The threat of substitute products and service.
Products that the customer views as alternatives are known as substitute products, i.e. those that give the customer very similar or even the same benefits. The examples of substitute products can be:
– Sugar vs. Artificial sweeteners.
– Eyeglasses vs. Contact lens
– Aspirin vs. Ibuprofen vs. Paracetamol
Porter indicated in five forces model that substitute product will cause an indirect threat to existing firms. It does not mean that this threat will be crucial from direct competitors, but it can still be considerable.
In the area that ‘Next’ business operates, products facing a strong threat of substitution, however, there are potential ways to protect the business from the threat of substitute products. The company may protect itself against substitution with exclusive distribution agreements. Another way is to protect its product to build strong branding and trade marks.
The example of product facing weak threat of substitution is oil. Despite that alternative forms of energy exists, most engines run a petrol. Unfortunately petrol cannot be replaced that quickly on a large scale.
The threat of the entry of new competitors (barriers to entry).
Threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. If an industry is profitable, it may attract more competitors who will look to achieve profits. The threat highly likely to the firms already competing in a market, if it is relatively easy for new entrants to enter the market, if entry barriers are low. More competition means less profit to go around. A high threat of new entrance can make an industry more competitive, and on the other hand, a low threat of entry makes and an industry less competitive.
When analyzing the industry in which ‘Next’ operates, there are factors regarding both high threat and low threat of entry of new competitors. To high threat factors may be included: consumer switching is low or products are undifferentiated. On the other hand, to low threat factors may be included: profitability requires economies of scale, brand names are well-known or initial capital is high.
The intensity of competitive rivalry.
The intensity of rivalry among competitors in an industry refers to the extent to which firms within industry put pressure on one another and limit each other’s profit potential. The intensity of rivalry is influenced by few factors such as: a larger number of firms increases rivalry because more firms must compete for the same customer; slow market growth causes firms to fight for market share; low level of product differentiation is associated with higher levels of rivalry; high storage costs or highly perishable products cause a producer to sell goods as soon as possible; low switching costs increases rivalry – when a customer can easily switch from one product to another.
Intensity of Rivalry is very high in the industry in which ‘Next’ operates due to: competitors are numerous, competitors have equal size, competitors have equal market share, industry growth is slow and consumer switching costs are low.
The bargaining power of customers/buyers.
The bargaining power of customers/buyers refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service and lower prices. Buyer power is one of the forces that shape that competitive structure of an industry. Buyers increase competition within an industry and as a result diminish industry profitability. Several factors determine buyer bargaining power. Buyers are powerful if: buyers are concentrated – there are a few buyers with significant market share; buyers purchase a significant proportion of output – distribution purchases of if the product is standardized; buyers possess a credible backward integration threat – can threaten to buy producing firm or rival. Buyers are weak if: producers threaten forward integration – producer can take over own distribution/retailing; significant buyers switching costs – products not standardized and buyer cannot easily switch to another product; buyers are fragmented(many, different) – no buyer has any particular influence on product or price; producers supply critical portion’s of buyers’ input – distribution of purchases.
Buyer power in the industry that ‘Next’ operates is high due to: buyer switching costs are low, buyer is price sensitive, buyer is well-educated about the product and substitutes are available.
The bargaining power of suppliers.
Supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering quality or reducing availability of their products. All of these things represent costs for the buyer. A strong supplier can make an industry more competitive and decrease potential profit for the buyer. Suppliers are powerful if: credible forward integration threat by suppliers; suppliers concentrated; significant cost to switch suppliers; customers powerful. Suppliers are weak if: many competitive suppliers – product is standardized; purchase commodity products; credible backward integration threat by purchases; concentrated purchases; customers weak.
REFERENCES
[1] http://www.photopla.net/wwp0503/substitutes.php
[2] http://www.york.ac.uk/enterprise/cetle/meng/Substitute%20Product%20Analysis.pdf
[3] ‘Strategy and the Internet’, M. Porter, Harvard Business Review, 2001
[5] http://www.quickmba.com/strategy/porter.shtml
[6] http://www.marsdd.com/entrepreneurs-toolkit/articles/bargaining-power-of-buyers
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