Michael Porter identified 5 forces that influence the state of competition in the industry. These forces include:
1. Existing Rivalry in the Industry
This is the strength or the intensity of competition in an industry. A market segment can be unattractive if it contains many strong or aggressive competitors and if the market is in a declining industry. It i more unattractive if fixed costs are high, and exit barriers are high. These conditions will lead to price wars, advertising battle, and new product introduction and will make it expensive to compete.
2. Threat of new entrants
This is the rate at which new firm join the industry. This may be due to market attractiveness because of growing profits. New entrants bring extra capacity and more number of competitors, e.g. Food industry — new restaurants, motor vehicle reengineering, and e.t.c. but difficult to enter the aircraft industry.
Sometimes it may be difficult to enter an industry due to certain barriers, which may include; high capital requirements, economies of scale, patents and licensing requirements, raw materials, access to distribution channels, product differentials, reputation requirements and switching cost of customers (time, money, and convenience). The most attractive segment is one’s whose entry barriers are high and exit barrier are low.
3. Threat of Substitute Products
A substitute product is a product offered by another industry that has potentials to satisfy the same customer need. Substitutes place a limit on prices and or profits that a firm industry can earn. A company has to watch closely the price trends of the substitute products, i.e. transport of passengers from Mombasa to Nairobi — Air, rail and bus. The three modes of transport need to think about each other. The higher the number of substitute products the lower the profitability.
4 Bargaining Power of Suppliers/Distributors
The suppliers tend to be powerful when they are concentrated and organized. They can be able to advertise a better price and reduce quantity supplied — suppliers are also powerful where there are few substitutes and when the supplied product/input is important to producer’s production and when the cost of switching a supplier are high. The concern of a marketer is to design best defense to build a strong relationship with and win suppliers’ confidence. Marketer must be able to pay the suppliers promptly. On the other hand, an organized distributor group may affect the producers positively or negatively depending on their bargaining power.
5.Bargaining Power of Buyers ‘
Where customers have a strong growing bargaining power, the segment is unattractive. Customers want low price, better quality or service and will set competitors against one another at the expense of the seller’s . Buyers bargaining power grows when they become more organized where the production represents a fraction of buyer’s cost when products are undifferentiated when the buyer’s switching cost are low and buyers are price sensitive because of low profits. Therefore, marketers will have to understand the bargaining power of each group.
skilled writter answered the question on April 1, 2018 at 18:19
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