Porter’s Five Forces Model

The threat of new entrants. The addition of new competitors will inevitably break the market balance and trigger the competitive response of existing competitors, which will inevitably require the deployment of new resources for competition, thus reducing profits.

Threat of substitutes. The existence of substitutes for your products and services in the market means that the price of your products and services will be limited.

The bargaining power of the buyer. If buyers have bargaining power, they will certainly take advantage of it. This will reduce your profits and, as a result, impact profitability.

Bargaining power of suppliers. In contrast to buyers, suppliers will try to raise prices, which will also affect your profitability.

The competitiveness of existing competitors. Competition can lead to investments in marketing, research and development or price cuts, which can also reduce your profits.

The relationship between Porter’s five forces model and general strategies

The five forces in the industry general strategies

Cost leadership strategy product differentiation strategy concentration strategy

p>

Barriers to entry: The ability to bargain to prevent the entry of potential rivals. Cultivate customer loyalty to dampen the confidence of potential entrants. Establish core capabilities to prevent the entry of potential rivals through a centralized strategy.

Buyers’ bargaining power Having the ability to offer lower prices to large buyers. Because the range of choices is small, the negotiating power of large buyers is weakened. Without a range of choices, large buyers lose their negotiating power

The supplier’s bargaining power is better Suppress the bargaining power of large sellers and better pass on the supplier's price increase to customers. Low purchase volume means the supplier's bargaining power is high, but companies that focus on differentiation can better pass on the supplier's price increase. Pass on the threat of substitutes

The threat of substitutes can be defended by using low prices. Customers are accustomed to a unique product or service, thus reducing the threat of substitutes. Special products and core capabilities can prevent the threat of substitutes

Competition among rivals in the industry can lead to better price competition. Brand loyalty can make customers ignore your competitors. Competitors cannot meet the needs of concentrated and differentiated customers. Competitors

Enterprise Competition among people is the most important of the five forces. Only those strategies that are more advantageous than those of competitors are likely to be successful. To this end, the company must establish its own core competitive advantages in terms of market, price, quality, output, functions, services, R&D, etc.

The factors that affect competition among enterprises in the industry include: industry increase, fixed (storage) costs/cyclical overproduction of added value, product differences, trademark exclusiveness, switching costs, concentration and balance, information complexity, Competitor diversity, company risks, exit barriers, etc. New Entrants

Enterprises must remain vigilant against new market entrants. Their presence will cause the enterprise to respond accordingly, and this will inevitably require the company to invest corresponding resources.

Factors that affect the entry of potential new competitors include: economic scale, differences in specialty products, trademark proprietary rights, capital requirements, distribution channels, absolute cost advantages, government policies, and expected counterattacks from companies in the industry. Buyers

When users are concentrated, large-scale or purchase in large quantities, their bargaining power will become a major factor affecting the intensity of industry competition.

The factors that determine buyer power are: buyer concentration relative to enterprise concentration, number of buyers, buyer switching costs relative to enterprise switching costs, buyer information, backward integration capabilities, substitutes, overcoming Crisis capabilities, price/volume purchased, product differentiation, brand exclusivity, quality/performance impact, buyer profits, decision maker incentives. Substitute Products

In many industries, companies compete directly or indirectly with companies in other industries that produce substitute products.

The existence of substitutes sets an upper limit on the price of the product. When the product price exceeds this upper limit, users will switch to other substitute products.

The factors that determine the threat of substitution include: the relative price performance of substitutes, switching costs, and customers' tendency to use substitutes. Suppliers

The bargaining power of suppliers will affect the degree of competition in the industry, especially when the degree of monopoly of suppliers is relatively high, there are few substitutes for raw materials, or the conversion costs of switching to other raw materials are relatively high. in this way.

The factors that determine the power of suppliers include: differences in inputs, switching costs between suppliers and enterprises in the industry, the current status of inputs into substitutes, the degree of supplier concentration, and the importance of batch size to suppliers. Costs related to the total purchase volume of the industry, the impact of inputs on costs and features, the threat of forward integration versus backward integration of companies in the industry, etc.

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. The five forces are: the bargaining power of suppliers, the bargaining power of buyers, the ability of potential competitors to enter, the substitution ability of substitutes, and the current competitiveness of competitors in the industry. Different combinations of the five forces ultimately affect changes in industry profit potential.

1. Bargaining power of suppliers

Suppliers mainly affect the profitability and products of existing enterprises in the industry through their ability to increase input factor prices and reduce unit value quality. competitiveness. The strength of the supplier's power mainly depends on what input factors they provide to the buyer. When the value of the input factors provided by the supplier constitutes a relatively large example of the total cost of the buyer's product, it is very important to the production process of the buyer's product. Or when the quality of the buyer's product is seriously affected, the supplier's potential bargaining power against the buyer will be greatly enhanced. Generally speaking, a supplier group that meets the following conditions will have relatively strong bargaining power:

- The supplier industry is controlled by some companies that have a relatively solid market position and are not subject to fierce market competition. There are so many buyers of its products that every single buyer cannot become an important customer of the supplier.

