As you all know that there is lots of competition in the market so, each and every business is busy in making new strategies to build their reputation in the market. Businesses whether established or new, have lots of questions regarding competition. Let’s unleash the answers of your questions here. I found a way that helps you in answering those questions and that is Porter’s Five Forces Model.
What are those five forces?
These are the five forces of the Porter’s model shown in the diagram. This model is helpful in identifying what level of competition is running in industries and business strategy development.
Understanding the Porter’s five forces model:
It is very crucial for making an effective strategic decision to understand these forces and also the overall structure of an industry. The five forces of Porter’s model are discussed below. Its gives you a better understanding about the industry competition and you will get the required answers of your questions also.
1) Competitive Rivalry
The name of the force gives you a hint that it is something about competition. It is the force used to examine the intensity of the competition in the marketplace in the current scenario. It concerned with the number of competitors exist is the marketplace. What each competitor could do? How capable the competitors are?
You can find rise in rivalry competition if the few businesses are selling the product or service equally, the industry is rising up and the consumers switch for those competitors who are selling products or service in less amount.
You can measure rivalry competition by a ratio known as Concentration Ratio. It is the percentage of the total output owned by the number of firms in the market or in an industry.
2) Bargaining Power of Suppliers
This force is helpful in identifying what bargaining power does suppliers have. How much power do suppliers have on raising its prices which lowers the business’s profit ratio? This force is also concerned with the number of suppliers available in the market. The less the suppliers, the more bargaining power they have.
3) Bargaining Power of Customers
What affects do consumers have on the pricing and quality of the business? It is obvious when consumers decides to buy products r services in small amount and the seller’s product is unique than his competitors then ultimately the bargaining power of the consumers is low. But they have more power when they are in small number and the seller is about to switch his business into another business.
4) Threat of new Entrants
This force is helpful in identifying that how far it’s easy for the competitors to start a business in a marketplace they have examined. This force refers to the barriers for the existing competitors that they would face due to the new competitors.
5) Threat of Substitution
How easily a consumer switches to the competitors products instead of a business product or service. A substitute product is that product which gives you the same benefits as the firm’s products. The threat of substitution is effects the industry’s profit ratio because consumers would like to consume substitutes instead of firm’s products.