What is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose?

Tips for use

You can do Porter’s Five Forces by yourself, but it is more effective if done by a group of people, for example with colleagues. 

Use Porter’s Five Forces to make a large printout and use this in a brainstorm. Use sticky notes to write things on the template, in this way it is easy to add or change things and keep the conversation going.

Have a look at the example as well, learn about the practical application of this tool through Porter’s Five Forces of Nike.

How to use

Porter’s Five Forces show that there are five important forces that determine the competitive power of your business. Write down high, moderate or low on Porter’s Five Forces template for each of the following forces.

Intensity of competition from existing competitors 

Identify the existing competitors of your business. Write down their names and the size of their businesses. Estimate how heavy the competition is. 

• The intensity is high if you have many competitors with a similar product or service. Your business will likely have little power in the market. Suppliers and buyers can easily go somewhere else.
• The intensity is low if there is no one else that offers what you offer. You have great power in the market. Buyers and suppliers have nowhere else to go.

Threat of substitutes

Substitute products or services offer an alternative for your offering. Write down those products or services that can be an alternative for your customers. 

• The threat is high if there are many substitutes. It is easy for buyers to find a different solution than your offering. 
• The threat is low if there is no alternative for your product. Your business has tremendous power since customers cannot find an alternative. 

Threat of new entrants

New entrants are businesses that want to enter your market. Your power is affected by the ability of others to enter the market. New competitors can easily enter your market when there are low entry costs, few economies of scale, no knowledge-intensity and little protection of key technologies. Write down the potential new entrants and the entry barriers of your market. 

• The threat is high if there are no or a few entrance barriers. It will be easy for new businesses to start competing in your market. 
• The threat is low if there are many and durable entrance barriers. You can maintain your position on the market and take advantage of it. 

Bargaining power of suppliers

High bargaining power of suppliers will result in a higher price for resources for your product. The bargaining power of suppliers is determined by the number of suppliers in the market. Write down on which suppliers you depend for your resources and how many other suppliers could offer the same resources. Also describe if it is easy to switch suppliers. 

• The bargaining power is high if there are few or just one supplier. That supplier has large bargaining power and the power to determine its price. 
• The bargaining power is low if there are many suppliers on the market. An individual supplier has little bargaining power, and no influence on the price.

Bargaining power of buyers

High bargaining power of buyers means that it is easy for buyers to drive down the price of your product. The bargaining power of buyers is determined by the number of buyers in your market. Write down how many buyers there are in your market. Also describe if you depend on your buyers or if they depend on you.

• The bargaining power is high if there are a few buyers. Those buyers have large bargaining power and can easily drive down the price. Your business depends on these buyers.

The bargaining power is low if there are many buyers. An individual buyer has little bargaining power and cannot drive down the price.

Abstract

This paper shows that when the alternatives offered to consumers span the preference space (as it would be chosen by a firm), search or evaluation costs may lead consumers not to search and not to choose if too many or too few alternatives are offered. If too many alternatives are offered, then the consumer may have to engage in many searches or evaluations to find a satisfactory fit. This may be too costly and result in the consumer avoiding making a choice altogether. If too few alternatives are offered, then the consumer may not search or choose, fearing that an acceptable choice is unlikely. These two forces result in the existence of a finite optimal number of alternatives that maximizes the probability of choice.

Journal Information

Discover the latest findings in the global marketplace with detailed results prepared through rigorous scientific methodology. Reviewed by prestigious scholars in the field of marketing science, articles often feature game theory, econometrics, multivariate analysis, econometric modeling, and choice models. Advertising Consumer choice modeling Interactions between manufacturers and retailers Market research Pricing decisions Purchase behavior Revenue forecasting

Publisher Information

With over 12,500 members from around the globe, INFORMS is the leading international association for professionals in operations research and analytics. INFORMS promotes best practices and advances in operations research, management science, and analytics to improve operational processes, decision-making, and outcomes through an array of highly-cited publications, conferences, competitions, networking communities, and professional development services.

Rights & Usage

This item is part of a JSTOR Collection.
For terms and use, please refer to our Terms and Conditions
Marketing Science © 2010 INFORMS
Request Permissions

What occurs when a company develops unique differences in its products or services with the intent to influence demand multiple choice question?

What analyzes the competitive forces within the environment in which a company operates to assess the potential for profitability in an industry?

What is a competitive advantage a product that an organization's customers place a lesser value on than similar offerings from a competitor?

What views a firm as a series of business processes that each add value to the product or service?