Question

discuss Porter’s Five Force Analysis. Explain the importance of understanding the analysis from business owner’s perspective. Also, choose one force that you feel is more important than the others and explain why.

Answer 1

Threat of new entrants- New industry entrants bring in new resources and a desire to gain market share. The magnitude of the hazard depends on the obstacles to accessing a given industry. The higher the entry barriers, the lower the threat to existing players. Definitions of entry barriers include the need for economies of scale, strong customer loyalty for existing brands, high capital requirements (e.g. major marketing or R&D investments), the need for combined expertise, government policies and limited access to distribution channels. You can find more obstacles in the table below.

Bargaining power of suppliers- This force analyzes how much power and control the manufacturer of a product (also known as the input market) has over the potential to increase its prices or lower the quality of the purchased goods or services, which in effect will decrease the productivity potential of a business. Supplier concentration and the availability of alternative suppliers are important factors in determining supplier strength. The less, the more strength they have. Industries are in a better position when there are a variety of suppliers. Supplier power sources also include the switching costs of companies in the industry, the availability of alternatives and the efficiency of their distribution channels

Bargaining power of buyers- Purchaser bargaining power is also defined as the export market. This force analyzes the degree to which consumers can put the company under pressure which also influences the responsiveness of the consumer to price changes. When there are not many of them and if consumers have many options to purchase from, customers have a lot of power. We should also have an easy time swapping. Customers can easily compare prices online, get updates on a wide range of products and immediately access deals from other businesses. Businesses may take steps to reduce purchasing power by introducing, for example, loyalty programs or by differentiating their products and services.

Threat of substitute products- The presence of goods outside the realm of common product limits raises consumers ' willingness to turn to alternatives. To discover these alternatives one should look beyond similar products which competitors brand differently. Alternatively, account should be taken of every commodity that serves a similar need for customers. For starters, energy drink like Redbull is typically not considered to be a rival to coffee brands like Nespresso or Starbucks.Nonetheless, since both coffee and energy drink serve a similar need (i.e. staying awake / getting energy), consumers may be willing to switch from one to another if they feel like prices in either coffee or energy drinks are -too much. This will ultimately affect the competitiveness of a company, and therefore should also be taken into account when determining the quality of the industry.

Rivalry among existing competitors- This last power of the Porter's Five Forces explores how strong the current business rivalry is, which is measured by the number of existing competitors and what each competitor can do. Rivalry is strong when there are many rivals that are nearly equal in size and strength, when the market is growing slowly, and when customers can easily switch to a low-cost competitor. The concentration ratio in a market is a good indicator of competitive rivalry. The smaller the proportion would definitely be the more intense rivalry. When competition is strong, rivals are likely to engage aggressively in advertising and price wars which can harm the bottom line of a company. Moreover, as barriers to exit are strong, competition will be more severe, forcing companies to stay in the industry even though profit margins are decreasing. For example, certain obstacles to exit can be long-term loan agreements and high fixed costs.

The rivalry among competitors is the most import- For example, Looking at the U.S. airline industry, we see that the industry is extremely competitive due to a number of factors including the introduction of low-cost carriers, strict market regulation where safety is paramount resulting in high fixed costs and high barriers to exit, and the fact that the industry is currently quite sluggish in terms of growth. There are also very low switching costs for consumers, and many players in the industry are similar in size (see graph below) contributing to extra fierce competition between those firms. Taken altogether, competition among established airline industry competitors can be said to be strong.