These five forces reflect the underlying structure of the market and will be discussed separately. They are distinct from the short run fluctuations that can affect market behaviour such as supply shortages, tax changes, strikes, etc. The five competitive forces are: 1. Threats posed by new entrants 2. Threats posed by substitutes 3. Bargaining power of Buyers 4. Bargaining power of Suppliers.
The threat from new entrants will depend upon the strength of the barriers of entry and the likely response of existing competitors to a new entrant. Barriers to entry are factors that make it difficult for a new entrant to gain an initial foothold in a market. There are six major sources of barriers to entry: 1. Economies of scale, where the industry is one where unit costs decline significantly as volume increases, such that a new entrant will be unable to start on a comparable cost basis e. g. automobile manufacturing. 2.
Product differentiation, where established firms have good brand image and customer loyalty; the costs of overcoming this can be prohibitive e. g. Apple Computer. 3. Capital requirements, where the industry requires a heavy initial investment e. g. steel industry, rail transport. 4. Switching costs, i. e. one-off costs in moving from one supplier to another e. g. a garage chain switching car dealership. 5. Access to distribution channels may be restricted e. g. for some major toiletry brands 90% of sales go through 12 buying points, i. e. hemist multiples and major retailers; therefore it is difficult for a new toiletry product or manufacturer to gain shelf space. 6. Cost advantages of existing producers, independent of economies of scale, e. g. patents, special knowledge, favourable access to suppliers, government subsidies. 4. 3 Competitive Rivalry Intensity of existing competition will depend on the following factors: 1. Number and relative strength of competitors – where an industry is dominated by a few large companies whilst rivalry is less intense e. g. petrol industry.
Rate of growth – where the market is expanding, competition is low key. 3. Where high fixed costs are involved companies will cut prices to marginal cost levels to protect volume, and drive weaker competitors out of the market. 4. If buyers can switch easily between suppliers the competition is intense. 5. If there is a high exit barrier (i. e. the cost incurred in leaving the market), companies will hang on until forced out, thereby increasing competition and depressing profit. 6. An organisation will be highly competitive if its presence in the market is the result of a strategic need (e. g. sing the market as a launch pad for a new generation of products) or tied into the development of a balanced portfolio, as considered later.
Threat of Substitute Products This threat is across industries (e. g. rail travel vs. bus travel vs. private car) or within an industry (e. g. long-life milk as a substitute for delivered fresh milk). Porter explains that “substitutes limit the potential returns … by placing a ceiling on the price which firms in the industry can profitably charge”. The better the price-performance alternative offered by substitutes, the more readily will customers’ switch. . 5 Bargaining Power of Customers This is high when a combination of factors arises. Such factors could include the following: 1. A buyer’s purchases are a high proportion of the supplier’s total business or represent a high proportion of total trade in that market. 2. Where a buyer makes low profit. 3. Where the quality or delivery timing of purchases is unimportant, prices will be forced down. 4. Where products have been strongly differentiated with good brand image, a retailer would have to stock the range to meet customer demands. 4. 6 Bargaining Power of Suppliers
The following will influence this: 1. The degree to which switching costs apply and substitutes are available. 2. The presence of one or two dominant suppliers controlling prices. The extent to which products offered have a uniqueness of brand, technical performance or design not available elsewhere. Prepared by Dr. Eric LAU 19 2. Stakeholder Analysis Stakeholders are those individuals or organisations that have an interest (a stake) in a particular organisation. The success or failure of our organisation directly or indirectly affects their well-being.
Stakeholders may include any of the following groups shown in the diagram below: Managers Shareholders Employees Local People STAKEHOLDERS Customers Government Society at Large Suppliers Each, to some degree, has a link of dependency with the organisation. Each will make demands on, and have expectations of, the company. These expectations may clash and conflict with the interest of other stakeholder groups. For instance, the rate of growth expectations of the managers of a family-owned company may conflict with those of the shareholders whose main interest may be in maintaining family control.
Prepared by Dr. Eric LAU 20 Clearly, some stakeholder groups wield greater power than others. The government’s legislative power is comprehensive. For example, rulings of the Monopolies and Mergers Commission (MMC, UK) have a direct effect upon the objectives and strategies of companies affected. Examples include: (i) breweries – Bass required to sell off a major part of its tied trade public houses (ii) newspaper publishing – Murdoch blocked from taking over other newspapers on grounds of safeguarding freedom of opinion across a range of views. . 1 Shareholders Shareholders are probably the most important category of stakeholders because they are the owners of the company and without them, there would not be a company in the first place as they provide the initial capital and ensure the continual supply of funds to sustain operation and growth. The owners of the organisation are generally concerned with: 1. a steady flow of income (e. g. dividend); 2. possible capital growth; and 3. continuation of the business.