Business competition is a normal part of any business venture, whether facing highly competitive markets like cosmetics or markets dominated by large companies. Adaptation and the use of competitive analysis tools are therefore crucial. Porter's Five Forces is a particularly interesting and useful tool for analyzing competitors in order to cope with and adapt to the competitive business landscape
What is the Five Forces Model ?
The Five Forces Model is an analytical model designed to help entrepreneurs and managers understand the factors that affect competitiveness. Analyzing the Five Forces Model helps in defining strategies that effectively respond to competitive industry conditions. It allows businesses to identify external factors, prepare to adapt to them, and leverage those factors to further develop their business
The five key components of the Five Forces Model.
1. Competition within the same market (Industry Rivalry)
In the same business or industry, businesses face numerous competitors, intensifying competition and making market share acquisition increasingly challenging. Therefore, businesses must quickly adapt to new trends, develop products, and implement marketing strategies to better meet customer needs
For example, the ready-to-drink green tea market in Thailand.
This is an interesting case study because this market has several major players and fierce competition in many areas, such as taste, price, brand image, and distribution channels. Two brands clearly demonstrate their brand positioning:
Oishi
- A pioneer in the ready-to-drink green tea market in Thailand
- Use intensive marketing strategies such as giving away gold or offering chances to win trips to Japan
- Available in convenience stores and supermarkets nationwide
- They have collaborated with anime series such as Kimetsu no Yaiba and Pokemon.
Ichitan
- Oishi's main competitor was founded by the original founder of Oishi
- They leveraged their affordable pricing and used online media to reach the teenage audience
- Personal branding by Tonman is used to build brand image
- They have created merchandise in collaboration with artists like Mackha
The examples given, although both involve selling ready-to-drink green tea, show that different brand identities and target groups can help businesses adapt to a highly competitive market and focus on effective branding
2. Threat of New Entrants
In the digital age, where some businesses have lower costs and greater accessibility, a large number of new businesses have emerged. This means that competition is no longer limited to existing businesses competing against competitors already in the market
However, businesses must be prepared to face a large number of new competitors, which puts pressure on profits. Therefore, establishing a strong customer base is one way to help businesses
For example, the fresh coffee market in Thailand.
In the case of the fresh coffee market in Thailand, the increasing number of new coffee shops creates challenges for existing businesses, such as Amazon which has to compete with...
New coffee shops may have more unique selling points, such as more attractive and comfortable seating, and more interesting menus, but Amazon can still compete by setting up stalls at gas stations and retaining existing customers through loyalty programs and discounts for bringing their own cups.
3. Bargaining Power of Customers
In business, customers are a key factor influencing success, as they are the ones who decide on purchasing goods and services. Therefore, sellers must negotiate with customers to determine prices and terms that customers are willing to pay
Customers' bargaining power increases when they have a variety of choices, can easily switch to competitors' services or products, and are price-sensitive. In this case, customers can pressure businesses to lower prices, improve quality, or modify terms and conditions to maximize their satisfaction
Conversely, if a business can differentiate its products and services, such as by creating a unique identity or providing superior value and experience, it can reduce the bargaining power of customers, as customers may feel they have no better alternative or are unwilling to switch providers
For example, the Thai telecommunications industry.
In the Thai telecommunications market, there are only three main players: AIS, TrueMove H, and DTAC (later merged with True). However, competition among these companies is fierce. Each company tries to attract customers with increasingly cheaper internet data packages, along with value-added services such as exclusive access to streaming applications or discounts on monthly fees. This gives customers significant bargaining power, allowing them to choose the internet package and speed that best suits their needs and benefit from price and promotional offers from the intense competition among these leading companies in the industry
4. Bargaining Power ofSuppliers
A supplier's bargaining power lies in their ability to set prices for raw materials, delivery terms, or the quality of ingredients necessary for product manufacturing. If there are few suppliers or they possess high levels of specialization, businesses will have less bargaining power and will be more compelled to accept stricter terms from their suppliers
5. Threat of Substitute Products orServices.
If a new product emerges that can replace an existing product at a lower price and with better quality, consumers will naturally switch to buying that new product, preventing a decline in sales for the business
For example, a business that has been heavily impacted by substitute products is Kuma tissue
Facing the challenge of a flood of Chinese-made tissue products competing on price with Thai tissue products, Kuma Tissue was able to employ a strategic brand image building approach
Launching products for mothers and babies in Thailand, and using TikTok for sales and brand image building, has created more credibility than brands from China that have entered the market.
5 Key Benefits of the Five Forces Model
1. Understand the competitive structure and profitability potential of the industry
The Five Forces Model helps businesses assess the level of competition within an industry by considering various factors that affect competitive power, such as the number of competitors, ease of market entry, bargaining power of suppliers and customers, and the risk of substitute products. This analysis helps businesses understand whether an industry has high or low profit potential and enables them to plan appropriate strategies
2. Develop and refine competitive strategies as needed
Once businesses understand the factors affecting competition, they can use this information to tailor their strategies to the situation. For example, in a highly competitive market, they might need to employ differentiation strategies to create unique selling points. Or, if customers have high bargaining power, they might need to develop loyalty programs to reduce customer switching to competitors
3. Manage relationships with suppliers and customers to maintain a competitive advantage
The Five Forces Model helps businesses understand the bargaining power of suppliers and customers. If suppliers have high bargaining power, businesses may need to find ways to reduce their dependence on a single vendor by exploring alternatives or negotiating more favorable terms. Conversely, if customers have high bargaining power, businesses must create added value to retain their customer base and mitigate the risk of customers switching to competitors
4. Assess the risk from threats from new entrants and substitute products
Businesses can use the Five Forces Model to examine whether a market is likely to see new competitors enter. If a market has low barriers to entry, such as low startup costs and lenient regulations, it may make it easy for new entrants, potentially reducing profitability opportunities. Conversely, the availability of cheaper or similarly beneficial substitutes may cause customers to switch to those products instead of the business's
5. Supporting strategic decision-making and business expansion
The information obtained from the Five Forces Model can be used to inform decisions about investment, business expansion, or entering new industries. If a business finds an industry to be highly competitive, with low profit margins and strong bargaining power from suppliers or competitors, it may not be a good investment option. Conversely, if an industry has high growth potential and low barriers to entry, the business can use this opportunity to expand and increase its market share
summarize
The Five Forces Model is a crucial tool that helps businesses understand the competition in their own industries. Thai businesses, such as coffee shops, food delivery services, and airlines, all face pressure from these factors. A careful analysis of the Five Forces model will help businesses adapt and develop appropriate strategies to remain competitive and achieve sustainable growth.
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