Porter's Competitive Forces

In Porter’s Competitive Force’s Model, we look at how substitutes might be used throughout different industries. There are many reasons that a substitute may be used. One example is the quality of the substitute. The question that comes to mind with this threat of a product is, "Is the substitute better?" After you reach that potential reason for change, you look at the buyers’ willingness to change and whether the price and performance of the substitute matches or exceeds that of the original product. Lastly, you look at the cost effectiveness to change to the substitute. Is it going to be easy and cost little to no money to change or is it going to be an expensive endeavor that will not pay off over time or may just simply not be affordable for most households. Substitutes tend to cause a lot of hassle with businesses. If you have a product to sell that no one else does, you are the sole determinant of the price and quantity that is put on that product. When substitutes come into place, prices must get much more competitive because you have to be able to keep up with the ‘best new thing.’ Look at how different computer companies are constantly upgrading, changing, and improving pricing structure so much to stay competitive to each other.

The power of customers is how much pressure they can place on a business. When the buyer’s power is significant, they can force prices down, demand higher quality products or services and play competitors against one another. Then you have the suppliers. Suppliers can make or break a firm. The only way for a firm to bargain with a supplier is to have many suppliers that can supply them with the same product. These market inputs are responsible for supplying raw materials, mechanisms, components, and services. The fewer number of suppliers for any given product means more power the supplier will have over the firm. They will also have more power over the firm if they are the only supplier that makes specific products for a firm. One thing that has helped firms gain more power over suppliers is the internet. Firms are able to contact suppliers much easier. They have easier access to many different manufacturers that produce many different materials all over the world. Distribution of these materials is made much easier and faster. Internet helps firms keep up with changing prices that in turn will help them make a better profit.

The threat of new market entrants is the possibility that new firms will enter the industry. New market entrants bring a desire to gain market share and often have significant resources. Their presence may force prices down and put pressure on profits. The threat of new entrants is highest when: Processes are not protected by regulations or patents, customers have little brand loyalty and etc. Without strong brand loyalty, a potential firm has to spend little to overcome the advertising and service programs of existing firms and is more likely to enter the industry. Enhancing your marketing/brand image, utilizing patents and creating alliances with associated products can minimize the threat of new entrants. Setting a price that earns positive but not excessive profits could reduce the threat of new entry in your industry because competitors may enter the industry if there are excess profits.

Traditional competitors are existing businesses in an industry. Rivalries naturally develop between companies competing in the same market. Competitors use means such as advertising, introducing new products, more attractive customer service and warranties, and price competition to enhance their standing and market share in a specific industry. To Porter, the intensity of this rivalry is the result of factors like equally balanced companies, slow growth within an industry, high fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse competitors, high-stakes investment, and the high risk of industry exit.