Importance of Porter’s Five Forces Analysis Substitutes

Under this theory, a business becomes more attractive, the greater the supplier’s power Substitutes are goods that can be used in place of another. These are goods that may,
to drive prices up, the less the buyer’s power to drive prices down, the less the number even if partly, satisfy the same needs of a consumer such that the consumer may use one
of competitors in the market, the more differentiated the product or service is, the less instead of another.
the substitutability of the products for similar goods, and the more difficult it is for new For example, margarine can be a substitute for butter or wheat bread for a white bread.
entrants to participate in the market. (Chartered Global Management Accountant 2015) Some goods are close substitutes while others are not. Pepsi cola may be a very good
Competition substitute for coca cola, but not everybody will be willing to switch brands because they
 Who are the major businesses in the industry? have developed a taste for particular cola. This is why manufacturers try to differentiate
 Are there locations close to your proposed business? their products from their competitors so that the customers will develop product loyalty
 Have they been long existing or still new entrants? for their brand.
The more differentiated a product is, the greater the edge of its manufacturer because
 What is the market share of each of these businesses?
this can convince the customers to buy their product instead of that of the competition.
 It is very important that you know your competitors and be ready for them.
 Your aim is to win their customers, convince them to buy from you instead, and
A GUIDE TO INDUSTRY ANALYSIS
remain as loyal customers.
An industry analysis guide developed by North Carolina’s Small Business and
Customers
Technology Development Center ( SBTDC) can help in making an analysis of one’s
 Who will sell your product to? business industry.
 The target market must be identified.
 Who exactly will buy your products? 1. Geographic Area – identify the area whether local, regional, nationwide, or
 What income groups? international.
 What age bracket? 2. Industry – worth in pesos and number of firms, trends, and developments and
 What gender? future outlook.
 What career groups? 3. Product – describe the product as to physical attributes and characteristics, and
 What type people will you cater to, based on their preferences, lifestyles, and its uses.
buying habits? 4. Buyers – describe target customers as to age, income group, geographical
Suppliers location, ad occupations; include consumer demographics such as population/
A business may need one or more suppliers. It is important to develop suppliers who are household size, sex, race, ethnicity, family status, housing status, etc.: may also
reliable in terms of the quality of what they supply and their dependability in coming up include psychographics such as lifestyle information, tastes, preferences, and
with the things you order from them. With modern technology, one can easily go online buying habits.
and shop for suppliers, look at reviews made by other retailers to determine who the 5. Regulatory Environment – should include government laws and regulations that
reliable ones are. The person intending to put up a business must ask around for prices in apply to the business
order to be more competitive with other sellers in the market. 6. Company Information – make a list of the most successful business in the
A business owner can buy directly from the manufacturers. This will be the cheapest industry
source since there are no middlemen involved. However, this is only recommended if 7. A brief history of the industry – when it started and how it developed
the supplier’s location is convenient and will not involve expensive delivery cost. 8. Factors that affect growth of the industry – such as migration of population
Another alternative is to buy from distributors. They are wholesalers or brokers who buy from rural to urban areas
in big quantities from manufacturers, add a mark-up to their purchase price, and sell to 9. Trends in sales over recent years – show actual sales in the industry over the
retailers. Their prices are higher but they can sell in small quantities, which the past 5 years
manufacturers would not normally do. 10. Current operational/ management trends within the industry, which are the
A third source of goods is through imports. Some businessmen go to nearby countries to standard practices prevalent among firms
buy their goods or raw materials there. This is advisable if the prices abroad are 11. The type of marketing strategies prevalent within the industry
relatively cheaper and no heavy import duties will raise the prices and make the goods 12. Competitor information – include the location of competitors and how long
less competitive in the country and when transport costs are not excessive. have they been in business and their market share