The collective strength of these five competitive forces determines the ability of an enterprise to obtain an average return on investment that exceeds the capital cost of an industry. The intensity of these five competitive forces varies from industry to industry and can change with the development of the industry. Therefore, from the perspective of inherent profitability, all industries are not consistent. In those industries where all five forces are favorable, such as medicine, soft drinks and database publishing, many competitors can make attractive profits, while in those industries where one or more forces are under pressure, such as rubber industry and steel industry, despite the best efforts of managers, almost no enterprises can make attractive profits. The profitability of the industry is not determined by the appearance of the product or the technical level contained in the product, but by the industry structure.
These five forces determine the profitability of the industry, because they affect the price, cost and investment required by enterprises in the industry, that is, the factors that affect the rate of return on investment. For example, the buyer's power affects the price that enterprises can demand, as does the threat of substitutes; The strength of the buyer may also affect the cost and investment, because powerful buyers need expensive services; The bargaining power of suppliers determines the cost of raw materials and other inputs; The intensity of competition affects the price of products, as well as the competitive cost of factory facilities, product development, advertising, sales team and other aspects. The threat of new competitors entering the market limits prices and leads to the need for investment to resist entry.
The strength of each of the five forces is a function of the industrial structure or the economic and technical characteristics as the industrial base. The industry structure is relatively stable, but it changes with the development of the industry. Structural changes have changed the overall and relative intensity of competitiveness, which can affect the profitability of the industry in a positive or negative way. For strategy, the most important industry trends are those that affect the industry structure. If the determinants of the five competitive forces and their structure depend only on the internal characteristics of the industry, then the competitive strategy depends largely on choosing the right industry, and it is slightly better than the competitors in understanding the five competitive forces. However, when these are undoubtedly the important tasks of any enterprise and the essence of competitive strategy in some industries, enterprises usually do not become slaves to their industry structure. An enterprise can influence five forces through its strategy. If an enterprise can transform its industrial structure, it can fundamentally improve or destroy the attractiveness of the industry. Many successful strategies have changed the rules of competition in this way. Industrial structure may promote all competitive factors in the industry. In any particular industry, not all five forces are equally important, and the important factors of special structure will be different. Every industry is unique and has its own unique structure. The five-force framework enables enterprises to break through the fog in confusion, accurately reveal those factors that are crucial to the competition in their industries, and identify those strategic innovations that can best improve the profitability of industries and enterprises themselves. The framework of five forces does not rule out the need for creativity in exploring new ways of competition in the industry. On the contrary, it leads the creativity of managers to those industry structures that are most important for long-term profitability. In this process, the purpose of the framework is to improve the possibility of finding satisfactory strategic innovation.
The strategy of changing the industry structure may have both advantages and disadvantages. Because an enterprise can improve its industrial structure and profitability, it can also easily destroy them. For example, a new product design that can reduce the barriers to entry or increase the volatility of the competitive situation may destroy the long-term profitability of the industry, even if the enterprise that introduces the new design can make high profits for a period of time. In addition, long-term price reduction may damage the unique effect, and unregistered goods may enhance customers' sensitivity to prices, trigger price competition, and weaken the high barrier effect of advertising to keep new people out. Because the joint ventures established by major aluminum products manufacturers to spread risks and reduce capital costs may also have a subtle destructive effect on their industrial structure. Major manufacturers invited a group of potentially dangerous new competitors to enter the industry and helped them to eliminate entry barriers. The joint venture will also strengthen the exit barriers, because a factory must obtain the consent of all parties to the joint venture before closing.
Enterprises often ignore the long-term consequences of industry structure when making strategic choices. They only see that if they succeed at one stroke, they can improve their competitive position, but they fail to foresee that the reaction of their competitors will bring endless trouble. If the main competitors follow suit and destroy the industry structure, then everyone will have a hard time. The "saboteurs" of such industries are usually secondary manufacturers who try their best to overcome their main competitive disadvantages, those manufacturers who are full of problems and eager to get out of trouble, or those "stupid" manufacturers who have unrealistic fantasies about the future at all costs.
The ability of enterprises to transform the industrial structure has added a special burden to the leading manufacturers in the industry. The actions taken by leading manufacturers may have different degrees of impact on the industry structure, because of their scale and the impact on buyers, suppliers and other competitors. At the same time, the high market share of leading manufacturers ensures that any factors that change the structure of the whole industry will also affect themselves. Therefore, leading manufacturers must constantly adjust their competitive position and keep a balance with the healthy development of the whole industry; They often take measures to improve or protect the industrial structure, instead of seeking a bigger competitive market for themselves, so as to improve their competitive position. Leading companies such as Coca Cola and Campbell Soup seem to follow this principle.
