When considering a business strategy, it is important to consider the attractiveness of the industry.
One method is 5F analysis - analysis of 5 competitive forces (five forces) as a way to measure the attractiveness of the industry.
In this article, Chiasenow will explain the analysis of 5F - 5 competitive forces. Lets find out with Chiasenow!
5F Analysis – What are the 5 competitive forces?
Porters 5F analysis - 5 competitive forces is a model created by Michael E.Porter in 1979. He is a Harvard professor who teaches business strategy.
According to him, there are five factors that affect the performance of a business:
- Bargaining rights of customers
- Threat of potential competitors
- Suppliers bargaining power
- Threat of substitute products
- The level of competition in the industry in which the company is involved
The experts later added another impact:
This impact together with Porters Five Forces form a six-effects model for a business model
That helps us to clearly define the characteristics of the business industry. From the five forces that affect the business industry.
We will know:
- How much profit?
- What is the investment cost?
The 5F 5 competitive force analysis is a template for determining the industrys profit structure and competitive pivot points.
These decisions are useful for prioritizing the investment of management resources, thereby making decisions on whether to enter the market or not, and to consider exiting the business from the market.
- There is also another interpretation of the 5F Analysis of 5 Competitive Forces defined by Porter.
- The threat of newcomers
- Alternative threat
- Buyers bargaining power
- The bargaining power of the seller
- Industry competitors
The following is a description of why a 5F 5 competitive force analysis is useful.
The key to building a business strategy is to consider the relationship between the company and its environment.
However, just looking at the competitive situation in the industry can ignore the structural aspect. A companys profitability is determined not only by its ability to compete in the industry, but also by the profitability of the industry itself.
And industry profitability is determined by industry structure. Layer 5 is useful when analyzing industry structure from this angle. When using a 5F 5 Competitive Force Analysis, it is very important to define the industry to be analyzed.
1. Threat of Newcomers in 5F Analysis of 5 Competitive Forces
New entrants mean more competition. An industry that is easy for newcomers to get into has the potential to make small profits.
On the other hand, new industries that are difficult to penetrate can be an advantage for new companies.
Industries with high barriers to entry have the following characteristics:
- When economies of scale are large, competitive advantages can be achieved
- High level of customer loyalty to existing brand deals
- Difficult to secure distribution channel
- High technical difficulty of the product (eg, protected by patent)
- Government-managed industry
- Strong competition from existing companies
2. Threat of Substitution in 5F Analysis of 5 Competitive Forces
The ability to replace traditional features with new technologies that are more cost-effective than products typically sold in the industry is a major threat to existing companies in the industry.
A company that once dominated the phonograph market is out of business if it doesnt exit the industry or follow industry trends amid changes to media like CD and DVD players.
Then, digital media like CDs and DVDs were phased out completely with the advent of the iPod and the smartphone.
Recently, with the growth of ZOOM and Skype, the wonders of the Online industry have increased.
The threat of these alternatives will drive down prices in the industry, leading to lower profits.
3. Buyer’s bargaining power in 5F Analysis of 5 Competitive Forces
If the product cannot be distinguished or the buyers information is large, the bargaining power of the buyer becomes stronger.
Electrical appliances and daily necessities tend to be bargained for by buyers.
The main situations in which buyers have a competitive edge are:
- When looking at the balance between supply and demand, in case supply exceeds demand
- If the product has no difference from other products
- When the cost of changing customers is low
- When buyers are concentrated and are buying in bulk
- If the buyer knows the details of the market price and separate charges
- If price is the sole determinant of purchase
If the bargaining power of buyers is strong, it will lead to a decrease in profit margin due to low selling price.
In addition, because the bargaining power of the buyer is too strong, payment collection will be delayed, leading to a decrease in the turnover of trade receivables.
Additionally, increasing buyers bargaining power can lead to poor product sales and reduced inventory turnover.
4. Bargaining Power of Sellers in 5F Analysis of 5 Competitive Forces
The bargaining power of sellers becomes stronger when the industry is monopolized by a few firms.
In the case of a product that uses a companys unique technology or a product that is protected by a patent, the sellers bargaining power becomes stronger.
The main cases where sellers become stronger are as follows.
- When the balance of supply and demand is strong, when the market has strong demand
- When the sellers goods are essential to the buyer
- When the product offered is unique or completely different from other products.