- The products of each supplier company have certain characteristics, making it difficult for buyers to switch or the switching cost is too high, or it is difficult to find substitutes that can compete with the supplier company's products.

- Suppliers can easily implement forward integration or integration, but buyers have difficulty in backward integration or integration.

2. Buyers' bargaining power

Buyers mainly affect the profitability of existing enterprises in the industry through their ability to lower prices and demand higher product or service quality. Generally speaking, buyers who meet the following conditions may have strong bargaining power:

- The total number of buyers is small, and the purchase volume of each buyer is larger, accounting for a portion of the seller’s sales volume Very **example.

- The sell-side industry consists of a large number of relatively small businesses.

- What the buyer is buying is basically a standardized product, and it is completely economically feasible to buy products from multiple sellers at the same time.

- Buyers have the ability to achieve backward integration, while sellers cannot achieve forward integration.

3. Threat of new entrants

While new entrants bring new production capabilities and new resources to the industry, they will also hope to win a place in the market that has been divided up by existing enterprises, which may Competition with existing companies for raw materials and market share will eventually lead to a reduction in the profitability of existing companies in the industry, and in serious cases may even endanger the survival of these companies. The severity of the threat of competitive entry depends on two factors: the size of the barriers to entry into the new field and the expected response of existing firms to the entrant.

Barriers to entry mainly include economies of scale, product differentiation, capital requirements, conversion costs, sales channel development, government actions and policies (such as petrochemical enterprises under the national comprehensive, balanced and unified construction), and cost disadvantages that are not dominated by scale. Some of the obstacles are (such as trade secrets, production supply and marketing relationships, learning and experience curve effects, etc.), natural resources (such as the metallurgical industry's ownership of minerals), geographical environment (such as shipyards can only be built in coastal cities), etc. It is difficult to break through by copying or counterfeiting. The expected reaction of existing enterprises to entrants, mainly the possibility of retaliatory actions, depends on the financial situation of the relevant manufacturers, retaliation records, fixed asset scale, industry growth rate, etc. In short, the possibility of a new enterprise entering an industry depends on the entrant's subjective estimation of the relative size of the potential benefits that entry can bring, the costs required, and the risks to be borne.

4． Threat of substitutes

Two companies in different industries may compete with each other because the products they produce are substitutes for each other. This kind of competition originates from substitutes. Competition will affect the competitive strategies of existing companies in the industry in various forms. First, the increase in selling prices and profit potential of existing companies' products will be limited by the existence of substitutes that can be easily accepted by users; second, due to the intrusion of substitute producers, existing companies must improve product quality. , or reduce the selling price by reducing costs, or make its products unique, otherwise its sales and profit growth goals may be frustrated; third, the intensity of competition from substitute product producers is affected by the high or low switching costs of product buyers. Influence. In short, the lower the price of the substitute, the better the quality, and the lower the user switching cost, the stronger the competitive pressure it can generate; and the intensity of this competitive pressure from substitute producers can be measured by examining the sales growth of substitutes. rate, production capacity and profit expansion of substitute manufacturers.

5． Competition among existing competitors in the industry

The interests of enterprises in most industries are closely linked to each other. As part of the overall enterprise strategy, the competitive strategies of each enterprise have the goal of This enables one's own enterprises to gain an advantage over their competitors. Therefore, conflicts and confrontations will inevitably occur during implementation. These conflicts and confrontations constitute competition among existing enterprises. Competition among existing enterprises often manifests itself in price, advertising, product introduction, after-sales service, etc. The intensity of competition is related to many factors.

Generally speaking, the occurrence of the following situations will mean intensified competition among existing enterprises in the industry, which is: low barriers to entry in the industry, more evenly matched competitors, and a wide range of competitive participants; The market is maturing and product demand is growing slowly; competitors attempt to use price reduction and other means to promote sales; competitors provide almost identical products or services, and user switching costs are very low; if a strategic action is successful, its revenue is considerable; the external strength of the industry After a strong company takes over a weak company in the industry, it launches offensive actions. As a result, the newly taken over company becomes a major competitor in the market; the exit barriers are high, that is, it is more costly to withdraw from the competition than to continue to participate in the competition. Here, exit barriers are mainly affected by economic, strategic, emotional and sociopolitical considerations, including: specificity of assets, fixed costs of exit, strategic mutual restraint, emotional difficulty, government and society various restrictions, etc.

Every enterprise in the industry must deal with the threats posed by the above forces to a greater or lesser extent, and customers must face the actions of every competitor in the industry. Unless head-to-head competition is deemed necessary and beneficial, such as by claiming a large market share, customers can protect themselves by erecting barriers to entry, including differentiation and switching costs.

When a customer determines its strengths and weaknesses, the customer must position itself to take advantage of the situation rather than be harmed by anticipated changes in environmental factors, such as product life cycles, industry growth rates, etc., and then protect itself and be prepared, To respond effectively to the actions of other businesses.

Based on the above discussion of the five competitive forces, companies can isolate their operations from competitive forces as much as possible, strive to influence industry competition rules based on their own interests, and occupy favorable markets first. Position and then launch offensive competitive actions and other means to deal with these five competitive forces to enhance their market position and competitive strength.