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?  

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?

 

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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.

  • Competitive rivalry: Nike, Adidas, and young players are putting a lot of pressure on Under Armour. Nike and Adidas are making a bid in the performance gear market to capture market share in this up-and-coming product category, despite having significantly more resources at their disposal. Because Under Armour has no fabric or process patents, its product portfolio may be imitated in the future.
  • Bargaining power of suppliers: Supply bargaining strength is hampered by a diverse supplier base. Under Armour's products are made by a slew of different companies across the globe. This gives Under Armour an advantage by reducing suppliers' leverage.
  • Bargaining power of customers: Clients of Under Armour include both wholesale and end-user customers. Wholesale clients, such as Dick's Sporting Goods, have some negotiating power because they can swap Under Armour's products for those of competitors to increase margins. The bargaining power of end-user customers is lower as Under Armour enjoys strong brand recognition.
  • The threat of new entrants: Branding, promoting, and building product demand all need a lot of money, which makes it difficult for newcomers to get into the sports apparel market. Existing sports apparel firms, on the other hand, may enter the performance apparel sector in the future.
  • The threat of substitute products: Performance gear, sports footwear, and accessories are projected to continue to be in high demand. As a result, this force does not pose a threat to Under Armour in the near future.

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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