The porter’s five-force model is a famous and
powerful business framework to analyze where power resides in a business model.
The main purpose of the Porter’s five-force model is to find a position in an
industry where a company or business model can defend itself against
competitive forces or can influence them in its favor. More so, it helps
analyzing the present strength of the current competitive position and strength
of a position the business proposition is trying to fit itself. Hence, an analysis
based on this model not only tells about the profit potential of product or
service but also about the balance of power in various scenarios. A strategist
can rate each competitive force by ranking it as high, medium or low. With a
clear analysis, a business model can take advantage of the strengths and
improve upon the possible weakness before the full-blown launch or adjust in accordance
to the ambient business conditions. Let us discuss the five salient features of
the model in general. [1]
Corresponding to each force, I will draw an analogy to the business model of Facebook-
the leading social media platform.[2]
1. The
power of Customers/buyers: This is an assessment of how easy
it is for the buyers to drive the price fluctuations. The various factors are :
·
number of buyers in the market
·
cost buyers bear to switch from one
supplier to the other
·
relevance of each individual buyer to
the organization
Evidently, if the
business has a few potential powerful buyers, then they are able to dictate
terms.
Analogy:
For Facebook the advertisers advertising in its platform are its customers.
After Facebook has triggered, and is now easily the leading social platform, it
attracts a large number of advertisers who want to advertise in the platform.
Hence, as of now, the bargaining power of customer is low. However, if Facebook looses its shine in the coming years and
people do not use the network, due to numerous unseen reasons, then advertisers
will also loose business interest in Facebook and they will have a larger say.
Such a scenario will flip the power of buyers from low to high.
2. The
power of supplier: This is an analysis of how easy it is
for suppliers to raise and control the prices of manufacturing. This is largely
a function of
·
number of suppliers of the key
components
·
uniqueness of their product or service
·
relative strength and size of the
supplier
·
relative cost of switching from one
supplier to the other
It is evident that
fewer the number of suppliers, the lesser the number of choice, which in turn
means higher supplier power.
Analogy:
For Facebook its suppliers are its users. Again, now, Facebook has a huge user
base globally. Facebook earns by selling the social sentiments of its complex
social graph. At present, the power of suppliers is low. However, Facebook has the looming danger of users migrating to
other appealing present or future social platforms. In addition, Facebook has
to keep growing its global footprint both on mobile devices and on web.
3. The
threat of substitute products: This is an evaluation
of the customer’s ability to pursue a different way of doing what the product
or service does. The various factors are:
·
buyer’s willingness to substitute
·
relative price performance of substitute
·
switching cost of buyers
·
the range of product differentiation
·
the range of quality
The markets where close substitute
products exist, the likelihood of the customers switching to alternatives in
response to price increases. Hence, in such scenarios, the power of suppliers
and attractiveness to enter the market decreases.
Analogy: Various other products are providing
functionalities similar to that of Facebook. Products such as Skype, WhatsApp,
Google+, etc. are always a danger being substitutes for Facebook. Hence, the
threat of substitute product is high.
To maintain dominance, they always have to stay ahead of the curve and outperform
possible substitute products.
4. The
threat of new entrants: Usually a lucrative market
attracts new entrants, this leads to erosion and sharing of profit. If entry is
less costly and less time intensive, the numerous entrants drive a monopolistic
market to a perfect competition. The various factors that determine the entry
of new player are:
·
barriers to entry(patents, government
regulations & policies)
·
ease to achieve economies of scales
·
switching cost
·
customer loyalty of existing brands
·
brand loyalty of exiting players
·
ability to produce product
differentiation
·
ease of access to distribution channels
If the initial barrier
to entry is low, and players see a scope for customers to switch, more players
will enter the marker.
Analogy:
For Facebook the threat of new entrants is high.
There are always disruptive innovations happening in the social space.
As a result new similar products keep creeping. Facebook especially needs to improve
its product in the mobile space and needs to better monetize it.
5. The
competitive rivalry: In this analysis, this force is
considered the center of all analyses. The number and capability of all
competitors is very important to gauze. Many competitors, offering
undifferentiated products and services definitely reduce the market shine for
entry. So the important factors are:
·
firm concentration ratio
·
degree of transparency
·
level of innovation capability required
·
sustainable competitive advantage
required
Analogy:
The playing field for Facebook is highly
competitive. The most recent example was when Google launched the rival social
network Google+ that could be accessed by all Gmail users through the web as
well as Android devices. Although Google+ has not been greatly successful in
outwitting Facebook, we cannot rightly predict what lies ahead in future.
Hence, the competitive rivalry that Facebook faces is high.
Weighted
Model on Porter’s Competition Analysis on Facebook
Porter's Competition Analysis on Facebook
|
|||||
The power of supplier
|
Low
|
3
|
3
|
Risk Weights
|
|
The power of buyers
|
Low
|
3
|
3
|
Low
|
3
|
The threat of
substitute products
|
High
|
1
|
3
|
Medium
|
2
|
The threat of new
entrants
|
High
|
1
|
3
|
High
|
1
|
The competitive
Rivalry
|
High
|
1
|
3
|
||
9
|
15
|
||||
Competitive Score
|
%age Score(9/15)
|
60.00%
|
|||
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.