question archive During this COVID-19 era, how can small businesses utilize its micro-environment: Porter's Five Forces to be successful in its industry that is gaining a competitive advantage?
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During this COVID-19 era, how can small businesses utilize its micro-environment: Porter's Five Forces to be successful in its industry that is gaining a competitive advantage?
Answer:
Michael Porter, a Harvard strategy professor, created an analytic tool to assess a company's micro environment. Porter's Five Forces is a tool for examining different micro-environmental groups in order to evaluate their impact on a corporation in an industry. (See Exhibit 8.5.) Each force indicates a different component of competition that has an impact on a company's ability to succeed in its industry. It's vital to note that this technique is not the same as Porter's generic strategy typology, which we'll talk about later.
Understanding Porter's Five Forces
Understanding both the competing dynamics at play and the broader industry structure, according to Porter, is critical for effective strategic decision-making and designing a compelling future competitive strategy.
In Porter's model, the five forces that shape industry competition are
1. Competitive rivalry
This force investigates the level of competitiveness in the marketplace. It takes into account the number of existing competitors as well as what each one can provide. When there are only a few enterprises selling a product or service, the sector is growing, and consumers may easily move to a competitor's offering at little cost, then competition is intense. When rivalry competition is high, advertising and price wars ensue, which can hurt a business's bottom line.
2. The bargaining power of suppliers
This force examines how much clout a company's supplier has and how much control it has over the company's capacity to raise prices, lowering profitability. It also evaluates the number of raw material and other resource suppliers available. The fewer the suppliers, the greater their influence. When there are several suppliers, businesses are in a better position.
3. The bargaining power of customers
This task group investigates consumer power and its impact on pricing and quality. When there are fewer consumers, they have more power, but when there are many sellers, consumers can easily switch. When consumers buy modest amounts of things and the seller's product is extremely different from that of its competitors, buying power is minimal.
4. The threat of new entrants
This force takes into account how simple or difficult it is for competitors to enter the market. The easier it is for a new competitor to break into a market, the more likely it is that an existing company's market share will be eroded. Absolute cost advantages, access to inputs, economies of scale, and strong brand identification are all barriers to entry.
5. The threat of substitute products or services
This force investigates how easy it is for customers to switch from one company's product or service to another. It looks at the number of competitors, how their prices and quality compare to the firm under consideration, and how much profit those competitors make, in order to see if they can cut costs even more. Switching costs, both immediate and long-term, as well as consumers' willingness to shift, inform the danger of replacements.
Example of Porter's Five Forces
Porter's Five Forces can be applied to a variety of industries, as shown in the examples below. The ultimate goal is to discover potential possibilities and dangers to a company. Trefis, a stock analysis business, examined how Under Armour fits within the athletic footwear and apparel market, as an example.
During this Covid-19 era, analyzing the Five Forces can help companies anticipate shifts in competition, shape how industry structure evolves, and find better strategic positions within the industry.
ref: https://openstax.org/books/principles-management/pages/8-4-a-firms-micro-environment-porters-five-forces
https://www.businessnewsdaily.com/5446-porters-five-forces.html
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