Five Forces Analysis

Five Forces Analysis

Analyzing the environment

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Five Forces Analysis helps to contrast a competi= tive environment. It has similarities with other tools for environmental audit, = such as PEST analysis, but tends to focus on = the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. For example, Dell would analyze the ma= rket for Business Computers i.e. one of its SBUs.

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F= ive forces analysis looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.

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The threat of entry.

Economies of scale e.g.= the benefits associated with bulk purchasing.

The high or low costs o= f entry e.g. how much will it cost for the latest technology?

Ease of access to distr= ibution channels e.g.: Do our competitors have the distribution channels sewn = up?

Cost advantages not rel= ated to the size of the company e.g. personal contacts or knowledge that larger companies do not own or learning curve effects.

Will competitors retali= ate?

Government action e.g. = will new laws be introduced that will weaken our competitive position?

How important is differentiation? E.g. The Champagne brand cannot be copied. This desen= sitizes the influence of the environment.

The power of buyers.

This is high where ther= e a few, large players in a market e.g. the large grocery chains.

If there are a large nu= mber of undifferentiated, small suppliers e.g. small farming businesses supply= ing the large grocery chains.

The cost of switching b= etween suppliers is low e.g. from one fleet supplier of trucks to another.

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The power of suppliers.=

T= he power of suppliers tends to be a reversal of the power of buyers.

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Where the switching cos= ts are high e.g. switching from one software supplier to another. =

Power is high where the= brand is powerful e.g. Cadillac, Pizza Hut, Microsoft.
There is a possibility = of the supplier integrating forward e.g. Brewers buying bars.

Customers are fragmente= d (not in clusters) so that they have little bargaining power e.g. Gas/Petrol stations in remote places.

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The threat of substitutes

Where there is product-for-product substitution e.g. email for fax where there is substitution of need e.g. better toothpaste reduces the need for denti= sts.

Where there is generic substitution (competing for the currency in your pocket) e.g. Video suppliers compete with travel companies.

We could always do with= out e.g. cigarettes.

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Competitive Rivalry=

This is most likely to = be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it = is always seen in the center of the diagram.

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