7.7 - Competitive environment

• Porter's Five Forces Model


  Shows influences on an industry
• Porter's Five Forces model

  • Shows an industry being influenced by five competitive forces
  • Analyses the state of the market and helps managers of existing businesses to figure out the best strategy to gain a competitive advantage
  • Can show potential market entrants how profitable the market is likely to be and whether it is worth getting into and if it is, where best to position themselves
• Barriers to Entry


  How easy it is for new firms to enter the market
• New entrants to the market


  Will want to compete by selling similar products
• Existing firms in the market

  Have an interest in making it hard for new firms to get in
• High start-up costs


  • Might deter new firms from entering the market
• Strategies to raise barriers to entry

  1. Use patents or trademarks to make it harder for new entrants to sell similar products

  2. Established businesses may take control of distribution channels (forward vertical integration)

  3. Threaten new entrants with a price war
• Buyer Power


  Buyers want products at as low a price as possible
• Buyers have more power


  • When there are few buyers and many sellers
  • When products are standardised
• A supplier's main customer

  Can negotiate special deals and lower prices
• Strategies to influence buyer power

  1. A company might buy the supplier out (backwards vertical integration)

  2. Similar businesses could come together to form a buying group
• Supplier Power


  Suppliers want to get as high a price as possible
• Suppliers have more power


  • When there are few suppliers and lots of firms buying from them
  • If it costs customers to switch suppliers
• Strategies to influence supplier power

  1. Businesses can try to tie buyers into long-term contracts

  2. Suppliers can use forward integration to gain power

  3. Businesses could develop new products and protect them with patents
• Porter's Five Forces are: Bargaining Power of Buyers, Bargaining Power of Suppliers, Threat of Substitutes, Threat of New Entrants, Competitive Rivalry
• Threat of Substitutes


  How likely consumers are to Buy an Alternative
• Threat of substitutes


  • Willingness of customers to substitute is a factor affecting competitiveness
  • Relative price and quality are important-buyers are unlikely to change to a poor value product
  • For undifferentiated products, e.g. washing powder, the threat is higher than for unique products
• Strategies to reduce the threat of substitutes

  1. Businesses can make it expensive or difficult for customers to switch to a substitute (although they have to be careful not to annoy them)

  2. Customers are often loyal to a brand that they perceive as better. If companies can differentiate their product and create brand loyalty, they'll reduce the threat of substitutes

  3. Businesses can identify a group of customers whose needs aren't quite being met and market a product designed to meet their needs exactly, eg, environmentally-conscious disposable nappy users. There won't be any substitutes for them to buy (until other businesses notice anyway)
• Rivalry within the industry


  How much Competition there is
• Rivalry


  • Rivalry is intense in a market with lots of equally-sized competitors
  • Industries with high fixed costs are very competitive, e.g. parcel delivery companies which have invested in vehicles. Firms have to sell a lot to even cover their fixed costs. So in competitive environments, they cut prices to raise demand. Even if they're not making a profit, it's often hard for them to get out of the market as their expensive equipment is hard to sell on this increases rivalry even more
  • Industries producing standardised goods (e.g. steel, milk, flour) have intense rivalry
  • Rivalry is also intense in young industries where competitors are following growth strategies
• Strategies to reduce the effects of rivalry

  1. Some businesses try to make it easy for customers to switch between standardised goods. E.g. it's a hassle to switch bank accounts no matter what incentives are offered so your new bank often handles the process of switching direct debits for you

  2. Businesses with a bigger promotional budget might do better in markets with intense rivalry