Second, the determinants of industry competition intensity
These five competitive forces-new competitors, the threat of substitute products, the bargaining power of buyers, the bargaining power of suppliers and the competition among existing competitors in the industry-reflect the fact that the competition in an industry is completely beyond the scope of competitors who have established themselves in the industry. Customers, suppliers, substitute products and potential competitors are all "competitors" of manufacturers in a certain industry, and their importance may be more or less different according to different specific circumstances. In this broader sense, competition can be called "expanded competition".
These five competitive forces all determine the intensity and profitability of industry competition, and from the perspective of strategic formulation, the most powerful one or some forces play a leading role and have decisive significance. For example, even if a company has a very strong market position in an industry where potential new competitors do not pose a threat, it will get lower returns if it faces a dominant low-cost alternative product. Even if there is no substitute product, new competitors can be prevented from entering, and fierce competition among existing competitors will limit potential benefits. The extreme situation of competition intensity occurs in what economists call a completely competitive industry, that is, free participation in competition. The existing manufacturers in the industry have no bargaining power for suppliers and customers, and because a large number of manufacturers and products are basically the same, the competition will be fierce.
Many important economic and technical characteristics of an industry are crucial to the strength of each kind of competitiveness. These features will be discussed in turn.
(a) Threatening to enter
When new competitors enter a certain industry, they will bring new production capacity, promote the desire to gain market share, and often bring considerable financial resources. This situation may lead to a sharp drop in prices or a sharp rise in the expenses of enterprises in the industry, thus reducing profitability.
Companies that diversify from other markets often use their financial resources to cause some drastic changes, just as Philip Morris did to Miller Beer Company. Therefore, the phenomenon of entering an industry in an attempt to consolidate its market position may be regarded as intentional participation in competition, even if no new entity is formed. The threat of new manufacturers entering an industry depends on the current barriers to entry and the expected response of existing competitors in the industry. If the obstacles are high, or if new manufacturers can expect serious retaliation from mature competitors, the threat posed by new manufacturers entering an industry is low.
1. Entry barriers
There are seven main sources of entry barriers:
(1) economies of scale. Economies of scale mean that the unit cost of products (or the operating or functional cost of producing products) decreases with the increase of absolute output in each period. Economies of scale prevent entry by forcing entrants to adopt large-scale entry mode and risking strong reaction from existing manufacturers in the industry, or adopting small-scale entry mode and facing cost disadvantage. Both modes of operation are unpleasant. Almost every functional department of an enterprise, including manufacturing, purchasing, R&D, marketing, service outlets, utilization and distribution of sales capacity, may have economies of scale. For example, Xerox and General Electric found that economies of scale in the production, research, marketing and service departments in the computer mainframe industry may be the main obstacle for new manufacturers to enter the industry.
Scale operation may be related to a complete functional field, which is the case in terms of sales ability, or it may result from specific operations or activities, which are part of the functional field. For example, the manufacture of TV sets and the production of color picture tubes are of great economies of scale, but their significance is not very important in the joinery of the shell and the assembly of the whole machine. Therefore, in view of the special relationship between unit cost and production scale, it is very important to study each component of cost separately.
(2) product differences. Product difference refers to the brand name and customer loyalty recognized by established manufacturers, which are caused by previous advertising, customer service and product diversification. Or just because of various activities that first entered the industry. Product differences force entrants to spend huge sums of money to conquer existing customer loyalty, thus forming some barriers to entry. This kind of effort usually includes the loss of production, and the period of experience will be extended. Investing in a brand is particularly risky, because once it fails, this kind of investment has no residual value.
In the fields of children's health care products, retail drugs, cosmetics, bank investment and public accounting, product differences may be the most important barriers to entry. In the brewing industry, product differences are often combined with economies of scale in production, marketing and distribution, resulting in high obstacles.
(3) Capital requirements. The huge investment consumed by competition will cause some barriers to entry, especially when the funds need to be used for risky or unpaid advertising or research and development. Not only production facilities need funds, but also things like customer credit, inventory or making up for production losses. For example, in the copier industry, when Xerox chose to rent the copier instead of selling it happily, it greatly increased the required working capital, thus creating some great financial obstacles for people entering the copier industry. Although some large companies have the financial resources to join almost any industry today, the requirement of huge capital in the fields of computer and mining limits the possible partnerships of entrants. Even if capital can be obtained in the capital market, prospective entrants must bear the risk of paying interest, so the use of the entered funds is still risky. These conditions are favorable to existing manufacturers.
