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MindMap Gallery five forces of competition

five forces of competition

The five forces analysis model was proposed by Michael Porter in the early 1980s and has had a profound global impact on corporate strategy formulation. Used for competitive strategy analysis, it can effectively analyze the customer's competitive environment.

Edited at 2022-09-13 15:03:22

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Outline

five forces of competition

Threats from new entrants

The threat comes from the cash flow and capabilities of new companies, such as Microsoft's browser and Apple's music

If existing companies in low-barrier industries want to maintain their position, they must increase investment, such as Starbucks

Incumbent companies create barriers (advantages)

Economies of scale on the supply side

The express delivery industry has the advantage of building a nationwide logistics system, so new companies require more time and investment.

Scale advantages on the demand side

Existing large companies have a large customer base and high levels of trust. If new companies find it difficult to sell, they may need to lower their prices, resulting in relatively low profits. For example, the IBM ThinkPad computer back then had a low price/performance ratio but had a good reputation and sold better. The price would be lower until the demand for domestically produced computers took advantage of the scale.

customer switching cost

It mainly refers to the cost for customers to replace products. For example, Xinchuang work requires not only the replacement of the original system, but also the interfaces of related peripheral systems need to be adjusted.

Funding needs

It mainly means that a large amount of capital investment is required in the early stage, which will discourage many companies. But it is also related to the expected rate of return. Industries with high returns still attract capital.

Established company advantages independent of size

It has nothing to do with the size of the company, such as product quality, technology, popularity, etc.

Unequal access to distribution channels

For example, if you make similar products of a certain brand in a supermarket, and if you want the supermarket to sell your products, you need to offer more discounts.

government policy restrictions

Certain industries have government restrictions, such as domestic tobacco, and only the state can do this. Or taxis, which also have license plates. There are also some such as financial photography and so on.

New entrants assess existing firms’ ability to fight back

Established companies have vigorously fought back against new entrants

Existing companies have ample counterattack resources, such as cash flow, loan lines, influence on customers, etc.

In order to fight back, existing companies increase their discounts

The growth of the industry is very slow, and new companies can only steal the market from existing companies.

Supplier’s Negotiating Power

It mainly means that suppliers can increase prices, limit the quality of goods and services provided, or pass costs to other participants in the industry.

The concentration of suppliers > the concentration of buying a house. For example, Microsoft's operating system basically has a monopoly in the field of personal computers, but there are many computer manufacturers, so Microsoft is very strong.

The supplier supplies many industries. If this industry is not its main source of income, the supplier is very strong.

The switching costs of changing suppliers are high, for example if a company has located its production lines near the supplier's factory.

Suppliers provide differentiated services, such as more advanced technology. For example, pharmaceutical companies with some patented drugs will be more powerful in facing hospitals than companies with "generic drugs" (drugs that have passed the patent period).

There are no substitutes for the products of suppliers such as pilots from pilot unions.

But what is the difference from monopoly of 1?

Because the profits of the downstream industry are high, suppliers may threaten to integrate forward and enter the downstream industry.

Buyer’s Negotiating Power

It is the opposite of a strong supplier, which can lower purchase prices, etc.

The buyer is stronger in the following situations:

The number of houses bought is not large, while the latter purchases large quantities, such as communication equipment and bulk chemicals. I think to myself, for example, if the buyer is an industry leader, it should also have advantages and can help the supplier increase sales.

Suppliers provide standardized products that are highly substitutable. Like ordinary screws?

It is not expensive for the buyer to switch suppliers

If supplier profits are too high, buyers may threaten backward integration, such as beer manufacturers producing their own packaging materials.

In this case, the buyer will be very concerned about the price

The buyer purchases a product that accounts for a large proportion of the purchase budget or cost, such as buying a house

The buyer has low profits or insufficient cash flow

The quality of the buyer's products is less affected by the products or services provided by the supplier

The supplier's products have less impact on the buyer's other costs

There is also a category of middlemen who should also be paid attention to, similar to the buyers. For example, if the middleman joins the upstream and the customer, and the customer recognizes the middleman, then the middleman is very important.

Threat of substitute products or services

It means that the functions of the products are the same or similar, but they are achieved using different functions. For example, video conferencing replaces business trips, and email replaces traditional mail. At the same time, substitute products may also affect downstream industries. For example, if intensive residences replace villas, the lawn repair industry will be affected. Another example is that when cars replaced bicycles, people who repaired bicycles became unemployed.

Alternatives have advantages in price and functionality, such as WeChat, which replaced SMS.

The cost for the buyer to switch products is very low, such as drinking Coca-Cola or drinking Pepsi-Cola.

Rivalry between established companies

Mainly refers to price discounts, new product launches, advertising activities Activities, service improvements, etc.

Competition is fierce in the following situations

There are many competing companies or the companies are about the same size and strength.

Industry growth is slow and companies must compete vigorously for market share

High exit barriers, such as highly specialized fixed assets, government restrictions, etc.

Competitors are deeply invested and eager to achieve leadership positions, such as job creation and reputation of state-owned enterprises.

Companies do not understand each other, and their competition methods and goals are inconsistent, so it is difficult to formulate strategies.

Price competition will occur under the following circumstances

Competitors have similar products and services and have low buyer switching costs, such as airline tickets.

Fixed costs are high and marginal costs are low. For example, in the express delivery industry, no matter how many express deliveries are made, the entire logistics network needs to be maintained.

Production capacity must be significantly expanded to maintain high efficiency. For example, the polyvinyl chloride industry

The product cannot be stored for long periods of time. Such as vegetables and consultation information (which will become less valuable over time)

Competing on the same product quality and features can easily lead to zero-sum competition, so try to provide differentiated services, products, etc.

Standard Practice for Industry Analysis

Define relevant industries

What products are there in the industry? Which products belong to other industries

What is the geographical scope of competition?

After finding relevant industries, classify them and analyze their strengths and weaknesses.

buyer, seller

supplier

competitors

alternative products

Potential new companies

Determine the overall industry structure and test the consistency of this analysis

Why is the current profitability

What forces control profitability

Are industry analysis results consistent with actual long-term profitability?

Do companies with higher profitability have advantages in the five competitive forces?

Impact of changes in industrial structure

The previous discussions were all about a certain point in time (the industrial structure remains unchanged). Although the industrial structure is stable, it may also change.

Change threats to new entrants

After the drug patent period expires, new companies will enter the market, increasing the threat of new companies.

Large retail giants, such as Wal-Mart, began to adopt new purchasing, logistics, and inventory technologies in the 1970s, which improved economies of scale in the retail industry.

Change the negotiating power of buyers and sellers

The airline is a supplier to the travel agency, and as the airline's tickets are sold directly through the website itself, it reduces the negotiating power of the travel agency (buyer) and therefore reduces the sales commission of the travel agency

Threat of changing substitute products

Common reasons are technological upgrades, such as digital cameras replacing film cameras, and the development of mobile phone cameras gradually replacing ordinary cameras. (Of course it cannot replace a professional SLR)

Confrontation and competition establish a new basis

misunderstood factors

Factors often considered to be competitive forces

Regarding the industrial growth rate, it is believed that companies with fast growth will have more opportunities, but fast growth may attract more new companies or substitute products. Such as personal computers, mobile phones

Technology and innovation, because some low-tech industries are highly profitable, causing many competitors to join

Government intervention has two sides. The five forces of competition are needed to analyze the consequences of government intervention. For example

Complementary products also have two sides and need to be analyzed through the five competitive forces.

Barriers to entry. For example, Microsoft's operating system provides more tools for writing software, which will lower barriers to entry.

The threat of substitute products. For example, the popularity of gas stations has increased the entry barriers for electric vehicles, but online music such as ITUNES has accelerated the replacement of CDs or records by electronic music.