Five Forces Analysis


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Five Forces Analysis

Five Forces is used when the potential of the industry is analyzed. It can clarify profitability of the industry or how much investment cost is needed in the industry. It can help the company consider the priority of using resources, whether the company enters the market or whether the company exits the market.

Five forces consist of;

Threat of New Entrants
Threat of Substitute Products or Services
Bargaining Power of Buyers
Bargaining Power of Suppliers
Rivalry among Existing Competitors


Five Forces Analysis


Threat of New Entrants

Increasing new entrants means increasing rival in the industry. If it is easy to enter the industry, it would be difficult to keep profitability of the industry. On the contrary, high entry barriers keep profitability of the industry. There are the following entry barriers.

Scale economics
Royalty to existing brand
Exclusive sales channel
High technology and difficulty to imitate it
Government regulation
Counterattack from existing players



Threat of Substitute Products or Services

If there is a substitute product that can replace existing products with same or more functions, the structure of profitability would be significantly changed.

For example tape recorder was replaced by CD or MP3 players and now they have been replaced by iTunes.


Bargaining Power of Buyers

In case that Bargaining Power of Buyers is high, it is hard to keep profitability of the industry because players of that cannot keep the price.

Bargaining power becomes high when;

The industry sells me-too products and services
Production capacity or supply volume are too much
Customers can change vendors at low cost
Customer's industry is occupied by a few players
Customers know the market price or cost structure well
Key buying factor for customers is only the price



Bargaining Power of Suppliers

For Bargaining Power of Suppliers, it is easily clarified when above customers are regarded as players of the industry.

Bargaining power becomes high when;

The industry buys me-too products and services from suppliers
Production capacity or supply volume of suppliers are too much
Players of the industry can change vendors at low cost
The industry is occupied by a few players
Players of the industry know the market price or cost structure well
Key buying factor for the industry is only the price



Rivalry among Existing Competitors

Rivalry among Existing Competitors becomes high when;

There are many players in the industry
It is difficult to exit the industry due to huge investment cost
It is easy to become price competition due to short product life cycle or high fixed cost
Switching cost is low
Differentiating products or services is difficult



Relationship between entry barriers and exit barriers

Exit barriers become high when;

The company has high responsibility to provide products or maintenance services for a long term.
The company has high responsibility to employ local people
There is no organization which can employ people who leave from the company.


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Framework of Competitor Analysis
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