The competitive model was developed by Michael Porter of Harvard.
It is based on the understanding that the appropriate strategy for each company is determined by the type and degree of competition in the industry.
Porter identifies 5 main competing forces that need to be analyzed:
- Competition between companies in the industry
- Increasing the strength of suppliers
- Increasing customer strength
- The risk of entering new competitors
- Risk of substitutes
Strong competition between existing companies leads to frequent price wars, advertising battles, and the frequent introduction of new products. Reference: “Strategic modeling for organizations”, https://www.mmrls.org/strategic-modeling-for-organizations/
This competition can take place in the following directions: in case of price policy (dumping) with a sharp reduction of prices, in case of active advertising activity, in case of changes such as the introduction of new products or improvement of technologies for the production of existing ones and application of additional conditions as a guarantee, service, additional services, and others.
This costs companies a lot of effort and cost and leads to lower profits.
There is also a danger in the growth of the commercial power of the company’s suppliers.
Their strength increases when they are concentrated or organized when the products they supply are very important to the company and when the cost of switching to another supplier is very high.
Strong suppliers can dictate high prices, low quality, and quantity of delivered products, inappropriate frequency, and delivery time.
A significant threat to the company is the growing power of consumers.
Their purchasing power increases when the product requires a significant part of the buyers’ costs and they are price sensitive when the product does not differ much from the others, and switching to other products does not cost buyers a high cost.
The commercial power of the customers is their real opportunity to put price pressure on the organization or to set conditions for improving the quality of the offered product.
In these cases, customers try to lower prices and look for higher quality, good service, and additional services.
The intensity of competition increases with the entry into the industry or segment of new manufacturing companies.
Therefore, when analyzing it, the barriers for entering the segment and the industry should be clear or high, and they should be compared with the barriers for a possible exit.
The worst option is the one where the barriers to entry of new companies are low and those to exit are high. Attracted by the good conditions, new companies easily enter the industry, which leads to an increase in available resources and production capacity and increases the intensity of competition.
In “bad times”, however, the industry is difficult to leave and this forces all companies to fight in any way to survive. All this is reflected in chronic overcrowding and low profits for all. The best option for the company is when the barriers to entry are high and those to exit are low.
To allow the entry of new competitors, existing companies resort to many repressions (price reductions, advertising battles), which together with the need for large start-up capital and lack of experience in the industry put high barriers for companies wishing to enter.
A risk for companies also lies in the possibility of a substitute for their products and services. This can reduce or even stop your search. The influence of this competitive force can be considered in 2 directions: limiting prices and reducing their market share.
The reason for these negatives is the redirection of customers to the substitute product.
The analysis of these competitive forces serves to select some of the following strategies:
Full cost leadership
This strategy is associated with providing lower costs than competitors, which allows the company to ensure a high return on investment even at lower prices.
Low prices, in turn, attract additional customers, but on the other hand, reduce profits. Achieving cost leadership requires the company to have a high market share, cheap access to raw materials and materials, optimized product design, production of by-products to fully utilize materials, modern technologies, and more.
Product differentiation strategy
With it, the company relies on the success of a product that is unique and high quality compared to others. Here, too, cost reduction is important, but it is a secondary issue.
The unique product attracts customers who are willing to pay a higher price for it. This strategy applies to companies with good opportunities in research, technology has a good image, traditions, markets, and financial opportunities. An example is “Mercedes”
It chooses either cost leadership or product uniqueness but in combination with focusing the company’s efforts on a narrow consumer group or geographic market.
The company provides the product or service for a specific market segment or niche.