The Five Competitive Forces That Shape Strategy
The five competitive forces that shape strategy
Answer to question 1
The primary purpose of the five forces model is to understand the underlying structural drivers of competition of profit among different industries. Profitability creates an economic value that is apportioned differently to the sectors in the market. The five forces help to govern the structure of profitability and determine the allocation of the economic value created by the profit structure of an industry. The model unveils underlying drivers of profitability, which a company can apply. In an economy, all the sectors are different, and the five forces show that competition is not about how big an industry is. Still, it is on the profitability of an enterprise. The five forces help define the structure and future of every industry. Economic fundamentals are different in all sectors, and the five forces identify the underlying causes of profitability for each business.
Answer to question 2
The applications of the five forces are different for each industry. The forces of the power of buyers and rivalry among existing companies are essential in achieving a competitive advantage in the footwear industry.
The Power of Buyers
Standardization of a company’s products can make the buyers switch from one company to another. If a customer believes that they can always access a similar product from another supplier or company, they will change from that particular company. For a footwear company, this is an opportunity to achieve a competitive advantage. In many footwear companies, the products are undifferentiated and standardized. To obtain a competitive advantage, the company should produce products that are different from the other products in the market and those that are not standardized. Providing unique products will attract buyers as they will always go for the unique and different products in the market. The company will have a competitive advantage in the power of the buyers.
A footwear company can also achieve a competitive advantage by improving the quality of its products. For a well-known industry in the market, buyers and customers of footwear products pay less attention to the price of the products as their focus is on the quality of the footwear. The company can take this as a competitive opportunity and improve the quality of its product, thus attracting more customers and therefore remain competitive over the other companies.
Rivalry among existing competitors
Rivalry among existing competitors in the footwear industry is a strong force that may help chive competitive advantage. One of the significant impacts of competition is the introduction of new products. Footwear rival companies will always try to introduce new and different kinds of footwear to attract consumers’ attention. A company can use this to achieve a competitive advantage by adding unique and quality footwear products. The fixed cost is high, and the marginal cost is low for the footwear industry, thus regulating the market prices to a considerable low level that cannot meet the cost of production. Since all the companies in the footwear industry are trying to achieve the same consumer needs, it results in zero-sum competition. In a zero-sum competition, if one company gains, the other company loses. Zero-sum competition reduces the profitability of a company.
Answer to question 3
New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete (Porter, 2008). New entrants can leverage the existing financial capabilities and cash flows to alter competition. When new footwear companies enter the market, they will limit the profitability potential of the current footwear company. When a new company comes into the market, it will produce its product at a relatively lower price than the incumbents’ company, as they try to create their brand name and acquire a market share. Lowering the prices of the products will pose a threat to the incumbent company as they are forced to hold down the prices. The incumbent footwear company will also be forced to boost its investment to prevent new competitors.
Answer to question 4
Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants (Porter, 2008). Any industry depends on different kinds of suppliers. The first kind is labor suppliers. In a footwear company, if the suppliers of labor choose to exits, the exit can have a positive a negative impact on the company. If the company had many labor suppliers and were unable to pass their cost of labor to their prices, exist of suppliers of labor is beneficial since the company will now incur less labor cost. The company can be affected by the exit of labor suppliers negatively, in that they will not be able to meet their production level and thus decrease in their profit margins.
Suppliers play a critical role in the success or failure of a company. They supply the raw materials needed to produce the company’s end product. A footwear company depends on different suppliers to manufacture their products. When many suppliers decide to go out of business, they will alter the production process. Required raw materials are essential for production. This will decrease the level of production and thus cause losses. Since the company is at an obligation to meet the demands of the consumer, low levels of production will not meet the consumer’s demand. Lacking to meet the needs of the consumer might make the company to lose some of its trusted consumers since they may no longer rust them.
The exit of many suppliers forms the company will also affect the profit margins of the company. There will be a decrease in the profit margins since the production level has even gone down. The company may also face fierce competition from its rivals. Existing rival competitive companies might choose to take advantage o the situation and increase the production of their products to meet the demands of the consumers. They will try to fill the existing market gap.
Answer to question 5
Rivalry among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and severe improvements (Porter, 2008). Competition among existing rivals can be high or low, and in all the levels, it affects the business operations. High competition reduces the amount of profit that the industry gets. If many companies are competing in the market, it means that the prices of the products or the services offered will be lower. High competition leverages market prices. If a company is not able to sell its products at a favorable price that will meet the cost of production and labor, then their profit margin will decrease considerably.
An economy with high competitive firms poses as a perfect or pure competition market. In pure competition, the prices are regulated, and it easy for new entrants to get into the market. High competition may also alter the quality of the products produced or the services offered. When an economy has many competitive companies, the quality of goods and services provided may be lower or standardized. Standardization of products and services happens when competitive companies lower the prices, and in return, reduce the cost of production by using poor or low-quality raw materials.
Low competition in the market is also a threat to businesses and competitors. When an economy does not have many competitive incumbent companies, it means that there are few of them which may try to act as monopolies. When a company is not facings any competition in the market, it will produce and sell its goods at service at its market price. For a monopolistic market, it creates a barrier for entry of new companies. The new entrants cannot meet the high cost of production, thus, the barrier for entry into the market. The consumers get affected when there is low competition in the market. Monopolistic firms set the market prices, which may not be favorable to the consumers. In a highly competitive market, consumers may enjoy favorable prices since there are many firms in the market, and the prices are regulated.
Having the right level of competition in the market will prevent the incumbent competitive forms from becoming monopolies. A proper level of competition will allow regulation of prices, reduces the barrier of entry into the market, and reduces the chances of monopoly and monopolistic firms.
Answer to question 6
- I believe in a footwear company, the threat of new entrants is a weak force. The height or level of entry barriers present determines the risk of new entry. If entry barriers are low, and new entrants expect little retaliation from the entrenched competitors, the threat of entry is high, and industry profitability is moderated (Porter, 2008). In the footwear industry, new entrants are not likely to face great retaliation upon entry into the market. When the new entrants face little to no retaliation, it does not affect the profit margins of the incumbent companies. Therefore the profitability of the existing footwear companies will not be affected, and thus the threat of entry is a weak force.
- Companies depend on a wide range of different suppliers groups for inputs, and a supplier group is powerful if industries participants face switching costs in changing suppliers (Porter, 2008). Footwear companies invest in different suppliers, such as machinery and equipment suppliers. It might be challenging to shift suppliers if the company had invested heavily in the equipment and machines of the supplier or in learning how the pieces of equipment operate. Therefore the bargaining power of suppliers is a strong force, and it affects the operations, structure, and profitability of the company.
- Influential customers can capture more value by forcing down prices, demanding better quality or more services, and generally playing industry participants against one another, all at the expense of industry profitability (Porter, 2008). I believe that the bargaining power of buyers or customers is a moderate force in a footwear company. For a footwear company, the key participants in the industry are the consumers. If influential consumers choose to demand quality products and play the industries against one another, they will affect the profit margins of the company in significant amounts.
- A substitute performs a similar function as an industry product by a different means (Porter, 2008). For a footwear company, the threat of substitutes is a weak force since for footwear products; there is little not to substitute that can replace the products.
- Rivalry among existing competitors in the footwear industry is a strong force. In a footwear industry, there are many competitive companies, and thus, the intensity of competition is higher. Large competitive footwear companies may engage in activities of business poaching, and lack of enforcement of business practices, desirable for the footwear industry. In a footwear industry, the products produced are almost similar, and due to a large number of companies in the industry, a company may be forced to lower their prices. The profits might not meet the cost of labor and production.
Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.