Porter’s 5 forces
Competitive Rivalry in the industryThe intensity of the rivalry is determined by the a few factors:
The number of competitors- the higher number of the competitors that are of similar capabilities (similar product quality), the more intense the rivalry.
This will lead to active marketing, results in high costs and aggressive price wars, which can be detrimental to the market.
Customers have a greater tendency to compare prices and to switch competitors that can offer a lower price.
One good indicator of competition is by looking at the industry concentration, whereby the lower the concentration ratio, the more intense the competition.
High costs and low profit margins due to competition can lead to exit barriers such as high fixed costs and long term loan agreements.
http://www.business-to-you.com/porters-five-forces/Threat of new entrants
In an industry that is profitable, there would be a higher number of new entrants.
New entrants can be a threat when they attempt to gain market share and cause profits of existing competitors to drop. The seriousness of their threat depends on the entry barriers.
When entry barriers are fewer, the would be an increase in new entrants.
Some entry barriers include the need for the economies of scale, high customer brand loyalty, issues of proprietorship, specialist knowledge requirements, large capital requirements, government policy restrictions and limited distributorship.
Established brands will have less threats from new entrants where customer confidence of the product is of a concern.
When entry barriers are high, new entrants become less of a threat.
Threat of substitute products or services
Products that can be easily substituted creates an unattractive industry.
Threat of substitution refers to the possibility that a product or a service can be replaced by other means; for example a manual procedure can be replaced by automation.
Consumers can easily replace one product for another at a lower cost or for a better quality.
Substitutes can also pose a threat if they are of equal in quality of performance of the competing product.
When switching costs are high, (eg. greater inconvenience), there would be less threat a product will be substituted.
Bargaining power of suppliers
Suppliers have the power to control the prices, reduce the quality of their products, or reduce the availability of their products (eg. lesser stock or longer lead time).
When prices and high, or lesser availability of a product, customers have the tendency to switch to alternatives with the same quality, resulting in low profitability for the business.
Lesser suppliers mean that the existing ones have more power.
Businesses will be less affected when there are more suppliers.
Suppliers have more power if their products are unique and irreplaceable and customers cannot do without the product.
A company would need to consider how much cost they need to incur should they change suppliers. Indirect costs may include losing customers who are brand loyal.
Suppliers may also have the power to do direct business with the company’s customers.
Bargaining power of Buyers
Buyers have the power to bargain when they purchase in huge quantities. Businesses will have to expect lower profit margins from bulk purchases.
When there are more sellers selling similar products, buyers will have the power to play the market, by comparing prices from different sellers and going to and fro each seller to bargain. Sellers who desperately wants to win the price war will end up earning minimal profits.
Buyers who possess greater knowledge of seller’s product, will have a greater bargaining power.
Buyer’s who could substitute a product using their own DIY product equivalent, will have a stronger power.
Buyers will have the power to bargain when they are return customers.
When there are less buyers in the market, the small pool of buyers will gain more bargaining power because they know that the company relies greatly on them for business.