The Porter’s Five Forces Part II

Author : Ami Fitri Utami, SE., MSM

Moreover, the threats of substitute is the level of risk that a company faces from replacement by its substitutes, a substitutes product is one that offer the same or similar benefits to a company as a product from another industry. For example, KFC is a substitute for McDonalds; or a good quality of counterfeit product of Gucci is a substitute product for the original. Not only from same industry, substitute product may come from a different industry, for example a tablet device is substitute product for desktop. A substitute is anything that can distract a consumer from a brand. In this vein, there are conditions that increase the threats of a substitute includes an attractive price of a substitute and increase quality of a substitute and the condition of buyer’s price sensitivity.
Talks about competitiveness, the rivalry condition of an industry also important to be determined. Rivalry among competitor may come in many forms such as price discount; advertising campaign; trade campaign; or service improvements. Intensity of rivalry is greatest because of several point, they are: number of competitors is numerous; slow growth in industry; exit barriers are high; rivals is highly committed to the business; or each firms do not read each other’s signals well. Rivalry can be positive or negative to their impact of company profitability. It will be destructive to profitability if there are price competitions among companies. But can be positive also, rivalry can increase the average profitability of an industry, when each competitor aims to serve the needs of different customer segments, with different mix of price; product service; features or brand identities. With a clear understanding of the structural underpinnings of rivalry, strategists can sometimes take steps to shift the nature of competition in a more positive direction.
In the end, a shift in structure may come from outside industry or from within. The changes can boost the industry profitability or reduce it. The five competitive forces provide a framework for identifying the most important industry developments and for anticipating their impact on industry attractiveness. Changes in industry structure can shifting threat of a new entry; changing supplier power; shifting threat of substitution; or event create a new base of rivalry. Understanding the forces that shape industry competition is the starting point for developing strategy. Every company should already know what the average profitability of its industry is and how that has been changing over time. The five forces can help reveal what underpinning the industry profitability. Only then can a company incorporate industry conditions into strategy. The competitive forces reveal the drivers of industry competition.

Reference :

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40