Porter's Five Forces AnalysisWritten by Chris Mallon
This article looks at an analysis tool called Porter’s Five Forces Analysis. In his book Competitive Strategy, Harvard professor Michael Porter describes five forces affecting profitability of companies. These are five forces he noted: 1) Intensity of rivalry amongst existing competitors 2) Threat of entry by new competitors 3) Pressure from substitute products 4) Bargaining power of buyers (customers) 5) Bargaining power of suppliers These five forces, taken together, give us insight into a company's competitive position, and its profitability. Rivals Rivals are competitors within an industry. Rivalry in industry can be weak, with few competitors that don’t compete very aggressively. Or it can be intense, with many competitors fighting in a cut-throat environment. Factors affecting intensity of rivalry are: • Number of firms – more firms will lead to increased competition. • Fixed costs – with high fixed costs as a percentage of total cost, companies must sell more products to cover those costs, increasing market competition. • Product differentiation – Products that are relatively same will compete based on price. Brand identification can reduce rivalry. New Entrants One of defining characteristics of competitive advantage is industry’s barrier to entry. Industries with high barriers to entry are usually too expensive for new firms to enter. Industries with low barriers to entry, are relatively cheap for new firms to enter. The threat of new entrants rises as barrier to entry is reduced in a marketplace. As more firms enter a market, you will see rivalry increase, and profitability will fall (theoretically) to point where there is no incentive for new firms to enter industry. Here are some common barriers to entry: • Patents – patented technology can be a huge barrier preventing other firms from joining market. • High cost of entry – more it will cost to get started in an industry, higher barrier to entry. • Brand loyalty – when brand loyalty is strong within an industry, it can be difficult and expensive to enter market with a new product.Substitute Products This is probably most overlooked, and therefore most damaging, element of strategic decision making. It’s imperative that business owners (us) not only look at what company’s direct competitors are doing, but what other types of products people could buy instead. When switching costs (the costs a customer incurs to switch to a new product) are low threat of substitutes is high. As is case when dealing with new entrants, companies may aggressively price their products to keep people from switching. When threat of substitutes is high, profit margins will tend to be low.
| | Resolve to Improve Your Finances in 2004Written by James H. Dimmitt
Kick off 2004 with these 7 money resolutions and get a fresh financial start to new year. At year’s end, you’ll be surprised at how much you’ve reduced your debt load and money you’ve saved! 1) I will create and use a budget. A budget helps you see exactly where your money is going from week to week and month to month. Creating and using a budget, no matter what your income level, will help you reach your financial goals more easily than without one. 2) I will use my budget to help reduce my credit card debts. Let’s say you are able to save $20 a month by budgeting your money. You could take that $20 and place it in a savings account where you would earn minimal interest. Or you could use that same $20 and add it to your budgeted credit card payment reducing your credit debt in two ways. You’ll be reducing amount you owe your creditor and you’ll also reduce finance charge on next month’s bill. 3) I will pay more than minimum due on my credit card bills. If you just pay minimum due on credit card bills, you'll barely cover interest you owe. It will take you years to pay off your balance and you'll end up spending thousands of dollars more than original amount you charged. 4) I will make my payments on time and avoid late fees. Making late payments adds to your debt load and may increase annual percentage rate (APR) your creditors charge you. Additionally, late payments are reported to credit reporting agencies and negatively affect your credit rating.
|
