What makes a business?

We define the factors that determine the nature of competition within industries in so many ways, the size of an organisation, the aggression of marketing, the on-going price war and the list in never ending.

A brilliant Michael Porter has stated the 5 most relevant factors that determine the nature of competition within an industry.


What this mean?
To simplify this boring diagram, Porter states that the balance of power within an industry depends on.

1. Power of Suppliers
2. Power of Buyers
3. Competition
4. Threat of Substitutions
5. Threat of New Entries

 Lets look at some companies
                                                       

Supplier such as Oil companies eg. ExxonMobile have a large market share in the oil industries. Oil as we all know is a scarce resource with high demand and very few major suppliers. 
There isn't really an alternative to oil. This gives the oil giants muscle to dictate and control prices.
Companies that rely heavily on oil to function are often loyal customers and usually particular about the quality of refined oil.

Applying Porters concept to ExxonMobile, it is safe to say that they have great bargaining power due to reputation and quality assurance. There are cheaper suppliers compared to ExxonMobile, however, they remain strong because of their long standing reputation of quality product and services.

Competition however is very aggressive with other major oil companies such as BP and Shell. The price war has been on ever since Oil was known to man ( figure of speech).

Threats such as substitutions to oil are almost insignificant. Not many cars run on electricity, airlines wouldn't use gas or stored energy to fly their planes and these are the two main industries that oil giants get their main source of revenue from.

To start an oil company would mean many years of investment in infrastructure, manpower, expertise and a whole lot more, as such the threat of new entrants hardly applies to the oil industry.


Now lets look at an industry that is more familiar to everyone.

SHOPPING!

One of the most lucrative industries with endless possibilities and evolutions taking the world by storm as every year goes by.

                                                
TOPSHOP is one of the well known names in the fashion industry.
People love their designs of apparels and accessories.
You can bet that competition is INTENSE. Although TOPSHOP is one of the biggest names internationally. Rivalry is everywhere.



 

These brands have one thing in common, target audience.
TOPSHOP, Zara and H&M, some of the more popular choices among teenagers and young adults.

In such a high demand industry, buyers have little to no bargaining power. These organisations have countless customers and products are high on demand. You will never be able to bargain for a discount unless willingly offered in the forms of promotions and sales. This translates to supplier having great bargaining power.

Although prices are competitive and fashion brands often hover around the same price ranges according to tiers.
There are different tiers in the fashion industries but the competitive edge is steered more towards design and quality since prices are almost on par.

I would group TOPSHOP, Zara, H&M and the other equivalent fashion brands as tier 3 out of 5 in terms of price and quality.

With 5 being Chanel and Hermes etc. and 1 being thrift shops.

Threats of new entrants are vague but do happen sometimes should powerful investors decide to step in.

Substitutes for clothes might seem unrealistic, it is only appropriate they everyone needs to dress.
However, a substitute for an original product would be an imitation. You pay less than 30% of the original price for an item that looks almost similar to the real thing.

Porters 5 forces model now becomes clearer and is easier to understand after some examples isn't it?