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The aim of any company is to achieve its goals, which is mainly to yield profits. A company as well as potential investors should always be conversant with the forces that affect the level of competition in an industry in order to achieve this goal.
Michael Porter, a business professor, asserts that a company should be familiar with the intensity of competition in the industry that it is operating. According to Porter, the basic competitive forces in a market control the degree of intensity of a business.
Porter mentions six forces that a corporation should use when assessing its industry. The six forces comprise of threat of new entrants, competition among firms in the industry, threat of substitution, customers’ bargaining power, bargaining power of suppliers, and the relative power of other shareholders.
These forces have a direct effect on the ability of corporations to increase prices in an attempt to earn more profit as explored in this paper.
Threat of New Entrants
The introduction of new firms into an industry points to an increased competition for the available market as well as resources. The existing companies might be forced to start advertising more in a bid to maintain their clients before they are attracted to the new companies.
Furthermore, the existing firms may raise the salaries of their labor force so that they do not lose their employees to the new entrants (Wheelen and Hunger 111). In case the threat is predominant in the industry, then it may force the other firms to impose a restriction on their prices thereby reducing their profit capability.
For instance, assuming a vibrant shopping mall was launched close to Wallmatt supermarket and it started attracting a commendable number of customers; Wallmatt would be forced to reduce its prices to maintain buyers.
However, the extent of this threat will rely on the availability of entry barriers as well as the incumbent corporations in the industry. An entry barrier is an obstacle, which prevents a corporation from joining a given industry to battle with the incumbent corporations.
Capital requirements, access to circulation networks, and government policies are some of the main and cogent examples of entry barriers.
The availability of entry barriers protects the incumbents because their profits are higher in the non-competitive market than in a competitive one at the expense of their customers and dealers (Wheelen and Hunger 111).
Some of industries with several entry barriers include car and mining industries. In the car industry, a large amount of investment is needed to purchase and maintain the manufacturing equipment.
There are several policies and guidelines to observe including safety and emission rules, which may pose a challenge in operations. Furthermore, reaching the dealers of parts, establishing a novel channel of distributors, and introducing the products to clients is always a challenge.
In the case of the mining industry, inputs are limited through natural supply coupled with hectic process of getting government license as well as machinery.
The higher the level of entry barriers, the higher influence the existing companies have in the industry (Wheelen and Hunger 111).
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Threat of Substitute Products
According to Wheelen and Hunger, customers always have the liberty to choose to take an alternative product or service in case it exists (112).
One of the goods and services that face the highest degree of the threat of distribution is the washing detergent. Several brands of washing detergents are always packed on shelves for customers to select their choice brand.
The customers are always likely to choose what they perceive as unique. Another telling example is the shopping malls. A consumer that does not like the services of Wallmatt can decide to go to Carrefour.
However, industries such as oil and medicine industry face minimal threat of substitution. Although researchers are searching for alternative methods of energy, consumption of gasoline cannot be replaced easily.
Porter asserts that substitutes restrict the extent a company can make profits in an industry as they try to balance with the prices of the substitute products of their competitors.
Bargaining Power of Suppliers
Bargaining power refers to the ability to control the setting of prices. Suppliers are able to govern the pricing of goods and services in an industry. Sometimes suppliers improve their bargaining power through the application of various factors (Wheelen and Hunger 113).
The suppliers may decide to control the supply industry by forming cartels or hoarding their products and services. The best example of an industry that has suppliers with strong bargaining power is the PC industry, which its chief operating system supplier is Microsoft.
However, the food processing industry has suppliers with flimsy bargaining power as food-processing companies can purchase raw material from agricultural produce suppliers that are spread throughout the globe.
Competition among Existing Firms
Most industries are structured in a way that the firms within it rely on each other. Porter notes that, a number of factors influence competition among the existing companies (Wheelen and Hunger 112). In industries where the number of rivals is few, firms can monitor the strategies of other competitors so that they operate in unison.
For instance, the firms providing aviation services are few in the United States and this aspect allows firms to monitor each other so that they operate under the current trend in the industry. This practice is likely to lead to price rise in the industries.
Bargaining Power of the Consumers
Consumers have the power to lower prices, demand for better services and quality products as well as intensify the battle among rivals in an industry. Large-scale buyers have a strong bargaining power in the prices of commodities.
Availability of substitute sellers intensifies the bargaining power of consumers (Wheelen and Hunger 112). Customers with low wages are always highly sensitive when it comes to pricing, and in case of any increase in prices, they are likely to face the changes with resistance.
Some industries that have extremely powerful consumers include defense contractors and carmakers. Defense contractors have a restricted group of politically inspired purchasers. In the case of carmakers, a small number of clients control a vast portion of their market.
Power of other Stakeholders
The other stakeholders include the government, trade unions, and stakeholders in the companies. These other stakeholders also play a crucial role in determining competitive intensity within an industry.
For instance, if government invests in a particular corporation in a given industry, the company will have an advantage when accessing resources as well as capital.
Consequently, the rival companies in the industry will be forced to comply with the demands of the government-involved company, which may also involve dropping of prices to attract clients.
Furthermore, if the government raised its taxes for a particular industry, the existing firms may be forced to adjust the amount of their commodities and services to comply with the change (Wheelen and Hunger 113).
According to Porter, there are forces that both the new entrants and incumbents in a given industry must understand. Company strategists should assess and define the degree of a competitive force because a little incident of inaccuracy could cause immense losses to the firm, if it ends up pricing goods and services in the wrong way.
Nevertheless, companies should learn to handle most of these forces so that they can achieve the highest level of profit viable for the corporation.
Wheelen, Thomas, and David Hunger. Strategic Management and Business Policy: Toward Global Sustainability. 13th ed. New Jersey: Prentice Hall, 2011. Print.