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The competition for goods and services in the market is defined by five forces that include competitors, customers, suppliers, potential entrants and substitute products. However, investors make the mistake of paying so much attention to competitors to the extent that they forget the other four forces of competition in the market.
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For any company to understand the industry competition, the company top management must understand the structure of the five forces because the underlying drivers of profitability in most companies are the same. The only difference is the intensity of the forces in different industries (“Competitive Forces (Porter’s Five Forces),” n.d).
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The strongest competitive force determines the profitability of that particular industry and becomes the most crucial to designing a strategy. However, outstanding force is not always obvious and direct. Therefore, the fiercest force in a company may not be the one controlling and limiting the profitability of an industry.
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The free entry and exit in the market put some extra pressure on the existing companies and organizations as this brings new limit and craving to win a piece of the overall industry that pushes the prices, costs and the rate of the venture important to contend
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There are notable barriers to free exit and entry into the market that gives the existing companies the power to control the market. Some of these sources of power include the supply-side economies of scale, demand side advantages of scale, client exchange cost, capital necessities, incumbency favorable circumstances autonomous of size, unequal access to distribution channels and prohibitive government policy (McMillan, 2010).
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The top management of any company needs to understand the forces that shape the industry competition before embarking on a journey to design, develop and implement a strategy. The five forces reveal the most substantial aspect of the competitive environment of a company.
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A strategy enables a company to build barriers against the focused powers or finding a position in the business where the strengths have little or no influence. This gives the company a competitive advantage over its rivals, making it a consumer favorite
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Through the knowledge obtained from the test, I can guide my future company into evaluating the competitive forces in the company rather than focusing on competitors alone.
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Additionally, the knowledge can be used to identify the underlying drivers of profitability so that the company can identify and design an appropriate strategy that can focus on giving a company competitive advantage over its competitors.
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Moreover, understanding the competitive forces of an industry allows a company to identify a chance or an opportunity to exploit industry assert a promising new vital position of the administration of an organization has a full comprehension of the aggressive strengths and their underpinnings (Levin, 2014).
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Through the information acquired from the perusing, a strategist can distinguish more extensive focused dangers and be better prepared to handle them considering the forces indicated the underlying drivers of industry competition.
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Additionally, understanding the industry structure is crucial to an organization as the five forces reveal shows the attractiveness of the industry and help investors to projects and forecast both positive and negative shifts in the market before they occur. As a result, they can determine when it is attractive to invest and when it is not safe to invest. This can give a company an upper hand compared to its competitors as they can anticipate profit and loss in the industry.
References
Competitive Forces (Porter’s Five Forces). (n.d.). Dictionary of Strategy: Strategic Management A-Z. doi:10.4135/9781452229805.n131
Levin, G. (2014). HBR’s 10 Must Reads On Change Management. Project Management Journal, 45(3), e1-e1. doi:10.1002/pmj.21413
McMillan, C. (2010). Five competitive forces of effective leadership and innovation. Journal of Business Strategy, 31(1), 11-22. doi:10.1108/02756661011012741
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