Porter’s five forces model is a simple yet very effective tool to understand the competitive scenario of the business environment. You can take the strategic decisions based on these five forces affecting your business and its profitability. Based on these five forces you can take policy decisions and take advantage of your strong position and improve the weaker part. Financeshed brings you how Porter’s five forces can impact your long-term profitability.
Competition in the Industry
There is no industry where you do not face competition. It is an obvious thing that the larger the number of competitors in the industry, the lesser the power of the company in the industry. With the increase in competition in the industry, competition for supply and target consumers also increases. This force is important as it has the ability to threaten a company. You should have the knowledge of how many rivals you have, what quality products are supplied by them and a lot more. When you have many rivals there is constant pressure on you for product improvement and vice versa. When you do not face any competition you likely have tremendous strength and healthy profits.
Threat of New Entrants
The company’s position is also affected by the new entrants in the market. The less time and money it costs for anyone to enter the market, the more a company’s position may be significantly weakened. You should have that position in the industry where the entry is not that easy as an industry where entry barriers are strong the new entrants will feel it risky to enter the market. You should have the analysis of how easy it is to get a foothold in your industry and how much it costs to a new entrant.
Bargaining Power of Buyer
Customers are referred to as the king of the market. The customer or the buyer has the capacity to drive prices down as the prices and profitability of any product by and large depends upon the demand raised by the buyers. You should have the track of how many buyers or customers a company has and how important the customer is and is the company trying to fulfill the demands created by them. Also, it should be remembered that a company will flourish more when they have more loyal client base.
Bargaining Power of Seller
This force is very much vital when deciding the cost of the product. This force is helpful as it gives a proper analysis of the number of suppliers and the services offered by them and how much it would cost a company to switch from one supplier to another. The lesser the number of suppliers in the market, the higher the bargaining power. One should always remember that this force directly affects the profitability of the company by affecting the cost of products.
This force refers to the time your customers are likely to find a substitute product offered by you. If your product is unique there are fewer chances of customers finding a substitute way out. The substitution is always easy and cheap and is enough to affect your business at a drastic level.