Analyze how the five forces define an industry’s structure and shape the nature of competitive interactions within an industry. Understanding the competitive forces, and their underlying causes, reveals the roots of an industry's current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company's own position. Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation. This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organisation’s current competitive position, and the strength of a position that an organisation may look to move into. Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes. Five forces analysis helps organisations to understand the factors affecting profitability in a specific industry, and can help to inform decisions relating to: whether to enter a specific industry; whether to increase capacity in a specific industry; and developing competitive strategies. Porter regarded understanding both the competitive forces and the overall industry structure as crucial for effective strategic decision-making. In Porter's model, the five forces that shape industry competition are as follow: 1. Threat of new entrants This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high when: • Low amount of capital is required to enter a market; • Existing companies can do little to retaliate; • Existing firms do not possess patents, trademarks or do not have established brand reputation; • There is no government regulation; • Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other industries); • There is low customer loyalty; • Products are nearly identical; • Economies of scale can be easily achieved. 2. Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when: • There are few suppliers but many buyers; • Suppliers are large and threaten to forward integrate; • Few substitute raw materials exist; • Suppliers hold scarce resources; • Cost of switching raw materials is especially high. 3. Bargaining power of buyers. Buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when: • Buying in large quantities or control many access points to the final customer; • Only few buyers exist; • Switching costs to other supplier are low; • They threaten to backward integrate; • There are many substitutes; • Buyers are price sensitive. 4. Threat of substitutes. This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle. 5. Rivalry among existing competitors. This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when: • There are many competitors; • Exit barriers are high; • Industry of growth is slow or negative; • Products are not differentiated and can be easily substituted; • Competitors are of equal size; • Low customer loyalty. How strategic group analysis helps understand the competitive advantage that some firms enjoy over their rivals in an industry? A strategic group is s group of firms in an industry following the same or a similar strategy along the strategic dimensions. The strategic dimensions are key strategic decision variables which best distinguish the Business strategies and competitive positioning of the firms in an industry. Unlike segmentation analysis which is centred on characteristics of product markets as a basis for dividing industries, strategic group analysis uses firm characteristics as a basis for industry division. Strategic groups are characterized by barriers to entry and exit and by “mobility barriers,” that make it more difficult for firms to move between groups. Such mobility barriers are due to market structure, technology, strategy or customer characteristics. Profitability at a corporate view may be the driver for strategic groups while at a business unit level other dimensions might be more important determinants of strategic groups. The industry as a whole, individual strategic groups and companies in the strategic group try to conduct strategies that bear the most promising results. Thus, they try to protect themselves from outside competition by building isolating mechanisms against their competitors who try to enter the industry or a strategic group. The strategic group attempt to preserve imperfectly competitive conditions and stability by increasing the investment costs, because high entry barriers implies less competition, which leads to a better performance in the long run and consequently to a reduction of the uncertainty of the environment. Below mentioned are some of the main advantages of strategic group analysis. 1. Helps in identifying barriers for entry and exit 2. Helps in identifying strategic areas with the help of which benefits can be easily gained 3. Helps in identifying best firms in the industry 4. Helps in rectifying major rivals Strategic group creation and analysis provides an effective way to develop a clearer understanding of how firms within an industry compete. Since each strategic group depicts firms with similar—if not identical—competitive attributes within the industry, the map helps managers identify important differences among competitive positions. These differences can be subject to further analysis to helps explain more subtle differences in performance. A company might use this analytical tool to identify competitors and determine how businesses within the group compete. Corporations that launch a new product might conduct an analysis to determine how to compete when entering the market. Creating a map of which businesses serve each market segment helps analysts discover any markets that are under-served or not served at all by the existing strategic groups. Product positioning and differentiation are two strategic marketing techniques that benefit from strategic group analysis. Positioning means ensuring that a product occupies a unique place in the consumer’s mind, and differentiation means making a product seem different from competing products. In both cases, having a competitive frame of reference can help make a product seem uniquely better than other products in the same strategic group.