Chapter 3 Summary

The porter’s five forces model was used to access the industry structure. The five competitive forces are bargaining power of customers, threat of substitutions, bargaining power of suppliers, threat of new entrains, and rivalry. The level of the five forces depends on the characteristics of the company or business such as how profitable or how sustainable it is.

Bargaining power of customers describe how much power the customer has. For example, if a business that have only 1 customer, of course the bargaining power of customer would be extremely strong. Whereas, if a business with over hundreds thousands of customers, their customers would have weak power of bargaining.

Threat of substitution describes the alternative options that customers have rather than choosing one particular company. If a patient only uses one type of medicine from a single company, then their threat of substitution would be weak. On the other hand, if a customer were to be renting vehicles for travel purpose, then they have many options to go with.

Bargaining power of suppliers describe how much power suppliers have in putting the price on their products. For example, car dealers have strong force in bargaining power because they have control over what price they tell customers rather than having a fixed price. Whereas, grain farmers have weak force in bargaining power.

Threats of new entrants describe how easy a business can enter the industry. For example, a lemonade stand at the corner of the block has strong force of new entrant’s threats because the business is very simple to replicate. An example of weak force would be the professional football team as the number of teams is tightly control by the NFL.

The last force is rivalry, where other competitors in the industry play a big role.

Companies should analyze the structure of their industry, and use that to determine their competitive strategy, whether they want to be cost effective or differentiated or focus.  They need to pick a strategy and implement it, if more than one strategy is chosen; customers would be confused as of what they are selling to them. The question needs to be answer is what is the customer paying for, is it the product, service, or resource?

The ways that companies gain competitive advantage is by creating new products, enhance existing products or service, and by differentiating their products and services from those of their competitors.  

Although our technology world is changing rapidly, the models of business strategy, competitive advantages, and their connection to companies will likely to remain the same in the next 10 years.