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Module 2

Uploaded by

pulbopul
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© © All Rights Reserved
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ACLC COLLEGE TACLOBAN

Tacloban City
SENIOR HIGH SCHOOL DEPARTMENT
Entrepreneurship

LESSON 2 FORCES OF COMPETITION MODEL

Competition
This the contest between several firms selling similar goods or services. Different
companies attempt to meet the same consumer needs with their version of a product and, when
successful, earn more revenue as people choose to buy their offering.

FORCES OF COMPETITION MODEL


Michael Porter
The tool was created by Harvard Business School professor Michael Porter. Since its
publication in 1979, it has become one of the most popular and highly regarded business strategy
tools

1. Competitive Rivalry
Porter's first force is what we usually mean when discussing business competition. We
think of Pepsi and Coca-Cola for soft drinks, Apple and Samsung for smartphones, Nike and
Adidas for sneakers, and Ford and General Motors for autos. Indeed, some of these rivalries are
so influential that consumers split almost culturally among those who have an iPhone, drive a
Ford, or prefer Netflix to Hulu. Thus, it's no accident that we also consider business competition
chiefly a war among rivals.
Such rivalries can lead to price wars, high-priced marketing battles, and races for slight
advances that could mean a competitive advantage. These tactics can stimulate companies to
make ever better products but also erode profits and market stability.
2. New Entrants
New entrants are companies that enter a market or an industry for the first time, offering
a new or alternative product or service to the existing customers. New entrants can pose a serious
challenge to the incumbent firms, as they may have lower costs, higher quality, better innovation,
or more customer loyalty.
Your position can be affected by potential rivals' ability to enter your market. If it takes
little money and effort to enter your market and compete effectively, or if you have little
protection for your key technologies, then rivals can quickly enter your market and weaken your
position.
However, if you have strong and durable barriers to entry, then you can preserve a
favourable position and take fair advantage of it. These barriers can include complex distribution
networks, high starting capital costs, and difficulties in finding suppliers who are not already
committed to competitors.

3. Supplier Power
Suppliers are powerful when they are the only source of something important that a firm
needs, can differentiate their product, or have strong brands. When the power of suppliers in an
industry is high, this raises costs or otherwise limits the resources a firm needs.
Suppliers gain power if they can increase their prices easily, or reduce the quality of their
product. If your suppliers are the only ones who can supply a particular service, then they have
considerable supplier power. Even if you can switch suppliers, you need to consider how
expensive it would be to do so.
The more suppliers you have to choose from, the easier it will be to switch to a cheaper
alternative. But if there are fewer suppliers, and you rely heavily on them, the stronger their
position – and their ability to charge you more. This can impact your profitability, for example, if
you're forced into expensive contracts.

4. Buyers
When customers have more strength, they can exert pressure on businesses to provide
better products or services at lower prices.
If the number of buyers is low compared to the number of suppliers in an industry, then
they have what's known as "buyer power." This means they may find it easy to switch to new,
cheaper competitors, which can ultimately drive down prices.
Think about how many buyers you have (that is, people who buy products or services
from you). Consider the size of their orders, and how much it would cost them to switch to a
rival.
When you deal with only a few savvy customers, they have more power. But if you have
many customers and little competition, buyer power decreases.

5. Threats of Substitute
Substitute means anything that takes the place or function of another. For example the
consumers decide to use margarine as a substitute for butter. In case the price of butter increases,
preferably the consumer will gradually switch to margarine.
When customers can find substitutes for a sector's services, that's a major threat to the
companies in that industry.
This refers to the likelihood of your customers finding a different way of doing what you
do. It could be cheaper, or better, or both. The threat of substitution rises when customers find it
easy to switch to another product, or when a new and desirable product enters the market
unexpectedly.

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