchases in large volume, business’s offerings do not have any differentiation and buyers can find comparable ones.
In terms of the threat of substitutes, it is the threat that one company’s product or service may be replaced with a competitor’s offerings by customers and availability of substitution in the market. For example, streaming media is a substitute for video rentals. The greater the threat of substitutes is the more negative effects on the business’s profitability in the marketplace.
The last and fifth force of Porter’s model is Rivalry among existing competitors, it examines the intensity of competition among existing rivals. Businesses can compete with their existing rivals by discounts on products, developing new products, and various promotions. And the high intensity of competition can affect the profitability of the industry.
These days a myriad of businesses that differ from each other exist in the market and most of these businesses use Porter’s five forces as a key framework for business strategy. Here just I want to take the famous brand Nike as an example and put it into Porter’s five forces.
Nike is a sports apparel brand and can be considered one of the leading brands in this market. Rivalry among existing competitors is so intense and there are enough brands such as Adidas, Puma, and Under Armour that can compete with Nike. If Nike can compete on pricing or product development, it can lose its market share quickly. Regarding the power of suppliers, Nike does not depend on a single supplier, Nike products are produced in several countries such as Vietnam, China, and Indonesia. Bargaining power of customers in Nike case, Nike allows its products to be purchased by individuals and wholesalers. their footwear designs are different and the company always tries to make product differentiations that can decrease the power of buyers. In terms of new entrants to this industry, I think it requires large capital from newcomers and Nike has gathered enough loyal clients who do not want to switch their brand. I think The threat of substitutes for Nike sports apparel is not high because their footwears and their designs are special and differences can be known by buyers. Switching cost is low because their competitor’s product prices are almost similar and no need to switch. I think Nike should focus more on rivalry among existing companies because of the high competition.
Overall, it is definitely true that understanding Porter’s Five forces reveal competitive strength and let the company know its position. Knowing how the industry is intense and company attractiveness is so important for the company’s current profitability and future profitability. I think, if a company considers Porter’s five forces in building their business strategy, it can help the company stay competitive in the market and can make profits in the long term.
