The first two parts of the Five Forces Model that I'll address are the threats that stem from competition and the existence of substitutes.
1. The threat of new competition:
For most firms, beyond their mission statement, the point of their existence is to generate profit. Many entrepreneurs can also attest to the fact that once others discover that a particular business or industry is possible, others try to enter the industry and replicate what is being done. Once this happens, the size of the profit margin for each of the businesses within this industry will decline. As a business owner it is important to continuously observe the industry you're in and how much of an issue this could be for you. Are there things which could prevent other firms from entering your industry? Examples include,
-customer loyalty to existing brands
-barriers to entry such as patents (e.g. the pharmaceutical industry) or high entry costs (e.g. in the oil industry drilling machinery is very costly)
This refers to products which consumers may use to satisfy the same need, this is not the same thing as competition. For example, Pepsi and Coca-Cola are competing products. On the other hand orange juice, which customers may also use to quench their thirst is a substitute for both Coca-Cola and Pepsi. To assess the threat of substitutes to your product or service, it is important to ask,
-How likely are customers to use substitutes for your product or service? Is it costly for them to make the switch ( not just in terms of sacrificing money, but also other attributes such as quality)?
-How many substitutes are there?
-How different do consumers perceive your product to be from substitutes?
3. Competitive Strategy
Once you've established what makes your business distinct and reduces its vulnerability to substitutes and competition, it is important to recognize how long this distinction or competitive advantage can be sustained. How powerful is your competitive strategy?
Wondering how you can apply this to your business? Send us an email at firstname.lastname@example.org. and stay tuned for more on Porter's Five Forces.
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