NAME:

JESULANA OLATUNDE SODIQ

MATRIC/ REGISTRATION
NUMBER:
P23DLBA83253

COURSE CODE:
BUAD 823

COURSE TITLE:
ENVIRONMENT OF BUSINESS
 QUESTION

The Competitive structure of an organization is a very important business

environment, which according to Porter depends on five (5) basic forces.

Explain with relevant examples these competitive forces.

Porter's Five Forces of competitive position refers to a framework developed

by Michael Porter that analyzes five key factors impacting a company's

competitive standing within an industry: Threat of new entrants, bargaining

power of suppliers, bargaining power of buyers, threat of substitute products,

and competitive rivalry; essentially assessing how these forces influence an

industry's profitability and a company's ability to sustain competitive

advantage within it.

1. COMPETITORS IN THE INDUSTRY

The first of Porter’s 5 forces is the number of competitors in a particular

industry. Competitors are the core of this specific strategy framework by

Michael Porter. So important, that when Porter’s 5 Forces model is

represented using a diagram, competitors are placed in the center and the

rest of the four forces are placed around it (as shown in the infographic).
 Now, when a company operates in an industry in which there are many

competitors selling similar products, it’ll have lesser power. The reason is

that there are many rivals trying to get a more significant share of the pie.

This is a scenario in which a customer has many options to choose from.

So, they will go for the best, the cheapest, the trendiest, and so on. On the

other hand, if a company offers products in an industry that doesn’t have

much competition, it can easily charge a premium price and dominate the

market. This is because, in the absence of another alternative, the

customers will have no choice but to depend on one company for a

particular product.

Practical example:

Let’s consider the hospitality industry as an example. In every country,

every city, and every neighborhood, there are many hotels for customers

to select from. Customers make their decision by evaluating the price,

ratings, reviews, and location of a hotel. With the advent of online

bookings, the competition has become tougher.

So, if there are two hotels in the same location with 4-star ratings, and

one offers a room for a measly #500,000 less, then it’s very likely that

customers will go for the cheaper one. From a strategy perspective, if one
 is thinking about getting into the hotel business, one must know that

rivalry in this industry is intense.

KEY TAKEAWAYS

Five forces by porter are as follows: Competitors in the industry; Threat

of new entrants; Bargaining power of suppliers; Bargaining power of

buyers; Threat of substitutes.

 Competitors operating in the same industry may drive profit margins

and revenue down for any given company.

 If the barrier to entry in an industry is low, the threat of new entrants

is high, and vice versa.

 The lower the number of suppliers in an industry, the more power

they’ll have, and vice versa.

 If a company has a small customer base, customers may have higher

bargaining power. In the case of a larger customer base, individual

customers may have lesser power.

 A new product that is better than an existing one can substitute the

existing product and put a business in dire straits.

2. THE THREAT OF NEW ENTRANTS

The second of Porter’s 5 forces is the threat of new entrants. Before

partaking in a business venture, investors, and entrepreneurs should ask

themselves: How easily can others do what we’re planning to do? The

threat of new entrants can be divided into three categories: high, medium,

and low. If an industry enables new competitors to enter quickly and

without investing a lot of money, then the barrier to entry is low and the

threat of new entrants is high.

On the flip side, for industries like petroleum and pharmaceuticals, the

barriers to entry are way too high for an average businessman or investor

to cross. Part of the reason are the high investment costs. So, in such

cases, the threat of new entrants is low and usually, only one or very few

companies can ever operate in these industries.

Practical example:

What’s the first brand name that comes to your mind when you hear the

term ‘electric vehicle’? That’s right—it is Tesla! This company is a great

example of an industry in which the threat of new entrants is really, really

low.
 Why? Well, it's one thing to design a prototype of an EV and show it off

in trade shows, and it’s another thing to manufacture these cars on a mass

scale and bring it to the customers. It’s hard to compete with Tesla, even

for established car manufacturers. Thus, a new entrant is highly unlikely

to be a threat.

3. BARGAINING POWER OF SUPPLIERS

The third of Porter’s 5 forces is the power of suppliers. Maybe you didn’t

think that suppliers would affect a business’s strategy? Well, they

actually do. You see, as customers, most of us only see the finished

product—a laptop, a car, a camera, and so on. However, Michael Porter

mentions how suppliers of raw materials, equipment, etc. can drive the

cost of a product and make businesses rethink their strategy. The lower

the number of suppliers in an industry, the more power they’ll have, and

vice versa. Let’s understand this using a real-life case.

Practical example:

The restaurant industry is a great example of a supplier-dependent sector.

Everything from cooking oil to flour comes from an external supplier.

Restaurant owners are not farmers, so they can’t have any raw material

for their business without external help.

 Thus, in a location where there is a lack of suppliers (for example, if

there’s only one supplier for cooking oil), the restaurant may have to pay

whatever price the supplier asks for to run their restaurant. On the other

hand, in a place where there is an abundance of suppliers, restaurant

owners can choose the best one from a pool of many suppliers.

4. BARGAINING POWER OF BUYERS

The fourth of five forces by porter is the power of customers. Michael

Porter, being a smart strategist, elaborated on the role of customers in this

classic strategy framework. In any industry, if a company only serves a

small number of customers, then customers have more power to negotiate

lower prices. This is because the business doesn’t have too many options

when it comes to customers.

Therefore, it will have to customize itself based on customer demands.

On the other hand, if a company has a very high number of customers, it can

dictate the terms of engagement. For instance, it could charge a higher price

for a product that is cheap to produce.

Practical example:
Let’s talk about Apple. According to many sources, an iPhone only costs

around #850,000-#900,000 to produce. Still, the cost of iPhones can be

around #1,700,000—almost double the production cost. The reason is that

Apple’s operating system and product are one of a kind. This means that

currently there is only one competitor to Apple’s smartphones—Android

phones (source). Hence, when it comes to Apple, the number of customers

and loyal fans is high. Therefore, the bargaining power of customers is low,

and the company can charge a premium price.

5. THE THREAT OF SUBSTITUTES

The fifth of Porter’s 5 forces is the threat of substitute products. A

company can sell a very popular product that generates high profits. Still,

if a substitute of that product seems more appealing, then customers may

ditch the company’s products and go for the substitute. Now, you must

understand what a substitute product really means. For instance, a

substitute for a calculator is not necessarily a faster calculator. Rather, it

could be a smartphone that has an in-built calculator. A substitute could

be a completely different product type from the original one or a better,

improved version of the same product.

Practical example:
Let’s start with the statistics. In 2016, the revenue of dairy-free frozen

desserts in Europe was $123.02 million. In 2021, it was over $184

million, and in 2024, it’s expected to cross $230 million (source). Due to

the prevalence of animal rights activism and a preference for vegan food,

milk-based ice creams are being substituted with dairy-free versions that

taste almost the same as milk-based ice creams. Two decades ago, no one

would have imagined this. But now, it’s the reality.

Conclusively, Michael Porter gave this very important strategic tool to

the world decades ago, and it’s still relevant to this day. In order to grow

and sustain a business, all five forces must be given equal importance.

It’s not that one can completely control any or all of these forces.

However, applying this framework to a business and keeping an eye on

all these factors can help business owners prepare themselves for a rainy

day. Moreover, this framework can be used to tweak one’s business

strategy in order to achieve desired outcomes. For instance, a business

can switch to a cheaper supplier or acquire a company that can

potentially become a competitor.