Figure 6: Michael E. Porter's 5 Forces Model
(Source: Michael E.Porter. 1985. Competitive strategy. New York: Free Press)
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Marketing Environment Analysis with the 5 Forces Model
i) Competitors:
Pressure from competitors is a constant and direct threat.
to the survival and development of all businesses in the industry.
Factors affecting the level of competition between businesses in
branch:
The nature and intensity of competition among existing firms in an industry depends on the following factors:
- Number of competitors : The more competitors there are in an industry, the more intense the competition becomes. Some companies in the industry believe that they can change their strategies without being noticed by other companies, and some companies have a misconception about their own strength. These companies will take the initiative to re-establish the market order according to their wishes, making the market chaotic.
- Industry growth rate: In an industry with a slow growth rate, the market capacity is hardly expanded. At that time, the competition in the industry will become a battle for market share. If a business wants to increase its market share, it is forced to compete for market share from other businesses. It will certainly be a fierce battle, because it is related to the survival of the businesses.
- Product differentiation and switching costs : if a company's products are not differentiated and switching costs are low, customers' choices will be based on price and service. The result will be a life-and-death battle over price and service among companies in the industry. On the contrary, when there is high differentiation between products, customers will find a number of product brands that best meet their needs, thereby forming loyalty to those brands. This situation, together with high switching costs, will create barriers to reduce competition.
- Industry diversity : Industry diversity depends on the diversity of strategies, origins and people of existing competitors. When industry diversity is high, businesses have to spend a long time to learn and evaluate each other, then form an order in the industry. Normally, competitors from abroad will contribute significantly to industry diversity due to differences in many aspects (especially in business culture and strategic goals).
Select competitors to analyze:
It is extremely important to identify exactly which competitors to consider. Of course, the major players in the industry are the first to be included in the list. However, attention should also be paid to potential competitors and those that may enter the game if their presence significantly affects the intensity of competition in the industry.
In addition, it is anticipated that a merger or acquisition may occur.
between firms in the same industry, or between an outside firm and an
industry is essential. Mergers can instantly turn a weak competitor into a strong one, or add to the strength of an already dangerous one.
Main contents to analyze about competitors
Businesses need to analyze each competitor to understand the possible responses and actions they can take. The main contents of competitor analysis are shown in Figure 7.
Figure 7: Main contents to analyze competitors [VI 2, ch.3,
p.15]
ii) Customers:
Customers are an integral part of a business. Customer loyalty is a business's most valuable asset. Another important issue related to customers is their bargaining power. A dominant buyer can reduce industry profits by:
- Squeeze the seller's price;
- Require sellers to improve service quality;
- Requires sellers to provide more services;
- Make competitors compete against each other.
Customer pressure often appears when conditions arise.
following:
- Customer purchases account for a large proportion of seller sales.
- The industry's products account for a significant proportion of the customer's costs or purchases.
- Customers only have to pay low renewal costs.
- There are few buyers.
- Buyers have full information about: demand, actual prices on the market,
supplier cost…
iii) Supplier:
Suppliers include: (1) suppliers of materials and equipment; (2) financial community; (3) labor sources. Similar to customers, when suppliers have an advantage, they can exert strong pressure and disadvantage the business.
Suppliers can threaten firms in the industry by: (1) raising prices; (2) reducing the quality of supply; (3) changing payment methods. As a result, firms' costs increase, reducing profits.
Supplier pressure often appears when the following conditions are present:
- There are only a few suppliers.
- Alternative products are not available, or regulations prohibit alternative products.
market competition with suppliers.
- Supplier products are important inputs to customer operations.
- The supplier's product is differentiated and highly valued by the buyer's customers; if the buyer chooses another source of supply, the customer will lose confidence in their product.
- Buyers will incur high costs if they change suppliers: cost of change
design, retraining of human resources, ordering costs, inventory…
iv) Potential competitors:
Potential competitors can be a factor that reduces the profitability of the enterprise because they put into operation new production capacity, with the desire to gain market share and necessary resources. To prevent the entry of new competitors, enterprises need to maintain legal barriers to prevent external intrusion.