- If the sellers industry is dominated by a few firms
- If the buyers industry is not important to the seller
If the sellers bargaining power is strong, the purchase debt turnover rate may increase because the other party may request early collection at the time of purchase.
In addition, among purchase obligations, it is likely that payment terms are often longer and there are fewer contracts.
5. Competitors in the same industry in 5F Analysis of 5 Competitive Forces
The more competitive the industry, the less attractive it is. Competition tends to be fierce in the following cases:
- When there are many competitors
- When the investment capital is large and difficult to withdraw when participating in the market
- If you are prone to price competition due to high fixed costs or constantly changing defective products
- When product differentiation is difficult and switching costs are low
In the context of fierce competition with industry competitors, the turnover rate of total assets (sales / total assets) and turnover of tangible fixed assets (sales / total assets) and tangible fixed asset turnover (revenue/tangible fixed assets) may become higher.
5F analysis 5 competitive forces the relationship between entry and exit from the market
In general, the following can be said using the table of barriers to entry and exit.
|Barriers to retreat|
|Barriers to entry||Short||Stable low profit margin||Low profitability |
|High||Stable high rate of return||Unstable low returns|
High barrier to exit
- Responsible for providing and maintaining products and services
- Take responsibility locally
- No employer market share after exit
Example of 5F Analysis of 5 Competitive Forces
Now, consider the 5F 5 Competitive Forces Analysis example:
- Gasoline car industry
- Furniture retail industry
1. 5F analysis of 5 competitive forces: Gasoline car industry
- Threat from new entrants :Electric vehicles like Tesla (big threat)
- The threat of alternatives: Reducing the number of cars needed per person due to autonomous driving, other means of transport (major threat)
- Buyers bargaining power: Dealers, urban areas have many alternatives for customers (slightly strong), rural areas have few alternatives (weak)
- Seller bargaining power: There are alternatives from the supplier and parts manufacturers point of view, but the relationship between the parts needs to be consistent with the finished product to be kept (neutral).
- Competitive state of the industry: Many competitors have been able to integrate multiple production segments in recent years (on average).
Thinking this way, we can see that gasoline-powered carmakers dont have a big backer for buyers and sellers, but the potential threat is huge and theyre never safe.
In other words, it has the potential to significantly reduce the attractiveness of the industry in the future.
2. 5F analysis of 5 competitive forces: Furniture retail industry
- Threat from new entrants: Small investment and low barrier to entry, but there are few players willing to join with a view of taste and time to build a brand (small threat) )
- The Threat of Alternatives: C2C Markets Threaten to Replace E-commerce Platforms (Major Threat)
- Buyers bargaining power: Except for some luxury furniture, buyers have many (strong) choices.
- Sellers bargaining power: Many people make furniture because this is a decentralized industry and it is difficult to operate on a large scale. From a retailers point of view, theres a lot to choose from. There is also a choice of retailers that embark on their own (weak) production.
- The state of competition in the industry: There are already many competitors with big brands, offline stores, and many private brands exist on sites like Amazon. (intense)
It can be seen that the structure of the furniture retail industry is quite unattractive. In that situation, retailers who cannot come up with their own colors will be forced to withdraw from the market and cause losses.
Pursuing the value of products while combining production and improving operational efficiency can be said to be one of the survival measures in this unattractive industry.
Be careful with industry definitions
As Chiasenow mentioned at the end of the quote Chiasenow just quoted, when doing a five-force analysis, you need to be careful about the industry definition.
In the case of the auto industry: Tesla, Toyota, Mazda, Tesla and autonomous driving are all in the same industry.
However, if we analyze the conventional gasoline-powered car industry as described above, Tesla and its autonomous driving systems can be considered the wonders of the alternatives.
In addition, sometimes we can get a lot of suggestions by making the industry definition a little narrower, such as the truck industry or the light vehicle industry.
It is important to understand that the way we define this industry is central to each of the 5F 5 Competitive Forces Analysis process.
Summary of 5F Analysis 5 Competitive Forces
As explained in this article, the 5F 5 Competitive Forces Analysis can be used to clarify the profit structure of an industry.
While a 5F Competitive Analysis will help you think about your industry structure, it is also very helpful to use this 5F Analysis to analyze your clients industry structure.
If we could make a recommendation based on the clients five industry strengths, it would be a more persuasive and effective proposition.
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