Question

Explain five forces for assessing industry competitiveness.

Answer 1

Porter’s five forces is a framework which is used for analysing an organization’s competitive environment. It typically uses factors like competitive rivalry, supplier power, buyer power, threat of substitute and thereat of new entry in order to analyse the strength and weakness.

1. Competition in Industry: One important analysis an organization has to do is analyze the number of competitors in the market and their ability to undercut a company. If the numbers of competitors are large in numbers the company may have the lesser power to introduce a product and vice versa when the competitive rivalry is slow a company would have greater power to sustain in the market.

2. Potential of New Entrants: An organization power will also be affected when the new entrants come in to the market. An organization becomes week when the competitors establish their products with less time and cost. Hence an industry with string barriers to entry becomes successful in the market.

3. Power of Suppliers: Another important factor in the five forces is to look into how easily suppliers can drive up the cost of inputs. It includes the number of suppliers of key inputs, how unique these inputs are and the cost involved for the company to switch to different suppliers. When a company depends upon fewer suppliers it would be week and vice versa when there are many suppliers the company can keep its inputs at lower cost and thereby gain cost.

4. Power of Customers: This would mean that in few cases the customers would have the ability to drive prices lower through negotiation. This is affected by how many customers an organization has, how important each customer is, the cost involved in finding new customers etc. The smaller the customer group higher would be the negotiation power and larger the group would gain profit to an organization.

5. Threat of Substitute: Finally it is the threat of substitute which means other products or services which can be used in place of company products poses this threat. Organizations which produce goods are services which has no close substitute will have high power and vice versa when it has lots of substitute for its products.