Today, I'm going to discuss Porter's 5 Forces. The basic forces are as follows: Barriers to entry, degree of rivalry, bargaining power of suppliers, bargaining power of buyers (consumers), and the relative substitute products.
Each force has a substantial impact in determining if a particular industry is attractive.
The barriers to entry would probably be at the top of anyone's list. If making the product for said industry requires tons of capital or is a risky proposition, then the likelihood of a company getting involved is slim.
Assuming you could enter, would the competitors completely dominate a newcomer by undercutting you in prices? If the competition is strong, your product might not survive compared to entrenched competition.
Do the suppliers have a great say in the price of supplies needed? If there happens to be one specific supplier, you might be in a crunch and at the whim of the suppler.
Will the customers cause havoc on your product? Will they demand lower prices for a completely unknown brand? This is another question you must determine an answer for when considering entering an industry.
And finally, similar to the competitor point, are there other substitute products that can take the place of your product that is as good or BETTER than your product?
Alas, so many questions to be asked utilizing Porter's 5 Forces. The forces are an excellent determinant if an industry is worth getting involved in. Of course, your product may be 10 times ahead of the competition and buyer's have no choice but to recognize your product. But, will the industry be suitable for you to enter without making massive concession or possibly losing all you invested? That's what Porter's 5 Forces helps you to determine.
An industry that I believe has high barriers to entry is the video game console market. The industry already has 3 major competitors, each with a substantial amount of market share. Some of the barriers you would face are large amounts of capital needed, the competitors and the brand loyalty they have already established, and 3rd party software support. These barriers already are a massive force blocking a successful entry into the market. The competitors are already established and getting 3rd party support for a complete unknown is unlikely. Even Microsoft, with all their capital and 3rd party support, has only posted 1 quarter of profit in their console division in their company.
So the console industry is a tough industry to enter.
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3 comments:
Hello Johathan,
I would have never thought about the video console industry before. Your analysis showed me some insight of this industry and I never realized that there were few companies that had already set a mark on the market. You differ from other posts that i have read in the way that you not only described the Porter's Analysis in a positive way but also demonstrated that there are many other issues that someone has to consider when thinking about business. I think that Poter's method is useful but at the moment of taking a decision to enter a specific market like yours is difficult to predict the financial capital that will be needed in the future. In this case I do not find this analysis 100% useful.
Jhoana Boyer
Well, I guess the most essential point for creating this barriers to entrance into the video console industry is really the competitors. As you mention, there are already three firms that dominant the market so for your case, capital needs is not an essential issue to be worry about.
Porter's five force model is good.
also, i think it is just good for these people try to invest.
however, if i am a speculator, the porter's five force model would not work for me so well, is it true?
i want to ask if we must do the industry analysis before we invest in a company.
if there's a very poor performance industry, will there a profitable company in that industry? if so, should we switch our focus on something else rather than this model?
i really like your analysis. i have never thought about the vedio console industry. so, i feel that you are doing a very good job...
thanks for your wonderful sharing.
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