The five-force model was developed in 1979 by Michael E. Porter, a highly acclaimed strategist and professor at the Harvard Business School. The model is used to identify and analyse forces that affect an industry. According to the model, companies must evaluate the opportunities available and threats posed by present competitors, prospective competitors, the availability of substitute products in the market, and the bargaining power vested with its customers and suppliers.
- Skill level:
- Moderately Challenging
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Determine the firm's position in comparison to its competitors. For this, measure competitiveness by the extent of industry concentration and market penetration.
Compare your product prices, technology, innovations and quality to those of your competitors. This will tell you whether the market is disciplined (low rivalry among firms) or concentrated (high rivalry).
Develop marketing and advertising strategies for your products. This will ensure that more people know about your products and help you gain a competitive advantage.
Review governmental policies for entry to a specific market. The government sometimes poses restrictions on the entry of new players into the market by grant of monopolies and by acting as regulator. Determine whether your company meets existing requirements.
Read about patents and licenses required to get into this line of business. Understand the procedures in developing and acquiring them to determine the level of difficulty involved in entering the industry.
Calculate "the internal economies of scale." This will help you determine the market share that you can expect to capture as a new player. This will reveal if it is profitable at all to enter the industry.
Barriers to Entry
Analyse your existing relationships with your suppliers of raw materials and labour. Also, analyse what would be the scenario in case they increase prices of their goods or refuse to supply to you.
Determine the costs associated with switching to newer suppliers. Create a matrix that highlights the additional costs -- or savings -- involved in making the switch.
Determine the level of control your suppliers have over distribution networks.
Bargaining Power of Suppliers
Analyse your customers' sensitivity to price changes, and forecast the potential effects in case you adjust the price of your product.
Check your distribution networks and understand your degree of reliance on them to reach out to your customers.
Research your customers and classify them as key or non-key. Use demographics to do this, measuring such factors as age, gender and income.
Bargaining Power of Buyers
Study your customers thoroughly and gauge their propensity to find substitutes for your core products. Analyse the costs associated with switching products.
Evaluate the quality of products that can be substituted for your product.
Create a trade-off matrix to understand the pluses and minuses associated with sticking to the product or finding a substitute for it.
Threat of Substitutes
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