Porter’s five forces is generally regarded as a credible and practical model for business introspection ahead of the widely used SWOT analysis for various reasons.
By NYASHA CHIZU
The analysis provides a horizontal and vertical analysis of competition. Horizontal competition relates to forces operating in the same way within the market that include the threats of new entrants through to the extent of rivalry between industry competition and the threats posed by substitute products.
Vertical analysis of competition relates to forces operating within a supply chain that relates to the bargaining power of suppliers that is reviewed together with the extent of rivalry between the industry and the bargaining power of buyers.
The assessment of the vertical and horizontal forces within the five forces of the model assists in understanding as well as identifying and evaluating potential risks and opportunities within a particular market.
The model is useful since it can be applied to all lines of business levels and is often used at the start of the development of a review process.
Review of the threats of new entrants is regarded very critical since it affects the status quo. New entrants take up a portion of the market affecting revenues as well as profitability of the existing businesses.
The quantum of potential entrants in any market depends on a variety of factors and such factors need to be quantified effectively for the proposed analysis to yield desired results.
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A characteristic that determines the gap between hard and soft sectors to venture into relate to the level of investment required as well as the expertise needed to break into the market.
Telecommunications industry would qualify as a hard sector due to the high level of investment that is needed as well as the high level of expertise that is required.
Such markets require the acquisition of patents and proprietary knowledge that deters new entrants because of the large upfront capital investment required.
Like in the telecommunications sector, customer loyalty is very high and existing firms thrive on first move advantage to gain a market share.
Brand loyalty is very high and customer switching is very difficult making it unattractive for new players to crack the new markets.
This is evidenced by the performance of EcoCash against competing products such as OneWallet and TeleCash in Zimbabwe. This becomes a challenge to new entrants and provides some level of comfort on the profit levels of existing players.
Easy markets to penetrate are characterised by industries that have a common technology base, which has little brand awareness or where customer loyalty is difficult to establish.
Such markets are also characterised by accessible distribution channels that all sizes of businesses can enter. All these factors are attractive for new entrants into that market.
There are several barriers that can prevent additional rivalry to enter into a market. Such barriers assist existing companies in a particular market to create or consolidate their existing competitive advantage.
Such barriers come in different forms and include those created by the government in the form of permits, licences and minimum capital requirements. Such licensing in the telecommunications sector in Zimbabwe is so high that even the big players like Econet at times are in danger of their licensing being cancelled for non-compliance.
Industries where the equipment is highly specialised create a barrier because of the levels of investment required.
The fact that most modern equipment and technology cannot be used for other products and services increases the appetite for existing organisations to aggressively defend their market share and investment from potential rivals.
Related to equipment is the fact that many markets are only attractive if they are at a level of production and costs that attain economies of scale which is commonly known as the minimum efficiency scale (MES). The higher the MES figure the greater the deterrent to new entrants.
High exit barriers also provide the same effects as high entrance barriers to both existing firms and new entrants. The assessment of threats of new entrants is therefore vital when an organisation is developing strategy to effectively compete in a market. Such strategy includes the procurement strategy that has a direct implication on the organisational competitiveness.
