Business Strategy: Five Forces Analysis

Five Forces Analysis

• Considers interactions among competitors, new entrants, substitutes, suppliers, and buyers.

Rivalry Among Competitors

• Competitors (firms producing similar products/services) use tactics like advertising, new offerings, and price cuts to gain market share.
• Rivalry intensity is determined by factors like the number of competitors, industry growth rate, product/service characteristics, fixed costs, increasing capacity, and diversity of rivals.
• Strong rivalry occurs when consumer demand falls, excess capacity exists, buyers have low switching costs, rivals have diverse market strategies, and competitors constantly improve performance/increase numbers.
• Weak rivalry occurs when product differentiation is high, competitors are non-aggressive, high buyer switching costs, strong consumer demand, few but more than 5 competitors.

Threat of Potential New Entrants

• New competitors entering an industry (new entrants) bring new products, services, and capacity, potentially reducing profits for existing firms.
• Threats are high if barriers to entry are low (e.g., weak government regulations, low capital requirements, easy access to distribution channels, low switching costs).
• High initial investment, strict regulations, high differentiation costs/switching costs, limited access to distribution channels make the threat of new competitors less of a threat.

Threat of Substitutes

• Substitute products can significantly threaten an industry if they are substantially cheaper, customer preferences change, substitute quality drastically improves, switching cost is low, and differentiation is low.

Power of Suppliers

• Strong supplier power exists when the product/service is unique, switching costs are high, few suppliers exist, high sales volume, no readily available substitutes.
• Low supplier power is when many suppliers exist, switching costs are low, there are many substitutes available on the market.

Power of Buyers

• Buyer power is strong when buyers can potentially integrate backward (produce their own products), switching costs to another supplier are low, large portion of a seller's product is purchased by the buyer, several suppliers are available in the market, and the product represents a high percentage of the buyer's cost.

Interpreting the Five Forces

• Porter's Five Forces ranks competitive forces as Strong/High, Moderate/Medium, or Weak/Low based on competition level and profit potential.
• Weak forces indicate desirable markets, high desirability, higher profitability; strong forces indicate higher competition and low profit.
• Firms use this analysis to enter or exit markets, develop competitive strategies.

Internal Firm Analysis and Competitive Advantage

• Internal assessments help firms understand their position compared to competitors.
• Evaluating resources and capabilities is crucial for developing a competitive edge.
• Advantage can be temporary or sustained.

Resource-Based View (RBV) and VRIO Framework

• RBV assesses tangible (physical assets) and intangible (knowledge, brand) resources for strategic advantage.
• VRIO framework analyzes resources/capabilities – Value, Rareness, Imitability, and Organization.

BCG Growth-Share Matrix

• Portfolio analysis tool categorizes business units/products based on market growth rate and market share.
• Categories include Stars, Cash Cows, Question Marks, and Dogs.

SWOT Analysis

• Structured framework for assessing internal (strengths, weaknesses) and external (opportunities, threats) factors.
• Used to identify business opportunities, market, and internal competitive advantages.

Intellectual Property and Competitive Edge

• Protecting unique creations (patents, trademarks, copyrights, trade secrets) gives competitive advantage.

Value Chain Analysis

• Developed by Michael Porter, examines how a firm adds value through activities (primary and support).
• Primary activities directly add value, while support activities enhance primary activity effectiveness (procurement, technology, HR, infrastructure).