Last time, I discussed one way to analyze uncertainty within an industry. Another way of looking at the uncertainty of an industry is looking at the relative power of suppliers and the threat of new entrants. In the previous example, technological changes and the predictability of purchases were used to gauge uncertainty. If all four are taken together you get famed Harvard Professor Michael Porter’s 5-Forces Analysis.
This framework states that the rivalry, or competitiveness within an industry is based on 4 external factors that combine to make a 5th element, the rivalry within an industry. The 4 factors are:
- The Bargaining Power of Suppliers
- This is the power suppliers have over purchasers in an industry. For example, saccharin (or cane sugar) suppliers over Coca-Cola.
- Threat of Substitutes
- This is what can be substituted for Coke. Pepsi comes to mind. Also, this goes back to the previous article. Are new technologies begin developed? Instead of cola, will there be a new way to ingest beverages
- Bargaining Power of Buyers
- This goes back to the previous article about industry uncertainty. Do the buyers have to have Coca-Cola? Things like electricity and food are higher up on the hierarchy of needs. Also, are the buyers unable to form a coop to purchase things in bulk?
- Threat of New Entrants
- New cola brands are coming in to challenge the old guard. The more this happens, the more uncertainty there might be in an industry.
These factors , can be ranked low, medium, high (or even 1-5) to give the relative rivalry within an industry. Now, there is no uniform standard stating that the threat of substitutes in the semi-conductor industry is low, but rather a general consensus of industry analysts will say that there are few viable substitutes to the silicon semi-conductors we most frequently see in today’s electronics. Maybe in the future, we will we graphene based semi-conductors. When they come, then the rivalry will go up.