Ever since Western marketers have recognised the ever-increasing changes in customers’ preference, they use dynamic models to assess their own strength vis-a-vis their competitor’s.
The first practical model was formulated by Michael E. Porter (1980), who indicated five competitive factors which could influence competitive strength, measured by the expected decrease in profitability.
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The factors are:
1. The present rivalry in the market. What would be the effect of an initiative which might distort present market shares/Is retaliation to be expected? Will that decrease profits?
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2. The bargaining strength of the buyers. Are the buyers so strong that they can dictate the terms of transaction (prices, delivery conditions, etc.) to the suppliers? Or are the buyers competing amongst each other to be supplied?
3. The bargaining power of the suppliers. Same as above, but projected on the relative influence of the suppliers (of half material, component, etc.). If the supplies are few, their power is great, reducing the profits.
4. The threat of potential entrants into the market will decrease the profitability. If market entry is easy, may competitors can be expected to fight for a piece of the profits, thereby reducing the profits. But if entry barriers are high (e.g. large investments in equipment, in know-how), some protection can be had.
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5. The threat of product/service substitutes is more difficult to identify. Some products can come and take over the function of other products (e.g. desktop publishing took over the function of type setters, the manufacturers of industrial glues pushed many nuts- and-bolts producers from their markets).
Identification of substitutes requires a ‘helicopter view’, which is the ability to look beyond the boundaries of one’s own product area.
The competitive analysis seems complicated, but has proven valuable in assessing one’s own competitive strength. The organisation could analyze its’ position in the near future. A discussion with key persons in the organisation (‘brain storm’) could provide many answers in a short time.