Understanding the dynamics of competitors

Background
The pure competition model does not present a viable tool to assess an industry. Porter’s Five Forces attempts to realistically assess potential levels of profitability, opportunity and risk based on five key factors within an industry. This model may be used as a tool to better develop a strategic advantage over competing firms within an industry in a competitive and healthy environment. It identifies five forces that determine the long-run profitability of a market or market segment.

  • Suppliers
  • Buyers
  • Entry/Exit Barriers
  • Substitutes
  • Rivalry

Supplier power

  • Supplier concentration
  • Importance of volume to supplier
  • Differentiation of inputs
  • Impact of inputs on cost or differentiation
  • Switching costs of firms in the industry
  • Presence of substitute inputs
  • Threat of forward integration
  • Cost relative to total purchases in industry

Buyer power

  • Bargaining leverage
  • Buyer volume
  • Buyer information
  • Brand identity
  • Price sensitivity
  • Threat of backward integration
  • Product differentiation
  • Buyer concentration vs. industry
  • Substitutes available
  • Buyers’ incentives

Entry/Exit barriers

  • Absolute cost advantages
  • Proprietary learning curve
  • Access to inputs
  • Government or other binding policy
  • Economies of scale
  • Capital requirements
  • Brand identity
  • Switching costs
  • Access to distribution
  • Expected retaliation
  • Proprietary products

Substitutes

  • Switching costs
  • Buyer inclination to find alternatives
  • Price-performance
  • Trade-off of the available substitute products or services

Rivalry

  • Exit barriers
  • Industry concentration
  • Fixed costs
  • Perceived value add
  • Industry growth
  • Overcapacity status
  • Product differences
  • Switching costs
  • Brand identity
  • Diversity of rivals
  • Corporate stakes

Service

  • Level of service compared to others
  • Added value perceptions
  • Dynamics with other attributes

Power of suppliers
An industry that produces goods requires raw materials. This leads to buyer-supplier relationships between the industry and the firms that provide the raw materials. Depending on where the power lies, suppliers may be able to exert an influence on the producing industry. They may be able to dictate price and influence availability.

A segment is unattractive when an organization’s suppliers have the ability to:

  • Increase prices without suffering from a decrease in volume
  • Reduce the quantity supplied
  • Organise in a formal or informal manner
  • Compete in an environment with relatively few substitutes
  • Provide a product/material that is a critical part of the end product or service
  • Impose switching costs on their customers when they depart
  • Integrate downstream by purchasing or controlling the distribution channels.