The Five Forces Model

Businesses can use technology to gain competitive advantage and increase on their (ROI) return on investment. A business is driven by five major forces and these include; (1) Buyer power, (2) Supplier power, (3) Threat of substitute products or services, (4) Threat of new entrants, (5) Rivalry among existing competitors. All these five forces will determine the success of any business, so business people can use technology to gain their competitive advantage basing on those five factors. In brief let me explain about each of the above factor and on the later stage we shall see how a business can use technology to gain competitive advantage.

(1) Buyer power: buyer power is high when buyers have many choices of whom to buy from, and its low when their choices are few. As a business person, this is what you need to understand, if the buyers in a particular industry hold a lot of power that industry is less attractive to enter, because these buyers can easily shift their interest towards your competition and your business will be left hanging.

(2) Supplier power: supplier power is high when buyers have few choices of whom to buy from , and low when there are many choices. As a business person, this is what you need to know, If the suppliers in a particular market hold a lot of power, that market or industry will be less attractive to enter. A good example is ”THE OIL INDUSTRY” in this industry, suppliers hold a  lot of power, in many cases they hold the supply of oil with an intention of increasing prices. So when the industry has a few suppliers, it will be risky to enter such an industry. In economics, forces of demand and supply are key factors in business growth. You as a business person, you will be in the middle of these two forces.

The Five Forces Model

(3) Threat of substitute products or services: If their very few alternatives to using a product or service the threat of substitute products or service will be low, so this will be a lucrative industry to enter because customers will have less choices. This can result when there are switching costs associated with the product or service, some customers will feel reluctant to switch to another product or service which is good news to a business person.

(4) Threat of new entrants: The threat of new entrants is high when it is easy for competitors to enter the market. As a business person, this is what you need to know. If it is easy for others to enter the market, shy away from that market, and if it is difficult for them, then this can be good news for you. Business owners can use technology to make it hard for others to enter their markets.

(5) Rivalry among existing competitors: An industry is less attractive when the rivalry among existing competitors is high and more attractive when it is low.  As a business person, you must always consider the intensity of competition in any given industry.

 

‘’ Now that you have learned the five forces which drive a business, lets learn how you can use technology to gain competitive advantage’’

 

  • Use technology to Increase buyer’s power for a specific product or service: In a any competitive market, buyers will have many choices. So for any small business to gain competitive advantage in such a tight market, it will have to use technological tools to attract customers’ attention towards its services or products. In this case a business can do various things which can include, using the internet to promote rewards and coupons to its customers, you can services like woobox.com to help you in setting up coupons and rewards on various social networks. Rewards can be set in such a manner, that whenever a customer purchases a product or use a service, they get points which can be converted into shopping points. The business can also use shopping coupons to attract customers attention, in this case, a business can use medias like social networks (facebook or Pinterest) to promote these shopping coupons, so each customers to comes to their store with that coupon they get a X% discount. With such offers, customers will divert their power to your services or products and this will keep you a head of the competition.

 

  • Use technology to reduce supplier power: As we saw in the points above, that a high supplier power can affect a business especially when the supplier decides to hold goods or services with an aim of increasing prices. For any business to succeed, it must find ways to decrease supplier’s power, and the best way to do this is to locate alternative sources of supply. Technological tools like the internet can help a business find more suppliers in their niche. Internet has a chain of B2B marketplaces which can help small businesses find alternative suppliers. A B2B marketplace is an internet-based service which brings together buyers and sellers. In this case the buyer is a small business owner and a seller is a supplier. A good example of popular Business to Business online marketplaces is Alibaba.com, aliexpress.com, made-in-china.com to mention but a few.

 

  • Use technology to create entry barriers: Use technology to create entry barriers: For any business to succeed, it must create barriers to its market using technology. If the market is so easy to enter, the business will not survive for so long. Businesses should not settle for survival, they have to plan and make sure that they will rule the market for a longer period.  Most successful companies like ”Google , Facebook , Coca cola , Apple , Nike , Amazon , Dell , Microsoft , Zappos have used technology to stay a head of the market, they have found ways of blocking competition and this has gained them competitive advantage in the market. If you own a small business, you can also use technology to get in the top. An entry barrier is a product or service feature that customers have come to expect from companies in a particular industry. Entry barriers make it more difficult for competitors to enter a particular market.  Let’s look at an example on how Google is using its technology to gain competitive advantage over Facebook. Recently Google introduced its new social network called ‘’Google Plus +’’ , this network has taken advantage of Google search technologies to show case profiles of business using ‘’Google Plus’’ in the search results of Google.com , this has enticed many business owners to jump on ‘’Google plus and create profiles for their business.

See example of the search I made on Zappos in google:

Google Plus Competitive Advantange over Facebook

6 COMMENTS

  1. Helllo, Karehka
    Would you mind explain how technology can impact on new entrants and other competitors?
    Thank you!

  2. This is all interesting, but ideas are a dime a dozen, it is data that makes a difference. The value of the internet is that anyone can quickly create a product. I would like to see data that shows the number of competitors in key markets over time driven by the decreasing cost of creating competitive advantage for online services.

    • Internet technology simplifies the process of starting a business, for sure, we need a tool to measure competitive advantage online, for websites, we have tools like Alexa.com and Compete.com, these two can give relative data on your position online, also salesforce.com can help when it comes to social media management. But we don’t have a tool that shows total number of competitors in a specific market and i guess that is called for. Thanks for this idea, will discuss it with some people and see if we can get a solution on this. I LOVE THE IDEA

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