The Five Competitive Forces That Shape Strategy
Michael Porters explains that the long-run profitability of any industry is determined by five competitive forces. These five forces determine how the economic value it creates is apportioned by governing the profit structure of the industry. The forces include; competitors’ rivalry, the power of suppliers, the power of customers, threat of new entrants, and threat of substitutes (Porter, & Heppelmann, 2014). For any company to survive in a particular industry, it has to strategies on how to build a defense against these competitive forces.
Competitors’ rivalry refers to the competition that occurs between two or more companies producing the same products, and are competing for the market share. Power of suppliers refers to situations where the suppliers want to supply less for more money. The threat of substitutes refers to the availability of a similar product that the customer can purchase instead of the company’s product. Power of customer refers to the force where consumers want to buy more products for less money. Lastly, the threat of new entrants is the risk exposed to existing companies by the entrance of new firms that are dealing with the same products. The new entrants take a part of the market share thus reducing the profit margins of the existing companies (Rothaermel, 2015). A company is supposed to strategies well for each of these forces for it to survive in the industry, and also make good profits.
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The Force of Threat of Substitutes
A substitute product is a product of another company which offers similar benefits to the customers as the product of the company in question (Rothaermel, 2015). The threat caused by substitution affects the competitive environment for the companies in that particular industry and influence their ability to make profits. The threat of substitutes can be classified either under high-risk threat or low-risk threat.
High-risk threat refers to where substitute product is cheaper than industry product, where the customer’s switching costs are low, the quality of the substitute product is equal or superior to the industry product, or the performance of the substitute is equal or superior to the industry product (Porter, & Heppelmann, 2014). Low-risk threat refers to a market where the substitute product is more expensive than the industry product, the consumer’s switching costs are high, the quality of the substitute is inferior to the industry product, the performance of the substitute is inferior to the industry product, or a situation where there is are no substitute products (Porter, & Heppelmann, 2014).
How the Threat of Substitutes Affected Apple Computer
The case of Apple computers can be classified under the “Porter threat of substitutes high-risk situation.” This is because from its early age, Apple computers have been fighting and strategizing against products that are similar to its products. Apple has been unable to be at the top of the industry because the of the substitute products which are mostly cheaper than its computers, some have equal or superior quality than its, and some have equal or superior performance than its computers. Generally, Apples’ computers are always more expensive than those of other companies which causes many customers to opt for the cheaper machines. Also, most substitute products quality is equal or superior to Apple’s products, for example, the HP and Dell computers are in the same range of quality with Apple’s thus giving the customer a wide range of choice. Lastly, the Microsoft OS is of the same or even better performance than the Mac OS; therefore, computers that are designed to use the Microsoft OS may be classified as equal or better than the Apple’s Mac OS in performance which increase the risk of customers going for the substitute products.
References
Porter, M. E., & Heppelmann, J. E. (2014). How smart, connected products are transforming competition. Harvard business review , 92 (11), 64-88.
Rothaermel, F. T. (2015). Strategic management . New York: McGraw-Hill Education.
