Dear friends, I want to share with you a very useful tool, five forces model, which you could use it to analyze the competition of an industry. Industry means the people or companies engaged in a particular kind of commercial enterprise, they product and sell the same kind of products, like the steel industry, the vehicle industry.
If you want to set up a company in a new industry you could use this tool to analyze the competition and see whether you can make a big profit or not. Specifically, the five forces are: suppliers, rivalry within an industry, substitute, buyers, and potential entrants. The Fives forces determine the competitive intensity and long-term profitability within the specific industrial sector. If the forces are strong, it maybe not a good idea to enter this industry.
This is the model, let’s analyze it together.
Firstly, rivalry within an industry. It means at now which companies sell the same products. For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
Secondly, suppliers. Suppliers of raw materials, components, labor, and service (such as expertise) to the firm can be a source of power over the firm when there are few substitutes. Suppliers have a great deal of influence over an industry as they affect price increases and product quality.
Thirdly, Buyers. Buyers’ power is strong if buyers have many choices. They can choose to buy one product according to their price, quality, design.
The fourth. Entrant means newly joined, a company enter a new industry.A good industry will attract new firms. But too many new firms eventually will decrease profitability for other firms in the industry.
The fifth. Substitutes products means replaceable products, for example, you can use apple to substitutes pear, they are fruits and can be eaten. A substitute product uses a different technology to try to solve the same economic need.
Do you remember the forces now? Let’s use the five forces model to do a practice together: analyze the competition in the smartphone industry.
Firstly, rivalry within an industry. Which companies sell smart phone? Can you name some? (Interaction) Yeah, great. Here is my answer. Samsung, Apple, Huawei, Xiaomi, Vivo, Oppo, Lenovo, Meizu and etc.We can see that there are so many competitors in this industry and competition is fierce.
Secondly, suppliers. Suppliers can provide the CPU, SCREEN,CHIP and other parts of smartphone. From the ZTE event we can know that the suppliers like 高通, they have strong bargaining power, because we could not produce the core parts, like CPU. Most companies can produce the simple parts by themselves but not the core pats.
Thirdly, Buyers. The buyers are us. When you want to buy a mobile phone, do you have many choice? Yeah, definitely, we can buy different brands at different price. So the bargaining power of buyers is strong.
The fourth. Threat of new entrants, what kind of company also want to sell smartphone? The internet companies, like 360. And the large manufacturing companies, like Gree, Mrs, Dong. She wants to produce new phone.
The fifth. Threat of substitutes products or services. What kind of high-tech products can replace mobile phones？Tablet PC, Smartwatch, smart bands(展示),Google glasses, in the future, I can speak to my glasses, call Sophie, then I can speak to Sophie.
From our simple analyze, we can see that the competition in smartphone industry is fierce. The five forces’ power is so strong, especially the rivalry within industry. If you enter this industry, you will face fierce competition. Enter this industry now is not a rational decision.
Isn’t it interesting to use this tool to analyze business phenomena. Hope it can be useful for you.
