The five forces analysis model was proposed by Michael Porter of Harvard Business School in the early 1980s. He believed that there are five forces in the industry that determine the scale and degree of competition. These five forces combined affect the attractiveness of the industry and the competitive strategy decisions of existing enterprises. The five forces are the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitutes, and the degree of competition of competitors in the same industry.
(I) Bargaining power of suppliers
Suppliers mainly affect the profitability and product competitiveness of existing enterprises in the industry by increasing the price of input factors and reducing the unit value quality. The strength of the supplier’s power mainly depends on what input factors they provide to customers. When the value of the input factors provided by the supplier accounts for a large proportion of the total cost of the product, or is very important to the production of the product, or seriously affects the quality of the product, the supplier’s bargaining power is greatly enhanced. Generally speaking, suppliers who meet the following conditions will have relatively strong bargaining power: the supplier is controlled by some enterprises with relatively stable market positions and are not troubled by fierce market competition. There are so many consumers of their products that it is impossible for every customer to become an important customer of the supplier; the supplier’s products have certain characteristics, so that it is difficult for customers to switch or the switching cost is too high, or it is difficult to find substitutes that can compete with the supplier’s products; the supplier can easily implement forward integration or integration, while it is difficult for customers to implement backward integration or integration.
(II) Bargaining power of buyers
Buyers mainly influence the profitability of existing enterprises in the industry by lowering prices and requiring higher product or service quality. The following are the main reasons why the bargaining power of buyers will have a certain impact: the total number of buyers is small, while the purchase volume of each buyer is large, accounting for a large proportion of the seller’s sales; the seller’s industry is composed of a large number of relatively small enterprises; the buyer basically purchases a standardized product and purchases products from multiple suppliers at the same time; the buyer has the ability to achieve backward integration, while the supplier cannot achieve forward integration.
(III) Threat of new entrants
While bringing new production capacity and new resources to the industry, new entrants hope to win a place in the market divided by existing enterprises. This may lead to competition with existing enterprises for raw materials and market share, which will eventually lead to a decrease in the profitability of existing enterprises in the industry. In serious cases, it may even endanger the survival of these enterprises. The severity of the threat of new entrants depends on two factors: the size of the barriers to entering the new field and the expected response of existing enterprises to new entrants.
The barriers to entering new fields mainly include economies of scale, product differences, capital requirements, conversion costs, development of sales channels, government behavior and policies, cost disadvantages not dominated by scale, natural resources, geographical environment, etc. Some of these barriers are difficult to break through by copying or imitating. The expected response of existing enterprises to new entrants is mainly to predict the possibility of retaliatory actions by existing enterprises, which depends on the financial situation of the relevant manufacturers, the record of retaliation, the scale of fixed assets, the growth rate of the industry, etc. In short, the possibility of new entrants entering a field depends on the potential benefits that the entrants subjectively expect to bring, the cost and the risks to be borne.
(IV) Threat of substitutes
Two companies in different industries may compete with each other because their products are substitutes for each other. This competition from substitutes will affect the competitive strategies of existing companies in the industry in various forms.
The improvement of product pricing and profit potential of existing companies will be limited by the existence of substitutes that can be easily accepted by customers; due to the invasion of substitute producers, existing companies must improve product quality or reduce pricing by reducing costs or make their products more distinctive, otherwise their sales and profit growth goals may be frustrated; because the competition intensity of substitute producers is affected by the level of consumer switching costs.
In short, the lower the price of substitutes, the better the quality, and the lower the consumer switching cost, the stronger the competitive pressure they can generate. The intensity of this competitive pressure from substitute producers can be expressed by specifically examining the sales growth rate of substitutes, the production capacity of substitute manufacturers, and the profit expansion.
(V) Competition degree of competitors in the same industry
The interests of most enterprises are closely linked. As part of the overall strategy of the enterprise, the competitive strategy of each enterprise aims to enable its own enterprise to gain advantages over competitors. Therefore, conflicts and confrontations will inevitably occur in the process of implementing the strategy. These conflicts and confrontations constitute the competition between existing enterprises. The competition between existing enterprises is often manifested in price, advertising, product introduction, after-sales service, etc., and its competition intensity is related to many factors.
Generally speaking, the following situations will mean that the competition between existing enterprises in the industry will intensify: the industry entry barrier is low, there are many evenly matched competitors, and the range of competitors is wide; the market tends to mature, and the demand for products grows slowly; competitors attempt to promote sales by means such as price cuts; competitors provide almost the same products or services, and the customer switching cost is very low; if a strategic action is successful, its revenue will be considerable; after the strong enterprise outside the industry swallows up the weak enterprise in the industry, it launches an offensive action, which makes the enterprise become the main competitor in the market; the exit barrier is high, that is, it is more costly to exit the competition than to continue to participate in the competition. Here, exit barriers are mainly affected by economic, strategic, emotional and socio-political relations, including: asset specificity, fixed costs of exit, strategic mutual restraint, emotional difficulty in acceptance, various restrictions from the government and society, etc.