(4) Transfer costs. The existence of resale cost will cause certain barriers to entry, which is a one-time cost faced by a buyer when transferring products from one supplier to another. Turnover costs may include the cost of retraining employees, the cost of new auxiliary equipment, the cost and time spent testing a new source of goods or verifying whether it is qualified, the cost of technical assistance caused by relying on the engineering assistance of the seller, the cost of product redesign, and even the psychological cost caused by cutting off the relationship. If the cost of this transfer is high, then new entrants must make great improvements in cost or product performance in order to transfer buyers from manufacturers in an industry. For example, in terms of intravenous injection and its complete sets of equipment used in hospitals, different competitive injections have different injection methods for patients, and the equipment for hanging injection bottles is not universal. In this case, product switching will be strongly resisted by nurses in charge of nursing, and new investment in suspension equipment is needed.
(5) enter the distribution channel. New entrants need to obtain the distribution channels of their products, which will create some barriers to entry. When the situation develops to such a point that the supply of products based on manufacturers has extended to those logical distribution channels, new manufacturers must persuade these distribution channels to accept their products by means of price interruption and joint advertising subsidies, which will reduce profits. For example, the manufacturer of a new type of food must persuade the retailer to give it a place on the shelf of a highly competitive supermarket through a sales contract, the retailer's active sales efforts or other means.
The more restricted the wholesale or retail channels of products are, the more existing competitors will block these channels. Obviously, it will be more difficult to enter this industry. The relationship between existing competitors and these channels may be based on long-term relationships, high-quality services, or even special relationships with specific vendor channels. Sometimes, the barrier of such entrants is so high that a new manufacturer must create a brand-new distribution channel if he wants to cross it. Timix has adopted this technology in the watch industry.
(6) Cost disadvantage not dominated by scale. No matter how large the potential entrants are, whether they achieve economies of scale or not, they can't realize the cost advantages similar to those that the established manufacturers may have. The key advantages lie in the following factors:
-Proprietary product technology: the proprietary production skills or design features of products are maintained by means of patents or confidentiality.
-Favorable access to raw materials: Perhaps as early as when the demand for raw materials was lower than the current demand, the established manufacturers blocked the most favorable source of raw materials at the current price, freezing the foreseeable demand. For example, many years ago, due to Vlachy's mining technology, its sulfur manufacturers controlled some large sulfur deposits on salt slopes like Texas Gulf Sulfur Company before the mine owners realized the value of their deposits. However, oil companies engaged in oil exploration often disappoint the discoverers of sulfur deposits, and they will not speak highly of them rashly.
Favorable position: well-known manufacturers may have monopolized these favorable positions before market forces push prices up to get their full value.
-Government subsidies: preferential government subsidies will enable established manufacturers to maintain long-term advantages in some enterprises.
-Knowledge curve or experience curve: In some businesses, when manufacturers gain more and more experience in product production, they can observe the downward trend of unit cost. The cost is reduced because workers have improved their working methods, the efficiency is getting higher and higher (that is, the typical knowledge curve), the layout has been improved, special equipment and technology have been developed, the operation has been gradually improved through equipment, the change of product design has made manufacturing easier, the measurement technology and job control have been improved, and so on.
Experience is just the conceptual name of some technological changes. It may be suitable not only for production, but also for distribution, logistics and other functions. As in the case of economies of scale, the decline of cost with experience has nothing to do with the whole manufacturer, but comes from a single business activity or a single functional department that constitutes the manufacturer. Experience can reduce the cost of marketing, distribution and other fields, as well as the production cost or activity cost in the production process. Every component of the cost must be reviewed in order to give full play to the effectiveness of experience.
(7) government policies. The last major source of barriers to entry is government policy. The government can restrict or even prevent the entry of one or some industries by controlling the application for issuing licenses and restricting the acquisition of raw materials (such as building ski resorts in coal yards or Jingshan Park). The obvious examples are the control of truck transportation, railway, liquor retail, sea, land and air cargo transshipment and other industries. More subtly, the government can also restrict access through air and water pollution standards and product safety and efficacy regulations. For example, pollution control requirements will increase the capital and technical difficulty required for entry, and even expand the scale of the most ideal facilities. The popular product inspection standards in food industry and other health-related products industries can forcibly extend the preparation period of production, which not only increases the basic investment of entry, but also makes the established manufacturers fully notice the upcoming entry, so that they can sometimes fully understand the products of new competitors and formulate revenge strategies. The government's policies in these areas will inevitably have direct social benefits, but they will also have some side effects on the entry that is not well understood in advance.
