The Five Competitive Forces That Shape Strategy

The Five Competitive Forces That Shape Strategy

In order for a company to understand the structure of its industry, awareness of the five forces can help. The first force is the Threat of Entry, where new entrants to an industry bring new capacity and a desire to gain market share that put pressure on prices, cost and rate of investment necessary to compete. New entrants shake up competition, where when threat is high, incumbents must either hold down prices or boost investment. The second force is the Power of Suppliers, where powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services or shifting cost to industry participants. The power of suppliers can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices. Third is the Power of Buyers, where powerful customers can capture more value by forcing down prices, demanding better quality or more service. Powerful customers play industry participants off against each other which challenges their profitability. Fourth is the Threat of Substitutes, where substitutes perform the same or similar functions as an industry’s product by a different means. When threat of substitutes is high, industry profitability and growth potential suffers. Last is the Rivalry among Existing Competitors, where high rivalry limits the profitability of an industry but rivalry depends on the intensity with which the companies compete and the basis of which they compete. Rivalry may take place in any form like price discounting, new product introductions, advertising campaigns and service improvements.

I think the most crucial force is the Power of Buyers. Without customers, there would be no business. Buyers are the ones that create the demand for goods and services, without them industries would not exist. When buyers refuse to buy the products, it has a great effect on the industry. As some people