When choosing a market segment, not only is the potential considered. Also, consider threats. Sometimes it must be avoided, by looking for other segments. Even so, the easiest segment has threats. Michael E Porter formulated threat factors as well as generic competitive strategies, or outlines. Threats are dynamic, so the strategy is effective so that it needs to develop. The following threats in a business field.
The threat of hard competition.
Hard competition is not always caused by market attractiveness, for example large demand and purchasing power. It could also be because companies that enter the market are unable to get out of the business. They made large investments. Do not have the skills to strive in other fields. Such conditions encourage price wars and advertising wars. Profits shrink and costs increase.
The threat of newcomers
The most interesting market segment is that if newcomers find it difficult to enter and the old players are easy to get out. The terms are high entry barrier and low exit barrier. Therefore, the new players will have difficulty to enter a business sector.
That situation can change. The existence of the internet can change this, for example the circulation of rotiboy recipes, allowing new players in the same bread field. Thus, Rotiboy can no longer enjoy monopoly as before.
If entry barrier and exit barrier are high, profits may be high, if between players form a price agreement. But in such situations, players can compete hard, because they have no other choice.
If the entry barrier is low and the exit barrier is high, competition will tend to be tight. More and more players, there are no exits. Production exceeding market capacity can occur and prices fall.
Threats from substitute or substitute products
In this era of digital technology, more and more innovations, substitute products often appear. Symbian phones replace telecommunication shops. Symbian mobile replaced Android or Apple smartphone. It can also happen that these substitute products are cheaper and easier, so that they reduce prices and profits.
Threats from the bargaining power of buyers
A market segment is less attractive if the buyer has large and increasing bargaining power. Suppose that the bargaining power of national minimarket at suppliers will tend to be large along with the amount of turnover. The national minimarket erodes competitors, so that suppliers increasingly lose alternative buyers, then with a large turnover can reduce prices. The bargaining power of buyers increases if the product does not have a differentiator or an easy buyer switches to another supplier with risk and low cost. The best defense is to arrange good and inimitable products, so buyers do not move.
Threats from the size of the supplier’s bargaining power
Market segments are less attractive if suppliers can easily increase prices or reduce the amount of goods sold. The strength of suppliers is strong if goods are scarce and there are no substitutes or substitute materials, and it is difficult to change suppliers. The best defense is to build mutually beneficial relationships or use a variety of sources.
These factors influence the competitive climate. Each market segment has a different level of competition based on its industrial structure. With that insight, it is better to choose an industry with a low level of competition and not increasing. Even so, in general every business sector is always in competition.