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A company requires identifying its competitors and the threats that they pose to the potential market. According to Porter, the company has to consider the following five forces since they help in determining the level of competition and, the profitability of a company.
The Buyers Power.
This refers to the amount of money, which a potential buyer is willing to spend on a certain product. Buyers who have powerful negotiation skills and, knowledge pose a threat to a company. They always try to negotiate and, influence the seller in order to get the best deals at a cheaper rate. In the auto industry, the buyer may have some home made products. This makes them to buy the single units instead of complete sets.
The Suppliers Power.
The supplier has an influence on the price and, the quality of products that are made available in the market. Competition from substitute products affects the supplier’s power. If the suppliers are few and, demand is high the prices may sharply rise and, vice versa.
The availability of alternative products with lower cost than what the company produces and, serves similar purposes. The Production of counterfeit, similar products and, new products limit profits of the original product. These companies have a lower rate of production costs and, this helps them to lower their costs without incurring losses. Potential buyers may choose to buy the substitute products because they serve the same purpose as the original product from this company. They are also cheaper in comparison with the company original and, genuine products.
There is existence of restrictions, terms and, conditions that must be met by the company in order for it to be operational. A high entry cost hinders a company operation. Also the government imposes rules and, regulations in order to control the business. These restrictions affect the entry of a company into operation.
New and already existing companies pose a threat because they take part of the market share. Competitor companies produce similar products and, offer more competitive prices. The already existing competitors find it easier in their distribution of products than new entrants who have to convince the buyers in order to make sales.
In conclusion, the success of a company depends on how well its competitive strategies relate with the environment.