"Moreover, in the fight for market share, competition is not manifested only in the other players. Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry" - Michael Porter
A fundamental questions posed by both nascent and mature companies is the level of attractiveness of a specific industry segment. Nascent companies ask this question in evaluating whether or not to enter the industry segment. Mature companies ask the question for either the same reason when evaluating potential growth opportunities or in analyzing their competitive position in the arena in which they operate.
Too often these companies focus on their rivals for market share, and forget the successful competition goes well beyond the fight for share. Rather, share is won or lost through an industry's underlying economics.
In his paper published in 1979, Professor Michael Porter of the Harvard Business School outlines five forces that play a role in determining the competitive intensity, and thus the overall attractiveness of a market.
Those five forces, as shown in Figure 1, consist of the bargaining power of suppliers, bargaining power of buyers, potential entrants, threat of substitute products, and the overall industry structure. This article briefly touches on each of the five forces, and describes how they affect overall attractiveness of an industry segment.
Michael E. Porter is the Bishop William Lawrence University Professor, based at Harvard Business School.
He is a leading authority on competitive strategy and the competitiveness and economic development of nations, states, and regions.
Force #1: Bargaining power of suppliers
Suppliers of key materials that make up a final product can have a significant influence on the competitiveness of an industry - primarily around the lead time / availability of the product as well as its final price.
As an example of the impact of a supplier on lead time and availability, consider an industry segment with very few suppliers of a key raw material - such as certain segments of the telecom industry. In these segments electronic chips are highly specialized and offered by very few manufacturers. If a manufacturer fails to deliver the chip for whatever reason (e.g. manufacturer chooses to work with vendors further along in the supply chain, manufacturing of the chip is discontinued, or there are simply production issues), vendors who rely on the chip will have difficultly in bringing their own product to market.
On the price side, it is likely that a chip this specialized will make up a significant fraction of the total cost of the final product. Should the chip manufacturer increase its prices, the telecom vendor may have difficulty in maintaining its overall margin.
Situations where a supplier has such a strong influence on the market should set off warning bells for anyone evaluating the industry. Companies deal with such issues in multiple ways. Many will maintain production of key components in-house (e.g. pharmaceutical companies will manufacture key raw materials themselves, even if they outsource other parts of the manufacturing process). Other companies will design their processes so that they are not dependent on a single source for key manufacturing inputs. Finally, some companies will enter into long term agreements with a manufacturer to ensure consistent availability and pricing of key inputs.
Force #2: Bargaining power of customers
As customers are the source of revenue in an industry, they are of course key in determining its overall attractiveness. The level of information available to them, their price sensitivity, geographic concentration, and switching costs will affect the revenue a competitor in the market can expect to receive.
The old adage "knowledge is power" is quite appropriate in this context. Customers will always seek to optimize their buying position, and will therefore use all information available to them to ensure they receive the optimal price for the product that suits their needs. The use of the internet by customers in a market serves as an excellent example. In the consumer goods market, customers will often use the internet to research specifications and compare prices for products. Once armed with all the information they need to make an informed decision, they will go to a brick-and-mortar store to make their final purchase.
Online options exist in the B2B market as well - for example, Tejari's Transact product offers a forum in which member companies and organizations can buy and sell goods and services in an efficient manner.
For organizations that carry products that meet the needs of customers, the abundance of information renders the overall industry attractive; in contrast, organizations with products that are passed up due to this additional information would consider the market less attractive.
Geographic concentration is important because they affect the underlying economics of the product. A more concentrated population will result in lower marketing and logistics costs as well as potential for geographical expansion. The flip side of this is, of course, that it may be easier for a competitor to enter the market.
Switching costs for customers will determine how likely they are to move from one offer to another. The higher switching costs are, the less likely they will be to migrate to a competitor. Consider the efforts of ING Direct in many western countries. When they introduced their high yield savings accounts, they also made it very easy for customers to transfer their money from their current bank to ING. Switching costs in terms of both time and capital were very low, and as a result ING was able to very quickly become a leader in savings deposits in most countries. Since then traditional banks have introduced a competitive offering (e.g. Citibank's e-savings account) and have been able to regain some of their lost share.
Force #3: Threat of substitute products
Closely related to Force #2 is the threat of substitute products. The key to success for any product is sustainable competitive advantage. Once a substitute product becomes available in the market, the advantage enjoyed by a first mover can decrease significantly - especially if it is of comparable price level and features.
These substitutes may simply increase competition in an industry - such as the launch of low cost carriers Sama Air and Nas Air in Saudi Arabia to compete with incumbent carrier Saudi Airlines - or fundamentally change an industry's competitive landscape - such as the impact of the introduction of the iPod on the mp3-player market.
Force #4: Potential entrants
The ideal situation for any competitor is to participate in a market that is closed to others. Barriers to entry - once you are on the correct side of the barrier - can be an effective source of competitive advantage and thus increase the overall attractiveness of an industry.
The telecom industry in the United Arab Emirates serves as a classic example of implications for this force. Until recently Etisalat was the sole owner of a telecom license in the country and therefore enjoyed 100% market share. A new competitor, du, has gained a telecom license and launched mobile services in the country. As a result, while the telecom industry in the UAE is still attractive for Etisalat, it is considerably less so now that it has to compete for market share.
Force #5: Industry rivals
The fifth element is the one that is most commonly considered when assessing the attractiveness of an industry - the players that make up the industry itself - the competition for market share. Factors that determine the level of attractiveness include the degree of rivalry between players, the degree of complexity involved, economies of scale enjoyed by existing players, and the level of investment needed to become a viable competitor.
Strategists often site the existence of a "sixth force" not defined by Porter: the power of stakeholders. These stakeholders consist of governments, creditors, shareholders, and other groups that can have an influence on the attractiveness of an industry.
Evaluation of the attractiveness of markets in the Muslim world will only become more intense over time. Companies already present in these markets will continue to mature and seek growth opportunities in adjacent markets. Similarly, external players continue to assess entry strategies into the Muslim arena. In each instance those assessing opportunities will need to consider all market forces as they plan their strategic initiatives. Porter's Five Forces offers a tool through which strategists can base their analyses as to the overall attractiveness of the industry under study.
By Dr. Mohammed H. Badi
Dinar Standard 2007
