There are five forces of competition that have been identified. According to Michael Porter, the five forces of competition govern the competitiveness of any business in any market. These five forces help the business units of an organization devise a competitive strategy for them and to stay competitive. The idea of the model is to ensure that the corporate strategy is well versed with the threats and opportunities that are present in the industry and the strategy is made such way that the organization is making full use of the forces to increase its profits and its competence (Porter, 1998).
The forces are rivalry of competitors, threat of new entrants, threats of substitutes, bargaining power of customer and bargaining power of supplier. The bargaining of supplier is high when there are few suppliers in the market and no substitutes exist for the particular kind of material or input. The costs of switching from one supplier to the other are very high. The bargaining power of customers is high when the customers buy large quantities of the product and there are few but large customers of that product, there are many substitutes available for that particular product.
The customers of the product are very price sensitive and they might not purchase the product if price increases, they might have low cost of switching to other products, and the customers can produce the product themselves. The threat of new entrants exist id the competition is very high and product is thriving in the market. Such threats will not exist if there are many barriers to entry. In monopolies, artificial barriers are created.
The barriers can be very high investment costs; there is very high brand loyalty amongst the customers, the governments have provided patents or copy rights to that particular product, there is limited availability of expertise in that particular field. Threats to substitutes also exist in a very competitive market. If the products are produced at very low cost and they are easy to replicate, the customers are not very brand loyal about the product and it is a necessity based product.
Rivalry of competitors is the intensity of competition that exists in a market or an industry. The higher the competition is the greater would be the price wars, and so would be profit margins on the products. The competition is usually high amongst the companies when there are many producers of the product, the strategies of the companies is more or less the same, high price competition exists (Porter, 1998). Competitive Disadvantage
Competitive disadvantage exists when an organization is able to attract a larger and wider base of customers through different strategies and other organization fails to apply that strategy and hence, lose a large customer base they could have availed. A common example is of an organization using the information technology to avail a wider base of customers, while the other does not and hence losses the customers it could have gained (Porter, 1998).
The common strategies used by organization include differentiation techniques, niche marketing strategy, cost leadership, innovation and growth. Differentiation means that the organization is offering a USP which others don’t have. It makes them stand out from others, and hence, they win a wide customers base. Entering niche market ensures the first entry to a segment and hence provides a quick response from customers that were not tapped earlier.
Innovation is mostly present in technology based organizations that keep coming up with a new feature to offer in their products and hence, gain great popularity amongst the customers. Cost leadership comes from higher economies of scale and through different methods of production that ensure minimum waste, such as Just in Time philosophy, Six Sigma, Kaizen etc. growth can occur through different strategies such as market penetration, market development, product development and diversification (Porter, 1998).