Competitive Forces

Porter offers a useful framework for examining competitive forces in the value-added system. The traditional view of competition is expanded by recognizing five competitive forces that determine industry performance:

1. Rivalry among existing firms.

2. Threat of new entrants.

3. Threat of substitute products.

4. Bargaining power of suppliers.

5. Bargaining power of buyers

The first force recognizes that active competition among firms helps determine industry performance. This is the most direct and intense form of competition. Rivalry may occur within a market segment or across an entire product-market. The nature and scope of competition may vary according to the type of industry structure. For example, competition in an emerging industry consists of the market pioneer and a few other early entrants.

. The second force highlights the possibility of new competitors entering the market. Existing firms may try to. Discourage new competition by aggressive expansion and other types of entry barriers. IBM's 1995 proposed acquisition of Lotus Development Corp. is an interesting entry strategy in the software market. This move indicates IBM's intent to compete with Microsoft, the software giant.

The third force considers the potential impact of substitutes. New technologies that satisfy the same customer need are important sources of competition. Including alternative technologies in the definition of product-market structure identifies substitute forms of competition. Western Union's failure to recognize the competitive threat posed by fax machines is an example of the dangers of defining competitive boundaries too narrowly.

The fourth force is the power that suppliers may have on the producers of an industry. For example, the high costs of labor and aircraft exert a major impact on the commercial urine industry. Companies may pursue vertical integration strategies to reduce the bargaining power of suppliers. Alternatively, collaborative relationships respond to the needs of both partners. The emphasis on quality improvement by many producers is strengthening^ cooperation between suppliers and their customers and reducing the number of suppliers servicing manufacturers.

Finally, buyers may use their purchasing power to influence their suppliers. Wal-Mart, for example, has a strong influence on the suppliers of its many products. Understanding which organizations have power and influence in the distribution channel provides important insights into the structure of competition. Power may be centered at any level in the channel, though producers and retailers often display strong buying power.

A major consequence of Porter's view of competition is that the competitive arena may be altered as a result of the impact of the five forces on the industry. The five competitive forces also highlight the existence of vertical and horizontal types of competition. Horizontal competition consists of rivalry among firms in the same industry, such as personal computer producers. Vertical competition involves rivalry among and within distribution channels. The intensity of vertical competition is related, in part, to the bargaining power of suppliers and buyers. The location (level) of an organization in its distribution channel and the extent of its control over the channel may affect the marketing strategy.

The intense competition between Reebok and Nike in the sneaker market offers interesting insights about channel of distribution power.12 Foot Locker's 2,800 stores account for nearly one-fourth of U.S. sneaker sales. Nike has worked aggressively in building a collaborative relationship with Foot Locker while Reebok has been less responsive to this key sneaker customer. Customers with buying power like Foot Locker want better terms, advance information on new products, exclusive lines, and fast response to orders. Nike's sales in 1995 to Foot, Locker were $620 million, compared to less than $200 million for Reebok.

Only two years earlier Nike sold $550 million to Foot Locker compared to Reebok's $228 million (see the accompanying Nike advertisement).