When conducting market analysis, it can be beneficial to examine the Five Forces of Competition model. This model proposes that an industry is comprised of competitive pressures in five distinct areas of the market as a whole. In order to gain a comprehensive understanding of the market, it is essential to analyze and evaluate each force.
To use the framework, one must
Identify the key figures and the major sources of competitive pressure in each area
Evaluate the intensity of the pressures
Determine how the overall picture supports profitability
Rivalry Among Competitive Sellers
This section denotes the extent to which competitors strive to gain market share and an edge over each other in the industry. When rivalry intensifies, the probability of earning a sustainable profit reduces as competitive strategies can be expensive.
Competitive actions include
Price Cutting
Marketing tactics (e.g., heavy advertising, attractive promotions, brand creation)
Providing better customer service
Frequent redesign of products to add new features or options
Attractive financing terms
Customizable products
Potential New Entrants to the Market
When a new competitor enters a market, the existing competitors often take costly actions to keep their positions. These actions may include investing more in developing new products, spending more on advertising, cutting costs, improving efficiencies, or offering more incentives to the distribution and retail network. However, these actions can also give the new entrants an advantage to overcome.
Substitute Products from Other Industries
When identifying your competitors, it’s important to think beyond the usual suspects and broaden your perspective. Your competition isn’t just limited to organizations that offer similar products or services. Every organization that satisfies the same customer need is considered a competitor. To illustrate this point, the authors provide the example of the sugar industry, which must compete not only with other sugar manufacturers but also with the chemical and sugar substitute industries. This is because the market need is for sweeteners, and different industries can produce products that fulfill that need. Another example is eyeglasses, which are currently manufactured by the precision manufacturing industry. But corrective surgery, which uses tools produced in the medical devices industry, is a substitute for eyeglasses and therefore a competitor in the same market.
Products are considered desirable when they are easily accessible, offer comparable or superior quality, and have minimal barriers to substitution (such as unaffordable prices or the need for additional products). For instance, vision-correcting surgery became more popular after its safety was confirmed and prices became more affordable. Similarly, sugar substitutes saw an increase in demand as their taste improved compared to sugar.
Crafting and Executing Strategy notes three warning signs that indicate possible dangers from substitute products:
Stronger increases in sales compared to the sales in the industry being analyzed
Signs that capacity is being increased by producers of these substitutes
Increased profits among makers of these substitutes
Bargaining Power of Suppliers and Buyers/Customers
Producers who have weaker bargaining power may face increased costs from their suppliers, resulting in higher prices for finished goods and potentially lower sales. In response, producers can choose to either absorb the cost increases without raising prices, or increase prices and accept a smaller profit margin. The book “Crafting and Executing Strategy” recommends that producers evaluate each supplier separately, as they may come from different industries.
It’s important to consider the buyer or customer at the other end of the supply chain. What are the conditions that favor customers?
Industry Attractiveness
When evaluating the appeal of an industry, it is important to consider the presence and potency of various forces. While each industry is distinct, favorable conditions generally include minimal to moderate competition among competitors, significant influence over suppliers and buyers, significant barriers to entry for new organizations, and minimal threat from alternative options. These factors contribute to an organization’s ability to attain profitability within the industry.
To comprehend the supplier, it’s crucial to have a grasp on the market. For instance, if there are numerous alternatives for the raw material or intense competition, it’s indicative of a buyer’s market. This implies that the buyer holds more negotiating power.