2. Anticipated retaliation
The expectation of potential entrants' reaction to existing competitors will also affect the entry threat. If it is expected that the existing competitors will react so strongly that the entrant's stay in the industry becomes an unpleasant thing, then the entry may be completely blocked. The conditions that indicate that there is a high possibility of retaliation for entry and thus prevent entry are as follows:
-A certain historical record of strong retaliation against the entrants;
-Counterattacked by established manufacturers with large financial resources, including excess cash and unused lending capacity, sufficient excess capacity to meet all possible future demands, or great impact on distribution channels and customers;
-some established manufacturers have undertaken a lot of tasks for the industry and can use most of the illiquid assets of the industry;
-The slow growth of the industry will limit the ability of the industry to absorb new manufacturers without weakening the sales ability and financial activities of existing manufacturers.
(b) the intensity of competition among existing competitors
The competition among existing competitors takes the familiar forms of intrigue and pursuit of profit-using strategies such as price competition, advertising war, product introduction, adding customer service items or providing insurance policies. Countervailing occurs when one or more competitors feel pressure or see opportunities to improve their position. In most industries, the competitive action taken by manufacturers will have a significant impact on their competitors, which will lead to retaliation or resistance to the action; In other words, manufacturers are interdependent. Such actions and reactions may improve the situation of the manufacturer who initiated the action and the whole industry. If we take action and resist upgrading, all manufacturers in this industry will suffer losses, making their situation worse than in the past.
From the profit point of view, some forms of competition, such as eye-catching price competition, are extremely unstable and are likely to make the whole industry go from bad to worse. The price reduction will soon be easily imitated by opponents. Once imitated, it will reduce the income of all manufacturers, unless the price demand elasticity of the industry is quite high. On the other hand, advertising activities will fully expand demand or improve the level of product differentiation in the industry, which will benefit all manufacturers. In some industries, the characteristics of competition can be described by phrases such as "bellicose", "painful" or "cruel", while in other industries, competition is said to be "polite"
Or "gentlemanly". Intense competition is the result of the interaction of a large number of structural factors.
A. a large number of competitors or close competitors. When there are a large number of manufacturers, they are likely to act on their own, and some manufacturers take it for granted that they can act at will without being noticed. Even in the case of relatively few manufacturers, if the scale and considerable financial resources are relatively balanced, there will be instability, because they are easy to compete with each other and have enough financial resources to carry out sustained and fierce retaliation. On the other hand, when the industry is highly concentrated or controlled by one or several manufacturers, there is no misleading relative strength. Industry leaders implement disciplinary measures and play a coordinating role in the industry by adopting measures similar to the pricing leadership system.
In many industries, foreign competitors, whether exported from abroad or directly involved through foreign investment, play an important role in industry competition. Although there are still some differences between foreign competitors and domestic competitors, which will be pointed out later, foreign competitors should be treated equally with domestic competitors for the purpose of structural analysis.
B. high fixed cost or high storage cost. High fixed costs will exert strong pressure on all manufacturers who want to enrich their production capacity, and when there is excess capacity, it will often lead to a rapid escalation of price reduction. For example, many basic materials such as paper and aluminum will encounter this problem. The important feature of cost is the fixed cost related to added value, not the proportion of fixed cost to total cost. Although the absolute proportion of fixed costs is very low, materials are imported from outside (low added value)
Manufacturers with a high proportion of purchasing costs will feel great pressure to enrich their production capacity in order to make ends meet.
One of the situations associated with high fixed costs is that once the product is produced, it is difficult to store or it costs a lot of money. In this case, in order to ensure sales, manufacturers will also be easily tempted to reduce prices. In some industries, such as shrimp fishing, dangerous chemicals manufacturing and some service industries, this pressure will keep profits at a very low level.
C. lack of product differences or transfer costs. When a product or service is understood as a commodity or quasi-commodity, the buyer's choice is mainly based on price and service, which leads to the pressure of fierce competition between price and service. As has been discussed, this form of competition is particularly unstable. On the other hand, product differences form some barriers to conflict, because buyers have preferences and loyalty to certain manufacturers. The resale costs already described have the same effect.
