4.2 The Competitive Position Matrix and its Assessment

4.2 The competitive position matrix and its assessment

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Porter's Model of Five Forces

Threat of new entrants

Porter's Five Forces model is an analysis tool that focuses on 5 competitive forces in an industry. Porter's model of Five Forces enables you to analyze the competitive position of your company in the sector in which it operates.The five forces are:

Rivalry among existing firms

Bargaining power of buyers

Bargaining power of suppliers

Threat of substitute products OR services

Threat of new entrants

A higher capacity for innovation, franchising and brand differentiation are only a few ways helping which you can establish yourself in the sector in which your company operates. As the entrance of a new competitor is a potential risk for established businesses, it is likely that they will defend their market position against a potential new competitor

New entrants are always a potential threat to existing companies. This could result in a possible decline in prices and a possible loss of market share which can put pressure on established companies. Competitors can try to establish their position and generate customer loyalty by employing various strategies.

These barriers can be divided into two categories: existing barriers and reactions of established companies in the sector:

Threat of new entrants

Switching costs

Economies of scale

Product differentiation

Access to distribution channel

Cost disadvantages independent of size

Capital requirements

Bargaining Power of Buyers or Customers

Lastly, analyze your customers. The following issues should be considered:

• How important is your product or service to your customers?
• Are you dependent on specific customers (groups)?
• What is the fraction of revenue that you gain by several customers (groups)?
• How high is the likelihood that your customers will buy substitute products?

• How much information do customers have access to, regarding substitutes?
• Which trends do you expect as far as the needs of your customers are concerned?
• How important is your brand for your customers?
• What is the level of demand with regard to quality?

Threat of Substitute Products or Services

This can take place if a customer can substitute a product or service with an equivalent product or service. If the prices in your organization increase, customers will likely search for substitutes in another organization. When analyzing substitute products, you should consider the following:

• How great is the threat that substitutes can have on your products or services?
• How high is the quality of possible substitutes?
• What research & development is being undertaken in the sector and which may result in possible substitutes?
• What is the price-performance ratio?

Bargaining Power of Suppliers

Suppliers are an important factor in Porter’s analysis, as your company is dependent on the quality of the products and services of your suppliers. You should consider the following questions in order to analyze, how suppliers affect your sector and your company:

• What pressure can the supplier put on you? (e.g. in terms of your dependence on the product)
• Can they find new customers and if so, how fast?
• How is the dependence-relation with your suppliers?

BIBLIOGRAPHY

Millett, S. and Leppanen, R. (May-Jun 1991). The Business Information and Analysis Function: A New Approach to Strategic Thinking and Planning. Planning Review. pp. 10-15, 36.Porter, M (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. (Summary).