Five Forces Analysis

Essay by lolobeeh May 2006

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Five Forces Analysis helps the marketer to contrast a competitive environment. It has similarities with other tools for environmental audit, such as PEST analysis, but tends to focus on the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. For example, Dell would analyse the market for Business Computers i.e. one of its SBUs.

Five forces analsysis looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.

The threat of entry.

* Economies of scale e.g. the benefits associated with bulk purchasing.

* The high or low cost of entry e.g. how much will it cost for the latest technology?

* Ease of access to distribution channels e.g. Do our competitors have the distribution channels

sewn up?

* Cost advantages not related to the size of the company e.g.

personal contacts or knowledge

that larger companies do not own or learning curve effects.

* Will competitors retaliate?

* Government action e.g. will new laws be introduced that will weaken our competitive position?

* How important is differentiation? e.g. The Champagne brand cannot be copied. This

desensitises the influence of the environment.

The power of buyers

* This is high where there a few, large players in a market e.g. the large grocery chains.

* If there are a large number of undifferentiated, small suppliers e.g. small farming businesses

supplying the large grocery chains.

* The cost of switching between suppliers is low e.g. from one fleet supplier of trucks to


The power of suppliers

* The power of suppliers tends to be a reversal of the power of buyers.

* Where the switching costs are high e.g. Switching from one software supplier to...