Michel E Porter developed a framework known as the 'Five Forces Model'
to analyze the business environment. The model includes the followings:
(1)Threat of new entrants:
When a new company appears in the market, then a price war created with old
companies. To sustain in the competition, the newly appeared company have to
lessen its products price. But, when they lessen their product price, the cost
of capital become higher. For this reason, it become tough to sustain in the
business. Newly entered company faces many barrier when they enter into a
market. The barrier includes:
(a)Economies of scale: It is a concept that, more amount of
production will reduce the average cost per unit of a product. This strategy is
very difficult for the newly appeared company. So the economics of scale become
barriers to them.
(b)Product differentiation: For a new company, one of the most
challenging question is ‘why people will buy your product’ and ‘what is your
products specialty’. New entrants always have to keep that on mind as those
question creates barrier.
(c)Capital requirements: Existing companies have larger share in
the market. For this reason they can easily get loan from financial
institutions. But new entrants couldn't able to get loan from the financial
institutions easily.
(d)Cost advantages to the existing firm: Existing firms able to
purchase materials from their suppliers at a low price sometimes on credit. But
this type of cost advantage is difficult for the new companies to avail.
(e)Access to distribution channel: The existing firms only knows
the actual distribution channel for their finished goods. But a newly entered
company can't be able to know the actual distribution channel.
(f)Government policy: Various types of conflicts with the
government can be tackled by only the existing firms. It's not possible for the
new companies.
(2)Bargaining power of
suppliers: If a firm’s suppliers have bargaining power they will:
*Exercise that power *Sell their
products at a higher price *Squeeze industry profits
If the supplier forces up the price paid for inputs, profits will be
reduced. It follows that the more
powerful the customer (buyer), the lower the price that can be achieved
by buying from them. Suppliers find themselves in a powerful position when:
*There are only a few large suppliers
*The resource they supply is scarce The cost of switching to an
alternative supplier is high
*The product is easy to distinguish and loyal customers are reluctant
to switch
*The supplier can threaten to integrate vertically
*The customer is small and unimportant
*There are no or few substitute resources available
(3)Bargaining power of
customers: Powerful customers are able to exert pressure to drive down
prices, or increase the required quality for the same price, and therefore
reduce profits in an industry. Customers tend to enjoy strong bargaining power
when:
*There are only a few of them
*The customer purchases a significant proportion of output of an
industry
*They possess a credible backward integration threat – that is they
threaten to buy the producing firm or its rivals
*They can choose from a wide range of supply firms
*They find it easy and inexpensive to switch to alternative suppliers
(4)Degree of competitive
rivalry: Several factors determine the degree of competitive rivalry;
the main ones are:
Numbers of competitors in the
market- Where competitors are greater in size, an intense rivalry exist
among all the companies
Market size and growth prospects-The company which undergoes slow
growth rate faces extreme level of competition, ex- Insurance company. On the
other hand, high growth rated companies face low level of competition, ex-
Pharmaceutical
Product differentiation-
When products are same, then competition occurs based on price among
competitors , ex- Prothom alo and Kaler kontho
Level of fixed cost-Firms
that have high fixed costs must sell a higher volume of their product to reach
the break-even point than firms with low fixed costs. For this reasons it
creates rivalry.
(5)Threat of substitute
products: A substitute product can be regarded as something that meets
the same need Substitute products are produced in a different industry
–but crucially satisfy the same
customer need. If there are many credible substitutes to a
firm’s product, they will limit the price that can be charged and will reduce
industry profits. As an example, consider the many substitutes that consumers
now have to buying a newspaper for their news.
