The chart below illustrates these five forces as well as a simplified view of their interactions. These forces include competitive rivalry, barriers to entry, threat of substitutes, supplier power, and buyer power. Michael Porter’s Five Forces analysis provides a (I’d venture to state the) structured framework for industry analysis.
Michael Porter’s Five Forces and the Importance of Buyer Power In my experience, there are methods of industry analysis that companies can use to foresee the ways in which they must adapt and evolve if they are to remain competitive and thrive. But is this inevitable? Can companies learn to adapt and react to ensure their continued success and prosperity? The answer is yes. I see countless examples of great companies that fail to understand the changing competitive environment around them and as a consequence start down a path of eventual decline. In today’s ever-changing business environment, the unfortunate fate of Company Z is not uncommon. Industry players were suffering, helplessly standing by as revenues and profits dwindled while the shrinking market only intensified competition. The industry faced competitive pressures from online distribution and fulfillment platforms that continued to innovate almost daily as well as changing customer expectations around media consumption.
With hindsight, even without considering the advent and popularization of streaming, the traditional media fulfillment and distribution industry was not long for the future. Nonetheless, reflecting paltry growth prospects, weakening demand, and business model disruption, the company was sold for a low valuation to a synergistic buyer. In late 2012, during my tenure as an investment banking analyst, I worked on the sale of a declining media fulfillment and distribution business, “Company Z.” Company Z fulfilled and distributed products that were nearing technological obsolescence (think DVDs, CDs, Blu-ray) while directly competing against Amazon and other online retailers on a number of others.Ĭompany Z had been in business for over 20 years, having established a reputation for reliability, dependability, and product offering breadth and variation.
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