Week 4: Clear- Five Competitive Forces

Michael Porter's five competitive forces that shape strategy was a very clear concept to me this week. Similar to what I learned in economic, the five competitive forces include: rival competitors, customers, suppliers, potential entrants and substitute products. It is hard to imagine that there are different types of competitors that can shape the industry of your business. Businesses tend to create their strategy around their rivalry companies only. Many of them do not analyze the other types of competitors in their industries and underestimate the danger of doing so.To fully understand the profitability of the industry your business is in, one must consider all of the five competitor forces.

To come up with a good strategy for your company, one must determine the forces that affect the structure of the industry the most. One industry can have strong potential entrants and substitute products; meanwhile, other industries may not. Having all five of competitive forces working together can potentially destroy the profitability of an industry, for example the airline industry. I will now explain the effect of each five competitive forces. When a market is profitable, it will attracts new competitors. With more new entrants to the market, it will decrease the profit for each firm. Substitute of products and services can affect an industry because the industry can lose profit when buyers decide to choose alternative products and services. Consumers/buyers have bargain power over many types of industries. In these type of industries, price change is very sensitive to buyers. Price war is also a constant battle between rival companies. Suppliers who provide raw materials, labor, services and etc, also have bargain power over industries they are in. When there are few substitute, suppliers can ask for high pay for their resources. Last and not least, the existing competitors is one of the most important competitive force that can affect the company's profit. Company can counteraction towards the effects of many existing competitors by practicing operation effectiveness.

In my opinion, many businesses enter the industry blindly without looking into the five competitive forces in it. It is very important for business major to learn how these five forces can shape the industries we are try to enter.We have to create our plan and strategy with the knowledge of how our industries are structured.

Here is a very creative YouTube video to explain the five competitive forces.

References
¹ Porter, M. E. (2008). THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY. Harvard Business Review, 86(1), 78-93. Retrieved from EBSCOhost