Every company needs a strategy that will help them gain and sustain a competitive advantage. In order to define a particular strategy a company must perform an internal analysis – what are its strengths and weaknesses, and an external analysis – what are the environmental threats and opportunities outside the company. This post focuses on identifying environmental threats to a company’s competitive advantage. Professor Michael Porter gave us The Five Forces Framework that includes five categories of external threats. These five threats are simply attributes of the industry that the company participates in. Once identified, a company can assess whether they have the necessary internal strengths that counteract and outweigh the threats.
5 Forces Framework
Threat of Entry
Can other companies enter my industry?
In order to start doing business in an industry a company asks what the barriers of entry are. For building microchips out of silicon wafers, the barrier of entry is very high, as a fab can cost billions of dollars. A large company that already operates in this space has to ask, do other companies desiring to enter into this industry also have the cash flow and know-how to put together such a facility? Other barriers of entry may include costly-to-acquire government relationships in the defense industry. Just because a company has the money, does not mean they have the necessary business relationships already established. Other barriers of entry exist, but when potential entrants have ways to overcome the barriers, that presents a threat of entry to existing companies.
Threat of Rivalry
Price or quality wars ensue.
Companies must also have an open eye to what existing competitors are up to. Many people shop at Walmart or Amazon simply because they are cheaper. If other companies lower their prices or offer a new convenience to the shopper (like delivery by drone), then this would be a threat of rivalry.
Threat of Substitutes
What, you love him now?
This not only holds for companies in an industry who offer similar products, it even holds for the products themselves. If tea, hot chocolate, or Taiwanese boba become too popular, then sellers of coffee may see a decline in the demand for their product. Plastic bottle makers must be on top of the threat posed by glass and aluminum container producers.
Threat of Powerful Suppliers
The choice is yours, wink, wink.
Coca Cola sells its syrup to bottlers. It used to be that there were many bottlers. These were at the mercy of the supplier and could not begin to negotiate terms that were favorable to them. The threat of powerful suppliers limits what buyers can do.
Threat of Powerful Buyers
We’ll buy it from you, at our price.
Walmart buys a large quantity of Rubber-Maid products. How large? If it stops ordering, the Rubber-Maid company can just about go out of business. Thus, suppliers and buyers can both present threats. The factor is not always size. Land rights or exclusive contracts can also be sources of power that make both buyers and suppliers powerful.