D. the production capacity has been greatly expanded. Under the control of economies of scale, it is necessary to greatly increase production capacity. The increase of production capacity will often destroy the balance between supply and demand in the industry, especially when the new production capacity is strung together, it will take certain risks. The industry will face another period of overcapacity and falling prices, just like those that produce chlorine, ethyl chloride and ammonia fertilizer.
E. various competitors. Competitors with different strategies, different backgrounds, different personalities and different relations with the parent company will have different goals and strategies on how to compete, and may kill each other constantly in the process of communication. It may take them a long time to accurately understand each other's intentions and reach an agreement on a series of "competition rules" in the industry. The strategic choice is right for one competitor, but it may be wrong for another competitor.
Due to the different environment and the change of goals, foreign competitors often add a lot of diversity to the industry Small manufacturers or service companies that operate independently will also encounter the same situation, because they are satisfied with the income that is generally lower than the normal return on investment to maintain the independence of their private ownership. However, for a recognized large competitor, this low income is unacceptable and obviously unreasonable. In such an industry, this attitude of small manufacturers may limit the profitability of large companies. Similarly, those manufacturers who regard the market as the way out of excess production capacity (in the case of dumping) will adopt the opposite policy to those manufacturers who regard the market as the main way out. Finally, the difference in the relationship between competing business departments and their parent companies is also an important source of industry diversity. For example, if a business unit is part of a vertical chain enterprise organized by its company, it is entirely possible to adopt different or even conflicting goals, unlike an independent small manufacturer competing in the same industry. Or, if a business unit is in a "Taurus" position within the business scope of the parent company, it will take different actions, unlike the business unit in the parent company that develops for long-term growth due to lack of other opportunities.
F. highly strategic bets. If a large number of manufacturers make high bets in order to succeed in a certain industry, the competition in this industry will become more unstable. For example, a diversified manufacturer will attach great importance to its success in a specific industry to promote the formation of its overall strategy. Or, foreign manufacturers, such as Bosch, Sony or Philips, will have a strong need to establish a solid position in the US market in order to establish a global reputation or technical reputation. In this case, the goals of such manufacturers may not only be different in form, but also more unstable, because these goals are expansionary and contain the potential desire to sacrifice profitability.
G. high exit barriers. Exit barriers refer to the economic, strategic and emotional factors that maintain the competitiveness of enterprises among enterprises, even if the return on investment they get is very low or even negative. The main sources of exit barriers are as follows:
-Dedicated assets: assets that are highly dedicated to a specific enterprise or location, have a low cost in liquidation value or have a high transfer or exchange cost.
-Fixed cost of withdrawal: these costs include labor agreement, resettlement fee, maintenance ability of parts, etc.
-Strategic relationship: the relationship between business units and other units in the company in terms of goodwill, marketing ability, access to financial markets, shared facilities, etc. This relationship enables manufacturers to focus on their business with a high degree of strategy.
-Emotional obstacle: The management department is unwilling to make an economically correct decision to leave because of its pretentious role in a specific enterprise, loyalty to employees, concern about personal career and self-esteem.
-Government and social restrictions: such restrictions include the government's refusal to accept or discourage withdrawal for fear of unemployment and local economic impact; This restriction is particularly common outside the United States.
When the exit barrier is high, the excess capacity has not left the industry, and those companies that failed in the competition have not given up. On the contrary, they will persevere and have to take extreme tactics because of their own weaknesses. As a result, the profitability of the whole industry can only be maintained at a low level.
Although exit barriers and entry barriers are different in concept, their similarity is an important aspect of industry analysis. Exit barriers and entry barriers are often interrelated. For example, considerable economies of scale in production are usually associated with specialized assets, just like the existence of proprietary technology.
Taking the simplified situation as an example, exit barriers and entry barriers can be high or low.
From the perspective of industry profits, the best situation is that the barriers to entry are high and the barriers to exit are low. In this case, entry will be prevented and the failed competitors will quit the industry. When the barriers to entry and exit are high, the potential profit is high, but it is usually accompanied by greater risks. Although the entry is blocked, the failed manufacturers will still stay in the industry and continue to struggle.
Low barriers to entry and exit are not exciting, but the worst case is low barriers to entry and high barriers to exit. In this case, entrants will be attracted by the improvement of the economic situation or other temporary unexpected gains, and it is easy to succeed. However, when the performance is getting worse and worse, the production capacity will not withdraw from the industry, resulting in a backlog of production capacity in the industry, resulting in long-term profitability. For example, an industry may be in such an unfortunate situation, if suppliers or lenders will readily agree to provide funds for entry, but once the entry is successful, manufacturers will face huge fixed financing costs.