Week #2, Blog Entry #2: Industry Analysis of Competitive Forces
This week’s lessons focused on how businesses analyze markets for their products, competitors, substitute and complementary products, potential threats, and risk mitigation. We learned about the significant factors that affect profitability and the success of a new business entering a market.
Porter’s Five Forces Model
Porter’s Five Forces analysis is a framework used to assess the likelihood of success for a new business entering a market. This competitive analysis examines five key areas: rivalry among competitors, threats to new entrants, threats from substitute products, and the bargaining power of buyers and suppliers (Karri, 2021). While Porter’s analysis provides a broad overview of the market sector, a SWOT analysis takes a more focused look at individual companies.
Entry Barriers
Current market players (competitors) often create challenges and threats for potential new entrants. Established competitors can increase product availability, decrease prices, and control essential resources for production and distribution. They may also invest in marketing and research and development to compete against new products, as well as advocate for stricter regulations and financial requirements that disincentive new entrants (Karri, 2021).
Competitive Rivalry
In established industries, companies often make substantial financial commitments in the form of investments in facilities, storage for products and raw materials, equipment, and workforce capital (Karri, 2021). The unity among competitors in a business sector can encourage collaboration to block newcomers by raising entry barriers and leveraging economies of scale.
Bargaining Power of Suppliers
When there are few sellers in an industry, those suppliers often become more powerful and united, allowing them to exert significant control over the market (Karri, 2021). A concentrated market with limited suppliers makes it easier for suppliers to dictate terms related to production, product availability, distribution, and sales.
Bargaining Power of Buyers
In markets with a large buyer base, suppliers typically enjoy a stronger position, allowing them to control market prices and profits. This dynamic can make it challenging for buyers to exert influence over suppliers (Karri, 2021).
Threat of Substitute Products
Products and services that are unique tend to face less competition from substitutes (Karri, 2021). In contrast, replaceable products tend to be more likely to struggle in a market that has numerous alternative options.
Other Analytical Tools: PEST and PESTLE
PEST and PESTLE are two other market analysis tools that are complementary in scope in understanding business external environmental factors (Fairlie, 2024). While Porter’s analysis focuses on the business operational internal environment related to success, PEST and PESTLE focus on external forces that could have a direct impact on a business, namely: political factors, external economic conditions, sociocultural factors, other technological factors, legal issues, and environmental factors.
Porter’s analysis, together with PEST and PESTLE, provide a holistic framework to develop a judicious business development and marketing strategy while allowing opportunity identification, risk mitigation, and long-term sustainability for new industries.
References:
Karri, R. (2021). Notes on Industry Analysis. Personal Collection of R. Karri, University of Illinois Springfield, IL.
Fairlie, M. (May 1 2024). What is PEST analysis? Business News Daily.
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