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One final framework
for assessing your business environment is Porter's Five Forces
Model. It shows an industry being influenced by five forces: Barriers
to new entry, the threat of substitute products, the power of the
suppliers and consumers, and rivalry between companies.
Porter's
Five Forces Model:
-
Barriers to
entry are things that prevent new businesses from entering an
industry. Existing economies of scale, established brands, patents,
government regulations, a steep knowledge/technology curve, and
high capital requirements will inhibit a business from entering
an industry. Naturally, if you are already established in an industry,
you would want to maintain these barriers to prevent further competition
from entering. If you are trying to enter an industry with barriers,
you will have to find ways of overcoming them, or altering your
business strategy to circumvent them.
- The threat
of substitute products refers to the potential of products from
other industries to affect your industry. An example of this might
be the threat to those in the oil industry of fuel-cell engines
entering the market. A new source of power for vehicles would
cut into the market for oil, affecting the demand and prices,
even though it is not competing in the same industry.
- Supply power
deals with the power of those that supply inputs needed the goods
and services in an industry. A supplier is powerful if they are
very large relative to the firms in the industry, if there are
few alternatives, or it is difficult/expensive to switch to another
supplier. It is more attractive to be in an industry where there
is low supplier power, as this will provide you more flexibility
and lower costs.
- Consumer/buyer
power is strong if there are only a few buyers for a product,
or if they are very large. This applies more to industries that
sell to other businesses, not individual consumers. It is generally
better to be in an industry with low buyer power.
-
Rivalry in
an industry is a measure of how intense the competition is within
it. It is related to how concentrated an industry is; if a few
large companies control most of the market, then it is highly
concentrated. If there are many companies with a small percentage
of the market, then it is highly fragmented. If there are a lot
of companies with similar products, and the customer can easily
choose between them, then there would be intense rivalry in the
industry.
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