Five Forces Model for Competition Analysis Porter's five forces analysis is a framework for industry analysis and business strategy development. Three of Porter's five forces refer to competition from external sources: threat of substitute products, the threat of established rivals, and the threat of new entrants. The remainders are internal threats: the bargaining power of suppliers and the bargaining power of customers. This analysis is based on the Structure-Conduct-Performance paradigm in industrial organizational economics.
It helps businesses become more profitable to helping governments stabilize industries. Based on case study, The Butler Lumber Company, I would like to analyze its business by using these techniques in order to see the firm’s structure, obstruction and the overall industry profitability. 1. Threats of new entrants Profitable markets that yield high returns will attract new firms. This causes the new entrants, which eventually will decrease profitability for all firms in the industry.
But the barrier to entry to this business is Capital requirements. This business need high fix assets.Moreover, the economics of scales is the factor that must have for retail business. And the butler company had an advantage in term of location. It was located in the growing suburb of large city in Pacific Northwest.
Base on these reasons above, the butler lumber company has no threats of new entrance. 2. Threats of substitute product The existence of products outside can make the customers switch to alternatives. As typical products of lumber are the plywood, moldings, sash and door products which have less number of substitute products available in the market.These are made from wood which is a limited resource.
Thus, the buyers cannot switch to buy the similar products. 3. Competitive rivalry The competitive rivalry is the major determinant of the competitiveness of the industry. The butler lumber has a Powerful competitive strategy, cost leadership. This is a competitive advantage that makes this company outstanding from the competitors.
So he must maintain this strategy to compete with his competitors. 4. The bargaining power of customerThe bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes. The butler lumber company is a retailer business. Price competitor is the strategy of this type of business.
Customers can you a bargaining power with the company. But one thing that is an advantage of the business is unavailability of existing substitute products. So the customers cannot have much bargaining power. 5. The bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs.
Suppliers of raw materials and components to the firm can be a source of power over the firm, when there are few substitutes. Supplier may give a short term credit or fewer discounts. This case butler cannot get the discount 2% from his supplier because his accounts are not paid by the tenth day in order to get the 2% discount. In my opinion, the bargaining power of suppliers is the external factor that has an effect to this company.
References: http://www. logisticafe. com/2009/07/5-force-model/ http://en. wikipedia.
org/wiki/Porter_five_forces_analysis
