The company ability to understand competitive forces reveals the current industry profitability and its ability to anticipate and influence competition in the market over time. The most potent competitive force determines a company’s profitability and becomes the basis of strategy formulation.
Threat of new entry into the market is one of the forces that determine competition in a particular industry. After the new entry, the new business takes part of the existing market share forcing other competitors’ to lower their prices in order to remain competitive. The companies forego some profits and bear additional costs of marketing to compete with the new firm in the industry (Porter, 2008). Profits are affected by new entry since prices must be capped to deter new competitors. Barriers to entry serve as protection or privilege to incumbents against new entry that holds down profitability.
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The second factor is power of suppliers that dictates value of supply, which then determines profitability of the firm through a pricing strategy. As Porter (2008) noted, powerful suppliers determine pricing of their commodities by making more profit for themselves though pricing strategy. The pricing approach limits quality of services and shifting costs of industry participants, which may drive them out of the industry. Suppliers of labor can also restrict the profitability of a company through demanding higher wages and salaries.
The power of buyers to bargain is another factor that shapes competitiveness of an industry. Buyers demand quality products and services and exert prices down through changing of vendors, especially when buyers are few. Customers also buy in bulk prompting substantial discounts thus forcing companies to bear the cost of discounts offered.
Threat of substitutes is the fourth factor that affects competitiveness of an industry product when consumers opt for affordable goods or of better quality that serves the same purpose. The threat of substitution is downstream since it affects the industry profitability through ceiling prices (Porter, 2008). Where industry does not improve product performance through differentiation, marketing, and quality, it suffers in terms of profitability and perhaps forced to exit the market.
Business rivalry is the last factor that shapes competition in the industry. Business rivalries include introducing new products in the market, discounting, low priced commodities, and advertising strategies that attract more customers to a particular business. Limited market with numerous competitors in the industry precipitates fights for the available market share.
References
E. Dobbs, M. (2014). Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review , 24 (1), 32-45.
Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review , 86 (1), 25-40.
