Friday, October 13, 2017

Market five forces

There are forces, which are shaping the strategy of a company to act in a specific manner in the market. The Porter’s five forces model is a widespread method of market analyzing. We will try to explain each of them separately and will bring some examples to make our points more understandable.
            First, the force that has an impact of companies’ actions is a treat of an entrance. If the barriers to entering specific market are low, there is a treat that others would like to enter and increase competition, pressure on costs and prices, consequently on profits. Actually, it is not the real entrance which impacts, but the threat, because companies try to decline prices => profits to make the market less interesting for others to enter and make “hard” competitive environment. An example of a new entrant can be Pepsi when it entered bottle water industry. What are the barriers?
1.      First, is an economy of scale from supplier side. Companies which have a big size and produce a big number of goods enjoy an economy of scale cause they can share the fixed cost to more products and get less average costs, so if there is a new company which wants to enter need to do it with big investments or accepts cost disadvantage.
2.      Buyers willingness to buy. There are customers who are loyal to the specific company not only for prices but also there is a kinda partnership, so it is hard to enter a market where existing firms have good networks with customers.

3.      Restrictive government policy. There are some products which can be produced only if it is licensed by the government, so it is an additional barrier to entry.
The second force which shape competition is a buyers bargaining power. Buyers who are strong can demand more services or less price and can affect the overall market. What makes buyers strong?
1.      If in a market there are a little number of buyers or each of them has a big share in a market, It is the vice versa of monopoly which is known in economic literature as a monopsony.
2.      If the product of a company is standardized and a buyer is sure that he/she can find the equivalent easily.
3.      If there are less or no switching costs. An example of switching cost is a one year contract for the internet services. If customers want to switch there are high fees.
The third force is The power of suppliers. The strong suppliers can increase prices of their products, can give poor services. What makes suppliers strong?
1.      If the supplier is the only one or there are a little number of suppliers, they are a monopoly in supply industry and can gain more profits.
2.      There are big switching costs and no buyer wants to change its supplier.
3.      The supplier offers unique benefits or is a specialist in an industry where you can not find equivalent substitutes.
The fourth force is a treat of substitutes. A substitute has a similar function and satisfies a similar need of a customer. And if company increase price the customer more probably can switch to the substitute. Substitute also can be attractive by its increased quality or if there is little switching cost.

The fifth and the last force which shapes the market is Competition. It can be high, low or moderate in a marketplace. Competition is an outcome of other four factors and has a major impact on the market. Any company who wants to succeed should investigate the competition level in the market and find a good position for its firm where competition is low and the profit margin is high. 
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