What is the "Five Forces Analysis" that evaluates the competitive intensity and profitability of an industry?
Posted: Tue Dec 03, 2024 5:34 am
table of contents
What is Five Forces Analysis?
How to do a Five Forces Analysis
summary
The most important mission for a company is to continue making profits in order to survive.
To do this, there are many factors to consider, such as product pricing, adjusting raw material costs, understanding the situation of competitors, and labor costs.
Furthermore, in today's society, which has become more complex due to factors such as advances in IT, there is a high possibility that companies in other industries will become competitors.
Many people are aware that they need to take some kind of action, but are scratching their heads, wondering, "Where do I even begin, when there are so many factors to consider?"
This time, we will explain andorra business email list the " Five Forces Analysis ," which divides the competitive factors that affect your company into five categories and allows you to appropriately evaluate them .
Specifically, we will explain the process as follows:
What is Five Forces Analysis?
How to do a Five Forces Analysis
Points to note when analyzing
By reading this article, you will be able to understand the Five Forces Analysis, which evaluates the competitive intensity and profitability of an industry.
If you put this into practice, you will be able to build a balanced profit-sharing structure, which will lead to your company's prosperity and business expansion, so please read to the end.
What is Five Forces Analysis?
The five forces analysis is a framework for evaluating the intensity of competition and profitability in an industry by analyzing the competitive factors that affect profitability into five categories.
It was proposed by Michael E. Porter, one of the most influential scholars in the fields of competitive strategy and business management.
The five elements of the Five Forces Analysis
Here we will explain each element of the 5 forces analysis.
As a premise, the degree to which each factor affects the business is related as follows:
The stronger the competitive edge, the greater the impact on business
→ fierce competition makes it difficult to monetize = red ocean
If the competitiveness is low, the impact on business is also low → weak competition and easy monetization = blue ocean
1. Threat of competition within the industry
This reflects the fierce competition within the industry.
If there are many competitors of the same size in the same industry, competition will be fierce and profitability will be low.
In this case, measures such as differentiation strategies to reduce the number of competing players or acquiring competitors to avoid direct competition may be necessary.
2. Threat of substitutes
This means that products or services that fill the same needs in a different way will emerge from other industries or markets. If a more cost-effective alternative to your product emerges, your market share will shrink, leading to reduced profitability.
In this situation, measures are needed to provide added value that substitutes cannot provide and to actively enter the substitute market.
3. Threat of new entrants
It represents the possibility of new companies entering an industry or market.
The entry of new companies leads to increased competition in the industry, which ultimately leads to reduced profitability.
Reduce the threat of new entrants by raising barriers to entry through customer retention, brand building, patents, etc.
4. Bargaining power of sellers
A seller is a supplier for your company.
If a supplier has its own proprietary technology and is in an oligopoly, purchase prices will rise, leading to a decrease in the company's profitability.
In this case, you may be able to reduce your purchasing prices by reviewing your suppliers or becoming "irreplaceable" to them.
5. Buyer's Bargaining Power
A buyer is a customer who purchases goods or services. Strong bargaining power of buyers means strong demands on price and quality, which means that companies are required to lower prices and improve quality, resulting in lower profit margins.
By reviewing your target customers and building your brand, you can aim to set appropriate product prices that will generate profits.
Three purposes of conducting a five forces analysis
Explain three purposes of conducting a five forces analysis.
Both of these are very important when developing your business plan and marketing strategy, so be sure to understand them.
① Understand your company’s position
The Five Forces Analysis objectively grasps the situation surrounding your company and understands your current position in the industry and market. It also helps you discover your company's strengths and challenges within the industry.
② Optimal allocation of management resources
Through analysis, we can determine which factors are threatening and evaluate profitability. Based on the results, we can determine the priorities for investing management resources and optimize their allocation.
What is Five Forces Analysis?
How to do a Five Forces Analysis
summary
The most important mission for a company is to continue making profits in order to survive.
To do this, there are many factors to consider, such as product pricing, adjusting raw material costs, understanding the situation of competitors, and labor costs.
Furthermore, in today's society, which has become more complex due to factors such as advances in IT, there is a high possibility that companies in other industries will become competitors.
Many people are aware that they need to take some kind of action, but are scratching their heads, wondering, "Where do I even begin, when there are so many factors to consider?"
This time, we will explain andorra business email list the " Five Forces Analysis ," which divides the competitive factors that affect your company into five categories and allows you to appropriately evaluate them .
Specifically, we will explain the process as follows:
What is Five Forces Analysis?
How to do a Five Forces Analysis
Points to note when analyzing
By reading this article, you will be able to understand the Five Forces Analysis, which evaluates the competitive intensity and profitability of an industry.
If you put this into practice, you will be able to build a balanced profit-sharing structure, which will lead to your company's prosperity and business expansion, so please read to the end.
What is Five Forces Analysis?
The five forces analysis is a framework for evaluating the intensity of competition and profitability in an industry by analyzing the competitive factors that affect profitability into five categories.
It was proposed by Michael E. Porter, one of the most influential scholars in the fields of competitive strategy and business management.
The five elements of the Five Forces Analysis
Here we will explain each element of the 5 forces analysis.
As a premise, the degree to which each factor affects the business is related as follows:
The stronger the competitive edge, the greater the impact on business
→ fierce competition makes it difficult to monetize = red ocean
If the competitiveness is low, the impact on business is also low → weak competition and easy monetization = blue ocean
1. Threat of competition within the industry
This reflects the fierce competition within the industry.
If there are many competitors of the same size in the same industry, competition will be fierce and profitability will be low.
In this case, measures such as differentiation strategies to reduce the number of competing players or acquiring competitors to avoid direct competition may be necessary.
2. Threat of substitutes
This means that products or services that fill the same needs in a different way will emerge from other industries or markets. If a more cost-effective alternative to your product emerges, your market share will shrink, leading to reduced profitability.
In this situation, measures are needed to provide added value that substitutes cannot provide and to actively enter the substitute market.
3. Threat of new entrants
It represents the possibility of new companies entering an industry or market.
The entry of new companies leads to increased competition in the industry, which ultimately leads to reduced profitability.
Reduce the threat of new entrants by raising barriers to entry through customer retention, brand building, patents, etc.
4. Bargaining power of sellers
A seller is a supplier for your company.
If a supplier has its own proprietary technology and is in an oligopoly, purchase prices will rise, leading to a decrease in the company's profitability.
In this case, you may be able to reduce your purchasing prices by reviewing your suppliers or becoming "irreplaceable" to them.
5. Buyer's Bargaining Power
A buyer is a customer who purchases goods or services. Strong bargaining power of buyers means strong demands on price and quality, which means that companies are required to lower prices and improve quality, resulting in lower profit margins.
By reviewing your target customers and building your brand, you can aim to set appropriate product prices that will generate profits.
Three purposes of conducting a five forces analysis
Explain three purposes of conducting a five forces analysis.
Both of these are very important when developing your business plan and marketing strategy, so be sure to understand them.
① Understand your company’s position
The Five Forces Analysis objectively grasps the situation surrounding your company and understands your current position in the industry and market. It also helps you discover your company's strengths and challenges within the industry.
② Optimal allocation of management resources
Through analysis, we can determine which factors are threatening and evaluate profitability. Based on the results, we can determine the priorities for investing management resources and optimize their allocation.