Five Forces Analysis Porter's Five Forces Model Essay

Excerpt from Essay :

Five Forces Analysis

Porter's Five Forces model analysis business opportunity "Start business provide music movies online internet"

Porter's Five Forces model:

A new business for downloadable music and movies online

Porter's Five Forces model:

A new business for downloadable music and movies online

According to the management theorist Michael Porter, "the model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure" (Porter's five forces, 2008, Quick MBA). Thus, it is necessary that every new company offering either an innovative or an existing type of product or service understands its current position in its specific industry market. The new company must strive to position its product in an optimal fashion by conducting what Porter calls a Five Forces analysis. Five Forces analysis offers insight into the current market environment in a product-specific way. It also can enable the manufacturer to reframe his or her product or service offering to be more unique and competitive, particularly in a market that is not particularly supportive of new entrants.

In this instance, the proposed business under analysis will be that of a new company designed to provide downloadable music and videos over the Internet. The online company will attempt to rival current popular websites such as iTunes, Kazaa, Hulu, and YouTube. Finding a new and unique online niche will be necessary, given the highly competitive industry structure, low barriers to entry, and fickle nature of consumers in the target demographic. The business does have some advantages, such as relatively low input costs for maintaining website, but this alone does not guarantee success.

Overview of the Five Forces Model in the context of online music and movie downloads

The first of Porter's 'forces' is that of supplier power, including "supplier concentration; importance of volume to supplier; differentiation of inputs; impact of inputs on cost or differentiation, switching costs of firms in the industry; presence of substitute inputs; threat of forward integration" and "cost relative to total purchases in industry" (Porter's five forces, 2008, Quick MBA). One advantage provided by marketing an online service, such as an online movie or music venture, is that there are relatively few input costs, other than maintaining the website. However, suppliers do have power to withhold attractive content. Some broadcasting companies refuse to allow content to be transmitted online, or will only allow content to be disseminated through select websites.

Additionally, there is a need to position the company, relative to its cost scale, in relation the prices of other online companies, such as iTunes. Even if it provides a free service, evident added value must be conveyed if it is to attract advertising revenue by drawing traffic comparable to existing online viewing sites such as YouTube, Hulu, and the websites of television channels that provide free content. This may affect its ability to offer specialized or differentiated content, relative to its competitors.

The second of Porter's 'forces' is that of barriers to entry, comprising "absolute cost advantages; proprietary learning curve[s]; access to inputs; government policy; economies of scale, capital requirements; brand identity; switching costs; access to distribution; expected retaliation, proprietary products" (Porter's five forces, 2008, Quick MBA). In theory, the barriers to entry for an Internet company are extremely low -- all that is required is a website, the knowledge to operate the website, and a dream. But in actuality, the barriers may be higher than they initially seem. The barrier of consumer preference can be difficult to surmount. Consider the fact that in the search engine market, Google has, with frightening speed, become the Coke of all search engines. In other words, to 'Google' has become synonymous with searching the web, even though Google is the name of a brand. YouTube and Hulu have substantial brand loyalty already in the market in terms of free video viewing; Kazaa and iTunes dominate the downloadable music market.

Although it is not a formal structural barrier, it will be difficult to divert advertising revenue away from sites that currently have so much traffic and have such a strong 'first mover' market advantage. Even the mighty Microsoft had difficulty challenging Apple on the downloadable music 'front.' On the other hand, while consumer attention spans are finite, consumers of Internet content are theoretically to download or watch content from multiple sites, thus there is no clear 'opportunity cost' they must face by selecting one site over another, other than time. The first mover advantage is surmountable, if the proposed website can offer added consumer value or is substantially differentiated from current sites.

The third of Porter's 'forces' is that of buyer power. Online, buyers or users have tremendous power, as they can be quite fickle and simply switch allegiance with a point and click of the mouse. Buyer power comprises: "bargaining leverage; buyer volume; buyer information; brand identity; price sensitivity; threat of backward integration; product differentiation; buyer concentration vs. industry; substitutes available; and maximizing "buyers' incentives" for choosing one product or service (in this case, one website) over another (Porter's five forces, 2008, Quick MBA).

Buyers have a wide array of currently familiar websites to download music and movies, and a high degree of leverage because of their willingness to shift websites, or simply opt out of the technology, as downloadable movies and movies are a luxury, rather than a necessity. Brand loyalty for websites is low, given that users come to explore content, rather than because of the name of a hot website. Price sensitivity is also high, given the availability of free content. Downloaders of music and movies are (reluctantly) willing to pay, but for content that they consider worthy of the premium status.

The fourth of Porter's 'forces' is that of the threat of substitutes, which is extremely high There are relatively few detrimental costs for a user in terms of switching from one substitute to another in the downloadable content market. Past precedent suggests that buyers tend to be loyal to particular websites, and while asking for consumers to pay for unlimited monthly content can create a small 'buy-in' audience, but few are willing to consider such an investment at a new website, given the ability to be more flexible in their buying habits at other sites. Additionally, given the popularity of Kazaa, which offers unlimited subscriptions and access to a wide array of popular artists like Katie Perry, asking consumers to subscribe monthly to an untested site may prove problematic. A clear, additional value must be offered in terms of performance and content, to make the 'trade-off' of viewer's time work the diversion from other entertainment websites online.

Porter's fifth factor is that of degree of rivalry, including exit barriers (extremely low online), fixed costs/value added (low), industry concentration and growth, "intermittent overcapacity," product differences, switching costs (low), "brand identity" and "diversity of rivals" (Porter's five forces, 2008, Quick MBA). The new website must clearly brand itself as something unique and advertise that it is capable of giving something unique to viewers. Viewers must know they are coming to see something special at the evolving website, much as they come to iTunes or Hulu because they are assured that their favorite artist or television personality will be featured on that website. Low levels of consumer loyalty, the ease of switching website and a relatively wide array of Internet sites to distract consumers increase firm rivalry online in the entertainment, even though the number of 'best known' websites that are popular for seeking out such content is small.

Analysis

Offering a special, exclusive line of videos or music selections is one way to draw attention and traffic to the website. If the website can enter into an agreement with a popular artist or television show for exclusive content it can then offer in downloadable form, an automatic consumer base will be generated. The problem is to find such an agreement between a sufficiently popular artist and an online site. While artists such as Brittney Spears might be willing to offer iTunes an exclusive 'release contract' for a new song, he or she would be far less likely to do so for an unknown website, unless it was done for charity or another reason that might garner additional notice in the press.

Another possibility is to create a built-in audience by entering into an agreement with an existing institution, such as a university, which can offer online course content through the website, again assuring the site of an automatic audience. Branding the website as an educational content site could limit its revenue, as its main source of income would likely be students, and outsiders would not be drawn to viewing its content.

Given the high levels of competition in the downloadable music and movie market, proceeding into these competitive waters must be done with extreme caution. However, there are some possible solutions to cope with a highly competitive marketplace…

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