Predict potential competitors:
Predicting potential competitors is a relatively difficult task, but we can identify them from groups such as:
- Businesses that are not in the industry but can easily surpass it
barriers to entry
- Businesses can benefit greatly by entering our industry.
- Big customers (if they decide to move forward).
- Major suppliers (if they decide to move forward).
Barriers to entry:
- Economies of scale: Means unit cost per product
will decrease as the volume of product increases.
- Product differentiation: Emphasizes customer loyalty to the products of famous businesses. Factors that create product differentiation include: quality, design, service and advertising of the product... This differentiation creates barriers to entry because it is very difficult for competitors to overcome customer loyalty.
- Capital requirements: Having to make large financial investments to compete creates barriers to entry, especially in the following cases: capital for venture capital, advertising costs, new product research costs, customer debt, inventory, etc.
- Switching costs: Are the one-time costs that a buyer must pay for changing from buying one person's product to buying another person's product; including: the cost of retraining employees, the price of new equipment, the cost and time of checking new supplies, re-registering products, the loss of morale due to ending old relationships, etc.
- Access to distribution channels: If the distribution system has cooperated well with existing competitors in the market, it is very difficult to convince that distribution network to work with new entrants.
- Government: can limit or prohibit entry into certain industries using control tools such as: licenses, limits on resource exploitation rights, standards on water and air pollution, product safety, etc.
v) Substitute products : Are products that have the same function as the product.
of the industry, that is, capable of satisfying the same type of customer needs.
Substitute products impose a maximum price on the products of existing firms in the industry, thus limiting the potential profit of the industry. Since there are substitutes, they compete with each other in the market. When the price of the main product increases, consumers tend to switch to the substitute product and vice versa.
b) Check marketing strategy :
Starting from reviewing the marketing strategy of the enterprise to know the situation of positive opportunities and difficulties that the enterprise faces. The starting point of the marketing strategy review is the purpose and objectives of the enterprise, along with the marketing objectives. We can find out whether the objectives are in a poor state, or good but not suitable for the resources and opportunities of the enterprise.
Although the growth target has been secured, we still need to find better strategies to achieve the growth target. Focus on reviewing the business's marketing goals and strategies, and determining how it fits into the current and future market environment.
c) Marketing organization check:
A complete marketing audit should include questions about the effectiveness of the marketing and sales organization, such as the quality of communication between the marketing department and other key management functions such as manufacturing, finance, purchasing, and research and development.
At this critical point, the marketing organization must review the good performance that the company has achieved and the market. Companies without product management systems will think about developing them; companies that have them will want to see why the system is not working well, or try to replace it with a new product management team. The company may want to redefine the role of product management from that of a marketing manager (concerned primarily with volume) to a sales manager (concerned primarily with profit). There is a question of whether or not to shift responsibility from the brand to the product level. There is a perennial question of how close the company is to the market, including the ability to position the product with the target market segment. Finally, the sales organization often does not understand the full meaning of marketing. In the words of the vice president of marketing:
“It takes five years to train a sales manager to understand marketing.” [EN 3,pp. 8].
With the test results of the two parts above, this part will focus in detail on the core competencies of the business and the necessary strategies to suit the continuous development of the market.
d) Check the marketing system :
A complete marketing audit should identify the various systems used to gather information, plan, and control marketing activities. The issue is not the marketing strategy of the business or the nature of the business, but rather the business procedures used and all the systems that go into it: demand forecasting, achievement goals and boundaries, marketing planning, marketing control, evaluation and control, order sequencing, physical distribution, new product development, and product obsolescence.
A marketing audit may reveal that marketing is operating with inadequate planning, implementation, and control systems. An audit of a large firm's product mix revealed that the decision to select or drop a product was made by a major mix based on his intuition, with little information or analysis to guide the decision. And the auditor might suggest a new product demonstration system for the products, and an improved inventory system. He might have observed that the mix of shopping baskets, but had difficulty creating a formal marketing plan, and had conducted a market study. He might suggest that the mix be reinforced by a marketing plan in the most feasible way possible.
It involves testing the capabilities of the system components for analysis, planning and control. Guiding questions in the marketing system audit process: