It is depends on the existing firms and the “height” of barriers to entry that attributes of an industry’s structure. The threat of new entrants will affect by: Firstly, the economics of scale as “high” barriers to entry into the industry that can make the industry more attractive because of the existing firms can earn expect above normal profits. Secondly, the product differentiations that the existing firms have their own brand identification and customer loyalty that will lead to new entrants use more costs to start other industry and then reduce their potential return. Thirdly, cost advantages independent of scale mean that the existing firms have a whole range of cost advantages. There are proprietary technology, managerial know-how, favorable access to raw materials, and learning-curve cost advantages.
Firms have different value chain and this is how they compete against each other. The one with the most effective value chain gains in competitive advantage. Value as mentioned above is the price that buyers are willing to pay for a product or service. The firm would be profitable if the price paid to create value exceeds the cost. The value chain displays the activities performed by the firm, which could be divided between primary and supporting
Porter’s contribution in strategic management field is very important. Porter’s five-forces model is used to determine the development of the business strategy and the extent of the competition among industries.
The five basic forces are: (1) Bargaining Power of Customers. This affects the profitability of a given industry. The various factors like the ease with which customers can switch to the competitor’s products, the price sensitivity of the customers, the volume which buyers command are deciding the bargaining power of customers. (2) Bargaining Power of Suppliers : This includes the concentration of suppliers to an industry compared to the concentration of firms in that industry, the ease of switching away from the industry, the availability of substitute products, the price sensitivity of firms in the industry to input prices, and the ability of suppliers to integrate downwards. (3) Threat of New Entrants : The factors required to face such threat includes high capital investment, a steep long learning curve, high brand equity for existing players, tight government regulation, high switching costs, and constraints in access to resources.
The tool assists in identifying the profitability potential of new or current products in specific situations. The first force is supplier bargaining power. The company assesses how suppliers can increase or decrease the company’s product prices. The increase or decrease is dependent on the uniqueness of a product, the suppliers available, suppliers’ control, and strength over a company, and the cost of changing from one supplier to another. A company with few suppliers will need more assistance from the suppliers, which gives the supplies more power and control.
The influence of rivalry is high if competitors are equal in size and power, barriers to exit are far above the ground, and growth of the industry is near to the ground. The price competition transfer profits from industry to customers that is why rivalry is destructive to profitability. Price competition occurs when the switching cost for buyer is low and product or service are almost same, marginal cost is low and fixed cost is high, capacity must be efficient, and product is perishable. Profitability can be less affected by the brand image or timely delivery as compare to price competition. Zero-sum competition is when all the competitors are focusing on same attributes or needs.
If customers can get substitute products or services easily then the competition will increase, therefore causing the profits to decrease (Williams and Mc Williams, 2010). According to Ucmak and Arslan (2012), substitute products and services can affect the attractiveness and the profitability of the industry because price level is limited (Ucmak and Arslan, 2012, p. 1038). Moreover, bargaining power of suppliers is determining on how much control suppliers have in setting the price for the parts or materials that supply as an input to firms in an industry. If a company only relies on a specific supplier, then the supplier will have the bargaining power to set the price of the parts or materials (Williams and Mc Williams, 2010). However, if a company can purchase the same material from many different suppliers, then the company will have the opportunity to bargain with the supplier in order to keep the price low (Williams and Mc Williams,
Awareness of the five forces can guide a firm perceive the overall structure of its market and create a proper position profitable and less attack risky place. Five forces Model define the main drivers of competition in the market.Managers equipped with the five forces can understand competitive threats and find out opportunities.Deep analysis and findings on rivals,potential entrants,suppliers, customers and substitues can be crucial for developing strategy and ensuring high company performance. In terms of rivalry, The level of competitiveness depends on market growth, diversification of products or exit barriers.If rivalry is high It means profitibality of the firm will be low. In the existing industry/sector, the other factors are bargaining power of suppliers and buyers.For example, Low Switching cost means that bargaining power of buyers will be high and It leads to low profitibality and It creates risky situation in the industry.Two forces remaining to complete the five forces model are Substitute Products and threat of potential entrants. For example, economies of scale, switching cost and accessibility to distribution channels are important items to to take into consideration to analyze threat level
In particular, the effects of decreasing marginal utility and consumer heterogeneity across market segments is shown to affect the sustainability of competitive advantage through shifts in consumer willingness to pay. Competitive advantage definition :The authors define competitive advantage as superior value creation -- with the firm's ability to sustain competitive advantage equivalent to its ability to sustain added value. 2.Reference collected from Adner and Zemsky (2007). The demand-side drivers are 1) marginal utility from performance improvements, 2) consumer taste for quality, and 3) the extent of consumer heterogeneity. At the level of firm resources, competitive advantage erodes not only because imitation undermines the uniqueness of resources, but also because consumer valuation of firm differences declines due to effects of decreasing marginal utility.
Porter’s Five Forces assist the strategist to understand the strength of current competitive position and deal with the competition. Porter’s five forces model identified five competitive forces that able to drive competitive and distinguish the strength of an industry. These forces comprise of rivalry among competing firms, potential entry of new competitors, potential development of substitute products, bargaining power of suppliers, and bargaining power of