No matter the size of a company, competition will always be a threat. Businesses should constantly ask themselves about their competitors and the impact of competition on their bottom line. The competition can help you answer these questions. Porter’s Five Forces is a model developed by Harvard University’s Michael E. Porter back in 1979. These five categories can be used to assess the profitability of companies based off the local business environment. Profitability is a function of the industry structure, not the products. Porter says that software companies, for example, can be profitable when the forces are favorable. Airlines and hotels have a lower profit when the forces are intense. Porter’s Five Forces Model helps companies analyze their competition by analyzing five categories.
Porter’s Model begins with the competitive rivalry force. This force analyses the level of competition on the market. The number of competitors and their capabilities are used to determine this. A customer is likely to be more competitive when there are a number of companies selling the same product or service for a lower price. Advertising and price wars can be a result of competition. This can also hurt the bottom line of a company. Nike and Adidas competitors have huge resources which allows them to gain a market share in apparel. Porter’s model includes the second factor, which is the bargaining strength of suppliers. This model measures the control and power a provider has over their price-hiking potential. Profits decrease when a supplier raises prices. The number of available suppliers is also taken into consideration. Suppliers are more powerful when they are fewer. Many suppliers are less powerful. Under Armour’s suppliers are located in many countries and produce the products.
Customers’ bargaining strength is the third force. The third force is the bargaining power of customers. There are fewer buyers, so the power of the consumer is greater. When there are more customers, the seller’s influence increases. Under Armour’s customers range from wholesalers to end-users. Dick’s Sporting Goods is one of their wholesale customers. Dick’s Sporting Goods has bargaining leverage with Under Armour. Fourth, the threat of new competitors. This force examines how new competitors can impact the position of the business.
It is riskier when competitors can enter the market easily. When there are high barriers for entering the market, a company can keep the upper-hand and benefit. Under Armour has a low risk of competition from new companies because branding, marketing and demand for their products are expensive. The performance apparel market is open to existing sportswear businesses in the future. The threat of substitute services or products is the final and last force. This force examines the ease with which a customer can switch to another business’s services or products. A cheaper alternative can damage a business by reducing its profit margin. Substitute products are unlikely to be a threat because performance apparel is expected continue in demand.
After the five-force analysis is complete, a strategy to increase competitive advantage can be implemented. Porter identifies 3 strategies which are applicable in all industries. Cost leadership is the first strategy. The first strategy is cost leadership. Second, differentiation. Differentiation is the second strategy. In order to achieve this, it is important that the company conducts thorough research and has a strong sales and marketing team. Thirdly, focus is the strategy. The third strategy is focus. A company’s understanding of market players, buyers, and sellers is essential.
