Competition has proved to be a critical force in the operations of global organizations regardless of their association with particular industries. Organizational managers usually use various tools to analyze the competitive environment, including Five Forces analysis, SWOT analysis, Value Chain Model, and others. Many managers believe that Five Forces analysis is the best strategic analysis tool of all. The five forces of the model include the existing rivalry between competitors, the bargaining power of an organization’s suppliers, the threats involved in the entry on new firms into a given industry, the bargaining power of an organization’s clients, and the threat posed to an organization’s product or services by substitutes.
Most managers use the Five Forces model to analyze the intensity of competition between the existing firms in a particular industry. According to the strategic analysis tool, when rivalry amongst the existing competitors is significant, the industry generally earns low returns due to the high cost of the competition. However, the mentioned trend depends on various factors, such as the number of firms in existence and competing against each other in a particular industry and how the industry is affected by its growth rate among others. Additionally, managers use the Five Forces model to determine the threat that the power of suppliers can pose to their businesses. The bargaining power of suppliers depends on factors such as the number of suppliers of a particular product and the cost of inputs relative to the selling price of the product (Bruijl 3). Managers also use the strategic analysis tool to determine the threats posed by new entrants. Indeed, new entrants tend to bring significant pressure in a particular market because of their endeavor to gain market share, which puts pressure on prices and costs of products. However, the high entry barriers that been put in place determine the threats of new entrants.
The Five Forces analysis helps managers to identify the bargaining power of buyers. Buyers have the greatest power in a monopoly market situation, especially when they are many because they can switch to alternative products that cost less (Narayanan and Fahey 214). Moreover, managers use the Five Forces model to analyze the threat of substitute products and services. Substitute products are a threat when the switching costs are low. The threats depend on the buyer’s addiction to substitute products and the relative price performance of the substitutes.
Bruijl, Gerard H. Th. “The Relevance of Porters Five Forces in Todays Innovative and Changing Business Environment.” SSRN Electronic Journal, 2018, DOI:10.2139/ssrn.3192207
Narayanan, V. K., and Liam Fahey. “The Relevance of the Institutional Underpinnings of Porters Five Forces Framework to Emerging Economies: An Epistemological Analysis.” Journal of Management Studies, vol. 42, no. 1, 2005, pp. 207–223., DOI:10.1111/j.1467-6486.2005.00494.x