Porter’s Five Forces Model: Part Three
Description:
The threat of new potential entrants usually depends on the market entry barriers effectiveness. The entry barriers can take diverse forms and are used to prevent a flow of companies into an industry.
Content:
The threat of new potential entrants usually depends on the market entry barriers effectiveness. The entry barriers can take diverse forms and are used to prevent a flow of companies into an industry. The most popular forms of entry barriers are economies of scale (profits associated with great purchasing), high cost of entry (technology and innovation investment), distribution channels, cost advantages not related to the size of the company, government laws (for instance, some new laws might weaken company’s competitive position), differentiation or brand uniqueness.
Force 4: The impact of the suppliers on the sellers.
The power of the suppliers on the sellers is a mirror image of the buyer’s power. First of all, the examination of supplier power is concentrated on the relative size and concentration of suppliers relative to industry participants. Secondly, it is focused on the degree of differentiation in the inputs supplied. The analysis shows that sellers are able to charge customers different prices along with differences in the quality created for every of those buyers when the market is characterized by high supplier power and by low buyer power simultaneously (Porter, 1998). Great power of suppliers exists when such factors as high brand power, high switching costs, possibility of integration of suppliers, and customers’ fragmentation take place.
Force 5: The threat of substitute products becoming available in the market.
The threat that substitute products pose to the industry and its benefit depends on the relative price-performance proportion of various kinds of products and services which consumers might start buying instead of previous ones. The threat of product substitution is influenced by switching costs, such as retooling and redesigning.
The nature of competition in an industry is greatly influenced by Porter’s five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition will be within the industry (Porter 1980). Nevertheless, these five forces are not the only ones that define the way companies compete in an industry. It should be pointed out that the whole structure of the industry plays a significant role.
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