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Competition is a company’s biggest threat no matter how big or small a company is. Businesses should always question themselves who their competitors are and how the competition is going to affect their bottom line. To help answer these questions, the competition should be analyzed. Porter’s Five Forces model was developed in 1979 by Michael E. Porter of Harvard University. The five categories are designed to deduce the profitable of a company, based on businesses in the local market. The origin of profitability is “identical regardless of industry.” Competition and profitability are driven by the structure of an industry, unlike what the industry produces. According to Porter, companies such as software, are profitable when forces are favorable. Airline and hotel companies are less profitable when forces are intense. The Porter’s Five Forces model helps businesses analyze the competition using five categories.
The first force in Porter’s model is competitive rivalry. This force analyzes the intensity of the competition in the marketplace. This is determined by the amount of the existing competitors and what they’re capable of doing. Rivalry competition is high when a customer can switch from a handful of businesses selling a similar product or service at a cheaper price. Competition can create advertising and price wars between competitors. In return, this can hurt a business’s bottom line. For example, Under Armour’s competitors Nike and Adidas have large resources at hand which helps them gain market share in the apparel category. The second force in Porter’s model is bargaining power of supplies. This evaluates the power and control a supplier has over the possibility of increasing their prices. When a business’s supplier increases the prices, the company’s profit decreases. This forces also looks at the number of suppliers there are available. Suppliers have the upper hand when there are less of them. Supplier’s lose power when there are many of them. Under Armour has many suppliers who produce their products and are in multiple countries.
The third force is bargaining power of customers. This force examines how customers can affect the pricing and quality. The buying power consumers have is high when there are few customers. The seller’s power increases when there are many customers. Under Armour has customers who range from wholesale customers to end customers. Their wholesale customers such as Dick’s Sporting Goods have bargaining leverage over Under Armour because they could substitute their products with the competitors for higher margins. The fourth force is the threat of new entrants. This force looks at how new competitors who are joining the market can affect the business’s position.
There is a greater risk when a competitor can easily join the marketplace. If there are strong barriers to enter the market, then a business can maintain the upper hand and take advantage. The threat of new entrants is low for Under Armour because there are large costs associated with branding, advertising and product demand. Although, existing sports apparel businesses can enter the performance apparel industry in the future. The last and final force is the threat of substitute products or services. This force analyzes how effortless it is for a customer to switch from buying a business’s products or services to the competitor. Substitutes that are cheaper can weaken a business’s position and lower their profitability. The threat of substitute products is low because it is expected that the demand for performance apparel will continue.
Once the analysis of the five forces has been finalized, a strategy is executed to expand competitive advantage. Porter has identified three strategies that can be performed in any industry. The first strategy is cost leadership. The goal of this strategy is to grow profit by decreasing the costs while charging consumers the industry-standard prices. The second strategy is differentiation. This strategy is put into effect by making products different from the competitors. This step requires the company to do their research and have successful sales and marketing teams. The third strategy is focus. This strategy requires a company to select a targetable market to sell its products or services. A company must have a high understanding of the market, sellers, buyers and competitors.
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