Competitive forces


Five forces that determine the intrinsic long-run attractiveness of a market or market segment have been identified by Market Research experts. They are:

· Industry competitors
· Potential entrants
· Substitutes
· Buyers and
· Suppliers.

1. Threat of intense segment rivalry—A segment is unattractive if it already contains numerous, strong, or aggressive competitors. It is even more unattractive if it is stable or declining , if plant capacity additions are done in large increments, if fixed costs are high, if exit barriers are high, or if competitors have high stakes in staying in the segment. These conditions will lead to frequent price wars, advertising battles, and new-product introduction, and will make it expensive to compete. The cellular phone market has seen fierce competition due to segment rivalry.

2. Threat of new entrants—A Segment’s attractiveness varies with the height of its entry and exit barriers. The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter the industry, and poor-performing firms can easily exit. When both entry and exit barriers are high, profit potential is high, but firms face more risk because poorer performing firms stay in and fight it out. When both entry and exit barriers are low, firms easily enter and leave the industry and the returns are stable and low. The worst case is when entry barriers are low and exit barriers are high: Here firms enter during good times but times but find it hard to leave during bad times. The result is chronic overcapacity and depressed earnings for all. The airline industry has low entry barriers but high exit barriers, leaving all the companies struggling during economic downturns.

3. Threat of substitute products—A Segment is unattractive when there are actual or potential substitutes for the product. Substitutes place a limit on prices and on profits. The company has to monitor price trends closely. If technology advances or competition increases in these substitute industries, prices and profits in the segment are likely to fall, Greyhound buses and Amtrak trains have been profitability threatened by the rise of air travel.

4. Threat of buyers’ growing bargaining power—A Segment is unattractive if buyers possess strong or growing bargaining power. The rise of retail giants such as Wal-Mart has led some analysts to conclude that the potential profitability of packaged-goods companies will become curtailed. Buyers’ bargaining power grows when they become more concentrated or organized, when the product represents a significant fraction of the buyers’ costs, when the product is undifferentiated, when the buyers’ switching costs are low, when buyers are price sensitive because of low profits, or when buyers can integrate upstream. To protect themselves, sellers might select buyers who have the least power to negotiate or switch suppliers. A better defense consists of developing superior offers that strong buyers cannot refuse.

5. Threat of suppliers’ growing bargaining power—A Segment is unattractive if the company’s suppliers are able to raise prices or reduce quantity supplied. Oil companies such as Exxon Mobil, Shell, BP, and Chevron-Texacon are at the mercy of the amount of oil reserves and the actions of oil supplying cartels like OPEC. Suppliers tend to be powerful when they are concentrated or organized, when there are few substitutes, when the supplied product is an important input, when the costs of switching suppliers are high, and when the suppliers can integrate downstream. The best defenses are to build win-win relations with suppliers or use multiple supply sources.

The above competitive forces are identified as 5 forces after extensive research over a period of time and identifying practical aspects of some big companies as case studies. The solutions for these forces are briefed above but individual segment force may have to be dealt based on the exact problem encountered.

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