Michael Porter’s Competitive analysis
No prospective entrepreneur can afford to ignore competitive factors. Study of competitive factors covers members of competing firms, their scale of operation, product range and features, prices channels of distribution, terms & conditions of sale etc. Michael E. Porter states the following four factors for the analysis of industry and competitors.
1. Existing and Potential Extrants- Various aspects studied are capital requirement, scale of operation,product differentiation, channels of distribution etc.
2.Bargaining Power of Buyers- Keeping inmind demand and supply position, bargaining power of buyers is studied.
3.Bargaining Power of Suppliers-Bargaining power of suppliers of raw materials and other factors can be assessed keeping in mind the demand and supply position.
4.Availability of Substitutes-Demand for a particular product will depend upon the availability and prices of substitutes.
Competitive or Industrial Environment
An industry comprises of group of enterprises offering similar products or services. Industry includes close substitute products or services that satisfy same consumer needs. No prospective entrepreneur can afford to ignore competitive factors. Study of competitive factors covers members of the competing firms, their scale of operation,product range and features, prices, channels of distribution,
terms and conditions of sale etc. An entrepreneur as a strategic manager has to analyse competitive forces in industrial opportunities and threats that a company will meet.Michael E. Porter has suggested a five forces model that help the strategic manager to focus his attention on following five forces that determine the competition within an industry
1.Risk of entry of potential competitors.
2.Degree of rivalry among established firms
3.Bargaining power of buyers,
4.Bargaining power of suppliers.
5.Threat of dose substitute products.
In case above forces are strong, there is danger to the enterprise as it cannot earn more profits by increasing prices. On the other hand in case these forces are weak, they Provide opportunities for the enterprise to earn more profits
The Five Forces Model of Competition
1. Risk of Entry of Potential Competitors
Potential firms are presently not posing threat but can certainly do so if they decide to take the plunge. Existing firms try to discourage potential entrants as their entry can adversely affect the market share of existing firms and can force them to resort to price cutting or offering additional services to consumers at the same price. Greater risk of entry by potential competitors poses a threat and lower risk of new entry presents enhanced opportunities for the existing firms. However there are various barriers restricting entry of new competitors and these are:
(i) Cost Advantage- An established enterprise can enjoy absolute cost advantages due to economics of scale,superior and tested production techniques, efficient & mature managerial skills and knowledge about cheap sources of raw materials. These advantages provide opportunities to the existing firms to earn profit and restrict entry of potential entrants.
(ii) Brand Image- An entrepreneur can build brand image or loyalty through innovations, product differentiations aggressive advertising, providing better quality products and efficient after sale service. Brand loyality proves to be an asset for existing firms and deterrent for potential competitors.
(iii) Government Policies – Entry of foreign companies is restricted due to preferential and protective policies of the government Licensing system practised in India before liberalisation served more the interests of existing units and prevented entry of new entrants.
(iv) Rapports with the Channels of Distribution-Established firms normally have efficient distribution channels where as new firms have to spend more time, effort and money for developing rapport with channel members. It provides opportunity for the existing firms and challenge for the new firms.
2. Rivalry Amongst Existing Companies
Competitive force refers to the extent of rivalry amongst existing firms within an industry. Intense rivalry benefits consumers as they are able to get same goods at lower prices and channel of distribution too provide ecopetitive force is weak, it generates opportunity for the exist nomical and efficient services, On the other hand if the coming firms to raise prices and earn more profits. Extent of rivalry amongst established firms depends upon.
(1) Demand Conditions Growing demand williessen rivalry as companies can increase their sales without grab tunities for companies to expand. Competition becomes all bing market share of rivals.the more fierce in the event of fall in demand.
(ii) Competitive Structure within Industry-Competitive structure represents the number of competing firms and their relative market share. Consolidated industry structure enables firms to charge more price. In order to maintain their position the firm will have to innovate and differentiate. Infragmented structure the firms will be required to cut cost because of higher rivalry and price war.
(iii) Exit barriers- These represent economic com-pulsions and emotional factors that keep companies competing in the industry despite low returns. These exist barriers are threats to industry when demand is going down. If exit barriers are high companies resort to excess production and price war in order to sell more. If exit barriers are high and demand is growing companies have opportunities to raise price. If exit barriers are low and demand is declining there are moderate threats of excess capacity and price war. On the other hand if exit barriers are law and demand is
going up the firms will have opportunities to increase prices and expand operations. These exit barriers represent fixed cost, retrenchment compensation and emotional attachment
3. Bargaining Strength of Buyers
Buyers can be competitive threat when they demand better quality and additional services or when they force down prices. Whereas weak buyers provide opportunity to the firm to increase prices and earn better returns. According to Porter buyers are most powerful in the following circumstances.
(i)When the suppliers are composed of small companies and their number is very high and the buyers are few in number and are large in size.
(ii)When the buyers purchase the goods in bulk quantities.
(iii)When the suppliers are dependent upon buyer for alarge percentage of total orders.
(iv)When the buyer can switch order between supply companies at a low cost and encourage competition amongst each other to force down prices,
(v)When it is economically feasible for the buyers to purchase the raw material from several companies at the same time.When the buyer can supply its own needs through.
(vi) vertical integration
4. Bargaining Power of Suppliers
It proves to be a threat when suppliers are able to inferior quality. Weak suppliers on the other hand provide force up the prices and the company has to pay or settle for the company an opportunity to force down price or demand higher quality resulting in the profitability of the company going up. According to Porter suppliers are most powerful in the following situations.
(i) When the suppliers products have few substitutes and the company is dependent on the supplier for the product.
(iii)When the company’s industry is not as substantial and significant customer to the suppliers and consequently the suppliers have little incentive to reduce
price or improve quality.
(iii) When the suppliers’ products are differentiated widely and the company is dependent upon its suppliers. In such a situation, it is costlier for a company
to switch from one supplier to another.
5.Threats of Close Substitute Products
Products serving similar consumer needs or purposes are called substitute products e.g. coffee and tea. The presence of close substitutes pose a strong competitive threat that limits the prices a company can charge and affects the profitability of the company. On the other hand if a firm’s products have few close substitutes, it will enjoy more liberty to rise prices and ear more profits,