To analyze a company’s competitiveness, you need to look into five main forces that shape the product or service, in order to assess its attractiveness for the customers. Those five forces are: (1) threat of new entrants, (2) threat of substitutes, (3) bargaining power of buyers, (4) bargaining power of suppliers, (5) degree of rivalry.
Intuitively, it seems that the basic unit of a company is its product, product use, and the person who uses it. However, the validity of this theory is problematic when it comes to companies like Coca Cola (NYSE: KO). To this day, Coca Cola is still headquartered in Atlanta, Georgia, which is considered to be a large market. However, with the recent growth of the company and the expansion of its products, the company is now headquartered in New York.
Oct 21, 2020
Bookkeeping by Adam Hill
Consumers have access to high quality information regarding the services of online retailers and the products they sell. This external factor affects Amazon.com Inc. in terms of the ability of customers to find alternatives to the company’s online retail service. In relation, the low switching costs make it easy for consumers to transfer from Amazon to other firms, such as Walmart. Also, the high availability of substitutes further empowers consumers to shift from one retailer to another. For example, instead of purchasing on Amazon’s e-commerce website, a customer can easily go to one of Walmart’s stores, which are strategically located throughout the United States.
Based on the low switching costs, customers can easily shift from Starbucks to other brands. In addition, the high substitute availability means that customers can stay away from Starbucks if they want to, because there are many substitutes like instant beverages from vending machines. These strong factors overshadow the fact that individual purchases are small compared to the company’s total revenues. The small size of individual purchases equate to the weak influence of individual buyers on the business.
- In relation, the low switching costs make it easy for consumers to transfer from Amazon to other firms, such as Walmart.
- Consumers have access to high quality information regarding the services of online retailers and the products they sell.
Moreover, in terms of product differentiation, available products in the market are generally similar in fulfilling specific purposes. For example, many popular apps are available for Android and iOS devices, and cloud storage services from different companies are available to iOS users. In Porter’s Five Forces analysis model, this condition creates a strong force by making it easy for customers to switch to other sellers or providers. On the other hand, the low switching cost means that it is easy for customers to switch from Apple to other brands, based on price, function, accessibility, network externalities, and related concerns. The combination of these external factors in this part of the Five Forces analysis leads to tough competitive rivalry that is among the most significant considerations in Apple’s strategic management.
Low switching costs reduce barriers for Tesla customers to purchase cars from other providers. In the context of this Porter’s Five Forces analysis, this external factor imposes a strong force against the company and other players in the automotive industry environment. However, the availability of substitutes is only moderate in many cases, thereby limiting customers’ bargaining power against Tesla Inc.
For example, many customers in suburban areas have limited access to public transportation, making it more practical to drive their own car. In addition, the low volume of purchases (each customer buys and keeps only one or a few cars) reduces the influence of customers on Tesla. Thus, the intensities of the external factors in this aspect of the Five Forces analysis reflect the bargaining power of customers as a moderate force and a secondary management priority.
This Porter’s Five Forces analysis of Disney also warrants strategies for customer retention to address the strong bargaining power of customers. For example, high quality attractions coupled with the company’s brand can optimize customer retention in the amusement park industry.
While the food service industry is saturated with aggressive firms, new products can attract new customers and retain more customers. In relation, based on this Porter’s Five Forces analysis, McDonald’s can implement higher quality standards to address the forces of competition and substitution. In this component of the Five Forces analysis model of the business, the bargaining power of buyers is among the most significant forces affecting the company.
Starbucks Corporation’s marketing mix or 4Ps provide support for brand strengthening to partially address the bargaining power of consumers. In this external analysis case, the low switching costs enable substitutes, such as public transportation, to easily attract customers. This external factor imposes a strong force against Tesla’s industry environment.
Threat of New Entrants or New Entry (Moderate Force)
However, the moderate availability of substitutes limits such influence of suppliers. For example, customers have only a moderate and limited number of substitute options in the market. In relation, many substitutes have only a moderate level of performance in satisfying customers’ practical needs. Such aggressiveness, observable in rapid innovation, aggressive advertising, and imitation, impose a strong force in the industry environment.
Five Forces Analysis of Apple Inc. – Overview
How can we reduce threat of substitutes?
The threat of substitutes is the availability of other products that a customer could purchase from outside an industry. The competitive structure of an industry is threatened when there are substitute products available that offer a reasonably close benefits match at a competitive price.
Despite such weakness, the other two external factors strengthen the bargaining power of customers. Thus, this component of the Five Forces analysis shows that the bargaining power of customers is a top-priority strategic issue.